Privatisation and Regulation of Business

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TABLE OF CONTENTS

TABLE OF CONTENTS......................................................................................2 ANNEX 5-2: CONCESSION CONTRACTS & PUBLIC-PRIVATE PARTNERSHIPS.....................................................................3 1. WHAT IS A CONCESSION?................................................................................. 3
1.1 Definition & application framework...........................................................3 1.2 Particularities in the application of concessions.......................................4

2. PUBLIC-PRIVATE PARTNERSHIPS.......................................................................8
2.1 What is a Public-Private Partnership (PPP)?...........................................8 2.2 Forms of Public-Private Partnerships (PPPs)..........................................9 2.3 PPPs compared to other types of contract.............................................14 2.4 Critical success factors for PPP contracts.............................................15 2.5 Advantages and drawbacks of the application of PPPs.........................16 2.5.1 2.5.2 Advantages of the application of PPPs .............................................16 Potential drawbacks of the application of PPPs.................................19

2.6 Steps in awarding and implementing a PPP contract............................20 2.7 PPP Projects in the EU and examples of sectors where PPPs are applied..........................................................................................22

ANNEX 5-2: CONCESSION CONTRACTS & PUBLICPRIVATE PARTNERSHIPS

1. 1.1

W HAT

IS A

C ONCESSION ?

Definition & application framework

Concessions are not defined in the EU Treaty. The only relevant definition is found in the secondary legislation (Community Directives etc.), where a special status is foreseen in particular for public works concessions, together with a general reference regarding service concessions.
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The concept of concession is in principle defined by the Community legislator on the basis of the concept of public contracts. In this context:

A public works concession is defined as a contract of the same type as a public works contract, except for the fact that the consideration for the works to be carried out consists either solely in the right to exploit the work or in this right together with payment (Directive 2004/18/EC, Article 1, and Law 12(I)2006, Chapter VII). Similarly: A service concession is defined as a contract of the same type as a public service contract, except for the fact that the consideration for the provision of services consists either solely in the right to exploit the service or in this right together with payment (Directive 2004/18/C, Article 1, par. 4). This, however, does not mean that concessions are exempted from the rules of the Treaty. As pointed out in the Commission Interpretative Communication on Concessions under Community Law (2000/C121/2, p. 3), works or service concessions are subject to the rules and principles of the Treaty. Regarding public works concessions, Community Directive 2004/18 and Law 12(I)2006 of the Republic of Cyprus contain specific provisions (Title III, Chapter I, and Chapter VII, respectively). Regarding service concessions, the Community and the national law provide that the provision under these rules do not apply to service concessions (Directive 2004/18?EC, Article 17, and Law 12(I)/2006, Article 16). According to this definition, the main distinctive feature of a works concession is that a right to exploit a construction is granted as a consideration for having erected it. This right may also be accompanied by payment.
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In general, if the contract is principally concerned with the construction of a work on behalf of the Contracting Authority, then the Community legislator holds that it should be considered to be a works concession.

In contrast, a concession contract in which the construction work is incidental or which only involves operating an existing work, is regarded as a service concession.
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In

a
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works concession, the risks inherent in exploitation are transferred to the Concessionaire.

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If recovery of expenditure were guaranteed by the Contracting Authority without the risk involved in the management of the work, there would be no element of risk and the contract should be regarded as a works contract rather than a concession contract. Moreover, if the Concessionaire receives, whether directly or indirectly, during the course of the contract or even when the contract comes to an end, payment (by way of reimbursement, covering losses etc.) other than connected with exploitation, the contract could no longer be regarded as a concession. In this situation, the compatibility of any subsequent financing should be considered in the light of any relevant Community law. The definition of a concession allows the Contracting Authority to make a payment in return for work carried out, provided that that this does not eliminate a significant element of the risk inherent in exploitation. By specifying that there may be payment in addition to the right to exploit the work, the Community legislator states that operation of the structure must be the source of the Concessionaire's revenue.

The determining factor in concessions continues to be the existence of the exploitation Icon0242.ico risk in connection with the investment made or the capital invested, particularly when the awarding authority has paid a sum of money. This applies as a general principle, even though in most concessions the origin of the resources comes from payments made directly by the users of the work (such as for example in the case of motorway tolls). In concessions, the risks arising from the operation of the concession are transferred to the Concessionaire with the right of exploitation. The division of specific risks between the Contracting Authority and the Concessionaire takes on a case by case basis, according to their respective ability to manage the risk in question. If the Contracting Authorities undertake to bear the risk arising from managing the work by, for example, guaranteeing that the financing will be reimbursed, there is no element of risk and the Community legislator considers such cases to be public works contracts and not concessions. In general, the correct approach to interpreting the above provisions requires, in order for a contract to be designated as a concession contract, the assessment of its duration and of the collection of a consideration from the operation of the work; this, however, should be combined with the transfer to the contractor of the investment risk and operating risk which, were they to remain within the sphere of control competence of the Contracting Authority, might be indicative of a classic public works contract.
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1.2

Particularities in the application of concessions

As already mentioned, insofar as concessions result from acts of the Contracting Authority the purpose of which is to provide economic activities or the supply of goods, they are subject to the relevant provisions of the Treaty and to the principles which derive from the Court case law in the respective areas.

These rules and principles are already known and have been mentioned in several Chapters of this Guide: they are the principle of equality of treatment, the principle of transparency, the principle of proportionality, and the principle of mutual recognition. In awarding concessions, the Contracting Authorities must adhere to the above principles of the Treaty. More in particular: The principle of equality of treatment The application of the principle of equality of treatment to concessions (which is obviously only possible when the Contracting Authority negotiates with more than one economic operators as potential concessionaires) means that the Contracting Authority is free to choose the most appropriate award procedure, especially in relation to the characteristics of the particular project, and to lay down the requirements which candidates must meet throughout the various phases of the relevant tendering procedure. However, this implies that the choice of candidate(s) must be made on the basis of objective criteria and the procedure must be conducted in accordance with the procedural rules and basic requirements originally set by the Contracting Authority. Where these rules have not yet been set, the application of the principle of equality of treatment requires in any event that the candidates be chosen objectively. The Court of Justice of the European Communities (ECJ) had the occasion to set out the scope of the principle of equality of treatment in the area of public contracts, by Icon1398.ico asserting on the one hand that this principle requires that all tenders conform to the terms of the contract, so as to guarantee an objective comparison between tenders (Judgement of 22 June 1993, Case C-243/89, Storebaelt, point 37), and, on the other hand, that when an Contracting Authority takes account of changes to the initial tenders of only one tenderer, who thereby obtains an advantage over his competitors, then the principle of equality of treatment of the tenderers is violated and the transparency of the procedure is impaired. Moreover, the Court notes that the procedure for comparing tenders has to comply at every stage with both the principle of the equal treatment of tenderers and the principle of transparency, so as to afford equality of opportunity to all tenderers when formulating their tenders (Judgment of 25 April 1996, Case C-87/94, Walloon Buses. See also Judgment of the Court of First Instance of 17 December 1998, T-203/96, Embassy Limousines & Services). In certain cases, the Contracting Authority may be unable to specify its requirements in sufficiently precise technical terms, and will look for alternative tenders likely to provide various solutions to a problem expressed in general terms. In such cases, however, in order to ensure fair and effective competition, the documents issued by the Contracting Authority must always state in a non-discriminatory and objective manner what is asked of the candidates and above all the way in which they must draw up their tenders.
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In this way, each candidate knows in advance that he has the possibility of proposing various technical solutions. More generally, the documents issued by the Contracting Authority must not contain elements that infringe the abovementioned rules and principles of the Treaty. The requirements of the Contracting Authority may also be determined in collaboration with economic operators, provided that this does not restrict competition.
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The principle of transparency The principle of transparency can be ensured by any appropriate means, including advertising, taking into account the particularities of each project. For example, transparency can be ensured, among other means, by way of publishing a Concession Notice or a pre-information notice in the daily Press or in specialist journals, or by posting appropriate notices
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This type of advertising generally contains the information necessary to enable potential concessionaires to decide whether they are interested in participating (selection and award criteria, etc.). This information also includes the subject of the concession and the nature and scope of the services expected from the Concessionaire.
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The principle of proportionality According to the principle of proportionality, any measure chosen should be both necessary and appropriate in the light of the objectives sought. When applied to concessions, this principle allows Contracting Authorities to define the objective to be reached, especially in terms of performance and technical specifications. This implies that any measure chosen must be both necessary and appropriate in relation to the objective set. Thus, for example, when selecting candidates, a Contracting Authority may not Icon0728.ico impose technical, professional or financial conditions which are excessive and disproportionate to the subject of the concession. The principle of proportionality also requires that competition and financial stability be reconciled. Therefore, the duration of the concession must be set so that it does not limit nor restrict open competition beyond what is required to ensure that the investment is paid off and there is a reasonable return on invested capital, whilst maintaining a risk inherent in exploitation by the concessionaire.

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The principle of mutual recognition The principle of mutual recognition has been laid down by the Court Case law and gradually defined in greater detail in a large number of judgments on the free circulation of goods, persons and services.
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According to this principle, a Member State must accept the products and services supplied by economic operators in other European Union countries, if the products and services meet in like manner the legitimate objectives of the recipient Member State. The application of this principle to concessions implies that the Member State in which the service is provided must accept the technical specifications, checks, diplomas, certificates and qualifications required in another Member State, if they are recognised as equivalent to those required by the Member State in which the service is provided. According to the Community Directive and the national transposition law on public works concessions, the following also apply within the framework of the principles of the Treaty:

 In terms of advertising, Contracting Authorities wishing to award a public works concession contract shall make known their intention by means of a relevant notice. Such notices shall be published in the OJEU and in the national Press. Notices concerning public works concessions contain the information listed in Annex VIIC of Directive 2004/18/EC, and any other information which the Contracting Authority may consider necessary, and are submitted using the standardised forms of the European Commission. In terms of time limits, when Contracting Authorities resort to a public works concession, the time limit for the presentation of applications for the concession usually cannot be less than 52 days from the date of dispatch of the notice. Chapter VII of Law 12(I)/2006 presents in detail the rules applicable to public works concessions. These rules concern, inter alia, time limits, subcontracting, awarding of additional works to the concessionaire, contracts awarded by the concessionaire to third parties etc.

2. 2.1

P UBLIC -P RIVATE P ARTNERSHIPS

What is a Public-Private Partnership (PPP)?

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A Public-Private Partnership (PPP) is a public contract concluded for a long period of time (usually 15 to 30 years) between a public sector entity and a private sector entity for the construction of infrastructure works and the provision of services of a public nature. This type of contract is increasingly applied in the European market, and also in the market of the new EU Member States. PPPs refer to various forms of cooperation of private investors with the public authorities, which also include Local Authorities, for ensuring all or part of the financing, construction, renovation, management and maintenance of an infrastructure, or the provision of a service, in sectors where full deregulation of the market is either unfeasible or undesirable. On the basis of the contract entered into, the private partner undertakes to finance, design and construct the project and operate it for the period of time agreed in the relevant contract. When the contract expires, the operation of the project is undertaken by the Public Authority on whose behalf the contract was entered into. The Contracting Authority of the public partner determines the framework and the requirements of the tendering procedure (tender documents), and the private partner assumes the construction risk and operation risk for the project and, is remunerated during the projects operation phase by way of a consideration (monetary or otherwise) which it receives either from the Contracting Authority or the public authority on whose behalf the project is put out to tender, or directly from the users, or in some cases by both (the public sector & the users). If the consideration is paid directly from the users, then the private partner undertakes the exploitation risk. The participation of the private sector in the implementation of works and services is either in the form of an associated partner for their implementation, or in the form of service provider to the public sector.

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The key distinction that can be made in terms of the contractual contents of PPPs is their distinction in compensatory contracts, where the use of the infrastructure/service is borne directly by its users, and in non-compensatory contracts, where usage costs are assumed by the public sector through regular payments, on the basis of concrete specifications regarding service quality and availability. Through PPPs, the public authorities aim to improve the quality of the services provided to the citizens, achieve savings in the resources of the public sector and of the local authorities which may be channelled to the implementation of additional projects and programmes, and utilise the advantages, experience, know-how and operation methods of the private sector. The international experience has shown that PPPs make possible the provision of highquality services and goods that meet the requirements of citizens in a cost-efficient and effective manner. Indicatively, from the efforts and contracts entered into to this date, it has been found that the successful implementation of PPPs has lead to reductions of 15-20% in the overall financial cost of the provision of the public service foreseen, compared to the traditional procurement methods.

On the other hand, the use of PPPs should not be presented as the only one or the best solution for a public entity facing budget constraints. To proceed to the Icon0728.ico application stage, the financial and organisational choices made in setting up the partnership to carry out the project must offer real value added value compared with other options (such as the conclusion of a more traditional method).
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The success of a PPP in practice depends to a great extent on the completeness of the contractual framework to be agreed, and on the precision and clarity of the terms to govern its implementation. Clear separation of roles, precise assessment and, in particular, optimum distribution of risk between the two parties, together with the clear definition of the responsibilities undertaken by each one of them, are of decisive importance. The scope of the cooperation and the risks associated with it must be distributed between the parties according to the respective ability of each party to assess and control them more efficiently and thus achieve the best possible utilisation of its skills, capacities and experience.

2.2

Forms of Public-Private Partnerships (PPPs)

During the last 20 years, various contractual PPP forms (PPP contracts) have been developed and tried internationally. All these forms have a minimum common core: The relatively long duration of the contractual relationship. The total or partial funding of the project by the private partner, often through complex arrangements. The important role of the private partners, who ensure the projects financial parameters, as opposed to the role of the public partner, who ensures the public interest (objectives, quality, pricing policy etc.). The distribution of risks between the public sector and the private partners, in such a way that the latter assume management of inherent risk factors which, in the case of public works, are today assumed by the public sector. The Green Paper issued by the European Commission in 2004 (COM(2004) 327 final, Brussels, 30-04-2004), distinguishes between two forms of PPPs: PPPs of a purely contractual nature, in which the partnership between the public and the private sector is based solely on contractual links, with a further distinction between concession contracts, characterised by the direct relationship between the private partner and the end user, under the control of the public sector, with payment in the form of fees imposed on the users, and Public Finance Initiative (PFI) contracts, in which the private partner is required to implement and manage a public administration infrastructure (school, hospital etc.), with payment in the form of regular payments made by the public sector (availability fee), and PPPs of an institutional nature, involving cooperation between the public and the private sector within a distinct entity (Special Purpose Vehicle or SPV). There are many types of PPP contracts, which are adapted to each particular project. Their main advantages, provided that there are applied properly, are: The need to secure funds of the State budget,

 The quality improvements in infrastructure construction and service provision, The mobilisation of private sector know-how on project design and implementation, and The significant curtailment of lifecycle costs for a project or service.
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The most widely used forms of PPP contracts are listed in the Table below:
Table 1: Most widely used PPP forms

B.O.T. D.B.F.O. B... B.O.O. B.B.O L.R.O B..L.T O.M. O.M.M.

(Build-Operate-Transfer) & BOOT (Build-Own-Operate-Transfer) (Design - Build - Finance - Operate) (Build - Transfer - Operate) (Build - Own - Operate) (Buy - Build - Operate) (Lease - Rehabilitate - Operate) (Build - Own - Lease - Transfer) (Private Services Contract : Operation and Maintenance) (Private Services Contract : Operation, Maintenance and Management)

In particular, these PPP forms involve the following: ... (Build Operate Transfer) and .... (Build Own-Operate Transfer) The private contractor constructs, maintains and operates the project, on the basis of the specifications agreed with the public sector. The project is either owned by State entities (B.O.T.) or assigned for a predetermined period of time to the private partner (B.O.O.T.), who upon expiry of the exploitation period (concession), transfers to the public sector the projects operation (BOT) or ownership (BOOT). In most cases, the private partner is responsible for part or for the entirety of the financing for the project. This form, considered as the most widely used of all PPP forms, was for example adopted by Greece for the construction of large-scale infrastructure projects, such as the ELEFTHERIOS VENIZELOS airport, the Spata-Elefsina Freeway, the West Immitos Ring Road, and the Rion-Antirion Bridge. D.B.F.O. (Design-Build-Finance-Operate) The private partner is responsible for the design, construction, operation and financing of the asset, and recovers the capital invested through the payments made by the public sector for the services provided during the contract. Upon expiry of the contract, ownership of the asset is transferred to the public sector. The DBFO model is the basic model for contracts involving the development of public sector infrastructures and assets, when the possibilities of parallel commercial exploitation are in principle unknown and may potentially be limited. ... (Build-Transfer-Operate) In this form, the private partner designs, finances and constructs the project. After completion, ownership of the project is transferred to the public sector, who then agrees to lease the project to the aforementioned private partner for a predetermined period of time. During this time, the private partner manages the project and collects the revenues from its operation.

... (Build-Own-Operate) In this form, the public sector approaches the private sector with a view to implementing a public utility project. The public sector grants a long-term operating license to the private partner, who assumes the responsibility for financing, designing, erecting and operating the project. In this particular form of PPP, the private partner owns the project, while the public sector establishes precisely the operating specifications regarding the services provided, the safety regulations and the maximum level of the fees, if any, for using the project (e.g. tolls). ... (Buy-Build-Operate) Within the framework of attracting private venture funds, the public sector sells existing public utility installations to private sector entities, with the aim of securing the realisation of additional investments for them (renovation-expansion), in order to take advantage of the construction and administration skills of the private sector, mitigate the risks resulting from owning and operating the project, and capitalising on the significant economic value of existing infrastructure works. The private partner operates these installations as a profitable utility project under State supervision. L.R.O. (Lease-Rehabilitate-Operate) In this form, the private partner leases existing facilities from the public sector, invests its own funds for modernising or expanding them, and then undertakes their operation and exploitation for a predetermined period of time, under a contract entered into with the public sector, who owns the project. B.O.L.T. (Build-Own-Lease-Transfer) In this form, the private partner finances and constructs the project, and then leases it to the public sector through a leasing agreement. The public sector makes regular payments to the private partner, through which ownership of the project is gradually transferred to it. At the end of this period, the public sector has full ownership of the facilities, or can purchase them for a price determined in the leasing agreement. During the term of the lease, operation of the facilities is undertaken either by the public sector or by the private partner.

.. (Private Services Contract: Operation and Maintenance) By awarding an OM private services contract, the public sector assigns to the private partner the operation and maintenance of a project but retains ownership and management of it. ... (Private Services Contract: Operation, Maintenance and Management) This form concerns the award of an integrated private services contract, whereby the public sector assigns to the private partner the operation, maintenance and management of a project but retains ownership of it.
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The distinction between the above forms of PPPs is defined within the two extreme boundaries of concession and ownership, and is a function of the distribution of risks between the parties involved and of the financing arrangements between the contracting parties (public sector funding agencies / banks contractors/shareholders). This distribution is shown indicatively in the Figure below:

Figure 1: Types of contract as a function of the distribution of risks between the parties involved and of the financing arrangements

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The organisational chart that follows shows a typical organisation of a PPP contract,, where the core comprises the contract and the private party (Special Purpose Vehicle) entering into contract with the public sector. Payment for the project or for the service provided by the SPV takes place over the term of the contract, either through the exploitation of the facility or through regular payments by the public sector, in line with the attainment of predetermined quality and availability targets. The private partner usually undertakes, through a tender procedure, to design, finance, construct, operate and maintain the project for a period of 15 to 30 years.

Figure 2: Typical organisation of a PPP contract

The Figure below presents the parties involved in PPPs and their interrelationships. Central to a PPP structure is the Special Purpose Vehicle (SPV), which is established exclusively for the purposes of the project and enters into contract with the other project entities through a complex system of contracts that ensures the clear distribution of risks. Roles and responsibilities: Contractor: own funds, know-how; Construction Contractor: construction, maintenance, adherence to construction schedule; Market: the market to benefit from the development of an efficient and socially acceptable solution; Manager: assumes the risk of return on the investment made, and part of the long-term management of the asset; Public Sector: legal framework, main part of the contracts, contribution in money; Banks: financing structure, know-how, provision of funding through a financially viable arrangement.

Banks / Funding Agencies

Funding Guarantees

Public Sector

Guarantees Shareholding ourceP Contracts

Investor inFunding terms ot time anc cost ...ncentive for the felivery s for servic

Shares Contribution in kind Service Contract Special Purpose Vehicle (SPV)

Shares Cash Management Contract

Manager

Contractor Market Construction Contract

Figure 3: Participants in PPP arrangements and their interrelationships

It should be noted that where the Public Sector wishes to retain a shareholding interest in the Special Purpose Vehicle, its participation is limited to 49%. However, the most common practice is for the public sector not to participate in the share capital of the SPV. In this case, if the construction is made on a plot owned by the public sector, this is granted to the SPV together with the exploitation rights for the plot and for any buildings erected on it.

2.3

PPPs compared to other types of contract

PPPs can offer significant advantages to the implementation of a project with the best value for money, allowing public sector entities a relative fiscal flexibility, as it provides them with an opportunity for securing the public expenditure required for the project or for converting short-term obligations into a series of long-term regular payments while in parallel exploiting in terms of fiscal planning the resulting difference to improve their macroeconomic figures, but in practice also for other purposes, such as the creation of infrastructures which, because of fiscal restrictions, could not be financed directly.
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It is however clear that the complexity of the resulting contractual relationship, and the very fact of public assets and services being assigned through PPPs to economic operators who by default operate on the basis of, and are motivated by, business profit, do not leave much room for experimentation in the procedure followed for selecting this method as more advantageous in comparison to other options available. Thus, in order to opt for this implementation method, the difference in the value added should, in terms of the financial and social end result, be undisputed. The Table below summarises the conditions necessary for deciding on the initial suitability of a PPP solution and on the need to further investigate its adoption:
Table 2: Conditions for investigating the award of a PPP Existence for the need to carry out an extensive investment programme that requires the management of risks associated with construction and with the provision of services.

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The private sector know-how and specialisation required to implement the project exists, and it is estimated that it can offer good value for money for the project. The type of the service envisaged is such that the public sector entity may specify it on the basis of operating specifications for the duration of the contract. Whole Life Costing (WLC) can be established for the project/service. Demand for the project/service concerns a long period of time and a growing client base. The technology incorporated in the implementation of the project/service is not expected to be modified significantly (and in any case, not beyond the possibility of adaptation) over the next years.

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In assessing PPPs as an option against other forms of contract, the criteria listed in the following Table may be used:
Table 3: Criteria for assessing PPPs as an option against other forms of contract

The techno-economic result of the project for the public sector entity. This involves issues related to the costs for implementation and operation of the project and/or the provision of the service throughout its lifecycle compared to the implementation and provision of the service by the public sector, to the quality operation specifications and the relevant checking procedures, to the required level of quality upon expiry of the contract etc. The expected compensatory nature and functionality of the project for its users (socio-economic result) in terms of the provision of the particular service, but also in terms of its complementarity to other services of a public nature. Sufficient size, so that the project may be bankable for credit institutions, whose contribution (and the terms governing the relevant agreements) is a key element of the project. In the case of PPPs, an important aspect which usually is underestimated is the cost of the award procedure, both for the public sector entity and for the tenderers, and its proportion to the cost of the project. Financial viability, so that the project is attractive to the private investors who will tender for it.

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In addition to the above criteria for assessing PPPs as an option against other forms of contract, the following Table lists some critical factors affecting their adoption:
Table 4: Critical factors affecting the adoption of PPPs

The expected development result of the project. The project should form part of, and contribute to, the public sector entitys development planning, in terms of its result at the level of the provision of the service to which it refers, as well as in terms of its overall impact on its operation, on social development and on its economic environment. The long-term political will to implement the project. The social acceptance of the project, at least during a first period in the implementation of the PPP. In what regards Local Authorities, for example, the project must complement social and administrative structures and acquired employment rights, rather than attempt to substitute them. The institutional and legal framework for implementation, which must ensure clear terms for the project. The trade, financial or other rights regarding the provision of the envisaged service.

2.4

Critical success factors for PPP contracts

The Table below lists the critical factors affecting the success of PPP contracts, grouped according to whether or not they are controlled or affected by the public or Icon1310.ico private sector, or by both.
Table 5: Critical factors for successful development of PPP contracts

Factors controlled or affected by the Public Sector

Determination of political priorities in relation to the projects to be developed

Commitment of the public sector to these forms of partnership Coordination between public services and entities Capability of the public sector to respond to the requirements of contracts of this form (negotiations, monitoring, checking, evaluation) Attracting interest from the market (viability and attractiveness of projects) Financial affordability of the project for the public sector Suitable economic, legal and institutional framework The environment within which the project is developed The projects particular characteristics The duration of the contract Standardisation for curtailing costs and determination of effective procurement procedures

Factors controlled or affected by the Private Sector

Capability of the market to respond to the requirements of the public sector and of the project Financial viability of project implementation from the viewpoint of the private sector Possibility for the private sector to achieve acceptable profit

Factors controlled or affected by both

Sufficient funding ensuring completion of the projects Compatibility of contracts with the applicable legal and institutional framework Structuring and Management of contracts (determination of minimum specifications, payment mechanisms etc.) Identification, effective management and suitable distribution of risks Know-how and experience

2.5

Advantages and drawbacks of the application of PPPs

The advantages and drawbacks of the application of PPPs are the following: 2.5.1 Advantages of the application of PPPs

The advantages of the application of PPPs for the public sector are the following: Improvement of infrastructures and assets Flexibility PPPs can be developed in many key infrastructure activity areas, such as water supply, energy, telecommunications, roads, transport, hospitals, schools, prisons, accommodation of offices and departments, museums etc., as well as in the area concerning the development of the public sectors real estate property. In all these cases, PPPs help bring about improvements in innovation and in the quality and quantity of supplies/services/assets. High-quality services Improved project management The quality of the services provided through PPP contracts may be higher than that obtained in the classic way, as a result of innovation, competition, performance incentives and planned maintenance throughout the project lifecycle.

Innovation Savings in time and money The specialisation and experience of corresponding projects available in the private sector offers an opportunity for developing innovative solutions, reducing project delivery cost and time, and improving functional design, construction, and process management. The processes to be developed can serve as standards for future projects, to which they could also be applied. Provision of services at a lower total cost The net present value of the total cost of the services provided through PPPs, if the corresponding arrangements and the contract have been structured and applied correctly, is lower than the cost borne by the public sector when the procurement of the corresponding supplies or services is made in the classic way. Although the financing of the project by private funds may involve additional costs, as the borrowing cost for the private sector is usually higher than that for the public sector, these costs may be compensated by the synergies developed by combining the design, construction and operation of the project under the same economic operator. These synergies may lead to reductions in operating and maintenance costs and to improvements in the level of the services provided (value for money), resulting in a total cost for the development and operation of the project which is lower than that obtained through the classic procurement approach. Financing of the project by private funds and the transfer of the responsibility for operation to the private sector, usually results in the avoidance of cost overruns and in the adherence to the construction schedule, two factors which are very difficult to control under the conventional method followed for the procurement of supplies and services. The Figure below presents the differences, in terms of time and money, between public works contracts and PPP contracts.

Public Works Contracts

PPP Contracts Payments

Payments

Cost overruns

Time overruns

Estimated investment cost

No payments made until the project is completed Operation/maintenance cost overruns

Payments for usage

Payments for availability Estimated operation/maintenance cost

0
Construction Period

10

15

20

0
Construction Period

15
Operation Period

20

Operation & Maintenance Period

Years

Years

Figure 4: Differences between Public Works Contracts and PPP Contracts in terms of time and cost (Source: IFS/PWC)

Transfer of risks The identification of the risks associated with the project and their distribution between the public and the private sector on the basis of their respective ability to manage and control more effectively each risk, is perhaps the most important benefit of PPPs. This distribution usually involves the following risks: design, construction, operation, technological change, financing, market, legal etc. The Figure below shows the distribution of risks between public and private sector:
Public Sector: Risk assumption Risk Transfer or Assumption Private Partner: Risk transfer

Required licenses/permits Institutional framework (taxes, spatial planning etc.)

Inflation Demand (usage / size) Residual Value Force majored events

Design Construction Operation Financing Technology

Figure 5: Risk distribution between Private and Public Sector (Source: IFS / PWC)

Improvement of the performance and effectiveness of the new services By allocating each risk to the entity best able to handle it, and by linking the payments for services provided to performance, PPP contracts may serve as clear incentive for the delivery of projects on time and without cost overruns, and for ensuring adherence to the desired specifications throughout the duration of the contract. The public sector shall pay the entire amount of payments only when the services provided meet fully the desired level and the specifications (payment mechanism). In contrast, in the case of public contracts, the maintenance and operation of the asset depends on the availability of corresponding funds under the State budget, and on the effective implementation of relevant programmes by entities who do not always have available the infrastructure required. Clear commitment to the client/citizen The development of PPPs by the public sector is aimed at meeting its needs and requirements in connection with the services required, rather than managing the existing procedures for the provision of services. This shift in focus from the management of procedures to the quality of the produced result is a determining factor in the promotion and development of innovative solutions and in improving the relationship between the public sector and the citizens. Differentiation of services The development of PPPs enhances competition and, through the introduction of benchmarks, allows comparisons the quality and production costs for the services provided to be compared to those of similar services in the market, a development that helps improve productivity and effectiveness.

Funding Development of more projects The use of private capital in the construction and development of projects can accelerate the infrastructure development programme and help keep public expenditure within the budgeted cost, eliminating overruns and the need for additional funds. Broader economic benefits By helping develop and bring to completion a significant number of projects during periods of budgetary restrictions, the development of PPPs may act as incentive for the private sector, mobilising resources that may help to increase employment and achieve economic growth. Know-how The application of PPPs assists the transfer of know-how to the public sector, through its cooperation with the private sector. The advantages of the application of PPPs for the private sector are the following: Participation in public projects and joint ownership of the assets. Attractive profit margins. Long-term contracts. 2.5.2 Potential drawbacks of the application of PPPs

Implementation complexity PPPs are characterised by increased complexity in their implementation, due to the necessary changes in the institutional framework and to the complex set-up of contracts which should foresee all potential risks and the ways in which to address them, in order to achieve the distribution of each risk to the party best suited to manage it. High partnership structuring costs Because of their complexity, the cost associated with the development of PPPs during stage of their formulation may be considerably higher than the costs to result through conventional procurement methods for assets and services. Of course, this does necessarily mean that the total cost of the project shall be higher compared to that of conventional procurement method. Higher borrowing cost The borrowing for the private partner is usually higher than that for the public sector and, given that the private partner will seek a high borrowing rate, the financial cost of the project may be increased. Of course, this does not necessarily mean that the total cost of the project shall be higher compared to that of the conventional procurement method. Ineffective contract management Proper monitoring and checking of the contract may not be available, resulting in failure to achieve the desired results (level of services, payment mechanism, assumption of risks etc.). This may be due either to a lack of know-how or to the absence of suitable monitoring procedures. the the not the

Lack of competition In the case of a PPP contract, the presence of competition contributes to the development of innovative solutions and to the improvement of the effectiveness in the provision of services. However, the result intended may not be achieved in cases of weak or limited competition or where the number of private partners able to provide these services (i.e. having the knowledge, capacity, and resources required) is small..
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It is important to note here that several of the drawbacks of PPPs can be minimised through proper planning, structuring and implementation of the project. For example, the initial financial viability study should document that the total economic benefit from such a structure may exceed the higher cost of structuring the partnership and the financing cost (value for money). In addition, clear support by the State is required at the political, legislative and institutional level.

2.6

Steps in awarding and implementing a PPP contract

The figure below presents the steps of a typical PPP procedure. The time required for completion of such a procedure, from the publication in the OJEU to the signature of the contract, varies from 14 to 24 months.

Preparation of Tender Procedure (Public Sector)

Determination of business need Assessment of alternatives for project implementation and of the suitability of the project for developing PPP/PFI solutions Documentation of the overall economic benefit from the project (value for money) Initial market sounding Securing of the approvals required to proceed with the solution Establishment of Project Team

Official Journal of the European Union (OJEU)

Publication in the OJEU

Prequalification Documents Invitation of Requests to Participate

Preparation of prequalification documents Dispatch of documents to the interested economic operators Submission of requests to participate by the candidates

Prequalification of Candidates

Evaluation of requests to participate Prequalification of candidates (usually 5 6)

Tender Submission Documents

Preparation of tender submission documents Dispatch of documents to the prequalified candidates Submission of tenders by the prequalified candidates

Evaluation Selection of Candidate Contractor

Evaluation of submitted tenders on the basis of the specified technical, financial and legal criteria Selection of candidate Contractor

Contract Signature Contract Management

Final discussions and negotiations for signature of the contract Contract Management

Figure 6: Steps of a typical PPP procedure

The Table below summarises the key conclusions regarding the application of PPPs.
Table 6: Conclusions regarding the application of PPPs PPPs are a reliable alternative for implementation of numerous infrastructures of the public sector, and of the management and operation services associated with them. Savings in time and cost may be achieved. Private financing may be more expensive than public funding, but in all cases the introduction of a competitive procedure leads usually and under the right circumstances to solutions which are more economic overall (construction, operation and maintenance). The legislative and institutional framework must be determined or enhanced. As a rule, the quality of the services provided through the development of PPPs is improved, while the public sector may specify and check the quality of the services provided. As the payments made to the private partner are linked clearly to the quality of the services provided and to the attainment of a specific quality level, the achievement of the objective acts as an incentive driving the efficiency and effectiveness of the private sector and the quality achieved is better than that obtained through the traditional procurement approach. The public sector maintains control over public assets, as risks and responsibilities regarding the dayto-day management of the services provided are transferred to the private sector selectively. In any

case, the public sector maintains control over the possibility of adopting and imposing policies, specifications and regulatory interventions.

2.7

PPP Projects in the EU and examples of sectors where PPPs are applied

The maps and tables in this section present applications and examples of PPPs in the EU. Source: European Investment Bank, Dexia Credit

Ireland Belgium PPP Act 2002 PPP Decree 2003 Education Transport Health Water Supply Networks Transport Education Water Supply Networks Education

Netherlands PPP Task Force 1999 Transport Water Supply Networks Health Prisons

Finland Transport Education Health Water Supply Networks

France LOPSI, LOPJI 2004 Ordonnance Mattei Ordonnance PPP Education Health Transport Infrastructures Prisons

Germany PPP Task Force 2003 Defense Water Supply Networks Infrastructures Roads Greece Transport Tourism

Portugal PPP Law 2003 Transport Health Prisons Water Supply Networks Education

Spain PPP Law 2003 Transport Health Education Water Supply Networks

Italy Merloni Law 2001-4 Transport Health Water Supply Networks Education

Poland Legal framework under preparation Water Supply Networks Transport

Slovakia Water Supply Networks Transport

Czech Republic PPP Taskforce 2004 Legal framework under preparation Water Supply Networks Transport Military Camps Health Education

Hungary PPP Committee 2003 New Procurement Act 2004 Transport Prisons Health Education Water Supply Networks

Croatia Transport Water Supply Networks

Romania Transport Health Water Supply Networks

Environment
Solid & liquid waste management Provision of water supply irrigation services Management of energy sources

Building facilities

Entertainment
Tourist facilities Theme parks Malls Recreation areas Exhibition areas Sports facilities

Court Halls Prefectural/Municipal Halls Relocation services Social welfare centres Management of real estate property

Education/Training

Transport
Motorways Tramway, Underground rail (Metro), airports Ports, marinas National trunk roads Road network in cities Parking

Health

Students residence halls University campuses Schools

Hospitals Health Centres Clinics Patient Treatment Units

Source : Grand Thornton Presentation (Athens 2005)

Security
Prisons Therapeutic Communities Police Stations Fire Brigade Centres

Defense
Accommodation, offices Construction of auxiliary facilities Training Centres

Technology
IT Services Systems for Schools, Universities, Ministries, Public Services and

Source : Grand Thornton Presentation (Athens 2005)