Public-Private Partnerships:

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Public-Private Partnerships:

Struggling with a foreign success story

Appendices

Faculty of Management & Organization

January 10, 2005

By: Luc van Rooijen stud.nr.: 1029835

Supervisors:

Drs. C.P.A. Heijes (faculty of Management & Organization) Drs. E. Gnirrep (faculty of Management & Organization) T. Treharne (KPMG Corporate Finance, London)

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Public Private Partnerships: Struggling with a foreign success story

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Appendices

1.1 Summary of PPPs by country and sector in Europe

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A government is responsible for the well being of its subjects. To provide in this responsibility, public services are offered.

They are the backbone of the well being of our society and this countries economy. The procurement of these services has always been done in a traditional manner, based on input-specifications provided by the public authority.¶

The United Kingdom gave rise to a new form of procurement, adding more Value for Money and reduced delivery time for projects. It is called Public- Private Partnerships, procurement of a public service in a partnership between public and private parties, based on an output based specification.¶

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Source: PriceWaterHouseCoopers (2004). Developing Public-Private Partnerships in New Europe

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3 1.2 Signed value of PPP contracts

The following figure depicts the signed value of public-private partnership contracts as a percentage of total public investment between 1995 and 2003. It shows a good comparison on the dedication with which PPP has been pursued over the past few years.

Signed value of public-private partnership contracts as a percentage of total public investment (average 1995-2003)

0 5 10 15 20 25 30 35

Italy Netherlands Portugal United Kingdom

%

Source: Dealogic ProjectWare

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4 1.3 Summary of several PPP projects in the Netherlands

1.3.1 A2 Passage Maastricht

This project combines the construction of a motorway and tunnel with the development of the surrounding areas. At a regional level the proposal has been made to acquire this service through a PPP. The authority refused any form of toll- collection to be incurred. The expected revenue generated by de urban

development of the region was to be applied to finance the project. Due to budget deficiency and lack of budget this project has been put on hold.

1.3.2 A59 Motorway

The A59 Motorway involves the upgrade of 9 km stretch of road between Rosmalen and Geffen. The Government has reached an agreement with the Province to upgrade the road to a motorway. This was done to relieve traffic congestion and decrease the amount of accidents occurring. Based on a 15-year concession, a consortium (Poort van Den Bosch) will build and maintain this stretch of road.

Initially the project was heavily delayed caused by the authority’s resolution to transfer almost all risk to the private sector. The private sector would,

understandably, not agree to this. Rough calculations, based on traditional procurement also revealed a deficit in the budget. The decision was made

however, to still go ahead with procurement. Multiple bidding consortia found ways to save millions, but were unable to implement these plans, because it would have meant deviating from the existing Tracé/MER decision. A deviation would have required a newly set up procurement procedure, causing too much delay. The decision was made to go ahead with the project based on lesser Value for Money than possible. Although more expensive than initially budgeted, the project reached financial close in 2003.

1.3.3 HSL-Zuid project

The HSL-Zuid is High Speed Line passenger railway, running from Schiphol Airport, Amsterdam and Rotterdam to Antwerp in Belgium.

The HSL-Zuid was cut up in three different segments. The first segment, the build of the concrete foundation for the track, was procured traditionally. Multiple consortia were involved. For the second segment, the contract for the provision and maintenance of the superstructure was signed by Infraspeed in December 2001.

This PPP Contract has a term of five years construction period covering the design, build and financing of the superstructure for the HSL Zuid line followed by a twenty-five years maintenance period.

A separate PPP competition went out to procure an operator. In December 2001 an agreement was reached on the operating contract. The Ministry of Transport, Public Works and Water Management has granted the High Speed Alliance (Nederlandse Spoorwegen / KLM) the use of the HSL infrastructure over a period of 15 years.

Starting from April 2007 High Speed Alliance will offer national and international travel services on this line.

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5 1.3.4 Metro Shuttle Kop van Zuid

The Metro Shuttle project was a proposal to build a metro (operating unmanned) from Rotterdam city centre to the Wilhelmina pier.

It was expected that by increasing the quality of the infrastructure, property revenue would increase, which the authority wanted to use to partially finance the project. Market consultation revealed that the private sector did not perceive any added value in the form the authority suggested. This project failed because of the budget deficiency. Private parties were only willing to invest money in this project, if in return they would receive development rights for the pier. Local Rotterdam Government was not willing to agree to these terms and the project was cancelled.

1.3.5 National highway N31

A good example for a newly conceived project is the national highway N31 between Leeuwarden and Drachten, which reached financial close in 2003. The Waldwei consortium will be responsible for the provision of this public service.

The widening of this existing road is procured by means of a PPP. The design, build, finance and maintenance of this road is based on a concession of 15 years starting at the end of completion. Construction has to be completed within a maximum of 5 years.

The consortium will be remunerated based on the quality of the availability.

Initially delayed by inexperience with PPP, this project has reached financial close.

And preliminary evaluation suggest improved Value for Money up to 15%

1.3.6 North-South Line Amsterdam (Noord-Zuidlijn)

The North-South Line involves the build of a 9,5 km metro-line connecting the north with the south of Amsterdam, by crossing the river IJ.

The project was discontinued as a PPP, because the municipal government of Amsterdam was unprepared to transfer responsibility for the build and

maintenance of this metro-line to private parties. They concluded there was too much uncertainty surrounding the project’s policy environment. It is now being procured traditionally.

1.3.7 RandstadRail

The RandstadRail project is a light-rail connection between Rotterdam and The Hague.

The two project-organisations responsible for the development in both

municipalities were unwilling to transfer responsibilities to the private sector and chose for in-house control. The option for a Public-Private Partnership was

cancelled. The project will be subsidised by the Ministry of Transport, Public Works and Water Management.

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6 1.3.8 Underground Logistics System Schiphol

The concept of this project was the construction of an internal logistics system between Schiphol Airport and two of their main clients: the flower-auction in Aalsmeer and Railservice Centre in Hoofddorp. The latter has dropped out of the project. This project was put on hold due to insufficient budget.

1.3.9 Zuiderzee Link

Provision of a high-speed passenger transport solution, to improve access between the Northern provinces and the Randstad conurbation, thereby boosting the regional economy in the north of the country. Two options chosen to facilitate this transport are the high-speed line (HSL) and the magnetically levitated link (maglev). The Dutch government is willing to contribute up to

€ 2.73 billion for the development of one of the two rapid options. The Northern provinces themselves and their local authorities will be expected to contribute an additional €1.02 billion. This figure would be € 0.23 billion for the high-speed line.

The project is in the early stages of mobilization. A technical adviser to the Government has just been appointed, to set up an output specification.

Preliminary talks have revealed there is still much uncertainty in striking a balance in the transfer of risk.

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7 1.4 Summary of PPP pathfinder projects in Italy

In 1999 additional PPP-legislation was enacted in Italy, next to the ‘Merloni’-law, identifying three pathfinder projects to be pursued as a PPP; Two motorways (Pedemontana-Veneta and Salerno-Reggio Calabria) and the link between Sicily and the Italian continent.

1.4.1 Stretta di Messina (Italy-Sicily link)

The central government of Italy announced plans to undertake Italy-Sicily link on July 1999. The project involved the construction and the operation of a bridge to link Reggio to Sicily. The 3,600 metre single-span suspension bridge was planned to have a highway platform able to bear 9,000 vehicles per hour and a double track railway allowing the passage of 200 trains per day. The scheme was also to include service lanes, emergency lanes and two lanes for maintenance and safety.

The project was officially launched on the market as a 40-year private-public partnership (PPP) design-build-finance-transfer project on June 2002 after marketing testing. The estimated cost of building the bridge was around €4.4bn with entire project cost at €6bn. It was expected that €2.5bn was to come from the state-controlled construction company, and the remaining €3.5 bn from the private sector. The central government passed the environmental impact assessment on June 2003. The state, through its infrastructure funding agency Infrastrutture-SpA would be the conduit for the debt.

The project will be collecting revenues based on real toll for the road part and a pretty much flat availability-type payment stream coming from the train operators.

It was foreseen that works would begin in 2006 and would be completed in 2011.

Currently this project is still in tender.

1.4.2 Salerno-Reggio Calabria toll road

The Italian Ministry of Public Works, announced plans to include the private sector for the Salerno to Reggio Calabria toll motorway project on January 2000. The project concerned upgrade of the existing motorway. This upgrade, with a total value of approximately €2 billion, is complicated in nature and has therefore been divided into separate lots. While the fact the road is already in use aids in the projects viability (due to the existing demand), it initially had adverse effects on the project, as introducing real tolls in the beginning of the project was seen politically impossible. Due to these issues, the decision was made in 2001 to go ahead with a traditional procurement scheme, rather than a PPP.

The construction contract for the first phase was awarded on July 2003 without backup banks. Under the contract, the contractor was to design, build and finance the project, but was not to operate the motorway. The project was to be transferred upon completion. The funders cannot see how the project can go forward without raising some external debt.

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8 1.4.3 Pedemontana-Veneta toll road

Societa' Pedemontana Veneta of Italy announced its plans to construct a

motorway on Oct 1999 to connect the region of Vicenza to Treviso. The motorway was to cover a stretch 0f 64.4 kilometres. Costs for the project were estimated to be € 1.5 billion. The project was to be developed under a 10-year build, operate and transfer concession with 60% of the costs to be raised in the private sector.

The Veneto Region approved the motorway project on Nov 2002 under the 37bis procurement provisions. Contrary to the other road-scheme (Salerno-Reggio toll road) this road is to be built from scratch. The contract was signed in January 2003 and completion is estimated in the first quarter of 2006.

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9 1.5 Summary of several PPP projects in Portugal

1.5.1 Tagus Bridge

The Tagus Bridge is an 18km crossing over the river Tagus, enabling north-south traffic to bypass Lisbon, the Portuguese capital.

The €897million project was financed with an European Union grant of €319 million (35%); an EIB loan (with bank guarantees) of €299million (33%) and a

Government grant of €218m (25%).

The 30-year concession includes the build, operation and maintenance of two river crossings, including the existing ‘25th of April bridge’. It was one of the first

important public works concession projects financed by limited recourse in Portugal.

1.5.2 The Norte Litoral SCUT toll road

This project involved the construction and operation of a 113km road, costing €306 million. 41km of new road would be constructed and 72km of maintenance and major repairs would be undertaken under the scheme. The road was to be developed on a shadow toll basis i.e. the users do not pay a toll, the operator will be paid a fee by the Portuguese government based on the level of usage. Of the 113 km of road offered under the concession, 72 km was existing road constructed by the Portuguese government and 41 km was was to be constructed by the developer. Construction was mostly funded by equity. Construction started in 2004 and due for completion in July 2005.

1.5.3 The Algarve SCUT toll road

The 130 km road (37.8 km newly-built) runs from Vila Real de Santo Antonio to Lagos and establishes a new east-west axis, 15-20 km inland, along the coast of Southern Portugal, improves communications for the coastal towns and reroutes long-distance traffic. The new road will service the towns along its route, whose population grows from its regular 80,000 to over 350,000 in the summer months.

Traffic is estimated to reach 14,500 vehicles per day. The project costs are estimated at € 218 million and is under concession for 30 years.

1.5.4 The Beiras Litoral e Alta SCUT toll road

This € 1.2 billion project is the largest shadow toll road project worldwide. The transaction is a 30 year concession awarded to Lusoscut, a consortium, to design, build, finance and operate the 166.8 km of motorway, also known as SCUT IP5.

The total capital value is approximately €1.2 billion, raised on behalf of the

Lusoscut consortium. Within this an important source of funding has been a loan of

€470 million from the European Investment Bank.

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10 1.5.5 The Grande Porto SCUT toll road

The Grande Porto SCUT project involves an €842 million shadow toll road concession in the metropolitan area of Porto, the second largest city in Portugal with a population of 1.2 million. The 66km project comprises the construction of three new sections and, in addition, the provision of maintenance for the existing IC24 motorway that runs to the city airport. The 30-year concession will be project financed jointly by commercial banks and the European Investment Bank.

1.5.6 The Beira Interior SCUT toll road

This €576 million project, operational since 2003 is an 177 km stretch of the highway which joins Abrantes and Guarda. The Beira Interior shadow toll road was the first to follow the SCUT-model (shadow toll). The model was expected to follow the UK design, build, finance and operate closely.

This road involved building 82km of motorway and upgrading a further 95km over four years, there will be 27 new viaducts and 3 tunnels.

1.5.7 The Costa da Prata SCUT toll road

The Costa de Prata Highway is 102 km long, costing €299 million. 38 km of the route are already in operation. The highway connects the cities of Mira ao Sul and Coimbrões in the Greater Porto region, operated through the SCUT system, without charge to users. The Portuguese government pays the concession company, LusoScut da Costa de Prata, in accordance with traffic volume. The design, construction, financing, operation, maintenance and management of the route has a concession length of 30 years

1.5.8 The Interior Norte SCUT toll road

The project company will operate the 155km motorway in north east Portugal under a 30-year concession. The project is estimated to cost in the region of €750 million.

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Page Break References¶

<#>Books¶

Andriessen, J.H.T.H.(1987), Organisaties en hun relaties, Tilburg: IVA.¶

Baarda, Dr. D.B., De Goede, Dr. M.P.M. (1997). Basisboek Methoden en Technieken.

Houten: Educatieve Partners Nederland B.V.¶

Bult-Spiering, M. (2003).

Publiek-Private Samenwerking:

de interactie centraal. Utrecht:

Uitgeverij Lemma B.V.¶

Carmines, E. G. & Zeller, R.A.

(1991). Reliability and validity assessment. Newbury Park:

Sage Publications.¶

Cartwright, J. (1999). Cultural Transformation: nine factors for improving the soul of your business. Harlow: Pearson ... [8]

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Executive Summary

A government is responsible for the well being of its subjects. To provide in this responsibility, public services are offered. They are the backbone of the well being of our society and this countries economy. The procurement of these services has always been done in a traditional manner, based on input- specifications provided by the public authority.

The United Kingdom gave rise to a new form of procurement, adding more Value for Money and reduced delivery time for projects. It is called Public- Private Partnerships, procurement of a public service in a partnership between public and private parties, based on an output based specification.

Public-Private Partnerships cover a broad spectrum of arrangements under which partnerships between public and private sector organisations are developed for the purpose of designing, planning, financing constructing and/or operating infrastructure projects, normally provided through a traditional procurement route by the state.

Well established in the United Kingdom, this process of procurement still is in its infancy in the Netherlands. The research covered in this dissertation has been done with the following goal in mind:

For this, a research question has been set up:

Key Conclusions:

Comparison of the signed value of public-private partnership contracts as a percentage of total public investment between 1995 and 2003 for Italy, Portugal, the Netherlands and the United Kingdom reveals a varied picture¹. Italy and the Netherlands, albeit simultaneous start-up of their PPP-

programme with Portugal, show significant less development, with Portugal nearly reaching UK levels.

Due to large budget-deficits, the poor state Public Service was in and disastrous experience with privatisation of the Rail industry amongst other things, the English government was forced to invest in making PPP

successful.

In the Netherlands, where budget was more sufficient and the quality of public services was good, this dire need for a more efficient procurement-measure never arose.

1 See Appendix 7.2

Providing insight into the generic and country specific driving mechanisms for successful implementation of Public Private Partnerships.

What factors influence the implementation of PPPs in the Netherlands and contribute to the underdevelopment of PPPs compared to the United Kingdom?

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PPP developed as an alternative form of procurement, next to the traditional methodology.

The Dutch government recognised the potential of PPP, from closely observing the United Kingdom. A pilot programme was set up, with 6 – 10 projects that were to be procured as a Public-Private Partnership, in order to gain experience with the phenomenon. The first few projects were already thus far in development, that conversion to PPP proved difficult, or even impossible.

Some projects with substantial budget deficits were converted to a PPP in the idle hope this would fill the financial gap. This proved to be an unjust strategy.

Although PPP can provide a more efficient procurement and added Value for Money for a public service, it will still cost money, be it spread over a longer period of time.

A great deal of the early projects reverted back to traditional procurement;

others were procured as a PPP, but only partly.

One of the key elements for the lack of tenacity in pursuing the PPP process can be explained by the uncertainty avoidance of the Dutch. The risk of choosing for a new –unproven- form of procurement, combined with the uncertainty caused by lack of experience creates a tendency to favour traditional procurement over PPP.

The uncertainty surrounding the policy environment of projects also causes public authorities to be hesitant in committing to a private party over a relatively long time period.

Comparing traditional procurement with PPP procurement also failed to be conducted on an apple-for-apple comparison. Cost estimation based on traditional procurement only involves the cost of construction. Cost estimation for a PPP involves the entire life-cycle of a public service. In order to be comparable, the incurred costs of risk should be prised in the traditional cost estimation. Because some risk is more efficiently handled by the private sector, comparing the cost of the same risk allocated to the public sector should be adjusted upwards.

still resides in a learning phase. The Government’s choice to pursue big infrastructure projects and mega projects combing infrastructure with urban development are not recommended at this stage. These projects are complex and their size make them virtually unmanageable. They also take a long time to develop and time to produce results. The lack of many small, rapidly succeeding projects cause both private and public sector to lose interest.

Recommendations:

In order to keep gaining experience, short-term manageable succeeding projects are required to be set up. To stimulate the learning experience, the path of traditional procurement should be discouraged. Preferably by requiring a as procurement method. A learning phase will always be more expensive at first, but the current under-investment in PPP will lead to a lot more expenses in the long run.

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Focus should be directed to projects that can generate results in the short run.

Projects that are suitable are:

Healthcare projects, such as hospitals, service flats and residential homes.

Government Building Agency (Rijksgebouwendienst) projects, such as the build or maintenance of Government buildings

Defence-projects, such as renovation of barracks.

These are all projects with a short start-up phase and results will show faster than complex infrastructure and urban regeneration programmes.

KPMG Corporate Finance London, with its knowledge and experience could set up a teacher-apprentice relationship with the Dutch firm, sharing the knowledge. Secondments from the public sector into KPMG could advocate PPP, by fanning out this knowledge. The trust gained could prove a fertile soil for future cooperation.

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Preface

Nothing could prepare me for what lay ahead when I first entered the KPMG building in the heart of The City, London. Entering a brave new world, the first hurdle would have to be overcome the next day already. I was thrown in the deep. After just being with the firm for no less than 48 hours I was sent off to Leeds to get ‘hands-on-experience’ with the product. This would be my first encounter with Public-Private Partnerships (PPP).

A well-established procedure for procurement of public services was the item of interest.

Proven itself in the United Kingdom, it still seemed to be at a stand-still in the Netherlands. How come?

A great deal of the time I spent in London was consumed by working on these PPP projects, gathering more insight in their working mechanisms and

restrictions.

Looking back, working in weekends and getting acquainted with adequately filled workweeks proved to be a cinch, compared to actually writing a thesis.

The end product, a research into the influences on the development of PPP in the Netherlands, lies in front of you. I hope you enjoy reading it.

Of course, finishing my dissertation would not have been possible on my own.

My thanks are due to the wonderful people at KPMG Corporate Finance, both in the UK practice and the Dutch practice. My six-month experience in London was one I will not promptly forget. Also most grateful am I to my supervisors at the university of Groningen, mr. Heijes and mr. Gnirrep. Their insights, but most of all the patience they had with me was received with the utmost gratitude.

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A final word is reserved for the one person that means the most to me.

Renske, thank you for your support, your gentle kindness and care proved to be the solid ground I desperately needed to cling to from time to time.

Luc van Rooijen

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Introduction

“It’s my strong belief, that government and private business have to consider each other more as partners than they have done in the preceding years. (…) If this partnership between government and private business takes shape gradually, different types of interrelation will develop on different societal levels and will contribute in that manner to an increase in the productivity and effectiveness of our society”²

A good idea does not necessarily imply success, even though it has proven its success elsewhere. It still requires good implementation. In the United

Kingdom, by April 2003 a total of 563 Public-Private Partnership transactions, with a total capital value of £ 35.5 billion reached financial close.³ In the Netherlands the first pilot-projects have reached, or are reaching financial close.

In my dissertation I would like to establish, through research, the reason behind the fact that Public-Private Partnerships (PPPs) are perceived as a successful means of public procurement in the United Kingdom, whereas the Netherlands still have great difficulty in implementing projects through this form of public procurement. and the United Kingdom

2 Brevoord, C. (1979). Partnership, interaction and effectiveness, pp. 21-22. Internal publication. Reeuwijk.

3 HM Treasury (July 2003). PFI: Meeting the investment challenge. London: HMSO.

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Public-Private Partnerships defined

Public-Private Partnerships cover a broad spectrum of arrangements under which partnerships between public and private sector organisations are

developed for the purpose of designing, planning, financing constructing and/or operating infrastructure projects, normally provided through a traditional

procurement route by the state.

In the Netherlands PPP, in Dutch referred to as PPS (Publiek Private Samenwerking) has been introduced as an additional instrument for the

government to improve functionality and effectiveness of its policy. The origin of PPP in the Netherlands dates back to 1986, where the rise of this new form of cooperation is marked by a passage in the governmental coalition agreement, which called for PPPs in view of increasing the investments in, amongst other things, the field of urban revitalisation.

In 1999 the Ministry of Finance established an independent body to gather and make accessible the knowledge and experience of both the private sector and government agencies. This body is known as The Knowledge Centre Public- Private Partnerships.

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The definition of PPP used by the Knowledge Centre is the following:

PPP is Public-Private Partnership: the public and the private sector –government and industry– work together on the implementation of projects requiring significant capital instruments. Both retain their own identity and responsibilities. They collaborate on the basis of clearly defined sharing of tasks and risks. The purpose of the collaboration is to achieve benefits of added value and increased efficiency: a better end product for the same money or the same quality at lower costs.⁴

In the Netherlands the Public-Private Partnerships framework is set up according to the English model, although the Dutch Knowledge Centre clearly defines two main manifestations of PPP:

The PPP as an integrated contract (concession) Public Private Partnership as joint development

The PPP as an integrated contract (concession)

The government formulates the functional requirements to be met by the building or infrastructure concerned, but does not prescribe how this should be achieved.

4 Knowledge Centre PPP(September 1999). Public Private Partnership: Pulling together, p. 5. The Hague.

The term ‘government’ as used in this document may refer to all levels of government: central, Provincial, or local, and/or to government departments, agencies and authorities.

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This represents an opportunity for the private sector to devise the best and/or most efficient solution for the entire duration of the contract. As a result, it is possible to take account of such aspects as maintenance and management costs even as early as the design stage.

Public Private Partnership as joint development

In this form of PPP the private sector is drawn into the process at an early stage and the two sides jointly draw up a plan for the project. This ensures that the public elements (e.g. access roads and other public amenities) and private elements (e.g. property development) are coordinated. One difference with integrated contracts is that in some cases private sector parties

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can be brought in even before the government is quite sure what ‘output’ it wishes to achieve, but it does not occurs very often. This means that it is

possible for both sides to put their heads together to determine what the project’s goals should be, or to work out its framework in a jointly developed plan. The process of plan development is thus a key element in such a PPP.

Involvement in the design of the plan does not, incidentally, automatically mean that the same private-sector partners will be responsible for implementing the plan once it has been developed.

The two forms of PPP are far from being mutually exclusive. For example, it is quite possible for a municipality to get together with a developer to come up with an integrated plan, after which a integrated contract is procured for the public infrastructure while a joint venture between municipality and developer is set up to develop the area surrounding it.

The objective of PPP

There are a number of reasons as to why governments undertake PPPs. The objective of achieving improved value for money, or improved services for the same amount of money as the public sector would spend to deliver a similar project, is often stated as the prime objective. But other objectives may also be important. These can include the desire to provide increased infrastructure provision and services within imposed budgetary constraints (such as the Maastricht criteria) by utilising private sources of finance via off balance sheet structures, or to accelerate delivery of projects, which might otherwise have to be delayed. The Dutch government aims at improving the quality of public services and optimising the efficiency of the supply of these services⁵

Central to the notion of PPP is the idea that risks should be allocated to the parties that are best able to manage them. Furthermore, PPP hinges on the idea that transferring the responsibility for service delivery to the private sector allows the public sector to concentrate on policy development, service planning and performance monitoring.

5 Knowledge Centre PPP(2002). Voortgangsrapportage PPS. The Hague : Knowledge Centre PPP

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Important is the fact that the cooperation between public and private sector is of a temporary nature. The project of making available a public service has a finite life, dependent on the length of the contract. A Public-Private Partnership can be regarded as a temporary inter-organisational relationship between public and private entities.

Due to the joint sharing of risks and benefits amongst the private parties involved and the public sector, motivation is created to create as much value as possible.

No longer can the negligence of responsibilities be blamed on other parties, since everyone is in it together.

It should be noted that PPPs might potentially have disadvantages. The investment in the project, through private financing can lead to higher costs of capital for the private sector, which needs to be offset by the cost savings arising from a properly executed tender and by the efficiencies generated by private sector skills. Due to the nature of these contracts, with a life span of multiple years, the long-term commitment of funds can lead to limited financial flexibility.

During the contract, refinancing the debt under better conditions is not uncommon though.

The complexity of PPPs can lead to more expensive and time-consuming transaction development stage, which requires dedicated resources from both public and private sector.

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The process of PPP

This paragraph will cover from start to finish all the different stages involved in the procurement of a public service, through a Public-Private Partnership.

Due to the broad nature of the definition of PPP the process may differ slightly, but most transactions will involve one or more of the following stages. At present the EU also has no agreed general definition of a PPP. This creates a challenge in developing legislation on PPPs, as a number of Member States are finding out.

If a narrow definition is taken, this can result in legislation, which only applies to a narrow range of project types, or structures, which may be of limited practical value.

Public-Private Partnerships are however subject to multiple European Union Directives.

Directive 2004/18/EC of the European Parliament and of the Council on the Coordination of Procedures for the Award of Public Works Contracts, Public Supply Contracts and Public Service Contracts;

Directive 93/36/EEC regulating the procedures for the award of public supply contracts;

Directive 93/37/EEC in relation to the award of public works contracts;

Directive 92/50/EEC governing the award of public service contracts; and Directive 90/531/EEC co-ordinates procedures for the award of contracts in the

water, energy, transport and telecommunications sectors (the Utilities Directive).

Start up and mobilisation

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The procurement of a public service will commence with the identification of the need for a public service. A firm political support needs to be established to guarantee the projects (political) viability. Once this has been established,

scoping and planning of the project will commence, setting up a Strategic Outline Case and forming a procurement team. During this stage the public sector will identify the business need, different options and ways to achieve the objectives, including any risks and rewards in principle.

Requirements need to be specified, a timetable set up, a procurement strategy adopted.

At this stage the public sector can attract technical, legal and financial advisers to guide and assist them in the procurement process. A feasibility study needs to be undertaken to establish the technical and financial feasibility of the project,

including affordability assessment. A Value for Money (VfM) analysis will provide the foundation for the political justification for the project.

Definition and documentation

The data gathered in the previous phase will complement The Strategic Outline Case to grow out to become a detailed business case. This business case will contain detailed information on the strategic fit of the project, the affordability, achievability and VfM. A Prior Information Notice (PIN) can be

published in the Official Journal of the European Communities (OJEC)⁶, as well as a prospectus, to keep stakeholders (e.g. ministers) and market parties informed.

Detailed requirements as an output-based specification need to be produced. A detailed risk analysis, including financial and technical risk as well as the

allocation of risk will provide a framework for a future project agreement. Legal advisers can start with production of draft contracts. A bid strategy will help the public sector smoothing the process to come. Evaluation models and criteria for shortlisting providers will have to be set up. These models will be used to be able to make an “apple for apple” comparison between bidders.

At the end of this stage a Contract Notice is dispatched for publication in the Official Journal of the European Communities along with being published in the national press. Additional information is provided to interested parties in an Information Memorandum and Pre-qualification Document. Potential bidders confirm their interest in the project via the specified means (e.g. 10 or more parties). This is commonly referred to as an Expression of Interest 'EOI'. Based on these publications, private companies will start to attract partners and possible sub-contractors, to form a consortium with, best suitable to complete the project.

Pre-qualification

The procuring entity draws up a list of interested bidders who meet the pre- determined procurement criteria (very general criteria. Companies are asked to

6 On occasion, The Official Journal of the European Communities is referred to as OJEU (Official Journal of the European Union).

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submit a range of information such as; projects and operations experience, a history of the company (often including financial statements and independently audited accounts), and background on their proposed sub-contractors/partners.

Based on the responses to the bidders’ Pre-qualification questionnaire/interviews the list of applicants will be reduced to a shortlist. After the Pre-qualification stage, a few candidates (e.g. 3-4) will be selected (shortlisted), to whom an invitation to negotiate will be issued. Bidders will start considering funding options.

Invitation to negotiate (ITN)

The ITN enables bidders to prepare detailed proposals outlining their suitability for the work. An initial approach to funders will take place. Financial modelling and data co-ordination will commence. Bidders will set up bid tactics. Clarification meetings between public sector and private sector will be held to

The tenders submitted by the bidders will be reviewed, including assessment of the funding source and structures, review of financial models, risk management and technical specifications.

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Identification of areas for optimisation within and between bids will be sought to create the highest Value for Money. At the end of this stage in the process the procuring entity will shorlist a select number (e.g. 1-3) of preferred bidders to continue negotiations.

Best and Final Offer (BAFO)

Negotiations between public sector and private sector will commence. At the end of this stage a Best and Final Offer (BAFO) needs to be submitted to the

procuring entity, based on pre-determined instructions. These pre-determined instructions will provide an equal comparison between bids. In general besides a compliant bid, the procuring entity can ask for a variant bid to be submitted. This variant bid enables the private side to use their creativity and market expertise to come up with innovative solutions, providing better Value for Money. The bidder will need to manage competition between funders and negotiate terms and conditions on the debt.

Financial and Contract Close

After the bidder is selected the project agreement is finalised between the bidding consortium, the procuring authority and the consortium’s funders. The deal is signed and financial and contractual closes take place.

The structure of PPP

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Central to the notion of PPP is the cooperation between a public entity on the one hand and a private entity on the other. In order to get a clear view on the workings of a Public-Private Partnership, the structure will be examined. In the following figure the involved parties and their relationships are depicted.

The Public Sector, being the Government or local Government (Procuring Authority) forms an inter-organisational relationship with a Private Sector entity (Project Company) over a finite life span. The length of the concession the Authority agrees upon with the Project Company determines the life span of this relationship.

Although the procuring authority can take on a direct agreement with funders, it is in general the Project Company’s responsibility to provide every aspect of the service, including financing it. The Project Company will be, when the asset has been built, remunerated for the availability of the service. The risk associated with a venture should be distributed amongst both public and private party, based on their ability to manage that risk. Risk should be borne by the party best able to manage it. The sharing of risk and the pooling of responsibility, combined with private sector ingenuity paves the way for efficient procurement and the creation of more Value for Money.

PPP in the United Kingdom

In the United Kingdom PPPs are not split out in such clear distinctions like the Dutch definitions.

According to the HM Treasury, Public-Private Partnerships bring public and private sectors together in long-term partnership for mutual benefit.⁷

7 HM Treasury (2000). PPP: The Government’s approach. Norwich: HMSO Fig. Simplified PPP structure

P

Prroojjeecctt CCoommppaannyy

Design & Build Contractor Funders

PPrrooccuurriinngg A Auutthhoorriittyy

Operator

Sponsors

•Finance Agreements

•Concession Agreement

•Shareholders Agreement

•Operating Subcontract

•D&B Subcontract

•Direct Agreement

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In the United Kingdom the term PFI Private -Finance Initiative- is also often used interchangeably with PPP.

The definition of PFI is:

The Private Finance Initiative (PFI) and other arrangements where the public sector contracts to purchase quality services on a long-term basis so as to take advantage of private sector management skills incentivised by having private finance at risk.⁸

The Private Finance Initiative emerged in the UK and is a form of PPP. There is, however next to no difference between the two. Arrangements are less

formalised under PPP than PFI and projects may involve a mix of end-user charges and public subsidy, such as capital grants, or the contribution of surplus land/ assets for income generation. PFI is one form of PPP and is about the procurement of services that are delivered through assets. This involves the negotiation of contracts, sometimes very complex in detail, between the public sector procurer and the private sector supplier. PFI focuses on service and value for money and is at present the main manifestation of PPPs. Under PFI,

contractors pay for the construction costs and then rent the finished project back to the public sector. This allows the government to procure a public service without raising taxes.

The (private) financing method used in the Private Finance Initiative is called Project Finance.

Project Finance

Traditionally public procurement was financed by public-sector debt; in

developing countries, projects were financed by the government borrowing from the international banking market, multilateral institutions such as the World Bank, or through grants (e.g. EU). Privatisation, deregulation and the emergence of Public-Private Partnerships have changed the approach to financing investments in major projects, transferring a significant share of the financing burden to the private sector.

Project Finance is a method of raising long-term debt financing for major projects, based on lending against the cash-flows of the project alone.

This is not the same as ‘financing projects’ since a project can be financed in many different ways.

Project Finance depends on a detailed evaluation of a project’s construction, operating and revenue risks, and their allocation amongst parties involved.

Project Finance is provided for a legally and economically self-contained (“ring- fenced”) project through a special purpose legal entity (“Special Purpose Vehicle”

or “Project Company”), whose only business is the project. This Project Company usually comprises of a consortium of multiple contractors (and their sub-

contractors) that take on all the separate stages of the project. This may include the design, build, operation and if necessary maintenance of the public service.

Investors invest money in the Project Company on a non-recourse, or limited- recourse basis, i.e.

In case of default, lenders can claim only the equity put into the Project Company

8 HM Treasury (July 2003). PFI: Meeting the investment challenge. Norwich: HMSO.

Public-Private Partnerships: