EIB’s Role & Experience in European Public Private Partnerships

1. EIB’s Role & Experience in European Public Private Partnerships Jaime BarraganEIB – European Investment BankIADB, 8-9 December 2005 1

2. Introduction to EIB • Section 1: Strategic characteristics and issues in European PPPs • Section 2: EIB’s policy and approach to PPPs • Section 3: Policy and project implementation lessons • Section 4: EU PPP policy framework developments

3. 1. Strategic Characteristics and Issues in European PPPs 1.0. 1

4. Drivers for PPP developments in EU • Improve the efficiency and quality of public services • Accelerate investment in infrastructure • Capturing private sector efficiencies • Risk sharing mechanism / Value for Money (VFM) for Public Sector • Fiscal environment • Reform of Public Procurement • Reform of Supply Industries • EU Single Market & Euro 1.1.

5. Financiacion de PPPs : Una prioridad para el BEI Contexto : Mercado Unico - EMU • Grandes necesidades • de financiación (e.g. TENs) • - Factor critico de integración • regional y desarrollo de Europa • Restricciones presupuestarias • (Condiciones Maastricht) • Moderación Fiscal • Necesidad de mejorar el nivel • eficiencia en la inversión publica Marco legal adecuado, Competición, Transparencia - Financiacion Privada - Eficiencia, Know-how - Value for Money PPPs

6. Main Characteristics of PPPsin EU • Utilising private sector skills for strategic public sector services via: • Partnership risk sharing and management • Whole life approach to design, build and operation • Generally, contracts for services, not procurement of assets • Output, not input, specifications • Payments related to service delivery • Diversity in payment mechanisms 1.3.

7. PPPs and Value for Money In principle, PPPs can improve VFM by: • Facilitating and incentivising on time and on budget project implementation • No service / no payment…Reduced service/reduced payment • Incentives to cost control • Optimisation of capital & maintenance spends over project life • Innovation in design and financing structures • Improving management of operational risks Optimal risk allocation  reduced cost of risk Reduced cost of risk  better Value for Money 1.4.

8. Testing Value for Money (VFM) • Competitive, public procurement procedures are the norm In practice: • Does the private sector’s price for taking project risks represent good value for money for the public sector? • Is the private sector’s return on capital appropriate to the level of risk being taken? • To be tested case by case through an agreed methodology (Public Sector Comparator) No presumption that PPPs will always prove better Value for Money than conventional procurement 1.5.

9. PPP development in Europe • Sectoral concentration: • Principally in transport. • Increasingly in health & education • Geographic concentration: • Primarily UK, Portugal, Greece, Spain, Netherlands, Denmark & Sweden. • Increasingly significant in Ireland, Italy, Belgium, France & Germany • Initiatives being revisited in Central and Eastern Europe 1.6.

10. PPP developments • Principally commence in transport sector • Development into other sectors as VFM benefits shown and public sector expertise grows • PPP structures vary across countries • Ability to adapt to national, regional and local policy requirements and socio-economic priorities is a key strength • Increased standardisation of contracts and procedures a key “critical mass” feature of successful programmes 1.7.

11. 2. EIB’s policy and approach to PPPs 1 2.0.

12. EIB Financing Principles • Competitive tendering • Non-exclusivity - support of all bidders through bidding stage • Investment Grade Risks are acceptable without direct public sector guarantees on public services • Extension of EIB financing to sub-investment grade risks increasingly possible in strategic public services • EIB’s objective complementarity with and leveraging of banks & capital markets • EIB benefits passed to end-users/taxpayer • Utility Risk and Utility Reward for Equity and Debt 2.1.

13. EIB’s approach to PPPs • Policy driven approach to PPPs based on the evaluation of the benefits achievable • PPPs are an additional policy option. No bias in favour of any particular procurement method • Expand expertise and financial resources available for “infrastructure” investment • Facilitating greater private sector investment • Focus on strategic public services with clear Value Added 2.2.

14. Key PPP sectors for EIB Supporting PPPs in areas of critical policy significance: • TENs and modernising transport infrastructure • Environmental improvements – water, sewerage, waste • Primary and acute healthcare services • Knowledge-based economy: primary, secondary, tertiary and life long education 2.3.

15. EIB Financing for PPPs:By volume 2.4.

16. EIB financing for PPPs:By sector 2.5.

17. EIB financing for PPPs:By loan maturity 2.6.

18. Flagship deals to date • DBFO roads and river crossings in the UK • Channel Tunnel Rail Link and London Tube • Italian power projects • Spanish & Portuguese transport projects • Spata airport and Athens ring road • UK education and health projects • Dutch high speed train link and water projects 2.7.

19. 3. Lessons for PPP Policy and Project Implementation 3.0. 1

20. Key lessons from the Bank’s PPP experience • Need for commitment, “critical mass”/scale and expertise in public sector organisation of PPP programmes • Importance of competitive, efficient and transparent procurement procures • Sectoral focus in PPP programmes • Transparent information on ex-ante and ex-post evidence of project performance • Effective payment mechanisms • Supportive developments at European Union level 3.1.

21. Importance of procurement • Sustainable size of PPP programme critical to private sector confidence and willingness to participate • Exclusive participation in PPP procurement is a key strategic as well as financial investment for the private sector • Competitive pressure in procurement a “must” to achieve VFM for the public sector from PPPs • Tendering process can be complex and, sometimes, costly • Public and private sector need appropriate skills organisations and procedures to design, respond to and manage procurement • Full compliance with EU legislation is a key requirement for EIB funding 3.2.

22. Evidence on PPP prospects and performance • Public sector comparator and competitive procurement are important ex-ante benchmarks • National audit authorities commit significant resources to assessing PPP VFM • Audit Reports are an important source of ex-post information on performance, learning and benchmarking for the future • For example, UK National Audit Office: • Cost and time performance in major infrastructure generally good; • Performance in IT sector generally weak 3.3.

23. PPP performance:Evidence on construction projects from the UK’s National Audit Office 3.4.

24. Sectoral focus • Most countries prioritise one sector initially to develop critical mass, credibility and expertise in its public sector • Commence PPP programmes in transport, with later migration to other sectors • Rate of ‘migration’ to other sectors (health, education, energy, water, waste treatment) reflects i) national priorities, ii) legal frameworks and iii) availability and organisation of skilled public sector staff • Key roles of regional/devolved Government Authorities as well as central and local government / municipalities 3.5.

25. Effective payment mechanisms • Innovative use of payment mechanisms to meet public sector objectives – must be “custom built/fit for purpose” • Examples from the road sector: • User tolls – to pass costs to users • Availability payments – to reduce congestion • Accident rate premia – to improve safety • Tendency to use toll as well as availability based payments in road projects; new mechanisms in freight/eurovignette 3.6.

26. Scale and expertise in PPP programmes • Public and private sector may need to acquire new skills to commence a PPP programme • Sufficient ‘deal flow’ is critical to justify the costs and promote effective competition • Procurement programmes need to be managed to minimise costs (eg standardised documentation) and maximise competition (eg timing of contract notices) • National PPP Task Forces can play key role in securing VFM in programmes 3.7.

27. Critical success factors for PPPs • Public Sector Political Commitment. • Focused, dedicated and experienced public sector team – PPP Task Force. • Clear legal and institutional framework. • Transparent + competitive procurement. • Realistic risk sharing. • Government Partnership. 3.8.

28. Learning Process Risk-sharing Value added Extra costs Benchmarking Procurement Extra costs Value added 3.9.

29. Motorway Developments With Tolls (user-pay) PRIVATE Toll Free (tax-payer) • Private Concessions: • DBFO shadow tolls (UK, FIN, P, ESP...) • Other “off-budget” methods: • German method: DBF • Dutch method (D&B and F) • Belgian ”Intercommunales” • Public ”Traditional ” Financing • Road Fund: NL, B, L. • and/or ”Vignette ”: (CH), A • Pure ”traditional ” method: D, UK, ESP autovias, I sud, DK, SWE... • Private Toll Concessions Companies: • stand-alone BOT-PPP(bridges, tunnels or motorways in UK, ESP, P, GR, F, I …). • Public Toll Concession Companies: • Toll Motorway Networks in F, I, ESP (partial), P (former). • Public Toll Companies/Authorities: • Complex stand-alone projects (e.g. DK-SWE) • Toll roads in A, GR PUBLIC 3.10.

30. service contracts lease managt. contracts concession BOT/DBFO BOO divestiture Theory - Forms of private participation commercialized public enterprise Private O&M Private O&M + financing • Continuous spectrum of public-private partnerships, with varying degrees of private risk-taking • Other Hybrid or intermediate forms possible • Differ in duration, financing & risk transfer 3.12.

31. PPP Choices PRIVATE FULL/PARTIAL DIVESTITURE CONCESSIONS BOT/DBFO etc LEASE AGREEMENTS OWNERSHIP ASSET PLANNING & FINANCE MANAGEMENT CONTRACTS SERVICE CONTRACTS PUBLIC TIME 3-5 YEARS LIMITED DELEGATION 5-30 YEARS PARTIAL DELEGATION PERPETUAL DELEGATION 3.13.

32. 4. EU PPP Policy Framework 4.0. 1

33. EU Institutional Developments • EU Communities expect PPPs to play a major role in Trans-European Networks in economic and social infrastructure and in environment • To support these developments, Commission has taken steps to clarify: • Procurement legislation as it applies to PPPs • Accounting and statistical rules for PPPs • Facilitate EU budget co-financing. • EIB/national PPP development sharing of institutional capacity in EU-25 • Development of additional risk sharing financial instruments (Infrastructure Funds, Mezzanine Guarantees, Securitisation Trusts) 4.1.

34. Procurement legislation • Community law neutral on political choice for or against PPPs • Recent Green Paper has launched review to ensure clearer legal framework for PPP procurements • Positive impact of 2004 ‘competitive dialogue’ procedure for complex contracts such as PPPs 4.2.

35. Accounting and statistical rules • 2004 Eurostat publishes new guidelines on ‘balance sheet’ treatment of PPPs • Recommends that PPP assets can be deemed non governmental (‘off balance sheet’ for the public sector) if: • Private sector takes construction risk; and • Private sector takes either availability or demand risk 4.3.

36. EIB’s wider role • Strategic policy advice to Public Authorities, Member & Acceding States and EU Institutions • Sharing experience from other PPP environments • Multisectoral know-how and geographical spread • Applying best practice of successful PPP 4.4.