Combining PPPs with EU grants

1. PPPs in Infrastructure Combining PPPs with EU grants Radek Czapski, Operations Officer This presentation benefitted from contribution by MM. Cledan Mandri-Perrot, Michel Noel and Sophie Sirtaine (World Bank Specialists)

2. Programming Period: 2007-2013 Cohesion Instruments: €308bn EU grant funds Up to 85% project costs Public Infrastructure (transport, environment, municipal) Major projects: > 50m transport etc. > 25m environment Ample EU funding is available for infrastructure Concerns: • New Member States absorption capacity • Project quality EU Grant funding should dominate public sector investment in NMS Source: European Investment Bank, presentation by Hugh Goldsmith, PPP Coordinator, Projects Directorate, March 2008

3. Why? Balance sheet treatment à la mode Cost & date certainty of construction contracts Operational performance Private sector skills Leverage of private finance Public procurement reform Rationale for PPPs – The EIB’s view • Why not? • Maturity of Legal Framework • Project preparation time & cost in n+2 context • Efficient scale of co-financing • Enhanced public sector capacity requirements • Poor experiences in New member States Source: European Investment Bank, presentation by Hugh Goldsmith, PPP Coordinator, Projects Directorate, March 2008 Value-for-Money

4. PPPs in Europe have been used successfully… • There are few examples which combine EU grant funding with private finance, e.g. Price Waterhouse Cooper Report on Hybrid PPP (2006) • Key challenge is how to bring together public and private funding and thus leverage EU resources • Use of EU Grants can allow: • Economic & Social Cohesion • Dealing effectively with externalities • Acquis compliance • Affordability: • To users • To paying agency / taxpayers • Cost recovery policy: • User Charges v Taxes

5. …although to varying extent in Western Europe … Source: PPIAF / PricewaterhouseCoopers, Hybrid PPPs, 2006

6. … and in the NMS Source: PPIAF / PricewaterhouseCoopers, Hybrid PPPs, 2006

7. So what do we mean by ‘hybrid’ projects…..

8. Until 2007, hybrid PPPs have been implemented using two main routes • Project ring-fencing • National underwriting of EU grants

9. Project ring-fencing relies on “divisible” projects Road project example

10. The Constanta Water and Wastewater Project used such ring-fencing scheme

11. National underwriting of EU grantwas also used, as for the Athens Ring Road

12. For existing projects, it is likely to be difficult to attract EU grants • Would need to prove that existing PPPs meet all requirements set in Council Resolution and other relevant legislation • Accounting treatment of grant might complicate how it is integrated into asset base (if at all)… • Sector specific directives would also apply e.g. Water Framework Directive

13. savings Unitary payments or user charges construction ……….. EU Grant operations National Private ……….. EU Grant Component A Private National Single operations SPV Component B Private Separate construction contracts For new single PPP projects, EU grants can be used in similar ways as prior to 2007 … 1. Capex subsidy model 2. Parallel co-financing / project ring-fencing

14. EU grants ? construction ……….. 2015 Private operations … provided all Council Resolution requirements are met 3. Payment subsidy

15. EU Grant National Private Financial Engineering Instrument (Urban Development Fund) projects The FEI structure probably offers the main avenue for future hybrid PPPs Option 1: EU as co-investor in Urban Development Fund Option 2: EU as co-investor in Holding Fund EU Grant National Private Holding Fund Urban Development Fund 1 Urban Development Fund 2 projects Based on articles 43-46 of Commission Regulation 1828/2006 and article 44 of Council Regulation 1083/2006

16. NMSs could consider establishing a local infrastructure equity fund as FEI • Fund invests equity in project companies established as joint ventures (JVs) with local governments (regions, municipalities) • Fund managed by independent fund manager selected by competitive tendering • Fund manager selected on the basis of track record in raising equity and in supporting local governments in project development and management of municipal assets • Fund capital originating from fund manager, domestic and international institutional investors, IFIs • Fund manager required to bring in its own equity alongside third party shareholders to incentivize project identification and development • Fund aims at balanced and diversified portfolio of investments • Fund has controlling stake in JVs (not necessarily majority)

17. The proposed structure presents several advantages • Enables to attract EU grant at three potential levels • holding fund • local government • FEI • Enables to attract institutional investors in holding fund • Diversified portfolio of infrastructure investments • Investment leveraged with EU grant and IFI funding • Appetite tested in feasibility study in Romania • Successful examples in UK and other OECD countries • Enables to attract PPP sponsors • Investment leveraged with EU grant and fund equity investment • Enables implementation of coherent local infrastructure program

18. Concluding remarks - 1 • Issues are still uncertain • 1828 Regulation is a start but not a finish line • Legal precedent (i.e. jurisprudence or case law) will likely set agenda (e.g. Stade Halle case) • Creativity is required • Use of Technical funds to pay for specialist input e.g. EIB is a plus

19. Concluding remarks - 2 • Uncertainties still exist on: • Definition of public vs. private expenditure • Treatment of availability payments • Co-financing rate calculation • Private beneficiary as “initiator” • Timing of application & grant decision • Implications of N+2 rule to availability schemes • From a procurement perspective, the following still needs to be considered: • Models for grant blending in different sectors • Appropriate tender/bid criteria

20. PPPs in Infrastructure THANK YOU!