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Czech-French PPP Meeting: Experience and Comparison of Concessions and Partnership Contracts

This document discusses the Czech and French experiences with public-private partnerships (PPPs) in infrastructure projects, focusing on the concept of concession and its variant, affermage. It explores the evolution from concessions to partnership contracts and highlights the main differences between the two. The document also delves into the allocation of risks in PPPs and the challenges in modeling and quantifying these risks. It concludes with a discussion on the affordability of PPPs compared to traditional procurement methods.

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Czech-French PPP Meeting: Experience and Comparison of Concessions and Partnership Contracts

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  1. Czech-French PPP meeting Ministry of financeof the Czech Republicmarch 5, 2010 Jean-Yves GACON Project director French MoF PPP taskforce

  2. French experience : a longstanding Public-Private cooperation in Infrastructures • XVIth-XVIIth C. Construction of Canals & Bridges • XIXth C. Railways,… • XXth C.(H2) Motorways,… • Last decade: Tramways, airports,… => This experience gave birth to the concept of Concession , and its operating variant Affermage, which took its legal form in the early 19th century a public service is transferred (« delegated ») to a private company, to be implemented, financed and operated over a long period of time, under the control of the administration, the company being paid back by end-users through tolls or fees.

  3. The new PPPFrom concessions to PPP • In 2002-3, sector-specific bills for justice, police, hospitals, defence projects (mostly centred on real estate) +setting-up of dedicated procurement units (health, justice, defence) • In June 2004, general legislation on “contrats de partenariat” (CP) followed in 2005 by creation of the MoF PPP taskforce (MAPPP) • => legal base now in place to develop PPPs

  4. Procurement contract/Public Tender Partnership contracts Concessions/BOT Short term One object (=>multiple contracts) Long term Multiple object (=>1 global contract) Long term Multiple object(=>1 global contract) No financing Successive tenders Service provided to administration Payment by administration Pre-financing Design/build/operate-maintain Service provided to administr. Payment (mostly) by administration but toll possible (on behalf of admin) Financing Design/build/operate-maintain Service provided to users Payment by users Construction risk Construction risk Performance risk Construction risk Performance risk Demand/traffic risk A comparative analysis

  5. Main differences between concession and Partnership contract ?Financing of equipmentand risk sharing Concession: Private sector finances at risk the equipment, without recourse on the public sector (once the initial subsidy paid).Contrat de partenariat: Private sector pre-finances the equipment and is repaid by the public partner over the duration of the contract.

  6. The partnership contract: a tool for better risk sharing •  Risk analysis is at the heart of the CP approach. Neither in MOP nor DSP, allocation of risks is finely tuned. The risk is (in theory) entirely borne by the public or by the dealer. In MOP, the risks are hidden. In PPP, risks are transferred to the private partner according to the following rule :The risks are borne by the partner best able to bear them on technical, economic and financial point of view (optimal allocation).

  7. PPPs and other methods of public purchasing • The partnership contract (PC): between Traditional Procurement & Concession

  8. Developping a tool for modelling risks Objective: to define an appropriate methodology to take into account the risk assessment within the preliminary evaluation Incorporate risk value in the financial model for calculating net present values methodological difficulties:- identify for each risk a relevant statistical distribution law, while the databases are insufficiently available- to reflect the correlation of risks is difficult

  9. Developping a tool for modelling risks The method involves:- list the relevant risks of the project, and assign each to one of the actors (public or private) – it is the "risk matrix";- quantify each of these risks, taking into account a probability of occurrence and value of impact ;integrate the result in the calculated costs of the project. • The allocation of each risk and its quantification will be different, depending on the chosen procedure (classic purchase or PPP).

  10. Developing a tool for modeling risk- Practical difficulties: The aim is to target the evaluation as close as the offers done by the candidates for the partnership contract. But It is not obvious that quantification of these offers obeys the laws chosen for modeling.The private groups can, for example:Pooling risks on several projects, with a consequent cost of its supply less than the forecast ; 100% provision a risk which transfer to private partner was agreed, with a consequent cost offer higher than forecast.

  11. Relative and absolute affordability • Relative affordability : • Affordability of PPP compared to that of traditional procurement • Assessed by mandatory preliminary evaluation, including risk evaluation ; • Absolute affordability : • Can the project (delivered either through a PPP or traditional procurement) be accomodated within the budget without violating the budget constrain ? • Assessed by the Ministry of budget, agreement of which is mandatory for state projects.

  12. Eurostat approach : based mainly on appreciation of construction, availability and demand risks • Construction risk : • Covers events related to the initial state of the involved asset(s). • In practice it is related to events such as late delivery, non-respect of specified standards, significant additional costs, technical deficiency, and external negative effects (including environmental risk) triggering compensation payment to third parties • Availability risk : • It covers cases where, during the operation of the asset, the responsibiliy of the partner is called upon, because of insufficient management, resulting in a volume of services lower than what was contractually agreed, or in services not meeting the quality standards specified in the contract. • Demand risk : • It covers the vairability of demand (higher or lower than expected when the contract was signed) irrespective of the performance of the private partner. • In other words, a shift of demand cannot be directly linked to an inadequate quality of the services provided by the partner. Instead, it should result from others factors, such as the business cycle, new market trends, a change in final users’ preferences, or technological obsolescence. This is part of a usual « econommic risk » born by private entities in a market economy.

  13. Eurostat approach

  14. French Government’s accountancy rules (februray 2008) • Guidance : control criteria • Cumulative conditions : • Grantor controls the asset ; • And grantor controls the demand risk. Otherwise, the contrat is considered as a leasing… Two restrictions : • Public and private accounting approachs • « Substance over form »

  15. Thank you for your attention Mission d’Appui aux PPP 6 rue Louise Weiss F-75703 Paris CEDEX 13 Tel: 33 (0) 1 44 97 33 39 Fax: 33 (0) 1 44 97 33 88 E-mail: Jean-Yves Gacon@finances.gouv.fr Web: http://www.ppp.minefi.gouv.fr/

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