Lessons from Europe’s
Experience of PPPs
Ed Farquharson
Lisbon, 7 October 2013
Seminar on “PPPs and public account sustainability” - Lisbon 7 Oct 2013
European PPP Expertise Centre: Who are we?
• Established in September 2008
• Purpose is to help the public sector deliver more, and better, PPPs
• A unique cooperative initiative of the EIB, the European
Commission and EU Candidate and Member States
• International team of 18 professionals
• Membership: Initially 20, EPEC now has 39 Public Sector Members
from EU and Candidate Countries
• Strong engagement from Members (more than 400 participations
annually in EPEC working groups)
Seminar on “PPPs and public account sustainability” - Lisbon 7 Oct 2013
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EPEC’s mission:
Help the public sector deliver more, and better, PPPs
EPEC’s activities
EPEC works by
• Collaborative working:
Information sharing through
Member working groups
• Sharing information, experience
and expertise
• Institutional strengthening:
Policy and programme support
through bilateral working with
Members
• Strengthening the organisational
capacity of public authorities to
develop PPP programmes
• Promoting good practice across
the public sector
• Helpdesk:
Service offered to Members
providing rapid responses to
enquiries
Seminar on “PPPs and public account sustainability” - Lisbon 7 Oct 2013
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EPEC Reports
EPEC provides Guidance on wide ranging PPP topics:
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Combining EU funds and PPP
State Guarantees in PPP
Non-financial Benefits of PPP
PPP Statistical and Accounting treatment
Competitive Dialogue
Project bonds
Operational PPPs
… and continues to address new questions:
Ex post Evaluations of PPP projects and programmes
PPPs and fiscal risk
New sources of financing (e.g. Islamic finance)
http://www.eib.org/epec/g2g/index.htm
Seminar on “PPPs and public account sustainability” - Lisbon 7 Oct 2013
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The European PPP market in H1 2013
•
24 transactions reached financial close
for an aggregate value of EUR 9 billion
•
Ten countries closed PPP transactions
(compared to seven in H1 2012)
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The United Kingdom was the largest
PPP market both in terms of value and
number of deals
•
Italy, the Netherlands, Turkey and the
UK closed four megadeals that alone
accounted for more than 70% of the
overall market value
BreBeMi motorway
(EUR 2.3 billion)
Thameslink rolling stock
(EUR 1.9 billion)
Gebze-Izmir road phase 1
(EUR 1.1 billion)
A1/A6 motorway
(EUR 1 billion)
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Seminar on “PPPs and public account sustainability” - Lisbon 7 Oct 2013
End-year projections for 2013
• The PPP market in 2013 is
expected to record an
increase in value but a
decrease in the number of
projects
• 12 countries are expected
to close PPP deals
• Positive signs of recovery
but pre-crisis levels are far
away
Seminar on “PPPs and public account sustainability” - Lisbon 7 Oct 2013
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State of play
• PPPs are a widely utilised tool of EU policy with a solid track
record in certain sectors
• Evidence from European audit and other bodies shows that
where properly used PPPs have generated value for money
• Most EU governments continue to use and to see PPPs as a
key instrument for planning, implementing and financing
capital investments
• Upstream efforts (reinforcing best practice PPP policy, PPP
project preparation) are needed more than ever to address
market weaknesses
• There is also a need for promoting new financing solutions for
PPPs
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Some lessons learnt
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Political economy - coherent long-term policy is key
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Robust project selection
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Cost of private finance – clear case that the additional cost of private finance
incentivises better outcomes than the public sector alternative
•
Doing PPPs for the wrong reasons – off-balance sheet treatment,
unreasonable expectations of what the private sector can do
•
Expertise – PPPs require a strong public sector throughout project selection,
preparation, procurement and the life of the contract
•
More focus on managing signed PPPs - culture of deal vs. culture of project
management - “Hands-off, eyes on”
•
Fiscal sustainability – understanding the budgetary implications of PPPs
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These issues are all inter-linked
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How fiscal commitments arise in PPPs
• Capital cost contributions
• Firm (or direct) service payment obligations (e.g. availability fees,
shadow tolls)
• Contingent contractual (explicit) obligations:
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Compensation events (risks that the authority keeps for itself)
Variations
Indexation provisions and hedging commitments (interest rate, currency)
Guarantees (e.g. financing, demand, revenues)
Force majeure provisions
Termination payments
• Contingent non-contractual (implicit) obligations
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Renegotiations
Rescues
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How can it all go wrong?
When commitments from public authorities (e.g. contracting
authorities, public guarantors) under PPP arrangements are:
• Not recognised
• Misunderstood
• Not centrally reported
• Not budgeted for / accounted for / disclosed
• Not managed
• Become significant enough to challenge the country’s public
finances
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Why can it all go wrong?
Two main factors:
1. Budget mismatch: with PPPs, there is often a mismatch between
the budgetary framework horizon and the long-term nature of
fiscal commitments, which leads to:
- adverse incentives (e.g. project selection, PPP bias)
- fiscal rigidities
BUDGETARY FRAMEWORK HORIZON
years
TIMELINE OF PPP PAYMENTS
2. Contingent liabilities (see next slide)
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PPP contingent liabilities
• Fiscal obligations contingent on the occurrence of
particular events (sometimes beyond the control of
government)
• Obligations by law/contract or forced by circumstances
• The fiscal cost is invisible until it comes due
• Examples: public guarantees, termination payments
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Mitigating fiscal risks: the basics
• At the project level: (i) sound project selection (ii) sound analysis of
PPP rationale incl. VFM, affordability analysis (with conservative
assumptions, taking into account contingent liabilities), market
analysis, (iii) appropriate structuring (risk allocation, form of financial
support etc.)
• At the institutional level: PPP gateway processes, PPP units, DMOs
and budget offices, audit bodies, control of subnational PPPs
• Sound legal and regulatory framework for PPPs
• Even if the above conditions are met, there is still a need to manage
the PPP fiscal risks once fiscal commitments have been incurred
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Tools available to manage PPP fiscal risks
• Identify, classify, analyse and monitor all fiscal commitments in the
PPP portfolio
• Budgeting: annual appropriations are not suited to PPPs,
medium/long-term budgeting is needed
• Accounting: on-balance sheet
• Disclosure: reports on fiscal risks associated with PPPs, statement
of future regular payments over 20-30 years, publish contract
provisions
• Introducing fiscal control measures (i.e. sizing PPP initiatives):
• Cap on stock of PPPs
• Cap on annual spending on PPPs
• Cap on stock and spending
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Managing PPP contingent liabilities
• On the whole, poor information is given by government and
contracting authorities on contingent liabilities
• Including contingent explicit liabilities and expenditure in
government financial statements (but issue of valuation and
‘when’)
• Allocating budgets for the NPV of the future cost of contingent
liabilities (e.g. guarantees)
• Disclosing sources of exposure and future fiscal implications
• Setting up contingency reserve funds to cover liabilities when
they materialise
• ….work in progress……
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EPEC’s work on PPP fiscal risk issues
• PPP Fiscal Risk Questionnaire to identify best practice in
EPEC Member countries
• Future guidance focusing on:
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accounting and budgeting practice for PPP fiscal
risk management;
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disclosure practice; and
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the introduction of fiscal rules to limit PPP
exposure.
Available guidance:
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State guarantees in PPPs
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Termination and Force Majeure Provisions in PPP contracts
http://www.eib.org/epec/resources/epec-state-guarantees-in-ppps-public.pdf
http://www.eib.org/epec/resources/Termination_Report_public_version.pdf
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Key messages
PPP fiscal commitments:
• Are binding over the long term and often contingent
• Can impact the budget process and create budget rigidities
• Will be scrutinised by many stakeholders (e.g. European
Commission, IMF, rating agencies, investors, lenders)
• Strong assessment and approval processes, clearly defined
roles and responsibilities and on-going management,
reporting and disclosure are important tools.
• Ensuring public accounting sustainability is closely interlinked with the whole PPP process
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Ed Farquharson
E.Farquharson@eib.org
Telephone: +352 43798 8424
European PPP Expertise Centre
epec@eib.org
www.eib.org/epec
Twitter: EpecNews
Telephone: +352 4379 22022
Fax: +352 4379 65499
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Seminar on “PPPs and public account sustainability” - Lisbon 7 Oct 2013
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