Public-private partnership and EU funds
for regional/local development
Velia Maria Leone, Leone and Associates Law Firm
velia.leone@leonelex.com
Pula, November 27, 2014
A new regulatory framework
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Implementation of the TERRE Project
• Main target
 fill the gap between the potential of
renewable energy used and their theoretical potential under
the TERRE Project (Terre)

implementing the single projects identified by Terre

Consider:
local regulatory framework
local economic framework
different territorial patterns
and specific territorial features
Implementation of Terre
IMPLEMENTATION PROCESS
and
building and management – essential

Public works tender
Public services tender

PUBLIC DEBT

Public private partnerships (PPP)
Private investment, BUT
risks must be allocated properly

NO PUBLIC DEBT

The private party has the advantage of operating in a sector
where tariffs are set by law and whose levels of energy production
can be easily estimated ex ante.
The combination of these elements is a guarantee of stability in
terms of cash of flow and profitability.
Definition of PPP
•
•
•
•
PPPs are arrangements  government/private sector entities for the purpose of
providing public infrastructure, community facilities and related services. Such
partnerships are characterized by the sharing of investment, risk, responsibility
and reward between the partners

The private sector finances capital investments and recovers investment during
the execution of the contract

The long-term financing of infrastructure is based upon a non-recourse or limited
recourse financial structure where the debt/equity used to finance the project are
remunerated by the cash flows generated by the project (self-sustained)

In a PPP each partner has responsibilities. The Public Sector must transform itself
 service provider  project manager
Definition of PPP: concession contracts according to Directive
2004/18/EC (currently in force)
• Art. 1, par. 3 “‘Public works concession’ is a contract of the same type as
a public works contract except for the fact that the consideration for the
works to be carried out consists either solely in the right to exploit the work
or in this right together with payment.”  Rules on time-limits, additional
works, and contracts awarded by concessionaires
• Art. 1, par. 4 “‘Service concession’ is a contract of the same type as a
public service contract except for the fact that the consideration for the
provision of services consists either solely in the right to exploit the service
or in this right together with payment.”  no specific rules apply, only
general EU principles  cross border interest
Definition of PPP: concession contracts according to Directive
2014/23/EU (not yet in force)
•
Directive 2014/23/EU of 26 February 2014 on the award of concession contracts
(the “Concessions Directive”)
Definitions (see Rec. 11, Art. 5)
• Concessions are:
1. Contracts for pecuniary interest, concluded in writing by means of which one, or
more, contracting authorities (“CA”) or contracting entities (“CE”) entrust the
execution of works, or the provision and the management of services, to one or
more economic operators (“EO”) the consideration for which consists either solely
in the right to exploit the works/services that are the subject of the contract or in
that right together with payment.
2. Such contracts may, but do not necessarily, involve a transfer of ownership to
CA/CE, but CA/CE always obtain the benefits of the works or services in question.
3. The award of a works , or services, concession shall involve the transfer to the
concessionaire of an operating risk in exploiting those works, or services,
encompassing demand or supply risk, or both.
Definition of PPP: concession contracts according to Directive
2014/23/EU (not yet in force)
4.
5.
6.
The concessionaire shall be deemed to assume operating risk where, under normal
operating conditions, it is not guaranteed to recoup the investments made or the costs
incurred in operating the works or the services which are the subject-matter of the
concession.
The part of the risk transferred to the concessionaire shall involve real exposure to the
vagaries of the market, such that any potential estimated loss incurred by the
concessionaire shall not be merely nominal or negligible.
Concession contracts provide for mutually binding obligations where the execution of the
works or services are subject to specific requirements defined by the CA/CE, which are
legally enforceable (Rec. 14).
Definition of PPP: main elements
• PPP  alternative and effective method to mobilize additional
technical and financial resources from private sector

• PPPs have been developed, in part, due to financial and technical
deficiencies in the public sector

• PPPs have demonstrated the ability take advantage of additional
financial resources, BUT – ideally – they should extract the private
sector’s know how
Definition of PPP: main elements
•
Guaranteeing and enhancing public benefit from PPP will depend to a large degree
on effective management and monitoring systems
Relevant aspect management activity  PPP require careful consideration of
control and management systems

energy from renewable sources-RES  performance related
contract  like EPC contracts

The main aspect of the PPP is not, therefore, only procedural (award of the contract)
but substantial  generate cash flow

FUNDAMENTAL ELEMENT  FEASIBILITY STUDY
Definition of PPP
FEASIBILITY STUDY

TECHNICAL ANALYSIS

FINANCIAL ANALYSIS (info memo)  assessing project sustainability/profitability

The economic and financial balance of an investment  simultaneously  affordability and
financial sustainability
Cost-effectiveness (profitability of an investment) is the project's ability to create value over
its entire life-cycle and generate profitability for the capital invested. It should meet the
private investor’s expectations.
The viability of a PPP is assed according to two main indicators, i.e. IRR (Internal Rate of
Return) and NPV (Net Present Value). Financial sustainability (bankability) = project's ability
to generate a cash flow sufficient to ensure repayment of loans activated. The indicators that
are used are: DSCR (Debt Service Cover Ratio) and LLCR (Loan Life Cover Ratio)
Definition of PPP
Profitability/economic-financial sustainability of the
project

Determines the EO’s capability of obtaining credit

Financial sector’s distrust of SMEs and innovative technologies  market failure
 Commission decision on State aid C(2011) 7296 final
in order to mitigate such risk
 Direct or indirect public resources/guarantee fund  debt
 Direct EU resources/guarantee fund  mixed
 European Investment Bank (EIB)  mixed
(depending on the beneficiary)
VERIFY
IF THERE IS A
STATE AID
Risk in PPP
In PPP agreements OE’s risk cannot be mitigated or eliminated

PPP agreements  services/works contracts

Regulatory framework primary aspect in relation to the system of energy tariffs

Target/need  proper risk allocation (balance=contract)

Risk allocated to party better capable of managing it
Risk in PPP: Eurostat Decision 2004
• Scope: adequate risk sharing (for accounting purposes) if the private
partner in a PPP bears:
– the construction risk, and
– at least one of either availability or demand risk
• Public contribution  awarded only after acceptance of the works:
proof of EO’s trust in the feasibility and effectiveness of the project
Risk in PPP: Eurostat Decision 2004
• In national accounts, the assets involved in a PPP can be considered as
non-government assets (off balance-sheet) only if:
– there is strong evidence that the OE is bearing most of the risk
attached to the specific project
– in this case  the assets do not affect Government deficit, nor debt
 off balance-sheet
• See Eurostat Manual - (European system of national and regional accounts
in the European Union): further criteria for assessing risk sharing
Risk in PPP: Eurostat Decision 2004
• “construction risk”
– covering events like late delivery, non-respect of specified
standards, additional costs, technical deficiency, and
external negative effects
– Government’s obligation to start making regular payments
to an OE without taking into account the effective state of
the assets would be evidence that Government bears the
majority of the construction risks
Notion of operating risk: Eurostat Decision 2004
• “demand risk”
– covering variability of demand (higher or lower than expected when
the contract was signed), irrespective of the behaviour (management)
of the OE not resulting from inadequate, or low quality, of the services
provided by the OE or any action that changes the quantity/quality of
services provided. It should result from factors, such as the business
cycle, new market trends, direct competition or technological
obsolescence
– Government will be assumed to bear the risk where it is obliged to
ensure a given level of payment to the OE, independently of the
effective level of demand expressed by the final user, rendering
irrelevant the fluctuations in level of demand on the OE’s profitability,
unless the shift in demand results from an obvious government action,
such as a significant policy change, or the development of directly
competing infrastructure built under Government mandate
Notion of operating risk: Eurostat Decision 2004
• “availability risk”
– where the OE may not be in a position to deliver the volume that was
contractually agreed or to meet safety or public certification standards
relating to the provision of services to final users, as specified in the
contract, or does not meet the required quality standards relating to
the delivery of the service, as stated in the contract
– Government will be assumed not to bear such risk if it is entitled to
reduce significantly (as a kind of penalty) its periodic payments, like
any “normal customer” in a commercial contract. Government
payments must depend on the effective degree of availability supplied
by the OE during a given period of time. Application of the penalties
where the OE is defaulting on its service obligations should be
automatic and should also have a significant effect on the OE’s
revenue/profit, and must not be purely "cosmetic" or symbolic
Notion of operating risk: Concessions Directive
Definition (Rec. 18):
•
The main feature of a concession, the right to exploit the works or services, always
implies the transfer to the concessionaire of an operating risk of economic nature
involving the possibility that it will not recoup the investments made and the costs
incurred in operating the works or services awarded under normal operating
conditions even if a part of the risk remains with the CA/CE
•
The application of specific rules governing the award of concessions would not be
justified if the CA/CE relieved the EO of any potential loss, by guaranteeing a
minimal revenue, equal or higher to the investments made and the costs that the
EO has to incur in relation with the performance of the contract
•
Certain arrangements, which are exclusively remunerated by a CA/CE, should
qualify as concessions where the recoupment of the investments and costs
incurred by the EO for executing the work, or providing the service, depends on
the actual demand for or the supply of the service or asset (no-tariffs based works)
Lack of “operating risk”
Definition (Rec. 19):
• NO concession: where sector-specific regulation eliminates the risk by
providing for a guarantee to the EO on breaking-even on investments and
costs incurred for operating the contract
• However, the fact that the risk is limited from the outset should not
preclude the qualification of the contract as a concession
• This can be the case:


in sectors with regulated tariffs (water, transport, etc.), or
where the operating risk is limited by means of contractual arrangements
providing for partial compensation, including compensation in the event of
early termination of the concession for reasons attributable to the CA/CE or
force majeure
Features of the “operating risk”
Definition (Rec. 20):
•
Operating risk should stem from factors which are outside the control of the
parties
•
Risks such as those linked to bad management, contractual defaults by the EO or
to force majeure, are not decisive for the purpose of classification as a concession,
since those risks are inherent in every contract, whether it be a public
procurement contract or a concession
•
Operating risk should be understood as the risk of exposure to the vagaries of the
market, which may consist of either a demand risk or a supply risk, or both:


•
demand risk is the risk on actual demand for the works or services which are the object
of the contract
supply risk is the risk on the provision of the works or services which are the object of
the contract, in particular the risk that the provision of the services will not match
demand
Assessment of the operating risk: the net present value of all the investments,
costs and revenues of the concessionaire should be taken into account in a
consistent and uniform manner
Stages of risk management
Risk monitoring
and control
Risk mitigation
Risk quantification
Risk allocation
Europe 2020
• Terre could be supported through the use of EU resources

Europe 2020 targets

• Climate change and energy sustainability greenhouse gas
emissions 20% (or even 30%, if the conditions are right) lower
than 1990
• 20% of energy from renewables
• 20% increase in energy efficiency
EU FUNDS: Framework for 2014-2020
Multiannual Financial Framework for 2014-2020

Climate change focus

The Cohesion Fund and the Structural Funds are
financial tools set up to implement the regional policy of
the European Union. They aim to reduce regional
disparities in terms of income, wealth and opportunities
EU FUNDS: Framework for 2014-2020
•
The Cohesion Fund - Regulation (UE) no. 1300/2013 – will, among others, support the shift towards a lowcarbon economy in all sectors, climate change adaptation and risk prevention and management, and may
pursue climate action in relation to transport and environmental investments.

Structural Funds
•
•

The European Social Fund (ESF) - Regulation (UE) n. 1304/2013 – will, among others, support the shift
towards a low-carbon and climate-resilient economy through reform of education and training systems,
adaptation of skills and qualifications, up-skilling of the labour force, and the creation of new jobs.
The European Regional Development Fund (ERDF) - Regulation (UE) n. 1301/2013 – will, among others,
promote energy efficiency in SMEs, housing and public buildings; production and distribution of
renewable energy; low-carbon strategies for urban areas; resilience to climate change and extreme
weather events. Furthermore, the ERDF will support European Territorial Cooperation (ETC), for example
cross-border co-operation between Member States, including on climate action.
Common Agricultural Policy (CAP)  The European Agricultural Fund for Rural Development (EAFRD) Regulation (UE) n. 1305/2013 – will, among others, support climate action in relation to forest area
development, establishment of agro-forestry systems, investments improving the resilience and
environmental value of forest ecosystems, organic farming, Natura 2000 and Water management
Focus: Financial instruments - guarantees
REGULATION (EU) No 1303/2013 laying down common provisions on the European Structural and Investment
Funds - ESI Funds
(art. 37, par 1 - 2)
• ESI Funds may be used to support financial instruments (FIs) under one or more programmes, including when
organised through funds of funds (holding funds), in order to contribute to the achievement of specific
objectives set out under a priority
• FIs shall be implemented to support investments which are expected to be financially viable and do not give
rise to sufficient funding from market sources. When applying this Title, the managing authorities, the bodies
implementing funds of funds, and the bodies implementing FIs shall comply with applicable law, in particular
on State aid and public procurement
(art. 37, par 4)
• Where FIs support financing to enterprises, including SMEs, such support shall target the establishment of
new enterprises, early stage-capital, i.e. seed capital and start-up capital, expansion capital, capital for the
strengthening of the general activities of an enterprise, or the realisation of new projects, penetration of new
markets or new developments by existing enterprises, without prejudice to applicable EU State aid rules, and in
accordance with the Fund-specific rules. Such support may include investment in both tangible and intangible
assets as well as working capital within the limits of applicable EU State aid rules and with a view to stimulating
the private sector as a supplier of funding to enterprises. It may also include the costs of transfer of proprietary
rights in enterprises provided that such transfers take place between independent investors
Focus: FIs - guarantees
(art. 38, par. 1)
In implementing Article 37, managing authorities may provide a financial contribution
to the following FIs:
a) FIs set up at EU level, managed directly or indirectly by the Commission;
b) FIs set up at national, regional, transnational, or cross-border level, managed by or
under the responsibility of the managing authority
(art. 39, par. 2)
Member States may use the ERDF and EAFRD to provide a financial contribution to FIs
referred to in point (a) of Article 38(1) of this Regulation, managed indirectly by the
Commission with implementation tasks entrusted to the EIB

Uncapped guarantees providing capital relief to financial intermediaries for new
portfolios of debt finance to eligible SMEs in accordance with Article 37(4) of the
REGULATION (EU) No 1303/2013
EU FUNDS: Framework for 2014-2020
The new Cohesion Policy means regions and Member States must target EU
investments on four key areas for economic growth and job creation

Supporting the shift towards a low-carbon economy
•
•
Research and Innovation  develop new renewable energy technologies
through
Enhancing the competitiveness of SMEs
To prevent the risk of the private banking system’s distrust in the Terre
EU FUNDS: Structural funds 2014-2020
Supporting the shift towards a low-carbon economy - ERDF resources
A minimum share of each region’s ERDF allocation will be invested in
measures supporting the shift to a low-carbon economy:
• 20% in more developed regions;
• 15% in transition regions; and
• 12% in less-developed regions.
This will ensure a minimum investment of at least €23 billion for 20142020 from the ERDF, while further investments through the Cohesion
Fund will provide additional support to the shift towards a low-carbon
economy
EU FUNDS: Structural funds 2014-2020
Investments from the ERDF and the Cohesion Fund
 Increasing the use of renewable energy:
• Investing in the production and distribution of energy derived from renewable sources (RES)
• Supporting projects to build awareness and increase the use of RES in both the public and
private sectors
 Decreasing energy use:
• Funding projects to enhance energy efficiency and smart energy management in public
infrastructures, including public buildings, in the housing sector and in the context of industrial
production to boost competitiveness, especially in SMEs
• Reducing emissions from transport by supporting the development of new technologies and
promoting sustainable multi-modal urban mobility including public transport, cycling and walking
EU FUNDS: Structural funds 2014-2020
 Promoting smart energy systems:
• Investing in smart grids for electricity distribution to enable improved
energy efficiency
• Integrating increased amounts of RES
 Encouraging an integrated approach to policy-making and
implementation:
• Developing integrated low-carbon strategies, in particular for urban areas,
which can encompass street lighting, sustainable multi-modal urban
mobility and smart electrical grids
• Promoting research and innovation in low-carbon technologies
EIB - European Investment Bank
The EIB is the EU's bank

• work closely with other EU institutions to implement EU policy
•provide finance and expertise for sound and sustainable investment projects which
contribute to furthering EU policy objectives
Main activities
Lending  the vast majority of financing is through loans, but also
guarantees, microfinance, equity investment, etc
Blending  unlock financing from other sources, particularly from the EU
budget. This is blended together to form the full financing package
Advising  lack of finance is often only one barrier to investment  help
with administrative and project management capacity, which facilitates
investment implementation
EIB - European Investment Bank: priorities
Realization of the Plan
EIB Priorities
• Energy: building competitive and secure supply
• Regional development: to address economic and social imbalances
• Environmental sustainability: including both climate action and investment in the
urban and natural environment
• Small and medium sized enterprises & mid-caps: the creators of 80% of new jobs
• Innovation: promoting skills and innovation at every level
EIB - European Investment Bank: funding options
•
•
•
•
•
•
Loans – the main source for energy projects, structured financing options. Projects classed as
Trans-European Networks can receive extra help  check the value of the project ˃ EUR 25 m
↳ Multi-component loans  finance multi-component, multi annual investment
programmes using a single “framework loan”. This funds a range of projects, usually by a
national or local public sector body, most frequently regarding infrastructure, energy
efficiency/renewables, transport and urban renovation
Partnership – EIB works with others to provide funding, such as through the Mediterranean
Solar Plan
Investment – EIB and his partners have raised billions of euros for climate investment
through funds of funds such as the Global Energy Efficiency and Renewable Energy Fund,
European Energy Efficiency Fund and vehicles such as the Marguerite Fund, the Crescent
Clean Energy Fund, the Facility for Energy Sustainability and Security of Supply and the Green
Initiative and the Climate Awareness Bond
Initiatives - Energy efficiency is supported via the joint EIB/European Commission initiatives
ELENA (energy project feasibility assistance), JEREMIE (SME funding), JESSICA (urban
development) and JASPERS (new member states)
RDI support – share risk in the research, development & innovation process through InnovFin
programme
Funds – the Green Initiative and the European Energy Efficiency funds support energy
efficiency projects. They are supported by funding from the EIB, the European Commission
and others
State aids
Art. 107 TFEU - Applicability = definition of State aids
• Granting of State resources (directly or through State resources in any
form whatsoever - imputability)
• Economic benefit which an undertaking would not have obtained under
normal market conditions – market economy operator test
• Selectivity: favouring certain undertakings or sectors
• Measure distorts – threats to – competition and affects trade between
Member States: economic activity - non reserved - relevant to EU trade
(undertakings and end users)
State aids
• Elements to be assessed to verify if there is a State aid
• In particular:
– Benefit
• Draft communication from the EU Commission on the
notion of State aid, according to Article 107, paragraph
1, TFEU (“State Aids Com.”): market economy operator
test («MEO»)
– Effect – even potential – on competition and EU trade
State aids and Public Procurement - Benefit
•
State aids vs. public procurement
– Public Procurement → contract, based on consideration, according to normal market conditions
• public entity purchases something (good, service, work) for its own use or to pursue the public
interest;
• good/service/work must be supplied/executed according to the output specifications provided
by the public entity;
• EO is paid a price, i.e. its remuneration → consideration = contract
– State Aid → benefit from the State. Conditions attached to the benefit are not equivalent to
consideration. The benefit is not granted under normal market conditions
• State reimburses, partially, some activities of the beneficiary as a form of incentive;
• activities are carried out according to the undertakings’ choice and they benefit from the end
result;
• undertakings receive a benefit which would not have obtained under normal market conditions
– (incentive effect)
– Concessions: trade-off between risks and compensations – grey area where a price is paid (MEO = no
advantage - price?)
State aids and Public Procurement - Benefit
•
•
•
Tender procedure = MEO: if carried out according to normal market conditions, price =
market price = it is not State aid – query: what about the level of public contribution paid?
– Public procurement: normally is not State aid
– concessions: no State aid if all the elements were subject to competition according to
economic and objective criteria, connected to the scope of the contract + there are no
modifications to the contract after the award – no State aid to the concessionaire – Even
if a «price» is paid
State Aids Com.: tender procedure does not grant a benefit (i.e., the State aid) if it is: open,
transparent, sufficiently publicized, non discriminatory and unconditional (conditions linked
to the scope of the contract), according to the principles set in the public procurement
directives, provided there is sufficient competition (no one single candidate) → difficult to
achieve with the Concessions Directive
BUT:
–
–
Non competitive procedure, or
Modifications after award are capable of altering the economic balance → benefit → State aid!
State aids
• Regulation (EU) No 651/2014  General block exemption
Regulation (GBER)

declaring certain categories of aid compatible with the internal market in
application of Articles 107 and 108 of the Treaty

Section 7 - Aid for environmental protection
Art. 41 - Investment aid for the promotion of energy from renewable sources
Art. 42 - Operating aid for the promotion of electricity from renewable sources
Art. 43 - Operating aid for the promotion of energy from renewable sources in
small scale installations
Contacts
Avv. Velia Maria Leone
Studio Legale Leone & Associati
Piazza Giunone Regina, 1
00153 Roma
Tel +39 06 4201 6132
E-mail velia.leone@leonelex.com