PPP Policy Lessons from Europe Robert Bain RBconsult | University of Leeds April 2015
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PPP Policy Lessons from Europe
Robert BainRBconsult | University of Leeds
April 2015
Presentation• Overview & Purpose of the PPP Research
• Key Research Questions
• Summary Findings– highways, rail, schools & hospitals
• The Issue of PPP Affordability
• Lessons Learned
2
Background/Purpose
• PPPs now maturing– Some projects > 15 years operational experience
• Consolidate and reflect on knowledge/experience
• Context of weak economic conditions– ...and unprecedented public sector budget deficits
• Focus on transport (mainly road, but also rail)– ...and contrast with education and health – Research identified recurring themes (‘lessons learned’)
3
Research Questions
• Do PPPs work equally well in all sectors?
• What conditions make for a successful PPP?
• Where should PPPs be avoided?
• How could PPPs be improved?
4
Research Questions
• Do PPPs work equally well in all sectors?
• What conditions make for a successful PPP?
• Where should PPPs be avoided?
• How could PPPs be improved?
5
A Word About the EIB
• The EU’s long-term lending institution
• A public-policy bank (IFI)
• Headquartered in Luxembourg
• MASSIVE lending operation– World Bank (2013) = $44.2bn– EIB (2013) = $94.7bn
6
Lessons Learned from PPPs
• EIB funds > 200 PPP Projects
• Place highways in the broader context
– Highways– Rail– Schools– Hospitals
7
Lessons Learned from PPPs
• EIB funds > 200 PPP Projects
• Place highways in the broader context
– Schools– Hospitals– Rail– Highways
8
PPP Schools• Good fit with PPPs
• Good construction experience– ...with innovation
• Clear design/build synergies
• Some minor delays– no problems with schedules/cancellations
• Allocation of some risks/responsibilities still evolving
• Largely, PPP schools reported to be successful
• Key = buy-in of principal/head teacher
9
PPP Hospitals• ‘Fit’ with PPPs reported to be less comfortable
• Value for Money sometimes challenging to deliver
• Some promoters had faced affordability problems
• Key concerns– Ensure flexibility of health care delivery– Responsiveness to future health care policy– Developments can happen relatively quickly
• Other concern = costs– Some PPP hospitals look expensive cf conventional procurement
• Biggest concern: impact on planning of health care facilities & services– Planning being driven by the procurement process?
10
PPP Rail• Limited experience to date
– More risk than other infrastructure projects/mixed success
• Key risks– Complexity and size (capital intensity/technical intensity)– Multiple interfaces with third parties– Demand risk– Low gradients (more structures)– Very low engineering error margins– Onerous approvals– Railway culture and traditional operating practices– Politics
• PPPs best when they are distinct, stand-alone projects– Separable operationally, institutionally & economically from other activities– This may be challenging to achieve in rail
11
PPP Highways• Particularly good fit with PPPs
• Straightforward assets/gradual pace of sector development
• Usefully ‘lock in’ future maintenance obligations
• Common risks– Unforeseen ground conditions
• Construction risk over-emphasised? Operational risks of greater concern (to lenders)?
– Interface with utilities– Permitting/approvals– Demand risk
• Good book on this subject!!– LTAs not as independent as they should be
• Highways likely to remain at the forefront of PPPs across Europe (and beyond)
12
Measuring PPP Highway Success?
• Revisit policy objectives
– Many of which…
• …have been muddled & contradictory• ...have been justified retrospectively• ...have evolved over time
• There have been three key winners
13
Measuring PPP Highway Success
1. Fixed price on asset delivery
2. Locking-in high quality maintenance
3. Value for money
14
Measuring PPP Highway Success• They have also enhanced the exposure of the highways sector to:
– Private sector skills and expertise• Risk assessment, innovation, new materials and technologies, fewer
institutional constraints etc.
– Commercial disciplines• Competition, risk mitigation, investor scrutiny, proper accounting
principles, the business of running highways, attention to maintenance etc.
– Financing and financiers• Capital market/lender requirements, expectations, appetite etc.
15
Affordability: A Caution• PPP roads use a variety of payment mechanisms
– User tolls versus availability/performance-based arrangements• User tolls = new money• Availability/performance-based arrangements = re-profiling government spend
• Is the availability/performance-based PPP approach sustainable?– England was...
• 20% of Highways Agency budget for 8% of the network.– Now with M25 DBFO...
• 35-40% of Highways Agency budget for 17% of the network– Portugal
• 125% of the budget for 50% of the network– Similar findings
• Need 2½ times the traditional budget for network-wide PPP-like performance
• Conclusion– M25 will be the last (current form) PPP highway in the England– Policy as it stands is unsustainable– Don’t confuse financing solutions with funding solutions
16
Affordability: A Caution• PPP roads use a variety of payment mechanisms
– User tolls versus availability/performance-based arrangements• User tolls = new money• Availability/performance-based arrangements = re-profiling government spend
• Is the availability/performance-based PPP approach sustainable?– England was...
• 20% of Highways Agency budget for 8% of the network.– Now with M25 DBFO...
• 35-40% of Highways Agency budget for 17% of the network– Portugal
• 125% of the budget for 50% of the network– Similar findings
• Need 2½ times the traditional budget for network-wide PPP-like performance
• Conclusion– M25 will be the last (current form) PPP highway in the England– Policy as it stands is unsustainable– Don’t confuse financing solutions with funding solutions
17
Affordability: A Caution• PPP roads use a variety of payment mechanisms
– User tolls versus availability/performance-based arrangements• User tolls = new money• Availability/performance-based arrangements = re-profiling government spend
• Is the availability/performance-based PPP approach sustainable?– England was...
• 20% of Highways Agency budget for 8% of the network.– Now with M25 DBFO...
• 35-40% of Highways Agency budget for 17% of the network– Portugal
• 125% of the budget for 50% of the network– Similar findings
• Need 2½ times the traditional budget for network-wide PPP-like performance
• Conclusion– M25 will be the last (current form) PPP highway in the England– Policy as it stands is unsustainable– Don’t confuse financing solutions with funding solutions
18
Affordability: A Caution• PPP roads use a variety of payment mechanisms
– User tolls versus availability/performance-based arrangements• User tolls = new money• Availability/performance-based arrangements = re-profiling government spend
• Is the availability/performance-based PPP approach sustainable?– England was...
• 20% of Highways Agency budget for 8% of the network.– Now with M25 DBFO...
• 35-40% of Highways Agency budget for 17% of the network– Portugal
• 125% of the budget for 50% of the network– Similar findings
• Need 2½ times the traditional budget for network-wide PPP-like performance
• Conclusion– M25 will be the last (current form) PPP highway in the England– Policy as it stands is unsustainable– Don’t confuse financing solutions with funding solutions
19
Lessons Learned (1)
• PPPs work best when:
1. Projects have strong rationale, are essential, enjoy broad public/ political support
2. Outputs can be clearly defined and specified contractually
3. The integration of project/financing contracts makes sense
4. Applied in mature/stable sectorsa. Pace of development is gradualb. Delivery requirements + usage = predictable
5. Competitive tension can be maintained during procurement
20
Lessons Learned (2)
• PPPs work best when:
6. Transaction structures avoid over-sophistication...and retain financial/contractual flexibility
7. Applied to straightforward assets of a modest size
8. Risk allocation reflects stakeholder capabilities & capacity
9. Private finance is really at risk
10. Selected because of efficiency and VfM benefits...not accounting treatment or fashion
21
Lessons Learned (3)
• PPPs work best when:
11. Procuring agency commits to a long-term active partnership, and ...is commercially literate...has strong negotiating skills...has responsive decision-making processes
12. The procuring agency selects a sustainable private sector partner
13. Used for separate, stand-alone projects with minimal interface risk
• A project that does not make sense– ...or a contract that cannot be let to the market on a sensible basis– ...under a traditional procurement model– ...is unlikely to be transformed by making it a PPP
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