Public-private partnership and EU funds for regional/local development Velia Maria Leone, Leone and Associates Law Firm [email protected] Pula,

Public-private partnership and EU funds for regional/local

development

Velia Maria Leone, Leone and Associates Law Firm [email protected]

Pula, November 27, 2014

A new regulatory framework P

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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: different territorial patterns

local regulatory framework and specific territorial features

local economic framework

Implementation of TerreIMPLEMENTATION PROCESS

andbuilding and management – essential

Public private partnerships (PPP)

Public works tender Private investment, BUTPublic services tender risks must be allocated properly

PUBLIC DEBT 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. 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.

5. 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.

6. 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 PPPFEASIBILITY STUDY

TECHNICAL ANALYSIS

FINANCIAL ANALYSIS (info memo) assessing project sustainability/profitability

The economic and financial balance of an investment simultaneously affordabilityaffordability and and financial sustainabilityfinancial 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 PPPProfitability/economic-financial sustainability of the Profitability/economic-financial sustainability of the

projectproject

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 VERIFY Direct EU resources/guarantee fund mixed IF THERE IS A European Investment Bank (EIB) mixed STATE AID (depending on the beneficiary)

Risk in PPPIn PPP agreements OE’s In PPP agreements OE’s risk cannot be mitigated or eliminatedrisk 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 DirectiveDefinition (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 quantification

Risk mitigation

Risk monitoring and control

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 focusClimate 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

low-carbon 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 FundsStructural 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 - guaranteesREGULATION (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 2014-2020The 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 2014-2020Supporting 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 2014-2020 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 2014-2020Investments 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 BankThe EIB is the EU's bankThe 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 Main activities LendingLending the vast majority of financing is through loans, but also guarantees, microfinance, equity investment, etc BlendingBlending unlock financing from other sources, particularly from the EU budget. This is blended together to form the full financing packageAdvisingAdvising 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 aidsArt. 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 7Section 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 LeoneStudio Legale Leone & AssociatiPiazza Giunone Regina, 100153 RomaTel +39 06 4201 6132E-mail [email protected]