1. 1 EIB’s Role & Experience in European Public Private Partnerships Public Private Partnerships Jaime Barragan EIB – European Investment Bank IADB, 8-9 December 2005

2. Introduction to EIB Section 1: Strategic characteristics and issues in European PPPs Section 2: EIB’s policy and approach to PPPs Section 3: Policy and project implementation lessons Section 4: EU PPP policy framework developments

3. 1 1.0. 1. Strategic Characteristics and Issues in European PPPs

4. Improve the efficiency and quality of public services Accelerate investment in infrastructure Capturing private sector efficiencies Risk sharing mechanism / Value for Money (VFM) for Public Sector Fiscal environment Reform of Public Procurement Reform of Supply Industries EU Single Market & Euro Drivers for PPP developments in EU 1.1.

5. Financiacion de PPPs : Una prioridad para el BEI - Grandes necesidades de financiación (e.g. TENs) - Factor critico de integración regional y desarrollo de Europa - Restricciones presupuestarias (Condiciones Maastricht) - Moderación Fiscal - Necesidad de mejorar el nivel eficiencia en la inversión publica Contexto : Mercado Unico - EMU Marco legal adecuado, Competición, Transparencia PPPs - Value for Money - Financiacion Privada - Eficiencia, Know-how

6. Partnership risk sharing and management Whole life approach to design, build and operation Generally, contracts for services, not procurement of assets Output, not input, specifications Payments related to service delivery Diversity in payment mechanisms  Utilising private sector skills for strategic public sector services via: Main Characteristics of PPPs in EU 1.3.

7. In principle, PPPs can improve VFM by: Facilitating and incentivising on time and on budget project implementation –No service / no payment … Reduced service/reduced payment –Incentives to cost control Optimisation of capital & maintenance spends over project life Innovation in design and financing structures Improving management of operational risks Optimal risk allocation  reduced cost of risk Reduced cost of risk  better Value for Money PPPs and Value for Money 1.4.

8. Competitive, public procurement procedures are the norm In practice: Does the private sector ’ s price for taking project risks represent good value for money for the public sector? Is the private sector ’ s return on capital appropriate to the level of risk being taken? To be tested case by case through an agreed methodology (Public Sector Comparator) No presumption that PPPs will always prove better Value for Money than conventional procurement Testing Value for Money (VFM) 1.5.

9. Sectoral concentration: Principally in transport. Increasingly in health & education Geographic concentration: Primarily UK, Portugal, Greece, Spain, Netherlands, Denmark & Sweden. Increasingly significant in Ireland, Italy, Belgium, France & Germany Initiatives being revisited in Central and Eastern Europe PPP development in Europe 1.6.

10. Principally commence in transport sector Development into other sectors as VFM benefits shown and public sector expertise grows PPP structures vary across countries Ability to adapt to national, regional and local policy requirements and socio-economic priorities is a key strength Increased standardisation of contracts and procedures a key “critical mass” feature of successful programmes PPP developments 1.7.

11. 1 2.0. 2. EIB’s policy and approach to PPPs

12. Competitive tendering Non-exclusivity - support of all bidders through bidding stage Investment Grade Risks are acceptable without direct public sector guarantees on public services Extension of EIB financing to sub-investment grade risks increasingly possible in strategic public services EIB ’ s objective complementarity with and leveraging of banks & capital markets EIB benefits passed to end-users/taxpayer Utility Risk and Utility Reward for Equity and Debt EIB Financing Principles 2.1.

13. Policy driven approach to PPPs based on the evaluation of the benefits achievable PPPs are an additional policy option. No bias in favour of any particular procurement method Expand expertise and financial resources available for “ infrastructure ” investment Facilitating greater private sector investment Focus on strategic public services with clear Value Added EIB’s approach to PPPs 2.2.

14. TENs and modernising transport infrastructure Environmental improvements – water, sewerage, waste Primary and acute healthcare services Knowledge-based economy: primary, secondary, tertiary and life long education Supporting PPPs in areas of critical policy significance: Key PPP sectors for EIB 2.3.

15. 2.4. EIB Financing for PPPs: By volume

16. EIB financing for PPPs: By sector 2.5.

17. EIB financing for PPPs: By loan maturity 2.6.

18. DBFO roads and river crossings in the UK Channel Tunnel Rail Link and London Tube Italian power projects Spanish & Portuguese transport projects Spata airport and Athens ring road UK education and health projects Dutch high speed train link and water projects Flagship deals to date 2.7.

19. 1 3.0. 3. Lessons for PPP Policy and Project Implementation

20. Need for commitment, “critical mass”/scale and expertise in public sector organisation of PPP programmes Importance of competitive, efficient and transparent procurement procures Sectoral focus in PPP programmes Transparent information on ex-ante and ex-post evidence of project performance Effective payment mechanisms Supportive developments at European Union level Key lessons from the Bank’s PPP experience 3.1.

21. Sustainable size of PPP programme critical to private sector confidence and willingness to participate Exclusive participation in PPP procurement is a key strategic as well as financial investment for the private sector Competitive pressure in procurement a “must” to achieve VFM for the public sector from PPPs Tendering process can be complex and, sometimes, costly Public and private sector need appropriate skills organisations and procedures to design, respond to and manage procurement Full compliance with EU legislation is a key requirement for EIB funding Importance of procurement 3.2.

22. Public sector comparator and competitive procurement are important ex-ante benchmarks National audit authorities commit significant resources to assessing PPP VFM Audit Reports are an important source of ex- post information on performance, learning and benchmarking for the future For example, UK National Audit Office: –Cost and time performance in major infrastructure generally good; –Performance in IT sector generally weak Evidence on PPP prospects and performance 3.3.

23. Conventional procurement PPP procurement Cost overruns for the public sector 73%22% Delay in project delivery 70%24% PPP performance: Evidence on construction projects from the UK ’ s National Audit Office 3.4.

24. Most countries prioritise one sector initially to develop critical mass, credibility and expertise in its public sector Commence PPP programmes in transport, with later migration to other sectors Rate of ‘migration’ to other sectors (health, education, energy, water, waste treatment) reflects i) national priorities, ii) legal frameworks and iii) availability and organisation of skilled public sector staff Key roles of regional/devolved Government Authorities as well as central and local government / municipalities Sectoral focus 3.5.

25. Innovative use of payment mechanisms to meet public sector objectives – must be “custom built/fit for purpose” Examples from the road sector: –User tolls – to pass costs to users –Availability payments – to reduce congestion –Accident rate premia – to improve safety Tendency to use toll as well as availability based payments in road projects; new mechanisms in freight/eurovignette Effective payment mechanisms 3.6.

26. Public and private sector may need to acquire new skills to commence a PPP programme Sufficient ‘deal flow’ is critical to justify the costs and promote effective competition Procurement programmes need to be managed to minimise costs (eg standardised documentation) and maximise competition (eg timing of contract notices) National PPP Task Forces can play key role in securing VFM in programmes Scale and expertise in PPP programmes 3.7.

27. Critical success factors for PPPs  Public Sector Political Commitment.  Focused, dedicated and experienced public sector team – PPP Task Force.  Clear legal and institutional framework.  Transparent + competitive procurement.  Realistic risk sharing.  Government Partnership. 3.8.

28. Learning Process Extra costs Value added Benchmarking Risk-sharing Procurement Extra costs Value added 3.9.

29. Motorway Developments –Private Toll Concessions Companies: stand-alone BOT-PPP (bridges, tunnels or motorways in UK, ESP, P, GR, F, I … ). –Public Toll Concession Companies: Toll Motorway Networks in F, I, ESP (partial), P (former). –Public Toll Companies/Authorities: Complex stand-alone projects (e.g. DK-SWE) Toll roads in A, GR –Private Concessions: DBFO shadow tolls (UK, FIN, P, ESP...) –Other “ off-budget ” methods: German method: DBF Dutch method (D&B and F) Belgian ” Intercommunales ” –Public ” Traditional ” Financing Road Fund: NL, B, L. and/or ” Vignette ” : (CH), A Pure ” traditional ” method: D, UK, ESP autovias, I sud, DK, SWE... With Tolls (user-pay) PRIVATE PUBLIC Toll Free (tax-payer) 3.10.

30. Theory - Forms of private participation commercialized public enterprise Continuous spectrum of public-private partnerships, with varying degrees of private risk-taking Other Hybrid or intermediate forms possible Differ in duration, financing & risk transfer Private O&M + financing Private O&M BOO divestiture concession BOT/DBFO lease managt. contracts service contracts 3.12.

31. PPP Choices TIME 3-5 YEARS LIMITED DELEGATION 5-30 YEARS PARTIAL DELEGATION PERPETUAL DELEGATION PUBLIC PRIVATE OWNERSHIP ASSET PLANNING & FINANCE SERVICE CONTRACTS MANAGEMENT CONTRACTS LEASE AGREEMENTS CONCESSIONS BOT/DBFO etc FULL/PARTIAL DIVESTITURE 3.13.

32. 1 4.0. 4. EU PPP Policy Framework

33. EU Communities expect PPPs to play a major role in Trans-European Networks in economic and social infrastructure and in environment To support these developments, Commission has taken steps to clarify: –Procurement legislation as it applies to PPPs –Accounting and statistical rules for PPPs –Facilitate EU budget co-financing. EIB/national PPP development sharing of institutional capacity in EU-25 Development of additional risk sharing financial instruments (Infrastructure Funds, Mezzanine Guarantees, Securitisation Trusts) EU Institutional Developments 4.1.

34. Community law neutral on political choice for or against PPPs Recent Green Paper has launched review to ensure clearer legal framework for PPP procurements Positive impact of 2004 ‘competitive dialogue’ procedure for complex contracts such as PPPs Procurement legislation 4.2.

35. 2004 Eurostat publishes new guidelines on ‘balance sheet’ treatment of PPPs Recommends that PPP assets can be deemed non governmental (‘off balance sheet’ for the public sector) if: –Private sector takes construction risk; and –Private sector takes either availability or demand risk Accounting and statistical rules 4.3.

36. Strategic policy advice to Public Authorities, Member & Acceding States and EU Institutions Sharing experience from other PPP environments Multisectoral know-how and geographical spread Applying best practice of successful PPP EIB ’ s wider role 4.4.