PPP and EU funds, what complementarities? 

This special issue compiles the issues discussed and put forward at the Conference organised on this subject by the Enlargement Economic Department and the MEDEF International, to which nearly 200 people attended. The underlying thoughts tally with a triple aim. First, the CEEC are going to receive European funds, for which it will be necessary to maximize their effectiveness, considering the very important investment needs in the region. Second, the European Commission is, with the publication of its Green Paper on Public-Private Partnerships (PPP), in a period of thought how to stimulate this kind of contracts. Third, the experience seems to show that PPP make it possible, when they are adapted to the structure and finality of an infrastructure project, to achieve mutual benefit for the public and the private sector.

1 - Uncertainty about absorption of EU Funds to come in the CEEC, yet much lower than the identified investments needs

• Over the 2004-2006 period, New Member States (NMS) might get up to € 25bn as part of the cohesion policy of the European Union. This fund transfer is conditioned by the implementation of projects and by the obligation of a national co-financing. Structural funds could amount to € 7.2bn (1999 prices), cohesion funds to € 1.7bn (1999 prices) and the remainder of pre-accession funds to € 4.2bn1). These funds should be devoted, in priority, to basic infrastructures (19.4%), to the development of human resources (20.7%), to competitiveness of industries (18.7%) and to regional development (24.5%) (See Revue Special Cohesion, n°43).

  Two sorts of questions arise:

  • These funds appear insufficient compared to the identified investment needs. According to two reports ordered by the European Commission at the end of the Nineties, € 120bn would be necessary in order to satisfy the EU legislation in the environment sector; investments in transport infrastructures would require more than € 90bn by 2015. Dispatched over 20 years for environment and over 15 years for infrastructures, these amounts would account for annual expenditure of respectively 1.5% and 2.3% of the GDP 2).
  • Experience from the Cohesion countries over the 1993-1999 period indicates that the NMS will absorb only part of the available funds3). Furthermore, opinions converge to admit that, despite training schemes implemented in the pre-accession period, the CEEC administration might have difficulties to set up, in an efficient way, sufficiently projects.
• In this context, and when they are adapted to the structure and the finality of a project, Public-Private Partnerships may generate:
  • financial leverage, in order either to increase the potential number of economically viable projects - the use of public funds allowing to increase the Net Present Value of a project or, conversely, to lower the break even point - or to accelerate investment programmes by associating the private sector to project financing; a given amount of public resources (or European funds) could that way be assigned two projects for example instead of only one.
  • various comparative studies in the United Kingdom for example, but also in the Netherlands seem to show lower cost price for services in comparison with those of a "traditional" public utility service, as well as total cost economies of, on average, about 15%.
  • positive externalities in terms of education and know how transfers to administrations, for the management of projects, on the one hand and infrastructures once under operation, on the other hand; these beneficial effects would additionally perfectly fit to the current EU cohesion policy, an efficient administration being one of the important criteria for a territory's attractiveness.

This issue was stretched out during the first session.

• On the CEEC s ide, interest for PPP deals is growing and the adoption of a specific regulatory framework for PPP spreads. It has already been adopted in the Baltic States. A law on concessions was passed in Latvia in February 2000, the Lithuanian legislation makes it possible for municipalities to choose any type of partnership and the law in Estonia does not set any obstacle to delegated management, working already in the environment and energy sector. In other countries of the region, legislation related to PPP is in preparation, even sometimes in the course of adoption. In Poland, a bill is being finalised and could be submitted to the Parliament by the end of the year. The Czech R. also prepares a law and a more regular use of PPP has already officially been supported by the current government; a specific support taskforce should be created within the Ministry of Finance. In Hungary, there is no specific legislation concerning PPP. A governmental resolution was however adopted to facilitate such arrangements; an entity dedicated to the PPP was created in the Ministry of Economy and Transport and legislative complements should be brought in with the new "Act on the finance Public" and the "Act on local government" to come. In Romania, finally, authorities officially started to take the issue into consideration).
• There is no specific EU Directive that includes the complete PPP subject. The European legislation approaches PPP in a dispersed order and the applicable rules appreciably vary from one kind of contract to another. Thus, the Green Paper recently published by the European Commission on the issue, which concentrates on issues covered by the law on public contracts and concessions, "aims at showing the extent to which Community rules apply to the phase of selection of the private partner and to the subsequent phase"5). The Green Paper distinguishes between "purely contractual PPP" and those implying the establishment of an ad hoc entity held jointly by the public and the private partner (called "institutionalised" PPPs).
  • As to the first category, the regulation differs between arrangements, in general referred to as a "concessive" type, to which the general principles of the Union's Treaties namely the respect of competition, transparency and equal treatment between potential operators are applied, and the other forms of PPP. The first are characterized by "the direct link that exists between the private partner and the final user: the private partner provides a service to the public, "in place of", though under the control of the public partner. Another feature is the method of remuneration for the joint contractor, which consists of charges levied on the users of the service, if necessary supplemented by subsidies from the public authorities". Concerning the other types of arrangements), where the remuneration of the private partner is not carried out through "charges paid by the users of the works or of the service ... but (through) regular payments of the public partner", is regulated by the much more constraining law on "public contracts". It should be noted that the procedure of "competitive dialogue" was set up in April 30, 2004 for the complex markets, which is in general the case concerning PPP. It makes it possible to hold discussions with the candidates to such an arrangement, in order to determine together the optimal solution, a procedure which also ensures the transparency of the choice as well as an equal treatment between the candidates.
  • When a specific entity is created with mixed capital (public and private) "the law on public contracts and concessions does not apply to the transaction by itself creating a mixed-capital entity. However, when such a transaction is accompanied by the award of tasks through an act which can be designated as a public contract, or even a concession, it is important that there is compliance with the rules and principles arising from this law". In other words, nothing in the European regulation formally opposes PPP to be associated with European funds in order t o finance projects. The relatively low number of such arrangements states however that blockings persist. Firstly, opinions agree to say that joint work on this subject could be more intensive between the different Directions at the Commission7). Secondly, these issues associating European funds and PPP being rather recent and concrete examples quite rare, uncertainties persist on the administrations' level in the CEEC, in particular as for "how to do", while they show, at the same time, a great interest, again put forward during this conference, for this type of arrangements that would combine PPP and EU funds. According to companies' and local governing bodies' points of view and experience, presented during this conference, pragmatic solutions seem to exist while waiting for a possible legislative process, by nature rather long).

• The second session was devoted to companies' and local governments' experience: the municipalities of Gdansk (Poland), Maribor (Slovenia) and Arras (France) explained the methods they used to set up PPP "delegated management" contracts (concession type) in combination with EU funds, when they had recourse to them. They also insisted on the importance of the dialogue with the future users and more generally, the civil society as a key factor of success). Bouygues Constructions, Dalkia, Saur, Suez, Systra, Vinci and Egis Projects unanimously reminded of the importance of legal (and tax) safety and stability this type of arrangements must be surrounded with, but also of the risks, on one hand, of over sized projects and, on the other hand, of too high invoicing compared to the local purchasing power. They also showed through precise case studies in former EU15 countries as well as in the NMS, how a joint use of European funds and PPP could be made. Which conclusions can be drawn from these experiments?
  • The assets built (units of water treatments, roads, etc.) within a PPP framework should remain in the public sector (a private partner could have a minority stake); if not, the chances are rather weak that the project will be eligible to European funds, either cohesion or structural ones.
  • European subsidies and public financings should be devoted in priority to the construction of infrastructures and not to the working capital which is necessary to operate and maintain them correctly, the financing (and remuneration) of which would rather concern the private partner in charge of the management of infrastructures.
  • Under these conditions and the current state of regulation, the simplest solution is for public entities to sign two parallel contracts: one for the construction of the infrastructure which would then be a "traditional" public contract, that can more easily profit from EU funds and/or from a contribution from a public development bank and/or from a private bank; the other contract would be of a concession of the public utility type, which would delegate to a private partner the management of the concerned public utility; this private partner might be different or not from the one who built the infrastructure.
• The third session gathered public development banks working in the CEEC (the EIB and the EBRD) as well as some private banks (Crédit Lyonnais - now CALyon - and Dexia). It handled two main questions:
  • Which financial partners to choose? The EIB and the BERD seem to be privileged partners when complex projects are concerned, particularly when they involve EU funds and/or the participation of the private sector in the financing and exploitation of a project. Their experience and statute are as many pledges a priori of the viability and transparency of a project, each of these banks having its specificities: The EIB focuses on projects involving very high financing amounts, with a strong priority for transport. Within the European Initiative for Growth, it announced a € 100bn provision to finance the Trans-European transport Networks (so calle d TENs) and moreover, does not involve in projects needing less than € 25M. Since 1999 grants have amounted to € 13,5bn in the CEEC. Yet, PPP projects only play a relatively modest part in the total amount of EIB engagements, approximately € 16bn cumulated since 1998, whereas the total of loans signed in the EU25 exceeds € 140bn. But this share is increasing continuously. The EBRD is doubtless the most active institution in the promotion of PPP in Central and Eastern Europe. And its recommendations exactly match the characteristics of successful PPP projects that associate EU funds. It operates in all countries of the region, in particular in the water sector, and it finances projects with, on average, lower amounts than those of the EIB.
  • Which are the main requirements of private banks to join a PPP project? CALyon and Dexia illustrated their point of view with examples of projects in which they took part in the region, often jointly with institutional investors. The first condition is a community of interest between the different participants, i.e. public and private partners but also the banks that finance operations: they consider it necessary to be involved right from the conception on, even before the project is being launched. The second is the identification and a precise allocation of risks. This question of risks allocation is fundamental, for two reasons, at least. Initially the risk determines the remuneration, the methods of which, in their turn, can influence the choice which legal procedure and European regulation to use (see point 2.). Then, the exact allocation can also prove to be a determining factor for assets accounting10). Dexia explained the issues of deconsolidation, for companies as well as for local governments, issues that are particularly linked with the legal and financial structure of a project.

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