Public Private Partnerships: A Global Review 9780415728966, 9781315686516

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Public Private Partnerships

This timely new book provides an international perspective on Public Private Partnerships (PPPs). Through twenty-one case studies, it investigates the existing and fast-developing body of principles and practices from a wide range of countries and is the first book to bring together leading international academics and practitioners under a common framework that enables convenient cross-country comparisons. The authors focus on the impact the financial crisis has had on how governments have reviewed and overhauled their PPP policies as they have examined or tested new ways of partnering more effectively, efficiently and sustainably with the private sector. Readers will be able to gauge the level of maturity of PPP development in the book’s case studies, understand similarities and differences in their practices, and gain useful insights into the regulatory framework and institutional infrastructure in place to support implementation of PPP. Finally, the book offers insights into the future challenges and opportunities that PPP offers stakeholders. Akintola Akintoye is Professor of Construction Management and Economics and Dean of School at the University of Central Lancashire, UK. He has served in various consultancy teams which have advised governmental institutions and private organisations on PPPs and PFIs. He has edited three published books in construction innovation and process improvement and Public Private Partnerships, is Joint Co-ordinator of the CIB Task Force TG72 on PPP and Editor-in-Chief of the Journal of Financial Management of Property and Construction. Matthias Beck is Professor of Public Management at the Queen’s University Management School, Belfast. He has research interests in public finance, Public Private Partnerships, risk management and health economics. He is a frequent book co-author on PPP. His most recent authored book (with Beth Kewell) is entitled Risk: A study of its origins, history and politics and was published in 2014. Mohan Kumaraswamy is an Honorary Professor of the University of Hong Kong (HKU) and also the T.N. Suba Rao Brigade Group Adjunct Chair Professor of IIT Madras. He was a Professor in the Department of Civil Engineering of the University of Hong Kong, a consultant to the World Bank Colombo office, and is the ‘Founding Director’ of the Centre for Innovation in Construction and Infrastructure Development (CICID) Hong Kong, Editor-in-Chief of the Journal of Built Environment Project and Asset Management (BEPAM) and Joint Co-ordinator of the CIB Task Force TG72 on PPP.

About CIB and the CIB series

CIB, the International Council for Research and Innovation in Building and Construction, was established in 1953 to stimulate and facilitate international cooperation and information exchange between governmental research institutes in the building and construction sector, with an emphasis on those institutes engaged in technical fields of research. CIB has since developed into a worldwide network of over 5000 experts from about 500 member organisations active in the research community, in industry or in education, who cooperate and exchange information in over 50 CIB Commissions and Task Groups covering all fields in building and construction related research and innovation. http://www.cibworld.nl/ This series consists of a careful selection of state-of-the-art reports and conference proceedings from CIB activities. Open & Industrialized Building A Sarja ISBN: 9780419238409. Published: 1998 Building Education and Research J Yang et al. ISBN: 978041923800X. Published: 1998 Dispute Resolution and Conflict Management P Fenn et al. ISBN: 9780419237003. Published: 1998 Profitable Partnering in Construction S Ogunlana ISBN: 9780419247602. Published: 1999 Case Studies in Post-Construction Liability A Lavers ISBN: 9780419245707. Published: 1999

Cost Modelling M Skitmore et al. (allied series: Foundation of the Built Environment) ISBN: 9780419192301. Published: 1999 Procurement Systems S Rowlinson et al. ISBN: 9780419241000. Published: 1999 Residential Open Building S Kendall et al. ISBN: 9780419238301. Published: 1999 Innovation in Construction A Manseau et al. ISBN: 9780415254787. Published: 2001 Construction Safety Management Systems S Rowlinson ISBN: 9780415300630. Published: 2004 Response Control and Seismic Isolation of Buildings M Higashino et al. ISBN: 9780415366232. Published: 2006 Mediation in the Construction Industry P Brooker et al. ISBN: 9780415471753. Published: 2010 Green Buildings and the Law J Adshead ISBN: 9780415559263. Published: 2011 New Perspectives on Construction in Developing Countries G Ofori ISBN: 9780415585724. Published 2012 Contemporary Issues in Construction in Developing Countries G Ofori ISBN: 9780415585716. Published: 2012 Culture in International Construction W Tijhuis et al. ISBN: 9780415472753. Published: 2012 R&D Investment and Impact in the Global Construction Industry K Hampson et al. ISBN: 9780415859134. Published: 2014 Public Private Partnership A Akintoye et al. ISBN: 9780415728966. Published 2015

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Public Private Partnerships A global review

Edited by Akintola Akintoye, Matthias Beck and Mohan Kumaraswamy

First published 2016 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2016 selection and editorial material, Akintola Akintoye, Matthias Beck and Mohan Kumaraswamy; individual chapters, the contributors The right of Akintola Akintoye, Matthias Beck and Mohan Kumaraswamy to be identified as the authors of the editorial material, and of the authors for their individual chapters, has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Public private partnerships : a global review / edited by Akintole Akintoye, Matthias Beck and Mohan Kumaraswamy. -- 1 Edition. pages cm. -- (CIB series) Includes bibliographical references and index. 1. Public-private sector cooperation. I. Akintoye, Akintole. HD3871.P835 2015 338.8⬘7--dc23 2015004037 ISBN: [978-0-415-72896-6] (hbk) ISBN: [978-1-315-68651-6] (ebk) Typeset in Goudy by Saxon Graphics Ltd, Derby

Contents

List of illustrations List of tables List of contributors 1

An overview of Public Private Partnerships

x xii xiv 1

A K I N T OL A A K I N TO YE , M ATTH I AS B ECK AN D M OHA N K U M AR ASWAM Y

2

PPP applications in Australian infrastructure development

19

P A T RI CK X .W . Z O U AN D R EB E CCA J . YAN G

3

Developments of Public Private Partnership in Belgium

45

K OE N VE RHOEST, STE VEN VAN GAR SSE, M AR TIJN V AN DEN HU RK A N D T OM W I LLEM S

4

Public Private Partnerships in Canada

59

M A T T I S I E M I A TYCK I

5

Public Private Partnership development in China

74

Y ON G J I A N K E AN D SH O UQ I N G WAN G

6

Perspectives on the limited emergence of Public Private Partnerships in Finland

89

P E K K A VA L K A M A, LASSE O ULASVI R TA AN D I LARI KARPPI

7

Public Private Partnership in Greece

100

A T HE N A ROU MB O UTSO S AN D N IK O S N I K O LAIDIS

8

Public Private Partnership in Hong Kong T S U N -I P P A T RICK LAM AN D AR SH AD ALI J AVE D

118

viii Contents 9

Public Private Partnership infrastructure development in India

132

BOE I N G L A ISH R AM AN D GAN ESH A. DEVK AR

10 Defining Public Private Partnership in infrastructure development within the Indonesian context

153

A N D RE A S WI B O WO AN D AN DR E PER M AN A

11 Public Private Partnerships in the Republic of Ireland

180

G A I L S HE P P AR D

12 Public Private Partnership in Italy: State of art, trends and proposals

195

N U N Z I A CA R B O N AR A, N ICO LA CO STAN TIN O AND ROBE RT A P ELLE GR IN O

13 Public Private Partnership in Japan

219

Y U J I N E M OTO

14 Public Private Partnership in Malaysia

229

S U HA I Z A I S M AI L

15 The state of Public Private Partnership in Nigeria

248

M A RT I N OL O R UN TO B I DADA AN D OL U K A Y OD E SUN DAY O YEDIR AN

16 Portugal’s experience with Public Private Partnerships

266

J OA QU I M M IR AN DA SAR M EN TO AN D LUC R ENNEBOOG

17 Public Private Partnership in Switzerland

283

J E N N I F E R F IR M E N I CH

18 Public Private Partnership in major Taiwan infrastructure projects

297

J U I - S HE N G CH O U, H . PI N G TSER N G, K UO -CH I TS ENG AND CHI E H L I N

19 PPP development in Thailand

313

N A K HON K OK K AE W

20 Public Private Partnership in Turkey M . T A L A T B IR GO N UL, ˙I R EM DI K M EN AN D CE M G ALIP OZENEN

337

Contents 21 Perspectives on the future of Public Private Partnership in the UK

ix 353

D A RI N K A A S E NO VA AN D M ATTH IAS B E CK

22 Public Private Partnerships in the US transportation sector

365

A HM E D M . A B DE L AZ IZ AN D GIO VAN N I C. M IGLIACCIO

Index

402

Illustrations

2.1 2.2 5.1 7.1 7.2 10.1 10.2 10.3 10.4 10.5 10.6 10.7 12.1 12.2 12.3 12.4 12.5 14.1 14.2 14.3 14.4 14.5 16.1 16.2 18.1 18.2 19.1 19.2 19.3 19.4

Value of completed Australian PPPs from 1987 to 2012 IS (Infrastructure sustainability) rating types Typical contract structure of a PPP project in China GDP rates (1995) Average 2000–2005 PPP activity as percentage of mean GDP Financial context in public–corporate partnership project development Institutional framework in public–corporate partnership project development Public–corporate partnership project classification and criteria Stages of government support provision Viability gap funding support provision Typical structure of retail infrastructure in Indonesia Typical structure of wholesale infrastructure in Indonesia Public works under bid in Italy: number and value (1995–2013) Number and value of PPP bids Number and value of awarded PPP projects Total number of PPP bids by sector (2002–2011) Total capital value of PPP bids by sector (2002–2011) Development of PPP in Malaysia PPP process flow Typical information required for PPP proposals PPP contractual structure Distribution of privatized projects based on sector Number of PPPs PPP public payments Simplified diagram of Taiwan PPP regime in 1994–2009 Structure of government organization in charge of promoting PPP Thailand GDP annual growth rate Thailand’s Infrastructure investment as a percentage of fiscal budget Thailand’s total investment per GDP Thailand’s public debt level as a percentage of GDP

22 42 80 100 107 161 164 165 166 167 168 169 196 209 210 210 211 232 237 238 239 241 277 278 300 305 313 316 317 318

Illustrations 19.5 19.6 19.7 19.8 19.9 19.10 20.1 20.2 20.3 20.4 20.5 20.6 20.7 22.1 22.2 22.3 22.4 22.5 22.6 22.7 22.8 22.9 22.10 22.11 22.12 22.13 22.14

Allocation of THB4.2 trillion in Thailand’s plan for infrastructure investment from 2014 to 2020 Typical structure of infrastructure funds The structure of BTSGIF PPP developments and implementation in Thailand Approval process of proposing PPP projects under the PISU Act 2013 Future infrastructure needs for Thailand (million baht) Percent share of investments Preparation stage Authorization stage Approval stage Approval stage for BLT school projects Contract amounts by sectors Total value of contracts by year (million U.S. dollars) Common PPP implementation paths East End PPP organization Investments in PPP projects in infrastructure sectors Number of PPP projects in infrastructure sectors Transportation PPP projects and total contract values for given years States and their projects and project value (rounded $) States with given PPP project range Number of states with given PPP value range Number of projects for contract value range (million $) Percentage of projects using PPP arrangements, 1989–2013 States use of PPPs States use of DB projects Finance-based PPPs – number of projects and contract values States use of DBFOM arrangement

xi 319 320 322 326 328 334 339 344 344 345 345 349 350 385 388 389 390 390 391 392 392 393 394 394 395 396 396

Tables

2.1 2.2 2.3 2.4 2.5 5.1 5.2 6.1 7.1 7.2 8.1 9.1 9.2 10.1 10.2 10.3 12.1 12.2 12.3 12.4 12.5 14.1 14.2 15.1 15.2

PPP process and successful principles Analysis of risks in PPP infrastructure projects Risk allocations for PPP public building projects Barriers, strategies and future directions of Australian PPPs The IS (Infrastructure Sustainability) rating framework Total projects by primary sector and subsector (US$ million) Total projects by primary sector and PPP type (US$ million) The major Finnish PPP projects Community support framework programmes Projects to be delivered through PPP as approved between 2006–2008 PPP/BOT projects in Hong Kong SAR (all BOTs are 30-year concessions unless otherwise shown) PPP context for Indian infrastructure development Status of PPP projects in India Characteristics of major financing institutions in Indonesia Number of Indonesia’s Public–Private Partnership projects (2009–2013) Project costs of Indonesia’s Public–Private Partnership projects (2009–2013; in USD million) Number and value of public works projects awarded (2002–2013) Number and value of public works under bidding (2002–2013) PPP market by macro-sector: number and value of bids (2002–2013) PPP Market by types: number and value of awarded PPP projects (2002–2013) PPP Market for types: number and value of PPP under bidding (2002–2013) Key statistics on Malaysia Mode, description and examples of project A comparison of Nigeria’s stock of infrastructure with Brazil and India Sector analysis of PPP projects on the basis of number and value (1990–2012)

24 28 31 38 41 81 83 95 102 111 125 136 143 162 171 172 197 199 212 214 214 230 242 249 259

Tables 15.3 16.1 16.2 17.1 17.2 18.1 18.2 18.3 18.4 18.5 18.6 19.1 19.2

Total number of projects by type and primary sector (1990–2012) PPP financial data Portuguese PPP data Decision-making levels and funding sources in Swiss transportation Overview Swiss PPP projects in a broader sense Taiwan competitiveness ranking Ranking of the key drivers of PPP in Taiwan Preferred allocations of risk factors for PPP projects in Taiwan Signed PPP contracts by sector Signed PPP contracts by model of private participation Signed PPP contracts by World Bank classifications Total number of projects by type and primary sector Total investment in projects by type and primary sector (US$ million) 19.3 Expenditure on infrastructure in Thailand over the next 10 years 20.1 Distribution of PPP projects in operation by sector 20.2 Distribution of PPP projects under construction by sector 20.3 Distribution of project values in operation by sector (million USD) 20.4 Distribution of project values under construction by sector (million USD) 20.5 Percent distribution of contract values by sectors (million USD) 22.1 ASCE rating of bridges and roads since 1989 22.2 Direct expenditure for transportation (non-transit) in 2010 22.3 Annual transportation expenditure (non-transit) 22.4 Funding sources for transportation (non-transit) Appendix 10.1 Public–corporate partnership water supply projects in operation Appendix 10.2 Investment opportunities in public–corporate partnership water supply projects

xiii 261 270 274 286 290 297 299 306 308 309 309 331 331 334 347 347 348 348 349 369 369 370 370 177 178

Contributors

Akintola Akintoye is Professor of Construction Management and Economics and Dean of School at the University of Central Lancashire, UK. He has served in various consultancy teams which have advised governmental institutions and private organisations on PPPs and PFIs. He has edited three published books in Construction Innovation and Process Improvement and Public Private Partnership and is Joint Co-ordinator of the CIB Task Force TG72 on PPP and Editor-in-Chief of the Journal of Financial Management of Property and Construction. Darinka Asenova is a Professor at Glasgow Caledonian University, UK. She has multi-disciplinary research interests covering a range of cutting-edge organisational and societal risk-related topics in the areas of public service provision, Public Private Partnerships, public service reconfiguration, and risk and regulation in health and social care. Aziz Ahmed Abdel Aziz is Associate Professor at the University of Washington, US and Associate Editor for the Canadian Journal of Civil Engineers. Through consulting to corporations and local governments, Aziz advises on Public Private Partnerships, project economic modelling, and project management. Matthias Beck is Professor of Public Management at the Queen’s University Management School, Belfast. He has research interests in public finance, Public Private Partnerships, risk management and health economics. He is a frequent book co-author on PPP. His most recent authored book (with Beth Kewell) is entitled Risk: A study of its origins, history and politics and was published in 2014. M. Talat Birgonul is a Professor in the Construction Management and Engineering Division of the Civil Engineering Department in the Middle East Technical University. His primary research interests include engineering economy, international construction, construction planning, macroeconomic aspects of the construction industry and claim management. Nunzia Carbonara is Associate Professor of Management Engineering at the Politecnico di Bari, Engineering Faculty, Italy. She is involved in many national and international research projects and associations in the fields of local development, Public Private Partnership, innovation management and inter-firm relationships.

Contributors

xv

Nicola Costantino is Professor of Management and Economics at the Politecnico di Bari, Italy. He was Visiting Professor at Worcester Polytechnic Institute (US) and Rector of the Politecnico di Bari, Italy. His research interests cover construction economics, supply chain management and risk management in PPP projects. Jui-Sheng Chou is Professor at the Department of Civil and Construction Engineering of National Taiwan University of Science and Technology, Taiwan. His teaching and research interests are primarily project management related to knowledge discovery in databases, data analytics, Public Private Partnerships, public construction policy, and sustainable development. Martin Dada is a Professor of Construction Procurement and Stakeholder Management in the Department of Building at the University of Lagos. He is also currently the Vice-Chairman of the Council of Registered Builders of Nigeria. He is involved in PPP research and training in Nigeria since 2006. (CORBON). His additional research interests include sustainability and stakeholder management in construction. Ganesh A. Devkar is Associate Professor in Faculty of Technology, CEPT University, Ahmedabad, India. His research focuses on identifying the competencies necessary for effective implementing Public Private Partnerships in infrastructure service delivery and developing a framework that allows urban local bodies to assess their capability to successfully deliver projects through PPPs. ˙Irem Dikmen is a Professor in the Construction Management and Engineering Division of the Civil Engineering Department in the Middle East Technical University. Her primary research interests include risk management, knowledge management, strategic management of construction companies and use of IT to improve the construction value chain. Jennifer Firmenich was a Researcher with the Institute of Construction and Infrastructure Management, ETH Zurich in Switzerland until 2014. Her research area covers risk allocation and risk bearing capacity testing for PPP building projects. Steven Van Garsse is a Professor of Law at Research Group on Government and Law, Faculty of Law, University of Antwerp, Belgium and manages the Flemish PPP Knowledge Centre, the central PPP Unit of the Flemish Government administration. His research interests include administrative law, PPP projects, procurement law, privatisation and externalisation of government services. Martijn van den Hurk is a Researcher in the Research Group on Public Administration And Management of the Department of Political Science, University of Antwerp, Belgium. His research interests are the governance of Public Private Partnerships (PPPs) in urban and infrastructure development; how the performance of PPPs is affected by the use of standardised contracts and procedures. Suhaiza Ismail is Associate Professor at the Department of Accounting, Faculty of Economics and Management Sciences, International Islamic University

xvi

Contributors

Malaysia, Malaysia. She has engaged in PPP research in Malaysia, ASEAN and the United Kingdom over the past ten years. Dr Arshad Ali Javed is Postdoctoral Research Fellow in Public Private Partnership at the Department of Building and Real Estate at the Hong Kong Polytechnic University, Hong Kong. His research interests are in the area of Public Private Partnership, construction safety, sustainability, value management and game theory. Ilari Karppi is University Lecturer and Acting Professor of local and regional development and governance at the University of Tampere, Finland. He has served as an expert in related issues in several Finnish government ministries and international organisations, including the European Commission. Yongjian Ke is Lecturer at the School of Architecture and Built Environment, the University of Newcastle, Australia. His research interests are around two interrelated areas of PPP and relational contracting. Nakhon Kokkaew is Assistant Professor at the Department of Civil Engineering, Walailak University, Thailand. He was a Visiting Scholar at Instituto Superior Técnico (IST), Technical University of Lisbon. His research interest includes risk analysis and management in PPP infrastructure and real options for infrastructure risk management. Mohan Kumaraswamy is an Honorary Professor of The University of Hong Kong (HKU) and also the T.N. Suba Rao Brigade Group Adjunct Chair Professor of IIT Madras. He was a Professor in the Department of Civil Engineering of the University of Hong Kong, a consultant to the World Bank Colombo office; and is the ‘Founding Director’ of the Centre for Innovation in Construction and Infrastructure Development (CICID) Hong Kong, Editor in Chief of the Journal of Built Environment Project and Asset Management (BEPAM) and Joint Co-ordinator of the CIB Task Force TG72 on PPP. Boeing Laishram is Assistant Professor in Department of Civil Engineering, Indian Institute of Technology Guwahati, India. He worked in an investment bank engaged in appraisal and structuring of project finance deals for infrastructure projects in India. His research interests include sustainability assessment of PPP, relational contracting, BIM in PPP projects, and MCDM in PPP project selection. Patrick T.I. Lam is Associate Professor in the Department of Building and Real Estate at the Hong Kong Polytechnic University, Hong Kong. He undertakes research and publishes on Public Private Partnership, project financing and more recently on green financing and business models. Chieh Lin is Deputy Director of the Department of Technology, the Taiwan Government, Taiwan. He was responsible for enacting, regulating, and promoting Public Private Partnerships (PPP)/Government Procurement (GP) policy.

Contributors

xvii

Giovanni C. Migliaccio is Associate Professor at the University of Washington, US. He serves as a Specialty Editor in Project Delivery and Contracting for the ASCE Journal of Construction Engineering and Management and is a member of the committee on Project Delivery Methods with the Transportation Research Board. Yuji Nemoto is Professor and Director of Toyo University Public Private Partnership (PPP) Research Center, Toyo University Graduate School of Economics, Japan. He is a member, PFI Promotion Committee, Cabinet Office of the Japanese Government. He is a specialist in in regional and industrial revitalisation Nikos Nikolaidis is Researcher in Public Private Partnership at the Department of Shipping, Trade and Transport, University of the Aegean, Greece. He is a project finance specialist of many years of experience in the private and public sectors with involvement in several large-scale PPP and PFI transactions through transaction advisory, sponsor equity, construction management, and debt placement roles. Lasse Oulasvirta is Professor of Public Sector Financial Management and Accounting, University of Tampere, School of Management, Finland. He has been active in different public sector accounting and auditing bodies. He was a member of the Finnish Central Government Accounting Board, Ministry of Finance. Olukayode S. Oyediran is Professor of Construction Economics at the Department of Building, University of Lagos, Nigeria. He is a former Registrar of the Quantity Surveyors Registration Board of Nigeria. His research interests include, Information Technology in construction, Dispute Resolution, and International Construction Business. Cem Galip Özenen is the Head of Public Private Partnership (PPP) Department at the Ministry of Development. He has supervised the implementation of annual infrastructure investment programmes, produced national policy papers, coordinated public and private institutions for the implementation of transportation plans and policies in PPP. Roberta Pellegrino is Research Fellow at Politecnico di Bari, Engineering Faculty, Italy. She was Visiting Scholar at Columbia University, US. Her main research interests are on Public Private Partnership/Project Financing, Risk Management, Real Options Theory. Andre Permana is a Researcher at the Indonesia Infrastructure Guarantee Fund (IIGF) Institute, Indonesia; a state-owned enterprise providing guarantee to PPP projects in Indonesia, where he also holds position as risk management function. Luc Renneboog is Professor of Corporate Finance at Tilburg University, Portugal and Director of Graduate Studies at the Centre for Economic Research; he is also Visiting Professor at Cambridge University. His research interests are corporate finance, law and economics, socially responsible investing, and alternative investments.

xviii Contributors Athena Roumboutsos is Associate Professor at the Department of Shipping, Trade and Transport, University of the Aegean, Greece Her research interests include risk analysis and management, change management and innovation, transport infrastructure development, innovative procurement, alliances and strategies, game theory and models. Joaquim Miranda Sarmento is Researcher in Finance at Tilburg University, Portugal and a lecturer in Finance at ISEG and Catolica Lisbon School. His research interests are PPPs, project finance, corporate finance, public finance, and taxation. He is also the Chief Economic Adviser to the President of the Portuguese Republic. Gail Sheppard is Lecturer of Management Accounting at the Institute of Technology, Tallaght, Dublin, Ireland. Matti Siemiatycki is Associate Professor in the Department of Geography and Program in Planning at the University of Toronto, Canada. His research focuses on infrastructure planning, financing and project delivery and the merits of delivering infrastructure mega-projects through Public Private Partnerships, especially as they relate to value for money, risk transfer, and the meeting of public policy goals. H. Ping Tserng is Professor at the Department of Civil Engineering of National Taiwan University, Taiwan. He is an esteemed member of the Russian Academy of Engineering. Kuo-Chi Tseng is Director in the Department of Promotion of Private Participation, Ministry of Finance, Taiwan. His Ministry is the competent authority in charge of the Act for Promotion of Private Participation in Infrastructure Projects in Taiwan. Pekka Valkama is Research Director in the School of Management at the University of Tampere, Finland and Adjunct Professor in Turku School of Economics at the University of Turku, Finland. He was advisor to Finnish ministries and city governments, the commerce committee of the Finnish Parliament and the World Bank Estonia Mission. Koen Verhoest is a Research Professor in Comparative Public Administration and Globalisation at the Department of Political Science, University of Antwerp, Belgium. His main research interest is on the organisational aspects of public regulation and their governance, including the autonomy, control and coordination of agencies, the governance of liberalised markets, and the governance of Public Private Partnerships and other forms of collaboration. ShouQing Wang is Professor at the Department of Construction Management, Tsinghua University and Deputy Director, Institute of International Engineering Project Management, Tsinghua University, Beijing, China. Andreas Wibowo is Research Professor at the Agency for Research and Development of the Ministry of Public Works Indonesia and Senior Lecturer at

Contributors

xix

Graduate Program in Civil Engineering, Parahyangan Catholic University Indonesia, Indonesia. Tom Willems is a Researcher in the Research Group on Public Administration and Management, Department of Political Science, University of Antwerp, Belgium. His research covers public private partnerships and public accountability and focuses on the issue of accountability in complex forms of public governance. Rebecca J. Yang is Senior Lecturer in School of Property, Construction and Project Management at RMIT University, Australia. Her main research interests focus on stakeholder collaborations in large-scale projects, and lifecycle assessment of sustainable buildings. Dr Yang is an expert in Social Network Analysis. Prior to her academic career, Rebecca worked as a quantity surveyor in Singapore. Patrick X.W. Zou is Professor of Building and Construction Management at the University of Canberra, Australia. Prior to this appointment, he was Associate Professor and Director of Construction Management and Property Program at the University of New South Wales.

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1

An overview of Public Private Partnerships Akintola Akintoye, Matthias Beck and Mohan Kumaraswamy

Introduction In many developed and developing countries there has been a move toward an increased reliance on Public Private Partnerships (PPPs) for infrastructure development. This involves an engagement with, or participation of, private companies and the public sector in the financing and provision of infrastructure. In most countries these PPP arrangements have been aimed at overcoming broad public sector constraints in relation to either a lack of public capital; and/or a lack of public sector capacity, resources and specialised expertise to develop, manage and operate infrastructure assets. In a number of countries PPPs are now commonly used to accelerate economic growth, development and infrastructure delivery and to achieve quality service delivery and good governance. The spectrum of nature and types of PPPs are vast, making a precise and complete definition of a PPP difficult. However, significant developments in the use of PPPs in many countries have made it increasingly important to understand these practices, as well as to unveil any underlying common principles and problems and to capture and develop a body of good practices, where such can be achieved. Given the changing economic, social and political environment, coupled with globalisation and budgetary constraints, PPP has become unavoidable and indeed desirable in many countries worldwide. The desire to procure via PPP in many countries has been increased by the public sector’s recognition of the vital role of modern infrastructure in economic growth. This recognition can be seen as a partial reversal of earlier neo-liberal assumptions that markets would provided the required infrastructure developments if these were needed. Clearly, there is now a widespread acknowledgement of the need for the state to play a role in coordinating future infrastructure developments as well as in creating the legal and procedural frameworks within which infrastructure projects can be developed. PPP is now accepted as an important avenue for funding major public sector infrastructure capital projects. PPPs are joint ventures in which business and government cooperate. Ideally this cooperation should allow each partner to apply their strengths to develop a project more quickly and more efficiently than government could accomplish on its own. Within this general goal, the practical

2

Akintola Akintoye et al.

implementation of PPP projects can take on several variants. In some instances, the private sector may be responsible for designing, financing, constructing, owning and/or operating the entire project. In such circumstances, the private sector would want to be assured that the PPP structure is designed to provide competitive rates of return commensurate with a financial rate of return that they could earn on alternative projects of comparable risk. Where the private sector makes a lesser contribution overall to PPP projects, with, for instance the public sector providing part of the financing or a large part of the project risk, these requirements for a market return can be relaxed. This book provides an international perspective on PPP by drawing upon the existing and fast developing body of principles and practices from many countries. It is the first of its kind in that it brings together leading academics and PPP specialists in this area of development from across the world. A book of this nature enables readers to capture the level of maturity of PPP development in the countries that are included in its analysis, understand similarities and differences in their practices, as well as assess the regulatory framework and institutional infrastructure in place to support the implementation of PPP, together with challenges and opportunities faced in respect to future developments of PPP including the future role of government, financial institutions and other stakeholders in PPP development. In essence, the book is based on multi-country best practices and a theoretical framework that draws on an international body of knowledge and theory. It focuses on applications in construction industry practice and other sectors/industries where PPP is taking root, such as in project finance and built asset management. It provides a global overview and draws on research, applications and case studies from international sources and regional perspectives. Finally, it seeks to suggest possible means for the future improvements of PPP policy by drawing, in part, on comparisons of PPP development and implementation within and across countries.

Concept and characteristics of Public Private Partnerships PPP can be described as a contractual agreement of shared ownership between a public agency and a private company, whereby they pool resources and share risks and rewards, to create efficiency in the production and provision of public or private goods. It can be argued that it is difficult to have a unified definition of PPP, although existing definitions have common features or characteristics. Accordingly, Peters (1998) has identified five general defining features of partnerships which are frequently common to PPPs, namely: 1

2

A partnership (in this case, PPP) involves two or more actors, at least one of which is public and another from the private business sector. Tarantello and Seymour (1998) suggest that partnerships between non-profit organisations and local governments should also be counted as PPPs. In the partnership, each participant is a principal, i.e., each of the participants is capable of bargaining on its own behalf, rather than having to refer back to

An overview of Public Private Partnerships

3

4

5

3

other sources of authority. Grimsey and Graham (1997) noted that, in some instances, the public sector has to set up a special agency capable of entering into partnership before collaboration becomes possible. Another feature of partnerships is that they establish a long-term, and ideally stable relationship among actors. In a PPP there is a need for continuing relationship and the parameters that are negotiated among the members from the outset as part of the process in which such a partnership is created (Moore and Pierre, 1988). In the PPP partnership, each of the participants brings something to the partnership table. Therefore, for the partnership to be a genuine relationship, each will have to transfer some resources – material or immaterial – to the partnership. A partnership implies that there is some shared responsibility for outcomes or activities (Collin, 1998). This differs from other relationships between the public and the private sectors in which the public sector retains full responsibility after receiving the advice of organisations in the private sector. Partnerships often are separate organisational structures, rather than bargaining relationships that have been established among otherwise autonomous organisations. Grant (1996) argues that shared authority and responsibility, joint investment, sharing liability/risk-taking and mutual benefit stand at the core of a partnership.

As previously noted, PPP can take different forms. Accordingly, the UK government has identified around seven PPP models (HM, 2000), one of which is the Private Finance Initiative (PFI), which is a common form of PPP found in the UK. Generally speaking, within PPPs, the level of private sector involvement might range from a purely service provision, without recourse to public facilities, through a service provision based on public facilities usage, up to ‘public facilities’ ownership. Gentry and Fernandez (1998) noted that the form of PPP adopted in a project often depends on such issues as: the degree of control desired by the government; the government’s capacity to provide the desired services; the capacity of private parties to provide the services; the legal framework for monitoring and regulation; and the availability of financial resources from public and private sources. For example, South African PPP regulations prohibit an agreement between an institution and a private party, where the latter perform an institutional function without accepting significant risks (South Africa Government Gazette, 2000). The variations in which PPPs occur across countries are numerous and so are the definitions of PPP. In some cases, city officials might describe a tax concession for which business promises to create jobs in the future as a partnership. In other instances, hiring a private contractor to manage a parking garage or to collect garbage might be labelled a PPP. A partnership might be as extensive as privatising facilities or services, or it might simply involve applying financing or management techniques from the private sector (McDonough, 1998). Historically speaking, the idea of bringing in private finance to funding public sector infrastructure originated

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in the 1970s with the early occurrences of PPP in Latin America and other regions (The World Bank and the International Finance Corporation, 1992). At the time, the terms ‘privatisation’, PPPs, alternative service delivery (Ford and Zussman, 1997) and municipal service partnerships were used to mean the same thing. This breadth of application is reflected in Carroll and Steane’s (2000) definition of PPP as a very wide diversity of partnerships which arise as ‘agreed, co-operative ventures that involve at least one public and one private-sector institution as partners’. According to the UK government (HM, 2000), PPPs bring public and private sectors together in long-term partnerships for mutual benefit. This can include a wide range of different types of partnership, such as:

• the introduction of private sector ownership into state-owned businesses, using •

•

the full range of possible structures (whether by flotation, or the introduction of a strategic partner), with sales of either a majority or a minority stake; the Private Finance Initiative (PFI) and other arrangements, where the public sector contracts to purchase quality services on a long-term basis, so as to take advantage of private sector management skills given the incentive of having private finance at risk. This includes concessions and franchises, where a private sector partner takes on the responsibility for providing a public service, including maintaining, enhancing or constructing the necessary infrastructure; the franchising of government service provision into wider markets, and other partnership arrangements where private sector expertise and finance are used to exploit the commercial potential of government assets.

The National Council for Public Private Partnership of the USA (Norment, 2000) defines PPP along similar terms as its UK counterpart in terms of a ‘contractual arrangement between a public sector agency and a for-profit private sector concern, whereby resources and risks are shared for the purpose of delivering a public service or development of public infrastructure’. The objective of PPP, accordingly, is to utilise the economies of the private sector to more effectively deliver the service or infrastructure. This can include everything from outsourcing of an Operation and Management contract to full privatisation (i.e. transfer of assets from the public to the private sector). The Canadian Council for Public Private Partnerships (1998) defines a PPP as a cooperative venture between the public and private sectors, built on the expertise of each partner, that best meets clearly defined public needs through the appropriate allocation of resources, risks and rewards. The Council does not consider a contracting out arrangement as a true PPP. The United Nations organisation PPPUE proposes a very broad definition. Here PPPs include informal dialogues between government officials and local communitybased organisations, as well as long-term concession arrangements with private businesses, but not privatisation.1 This idea follows the presumption of the United Nations (1995), according to which co-management is seen as part of the definition of a true PPP in addition to shared ownership and equal responsibility.

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Sindane (2000) differentiates PPP from contractual arrangements where a private party takes responsibility for all, or part, of a government’s (department’s) functions. Such contractual arrangements, accordingly, are different from the total selling off of state assets or the complete transfer of responsibility for relevant services. Spillers (2000) similarly suggests that PPP offers advantages over privatisation and concession schemes.

Type and nature of PPP projects and developments In the mid-2000s, the Institute of International Project Financing (IIPF) produced a pioneering list of how PPP project finance had been used internationally (IIPF, 2005). According to IIPF, whether termed ‘international project finance’, ‘global project finance’ or ‘transitional project finance’, the financing technique of bringing together development, construction, operation, financing and investment capabilities from throughout the world to develop a project in a particular country was generally successful. The technique was being used throughout the world, in emerging and industrialised societies. Examples of facilities developed through PPP project financing included (IIPF, 2005):

• Energy generation. This is for construction of new energy infrastructure and

• • •

• •

presents an alternative to the traditional, non-market-based development of electricity resources and allows private generation of electricity through various models: privatisation of existing assets, encouragement of private development of new electrical production, and establishing the governmentowned utility as a purchaser of power for transmission and distribution over existing facilities, or a combination of these. Pipelines developments. This allows large natural gas pipelines and oil refineries to be developed through this model rather than being financed either by the internal cash generation of oil companies or by governments. Mining development. Projects financed through PPPs are commonly used for mining operations in many developed and developing countries. Toll roads. The capital-intensive nature of these projects, in a time of intense competition for limited governmental resources, makes PPP project finance based on toll revenues particularly attractive. This is used in many Asian countries including Thailand, India and Malaysia. Waste disposal: PPP has become an attractive financing vehicle for household, industrial and hazardous waste disposal facilities. Telecommunications. According to IIPF, the information revolution has created enormous demand for telecommunications infrastructure in developed and developing countries.

Apart from multinational organisations, such as the IIPF, regional bodies such as the Northern Ireland Executive (2002) have also identified a series of projects as being suitable for PPP developments:

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Infrastructure

Accommodation

Technology

Water & wastewater Roads Public transport Waste management

Schools and colleges Health accommodation Student accommodation Office accommodation Museums and libraries Leisure facilities

Vehicle fleets Equipment Broad band network Driver and Vehicle Testing Agency Rates Agency Council IT systems

In terms of types of PPP, the World Bank has taken a holistic view, defining them as including all investment (public and private) in projects with private participation in public sector infrastructure provision. The World Bank, accordingly, identified four categories of PPPs (World Bank, 2005):

• Management and lease contracts. These are contracts where a private entity

•

•

•

takes over the management of a state-owned enterprise for a fixed period while ownership and investment decisions remain with the state. In a management contract the government pays a private operator to manage the facility and assumes the operational risk. In a lease contract the government leases to the private operator who takes on the operational risks. Concessions. A private entity takes over the management of a state-owned enterprise for a given period during which it also assumes significant investment risk. Concession can have several functions, including: (i) rehabilitate, operate, and transfer; (ii) rehabilitate, lease or rent, and transfer; and (iii) build, rehabilitate, operate and transfer projects. Greenfield projects. The World Bank identifies four categories of this, including: (i) build, lease, and own; (ii) build, own, transfer, or build, own, operate, transfer; (iii) build, own and operate; (iv) Merchant projects where a private entity or a public–private joint venture builds and operates a new facility for the period specified in the project contract. Divestitures. These involve the full (100 per cent) or partial transfer of governmentowned equity to a private entity that buys an equity stake in the state-owned enterprise as part of an asset sale, public offering or mass privatisation programme.

Various types of PPPs are being used in different parts of the world and for different projects. While in the UK DBFO is popular for the PFI projects, other methods of PPP used worldwide are turnkey contracts, perpetual franchise, BOT, BTO, leasepurchase, operating leasing, lease-develop-operate, sale and leaseback etc. Each of these approaches can offer distinct advantages to clients or private sector actors, often depending on the specific social, economic, political and regulatory environment.

The structure of the chapters The chapters of this book are structured into similar thematic sections that allow the reader to explore the development and operation of PPP in the various countries

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under a common framework, which hopefully also facilitates some cross-country comparisons. Specifically, each chapter aims to address the following issues: Origin and drivers

• How and why was PPP started? • What were the specific motivations for PPP? • Which infrastructure needs and gaps (e.g. in economic and social • • • •

infrastructure) was PPP meant to address? Which other forms of procurement could have filled the gap which PPP was meant to address? Why was PPP chosen as a procurement mechanism? What were the patterns of opposition and support for PPP? Which policy outcomes can be attributed to different phases of PPP development?

Policy framework for PPP

• • • •

What are the key aspects of official government policy on PPP? What role do different levels of government play (local, municipal, state, national)? How was the respective PPP policy developed? Who has been leading policy development and implementation?

Financial context for PPP

• How has the banking sector developed in relation to PPP? • What source of funding (local, international, syndicate, private equity) has • • • •

underpinned PPP implementation? What influence have financial institutions had on the PPP policy framework? What are the funding patterns for PPP (what is funded, what conditions are attached, what timeframes were employed)? Does PPP project refinancing exist and if so in which form? What has the impact of austerity and financial management issues been in relation to PPPs?

Institutional framework, e.g. contractual, legal, governance

• What are the characteristics of the government approval process (e.g., is • • • •

there a requirement for central government approval, or a government guarantee, for the project to proceed)? Are there standard templates addressing issues such as organisational structures, funding mechanisms, contracts etc.? What is the nature of payment systems and are there provisions for default? Are there mechanisms for dispute minimisation and resolution? What is the relationship between PPP and the country’s legal system?

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Organisational structure

• Who are the main PPP stakeholders and, specifically, what is the role of contractors, clients, financial institutions, etc.?

• How are stakeholders represented, what are their roles and responsibilities? • What is the level of government control? • How are PPPs internally organised, are there special purpose vehicles or equivalent?

• Does the country possess designated governmental PPP units? Extent of use of PPP adoption

• • • • •

Which are the core sectors for the use of PPP? What has been the number of PPP projects? What amount of investment has gone into PPP (past, ongoing and planned)? What is the long-term ownership structure of PPP infrastructure? What are the opportunities and rewards for those engaging in PPP development

Changes in PPP usage and extent over time

• What is the country’s risk profile, has it changed and what has been the effect of this on PFI?

• What have been the principal changes in PPP in terms of sectoral distribution and the type of projects?

• What has been the impact of the financial crisis, and the special provisions arising from this, on PPP?

• Have there been changes in government and/or government priorities and, if so, how have these impacted on PPP development?

Future developments

• What is the outlook with regard to future infrastructure needs? • Which future political, social and economic developments are likely to impact on PPP?

• What opportunities does the country’s PPP sector present for local and international investors?

• In terms of a future development strategy, what is needed in terms of

knowledge, information, tools, concepts and applications to enable the respective systems, processes and technologies to develop from where PPP is today in a country and where the country would like to be in the future?

Overview of the country chapters The following section summarises the contents of the book by providing a summary of each chapter. In order to facilitate reading for those readers who are interested

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in one or several specific countries, the chapters are present in alphabetical rather than geographic order. Accordingly, Chapter 2 presents PPP in Australia. PPPs have been vigorously promoted in the context of social and public facilities and services in Australia. In order to ensure an efficient delivery of infrastructure investment, the Australian Government Infrastructure Department has developed a comprehensive set of National PPP Guidelines, which have been endorsed by the Australian Federal Government through its Infrastructure Australia Department and the State, Territory and Commonwealth Governments as an agreed framework for the delivery of PPP projects. These Guidelines provide a detailed framework that enables both the public and private sectors to work together to improve public service delivery through private sector provision of infrastructure and related noncore services. By 2012, there were 125 PPPs that had been completed with a total value exceeding $59 billion Australian Dollars. However, there remain significant gaps and opportunities for PPP to grow in the next decade. A key motivation for using the PPP procurement strategy in Australia was the need for more infrastructure including highway networks, social and public buildings, which was caused by increasing population; while the government lacked funding to fulfil this increasing demand of better and more infrastructure. Another motivation is improved project scoping and risk assessment by government. The level of risk assessment by government agencies prior to contract award is much greater on PPPs. This additional analysis makes the government agency a more informed purchaser, better able to interrogate the pricing and risk assumptions of bidders. The chapter is based on four cases that highlight the importance of undertaking detailed risk analysis and proper risk allocation and the importance of achieving dynamic optimal risk sharing between the government and private parties during the lifecycle of the PPP project. Chapter 3 discusses PPP in Belgium. Despite a long history of public–private endeavours, PPP in Belgium took off relatively late. Nonetheless, by 2013, PPP had become a well-embedded procurement method for long-term infrastructure projects. However, the distribution of PPPs across the different regions of Belgium is skewed. Both in terms of the number and volume of PPPs, the Flemish Region has an edge over the Walloon Region and the Brussels-Capital Region. This is mainly due to the fact that a national PPP policy was never drafted. In fact, only in Flanders has there ever been an official policy. PPP in Belgium was initially supported on account of its fiscal-budgetary advantages, since it allowed financing investments off-balance-sheet. Criticisms by the national Audit Court and global credit institutions made decision makers look for other possible benefits of PPP and other PPP structures. Consequently, it is now required that potential PPPs create more than temporary financial savings. Chapter 4 on PPP in Canada emphasises that PPPs have, over the past decade, increasingly become the model of choice in that country to design, build, finance, operate and maintain large public infrastructure projects. To date, over 100 healthcare, justice, transportation, waste and water treatment, energy and recreation facilities have been delivered through PPPs, and another 100 are in

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various stages of the delivery process. Within the context of this highly active marketplace, this chapter shows that while PPPs in Canada involve an expansion of the private sector involvement in infrastructure provision, the government still maintains a key role in the development of infrastructure. During the current wave of projects, PPP usage has been primarily motivated by a desire to realise value for money, which is generated by transferring construction and availability risk to the private sector partner and by encouraging innovation over the lifecycle of the project. Meanwhile, Canadian governments have maintained a key position in selecting projects that meet the public interest, financing much of the upfront capital infrastructure costs using their lower borrowing capacity, and retaining demand risk enabling them to maintain long-term policy flexibility over service planning and coordination. Chapter 5 presents PPP in China. The Chinese government has been encouraging and supporting the participation of private investors in the provision of infrastructure and public services. There is a huge investment opportunity for PPP developers in China. China has a wealth of experience with delivering PPPs with strong support from central and subnational governments. However, the legal, regulatory and institutional frameworks for PPPs are immature. Given the tremendous economic growth and immense demand for infrastructure and public services, the chapter argues that China will continue to experience strong demand for future PPP projects. Chapter 6 on PPP in Finland highlights how in that country classic public procurements has been the dominant approach to infrastructure investment so far. Only very recently have the Finnish Transport Agency and some bigger cities introduced a small number of PPP contracts. The utilisation of private finances in public sector investment projects in Finland has remained limited because both the central government and the funding agency of local governments have enjoyed good credit ratings and have been able to collect affordable loans from the international markets. In addition, the municipalities have had taxation rights, broad local tax bases and a high capacity for sustainable financial management. However, with economic recession, the global financial crisis and a growing need to renovate existing old facilities and build new premises, government interest in partnership-based investment procurement has increased. The first experiences with the PPP contracts have been mixed and these new procurement methods in some instances are regarded as more expensive compared to traditional investment arrangements through budget financing. The Association of Finnish Local and Regional Authorities has now developed an alternative framework model for PPP contracts and private finance. In the lifecycle model of public investments, the local government keeps the ownership of service facilities and takes care of the financing without a special purpose vehicle and private capital but signs 20–25 year contracts with construction companies for maintenance of the service facilities. Chapter 7 on Greece discusses how the country endorsed PPPs in the early 1990s, initially as a model to deliver transport infrastructure within the TransEuropean Transport Network (TEN-T) programme. The state tapped into EU

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structural funds and private financing in order to overcome public financing restrictions and provide much needed social and transport infrastructure. At the same time, the private sector began to play a role that required a longer-term view on a project’s construction and lifecycle costs. The successful initial implementation of hybrid public–private funding solutions in transport projects was followed by a slower but steadfast adaptation to PPP regulatory standards via changes in legislation and governmental procedure. The State’s new private-funding oriented strategy brought important changes to the country’s infrastructure and financial markets. New players emerged in the Greek market, while older actors underwent necessary restructuring in order to better position themselves in relation to this previously unknown approach. International groups assessed the opportunities presented by an emerging economy such as Greece and entered the market decisively, bringing an international perspective and years of experience in infrastructure financing, development and operation. Large-scale transport projects as well as social infrastructure and energy PPP’s were tendered and awarded as part of this policy, but their development was severely hindered by the deep recession from which the country is still recovering. Even though this recovery has been costly, particularly from a socio-economic point of view, and important challenges still lie ahead in the country’s regulatory and legislative reform, there is a strong political will to continue implementing PPPs as a vehicle for developing the country’s transport, social and energy infrastructure. Chapter 8 discusses PPPs in Hong Kong. Since the 1970s many infrastructure projects have been procured through PPPs in Hong Kong particularly via build, operate, transfer (BOT) and design, build, operate (DBO) approaches. Considering that Hong Kong is regarded as a vibrant international city and a major gateway to mainland China, its intensive infrastructure development opportunities have encouraged much private sector participation. After the global financial crises, and in order to boost the local economy, the Hong Kong Government launched its ‘Ten Major Infrastructure Projects’, some of which were earmarked to be procured using the PPP approach. However, due to many reasons, including the need to catch up on delays, these projects are now funded directly by the government instead, using the Design and Build option. There is, however, currently a new move towards the use of PPP in conservation and revitalisation projects where the time pressure for these types of project is not as great. Chapter 9 on India suggests that the Indian infrastructure sector has been of continued interest at both international and national levels; the reason being that infrastructure has been considered to be the key to India’s socioeconomic development. In this context, the PPP model has played a significant role in re-energising India’s infrastructure sector. The analysis of Indian PPP provides an interesting story of the ‘PPP Way’ of infrastructure development. The PPP model, which has made an initial footprint in national highways development, is now gradually spreading into other sectors such as power, airports and urban infrastructure. The extent of adoption of the PPP model has varied across different infrastructure sectors, with build–operate–transfer (BOT) and its variants being popular in the roads and ports sectors, while service and management contracts

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have dominated the urban infrastructure sector. Although the Indian infrastructure sector is considered as falling short in meeting private sector investment targets, the extent of operational PPP projects indicates that the PPP model has made an impressive mark on the Indian infrastructure landscape. Chapter 10 is about PPP in Indonesia. The participation of the private sector in infrastructure service provision in Indonesia dates back to the nineteenth century. While the number of completed PPP projects in Indonesia remains limited, this arrangement is growing in importance as the gap between the supply of government funding and the demand for infrastructure development widens. The build– operate–transfer model is still the main option for PPP in Indonesia. The Government of Indonesia (GoI) has made efforts to foster more PPP development, including reforming the legal and regulatory framework and providing government support. This support may take the form of contingent support mechanisms (e.g., land capping instruments, guarantees) and non-contingent support mechanisms (e.g., Project Development Facility, land revolving and acquisition fund, Viability Gap Funding). To allow for more competition between state-owned enterprises and private-sector firms, the GoI has also introduced a public–corporate partnership, a broader concept of PPP. The capital market of Indonesia is generally liquid, especially with the presence of non-banking financing institutions established by the GoI, which can provide flexible and long-term capital. The key issues that potentially hinder successful PPP implementation in Indonesia centre around commitment to policy sustainability, coordination among government stakeholders, and public sector capacity. It can nonetheless be argued that Indonesia is on the right track in terms of PPP investment. However, the main challenge remains how to maintain this momentum. Chapter 11 on PPP in Ireland explores the political history of private sector involvement in service and infrastructure delivery in the Republic of Ireland in relation to PPPs. There has always been a history of private sector involvement in services and infrastructure delivery in the Republic of Ireland in the running of schools, some local authority services and the building of toll bridges. Moreover, there have been ten privatisations of state-owned enterprises since the 1980s. The origins of PPP in Ireland, however, trace back to the twenty-sixth Dáil (1989– 1992) when the FiannaFáil and Progressive Democrats coalition came to power. The main rationale for PPP was the increasing infrastructural deficit and the prospect of reduced investment by the EU during a period of rapid economic growth. Political expediency can be offered as an alternative reason for the introduction of PPPs as they offer returns in the form of infrastructure and also move capital expenditure off budget. The chapter examines the recent decision to expand the use of PPP as a means of stimulating the economy, the new measures and reforms in relation to PPP and the similarities between them and recent changes to PFI made in the UK by HM Treasury. Chapter 12 on Italy provides a comprehensive overview of PPP in that country in order to highlight challenges and opportunities for a more effective use of PPP. The chapter reveals that, although PPP is a relatively recent practice, its use is now widely spreading. Nevertheless, there are still some shortcomings that are

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related to administrative, financial and legal issues, which make the application and use of PPP less effective and efficient in Italy than in some other countries. In order to overcome these limitations, different interventions are required in order to improve existing practices and advance the body of knowledge. The chapter formulates useful recommendations for an effective implementation of PPP, based on the analysis of the main constraints faced by PPP developers in Italy. Chapter 13 is on PPP in Japan. Until recently, Japan has depended on tax revenue at national and local municipality level to procure infrastructure. The main driver for the use of PPP today is the fact that infrastructure is now deteriorating and there is a need for an injection of investment. Most of the existing infrastructure in Japan was developed over a short period of time during the era of Japan’s rapid economic growth. Therefore, there is now also a concentrated pattern of deterioration. A third sector procurement approach to infrastructure development, a rudimentary form of PPP, was introduced in the 1980s in the form of joint public–private corporations for infrastructure development. This chapter estimates that the current public works budgets for maintaining currently existing infrastructure are between 30 and 40 per cent below actual needs, which makes PPP an attractive alternative option. The Japanese government, municipalities and private companies have recognised that covering the cost of infrastructure renovations with public works is impossible. Therefore in 2013 the government announced a ‘PPP/PFI Action Plan’ to promote PPP/PFI. The Action Plan envisages the target amount for PPP/PFI projects to increase to 10–12 trillion yen, which is 3–4 times the level of past PPP/PFI expenditure (which can be regarded as being very ambitious). Japanese PFIs are governed by the PFI Act of 1999. The 2011 revision allows for concessions whereby ownership of infrastructure stays in the hands of government while administration rights are transferred to private companies. Chapter 14 discusses PPP in Malaysia. Realising the contribution of a PPP programme to the development of the country’s public infrastructure and facilities, the Malaysian government has shown continuous support for PPP. This is evidenced in the government’s plans and policies that give emphasis to the use of PPP. In particular, in the Tenth Malaysia Plan, which covers the government’s strategy for the country’s infrastructure development for the period from 2011 to 2015, it has been highlighted that PPP will be extensively intensified with 52 largescale projects to be delivered via PPP. Although the government’s present focus for PPP is on infrastructure projects, in the future, more PPP projects will be used in other sectors, including education, telecommunications and renewable energy. Moreover, the International Finance Corporation for Singapore and Malaysia is currently negotiating with the private sector to embark on PPP projects in other countries, particularly other developing countries. Due to the importance of PPP for the economic development of the country, PPP is labelled as ‘Malaysia’s Third Way’ of procurement. Chapter 15 on PPP in Nigeria notes a wide gap between demand and supply of both economic and social infrastructure. With an increasing population and an ambitious national vision, but with limited resources, the Nigerian governments at

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both Federal and state level are opting for PPP as an alternative procurement approach. Overall, the public and private sector investors in Nigeria support PPPs. Users and civil society organisations do not question the desirability of projects executed via PPP but rather express concern over perceived official corruption, lack of transparency and inadequate consultation. The experience with PPP in Nigeria reveals some mixed stories: some projects have succeeded while some have failed. Despite this, there is growing demand for PPP projects which are seen as creating opportunities for new skills development and professional expertise at both national and state levels. Chapter 16 focuses on PPP in Portugal. PPPs have been used intensively in Portugal, mainly for highway construction and in the health sector. This has enabled the country to close the infrastructure gap and avoid budget constraints at the time of investment. However, doubts about whether PPPs represent value-formoney have emerged. The chapter discusses several factors that militate against the success of PPP in Portugal. They include: (i) the fact that there was a very high concentration of PPP projects over a limited timespan and the public sector was not prepared for this, nor had the ability to manage and control the contracts; (ii) the fact that the motive to resort to PPPs was mainly to avoid budget constraints, but not to use public resources better by taking advantage of private sector efficiency; (iii) the fact that risk allocation between the private and public sector was flawed because the private sector bore too little risk and payments from the public to the private sector were considerably above the investment cost. Consequently, the current and future annual payments from the state to the private sector are considered a great burden to the government and users of the facilities (especially in the current times of austerity and budget consolidation). This has in some situations led to PPP renegotiations in order to reduce public payments. Chapter 17 on Switzerland looks back on a long tradition of public–private cooperation in one of the wealthiest economies worldwide with a unique democratic system and remarkable political stability. Switzerland has had 17 PPP projects in a broader sense. They involved either buildings or service projects. One project qualifies as PPP project in a narrow sense including a lifecycle approach to design, construction, operation, maintenance and financing. This project covers an administrative centre and a regional prison in the canton of Berne that began operation successfully in 2012. No PPP project of any kind has been implemented in the Swiss transportation sector so far. All Swiss PPP projects were initiated without explicit Swiss PPP legislation. Adequacy tests and Public Sector Comparators are tools that are used to analyse the potential of PPP procurement when an infrastructure project is planned. At the moment, no PPP project development is in the pipeline. In the near future, it is expected that public– private co-operations in general will continue to be implemented but PPP projects in particular will remain isolated cases. Chapter 18 discusses PPP in Taiwan, which has successfully used PPPs to complete infrastructure projects. The use of PPP as an ‘outside-the-box’ budget strategy was the main reason why the Taiwanese government adopted the PPP framework. Official data show that private capital is urgently needed to fill gaps in

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the public construction budget. However, because the market for project financing is still developing in Taiwan, financial institutions are reluctant to provide loans for Special Purpose Vehicles unless they are well secured by the mother companies or by collateral. In Taiwan, formal institutional frameworks are classified as ‘contractual’ and ‘legal’. The Taiwanese Ministry of Finance provides model contracts for each PPP type. In addition, the Taiwanese government has improved the domestic environment for PPPs by promulgating the Act for Promotion of Private Participation in Infrastructure Projects in February 2000. Central and local governments now often use PPP to finance infrastructure projects. Chapter 19 discusses PPP in Thailand where PPPs have been employed since the 1980s. The primary impetus for PPP implementation in the 1980s, when the country’s GDP grew dramatically, was that the investment needed for economic infrastructure dwarfed the country’s fiscal budget. This fiscal imbalance provided the private sector with opportunities to invest in the country’s infrastructure, especially in transportation projects (particularly in Bangkok to alleviate traffic congestion). PPPs in Thailand have evolved from the first generation (no PPP law until 1992), to the second generation (governed by the PPSU Act 1992), and on to the present third generation when the Private Participation in State Undertakings (PPSU)Act 1992 has been reformed through the Private Participation in State Undertakings (PISU) Act 2013. Currently, the sectors actively engaging in PPPs are energy, telecom and transport. To address issues of PPP policy continuity and transparent implementation, the government’s Central PPP Unit is now preparing its PPP Master Plan with a pipeline of strategic PPP projects that the government is committed to procure in the future. Chapter 20 focuses on PPP in Turkey. Despite an increase in expenditure, Turkey’s infrastructure assets still lag behind other OECD and EU countries. Being a developing country, Turkey has huge infrastructure needs. However, as in other developing countries, the fiscal budget remains an important constraint. Turkey’s economic dynamics and investment policies have evolved significantly. Especially after the 1980s an increasing need for infrastructure and a lack of sufficient financial resources, led to the implantation of PPP as an alternative method in parallel with privatisation initiatives. Turkey created a legal framework for PPP applications at the beginning of the 1980s in order to provide an enabling environment for private sector engagement with this. In addition, the tenth Development Plan announced by the Turkish government includes a roadmap for PPP applications in the country. Chapter 21 deals with PPP in the United Kingdom (UK). During the past two decades the UK has held a leading position in the development and application of PPP-based infrastructure procurement through its Private Finance Initiative model. The banking and economic crisis of 2007–09 has created major challenges to the use of PPP in the UK, making the sustainability of past levels of PPP investment and the future direction of PPP-based infrastructure procurement uncertain. This chapter summarises key developments in UK PPP up to the crisis; reviews the economic issues that have led up to the crisis; discusses the immediate impact of the crisis on the UK PFI and PPP market together with the transition

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arrangements that were put into place by the successive governments leading to the development of Private Finance 2 (PF2) by the current government. One of the main points of this chapter is that the UK PPP landscape has been characterised by two contradictory developments. On the one hand, the general approaches within which PPPs/PFIs could be implemented have evolved and become more differentiated, allowing a greater number of public sector clients to utilise these procurement mechanisms. On the other hand, the contractual framework of UK PPP/PFI and its regulatory setting have remained largely unaltered. There are some indications that the most recent modification of UK PFI, as envisaged by the PF2 programme, represents an attempt to address the more fundamental contractual shortcomings of UK PPP, by stipulating public sector equity provision and reducing the length of service contracts. Chapter 22 on PPP in the United States (US) discusses the extensive use of PPPs for the development of public infrastructure since the late 1980s. PPP adoption in the US has been affected by a series of rapid accelerations and subsequent withdrawals. To date, 33 states and one territory have authorised PPPs, but only 29 of the states have actually seen at least one PPP project. However, recent trends suggest PPP growth is sustainable for a number of reasons, including a series of structural changes in project delivery options. The continued deterioration of the highways infrastructure creates opportunities for PPP to play a greater role in capital improvements and maintenance projects. The dwindling of federal and State funds due to declining fuel taxes is another pressing factor that will encourage the greater use of PPPs. More importantly, the increased reliance on the federal credit assistance programmes (e.g. The Transportation Infrastructure Finance and Innovation Act (TIFIA), Private Activity Bonds (PABs)) is likely to underpin a greater use of PPPs since financing can be obtained at favourable terms. This factor will also allow for PPPs to be streamlined at the State level while encouraging more states and localities to authorise and use PPPs. Although the latest US budget identified a tax-based approach to refill the National Highway Trust Fund, it also forecast a significant reduction of non-defence discretionary spending, which includes critical investments in infrastructure. This dramatic reduction of federal discretionary funds is expected to act as a further driver toward PPPs.

Conclusion The preceding overview of country PPP profiles highlights the diverse drivers, different practices and varying degrees of success of PPPs across countries. Indeed, these differ, not just from place to place, but also from time to time, given periodic shifts in needs, agendas and priorities along national development trajectories. As in any such comparison, there is value in adapting relevant lessons learned to applicable scenarios, so as to shorten learning curves or avoid similar mistakes, e.g. in selecting PPP modes, protocols or partners. Going further, this book provides a range of scenarios from which a reader may try to identify a body of core principles and good practices that could be worth

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exploring further for their applicability in other places and/or at other points of time. This book was intended to present a reasonably representative, rather than a comprehensive, cross-section of country experiences for the above purposes. However, as in many such endeavours, we would have been happier had we received a couple more examples from countries in regions such as South America. We point to this, so that readers can recognise the incompleteness of our work, and the need to take into account such possible experiences and connect to them where relevant. In any case, the context of each set of experiences would of course always be considered before merely ‘extrapolating’. The successes amid some sad stories from different jurisdictions are indicative of patterns of smooth sailing adventures that seem to be interrupted by rollercoaster rides which characterise various PPP journeys. The presence, or otherwise, of various success and/or failure ‘factors’ obviously can make a valuable contribution to how we approach PPP. These success factors include the presence and continuity of a conducive legal, financial and regulatory regime, as well as of PPP champions, a reasonable pipeline of bankable PPP projects and a strong and respected private sector. Equally important appears to be the need to build up relevant knowledge resources and expertise within both public and private sectors. Another important point is that PPP is not a panacea for public infrastructure and services needs. Some inappropriate choices of projects or fumbled implementation may have led to high profile breakdowns that discourage communities from pursuing potentially beneficial PPPs thereafter. Another common deterrent is the reluctance of some public officials to venture outside comfort zones, to non-traditional procurement and its associated risks (to both the projects and their careers), e.g. in assessing the many variables in longer-term and higher risk PPPs. Apparently private parties need full confidence in the continuity of public policy vis-à-vis their project. Community concerns about value for money often also relate to apprehensions as to the heightened likelihood of collusion and worse, given the many more variables involved in PPP as well as the role played by subjective assessments. We hope that readers will benefit from this book and take account of those alerts and caveats such as are mentioned above, while endeavouring to identify potential success factors and ways forward, particularly those articulated in the contexts of specific country scenarios in the chapters that follow.

Note 1 www3.undp.org/pppue/prog.html, August 2000.

References Carroll, P. and Steane, P. (2000) ‘Public–private partnerships: sectoral perspectives’, in S. Osborne (ed.) Public-Private Partnerships: Theory and practice in international perspective, London: Routledge, pp. 36–56. Collin, S. (1998) ‘In the twilight zone: a survey of public–private partnerships in Sweden’, Public Productivity & Management Review, 21(3): 272–83.

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Ford R. and Zussman, D. (1997) Alternative Service Delivery: Sharing Governance in Canada, Canada: Institute of Public Administrative of Canada. Gentry, B. and Fernandez, L. (1998) Evolving Public Private Partnerships: General themes and examples from the urban water sector. OECD Proceedings: Globalisation and the Environment, Perspectives from OECD and Dynamic Non-Members Economies, pp. 99–125. Grant, T. (1996) ‘Keys to successful public–private partnerships’, Canadian Business Review, 23(3): 27–28. Grimsey, D. and Graham, R. (1997) ‘PFI in NHS’, Engineering, Construction and Architectural Management, 4(3): 215–31. HM, Treasury (2000) Public Private Partnerships – The Government’s Approach, London: The Stationery Office, www.hm-treasury.gov.uk/docs/2000/ppp.html. IIPJ (2005) International project finance, available online: http://members.aol.com/ projectfin/project_finance_links.htm [accessed August 2005]. Locke, D. (1998) ‘On the move’, Private Finance Initiative Journal, 3(4): 82–85. McDonough, K. (1998) ‘Constructive financing’, The American City & County, 113(6): 18–27. Moore, C. and Pierre, J. (1988) ‘Partnership or privatisation? The political economy of local economic restructuring’, Policy and Politics, 16(3): 169–78. Norment, R. B. (2000) Executive director of NCPPP. Email information. Peters, B. (1998) ‘With a little help from our friends public-private partnerships as institutions and instruments’, in J. Pierre (ed.) Partnerships in Urban Governance: European and American Experience, London: MacMillan, pp. 11–33. Sindane, J. (2000) ‘Public–Private Partnerships: Case Study of Solid Waste Management in Khayelitsha-Cape Town, South Africa’, in L. Montanheiro and M. Linehan (eds) Public and Private Sector Partnerships: The enabling mix, Sheffield: Sheffield Hallam University, pp. 539–64. South Africa Government Gazette (2000) ‘Public Finance Management Act, 1999’, Regulation Gazette No. 6780. Available online: www.gov.za/gazette/regulation/2000/21082. pdf [accessed August 2005] p. 54. Spillers, C. A. (2000) ‘Airport privatisations: smooth flying or a crash landing?’ The Journal of Project Finance, 5(4): 41–47. Tarantello, R. and Seymour, J. (1998) ‘Affordable housing through non-profit/privatepublic partnerships’, Real Estate Issues, 23(3): 15–17. United Nations (1995) Comparative Experiences with Privatisation: Policy Insights and Lessons Learned. United Nations Conference on Trade and Development. United Nations, New York/Geneva. World Bank (2005) ‘Private participation in infrastructure database’. Available online: http://ppi.worldbank.org/reports/customQueryAggregate.asp [accessed August, 2005].

2

PPP applications in Australian infrastructure development Patrick X.W. Zou and Rebecca J. Yang

Introduction As a concept, PPP is a risk-sharing relationship between the public and private sectors, which aims to bring about a desired public policy outcome; it involves the public and private sectors in cooperation to provide infrastructure and services. Specifically, a PPP is a long-term contract between the public and private sectors where governments pay the private sector to deliver infrastructure and related services on behalf, or in support, of their broader service responsibilities. In general, PPP procurement and delivery strategy is suitable for projects that are long term with measurable service outputs, involve innovation, and consider whole-of-life costing, where there is a market appetite and opportunity for risk transfer. Such a project could be a bundle of contracts that include core and non-core services as well as complementary commercial development. PPPs typically make the private sector parties who build the infrastructure responsible for its condition and performance on a whole-of-life basis. PPP projects cover economic and social infrastructure and typically include both a capital component and an ongoing service delivery component of non-core services. The features of a PPP include (Australia Government Infrastructure Australia, 2008):

• provision of a service involving the creation of an asset involving private • •

sector design, construction, financing, maintenance and delivery of ancillary services for a specific period; a contribution by government through land, capital works, risk sharing, revenue diversion, purchase of the agreed services or other supporting mechanisms; the private sector receiving payments from government (or users in economic infrastructure) once operation of the infrastructure has commenced and contingent on the private sector’s performance in supplying the services.

Australia is a relatively young country and has a population of about 23 million, with most of them living in major cities such as Sydney, Melbourne, Brisbane, Adelaide, Perth and Hobart. The distance between these major cities is about 1000 km. The main transportation networks linking these cities together are highways and railways as well as airlines. Most of the new infrastructures such as

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highways are now built by using PPP procurement strategy. PPPs nowadays are also vigorously promoted in the context of social and public facilities and services in Australia. Australia was one of the earliest countries to implement PPPs in infrastructure procurement via a strategy that created long-term contractual obligations and a sharing of risks and rewards between the private and public sectors. In order to ensure an efficient delivery of infrastructure investment, the Australian Government Infrastructure Department has developed a comprehensive set of ‘National PPP Guidelines’, which includes several volumes (and sets of documents) (Infrastructure Australia, 2013): 1 National PPP Guidelines Overview (updated as at 2008, total 33 pages). 2 National PPP Policy Framework (updated as at 2008, total ten pages). 3 Roadmap for Applying Commercial Principles (updated as at 2011, total six pages). 4 Volume 1: Procurement Options Analysis (updated as at 2008, total 32 pages). 5 Volume 2: Practitioners’ Guide (updated as at 2011, total 108 pages). 6 Volume 3: Commercial Principles for Social Infrastructure (updated as at 2008, total 183 pages). 7 Volume 4: Public Sector Comparator Guidance (updated as at 2008, total 65 pages). 8 Volume 5: Discount Rate Methodology Guidance (updated as at 2013, total 57 pages). 9 Volume 6: Jurisdiction Requirements (updated as at 2013, total 77 pages). 10 Volume 7: Commercials Principles for Economic Infrastructure (updated as at 2011, total 163 pages). These National PPP Guidelines have been prepared and endorsed by the Australian Federal Government through its Infrastructure Australia Department and the State, Territory and Commonwealth Governments as an agreed framework for the delivery of PPP projects. However, each state or territory also has the authority and flexibility of imposing state-specific requirements, such as the Queensland PPP guidance material (QLD Treasury, 2008), the New South Wales PPP Guidelines (NSW Treasury, 2012), and Partnerships Victoria Requirements (VIC Department of Treasury and Finance, 2013). These Guidelines provide a comprehensive framework that enables both the public and private sectors to work together to improve public service delivery through private sector provision of infrastructure and related noncore services. The Guidelines describe competitive and transparent mechanisms for pursuing opportunities that bring together the ideas, experience and skills of both sectors (Infrastructure Australia, 2013). Furthermore, the aim of these guidelines is to deliver improved services and better value for money, primarily through optimal risk transfer, management synergies, encouraging innovation, efficient asset utilisation and integrated whole-of-life asset management as well as protection of public interests. Interested readers are referred to these guidelines. The Australian PPP’s institutional and governance structure has been described in an OECD (2010) report as ‘dedicated public-private partnership units, a survey

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of institutional and governance structure’, which is exemplified especially well by the state of Victoria. Interested readers are referred to this report. In this chapter we shall discuss several key issues including PPP drivers, PPP suitability, PPP processes and key success principles, as well as PPP risk management in an Australian context. Following a discussion of these issues, this chapter provides in-depth studies on the risk management of several PPP infrastructure projects (highway, rail and building projects). At the end of the chapter, we also discuss the perceived problems and possible solution and sustainable infrastructure rating systems that may be useful in future PPP infrastructure procurement.

Context of Australian PPP projects Before looking into the key issues, let’s have a look at the overall picture of Australian PPP Projects (Figure 2.1). Between 1987 and 2012, 125 PPPs were completed with a total value exceeding $59 billion Australian Dollars. In 2008, the project value reached a peak at $12 billion with the completion of two major projects (BrisConnections, and Airport Link and Northern Busway) in Queensland. Historically, there has been a steady increase in PPP procurement since its introduction, and 1996/7 saw the first peak, followed by the Asian financial crisis. After that, PPP procurement took a long time to regain momentum until another increase occurred in 2004. As mentioned above, 2008 saw the second peak in PPP activity followed by the global financial crisis of the same year. There are 69 PPP projects of the economic type, including transportation, civil and commercial works, and these comprise 71 per cent of the contracted value, while social type PPP projects, such as hospitals, schools and prisons, increased their market share recently in the last ten years (Figure 2.1). The average contract term of these projects is 23 years with a range from 5 up to 30. Although PPP projects grew quickly in Australia as indicated in Figure 2.1, there is still a large gap to achieve the $100 billion target that the Financial Times forecasted for 2016. Infrastructure Partnerships Australia (2007) suggested that the Australian PPPs need to capture a 25 per cent share of the overall infrastructure market, compared with the current share of about 10–15 per cent. This means there is a significant gap and opportunity for PPP to grow in the next decade.

Drivers for PPP in Australia A key motivation for using the PPP procurement strategy in Australia was due to the need for more infrastructure including highways networks, social and public buildings, which was caused by increasing population. The need for PPP was also due, to some extent, to a lack of government funding to fulfil the increasing demand of better and more infrastructure. The third motivation for PPP has been the need for better integration of project finance, design, construction and management, and the opportunity for innovation that PPP brings. Among others, a unique benefit of the PPP model is the rigour that the lenders apply to the due

Year of completion

1987 1991 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Figure 2.1 Value of completed Australian PPPs from 1987 to 2012

0

2000

4000

6000

8000

10000

12000

14000

Value (SM)

Economic type Social type Total

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diligence assessment and monitoring of a project that is financed on a limited recourse base. This is perhaps the single biggest factor that explains the superior cost and time performance of PPPs over traditional procurements, after contracts are signed (Clayton Utz, 2013). Another advantage is improved project scoping and risk assessment by government. The level of risk assessment by government agencies prior to contract award is much greater on PPPs. The risk analysis that underpins the Public Sector Comparators (PSC) tends to far exceed the risk analysis performed by government for cost estimates for traditional procurements. This additional analysis makes the government agency a more informed purchaser, better able to interrogate the pricing and risk assumptions of bidders. In addition, the third advantage is that PPP projects also encourage innovation and long-term output-focus. The long-term nature of PPP contracts makes government think more carefully about the outcomes that a project should achieve and the tender documents for PPP projects tend to encourage and provide greater scope for the private sector to develop and bid with innovative solutions that can deliver the required services at a lower whole of life cost. Other advantages of PPPs include the financial incentives that drive timely completion and the upfront planning and allowance for operation and maintenance costs (Clayton Utz, 2013). A key aspect of the PPP policies is value for money from the public perspective. The value-for-money drivers, as defined by Infrastructure Australia (2013) in the PPP guideline overview, include:

• Sufficient scale and long-term nature. The project represents a major capital •

• • • •

•

investment with long-term requirements. Complex risk profile and opportunity for risk transfer. There is rigorous risk evaluation and transfer to the private sector of those risks it is best able to manage, including those associated with providing the specified services, asset ownership and whole-of-life asset management. Whole-of-life costing. There is full integration of upfront design and construction costs with ongoing service delivery, operational, maintenance and refurbishment costs, i.e. through whole-of-life costing. Innovation. The PPP approach provides opportunities to use competition as an incentive for private parties to develop innovative solutions in meeting these output-focused service specifications. Asset utilisation. Costs to government are reduced, through third party utilisation and through more efficient design to meet performance (e.g. service delivery) specifications. Better integration of design, construction and operational requirements. Ongoing service delivery, operational, maintenance and refurbishment responsibilities become a single private party’s responsibility for the length of the contract period. Competitive process. The use of a competitive process helps to encourage the private party to develop innovative means of service delivery while meeting government cost objectives.

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PPP process and successful principles According to the Australian Government’s Guidelines (Infrastructure Australia, 2013), the key process and principles for creating a successful PPP project are summarised in Table 2.1. Table 2.1 PPP process and successful principles No.

Process/Principles

Explanation

1

Planning and specification

The focus should be on specifying the outcomes that government is looking to achieve. How carefully the requirements of the project are developed before the project is put to the market directly relates to the efficiency of the bid process and the quality of the result.

2

Project resourcing

Appropriate resourcing is critical to a project’s success. This includes identification and selection of a project team that has the requisite skills and the appointment of specialist advisors where required. A strong project team is required to ensure the process runs efficiently and without unnecessary cost, in line with the required timelines, to protect the government’s interests and to deliver value for money outputs.

3

Business opportunity

The commercial structure of the project must provide a viable business opportunity for private parties who are able and willing to manage the opportunities and the risks inherent in providing the required outputs.

4

Probity

The process is to be managed according to well-developed probity principles and probity plans.

5

Invest time in development of the process and tender documents

Sufficient time needs to be invested in developing a well-thought-through process and high-quality tender documents.

6

Timeline management

The tender process must be carefully managed to ensure adherence as far as possible to agreed timelines.

7

Certainty of process

The private sector must be provided with a precise description of what is required and the hurdles that need to be cleared if government is to proceed with the project.

8

Clarity of communication

The clarity and effectiveness of communication throughout the process is critical to ensuring a common understanding of the requirements and the maximisation of the opportunity to provide a value for money outcome.

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No.

Process/Principles

Explanation

9

Maintaining competition in the tender process

The process needs to encourage strong competition between private parties to drive value for money outcomes for government.

10

Achieving value for money

Achieving value for money is a key requirement of government and is a combination of the service outcome to be delivered by the private sector and the degree of risk transfer and financial implications for government.

11

Minimising bid costs where practicable

Governments are aware of the need to balance the requirement for a competitive bidding process for PPP projects with the costs of participating in that process. Governments aim to minimise these costs where practicable.

12

Bid evaluation

The evaluation criteria need to clearly articulate the key issues for consideration and the submission requirements need to efficiently request the information that is needed to enable Government to evaluate proposals.

13

Recognition of the partnership

This encourages good faith and good will between government and the private party in all dealings.

14

Contract management

The PPP process needs sound contract management arrangements, including early involvement of those responsible for administering the contract.

Risk management in PPP PPP is an arrangement involving risk-sharing. Therefore, in this section, we will focus on how risk should be identified, assessed, mitigated and allocated/shared between the public and private parties in the project procurement, delivery management and operation process. Risk categories The following section provides details on the key risks that may arise as part of a PPP project. Specific guidance on the commercial principles and risk allocation in relation to these and other items is provided in the Australian National PPP Guidelines Volume 3 Commercial Principles for Social Infrastructure (Australia Government Infrastructure Australia, 2008). The guidelines identify the following risks as key ones in PPP projects: Site risk, design, construction and commissioning risk, sponsor risk, financial risk, hard and soft facility maintenance operation risk and the payment

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Patrick X. W. Zou and Rebecca J. Yang mechanism risk, market risk, network and interface risk, industrial relation risk, legislative and government policy risk, force majeure risk, asset ownership risk, tax risk, and interest rate risk.

Risk assessment and allocation To achieve value for money, risks are allocated to the party best able to manage them. This ensures that the cost of managing risk is minimised on a whole-of-life and whole-of-project basis. A full risk analysis should be undertaken for all PPPs. This involves comprehensive risk identification, assessment, allocation and mitigation strategies. This process generates information which is used, among other things, in the construction of the PSC, evaluation of value for money, determination of the payment mechanism, the development of risk management plans and in determining the contractual terms and conditions. The risk allocation principles for a social or an economic infrastructure project may differ markedly, particularly in market risk allocation, treatment of force majeure events, default and termination events and compensation events. Optimal risk allocation seeks to assign project risks to the party in the best position to control them in order to minimise both project costs and risks. The party with greatest control of a particular risk has the best opportunity to reduce the likelihood of the risk materialising and also to control the consequences if it does materialise. Thus, for both pricing and management reasons, optimal risk allocation dictates that particular risks are allocated in line with capacity to control and manage risk at least cost. The risk allocation process results in various risks being:

• retained by a government; • transferred to the private sector; and • shared by the two parties. Risk sharing Although many risks are in the control of the private or public sectors, to some degree certain risks are outside the control of both parties. If neither party is in a position of full control, the risk allocation should reflect how the private party prices the risk and whether it is reasonable for government to pay that price, taking into account the likelihood of the risk materialising, the cost to government if it retained that risk and the ability of government to mitigate any consequences if the risk materialises. In relation to shared risks, it is important to note that the sharing may not be on a 50:50 basis, but split in some other way. Risk sharing can also use a predetermined mechanism where the parties can act together to mitigate and share the consequences of a specified materialised risk. Ultimately the responsibility for the delivery of public services stays with government. Where payment for the service is not made by government but by the end-consumer, the private party may be able to mitigate a materialised risk by passing through any additional costs to the end-users. Any passing through should be subject to

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appropriate contractual restrictions and may be subject to a regulatory regime that ensures that the level of pass-through is justified (Australia Government Infrastructure Australia, 2008). Risk value versus payment mechanism The payment mechanism is at the heart of social infrastructure PPPs, as it puts into financial effect the allocation of risk and responsibility between government and the private party. It determines the payments that government makes to the private party and establishes the incentives for the private party to deliver the service required in a manner that gives value for money. To reflect properly the costs of public sector delivery, a PSC should include both the value of those risks that would be retained by government under a PPP and those that would be transferred to the private party. Pricing both of these risk categories can help to determine whether risks should be assumed by government, rather than government paying a higher price for their allocation to the private party. For social infrastructure, the expected costs/benefits of risks should be included in the cash flows of the PSC. To value risk, an estimate should be made of both the likelihood of the risk occurring and the dollar impact of the risk if it did eventuate. For economic infrastructure projects, the construction of the PSC is developed on a project finance basis (Australia Government Infrastructure Australia, 2008).

Case studies of PPP risk management in Australia In this section four cases are analysed, from risk analysis and allocation perspectives to help the readers understand the Australia PPP risk environment and its risk-sharing practice. The first two are infrastructure highway and rail projects and the last two are hospital/cancer centre buildings. Risk analysis This section analysed two PPP infrastructure projects: Case 1: The Sydney cross-city tunnel is a 2.1 km-long tunnel running east–west between Darling Harbour and Rushcutters Bay. It is a build own operate transfer (BOOT) type of PPP between the New South Wales (NSW) Government and the Cross City Motorway Consortium (CCMC) with a 30-year concession period. In January 2003, construction of the project started and the tunnel was officially opened on 28 August 2005. Case 2: The Sydney airport rail link is a 10 km underground railway between Sydney Central Business District and Sydney’s Kingsford Smith airport with a 30-year concession period. The project was completed in May 2000, four months before the Sydney 2000 Olympics. Maintenance of the Airport link stations was the consortium’s responsibility and tracks and tunnel, the government RailCorp’s responsibility.

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As shown in Table 2.2, three key risks are analysed – financial risk, public perception risk and political risk (Zou et al., 2008). These two cases highlighted the importance of undertaking detailed risk analysis and developing strategies to eliminate, reduce or mitigate the risks, particularly the financial risk, public acceptance risk and political risk. It is also interesting to point out that PPP financial risk ultimately rests with the government. Table 2.2 Analysis of risks in PPP infrastructure projects Risks

Case 1 - Sydney cross city tunnel

Case 2 - Sydney airport rail link

Financial risks

The project was not well received by motorists and only reached 57% of the utilization expectation, one month after the opening. The main reason leading to the low usage of the tunnel is that the Tunnel is Sydney’s most expensive tollway on a per km basis.

The project was expected to be built for $600 million, of which $470 million was supposed to be provided by the Government, but the extra cost for pedestrian facilities at the domestic terminal, route changes and tunnelling problems increased the project cost to $716 million, $74 million of the $116 million extra born by the Government. The project cost also increased as a result of construction of the North Arncliffe Interchange including Wolli Creek station. It connected the Illawarra line with the airport link and was considered to be crucial in the project’s success. However, it was not included in the original deal and it resulted to an extra $130 million to the Government increasing the total cost to the public to $700 million. Moreover, on the project completion, the actual usage of the railway was far less than the projected usage.

Reducing the toll price will result in an increase in the tunnel usage and 66 cents reduction in tolls will result in the second balance point, which will produce the same income for the private company. However, the number of vehicles using the tunnel is not so much important to the private sector as it is to the public sector. This is a financial risk requiring analysis at feasibility study stage and a risk management mechanism should be developed to monitor this risk and adjustment be made at the operation stage if the actual usage was less than the predicted.

The Airport Link project’s main reason for failure could be considered to be its low patronage (i.e. financial or return on investment risk). Amongst the reasons resulting in low project patronage, excessive ticket price has been the most important one. Excessive expectation of return on investment as can be seen in the negotiated terms of the contract clarifies the high ticket price of the line. Another mistake was the ticketing problem and poor marketing. Scarcity of passengers was related to ticketing problems and poor marketing when the project was first opened.

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Risks

Case 1 - Sydney cross city tunnel

Case 2 - Sydney airport rail link

Public perception risks

In dealing with the risk of people not using the tunnel, as a requirement of the private operator, the Government agreed to make certain changes by closing off the existing free routes. This angered the public and affected the public inclination against using the tunnel. The issue was not appropriately attended to at the time and the immediate public perception of the tunnel opening was not the provision of a service, but worsening the current traffic situation. This situation attracted much media attention, which might have heightened the public’s negative perception on the project. The risk described above should have been dealt with at the design stage where minimum alterations and changes of the existing roads and traffic conditions should be maintained if not improved.

The return on investment is dependent on the toll and therefore the public acceptance of the project is very important. Over-crowded carriages at peak times, and lack of luggage space in the trains were the problems. Furthermore, owing to the fact that many passengers need to use suburban stations, usually with many stairs, to get to the airport, exacerbated with the inconvenience of bringing the luggage to the stations itself, severely affects travellers’ choice. This risk could have been reduced if proper risk identification and analysis was conducted in design stage.

Political risks

The tunnel was used as a medium to generate income for the Government, which in turn had its effect on the toll price. In this project the private provider was charged $105m to obtain the government’s permission to build the tunnel which was subsequently converted by the private provider into an extra 50 cents per use which was then added to toll payments. Although one of the roles of government is to redistribute income and wealth, reconcile private and social costs and implement its political program using whatever means suitable, imposing an extra 50 cents to the toll price, somehow contradicts with the fundamental of providing a service to the society. Other issues included no cash payment facilities, higher price for drivers without e-tag, concerns about exhaust fumes from the tunnel, secrecy of the contract conditions and misleading signage.

Governmental political risk is another issue in this project. In this case there are no obvious reasons why the NSW Government needed to involve the private sector. The government itself was responsible for the designing, building and maintenance of the tunnel, tracks and signalling. The government is a major financier of the project by contributing $700 million to the project. The government is also taking all the risks by being responsible for bailing out the corporation if it fails. Under such circumstances the Government would have been better off building the stations itself as well as running the line as a part of its own network.

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Risk Allocation As mentioned in the previous section, risk allocation is a fundamental key for PPP projects to be successful. In this section we studied two cases, which are public buildings procured using PPP strategy. Case 3: Bendigo Hospital is a new hospital with 372 beds, ten operating theatres, an integrated cancer centre and mental health unit, helipad and a new multistorey car park. The PPP model for the Bendigo Hospital is a ‘design, build, finance and maintain’ model, with the medical services being provided by Bendigo Health. A Project Summary was released in October 2013 and it is due for completion by December 2016. Case 4: Victoria Comprehensive Cancer Centre is a new, $1 billion facility purpose-built for cancer research, treatment and care in the Melbourne suburb of Parkville, Victoria. The private sector, Plenary Health consortium, will be responsible for designing, building and then maintaining the new building for 25 years. Construction of the new $1 billion facility began in 2011 and will be completed by the end of 2015. The risk allocation details are shown in Table 2.3 and draw on case studies conducted by Victoria Department of Treasury and Finance (2012b and 2013). Table 2.3 shows that for those risks that can be clearly identified and assessed, they have been allocated to the party that is best suited to managing them, i.e. either the government or the private party. For those ‘unknown’ risks, such as soil contamination, artefacts and heritage claims, they will be shared between the two parties. It is interesting to see that the risk of costs of equipment selection, purchase and maintenance is also shared between the two parties, as is the risk of general operational costs. It is understandable that the risks of ‘change of law’ and ‘force majeure’ would be shared between the public and private parties since they are ‘unknown’ unknowns. Table 2.3 includes a reasonably comprehensive list of risks and has been used in Victoria government PPP projects. We suggest that this list could be used as reference/template for other social PPP building projects.

PPP adoption and future direction: discussions Discussion 1: More risk sharing between public and private partners Given the long-term concession nature of PPP projects and that many risks are unpredictable during this up to 30 years of concession contract period, it is necessary to consider risk sharing between the government and private parties. For example, for ‘user-pay’ economic PPP projects, user demand risks (i.e. financial risks) are often inaccurately predicted and such inaccuracy has led to many PPP projects being unsuccessful. In such cases, government should consider sharing the risks with the private party. Another significant risk that requires sharing is construction risk, such as site condition risk, contamination risks, and change in

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Table 2.3 Risk allocations for PPP public building projects Risk category

Description

Bendigo Hospital

Victoria Comprehensive Cancer Centre

Government Exemplar Government Exemplar (public) health (public) health (private) (private) Planning risk Obtaining appropriate planning approvals

The State is responsible for the Site being appropriately zoned for general hospital use. Risk that planning permits for the use of the Site are required.



Cost relating to the management and removal of existing contamination in the Site



Contamination for which State responsible

Cost relating to management and removal of contamination caused by the State, that migrates onto Site post contract, or that State requires remediated to higher standard than legally required



Contamination for which Project Co responsible

Cost relating to management and removal of contamination caused by the Project Co

Artefacts, heritage claim

Risk that the Site has archaeological and cultural heritage value (above or below ground)

Site risk Contamination







 (where approval is required solely because of private party’s misconduct or a change in its proposal) 















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Table 2.3 continued Risk category

Description

Bendigo Hospital

Victoria Comprehensive Cancer Centre

Government Exemplar Government Exemplar (public) health (public) health (private) (private) Site risk continued Native Title Risk that the Site is the subject of a Native Title claim



Design, construction and commissioning risks Design risk The risk that the design development activities cannot be completed on time and/or to budget and the design does not allow the delivery of the Services to the Services Specification







Construction risk

The risk that construction activities cannot be completed on time and/or to budget





Defect risk

The risk that defects are identified following completion of construction





Equipment

Responsibility for the selection, procurement and maintenance of equipment

Fit for purpose (commissioning)

Risk that the New Facility is not constructed so as to be fit for purpose or does not comply with contractual obligations













PPP applications in Australia Risk category

Description

Bendigo Hospital

33

Victoria Comprehensive Cancer Centre

Government Exemplar Government Exemplar (public) health (public) health (private) (private) Modification

If the State elects to make a significant variation to the New Facility or the Services to be provided by Exemplar Health

Commissioning and Completion

Risk that the New Facility cannot be commissioned in accordance with the agreed commissioning criteria



Operational risks Fit for purpose Risk that the New (operating) Facility is not able to deliver the Services and/or is not fit for purpose at the required levels Operational costs (non-reviewable services and facilities management)

Risk that operational costs exceed Exemplar Health’s budgeted cost over the operating phase of the Project

Operational costs (reviewable services)

Risk that operational costs exceed budgeted cost over the operating phase of the Project

Lifecycle costs

Risks associated with the replacement and refurbishment of the New Facility over the operating phase of the Project



























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Table 2.3 continued Risk category

Description

Bendigo Hospital

Victoria Comprehensive Cancer Centre

Government Exemplar Government Exemplar (public) health (public) health (private) (private) Operational risks continued Utility price and Risk of change in volume risk the price of the utility inputs required by the facilities and energy demand risk Change in Law or Policy Risks Changes in Law Risk that a change and Policy in legislation / (General) regulations, State policy or quality standard, which applies generally, will impact on the design or construction of the New Facility or provision of the Services Changes in Law and Policy (Project Specific)

Risk that a change in legislation / regulations, State policy or quality standard, which expressly and exclusively applies to the Project, will impact on the design or construction of the New Facility or provision of the Services

Tax risk

Risk of changes in income tax, GST or the introduction of a tax affecting companies generally





















PPP applications in Australia Risk category

Description

Bendigo Hospital

35

Victoria Comprehensive Cancer Centre

Government Exemplar Government Exemplar (public) health (public) health (private) (private) Force majeure Force majeure

Finance risk Finance risk

Risk that specified unforeseen events will impact on the design or construction of the New Facility or on the provision of the Services









Risk of providing funds to meet design and construction costs





Base interest rate risk after Financial Close to the first scheduled refinancing

Risk of movements in base interest rates after Financial Close to the first scheduled refinancing





Base interest rate risk from the first scheduled refinancing

Risk of movements in base interest rates from the first scheduled refinancing





Operating insurance premium risk

Risk of inability to obtain insurance or material increases in insurance premiums (e.g. industrial special risks /consequential loss, public and products liability and workers compensation insurance)





Residual condition

Risk that on expiry of the contract term the condition of the New Facility is less than that required by the Project Agreement

Source: VIC Department of Treasury and Finance (2013, 2012b)







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law risks. To this end, when identifying and allocating risks, it is recommended that both the government and private parties follow relevant risk management standards and guidelines, such as AS/NZS ISO31000 Risk Management Principles and Guidelines, and Queensland State Government’s PPP Guidance Material Supporting Document: Risk Management. Researchers have also developed lifecycle risk management for PPP infrastructure projects (e.g. Zou et al., 2008). In such lifecycle risk management approaches, risk-sharing mechanisms are specified, reviewed and adjusted according to the change of the external business environment that influence the market/user demand risks in economic PPP projects. Discussion 2: Controversial/perceived problems and possible solutions Despite the advantages, drivers and successful examples as discussed in the previous sections, PPPs remain controversial and critics point to many problems – some perceived and others real as listed below (Clayton Utz, 2013):

• • • • • • •

higher financing costs; PPP consortium company insolvency; illusory risk transfer; insufficient flexibility; fetter on future decision-making; shifting government’s balance sheet (i.e. accounting treatment); and lack of transparency.

To address these problems and improve PPP process and performance, the following solutions may be considered (Clayton Utz, 2013):

• More robust financing structures. Making ‘the robustness of the financing • •

• • • • •

structure’ one of the evaluation criteria against which bids are assessed and by giving more weight to this criterion. Minimise financing costs. This can be achieved by the government providing a portion of its funding, or make progress payment earlier. Reduce transaction and bid costs. Strategies for reducing bidding costs include avoiding premature project announcement; allow sufficient time for pre-tender preparation, adopting a sensible procurement timetable and sticking to it; ensuring the government project team is resourced with highly capable people; adopting a clear and effective governance structure; interacting effectively with the bidder, not asking unnecessary information from bidders. Sensible management of probity. Ensure the bidding and tender evaluation process is fair and transparent; provide sufficient and timely interactions and project information sessions. Cease using PSC as a pass/fail test of value for money. Encourage ‘owner-led’ bids. Unbundle PPP projects. Establish centralised PPP project governance and authorities.

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• Disclose weighting for evaluation criteria. • Use dispute resolution boards. It should be noted that the above possible solutions for improving outcomes of PPPs may also have their downsides, and therefore each need to be carefully considered when deciding their suitability for specific PPP projects. Discussion 3: Overcoming the barriers and defining future directions Although there have been more and more applications of PPP procurement in infrastructure development, there are still barriers for its wider application, particularly in relation to fair competition and project efficiency. In 2010, Infrastructure Australia commissioned KPMG to identify barriers to competition and efficiency in the procurement of PPP projects (KPMG, 2010). Four years later, the Victoria Department of Treasury and Finance consolidated and detailed a range of options to reform the PPP model (Victoria Department, 2014). The key findings of these two sets of literature are summarised in Table 2.4, which presents the barriers and strategy to overcome the barriers, or defined as future PPP directions for development, application and research.

Sustainable PPP infrastructure rating system With the mission of enhancing the liveability and productivity of Australian major cities and regional communities through advancing sustainability in infrastructure planning, procurement, delivery and operation, the Infrastructure Sustainability Council of Australia (ISCA) was formed in 2008 by a group of industry professionals from engineering, environmental, planning, legal, financial and construction backgrounds working in both private and public organisations related to infrastructure. In November 2008, ISCA developed an IS (infrastructure sustainability) rating tool, and after three years Pilot Trials, the Tool was finalised and launched nationally in February 2012, and in each State and Territory from March 2012 to April 2013. The IS is Australia’s only comprehensive rating system for evaluating sustainability across design, construction and operation of infrastructure (ISCA, 2014). It is comprised of the Rating Tool, IS Technical Manual, IS Rating Tool Scorecard, and IS Materials Calculator. The IS rating tool uses a framework consisting of 15 categories within six broad themes as indicated in Table 2.5. The ISCA intends to add two extra sustainability themes of Economic Performance and Workforce, each with their own categories. They are currently seeking to develop, test and incorporate these remaining themes into the current rating tool. There are three rating types, namely Design Rating, As Built Rating and Operation Rating, as shown in Figure 2.2. The rating tools by ISCA provides a common national language for sustainability in infrastructure in Australia, facilitates scoping whole-of-life sustainability risks for projects and assets, enabling smarter solutions that reduce risks and costs, and fosters innovation and continuous improvement in the sustainability outcomes from infrastructure (ISCA, 2014).

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Table 2.4 Barriers, strategies and future directions of Australian PPPs Barriers

Descriptions

Strategies / Future directions

Complexity of PPP

Australian PPP procurement processes are complex. Some of this complexity is necessary to deliver the outcomes that Governments desire from PPP projects. Some relates to the Australian federal political system and to the tax. Consequently, PPP projects require significant upfront investment by new domestic entrants in recruiting staff with the requisite skills and knowledge.

Education of new entrants in respect of Australian PPP procurement processes is necessary. For example, enhancing debriefing sessions so that bidders can obtain a better understanding of how they can improve their responses in future.

Critical financial environment

The global financial crisis impacted on the availability, cost, tenor and appetite for providing private finance to PPPs. In Australia, the post-global financial crisis environment resulted in tighter debt terms, reduced tenors of lending, prevalence of club arrangements for banks providing finance, and changes in the financial market risk allocation.

The Australian government should develop modified financing structures to adopt the challenging market conditions. A modified finance structure needs to use the benefits of private finance efficiency and risk transfer in PPPs, and also use the State’s balance sheet to reduce the overall cost of finance. Where the market is not capable of delivering full private finance, the Government’s preferred approach is a partial State contribution paid during construction either as milestone payments or proportionately alongside private finance. Modified structures, including additional options to a partial State contribution, would be determined on a case by case basis based on advice and following consultation with the market. Finance options would also be evaluated against their impact on risk allocation, cost and complexity.

PPP applications in Australia

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Barriers

Descriptions

Strategies / Future directions

Limited services in PPPs

PPP projects in some states (e.g. Victoria) have not typically included core services. They have focused on ancillary services which support operating the infrastructure.

There is an opportunity for government to consider extending the package of services, including both core and ancillary services on a case by case basis for all future PPPs. Increasing the scope of services included in future PPPs provides an opportunity for government to harness greater whole of life savings, consistent with their desire to improve operational efficiencies. When applied appropriately, greater private sector involvement in service delivery can also provide a catalyst for system wide reform and improving performance.

Lack of PPP pipeline

Compared with some international jurisdictions, the number of PPP projects undertaken in any year and the announced pipeline of future PPP projects in Australia is limited.

The government should launch more consistent and rigorous application process of the National PPP Guidelines on the criteria for determining whether PPP procurement is appropriate for a project.

The transparency of the pipeline has improved for infrastructure generally with the creation of Infrastructure Australia and its publication in May 2009 of the National Infrastructure Priorities. However, this document contains little information about which projects might become PPPs, and focuses only on those projects that are nationally important. The States procure most PPP projects, and they have additional, largely local priorities not addressed by Infrastructure Australia.

It is also important to develop a communications strategy that demonstrates the benefits achieved from PPP projects and addresses general misconceptions about the PPP model.

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Table 2.4 continued Barriers

Descriptions

Strategies / Future directions

Excessive information requirements during procurement processes

The RFP and any subsequent stage of PPP procurement processes require fully costed solutions supported by detailed information on design, construction, maintenance and financing. As a result, the level and/or amount of information required from bidders are significant and can easily become excessive if Governments request unnecessary information.

The EOI process needs to be reviewed to ensure clear communication of objectives to the market and a focus on the ultimate selection of a short-list of bidders that is most likely to deliver the best overall solution for the project. In particular, information requirements should match closely the evaluation criteria

Inaccurate value for money assessment

Value for money in Australian PPP projects is assessed in two key ways: the Public Sector Comparator (PSC), and a range of qualitative factors. The PSC is an important tool to ensure that government is an informed buyer and has the knowledge to drive competitive outcomes during the tender process. However, there are limitations and the PSC has attracted significant criticism at times. In particular, it has been criticised for being a point in time estimate that is not adjusted for material changes to the underlying assumptions which may occur during the tender process.

A number of reforms are proposed to strengthen the value for money framework. • Strengthening the robustness of the PSC • Better informing bidders of government expectations, providing incentives for competitive bids and improving efficiency of the bidding process. • Capturing all aspects of value in the assessment

High level of bid cost

PPPs are complex projects and attract significant bid costs. Government recognises the importance of continually improving the bid process for PPP projects to minimise these costs. There is always a balance between minimising the process costs for tenderers and maintaining sufficient information requirements and competitive pressures to ensure a value for money outcome for government.

Government needs to continue to refine the PPP bidding process by rationalising information submission requirements, shortlisting only two bidders where appropriate and avoiding extended ‘best and final offer’ processes where possible.

PPP applications in Australia

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Barriers

Descriptions

Strategies / Future directions

Complex PPP model

The PPP model is complex and expensive to tender relative to other procurement methods. As such it is currently applied to projects of sufficient capital scale, generally over $100 million.

Opportunity exists to develop a streamlined model that will apply to smaller scale procurement, using the key commercial principles of a PPP to drive efficiencies while tailoring the procurement process for smaller scale projects. The development of a streamlined PPP option will use the key commercial principles of a PPP but simplify the PPP procurement model, in particular design elements.

Sources: Infrastructure Australia, (2010); VIC Department of Treasury and Finance, (2012a)

Table 2.5 The IS (Infrastructure Sustainability) rating framework (ISCA, 2014) Theme

Category

Management & Governance

Management Systems Procurement & Purchasing Climate Change Adaptation

Using Resources

Energy & Carbon Water Materials

Emission, Pollution & Waste

Discharges to Air, Land & Water Land Waste

Ecology

Ecology

People & Places

Community Health, Wellbeing & Safety Heritage Stakeholder Participation Urban & Landscape Design

Innovation

Innovation

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Project phase:

Planning and Design

Construction

Design rating

Operation

Operation rating

Rating type: As built rating

Figure 2.2 IS (Infrastructure sustainability) rating types (ISCA 2014)

We suggest that such IS rating tools and systems be incorporated into the future PPP procurement strategies from lifecycle perspective: development, planning, design, construction and operation/maintenance.

Conclusion PPP as a procurement strategy in Australia, is still relatively ‘young’, being less than 30 years. In this chapter we have discussed, in an Australian context, the current policies/guidelines, uptake/scales and types of PPP applications, the key drivers and advantages of PPP as well as the typical implementation process. Our discussion of four cases highlighted the importance of undertaking detailed risk analysis and proper risk allocation. We have also discussed the importance of achieving dynamic optimal risk sharing between the government and private parties during the lifecycle of the PPP project. We also discussed barriers and possible strategies to overcome them, perceived problems and possible solutions, as well as areas for future directions for research and development of PPP project procurement. We hope the ‘Australian way of PPP’, may offer some useful references to researchers and practitioners in other countries as well.

References Australian Government Infrastructure Australia (2010) ‘PPP procurement: review of barriers to competition and efficiency in the procurement of PPP projects’. Available online: www.infrastructureaustralia.gov.au/publications/barriers.aspx (accessed January 2014). Australian Government Infrastructure Australia (2013) ‘National Public Private Partnership guidelines: overview, framework, roadmap’. Available online: www.infrastructureaustralia. gov.au/public_private/ppp_policy_guidelines.aspx (accessed January 2014). Australian Government Infrastructure Partnerships Australia (2007) ‘Performance of PPPS and traditional procurement in Australia’. Available online: www.infrastructure.org.au/ DisplayFile.aspx?FileID=450 (accessed January 2014).

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Australian Government Infrastructure Australia (2008) ‘National Public Private Partnership guidelines: overview’, Infrastructure Australia, 37 pages. Australian Government Infrastructure Australia (2008) ‘National Public Private Partnership Guidelines: Policy Framework’, Infrastructure Australia, 10 pages. Guidelines: Volume 1 Procurement Options Analysis, Infrastructure Australia, 32 pages. Australian Government Infrastructure Australia (2011) ‘National Public Private Partnership Guidelines: Volume 2 Practitioners Guide’, Infrastructure Australia, 108 pages. Australian Government Infrastructure Australia (2008) ‘National Public Private Partnership Australian Government Infrastructure Australia (2008), National Public Private Partnership Guidelines: Volume 3 Commercial Principles for Social Infrastructure, Infrastructure Australia, 188 pages. Australian Government Infrastructure Australia (2008) ‘National Public Private Partnership Guidelines: Volume 4 Public Sector Comparator Guidance’, Infrastructure Australia, 65 pages. Australian Government Infrastructure Australia (2013) ‘National Public Private Partnership Guidelines: Volume 5 Discount Rate Methodology’, Infrastructure Australia, 57 pages. Australian Government Infrastructure Australia (2009) ‘National Public Private Partnership Guidelines: Volume 6 Jurisdictional Requirements’, Infrastructure Australia, 77 pages. Australian Government Infrastructure Australia (2011) ‘National Public Private Partnership Guidelines: Volume 7 Commercial Principles for Economic Infrastructure’, Infrastructure Australia, 166 pages. Australian Standard (2009) ‘ANS/NZS ISO 31000 Risk Management Principles and Guidelines’, Standards Australia, 24 pages. Clayton Utz (2013) ‘Improving the outcomes of Public Private Partnerships’. Available online: www.claytonutz.com/publications/ (accessed 15 August 2014). Isca (2014) www.isca.org.au/ (accessed April 2014). KPMG (2010) ‘PPP Procurement: review of barriers to completion and efficiency in the Procurement of PPP Projects’. Available online: www.kpmg.com date (accessed 20 February 2014). NSW Treasury (2012) ‘NSW Public Private Partnerships Guidelines’. Available online: www.treasury.nsw.gov.au/ppp/ppp_policy_guidelines (accessed January 2014). OECD (2010) ‘Dedicated public-private partnership units, a survey of institutional and governance structure’. Available online: www.infrastructureaustralia.gov.au/publications/ files/Dedicated_PPP_Units_OECD_2010.pdf (accessed January 2014). QLD Treasury (2008) ‘QLD Public private partnerships guidance material’. Available online: www.treasury.qld.gov.au/projects-queensland/policy-framework/public-privatepartnerships/ppp-policy.pdf (accessed January 2014). QLD Treasury (2008) ‘QLD Public private partnerships guidance material risk management’. Available online: www.treasury.qld.gov.au/projects-queensland/policy-framework/publicprivate-partnerships/ppp-policy.pdf (accessed January 2014). VIC Department of Treasury and Finance (2012a) ‘Future Direction for Victorian Public Private Partnerships’. Available online: www.dtf.vic.gov.au/Publications/Aboutpublications/Future-direction-for-public-private-partnerships (accessed January 2014). VIC Department of Treasury and Finance (2012b) ‘Victorian Comprehensive Cancer Centre – Project summary’. Available online: www.dtf.vic.gov.au/Publications/InfrastructureDelivery-publications/Partnerships-Victoria/Victorian-Comprehensive-Cancer-CentreProject-summary (accessed January 2014).

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VIC Department of Treasury and Finance (2013) ‘Partnerships Victoria Requirements’. Available online: www.dtf.vic.gov.au/Publications/Infrastructure-Delivery-publications/ Partnerships-Victoria/Partnerships-Victoria-Requirements (accessed January 2014). Zou P.X.W., Wang S.Q. and Fang D.P., (2008) ‘A life-cycle risk management framework for PPP infrastructure projects’, Journal of Financial Management of Property and Construction, 13(2): 123–42.

3

Developments of Public Private Partnership in Belgium Koen Verhoest, Steven Van Garsse, Martijn van den Hurk and Tom Willems

Introduction Belgium is a country with a population of well over 11 million. The country evolved into a complicated federal structure through several state reforms. As a result, the first Article of the Belgian Constitution nowadays reads: ‘Belgium is a federal state, composed of communities and regions.’ These regional governments independently exercise their authority within their domains. Flanders is the northern federated region of Belgium with Brussels as its capital. Moreover, it is the largest region of Belgium and encompasses more than 60 per cent of Belgian citizens. The two other regions are the Brussels-Capital Region and the Walloon Region. Each region has its own parliament and government. Apart from the regions, there are communities: the Flemish community, the French-speaking community, and the German-speaking community. Besides these federal and regional governments we find local governments: provincial, city and municipal governments. In Belgium, political decision-making powers are divided. Powers and responsibilities are allocated between the federal government, regions, communities and local governments. The federal government enjoys inter alia legal powers in defence, foreign affairs and justice. The regions and communities have powers in such fields as education, sports, public works and public housing. All levels of government, from federal level to local level, can use Public Private Partnerships (PPPs) for matters for which they are legally responsible. Furthermore, any proposed infrastructure project will be guided by federal and/or regional legislation. For example, in order to develop a PPP project in the city of Antwerp, which is located in the Flemish Region, one has to bear in mind both regional planning laws and federal public procurement law. The country of Belgium had a GDP of EUR 376 billion in 2012 (Eurostat, 2014b). General government expenditure in that year could be estimated at 55 per cent of the GDP (Eurostat, 2014a). About 18 per cent of the annual public expenditure is spent on public contracts for works, supplies and services. Although the number of PPP projects strongly increased over recent years, the share of public subsidies and availability payments for PPP projects still counts for less than 1 per cent of the GDP.

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Origin and drivers PPP projects have existed for a long time in Belgium, in different forms than those that are being developed today. Various large infrastructure works were realised through concessions in the nineteenth century. Examples include telegraph networks, roads, and railways (Van Garsse, 2007). The reason for setting up such projects was twofold. First, these often complex and sometimes innovative projects required expertise from the private sector. Second, it was essential for the economic development of Belgium, which had become independent in that period, that new infrastructures would be constructed as quickly as possible. Since public budgetary resources to that end were insufficient, considerable private investments took their place. Throughout the twentieth century, relatively little attention was devoted to PPP. For public services and infrastructural facilities, public structures and public agencies were used in particular. This can be partially attributed to the fact that the two World Wars had disrupted economic life. Still, PPPs were also noticeable in this specific period. Especially in the second half of the twentieth century, important large-scale infrastructure PPPs were established. Reference can be made to the Liefkenshoek tunnel project in the 1980s, which involved the construction of a road tunnel under the river Scheldt in Antwerp (Liefkenshoektunnel, 2014). Furthermore, several PPPs were initiated as mixed or institutional PPPs. These were mainly established at the local level for inter-municipal activities (e.g. electricity distribution and waste incineration). At the regional level, a public–private company (Aquafin) was set up in Flanders to create sewer and waste water treatment works in the Flemish Region. Moreover, the Walloon regional government set up a company (Sofico) for the private funding of numerous road infrastructure works. Despite the aforementioned historical PPP activity in Belgium, official federal or regional PPP policies were not developed, nor did governments systematically use PPP as a procurement method. This changed in the late 1990s, when the Flemish regional government started to show renewed interest in PPP. This was reflected in the fact that that government repeatedly mentioned PPP in the Flemish Coalition Agreement 1999–2004, saying that: ‘taking into account the limited budgetary resources, […] a system of public-private partnership (PPP) and alternative financing must be developed’ (Flemish Parliament, 1999a, p. 49). In the Flemish Parliament, PPP also received growing interest. A parliamentary resolution from 1999 urged the creation of a proper policy framework for PPP and stipulated that PPP was to be regarded as a modern instrument which, for financial and efficiency reasons and following the example of a number of other European countries, could play an important role in the development of a series of Flemish projects (Flemish Parliament, 1999b). Unlike the Flemish government, other governments in Belgium did not pay explicit attention to a PPP policy or supporting institutions. Large-scale PPPs were still initiated on an ad hoc basis. For instance, the Belgian railway operator prepared a concession project to construct a railway connection to Brussels Airport (the Diabolo railway tunnel), and the Brussels-Capital Region set up a large-scale PPP project for waste water treatment (the Aquiris project).

Developments of PPP in Belgium

47

Regarding motivations to use PPP in Belgium, two major elements arise. The first element relates to financial-budgetary reasons. PPP was assumed to allow for spreading investment costs and reducing annual public investment expenses, keeping them off-balance-sheet in accordance with ESA 95 regulation. Due to this, it was assumed that public investment capacity could increase without direct consequences for the annual public budget or public debt (Ducatteeuw, 2005). The second major motivation for PPP relates to the rather poor state of economic and social infrastructure in Belgium – particularly roads, schools, and sports facilities. On the brink of the twenty-first century, various political parties shared the belief that societal needs had to be met and several catch-up operations in infrastructure had to be carried out. One of the promises of PPP was that it would enable swift project delivery. Therefore, it was chosen as the procurement method for renewal and refurbishment in the aforementioned sectors.

Policy framework for PPP An overarching PPP policy framework, including a significant pipeline and a timetable of projects to which governments are committed to procure, does not exist and has never existed at any governmental level in Belgium. In the federal, Walloon and Brussels-Capital governments, PPP has not received much political attention or support in the form of explicit policies. In the Brussels-Capital Region, work has been done on a draft law (ordinance) for the facilitation of PPP projects and the establishment of a PPP unit; yet at the time of writing this chapter (February 2014), this order had not been adopted. A notable exception to this general trend can be found in Flanders, since in this region an official PPP policy has been developed since the late 1990s. Following best practices and international recommendations, in the early 2000s the Flemish regional government formulated specific legislation – the Flemish PPP Decree – which supported PPP-based procurement (Flemish Parliament, 2003). Mid-2002 it also established the Flemish PPP Knowledge Centre, which was to boost the introduction and implementation of PPP. PPP has received considerable attention in various Flemish regional policy documents over time, particularly in annual ministerial policy letters and notes (Flemish Parliament, 2005, 2006; Peeters, 2007, 2008, 2011). Initially, the focus was on opportunities for PPP-based procurement and on instruments that were to be developed. At a later stage, more emphasis was put on the application of instruments, e.g. the ex-ante screening of PPP project proposals for added value, knowledge sharing and monitoring. Furthermore, several policy documents have been published discussing PPP as an element of sectorial policy frameworks. Accordingly, public limited companies (PLCs) were established that in turn drafted PPP proposals in these specific sectors – for instance, policy proposals have been drafted regularly in the transport sector since 2000 (Flemish Parliament, 2000, 2004a, 2004b, 2009). A PLC called Via-Invest has been founded with the aim of realising several road projects as part of a PPP programme that contributes to filling missing links in the Flemish road network. Similar policy frameworks were established for school infrastructure – a DBFM programme called Schools of

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Tomorrow – and sports facilities – the Flemish Sports Infrastructure Programme (Agion, 2013; Flemish Ministry of Sports, 2012).

The financial context for PPPs As the Flemish government initiated a new wave of PPP projects in the early 2000s, market actors initially responded with hesitation. Nevertheless, PPP was soon embraced by quite a large number of big companies. The support was also recognisable in successive reports of the Flemish Building Confederation (Belgium’s largest sectorial organisation of building companies). At that time, the financing of PPP projects usually did not cause many problems; the market was highly liquid with plenty of international actors being involved through syndication techniques: banks would underwrite projects individually and then syndicate (resell) the loans. This favourable situation changed when the financial-economic crisis broke out. Whereas before the crisis it was relatively easy to attract funding through syndication, even for projects worth billions, this became much harder after the crisis hit – particularly due to a decreased degree of trust between banks. Bank margins increased substantially as banks passed their liquidity restrictions on to customers and imposed higher interest rates and risk premiums. As a consequence, project financing became more expensive. Finally, the common duration of project financing was shortened significantly, thereby impeding a long-term approach to PPP procurement. Despite the poor state of the economy, local financial actors remained relatively active in the PPP market, and PPP in Belgium never came to a standstill. With the help of a limited number of foreign banks, several PPP projects were financed through club deals. Moreover, for a number of projects government guarantees were given to facilitate financing and to lower financing costs. In some cases external capital guarantees and/or refinancing guarantees were provided. For instance, a refinancing guarantee scheme was established for a tramway project in the city of Antwerp (Brabo I) (DLA Piper, 2009; Van den Hurk and Van Gestel, 2013a). If it was not for the government’s financial contribution, a number of PPPs would not have made it to the construction phase, thus financial support by government has certainly contributed to the progress of PPP in Belgium. However, since guarantees burden the public budget, public–private negotiations often evolve into cumbersome and delicate activities. As of today, it can be said that financing sources for PPP have diversified over time and that the market is recovering. Similar to other EU countries, in Belgium an increasing number of actors other than traditional financiers are becoming involved, and new financing techniques are being explored. As an example, the financing of the recent PPP road project A11 was arranged by using project bonds. This project was one of the pilot projects under the new credit enhancement scheme of the Europe 2020 Project Bond Initiative. A second example concerns a local PPP project financed by a pension insurance fund instead of a bank. Third, there have been DBFM projects in which the financing element was delivered through a separate financing agreement, resulting in a DBM+F structure (Van den Hurk and Van Gestel, 2013b).

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Institutional framework, e.g. contractual, legal, governance As already indicated in the introduction, in Belgium governments at any level can initiate PPP projects. When doing so, however, they must respect the regulations of other (superior) levels of government. Here, the federal legislation on public procurement and taxation comes into play. Until recently, as far as federal legislation on public procurement was concerned, no special rules were imposed with regard to PPP. As a result, some general rules were incompatible with PPP contracts and some implementation provisions were systematically considered inoperative. This was only possible if specific reasons were stated and the derogations were justified by the special nature of the contract. However, in practice these derogations often caused legal insecurity and risks. On 1 July 2013 new legislation on public procurement, including new implementation rules, came into effect. This legislation stated that the majority of implementation rules on contract performance did not apply to DBFM contracts and institutional public– private structures (Belgian Official Journal, 2013), which in turn implied a de facto relaxation of rules for PPP projects. In terms of award procedure, the most common procedure negotiation procedure with prior publication of contract notice. In recent years, the use of this procedure has led to a number of legal disputes due to the fact that in traditional sectors this procedure can only be used in exceptional cases. In 2011 the competitive dialogue procedure was introduced in Belgium as an alternative. This procedure was developed at the European level to create a more flexible framework for awarding complex projects, and it has de facto become the standard procedure for the majority of PPP projects in several European countries. A limited number of PPP projects in Belgium are awarded without negotiations or dialogue, i.e. through a restricted call for tenders. These cases mainly concern smaller projects in which a highly standardised approach can be adopted and tender documents have been tested in previous projects so that negotiations are not necessary. As for taxation, several VAT rulings have been obtained so as to gain more legal security with regard to the fiscal treatment of PPP projects. Considerable attention has been paid to PPPs in the context of corporation tax. Reference can be made to the thin cap regulation, which was introduced recently to avoid undercapitalisation of companies, and to prevent the establishment of fiscal structures within groups of enterprises seeking to reduce taxable profits. The new basic rule of this thin cap regulation is to reject interests as deductible cost when the debt/equity ratio is higher than the remuneration 5/1. However, the thin cap regulation does not apply to companies whose main activity is to implement a PPP that was awarded following a competition in line with public procurement legislation. As a final comment on legislation, we mention that specific legislation has been drafted at the federal level in order to make specific PPP projects possible. Reference can be made to the Act of 30 April 2007 on urgent railway provisions that facilitated the realisation of a railway tunnel project. Similar specific regulations have been drafted at other levels of government. For example, at the Flemish regional level, sector-specific regulations have been developed to allow for

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the founding of the DBFM programme Schools of Tomorrow, and to provide guarantees to PPPs in public transport. Furthermore, a decree was designed and adopted for the implementation of the Flemish Sports Infrastructure Programme (Flemish Parliament, 2008). In the Walloon region, one can mention for example article 78 of the Code for Housing which facilitates partnerships for social housing, and the decree of 22 March 2007 which facilitates PPPs for the treatment and valorisation of industrial waste. Next to the legal institutionalisation of PPP in Belgium we find evidence of an institutionalisation of particular governance structures and tools. First of all, the Flemish regional government has shown steps towards the drafting of standard contracts (Delporte et al., 2009; Van Garsse et al., 2009). For instance, the Flemish PPP Knowledge Centre recently developed generic model contracts for PPP (Vlaams Kenniscentrum PPS, 2012). Flemish DBFM road projects have benefited from model contracts and model output specifications that were inspired by British and Dutch model DBFM contracts. These documents clarified, among other things, performance-related payment mechanisms, risk allocation between parties, mechanisms for dispute resolution, contract modification clauses, and contract termination. Additionally, an example of standardisation can be found in the Flemish Sports Infrastructure Programme. Here, standard DBFM agreements were designed and disseminated among a large group of contracting authorities who participated in similar PPPs (e.g. a series of artificial pitches), which were then jointly procured to one single private partner (bundled PPP procurement). The reason for using standard contracts is multifold: they are said to help spread best practices and promote a common understanding of the main risks encountered in PPP, hence they allow for a simplification of the PPP process (cf. HM Treasury, 2007). However, the feasibility of standard contracts depends on the complexity and specificity of the infrastructure that is to be built and maintained. As an example, DBFMO contracts for highly complex multifunctional sports centres are likely to benefit less from a standardised approach than DBFM contracts for plain artificial pitches. Moreover, the latter type of projects allows for bundled procurement and creates opportunities for achieving economies of scale (i.e. lower transaction costs) if applied properly. However, large-scale bundling can jeopardise competition as only a few competitive bidders will survive the ‘cut’. In Flanders a new tool has been developed to assess ex-ante the value of a PPP project. When it comes to ex-ante evaluation, the Public Sector Comparator (PSC) was used in Flanders in the past. However, the PSC never became pivotal to the approval of PPP projects, and it became increasingly controversial since its results can often be manipulated and obscured for the benefit of political interests (Flinders, 2005). Recently, a non-binding process flow was designed for PPP projects at the level of the Flemish regional government. The basic principle is that any new project should be presented to the PPP Knowledge Centre at an early stage for an ex-ante screening with respect to its potential and added value. On this occasion, an advisory opinion is delivered by the Knowledge Centre. This opinion may be used later on in order to have the project officially recognised as a PPP. However, as the Knowledge Centre does not have any formal green lighting role,

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it cannot be considered a gatekeeper that approves or rejects PPPs through binding advice. Although the evaluation tool signifies further institutionalisation of PPP in Belgium, it has only been developed for new PPP projects in Flanders. All in all, the Belgian institutional framework for PPP requires further development.

Organisational structure As discussed before, support structures for the realisation of projects were mostly developed in Flanders, and much less so by other governments. At Flemish regional government level, two different actors have been acting in the interest of PPP: (1) the Flemish PPP Knowledge Centre, a government entity which falls under auspices of the Prime Minister; and (2) PMV, which is a public investment company. The PPP Knowledge Centre has been the network organisation serving Flemish regional and local authorities by advising PPP policy and supporting PPP projects. In order to achieve added value and efficiency gains in PPP, the Knowledge Centre unites four functions, namely those of: field developer, knowledge broker, process guide, and value for money monitor. In its capacity of field developer, the Knowledge Centre provides both Flemish (regional and local) governments and private sector parties with information on PPP policy and PPP opportunities. In doing so, it seeks to promote the self-reliance of these parties regarding PPP. In its role as knowledge broker, the PPP Knowledge Centre assumes an advisory position (both policy-wise and project-wise) by collecting and sharing knowledge, experiences, and models with actors involved in PPP. Shortening the PPP learning curve for Flanders is a clear objective of the Knowledge Centre, and this is reflected in its process guidance function, which comprises advisory and guidance to the Flemish public authorities in detecting potential PPP projects and the design of these projects. Finally, the Knowledge Centre assumes the role of added value monitor by evaluating the social value of a PPPs both ex-ante and ex-post. While the PPP Knowledge Centre has been situated in the vicinity of policy making, PMV was founded as an autonomous agency under private law in the late 1990s. It is fully owned by the Flemish regional government and supports economic investment initiatives in Flanders. PMV has been entrusted with the task of setting up and investing in PPP projects, and helping other entities to make their projects operational. Acting as an entrepreneur and market broker, it provides financial levers if the market needs support and if desirable private initiatives fail to evolve (Belgian Court of Audit, 2009; Flemish Parliament, 2011a). Since PMV puts its own financial resources at stake in PPP projects and since it often acts as one of the contracting authorities, it has a significant voice in PPP project cycles. The relevance of PMV becomes clear when we take a closer look at a typical Belgian PPP model, which can be described as a ‘hybrid PPP model’. The hybrid PPP model combines elements of both contractual and participatory PPP as it features a double control and steering structure: (1) a separate and mixed SPV to execute the programme; and (2) a strict DBFM framework agreement between the SPV and the Flemish government, and separate DBM and Finance contracts between the SPV and other private partners (Van Gestel et al., 2011). In

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a hybrid PPP the public actor participates as a minority shareholder in the SPV. PMV often acts on behalf of this public actor by providing equity. This has led to situations in which PMV acted both as procuring authority and financier – which carries an inherent conflict of interest. Hybrid PPP models have been used for a number of reasons. First of all, they allow the public actor to facilitate the financing of a project. This has proven to be useful in times when banks are reluctant to provide private financing; it is likely that private parties are more inclined to invest if the government puts its own resources at risk. Second, hybrid PPP enables the public actor to have a voice in PPP, thereby safeguarding the public interest. One of the major drawbacks of the hybrid PPP model has been its impact on the complexity of PPP. Moreover, the model is largely unknown – and therefore unattractive – to international banks, investors and consortia. Nevertheless, as this sui generis hybrid model has no similar examples in other countries, it allows for test cases that are interesting for an international audience (Willems, 2014). As for the structure of PPP projects in Belgium, most projects at the federal and regional level have taken the form of genuine DBFM contracts. Often the private partners are large, international building companies, maintenance firms, or investment funds – and sometimes financial institutions. It is no surprise that most projects are structured as DBFM contracts, since this structure allows working off-balance-sheet and is, in other words, ESA neutral. When it comes to PPP at the municipal level, many projects are developed as area development and urban renewal projects. Usually, the private partners involved in these projects are real estate companies and investment funds. In addition, a large number of DBF contracts with locally active building companies can be recorded. Local DBFM contracts are mostly limited to sports infrastructure and administrative buildings. Besides hybrid PPPs, some of the largest Flemish PPP projects are bundles of local projects. With regard to sports infrastructure and school buildings, the Flemish government negotiates large PPP contracts on behalf of local authorities based on a mandate agreement. Within this large contract the private consortium then concludes a separate contract with the local authority for which the infrastructure will be built. Together with the hybrid character, this bundling creates complex PPP structures with multi-level governance challenges. Based on these experiences there is now a tendency in favour of simpler structures.

Extent of use of PPP adoption In Belgium, PPP has evolved in many different sectors over time. Most of the projects are situated in the transport sector (particularly roads, tramways, and railway tunnels). Other sectors in which PPP has gained a foothold, particularly in Flanders, include school infrastructure, social housing, youth hostels, sports infrastructure, water sanitation, administrative buildings, and student housing. At federal government level, several PPP-procured prisons were constructed. Also, in Wallonia, a large tramway project and several municipal PPPs are being procured. In the German-speaking Community a school was established via PPP. In the

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Brussels-Capital Region projects in the public transport sector were designed, and several projects in the roads sector were developed. Finally, a large-scale interregional PPP project was recently launched for road pricing in the different Belgian regions. In sum, the Belgian PPP market ranges from small-scale infrastructure projects (e.g. swimming pools and sports halls) to large-scale investments (e.g. tunnels infrastructure and area development). A clear, exhaustive overview of PPP in Belgium does not exist, partly because no consolidated data exist at federal level. This makes it difficult to determine the exact number or volume of PPPs that have been realised. At Flemish regional level, the annual report on alternative financing of projects mentions investments up to 11 billion EUR, but this figure also includes projects that do not take the form of a PPP (Flemish Parliament, 2013a). Most probably, the actual total volume of Belgian PPP projects in the construction or operational phase is about 7 billion EUR. The lion’s share of this volume has been realised in Flanders since the Flemish PPP policy strategy came into play in the early 2000s. However, despite the lack of explicit policies and political support for PPP at the level of the federal government and the governments of the Walloon Region and the Brussels-Capital Region, in recent years an increase was noticeable in the number of PPP projects procured at these government levels.

Types of PPP In general, two types of PPP are distinguishable in Belgium: object-based PPPs (e.g. concessions and DBFM) and area development PPPs (e.g. urban regeneration and brownfield development). Both types of PPPs are profoundly different in terms of development. The first category (object-based PPP) takes off with an integrated concept and procurement, including design, construction, financing, and maintenance (and operation). Furthermore, the project’s lifecycle cost is very important, and much attention is paid to output specifications. In practice, this type of PPP usually comes with DBFM (BOT/BOOT) or DBF (design, build, finance, and transfer) contracts, and concessions. Here, projects include Greenfield and renovation projects in the social and transport sector. Area development PPPs are situated at local or regional level. They involve the (re)development of an entire area (brownfield and Greenfield projects). These projects generate their own means of financing and/or use private investment. PPP ensures that profit goes along with quality. Most PPP projects in Belgium are structured as DBFM (BOT/BOOT) projects and urban renewal/area development projects. Some projects take the form of concessions. On a municipal level also a lot of DBF projects exist. In Belgium divestiture operations, management and lease contracts are not considered to be PPP projects.

Changes in PPP usage over time In recent years, a few shifts could be observed in the use of PPP in Belgium. A first shift relates to the motivation for using PPP. As was discussed earlier in this chapter,

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the early use was very much driven by budgetary motives; ESA-neutral PPP was an attractive formula for accelerating investments without increasing the public debt (De Braekeleer, 2006). However, in 2009 the Belgian Court of Audit criticised this fiscally-oriented motivation. According to the Court of Audit, off-balance-sheet financing should not be the only motive for PPP: merely using ESA neutrality as a basis for project approval or rejection would lead to suboptimal results, and therefore, ‘when looking for new formulas to realise investment objectives, one should increasingly take into account both the financial, the operational, and the social surplus value of those formulas’ (2009, p. 86). Public authorities were advised to take account of the social and financial added value of a PPP when making decisions on using PPP or not. In order to allow for better PPP, a thorough ex-ante screening of potential PPPs was required, and the mere focus upon the budgetary and fiscal benefits of PPP had to be abandoned. Ever since this call came from the Court of Audit, in Flanders greater emphasis has been put on the potential added value of PPP projects, which is recognisable in the development of an ex-ante PPP evaluation tool as discussed earlier. This tool has been made available to other levels of government so as to allow them to make an ex-ante comparative assessment between public procurement and public–private procurement. Nonetheless, the use of this tool remains limited, and so does its impact. A second important shift that has been noticeable in PPP usage over time concerns the size of PPP. Increasing attention has been devoted to small PPP projects. This development partly stemmed from the financial-economic crisis that had made the financing of large projects more difficult. A growing diversity of PPP types can be recorded as we see the rise of area development PPPs, mixed companies, and smaller contracts such as DBF and DBM. Furthermore, diversification is found in terms of how projects are or can be financed, e.g. partially by the public authority itself, by financial institutions, or by other financial actors. A third trend is related to PPP policy. Whereas PPP was strongly promoted as a policy instrument at the beginning of the twenty-first century, it has increasingly been subjected to criticism over time. More and more, PPP is being treated as just another procurement and financing technique. Furthermore policymakers increasingly concentrate on how greater professionalism and efficiency can be achieved through different procurement modes in general – in other words, today’s question is: how do we move forward?

Future developments PPP programs and projects have gained a foothold in Belgium, and a significant project volume has been realised over time. However, as the revival of PPP in Belgium only occurred in the late twentieth century, partnerships remain subject to discussion as the performance of the first generation of projects was often not as optimal as desired and governments are still learning. Doubts about the long-term performance of PPP are still abundant: it is often alleged to be a complex phenomenon and a risky business, hence PPP projects attract controversy and debate (cf. criticism regarding Flemish Sports Infrastructure Programme, Flemish

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Parliament, 2011b, 2013b). A number of potential future developments can improve the performance of PPPs in Belgium. First of all, transparency and evaluation are indispensable in creating long-term support for PPP (Willems, 2014; Willems and Van Dooren, 2012). In Flanders, the government has taken steps to improve transparency by developing an ex-ante evaluation tool for PPP, and by installing regulation to inform the parliament on PPP every year by delivering an annual report on the realisation of alternatively financed projects. Despite these efforts, transparency and accountability issues are not solved yet. For instance, the ex-ante evaluation instrument is not systematically and regularly used in other levels of government in Flanders. Moreover, most of the time technical and financial ex-ante feasibility studies are not published. All in all, the endeavour towards better democratic accountability deserves further attention. Another problem is the fragmentation of PPP knowledge across Belgian public authorities. Although an important amount of knowledge and expertise has been obtained over the years, an unequal distribution of these resources can be noticed. For example, Flemish authorities may well have more experience with PPPs than Walloon authorities. Furthermore, within the Flemish Region, large cities (e.g. Antwerp and Ghent) are likely to lead local PPP practice due to the expertise they have built up over time, leaving smaller cities and municipalities behind. In order to develop the Belgian PPP market further, it would be useful to pool knowledge and expertise in an authoritative inter-regional procurement unit. This unit should not merely focus upon PPP programmes and projects, but on procurement matters in general, allowing for a centralisation of competences and further professionalisation of the public sector (cf. Infrastructure UK). The unit could then provide support to less-experienced public authorities in their decision making regarding procurement. A third issue to be considered relates to the complexity of PPP. Scholars have criticised Belgian PPPs for their complexity in terms of the actors involved, the risk sharing between those actors, and the institutional environment. While PPPs are intrinsically complex, governments have worsened this complexity by opting for unseen and untested governance structures (e.g. the hybrid PPP model). As a result, PPP programmes often had (and still have) to deal with considerable delays and suboptimal project delivery – see for example the Schools of Tomorrow programme (Van Gestel et al., 2012; Van Gestel et al., forthcoming) and the Flemish Sports Infrastructure Programme (Van den Hurk & Verhoest, 2014). In the near future, Belgian governments could make more use of international best practices and tested models.

PPP research and development agenda Following the aforementioned development strategy for PPP in Belgium, research is needed on a number of topics. First of all, the democratic accountability of PPP requires further scrutiny. As discussed earlier in this chapter, effort has been put in the development of an ex-ante evaluation tool, but the accountability issue does not stop there. A major challenge to genuine democratic governance nowadays is

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the growing influence and decision-making power of technocratic experts in public policy. It is part of the wider problem of depoliticisation, which basically implies a shift of responsibility for public policy from elected political actors to specialised private actors who are shielded from public scrutiny (Roberts, 2010). The world of PPP provides an example of this tendency: large and complicated public projects, growing responsibility and involvement of private firms, much needed technical expertise and experience, and the juridification of infrastructure projects set the stage for debate. By investigating the role played by consultants and legal advisors in PPP, the depoliticisation thesis can be underpinned with empirical data. In the previous section we addressed the complexity of some PPPs in Belgium, and in another section in this chapter we discussed the potential of standard contracts to simplify PPP. Although the practical relevance of standards in PPP has increased, academic contributions have been rare (for some interesting contributions, see Börzel and Risse, 2002; Jooste et al., 2011). The success of standards in PPP is likely to depend on the volume, size, and specificity of PPP deals, hence the simplification of PPP through standardisation is not as straightforward as one might expect. For instance, both public and private project partners need time and repeated experience with standard contracts to become familiar with certain practices, making learning a crucial part of the deal. We suggest examining further the use and impact of standard contracts (and the change therein over time) so as to find out what the actual contribution of standardisation to PPP is. The main focus of PPP research in Belgium has been on Flemish PPP. However, since PPP has also taken off in other areas of Belgium, it would be interesting to compare the Flemish PPP experiences with PPP experiences in other regions. Finally, we should broaden the research scope to PPP stages other than preparation and procurement. As of today, the number of PPP projects that has entered the operational stage is increasing. This development makes it particularly interesting to scrutinise a largely unbeaten track in Belgian PPP research: contract management.

Conclusions In spite of significantly different usage across the country in terms of types and volume, PPP has found its way in Belgium and has acquired a solid position in the landscape of infrastructure projects. PPP was initially favoured for its fiscalbudgetary advantages, and considerations of financial nature remain the main motivation for PPP today. However, criticisms by the Court of Audit and the impact of the global credit crunch have caused decision makers to look for other possible benefits of PPP. PPP has spread across different sectors over time, and we see other PPP types than common DBFM(O) projects being developed these days. PPP improvements in Belgium are to be sought by enhancing transparency and evaluation, pooling knowledge, and acting more in line with the complex environment of infrastructure projects. In doing so, better democratic accountability of PPP can be achieved, competences can be used in a more

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effective and efficient manner, and the complicated Belgian institutional context can be dealt with in a more feasible way. We recommend these topics as avenues for further research in the near future.

References Agion. (2013) ‘DBFM-programma Scholen van Morgen’. Retrieved 28 March 2013 from: www.agion.be/inhaalbewegingschoolinfrastructuurVlaanderen/DBFMprogramma Scholenvanmorgen.aspx Belgian Court of Audit. (2009) ‘Publiek-private samenwerking bij de Vlaamse overheid. Verslag van het Rekenhof aan het Vlaams Parlement.’ Brussels. Belgian Official Journal. (2013, 14 February) ‘Koninklijk besluit tot bepaling van de algemene uitvoeringsregels van de overheidsopdrachten en van de concessies voor openbare werken’, from www.ejustice.just.fgov.be/cgi/article_body.pl?language=nl&call er=summary&pub_date=13–02–14&numac=2013021005 Börzel, T. A. and Risse, T. (2002) ‘Public-private partnerships: effective and legitimate tools of international governance?’ In E. Grande and L. Pauly (Eds), Complex Sovereignty: Reconstituting political authority in the twenty-first century (pp. 195–216). Toronto: University of Toronto Press. De Braekeleer, F. (2006) ‘Publiek-private samenwerking en ESR95-neutraliteit’, Documentatieblad – Bulletin de Documentation, quarterly journal of the Belgian Federal Public Service Finance, 66(4): 7–33. Delporte, T., De Meyer, J., De Muyter, J., Hellemans, L., Van Garsse, S. and Wauters, R. (2009) Outputspecificaties. Een leidraad voor opdrachtgevers en opdrachtnemers van PPS-contracten, Brussels: Vlaams Kenniscentrum PPS. DLA Piper. (2009) European PPP report 2009. Ducatteeuw, S. (2005) Publiek-private samenwerking en ESR-neutraliteit, Brussels: Vlaams Kenniscentrum PPS. Eurostat. (2014a) ‘General government expenditure by function (COFOG)’. Retrieved 10 February 2014 from: http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/ Eurostat. (2014b) ‘Gross domestic product at market prices’, from http://epp.eurostat.ec. europa.eu/portal/page/portal/eurostat/home/ Flemish Ministry of Sports. (2012) ‘Vlaams Sportinfrastructuurplan’. Retrieved 1 December 2012 from: www.cjsm.vlaanderen.be/sport/sportinfrastructuurplan/index.shtml Flemish Parliament. (1999a) 31 (1999), nr. 1. Flemish Parliament. (1999b) 128 (1999–2000), nr. 1. Flemish Parliament. (2000) 164 (1999–2000), nr. 1. Flemish Parliament. (2003) PPS-decreet [PPP Decree]. Brussels. Flemish Parliament. (2004a) 130 (2004–2005), nr. 1. Flemish Parliament. (2004b) 131 (2004–2005), nr. 1. Flemish Parliament. (2005) 532 (2005–2006), nr. 1. Flemish Parliament. (2006) 990 (2006–2007), nr. 1. Flemish Parliament. (2008) 1541 (2007–2008), nr. 1. Flemish Parliament. (2009) 217 (2009–2010), nr. 1. Flemish Parliament. (2011a) 52 (2011–2012), nr. 1. Flemish Parliament. (2011b) Proceedings (2010–2011), C198–CUL22. Flemish Parliament. (2013a) 52 (2013–2014), nr. 1. Flemish Parliament. (2013b) Proceedings (2012–2013), C150–CUL20.

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Flinders, M. (2005) ‘The politics of public-private partnerships’, British Journal of Politics and International Relations, 7(2): 215–39. HM Treasury. (2007) Standardisation of PFI contracts, London: Stationery Office. Jooste, S. F., Levitt, R. and Scott, D. (2011) ‘Beyond ‘one size fits all’: how local conditions shape PPP-enabling field development’, Engineering Project Organization Journal, 1(1): 11–25. Liefkenshoektunnel. (2014) ‘Historiek’. Retrieved 31 January 2014 from: www. liefkenshoektunnel.be/Historiek/22777/liefkenshoektunnel Peeters, K. (2007) Beleidsbrief publiek-private samenwerking. Beleidsprioriteiten 2007–2008, Brussels: Flemish Parliament. Peeters, K. (2008) Beleidsbrief publiek-private samenwerking 2009, Brussels: Flemish Parliament. Peeters, K. (2011) Beleidsbrief Algemeen Regeringsbeleid. Beleidsprioriteiten 2011–2012, Brussels: Flemish Parliament. Roberts, A. (2010) The Logic of Discipline: Global Capitalism and the New Architecture of Government, Oxford: Oxford University Press. Van den Hurk, M. and Van Gestel, K. (2013a) ‘Brabo 1’, in A. Roumboutsos, S. Farrell, C. L. Liyanage and R. Macário (Eds), COST Action TU1001 – 2013 Discussion Papers: Part II Case Studies (pp. 186–192), Brussels: COST Office. Van den Hurk, M. and Van Gestel, K. (2013b) ‘Via-Invest Zaventem’, in A. Roumboutsos, S. Farrell, C. L. Liyanage and R. Macário (Eds), COST Action TU1001 – 2013 Discussion Papers: Part II Case Studies (pp. 90–98), Brussels: COST Office. Van den Hurk, M. and Verhoest, K. (2015) The governance of public-private partnerships in sports infrastructure: Interfering complexities in Belgium. International Journal of Project Management, 33(1), 201–211. doi: 10.1016/j.ijproman.2014.05.005 Van Garsse, S. (2007) De concessie in het raam van publiek-private samenwerking: een analyse van het openbaar en het privaat domein, van de domeinconcessies, de concessies van openbare werken, de concessies van diensten en hun aanbesteding, Bruges: Die Keure. Van Garsse, S., De Muyter, J., Schutyser, B. and Verlinden, A. (2009) DBFM-handboek. Brussels: Vlaams Kenniscentrum PPS. Van Gestel, K., Voets, J. and Verhoest, K. (2011) Pijlers voor een performante samenwerking. Handreikingen voor de PPS-praktijk op basis van vijf Vlaamse PPS-projecten. Leuven: SBOV. Van Gestel, K., Voets, J. and Verhoest, K. (2012) ‘How governance of complex PPPs affects performance’, Public Administration Quarterly, 36(2): 140–88. Van Gestel, K., Willems, T., Verhoest, K., Voets, J. and Van Garsse, S. (forthcoming) ‘PPP for schools in Flanders: complex structure in a complex context’, Public Money & Management. Vlaams Kenniscentrum PPS. (2012) ‘Design Build Finance Maintain overeenkomst’. Retrieved 17 September 2012 from www2.vlaanderen.be/pps/documenten/DBFM%20 Overeenkomst.pdf Willems, T. (2014) ‘Democratic accountability in public-private partnerships: the curious case of Flemish school infrastructure’, Public Administration. doi: 10.1111/padm.12064 Willems, T. and Van Dooren, W. (2012) ‘Coming to terms with accountability: Combining multiple forums and functions’, Public Management Review, 14(7). doi: 10.1080/ 14719037.2012.662446

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Public Private Partnerships in Canada Matti Siemiatycki

Introduction Canada is a federalist country with a population of 35 million people. It has the second largest land area of any country in the world, which is divided into ten provinces and three territories. Despite its immense size, the Canadian population is highly concentrated. Over 80 percent of residents reside in cities, with more than a third living in Canada’s three largest urban areas: Toronto, Montreal and Vancouver. Canada is also a nation of immigrants. Each year some 250,000 newcomers arrive in Canada from abroad, settling primarily in the country’s biggest cities, and this sustained level of in-migration has resulted in Canada having the highest population growth rate in the G8 between 2001 and 2011. As the Canadian population has grown, investment in infrastructure renewal and expansion has failed to keep pace. Over the years, governments have accumulated considerable infrastructural deficits. Nationwide, the Federation of Canadian Municipalities estimates a need for $123 billion in spending on new and upgraded infrastructure over the next decade to meet existing and projected demands. This includes urgent investments in sewer and water treatment facilities, roads and transit systems, energy production and transmission lines, schools, justice facilities and hospitals. The substantial need for infrastructure investment provides a backdrop for understanding the rise of PPPs in Canada, alongside frequent government concerns about construction cost overruns and delays that have plagued major public works projects. Nevertheless, identifying a common Canadian PPP model or state of practice is difficult because infrastructure provision is primarily the responsibility of the provincial and local municipal city governments rather than the federal government, and each province has followed their own unique trajectory. There has been considerable variation across the country in terms of the number of projects completed, PPP models used, and the legislative frameworks and institutions developed to support the delivery of PPPs. Taken together, there are multiple rationales and approaches to PPPs in the different Canadian provinces. This chapter documents distinctly Canadian models of PPP governance, financing and project delivery that have emerged over the past two decades.

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Origins and drivers PPP development in Canada can be divided into two waves. The first wave of PPPs were planned and delivered in the 1990s and the early 2000s. This includes projects such as the Highway 407 long-term lease in the Greater Toronto Area, the development of the Brampton and Royal Ottawa Hospitals in Ontario, the Confederation Bridge linking Prince Edward Island and New Brunswick, a toll road connecting Fredericton and Moncton in New Brunswick, and the development of schools in Nova Scotia. Local governments also turned to PPPs to deliver water treatment plants and social infrastructure such as new community sports arenas and recreational facilities. During this first wave, PPPs were politically aligned with the largely ideological expectation that greater competition and private sector involvement in the provision of public services would lead to lower costs and greater efficiency. Within this context, PPPs were driven by rationales that were similar to those articulated internationally at the time: attracting private finance to raise new money for infrastructure; keeping expensive infrastructure projects off-balance sheet; repaying upfront private investment from user fees; transferring as much risk as possible to the private sector, including construction, operational availability and demand/revenue risk. PPPs of this period faced strong opposition from labor unions, anti-privatization activists community organizations and, at times, the general public. Critics argued that PPPs were synonymous with privatization and politically motivated to weaken organized labor, that they were costly due to the use of private finance, lacked rigorous assessments demonstrating the comparative value of the PPP approach, unfairly levied user fees on services that were previously free, and included long-term concessions that limited public policy flexibility in the future. It also became clear that the outcomes of the first generation of PPPs were decidedly mixed. Public opposition and changes in governments led to legal challenges of tolling arrangements, contract renegotiations to remove user fees, antagonism and conflicts between the partners, and some contracts being terminated and services brought back in house. In response to these experiences, a second wave of PPPs has been developed in Canada from the mid-2000s onwards, led initially by the Province of British Columbia. During this second wave of projects, Canada’s provincial governments became the leading users of PPPs to deliver hospitals and healthcare facilities, roads and bridges, and justice facilities including prisons and courthouses. A smaller number of provincial and municipal public transit, road, water and waste treatment, education and cultural facilities have also used PPP approaches. In Canada, during the second wave of PPPs, realizing value for money was identified as the primary rationale for delivering infrastructure through PPPs by their government, private sector and political promoters. Canadian practitioners of PPPs defined value for money as a measure of the extent to which cost savings from efficiencies, more innovative project designs, and improved risk management were achieved when delivering a public infrastructure project as a PPP relative to a traditional government-led procurement approach.

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Policy framework for PPP Over the past decade, policy frameworks have been developed at various levels of government in Canada to make PPPs the preferred model for delivering large greenfield infrastructure projects, as well as major building additions or renovations. This policy framework reflects a technocratic response to the critiques of first wave PPPs, by emphasizing value for money rather than ideological considerations. Within the Canadian constitution, the provincial governments are assigned the primary responsibility for providing infrastructure services such as transportation, justice, health and education. Against this backdrop, it is the provinces that have led the national formation of policies to encourage the use of PPPs as a procurement strategy. One common measure has been the formation of special purpose PPP procurement agencies or government departments. To date, six out of ten provinces have created such institutions, which are designed to bring a level of rigor and in-house procurement expertise that can level the playing field when governments negotiate with sophisticated and experienced concessionaires. A key function of these agencies has been to develop standardized procurement and project assessment processes, and to ensure a steady pipeline of PPP projects. Such measures are intended to reduce transaction costs and build industry confidence in Canadian governments as viable PPP partners, thereby attracting large national and global firms to the marketplace to boost competition. The undertaking of value-for-money assessments using the public sector comparator approach have also become standard practice in the Canadian PPP planning process. Across Canada, the provincial PPP agencies and departments, each have somewhat different structures and responsibilities, while their formation and operating practices have often become a source of criticism from PPP opponents. In British Columbia, for instance, Partnerships BC has the widest mandate, which includes providing project scoping and project specific transaction advice, developing the value-for-money methodology and producing an assessment for each project, as well as overseeing project delivery and project monitoring. This broad mandate has led to criticisms that an agency structured in this way may have a conflict of interest between its evaluation function and project delivery objectives, since it can benefit from further work if more projects are approved for delivery as PPPs (Rachwalski and Ross, 2010). By contrast, Infrastructure Ontario’s mandate is narrower, as the agency is responsible for overseeing project procurement and delivery once a project is formally approved for provision as a PPP by the government. While Infrastructure Ontario does still carry out a value-for-money audit on each project it is assigned, the fact that the final assessment comes after political approval for a PPP has been granted by the provincial government has created concerns about the utility of these assessments in the decision-making process (Siemiatycki and Farooqi, 2012). In provinces such as Alberta and New Brunswick, expert PPP procurement teams are nested within government ministries such as finance and transportation. In Quebec, the province formed an arm’s-length special purpose PPP agency in 2004. However, the agency faced strong criticism that its assessments were biased in favor of PPPs to the detriment of public value in procurement. It was ultimately disbanded

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in 2009 and replaced by a new agency with a broader mandate to provide expertise on all public procurement, including PPPs. In recent years, the national government of Canada has also played an increasingly prominent role in promoting the use of PPPs through the creation of a supportive policy framework. In 2009 the federal government created the crown agency PPP Canada, ‘to improve the delivery of public infrastructure by achieving better value, timeliness and accountability to taxpayers, through P3s’ (PPP Canada, 2013). PPP Canada is designed as a center of excellence that promotes PPPs nationally and provides expertise and advice on best practices for other governments looking to use PPPs. Its main lever to entice provincial and local governments to use PPPs is the administration of the PPP Canada fund that can contribute up to 25 percent of the capital costs of a project provided it is delivered through a PPP model. The lure of using a PPP to attract federal money from the PPP Canada Fund is especially significant in Canada, where the federal government has little statutory responsibility to fund community infrastructure and instead provides funding on a more discretionary basis. To date, 24 large infrastructure projects have received funds through the PPP Canada Fund. To further support the rollout of PPPs and to establish them as the preferred model of procurement, the federal government and some provinces such as Ontario and British Columbia have also established policy directives requiring all long-term capital projects over a minimum threshold be evaluated for their viability as PPPs. Finally, at the municipal level, the policy framework towards PPPs has been more ad hoc and with wide variations across the country. Most municipalities undertake PPPs on a one-off basis as projects arise in their jurisdiction that could be delivered through such models. In this context, municipalities in Canada have the least ongoing experience and in-house expertise in undertaking PPPs. With a need for infrastructure that exceeds their limited resources, many municipalities have turned to the federal and provincial PPP agencies as a source of expertise and also of project funding. In recent years, as PPPs have gained prominence across the country, a handful of municipalities including Calgary, Ottawa, Edmonton and St. Albert, Alberta have developed formal policies outlining their standard practice for engaging in PPPs. The City of Ottawa has gone one step further and developed its own PPP office to provide in-house transaction expertise and manage the numerous PPPs that the city has undertaken. The key benefits of PPPs identified by municipal government officials in Canada are the potential to transfer the risk of major construction cost overruns to the private sector, and the ability to contractually lock in funding for long-term maintenance regimes in contexts where budget cuts have often left infrastructure assets to deteriorate. Despite the growing municipal interest in PPPs, it is not uncommon for PPPs to be presented to municipal officials as ‘the only show in town’ if they want to obtain senior government funding and interest in their projects. In cities including Abbotsford and Regina, there has been heated public debate about the merits of PPP Canada offering funding for new water and wastewater treatment plants on the condition that they are delivered as PPPs, leading to referenda to settle the

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issue. In Abbotsford, voters rejected the PPP proposal and voted out the mayor who had become the project’s champion; conversely in Regina voters approved the use of a PPP to deliver their new wastewater treatment plant, which was endorsed by the mayor. Thus at all three levels of government, PPP policy frameworks and institutions have been designed to emphasize value for money as the driving rationale for using PPPs, while putting funding incentives in place for decision makers to select PPPs over other alternatives. The emphasis on value for money has been a crucial step in rebranding the second wave PPPs in Canada, as the first wave of projects had become widely conflated with unpopular privatizations that did not realize the public interest. Nevertheless, PPPs continue to face stiff opposition from organized labor and community groups concerned with job losses, punitive contractual terms and conditions, and even public safety on infrastructure operated and maintained by private firms. The result is a landscape of ongoing contestation, where the merits of delivering infrastructure through PPPs and the institutional arrangement put in place to support them continue to be vigorously debated.

Financial context for PPP An emerging trend with second-wave Canadian PPPs is that they have not been widely seen or used as a mechanism to raise new sources of private funding for critical public infrastructure, move public expenditure off balance sheet, or reduce the need for public investment in such facilities. In fact, many large Canadian PPPs receive substantial upfront public investment that can account for up to two thirds of the project capital costs as well as operating subsidies. This public investment augments the private financing that is invested in the initial capital costs of the project. Public funding in the Canadian PPP marketplace serves two functions. First, it makes it possible to use long-term bundled PPP type concessions to deliver infrastructure projects that would not be viable as straight business transactions. This includes health and justice projects that do not have their own private revenue streams to repay private borrowing and operating costs, as well as transit projects, waste and water treatment facilities, or recreational centers that provide important public benefit but for which user fees cannot cover capital and operating costs. Second, it enables Canadian governments to lower the overall borrowing costs associated with infrastructure delivery, as Canadian governments can borrow money at considerably lower interest rates than the private sector concessionaires. In recent years, governments have been able to finance infrastructure projects at interest rates that are between 100 and 300 basis points below that available to private infrastructure investors, which can lead to a considerable cost difference when borrowing hundreds of millions of dollars over a 25–50-year period. In this context, PPPs have been primarily used to privately finance some of the upfront costs of public infrastructure. Most or all of the initial private capital investment plus operating costs are repaid directly through lump sum construction completion payments, as well as availability payments at regular intervals from

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government over the course of the long-term operating concession. Government project sponsors have sought to structure PPP deals so that sufficient private debt and equity is included to ensure that the concessionaire has ‘skin in the game’ and an incentive to manage project risks assigned to them, rather than more broadly as a way of replacing the need for public infrastructure investment. To this end, project sponsors have sought to minimize the amount of high cost equity investment in PPP deals, which can make project financing uncompetitive as compared with public issued debt. The typical structure of Canadian PPPs has influenced the types and sources of private capital that are utilized in these projects. In particular, Canadian PPPs are often relatively low risk as the private sector concessionaire is exposed to construction and availability risk but not revenue or demand risk. The response has been a financial structure that is highly leveraged, with debt commonly accounting for 85–90 percent of the private capital as compared to 10–15 percent equity. Thus for all but the largest Canadian PPPs, the amount of equity invested in the project is quite small, and often provided directly by the members of the consortium as well as local and international private equity funds. Interestingly, while Canadian pension funds are among the world’s most prolific institutional equity investors in infrastructure, they have not made significant investments in Canadian PPPs. The amount of equity is typically too small to be an attractive investment opportunity for the multi-billion dollar pension funds, and the uncertainty of winning a lengthy competitive bidding process is also unattractive to pension funds as it ties up their capital. With respect to the debt component of PPP financing, Canadian PPPs typically receive investment grade ratings from the international ratings firms. This is due to the provision of lump sum construction completion payments and availability payment structure of Canadian PPPs that effectively guarantees a predictable revenue stream once the project is operational. In response, large national and international banks have been a common source of short-term debt in Canadian PPPs to finance the large upfront capital investment for construction. Prior to the financial crisis of 2008, bank debt had comprised the largest portion of long-term financing for PPPs in Canada, primarily provided by Canadian, European and Japanese banks (Ford, 2013; PPP Canada, 2013). During the height of the financial crisis, a number of Canadian PPPs faced challenges raising private capital at competitive rates, and governments stepped in to provide upfront capital funding. Since 2009, private investors have returned to the Canadian PPP market as interest rate spreads with government have declined. In particular, bonds have grown substantially and now make up the largest share of long-term debt financing for PPPs, primarily realized through ‘club deal’ style private placements. Both shortterm and long-term investors are exposed primarily to construction risk, while long-term investors face the risk of penalties levied by government against the availability payments if operational performance falls below established standards. To date, second wave Canadian PPPs have achieved a high level of contractual stability and financial success. While some projects have faced delays and financial difficulties during construction, there have been no reported bankruptcies or major contract renegotiations of an operational provincial government project.

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Institutional framework With PPPs being the primary responsibility of the provincial governments in Canada, the administration of PPPs in the country is characterized by a diversity of institutional frameworks, approval processes and contractual structures. The federal government in Canada has no formal role in the approval process of provincial or municipal government PPPs or in guaranteeing sub-national debt. Instead, the federal government only becomes formally involved in project planning when provinces or municipalities request capital funding through the P3 Canada fund, or in cases where a department of the federal government is seeking to procure an asset using a PPP. Over the past decade, a key role of the special purpose PPP agencies and departments that have been formed by the federal and provincial governments has been to develop standardized PPP documents and procurement processes. This includes the development of contract templates, standard risk matrices, procurement processes and bidding practices, and value-for-money assessments. These documents and processes vary between the provinces, meaning that the Canadian PPP landscape is regional rather than comprised of a single national market. The legislative framework in Canada also varies by province, though all provinces have legal codes enabling infrastructure PPPs in their jurisdiction. Alongside the development of standardized government documentation and procedures for delivering Canadian PPPs has been the emergence of a robust industry of legal, transaction, and financial consultants that advise both the project sponsor and the private sector bidders. These business services advisors have tapped into a lucrative industry for transaction advising on PPPs. Transaction costs on PPPs for the public sector partner account for between 2 and 3 percent of the total concession value as compared to 1 and 2 percent for traditional procurement, with similar transaction costs experienced by the bidders. One outcome of the highly standardized PPP procurement process and expertise within the PPP industry is that since 2009 the length of time it takes to procure a PPP in Canada is usually between 16 and 18 months, shorter than in other countries. Despite the interprovincial diversity of PPP practice in Canada, it is now common across the country that each project being considered for delivery as a PPP is vetted through a value-for-money assessment using the Anglo-style public sector comparator approach. This assessment framework compares the base delivery costs, transaction costs and risk borne by the government in the traditional and PPP procurement approach. Value-for-money evaluations carried out by governments in Canada show that risk transfer to the private sector (mainly construction risk) is the primary driver of value for money on PPPs; base construction costs, transaction costs and project financing costs are all typically greater for PPPs as compared to traditional procurement alternatives (see Siemiatycki and Farooqi, 2012). Dispute resolution mechanisms are also a common component of Canadian PPP concession contracts, as there is recognition that disputes between the partners in a PPP are quite common and can be costly to resolve. PPP contracts

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commonly contain provisions for negotiation and mediation as a first mechanism to settle disputes between the public sector sponsor and the private sector concessionaire, with more lengthy and expensive legal remedies as a final alternative. In either case, emphasis is placed on ensuring that construction activity or service provision continues while the dispute is being resolved. Contracts also commonly include step in rights for lenders to replace a non-performing contractor such that they do not threaten the punctuality of project delivery that can result in non-performance penalties levied by the public project sponsor, or a default of the entire concession consortium.

Organizational structure PPPs in Canada are structured as contractual arrangement between two main partners: the public sector sponsor and the private sector concessionaire. In fact, both partners are comprised of a complex network of organizations and relationships. The private sector concessionaire in Canadian PPPs is a project company or special purpose vehicle that is a consortium of the main project delivery contractors. A new special purpose vehicle is established for each PPP, and is typically a consortium of the main construction contractors and an operating firm in cases where the concession includes long-term private sector operations. The special purpose vehicle then enters into sub-contracting arrangements with each individual company to deliver their component of the project, and can also sub-contract work to other firms. Each firm that is a sponsor of the project company typically invests a small amount of equity into the project. This arrangement ensures that the parent companies of the firms included in the special purpose vehicle are not liable for losses incurred if the PPP faces unexpected problems. At the same time, the equity investment into the project by the sponsors of the special purpose vehicle is meant to ensure that the firms have ‘skin in the game’ and an incentive to meet their contractual obligations. External equity investors then capitalize the special purpose vehicle if the project is large enough and the contractors do not invest a sufficient amount to reach the 10–15 percent equity threshold, with the remainder of the private capital for the project raised through debt issues. The public sector partner in a Canadian PPP can also consist of numerous partner agencies. In jurisdictions such as Ontario and British Columbia, the provincial PPP agency commonly executes the PPP transaction on behalf of the provincial government agency or ministry responsible for the project. Thus once the project has been approved for delivery, the PPP procurement is handed off and run by the PPP agency. For some of the larger PPPs, a dedicated crown corporation will be established to deliver the project and enter into the concession agreement with the private sector partner. In other cases, especially for municipal PPPs, the line department or agency will be responsible for planning, procurement and entering into the contract with the private sector partner, sometimes receiving technical advice or support from the provincial PPP agency. PPPs in Canada commonly receive public funding from multiple levels of government, or different departments and agencies of the province or federal government.

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Following the completion of the construction phase of the project, the day-to-day oversight and management of provincial PPP facilities and concessions most commonly become the responsibility of the line government ministry or agency, rather than an oversight division of the dedicated provincial PPP agency. As such, the Ministry of Health is responsible for new hospitals delivered as PPPs, the Ministry of Transportation oversees road or bridge PPPs, and universities manage new research facilities built as PPPs. In some cases, this has created coordination problems between the PPP procurement agency that leads the planning and manages the construction phase of the project, and the line ministry staff that are responsible for operating the facility and overseeing the concessionaire within the terms of the long-term PPP concession agreement. While the norm in Canada is to have the PPP concession managed by the responsible line ministry, in some cases where a crown corporation was formed to plan and deliver the PPP project, that agency will remain in existence over the life of the project to manage the concession.

Extent of use of PPP adoption Canada has made extensive use of PPPs across the country, and in a wide variety of infrastructure sectors. To date, there are over 100 operational PPP projects in Canada, and nearly 100 more in various stages of the procurement and delivery process. The majority are provincially initiated projects in the health, transportation and justice sectors. This includes hospitals and health care centers, roads, bridges, and highway rest stops, and prisons, and courthouses. A smaller number of municipal transit projects, culture and recreation facilities, social housing complexes, police stations, and solid waste and water treatment facilities have also been delivered as PPPs. Ontario, British Columbia, Alberta and Quebec are the provinces that have procured the most number of PPPs to date, building on a strong role of the provincial PPP procurement agency and ongoing political support for the model. As noted above, numerous first generation PPPs carried out by the provinces and provincial governments in the late 1990s and early 2000s faced challenges in terms of bankruptcies or contract renegotiations. The large number of second generation PPPs delivered since the mid-2000s have fared considerably better. While it is not uncommon for the cost of PPP projects to rise considerably during the procurement and contract negotiation process, once a fixed price concession has been signed, most have been delivered within budget. In terms of contract stability there have been no failures of an operational second generation PPP in Canada. Across Canada, there is a robust pipeline of PPP projects at various stages of the procurement process. Between 2009 and 2011, 39 projects reached financial close, with a combined capital value of $21 billion. Another 52 projects were either at or beyond the request for qualifications stage of the procurement (PPP Canada, 2013). The high level of consistent PPP activity, combined with a national reputation for fair and quick procurements, have been important factors that have made Canada a globally attractive PPP marketplace. In recent years, the world’s

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largest construction contractors, facility operators, and financiers have set up local operations in Canada and begun bidding on domestic PPPs. This has generated increased competition in the marketplace, but also generated tensions with mid-sized Canadian contractors that are finding it increasingly difficult to win work on PPPs that favor ever-larger firms with the financial capacity to raise large amounts of private capital.

Types of PPPs in Canada PPPs in Canada have been concentrated around a narrow spectrum of delivery models, primarily to deliver greenfield projects. In the late 1990s and early 2000s, Canadian provincial governments conducted a few high-profile long-term lease concessions of existing public assets, most notably Highway 407 in Ontario. These asset lease arrangements sought to transfer significant financing, operations and demand risk to the private sector partners, placing them closer to outright privatizations in terms of the responsibilities and risks transferred to the private sector partner. However, these initiatives have been criticized due to the loss of public control over rate setting and service levels within an integrated infrastructure network. In Canada, there is a longstanding view among the citizenry that the public interest is best maintained when critical infrastructure assets are publicly owned. Outside of the energy sector, Canada’s infrastructure networks are also more likely to be controlled by a state-owned enterprise or government department operating in monopoly conditions, rather than unbundled networks with individual highways, transit lines, and water services provided by different operators. More recently, attempts to divest of public assets or enter into long-term leases with private operators have faced strong community opposition, and have not been widely employed in Canada. Today, PPPs in Canada primarily follow variants of the design-build-financeoperate-maintain model, and are most often used to either build greenfield projects or additions onto an existing building. In this model, consortiums bid to provide a bundle of services, with long-term concessions typically lasting between 25 and 50 years. On many projects, much if not all of the upfront private capital invested in Canadian PPPs is recouped through government payments to the concessionaire, rather than through toll revenues or user fees. Canadian governments have made significant use of milestone and substantial completion payments to the concessionaire, thereby using private finance primarily to incentivize the transfer of construction risk to the private sector rather than as a new source of infrastructure funding. Additionally, Canadian PPPs are most commonly based on availability payment structures where the concessionaire is paid a specified amount at scheduled intervals provided that the asset is meeting predetermined standards; direct user fees are less common except in the water, energy and transit sectors. There are two important distinguishing aspects of the Canadian PPP approach. First, in sectors such as health and justice, the private sector partner takes on little or no responsibility for facility operation or demand and revenue risk. The provision of medical or nursing services in a hospital or guards in a prison is most

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often provided by the government. Highway and transit PPPs have gone further in transferring operations to the private sector partner, but even when tolls are included on the facility, the public sector sponsor usually retains demand risk. To this end, the private sector concessionaire is responsible for the availability and long-term maintenance of the physical asset, such as the building envelope and heating and cooling system. Conversely, the model ensures that government retains a high level of control over strategic-level public policy related to scheduling and integration of service into the wider infrastructure network, as well as flexibility to alter service levels as future conditions change. A second key feature of Canadian PPPs is that most infrastructure assets remain publicly owned, rather than ownership being transferred to the private sector partner over the duration of the concession. Indeed, politicians and the special purpose agencies that plan PPPs in Canada have made a particular point of highlighting that public ownership is retained in domestic PPPs, in order to help counter public skepticism about privatization and make PPPs politically supportable. To this end, trust in the Canadian legal system and the enforceability of contracts is key to the attractiveness of Canadian PPPs to private sector firms, as the concessionaire has no ownership rights of the underlying asset.

Changes in PPP usage and extent over time Since Canadian governments began experimenting with PPPs in the early 1990s, there have been considerable changes in the extent and usage of PPPs in the country. Most noticeably, there has been an increase in the application of deals structured using availability payments rather than tolls or user fees, as governments in Canada have come to see PPPs as a mechanism to improve procurement rather than raise new private money for infrastructure. Canadian governments have also moved away from transferring demand risk to the private sector, or significant operations of core services in the social infrastructure sectors. This is in recognition of the fact that governments have greater control over the policy levers that influence infrastructure demand than the private sector. Transferring control over demand risk or service provision is often accompanied by terms in the concession agreement that limit future policy flexibility, and can ultimately lead to long-term tensions between the partners. Additionally, Canadian governments across the country have developed institutions, regulations, standardized procurement documents and government spending policies that increasingly make PPPs the default choice for delivering large public works projects over $50 million. This institutionalization of PPPs as the preferred infrastructure procurement option has been encouraged by strong support from firms that are active within the Canadian PPP industry, which is mobilized through a powerful industry group called the Canadian Council for Public–Private Partnerships that promotes the merits of PPPs to governments and the general public. These developments in the structure of Canadian PPPs and the governance landscape are significant. First, they make PPPs viable in sectors where infrastructure cannot be provided as a straight business venture, such as in healthcare (which is

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state funded in Canada), prisons and courthouses, and public transit where fares rarely cover operating let alone capital costs. Second, retaining facility demand risk with the public sector has eliminated a key source of tension between the partners that has been observed on PPPs globally. One outcome is that Canadian PPP arrangements have demonstrated a high level of stability and mainly avoided contract renegotiations and bankruptcies that are common worldwide. Third, international firms have been increasingly attracted to the Canadian PPP marketplace, drawn by a steady pipeline of projects, strong government support for the model in most jurisdictions, and sophisticated institutions that encourage relatively quick procurement periods and fair competitions for projects. At the same time, the institutionalization of PPPs as the preferred method of delivering infrastructure has also led to the critique that PPPs are the “only game in town” for delivering large public works in Canada, even in cases where there is uncertain evidence that the PPP model will deliver value for money. The structure of the Canadian PPP marketplace meant it was less impacted by the onset of the financial crisis than other countries. The financial crisis of 2008 saw an overall decline in the number of PPP projects carried out in Canada. The government was required to step in and provide public capital funding for some projects that were in the midst of procurement when the private sector partner could not raise the necessary money on the capital markets at competitive rates. However, the Canadian marketplace was not as significantly affected as was the case elsewhere. Canadian governments had always provided substantial upfront capital funding for PPPs and thus the industry was not as dependent on private finance, which became more costly and difficult to obtain during the crisis. Because Canadian PPP projects do not typically transfer demand risk to the private sector, the revenues of PPPs were not jeopardized by falling demand for infrastructural services such as roads, transit, airports, energy and water that are typically experienced during a recession. In sum, while the Canadian PPP marketplace was not unscathed by the financial crisis, governments ensured that there remained a steady pipeline of projects, and one result of this was that Canada became an attractive country for international firms looking to continue their activities in the PPP industry as work dried up in other jurisdictions.

Future developments The future of PPPs in Canada is shaped by the country’s infrastructural needs. Over the past decade, the policy emphasis has focused on developing, expanding and rehabilitating hospitals, justice facilities and highways, and these have been the sectors that have seen the most PPP activity. More recently, public transit such as subways, light rail lines, rapid bus systems and commuter railways have been identified as a key growth area for PPP activity, amid an emerging recognition that road congestion is having a negative impact on the economy, environment and livability of Canadian urban regions. Municipal infrastructure such as waste and water treatment plants, social housing, recreation and culture facilities is another area where there is an expanding interest in PPPs. Cash-strapped local

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governments have increasingly sought to access private sector capital to finance their infrastructure needs. Municipalities also often have the least in-house expertise or experience procuring large infrastructure, and an attractive feature of PPPs is the opportunity to transfer risks to the private sector in order to control construction cost overruns that have plagued municipal projects in Canada. Despite the strong contemporary political and institutional support for PPPs at all levels of government, they remain a contentious model of project delivery, their future not entirely assured. Labor unions and anti-privatization activists have vigorously contested second generation PPPs on the grounds that they adversely impact worker wages and conditions, fail to deliver value for money as they are more costly than traditional procurement due to the use of private finance, and result in a loss of citizen engagement in decision making and oversight over public assets as their planning, operation and maintenance is shifted to private firms. In addition to engaging with policy makers, these organizations have launched public campaigns opposing specific PPP projects that have had mixed results, including the cancellation of the proposed PPP water treatment plant in Abbotsford, British Columbia. Domestic contractors, builders, and architects have also raised concerns that amid larger bundled PPPs and the influx of bidding by major international firms, smalland mid-sized Canadian companies are having trouble winning work on PPPs. These domestic firms have argued that they are being increasingly excluded from a significant share of construction activity in the country, which has the potential to reduce the important local job creation benefits of infrastructure projects. Recent PPPs in Canada have not been immune to procurement and contract management problems during the delivery and construction period. In Ontario, a quarter of second generation PPP projects experienced construction delays typically of a few weeks or months, but were completed within budget. In Quebec, a $1 billion hospital procurement was criticized by the Provincial Auditor General for lacking a credible value-for-money assessment to ensure that the PPP was superior to traditional procurement methods. And on a major highway PPP in Ontario, the foreign concessionaire installed girders that did not meet Canadian highway building codes, and ultimately was required to replace them at their cost by the procurement agency. While the majority of Canadian PPP projects have been successfully executed, projects that have faced challenges are seized on by critics of PPPs as examples of the risks associated with this model of project delivery, and reasons to search for more effective procurement alternatives.

PPP research and development agenda Given the mature yet contested state of the PPP industry in Canada, research has the potential to play an important role in informing future practice. To date in Canada, the academic research community that studies PPPs is small. There are only a handful of scholars across the country that have consistently conducted and published detailed independent academic research on PPPs, alongside a few thinktanks and consulting firms that have been commissioned to carry out studies on the topic. Moreover, there has been limited sustained interaction and collaboration

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between PPP researchers and the community of practitioners that plan and deliver projects, thereby limiting the potential for knowledge transfer. As a result, much of the Canadian scholarly research has analyzed the merits of the evolving rationales upon which PPPs have been promoted (i.e. bringing in new money for infrastructure, tapping into private sector efficiencies, value for money), and the political imperatives that support PPPs over other alternatives. At the same time, limited empirical data has been available to examine PPP project outcomes in detail. However, as PPP activity in the country has grown and the industry has matured, there is growing interest in developing greater linkages between research and practice around a common research agenda. Three key issues have been identified for further study. First are detailed examinations of the value for money proposition of PPPs. Of particular interests are comparisons of actual risk events on PPPs and traditional build projects, and whether the PPP procurement model drives design innovations. Second are issues related to the governance and politics of PPPs, and whether appropriate evaluation mechanisms and incentives are in place to ensure that PPPs are only used when they deliver demonstrable value for money. Third, as more projects pass through the planning and construction phase and into operations, there is an interest in studying the performance of infrastructure PPPs over the entire lifecycle of the asset. In particular, have the terms specified in the concession agreement relating to operational efficiencies, facility maintenance levels, and asset quality at the point of hand back actually been met in practice.

Conclusions Over the past two decades, the Canadian PPP landscape has undergone considerable transformation. From the first wave of PPPs that sought to transfer as much responsibility and risk as possible to the private sector, the second wave of projects presents a more nuanced effort to blend the comparative strengths of the public and private sectors. In second wave projects, Canadian governments have maintained a central role in selecting projects that meet the public interest, financing much of the upfront capital infrastructure costs using their lower borrowing capacity, and retaining demand risk enabling them to maintain long-term policy flexibility over service planning and coordination. Conversely, the primary risks and responsibilities that the private sector partner has been assigned are project design, construction risk and facility availability. Facility operations have most commonly been transferred to the private sector partner on asset classes where there is typically minimal interaction between the user and the operator, such as highways or a water treatment plant, while government workers provide the core healthcare and justice services in PPP buildings. Taken together, a key lesson from the second wave of PPPs in Canada is that success can be achieved by applying partnership models that more closely resemble traditional contracting than outright privatization, when governments develop high quality procurement processes and expertise to manage complex projects. To date, operational second generation PPPs in Canada have not failed or required contract renegotiations at anything near the same rate as in other jurisdictions.

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Given the degree to which PPPs have been institutionalized and gained political support in Canada, it is likely that they will continue as the primary approach for delivering large infrastructure for the foreseeable future. However, it is also likely that the most popular models used across the country will evolve over time in response to policy demand for new types of assets, the growing application of PPPs by local levels of government, and current critiques of the Canadian PPP practice. To this end, the future success of PPPs in Canada will depend on the capacity of government, industry and other stakeholders to innovate in order to meet emerging challenges.

References Ford, D. (2013) Capital Markets 2013 Mid-Year Report The Role of Capital Markets in P3 Financing. Torys LLP. Retrieved January 23, 2014, from: www.torys.com/Publications/ Pages/CapitalMarkets2013Mid-YearReport-05.aspx PPP Canada (2013) Corporate Profile. Retrieved January 23, 2014, from: www.p3canada.ca/ about-ppp-canada-overview.php PPP Canada. (2013) What does the Canadian P3 market look like? Retrieved January 23, 2014, from: www.p3canada.ca/p3-market.php Rachwalski, M.D. and Ross, T.W. (2010) ‘Running a Government’s P3 Program: Special Purpose Agency or Line Departments?’ Journal of Comparative Policy Analysis: Research and Practice, 12(3): 275–98. Siemiatycki, M. and Farooqi, N. (2012) ‘Infrastructure Public-Private Partnerships: Delivering Value for Money?’ Journal of the American Planning Association, 78(3): 283–99.

5

Public Private Partnership development in China Yongjian Ke and ShouQing Wang

Introduction China is the most densely populated country in the world with a population of over 1.37 billion. Since the introduction of economic reforms in 1978, which moved the country from a centrally planned economy towards a more marketoriented economy, China has become the fastest-growing major economy in the world. According to China’s twelfth Five-Year Plan (2011–2015), China’s annual average Gross Domestic Product (GDP) growth between 2006 and 2010 was 11.2 per cent, and the urbanisation rate grew from 43 per cent in 2005 to 47.5 per cent in 2010. One of the key targets in the twelfth Five-Year Plan is to reach an annual average GDP growth of 7 per cent and an urbanisation rate of 51.5 per cent. To alleviate the negative impact of unorganised urbanisation growth, the Chinese government is promoting the development of public transportation to relieve traffic jams and enhance mobility for urban commuters. Other public facilities such as water supply, gas supply, waste water treatment and waste disposal are also struggling to cope with increasing urbanisation. Infrastructure development in China since the open-door reform could be divided into three phases, i.e. initial development (1978–1989), rapid development (1990–2002) and stable development (2003–present) (National Bureau of Statistics of China, 2008). At the early stage of China’s opening-up, basic infrastructure such as roads, ports and power generation facilities were much needed and accounted for a large proportion of government funding. During the period from 1982–1989, the Chinese government put a total investment of 292.7 billion RMB into about 261 infrastructure projects including energy and public transportations. Since 1990, private (including foreign) capital had been encouraged to participate in infrastructure developments, most of which involved BOTs. With private participation, there was a rapid growth in China’s infrastructure. The Chinese government issued a total number of 660 billion RMB treasury bonds and invested these in the infrastructure construction, when the Asian Financial Crisis happened in 1997. In line with China’s economic growth and its success in bidding for the 2008 Olympic Games, huge amounts of capital have been invested in order to decrease infrastructure shortages. A stimulus package estimated at 4 trillion RMB was spent

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in the two years after 2008 to finance programmes in ten major areas, such as low-income housing, rural infrastructure, water, electricity, transportation (especially high-speed railway), the environment, technological innovation and rebuilding from several disasters.

Origin and drivers Public Private Partnership (PPP) is an innovative tool for attracting foreign and private capital in the development of infrastructure facilities, which is highly welcomed by the Chinese government, especially by subnational governments. It was adopted to relieve the pressure on the government’s budget for infrastructure development. Chan et al. (2009) noted that the top drivers for PPP identified by Chinese respondents included: (1) solving the problem of public sector budget restraint; (2) providing an integrated solution (for public infrastructure/services); (3) reducing public money tied up in capital investment; (4) capping final service costs; (5) reducing the total project cost; (6) saving time in delivering the project; (7) reducing public sector administration costs; (8) ensuring benefits to local economic development; and (9) providing non-recourse or limited recourse to public funding. Most of these main drivers for adopting PPP in China are economyrelated drivers, which is consistent with the reality. Given that the abovementioned key targets in the twelfth Five-Year Plan (2011–2015) would not be achieved if the government relied on public financing alone, the Chinese government is hence continuing to invite foreign and domestic private companies to participate in infrastructure development and public services. However, PPP is not a panacea for delivering project financing and project realisation. One problematic issue is whether the adoption of PPP would allow private investors to charge a premium for providing a public service that used to be free under traditional procurement methods. PPP projects often require extensive expert input, have high preliminary cost, and require lengthy deal negotiation, which may not offer a good return to all parties and as a result the deal may not materialise in the beginning or may fail in the end. Private sector consortia may not be experienced enough or financially capable of taking up large infrastructure projects owing to a lack of relevant skills and experience. Another driving force for adopting PPP is that there are questions about the suitability of privatisation and similar approaches in the infrastructure context. Privatisation of state firms started in the 1980s at subnational government level, even though it was not officially encouraged by the central government at that time. Larger-scale privatisation began in the 1990s, when many state-owned enterprises were deeply in debt. Privatisation was usually carried out as part of the reform of state-owned enterprises or assets with the objective of improving their productivity and efficiency. In the construction and operation of infrastructure, private participation is allowed and encouraged in order to reduce pressures on the government’s budget. But to the best of the authors’ knowledge, there is no evidence of the Chinese government pursuing the privatisation of infrastructure projects.

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Built-Transfer (BT), a specific form of PPP (which may not be considered as a PPP in some other countries), was very popular in China from the late 1990s to the end of 2012. The reason for the prevalence of BT is that private investors were afraid of the long-term creditworthy risk of the governments (e.g. change of government officials) and therefore preferred short-term BT projects to long-term BOT/PPP projects. Another driving force of BT usage is that the land price increases in areas surrounding BT projects have given governments the confidence to pay private investors after the transfer of built asset, even though the BT model could not deliver value for money (Wang, 2013). In December 2012, the central government issued the ‘Notice on Suppressing Local Governments’ Illegal Financing Activities’ in order to standardise the adoption of BT model, which thereafter faded out of usage. The adoption of PPP has put the legislative framework under pressure. In China, the PPP regulatory system, including cost auditing, tariff regulation, and definition of scope of responsibility and remit of relevant regulatory agencies, has not been set up in a timely manner. This has led to a great deal of resistance from the conservative wing of the government and has slowed down some of the key reform projects.

Policy framework for PPP The legal and regulatory framework for PPP in China is still not mature and continues to evolve. There is no PPP law at national level yet. This situation can often be found in China, where the legislation can lag behind reality and the central government sets up a law only after many (and even dozens of) years of practices. Current PPP regulations lack strong legal force. They were issued by the State Council or its ministries or by provincial and municipal governments, taking into account their own responsibilities, and hence lack completeness or compatibility. China has various provincial- and city-driven PPP programmes operating under the above-mentioned regulations, but public capacity varies significantly across the provinces and cities. The central government is responsible for the regulations and approval of all major infrastructure projects. Subnational governments provide the detailed administrative measures and take the lead role in PPP implementation. For example, frameworks for PPP bidding procedures issued by subnational governments list detailed evaluation criteria for bids. As municipal approaches to PPP are based on the regulations issued by the central government, there are very few differences in these subnational frameworks. As of today, there is no guidance for value-for-money assessment or other mechanisms to ensure that PPP is the most appropriate option. Because of the great pressure on the government’s budget for infrastructure development, the need for infrastructure to be developed often overrides concerns about the efficiency of its development and operation. The decision to use PPP is often made without regard for the specific characteristics of the target project. In addition, there is no formal process for deciding on the type and extent of government support for PPPs. Government officials make decisions based on their own

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judgements or preferences while the public, including professionals or academicians, have little influence on the decision-making. Although a feasibility study and post-evaluation for a PPP project are typically conducted, information relevant to appraisal, project details and post-implementation evaluations are usually not available to the general public. There is no obligation for the government or the investors to publish contracts and their amendments, which are usually regarded as commercially confidential (by investors) or officially confidential (by governments). However, there have been several improvements in PPP-related regulations in China. These improvements include widening the range of PPP players from solely foreign investors to all private investors, allowing the use of diverse models instead of BOT only, and providing more operational guideline (Wang et al., 2012). According to ‘Several Opinions of the State Council on Encouraging and Guiding the Healthy Development of Private Investment’ issued in 2010, the private sector is now allowed to invest in even railways, water conservation, petroleum and gas-related activities, telecommunication, land control, exploration and development of mineral resources, policy-related housing, medical industry, education, social warfare service, and national defence related science and technology industries, in addition to previously allowed road, bridge, power, water supply, waster water treatment and waste disposal. Private enterprises are also allowed to establish financial institutions and participate in the reform of state-owned enterprises. The transfer of power to a new generation of Chinese political leaders, which was completed at the twelfth National People’s Congress (NPC) in March 2013, is not expected to lead to substantive change in attitudes towards private investment in infrastructure development. This is evident from the fact that the twelfth NPC decided to set up a national PPP law. The development of this national PPP law is led by the Department of Laws and Regulations of National Development and Reform Commission. The drafting work commenced in February 2014, and the second author is one of the key drafting members. The first draft of the law was expected to be submitted to the State Council by the end of 2014 and to be passed at the NPC within four years. In addition, the State Council issued its ‘Opinions of the State Council on Strengthening Urban Infrastructure Construction’, ‘Guidance for Government Purchases of Public Services from Social Organizations’ and ‘Regulations on Urban Drainage and Sewage Treatment’ on 6 September, 26 September and 2 October 2013 respectively. The central government is also drafting a ‘Guidance for Concession Evaluation of Municipal Public Utilities’, which proposes a four-step evaluation process: 1) whether the project is needed and worthwhile; 2) whether it should be done using traditional public procurement or PPP; 3) if using PPP, which specific model should be adopted; and 4) if using a specific model, which performance aspects should be considered and how they should be evaluated and monitored.

Financial context for PPP Responsibility for the implementation of infrastructure projects resides primarily with subnational governments. They have insufficient capacity to levy taxes and

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thereby make extensive use of off-budget financing options for infrastructure. The majority of subnational government debt financing is estimated to come from bank loans, with the majority of these loans being provided by state-owned banks. Subnational governments have also been increasing their use of bonds in recent years. Six local governments (Shandong, Jiangsu, Guangdong, Shanghai, Shenzhen and Zhejiang) now have direct access to bond market finance under pilot schemes. In most PPP projects, private partners have sole responsibility for the financing component, although they may receive support in the form of government capital grants, loans from development banks and credit enhancement. Governments have also used many other methods to encourage private participation in PPPs. For instance, governments can use special mechanisms to shield private parties from some of the downside risk in the form of take-or-pay agreement. In certain cases, the government will provide subsidies to improve access for the poor, using two methods. The first way is to subsidise investors directly for construction and/ or operation costs. Taking the Subway Line 4 in Beijing for example, in order to keep the fair price affordable for the poor, the government introduced a subsidy mechanism based on shadow pricing for 30 years of concession period. The other approach is to subsidise the low-income users by using differential pricing structures. For example, in order to encourage private investment in the social welfare, governments are willing to undertake part of cost for low-income old people in sheltered housing. Debt constitutes a large proportion of PPP infrastructure financing, which may depend on the stability and predictability of income cash flows. In China, debt financing in a PPP is still made up of two or three years short-term loans from banks, because the syndicated loan market is not prevalent as a source of debt finance, the corporate bond market is not sufficiently mature compared with sovereign bonds, and the arrangement of floating charge on project assets as a guarantee needed for innovative project financing is not well established legally. Due to an immature banking system, legal system and credit system in China, it is very hard to raise finance through project financing for PPP projects. Although the China Banking Regulatory Commission issued a ‘Guideline for Project Financing Business’ in 2009 in order to promote the healthy development of project financing, there is no significant improvement. Banks still prefer short-term full-recourse loan to long-term non- or limitedrecourse loan. This is why private investors lean towards BT projects that are usually short term and have purchase-back guarantee from subnational governments. But the ‘Notice on Suppressing Local Governments’ Illegal Financing Activities’ of December 2012 has forbidden such kind of guarantees.

Institutional framework e.g., contractual, legal, governance There are no national PPP-specific agencies in China yet. On 26 May 2014, a PPP working group was established under the Ministry of Finance. However, the members of this working group are all its subordinates. Its role and responsibilities are not that of a national PPP unit.

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PPP projects are currently treated in the same way as traditional public infrastructure projects in term of government administration. The State Council and its ministries, especially the Ministry of Housing and Urban-Rural Development (previously named Ministry of Construction), have issued several PPP regulations in the form of opinion, notice and decision. The National Development and Reform Commission and local planning commissions are in charge of evaluation and approval of project feasibility studies and application reports of PPP projects. The Ministry of Housing and Urban-Rural Development is responsible for the overall administration of the tendering activities throughout the country, while the subnational construction authorities are responsible for those within their own areas. The main tasks of the subnational construction authorities are to prequalify private investors, review calling for tenders and tender documents, and supervise tender opening, tender evaluation and contract award. Only a few subnational city governments like Chengdu and Kunming proposed to form a PPP-specific commission. In other cities, the Development and Reform Commission, acting on behalf of the municipal government, usually takes the lead role in a PPP project. It is worth noting that the public capabilities in different cities may vary. Those more developed cities or provinces such as Beijing, Shanghai, Shenzhen, Guangdong, Zhejiang and Jiangsu are believed to be much more capable than the less developed cities or provinces. There are usually two types of administrative arrangement for tender evaluation in PPP projects. The first approach is to set up a separate tendering office, which is formulated jointly by the construction commission, planning commission, fiscal and auditing bureau, and other relative departments, with the construction commission representative as the leader of this office. The other approach is to employ or create an agency entrusted with the whole process. Although there is yet no official guidance on risk allocation in place, risk allocations have been relatively fair between the public and private sectors, mostly because of the rich past experience (Ke et al., 2013). In addition, the Ministry of Housing and Urban-Rural Development has issued several contract samples for PPP, which strongly reinforce the importance of performance bonds for bidding, construction and operation. As regards post-bid opportunism, this is typically prevented by the restriction clauses on project interest transfer or price adjustment. However, disputes are common because of changes in various risks or non-performance of obligations, especially when one sector is forced to accept the requirements by the other as a result of the unequal status, the urgency of a project or other reasons (Wang et al., 2012). For example, renegotiations were required in some cases by the new government when there were some changes of head officials and new officials refused to perform the obligations agreed by previous ones.

Organisational structure Typically a project company is formed to hold the concession in order to protect sponsors’ other business. This is realised by putting the project company as the core in the contract structure as shown in Figure 5.1.

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Off-taker

Sponsors

Concession agreement

Cash contribution agreement

Off-take agreement

Project company

Supply agreements

Operating & maintenance agreement

Suppliers

Lenders

Financial agreement

Construction contracts

Operator

Construtor

Figure 5.1 Typical contract structure of a PPP project in China

Sometimes in China, the function of the government in Figure 5.1 is performed by a local government-owned enterprise (so-called government’s platform enterprise) which is authorised by the government to represent it. The shareholder of the project company could be a contractor, designer, bank, consultant, operator or supplier. Normally in China, contractors take the lead role. The common number of shareholders in a PPP project company in China is three to five. Unlike in other countries where the shareholders are all private companies, state-owned enterprises are the main shareholders of PPP project companies in China. To obtain service payments, a project company must provide key services, usually through sub-contracts under the condition that the project company still retains single point responsibility to the public sector. In most cases, such sub-contracts will be directly passed to the contractor/operator/supplier who is one of the shareholders according to the shareholder agreement.

Extent of use of PPP adoption PPPs were introduced in China through the Shajiao B power plant project in the Guangdong province. This was followed by other subnational governments in the mid-1980s. After 1996, several state-approved pilot BOT projects were awarded in order to promote BOT on a larger scale, as was exemplified by the Laibin B power project and Chengdu No. 6 water project etc. Thereafter, the involvement of private investors in infrastructure development grew rapidly. At the end of the 1990s, the central government invested huge amounts of treasury bonds in infrastructure in an effort to cope with the adverse effects of the Financial Crisis in Asia, and also determined to clean up the unregulated or illegal projects. The issuance of these government bonds led to a fading out of the first round of the private investment boom. When stepping into the twenty-

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first century, it again became clear that the shortage infrastructure affected economic growth and quality of life improvement while imposed budgetary pressures on subnational governments. As a result of this, the second boom in private investment occurred. Table 5.1 shows numbers and investments in relation to PPP projects in different sectors in China according to the World Bank PPI database. The numbers of PPP projects is illustrative of the proactive attitude of the Chinese government toward PPP. The greatest number of projects involved toll road and municipal utilities including water, power, environment, city gas, etc. The data also indicates that subnational governments are keener to promote PPP than the central government. The most important driver for subnational governments to open the infrastructure market for private investors is the pressure of inadequate fiscal resources (Chan et al., 2009). There are three main types of players in the PPP market, namely foreign enterprises, state-owned enterprises and domestic private enterprises. Foreign investors acted as the major player in the first boom usually charging higher premium and preferring projects in more developed regions. It has been suggested that these companies achieved high levels of efficiency in terms of operation and management, but it has been argued that they were unfamiliar with Chinese Table 5.1 Total projects by primary sector and subsector (US$ million) (World Bank, 2014) Number of Projects

Total (in US$ m) Investment

Sector

Sub-Sector

Energy

Electricity

244

Natural Gas

194

4,480

Total Energy

438

43,965

Telecom

4

14,518

Total Telecom

4

14,518

Airports

17

2,555

Railroads

11

8,593

138

26,221

67

13,570

Total Transport

233

50,939

Treatment plant

353

5,986

36

3,922

389

9,908

1,064

119,330

Telecom

Transport

Roads Seaports

Water and sewerage

Utility Total Water and sewerage Total

39,486

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culture. State-owned enterprises as the principle players of the second boom are said to have relatively low operational and managerial efficiency, which reduces the advantages of PPP model (Ke et al., 2009a). State-owned enterprises have the strongest relationship with the government and the strongest capability to undertake country-level risks as well as widest access to finance. Currently, stateowned enterprises and state-holding enterprises have the major PPP market share in most infrastructure sectors. Domestic private enterprises and foreign investors are active in several sectors such as water, toll road, etc., which have a steady or appreciable revenue stream. There are only a few domestic enterprises that have ventured into foreign countries via the PPP model. The first BOT project implemented by a Chinese enterprise is a power plant signed in the early 2000s in Cambodia that was not very successful from the lender’s viewpoint. The first successful BOT project implemented by a Chinese enterprise in foreign countries is a power plant signed in 2003 in Indonesia (Wang et al., 2012). In recent years, more and more Chinese enterprises have become involved in foreign infrastructure development through PPP. For example, some large state-owned companies are preparing for tendering road and high-speed railway projects overseas (Wang et al., 2012). But for Chinese enterprises to be successful in overseas PPP projects, there is still a long way to go, partially because they have not gained sufficient expertise and experience in doing such projects in regions where the legal, banking, and social systems are different.

Types of PPP in China Table 5.2 illustrates the numbers and total investments of PPP projects in different sectors in China according to the World Bank PPI database. It can be seen that management and lease contracts were seldom used. One of the reasons may be that PPP is adopted mainly to relieve pressure on governments’ budgets for infrastructure development. It is also notable that divestiture is uncommon. The Chinese government has not fully privatised any infrastructure project yet. There are significant differences among the PPP business models in different sectors in terms of the financial self-liquidating ratio, operating process and other project natures. In the water sector, sewage treatment and water supply differ in terms of the financial self-liquidating ratio of projects. The total cost of a sewage treatment plant cannot be covered by the wastewater treatment tariff collected, but the tariff of water supply usually would be able to offer an appreciable return to investors. Therefore, most water supply plants in China adopt the mode of so-called ‘Plantpipeline bundle’, which means the water companies collect tariff from end-users. Local governments usually procure the sewage treatment plants by means of BOT or TOT, and leave wastewater pipeline network to be invested and operated by government herself. Sewage treatment companies usually collect a fee from local governments according to their treatment volume, no matter how much the government charges end-users of wastewater treatment.

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Table 5.2 Total projects by primary sector and PPP type (US$ million) (World Bank, 2014) Number of Projects

Total Investment

Sector

Sub-Sector

Energy

Concession

47

1,203

Divestiture

53

9,292

338

33,470

0

0

438

43,965

Concession

0

0

Divestiture

4

14,518

Greenfield project

0

0

Management and lease contract

0

0

Total Telecom

4

14,518

Concession

70

7,692

Divestiture

37

10,315

125

32,931

1

1

Total Transport

233

50,939

Concession

118

4,457

Divestiture

11

1,243

241

4,074

19

134

389

9,908

1,064

119,330

Greenfield project Management and lease contract Total Energy Telecom

Transport

Greenfield project Management and lease contract

Water and sewerage

Greenfield project Management and lease contract Total Water and sewerage Total

BOT is the most popular model in toll roads, where private investors directly collect toll from passengers. This user-pay mechanism means that operators of toll roads in China have to take on the risk of traffic flow volume and the resultant risks associated with toll revenue. More importantly, the tariff is regulated by provincial authorities following the central government’s guidelines. However in most past cases, toll road companies have failed to adjust tariffs according to concession agreements suggesting that this should be adjusted to operating costs (Zhang, 2009). Joint ventures of public and private sector participants, meanwhile, are relatively rare in the toll road sector.

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In the rail transportation sector, the most critical issues are lower financial self-liquidating ratios and unclear subsidiary and profit mechanisms, all of which make private participation difficult, except in case of dedicated lines with independent tariff settlement. The former Ministry of Railway (merged with the Ministry of Communication in 2013), as distinct from other ministries, does not fully support popular reforms. The railway sector therefore is least open to private investment. This also affects urban railway development. Hugh investment requirements and low fares instituted on account of public welfare concerns greatly reduce the possibility for private investors to obtain reasonable financial returns from construction and operation. Some pilot projects such as Beijing Metro Line 4 and Shenzhen Metro Line 4 have encountered financial difficulties and require government’s huge subsidy, even though the Hong Kong MTR Company has been brought in as investor. Under current Chinese land law local governments cannot grant land around stations to investors without competitive tendering. This means that the integration of land use and transportation is hard to achieve. Such integration, however, would also allow the investors to gain profit from real estate development so as to compensate partially for transportation construction cost. In light of the current legal framework, two common business models have been adopted; namely Subsidise in Building-Operate-Transfer (SBOT) and Build-Subsidise in Operation-Transfer (BSOT). In a SBOT project, government is responsible for part of the construction, while in a BSOT project, government provides a subsidy during the operating period. The aim of these two models is to improve the financial self-liquidating ratio by sharing part of the cost or providing part of the revenue. Municipal solid waste treatment is a sector where a polluter-pay system is being introduced in some areas in China. This sector, therefore, relies heavily on governmental fiscal input. For the private investments, a BOT model is usually adopted. Similar with wastewater treatment plants, project companies obtain their service fees from local governments instead of end-users. This means that investors of a solid waste treatment share the default risk of local governments. The revenue of city gas projects comprises the connection charge and commodity charge, where the connection charge is applicable when a user applies for access to the pipeline network, and the commodity tariff is associated with the gas throughput on the transmission network. There is much controversy regarding rationality and legality of charges for connection, which date back to the earliest case of such charges being levied in Guangdong at the end of 2006 (Zhang, 2009). Given the lack of governmental fiscal support to the construction of pipeline network, it may be reasonable and necessary to charge for connection in the future.

Changes in PPP usage and extent over time Along with the evolution of PPP application in China, there are several changes in PPP regulations, PPP players, PPP usage, etc.:

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• There are several improvements in PPP related regulations in China. These

•

•

•

•

•

•

•

improvements include switching PPP key players from foreigners solely to all private investors, widening PPP implementation from BOT only to diverse models, and providing more procedural guidelines. Foreign investors acted as the major player in the first boom. They may have been efficient in operation and management, but were often unfamiliar with Chinese culture. State-owned enterprises are the principal players in the second boom. They may have lower operational and managerial efficiency, but they have strong relationships with the government and a capability to undertake country-level risks. Currently, state-owned enterprises and state-holding enterprises have the major market share in most PPP infrastructure sectors. In the first PPP boom, private investors preferred economically viable infrastructure projects such as toll road, waste water, power, environment, city gas, etc. But in the second private investment boom, private investments have been introduced in the social infrastructure projects such as policyrelated housing, medical industry, education, social warfare service, etc. At the end of the 1990s, the central government invested a huge amount of treasury bonds in infrastructure in order to cope with the adverse influence of the Asia Financial Crisis, and determined to clean up the unregulated or illegal projects. This led to a fading out of the first private investment boom. The Chinese government announced on 9 November 2008 that China would relax credit conditions, reduce taxes and embark on a massive infrastructure spending programme in a wide-ranging effort to offset adverse global economic conditions by boosting domestic demand. With the 4 trillion RMB stimulus plan as announced by the Chinese government, only 1.18 trillion came from the central government, the rest would have to be topped up by the local government, and/or the private sector. Since most of the local governments were subject to severe budgetary pressure, there was a heavy reliance on private sector investment. This has provided an opportunity for private investors to get more involved in infrastructure development via the PPP mode. Due to the immature legislative framework for PPP, risks of delay in approval, changes in law and tax regulations changes are still a hindrance to PPP investment. But because of the continued positive attitude of Chinese government in promoting PPP, the risks of expropriation and nationalisation, public/political opposition, and reliability risks with regard to public sector entities are no longer the major concerns of private investors. Changes in Chinese society from rural society to a predominantly urban one raise questions about infrastructure funding. The Ministry of Finance and the Ministry of Housing and Urban-Rural Development have emphasised the importance of PPP to improve urban development. Because of the active promotion by the Ministry of Finance, and the preparation of PPP law by National Development and Reform Commission, there was heavy media coverage of PPP in 2014.

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Future developments The new generation of Chinese political leaders have a positive attitude towards promoting private investments in infrastructure development. Current PPP regulations lack strong legal status. It is expected that the forthcoming system of PPP law will include nationwide PPP guidelines, support national and provincial PPP-specific agencies, and provide public accountability mechanisms and information publishing mechanisms. China’s demand for more public infrastructure and services has imposed great pressure on the government budgets. This has caused subnational governments’ to favour PPPs often without carefully considerations of their feasibility. The central government has recognised this issue and is drafting ‘Guidance for Concession Evaluation of Municipal Public Utilities’. Given the severe budgetary pressure of subnational governments, an increase of PPP application should be expected in the near future. However, as emphasised in China’s twelfth Five-Year Plan, upgrading social welfare and increasing urbanisation rate are key areas for future investment. This suggests that there will be PPP usage in urban development as well as the sectors of education, health and other social infrastructures.

PPP research and development agenda There is increasing attention in the topic of PPP in China, but Chinese academics appear to be less active in publishing PPP papers in the international journals. In terms of papers published in international journals, Tsinghua University and Southeast University are the most active institutions in pursuing PPP research. The around 2,000 PPP papers published, can be categorised into three groups, namely ‘risk’, ‘procurement’ and ‘financial’. New ideas and topics have been introduced in the latest publications, including: (a) investment environment; (b) procurement; (c) economic viability; (d) financial package; (e) risk allocation and management; (f) governance issue; and (g) other integration research (Ke et al., 2009b). More and more Chinese academic journals have published papers on PPP. The research topics have been switched from a pure construction perspective to a combination of topics from finance, law, public administration, construction and management. Current research topics include: (a) selection of financing models; (b) optimisation of financial structure; (c) risk allocation and management; (d) regulatory and institutional frameworks; (e) behaviours of both sectors; (f) determination of concession period; (g) contract structure and key clauses; (h) evaluation of private partners; (i) performance indicators; and (j) price mechanism. Given that PPP usage in urban development is part of larger programmes (instead of individual projects), PPP programme management could be one of the future research areas in China. Bringing ‘big data’ to the PPP management is another future research topic. Other topics worth investigating include the standardisation and simplification of PPP contracts, and the communication/ promotion of research outcomes to government and industry.

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Conclusions With continued economic growth and urbanisation, the increasing need to provide and improve infrastructures has been placing budgetary pressure on the government. Today private investors cannot afford to ignore the scale of the infrastructure market in China. Recommendations for private investors, who are willing to step into the infrastructure market in China, include:

• legal/regulation risks, political risks, economic risks and force majeure risk are • • • • •

•

most frequently associated with China’s PPP projects; when disputes appear, re-negotiation among partners especially with government is more efficient and effective than mediation/arbitration/lawsuit; proper risk management is critical, especially in terms of aligning the private sector’s interests with the public sector; private investors should standardise and detail the contract terms and conditions as much as possible, by relying on published policies/regulations/ laws and written contracts rather than oral promises from government officials; a friendly attitude from government is important especially for projects with weak revenue-generating capability; private investors should be familiar with local government and its capabilities as well as the business environment, and not take advantage of government officials’ lack of poor knowledge/experience and sign an unfair contract with the government; imposing a boundary for higher and lower rates of return is a good practice especially for those PPP projects with uncertain market demand.

References Chan, A.P.C., Lam, P.T.I., Chan, D.W.M., Cheung, E. and Ke, Y.J. (2009) ‘Drivers for adopting public private partnerships – empirical comparison between China and Hong Kong special administrative region’, Journal of Construction Engineering and Management, 135(11), pp. 1115–24. Ke, Y.J., Wang, S.Q. and Chan, A.P.C. (2009a) ‘Public-private partnerships in China’s infrastructure development: lessons learnt’, Proceedings of Changing roles: new roles, new challenges (CIB W096, W104), Noordwijk ann Zee, Netherlands, 5–9 October 2009, pp. 177–88. Ke, Y.J., Wang, S.Q., Chan, A.P.C. and Cheung, E. (2009b) ‘Research trend of publicprivate partnership in construction journals’, Journal of Construction Engineering and Management, 135(10): 1076–86. Ke, Y.J., Wang, S.Q. and Chan, A.P.C. (2013) ‘Risk misallocation in public-private partnership projects in China’, International Public Management Journal, 16(3): 438–60. Wang, S.Q., Ke, Y.J. and Xie, J. (2012) ‘Public-Private Partnership Implementation in China’, in G.M. Winch, M. Onishi and S. Schmidt (eds), Taking Stock of PPP and PFI Around the World, ACCA, London: Certified Accountants Educational Trust, Feb 2012, pp. 29–36. Wang, S.Q. (2013) ‘Impacts of Ministry of Finance’s Notice No.463 on Build-Transfer’, Construction Enterprise Management, 4, pp. 54–57.

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World Bank (2014) Country Snapshots – China. http://ppi.worldbank.org/explore/ppi_ exploreCountry.aspx?countryID=50 (Last visited: 14 January 2014). Zhang, L. (2009) Development of infrastructure sectors in China: status quo and trends (Seminar speech). Revamping PPPs: From ‘Revisiting and Rethinking’ to ‘Revamping and Revitalising’ PPPs, The University of Hong Kong, Hong Kong, China, 28 February.

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Perspectives on the limited emergence of Public Private Partnerships in Finland Pekka Valkama, Lasse Oulasvirta and Ilari Karppi

Introduction Finland is a unitary state with well-established principles of good public governance and administrative practices based on the rule of law. The Finnish public sector is extensive with wide sets of public services and income transfer and equalization systems in accordance with the prevailing ideologies of the Nordic welfare states. The basic rights of citizens are defined in the constitution and citizens have broad legal protection. Classic corruption routes are effectively constricted and malpractices by civil servants and politicians are rare. Even though Finland is one of the least corrupt countries in the world, the EU commission has urged Finland to increase transparency in public procurement. Bipolarity between central government and municipalities can be clearly seen in Finnish infrastructure ownership arrangements. Regional or meso-level authorities have a limited role in Finland, and there are no particularly strong independent public agencies or authorities for specific infrastructure purposes. The key elements of public infrastructure, such as roads, airports, railways, national grid of electricity and research, university and military facilities are planned, owned and managed by state public authorities or state-owned enterprises. Other important but smallerscale elements of public infrastructure such as urban streets, parks, harbours, landfills, waste burning plants, waterworks, waste-water treatment facilities, local power stations, schools, hospitals, local public housing facilities and social service facilities are taken care of by municipalities. The commercial private sector is responsible for telecommunication, broadband connections, logistic terminals, and some tourist, sports and senior care facilities. The not-for-profit private or third sector owns some small public facilities such as local physical exercise facilities, community houses, and local educational facilities. The peculiarity of all Nordic Countries, Finland included, in the international Public Private Partnership (PPP) scene can hardly be understood without taking into account the strong financial and political role of the municipalities and municipal joint authorities on the one hand and the process of building up the Nordic universal welfare state on the other. The institutionally strong self-government of modern Finnish municipalities dates back to 1865 when an act of municipal government was created, following a related act in Sweden two years

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earlier. Among the peculiarities of Finnish and other Nordic municipalities is their financial autonomy with traditionally broad local tax bases and a high capacity for sustainable financial management. Compared to the welfare state creation – a process that occurred in Finland in the 1960s and early 1970s with national reforms on public health and comprehensive education – local self-government thus predates this by a century. Local governments were the key actors in providing the public health and educational services, and for that they needed both newly educated personnel and often equally newly built premises. This expanded the public sector not only locally but also at the central government level. To make the new public services physically available for the citizens, in turn, required better accessibility that was often secured with large-scale road and urban infrastructure construction and upgrading works – necessitated by a rapid growth of automobile stock taking place at the same time. Thus, choices made some 50 years ago made both central government and municipalities strong actors in managing the resource bases required for large-scale projects. As a consequence, classic public procurement has typically been much more desirable to Finnish public actors than alternative forms. At least this has been the case during the period of economic growth and sound public finance. Only after major systemic shocks to the Finnish (public) economy occurred, first in the early 1990s and more recently since the 2008 global financial meltdown, have alternative models been sought for. In this context, PPPs, or, as they have been often called in Finland, lifecycle models, have been examined and implemented. Before Finland’s EU membership and the treaty of The European Economic Area (EEA) in the early and mid-1990s public procurements were loosely regulated. Nowadays both EU and national legislation and the Agreement on Government Procurement (GPA) of the World Trade Organization provide detailed legal rules for public procurements that are aimed at ensuring the principles of the open and effective competition and neutral and non-discriminatory treatment of bidders. The Ministry of Employment and the Economy (MEE) is responsible for the drafting of the procurement legislation and ensuring the functionality of internal markets in the country. MEE also maintains the announcement platform of public projects both in Finnish and Swedish. According to the national procurement law, a building contract has to be put to an open tender if its threshold value is 150,000 euro or more. The total value of public procurements in Finland was over 23 billion euro in 2013. The total value of building contracts was 5.4 billion euro. There are 18,760 public procurement units, most of which are municipalities or municipality-owned units.

Origin and drivers for PPP It is easier to argue why the Finnish public sector has been strong enough to finance public procurements and infrastructure investments without the extensive help of the private finance, than to widely demonstrate the driving factors behind the emergence and development of PPPs.

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In the local government sector most of the municipalities are too small to choose a PPP. At the start of 2014 Finland had 320 municipalities (Åland Islands excluded), and over half of them had less than 6,000 inhabitants. There were eight municipalities with over 100,000 inhabitants (Helsinki, Espoo, Jyväskylä, Tampere, Vantaa, Turku, Oulu and Lahti). The local government sector consists also of joint authorities of municipalities that take care of special services that need a large population base such as hospitals, vocational schools and colleges. Besides the small size of service operators, another obstacle has been the special financing model of local governments. Municipalities in Finland have strong taxation rights and therefore a high capacity to fund capital projects. Furthermore, the central government has subsidized investments in local governments. The municipal investments are often supplemented by central government investment grants. These investment grants have been targeted at municipalities that had limited investment resources. However, richer and bigger municipalities and joint authorities were also able to derive investment grants during the construction era of the welfare state and during strong central government finances. After the recession in the beginning of nineties and after the change of the grant system for local governments this additional financing has been massively reduced. The terms of investments grants deny giving them to such PPP projects where the facility is owned by an external non-municipal partner. These factors jointly reduced enthusiasm for PPP projects in local government before the turn of the century. However, in the aftermath of the financial crisis of 2008–2009 the new austerity has reduced local governments’ ability to finance capital investments. This, together with the fact that many local government service facilities are in need of repair, has created interest in alternative procurement methods. The first PPP contract in Finland was signed in the late 1990s. It was a national government highway project in the Southern part of the country. The government conducted a cost–benefit analysis and considered whether to build a new highway or use the old main road. According to the results of the review, the new highway seemed to be worthwhile on account of wider socio-economic benefits. Instead of the traditional procurement practices the government decided to use the PPP model as a brand new way to implement the project (Valkama and Anttiroiko, 2010, p. 117). When the contract was made, government finances were recovering from the dramatic recession of the early 1990s. PPPs had increased their popularity in many countries, not only in developing countries but also in OECD countries such as France, South Korea, Australia and the UK. In the spirit of new public management ideas, the Finnish government wanted to experiment with PPP in order to compare the traditional and new methods with each other. The first PPP contract has expired already and the SPV has transferred the highway back to government ownership. The experiences of the project are mixed. It has been argued that the highway could have been built five years earlier had the project been financed directly from the budget of the government. The highway, however, was built by the private company a year ahead of the agreed timetable (Valkama and Anttiroiko, 2010, p. 117). The head of the Finnish

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Transport Agency has concluded that the total costs of the PPP highway were double compared with the traditional procurement method (ESS, 2011). The first municipal PPP project was implemented by the city of Espoo. The city needed a new high school and swimming pool and the city council decided to organize the new facilities as a pilot PPP project. A private sector consortium established a special purpose vehicle, which carried out the project based on a build-own-operate contract with the city for 25 years. The new facilities were completed in 2003 and since that year the building complex has been in use by municipal high school students and teachers and swimming pool customers. According to experiences of the first years, the city government’s annual costs have been higher than what the costs are in comparable facilities. However, the city councillors consider this first PPP project as a learning experience for the municipal and private sector contract parties.

Financial context for PPP Central and local governments have used tax revenues and other operational incomes to finance their minor infrastructure investments, but there have been differences between these governments with regard to the financing of larger investments. The central government has well-established bond programmes by which it borrows money from the global financial market with relatively low costs as interest rates have been favourable to the Finnish government due to its high credit rating. Local governments used to borrow money from private banks and some other financial institutions for their major investments, but within these financial markets competition and availability of credit were sometimes very limited. Furthermore, in the 1980s when the financial markets were liberalized, Finnish local governments were allowed to borrow money from abroad which did not become popular because of the high transaction costs and risks of exchange rates (Anderson, Bailey and Pautz, 2010). The Finnish local government sector followed the examples of other Nordic countries and established a jointly owned special financial institution called Municipality Finance PLC. Nordic local government funding agencies (NLGFA) were created at different times in Sweden, Norway, Denmark and Finland, but all of them are limited companies that operate in a cooperative manner. The key idea of these municipal funding bodies has been to replicate state government bond programmes by pooling loans of single local authorities together and offering them to the investors globally. The Danish, Norwegian, Swedish and Finnish funding agencies have done pretty well since their market shares of local government borrowing have been between 45 and 96 per cent. The Finnish local government sector is majority owner of Municipality Finance PLC, but local governments are not obliged to borrow money by using its services. They can still ask for competing bids from the commercial banks and other private financial institutions (Anderson, Bailey and Pautz, 2010). Municipality Finance PLC has enjoyed the same credit rating as the Finnish central government, which has meant that it has been capable of competing effectively with privately owned commercial and co-operative banks. The company

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is able to provide affordable financing from global financing markets. When Municipality Finance PLC was established in 1989, the company was able to lower the interest rate by 1 per cent, which delivered remarkable savings for the local government sector. Since then it has been able to offer loans to local governments with low interest rates. The financial crises validated the market position of Municipality Finance PLC in the municipal sector, since commercial banks faced increasing difficulties in lending money to the municipalities.

Institutional framework and organizational structure In many countries, the use of PPP contracts has been underpinned by a special act or law. In Finland, a new law was not seen to be necessary, since local public authorities have relatively extensive self-governance. Since a PPP project has been interpreted as a long-term procurement contract between a private sector organization and a public authority (World Bank, 2012), the statues of the Finnish law of public procurement have been applied to PPP contracts and processes. According to mainstream interpretations, PPPs are considered as a mixed public procurement and rental arrangement. In many countries governments have created a new centralized organization in order to plan and supervise PPP projects in the country. The Finnish government has not considered this kind of national body necessary mainly because the public sector has skilful and educated civil servants and public authorities have well-established procurement practices. In the local government sector, the Finnish Association of Local and Regional Authorities have provided guidance for local governments in investment projects. Some countries have introduced special incentives for private sector enterprises to participate in competitive tendering for PPP contracts. These kinds of incentives include tax benefits (that is preferential tax rates), land expropriation, and credit guarantees. Furthermore, governments may pay compensations in case of a contract termination and offer compensation for the bidding costs to unsuccessful bidders (Kim, 2010, pp. 44–46). The Finnish government has not considered special financial incentives necessary. However, Finnish local governments are allowed to consider their own incentives on a case-by-case basis, although they are not able to adjust national tax policies and regulations. Specifically they can give credit guarantees or pay compensation. Local governments may also inject share capital into special purpose companies. Municipal Finance PLC has recognized that PPPs may create some new challenges for the company. In order to be able to work with PPP projects the company has established a subsidiary company called Inspira. It offers expertise services both to the central government and local governments on investments projects and ownership arrangements. Since Inspira is not a public organization, public authorities may voluntarily use its experts on a commercial basis. At the end of the 2000s, Finland planned to create a special fund for PPP-projects, the so-called Kaira project (National Life Cycle Fund Project). The project published its report in 2009 (Elron, 2009). This financial institution would have meant a major

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breakthrough for a new funding policy framework. However, after initial enthusiasm, the fund suggestion was shot down by the powerful Finnish private pension fund companies (i.e. Varma and Ilmarinen), which did not show enough interest. They did not find PPP project financing profitable enough in the Finnish context, and thought that investing directly in local government projects without intermediaries was preferable. It was also speculated that these major pension fund companies were afraid of new financial operators entering the market. The fund idea reappeared in 2014 when the incumbent cabinet suggested that a fund for municipal infrastructure and service facilities should be established. This fund, called Remonttiraha Oy (Renovation Ltd), would derive its capital from municipalities and central government as well as from private financiers. This fund would own the built facilities and rent them to municipalities with long-term contracts. Not all reactions to this suggestion have been positive, for instance, the real estate managers of the biggest Finnish cities have rejected the suggestion as useless. One impediment to PPP is that the domestic construction market contains only about four big construction companies that are able to take part in PPP bids. A survey also revealed that Finnish construction companies are not interested to take care of PPP project financing and that they have little to offer in this field because of affordable municipal financing in Finland.1 In addition, there are some unfavourable tax stipulations in relation to PPPs, including, for instance, the stipulation that the value-added tax must be paid by the contractor in one amount when the asset is delivered to the purchaser even if the contract period lasts for many years.

Extent of use and types of PPPs PPPs are not widely used in Finland yet. So far, all the signed PPP contracts are individual cases not finalized under a coherent policy framework. Even though PPP projects are very different and new in comparison with traditional procurement, neutral follow-up studies and evaluations are limited. Because of the decentralized decision-making powers within the public sector in Finland, there is no central governmental information available with regard to how many PPP contracts have been agreed. A national review published in 2009 found out that the state government had made three PPP contracts and municipalities five contracts. Later on, a few more PPP projects have been launched, but national statistics are missing. Table 6.1 includes lists of the major PPP projects of both state administration and municipalities. Table 6.1 demonstrates that most central government PPP investments have been procured by The Finnish Transport Agency, which has adopted a policy of favouring partnership models in order to build new highways. In the municipal sector, the city of Espoo, which is the second biggest city of the country, is the most active local government to arrange partnership-based facilities. The city of Espoo has had relatively strong municipal finances compared with the rest of the country, but the city has gone through a long period of the population growth. It has been necessary for the city government to speed up municipal investment projects and it has seen a good opportunity to introduce PPPs in this context.

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Table 6.1 The major Finnish PPP projects (Cf. Elron 2009) Procuring public authority

Content

Duration

Järvenpää – Lahti highway

The Finnish Transport Agency

Planning, financing, building, maintenance

15 years (from 1997 to 2012)

Muurla – Lohja highway

The Finnish Transport Agency

Planning, financing, building, maintenance

25 years

Facilities of the Finnish Meteorological Institute

State government property management company

Planning, financing, building, ownership arrangements

30 years

Hamina – Vaalimaa Highway

The Finnish Transport Agency

Planning, financing, building, maintenance

20 years

High school and swimming hall facilities

City of Espoo

Planning, financing, building, maintenance and user services

25 years

High-tech center facilities

Municipal company owned by the City of Seinäjoki

Planning, Financing and building

25 years

Waste water treatment facilities

City of Haapavesi

Renovating, operating, and maintenance

12 years

Primary health care facilities

City of Espoo

Planning, Building, Management and maintenance

25 years rental agreement

Facilities of a primary health and social care center

City of Espoo

Planning, Building, Management of maintenance activities

20 years rental agreement

Facilities of a multi-purpose service house

City of Oulu

Planning, financing, building, maintenance and user services

25 years

State PPPs

Municipal PPPs

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An emerging Finnish PPP model: the case of Lempäälä urban development After a lengthy phasing-in stage, PPP has found its niche in Finnish infrastructure and construction projects. Simultaneously, new governance models for various participants and stakeholders in the PPP procurement are emerging. As we have noted here, PPP has been introduced in the affluent municipalities, not by those experiencing financial austerity. In the same vein, subsequent steps in the evolution of PPP mode have therefore first been taken by municipalities with some financial leeway and, hence, the possibility of negotiating with PPP partners from a strong position. An example for this is the municipality of Lempäälä in Southern Finland. Lempäälä is among the fastest-growing municipalities in Finland. Its current population is over 22,000 inhabitants with a long-term annual population growth of between 1.3 and 1.5 per cent. This positive development owes much to Lempäälä’s serendipitous location on the southern fringe of the Tampere city region, adjacent to the most important national railway and motorway corridor linking two largest Finnish urban agglomerations, Helsinki and Tampere. Moreover, Tampere is one of the key Finnish attractors of university students and young professionals, which has secured a steady inflow of inhabitants to the entire urban region. The preferred mode of housing in this area is suburban detached single family houses. This, however, creates challenges. The scattered developments are turning prohibitively expensive to build and maintain. They are inefficient, particularly in terms of energy consumption. If municipalities like Lempäälä wish to continue to grow they need to find a way to produce new living environments that are more efficient – in a word: denser. However, simultaneously the suburban local authorities have to improve their local amenities. It seems that municipalities like Lempäälä need to produce a new kind of urbanity, and to successfully compete with Tampere it needs to provide a better urbanity than the region’s urban core. Here is where the new form of PPP process comes into play. Urban planning has always been a PPP process of sorts. This is due to the particularly strong de jure position of municipalities as zoning authorities and the particularly strong de facto position of landowners and construction industry. Most Finnish municipalities are proud to proclaim that they avoid compulsory land purchases. Much of planning practice, particularly in small- and mid-sized municipalities, therefore starts with the construction companies’ business interests. They sell their development ideas to landowners who, in turn, submit a request for the zoning to local authorities. What typically follows is called in Finnish public discussion a ‘stamp zoning’ of projects irrespective of their quality. Such stamp zoning quite understandably is most typical in central areas of fast-growing municipalities that provide the entire developer community (construction industry; technical, business and property consultants; landowners) with lucrative development possibilities. The current urban core of Lempäälä municipality is no exception here. A serious effort to enhance quality involves architects and other professionals. In 2006 the initiative was moved from the professionals to the local residents

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who were asked to define the features they found most important for the centre of their municipality. After several stages of a research, the process was then taken over by a visionary team that combined local decision makers, senior city hall staff as well as people from universities and both public and private research institutions. The team was coached by an external facilitator who sometimes defined his role as ‘being a pair of external ears ever present and always reminding the city hall of the fact that someone without a public position is there and hears everything’. This visionary team – or urban development task force – has since 2013 recreated itself as a forum engaged in urban renewal. The greatest value added by the team compared to the traditional urban development mode as described above is its capacity to work on the entire concept of producing energy efficient, yet attractive urban community. The work method is new for all participants, and not entirely without risks to construction companies, because it changes the way in which they are accustomed to doing profitable business. It has also involved a great deal of learning. The participants have been forced to discuss the pros and cons of their ideas in the context of the big development vision and the objectives given to it, rather than through the benefits that one single built object might bestow upon the landowner, the community, and the builder. The task force is open in a sense that members are free to detach themselves from its operation if they find its work methods unbearable. All legally binding responsibilities between the different stakeholders need to be included in separately made traditional agreements. Hence the task force needs to create an atmosphere of particular trust to keep the profit-oriented stakeholders from drifting away. The challenges to be faced in this respect right at the moment are remarkable, but there are good reasons to believe in the task force’s ability to do it in an orderly manner. After exhaustive meetings among the task force members with the local council – the highest decision-making authority – and the key institutional landowners, a common vision for something that can be called new urbanity has started to energize Lempäälä. Probably the single most important financial challenge is the scale of the reconstruction and reconceptualization process. What will be reconstructed is not a group of buildings, built one by one, here and there, but a major urban structure. This may explain the willingness of the construction companies to invest so much working time in the visionary work of the task force. They may be eager to see if the Lempäälä process may be a harbinger of a new development. Yet the construction companies know that the municipality cannot do this by itself, since the capital budget of the authority is limited. Thus construction companies, with the ability to take financial risks, remain cornerstone actors in producing new urbanity. New urbanity on the entire metropolitan scale might also be brought about with a regionally operated railway system. Its alternative operating models were weighted in a recent survey that emphasized the acquisition and ownership of train equipment through an internationally tested project company/life cycle model, a worthwhile alternative in transferring the equipment-related risks from public actors to the private sector. (Tampereen… 2012, appendix 6).

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The question of new urbanity is something neither the construction companies nor the municipalities can solve alone. Around Finland mid-sized municipalities that surround large cities try to enhance their attractiveness by adding the building-stock to their central areas – a process that is well recognizable internationally, and particularly so in the US. Requirements of enhanced energy efficiency will continue to concentrate urban development in areas with good railway accessibility. Finally, there are gentle yet distinguishable signs of a cultural transformation that now attracts suburban dwellers to the centres, irrespective of the diminishing personal living space it entails.

Future developments The Association of Finnish Local and Regional Authorities has launched a project to establish a framework for a lifecycle model of construction and maintenance of service premises. The outcome was published in 2013 (Suomen Kuntaliitto, 2013). In this framework, the local government takes care of the financing without a SPV. The construction company builds the facility (so far mainly schools, daycare centres and multi-purpose service centres), and it is also responsible that the facility fulfils requirements during the agreement period of 20–25 years, all the quality and usability requirements agreed upon. This form of procurement has so far aroused more interest than private finance initiatives. At the moment there are about ten municipalities that have used this Finnish lifecycle model but there is a growing interest among local governments. The most active lifecycle model user has been the city of Espoo, which is a growing city in the capital region beside the capital city Helsinki (Interview with Kirsi Rontu, 31 January 2014, Head of community planning and technology in the Finnish Association of Local and Regional Authority). The Finnish Association of Local and Regional Authorities has created a standard template for lifecycle contracts for service premises containing the procurement process, main points in the contracts, payment systems, maintenance quality definitions, liability distribution and resolution processes. So far, these templates are for service premises for schools, daycare centres, multi-purpose buildings and other premises and not for infrastructure projects such as water and sewage networks, streets and bridges and alike. These templates are not specifically for private finance initiatives but for lifecycle procurements where the construction and maintenance and renovation is bought from the external service operators but the ownership and financing stay at the local government. At the moment, there is a huge need for both renovating buildings with mould damages and to get new premises protected against mould and inferior construction work which are big risks in normal contracts with a period of guarantee of one or two years only. So far about ten big cities have used these new templates. The need to repair service facilities and infrastructure seems to strengthen the interest in life cycle models, but, the affordable financing that local governments can get based on their joint municipal bank means that pure PPPs with SPVs will remain relatively rare in Finland in the future.

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Note 1 The research publication on lifecycle projects in Finland made by the Association of Constructors in Finland and the city of Espoo, published 19 January 2012: www. rakli.fi/ajankohtaista-raklista/uutinen/rakli-ja-espoo-selvittivat-elinkaariurakoidentarjouskayttaytymista.html

References Anderson, Nicholas, Bailey, Stephen J. and Pautz, Hartwig (2010) ‘Local government funding agencies: lessons from success and failure’, in Bailey, Stephen J., Valkama, Pekka and Anttiroiko, Ari-Veikko (eds) Innovations in Financing Public Services. Country Case Studies, Basingstoke: Palgrave Macmillan, pp. 114–34. Blåfield, Antti (2010) Helsingin Sanomat pääkirjoitus. Elron (2009) Kansallinen elinkaarimalli. Yksityisrahoitteisten hankkeiden kilpailukyvyn kehittäminen ja tarjousvertailu ns. budjettirahoitteisten toteutusvaihtoehtojen kanssa. Loppuraportti. ESS (2011) HS: Nelostien rakentaja pääsee voitolle. Retrieved June 20, 2015, from http:// www.ess.fi/uutiset/paijathame/2011/10/25/hs-nelostien-rakentaja-paasee-voitolle. Kim, Surk-Tae (2010) ‘Innovations in Private Sector Provision of Infrastructure South Korea’, in Bailey, Stephen J., Valkama, Pekka and Anttiroiko, Ari-Veikko (eds) Innovations in Financing Public Services. Country Case Studies, Basingstoke: Palgrave Macmillan, pp. 38–58. Korhonen, Esko and Rontu, Kirsi (eds) (2013) Elinkaarihankkeen palvelusopimusmalli, Helsinki: Suomen Kuntaliitto. Tampereen kaupunkiseutu (Tampere Urban Region) (2012) Tampereen kaupunkiseudun lähijunaliikenteen kehittämisselvitys: loppuraportti (in English: Tampere urban region’s rail traffic survey: Final report). Tampereen kaupunkiseutu and Ramboll. Valkama, Pekka and Anttiroiko, Ari-Veikko (2010) ‘Innovation in Public Service Delivery: The Case of Finland’, in Ramesh, G., Nagadevara, Vishnuprasad, Naik, Gopal and Suraj, Anil, B. (eds) Public-Private Partnerships, New Delhi: Routledge, pp. 99–122. World Bank Institute (2012) Public-Private Partnership. Reference Guide, Version 1.0, Washington DC: The World Bank.

7

Public Private Partnership in Greece Athena Roumboutsos and Nikos Nikolaidis

Introduction Greece, with a land area of 132 km2, is strategically situated at the crossroads of Europe, Asia and Africa. With the mainland covered by mountains and hills, Greece is one of the most hilly countries in Europe and has the longest coastline in the Mediterranean Basin (eleventh longest in the world) as it includes some 1,400 islands of which 227 are inhabited. The population of Greece is 10.9 million according to the 2011 census. In 1981, Greece joined the European Union. In the 1980s the Greek economy grew at an average rate of 0.7 per cent versus 2.4 per cent of the EU 15 average. Since the 1990s, the growth rate has been above average, especially in the years before the economic crisis (see Figure 7.1). Since the 1980s, development in Greece has been supported by EU regional and structural funds under the respective cohesion framework programmes. In this context, infrastructure planning and procurement have followed both national and the European funding programme policies, regulations and rules. 8 6 4 2 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 –2 –4 –6 –8 EU (27)

Figure 7.1 GDP rates (1995) Source: Authors’ compilation; Eurostat database

EU (15)

Greece

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Origin and drivers In 1860, the excavations in Chalkis, Euboea (Papademos, 1975) revealed a marble stele (87 x 47 x 9 cm) describing the contract between the city of the Eretrians, representing the 31 municipalities of the Eretrian region and the contractor Chairephanes concerning the drainage of lake Ptechae. The contract included the full description of works and defined a four-year construction period, followed by a ten-year grant to exploit the dried fields. The concessionaire’s obligations included payment of all labour costs; a concession monthly fee of 30 talents; maintenance of works and transfer in good condition. Penalties were enforced against any person trying to annul the contract. A guarantee for good construction was submitted (Venieris, 2007; Koutsoyiannis and Angelakis, 2007; Tassios, 2002). The project is what we would define today as a BOOT (build, own, operate, transfer) project contract dated from the fourth century BC (Koutsoyiannis and Angelakis, 2007). The New Greek State (as of 22 January 1830) based development of infrastructure on private investments. An example concerns the construction of the Corinth Canal, which was initiated in 1869 and granted via concession in 1881 for 99 years to the Société Internationale du Canal Maritime de Corinthe. The specific agreement was not successful. Today (2014), the Corinth Canal is however still operated under concession. In the 1920s, 1.3 million refugees landed in the greater Athens area, effectively tripling its population. The drastic need for social infrastructure led to the construction of infrastructure projects delivered through private finance and repaid through user charges. These included the water supply system concession (including the Marathon Dam) with Ulen & Co. – an American interests company – and electrical power generation and distribution awarded via concession to Power & Tractor. Both concessions were completed in the early 1970s and the facilities have since operated as public entities. Later again, seeking know-how, the Siemens concession for telephony was introduced. Finally, the tourism sector also benefited from various concessions while seeking financing (Expert Group Report, 2004). In the 1990s, with the reintroduction of private financing as a public infrastructure/ service delivery model under the umbrella term ‘Public Private Partnerships (PPPs)’, the Greek Authorities and the European Commission agreed within the framework of the Community Support Framework 1994–1999 (CSF II) to maximise private sector partnerships in the development of transport-related infrastructure (PricewaterhouseCoopers, 2005). Similar provisions were made for the CSF III (2000–2007) and the National Strategic Reference Framework (NSRF, 2007–2013) extending to other infrastructure sectors (energy, ICT, education and public buildings). The intensity of financial support through CSFs peaked at around 3.7 per cent of GDP during the 1994–99 period (CSF II). It declined to 2.9 per cent during the 2000–06 period (CSF III). Almost half (45.9 per cent) of the expenditure during the first period went to infrastructure, compared to 21.9 per cent in the second period (Kamps et al., 2009). Nevertheless, private financing was utilised within PPPs in order to carry out the ‘Greece 2010 – Strategic Development Plan for Transport Infrastructure’ (Greek Ministry of National Economy, 2003).

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Table 7.1 Community support framework programmes Framework Programme

1989-1993** ‘000 ECU in 1989 values

1994-1999** ‘000 ECU in 1994 values

2000-2006** ‘000 Euro in 2000 values

National Funding

5,802,196

7,069,900

11,126,075

5,601,529

Community Support

7,193,241

13,980,000

22,707,000

20,424,633

Private Funding

1,346,617

8,671,400

10,730,465

5,580,356

Other National Funding*

2006-2013*** ‘000 Euro in 2011 values

7,553,355

Total

14,342,054

29,721,300

44,363,540

39,159,873

Private Funding %

9.38%

29,18%

24,19%

14,25%

*Including project revenues; ** As approved; *** As adjusted and approved Authors’ Compilation; Source: Ministry of Finance & Economy website

Table 7.1 presents the aggregate funding figures of Community Support Framework Programmes by funding source. Private funding does not only concern infrastructure but also co-financing of SME business development. However, a significant share is directed to funding of infrastructure. For example, in the 2006–2013 Framework Programme, private funding towards transport infrastructure was estimated at 2.4 billion euros (not including national revenues from PPP projects) of over 11 billion total funds allocated. In the same programme, private financing for renewable energy was estimated at 0.7 billion euros. Finally, it is worth noting that the new framework programme (2014–2020), which is currently under negotiation, foresees the need for investments in the range of 112 billion euros, while the available national and European Union funds are 20.8 billion euros. According to the Ministry of Development (proposal presentation to the EC, 13 December 2013), the funding gap needs to be covered by innovative private financing. Notably, the Community Structural Framework Programmes are not the only development programmes implemented by the Greek State. However, they do represent a significant part of the overall planning and have been used to drive the endorsement of PPPs.

Policy framework for PPP Private financing of public infrastructure and services has been government policy for many decades. This has been expressed in legislation allowing and supporting private investments and concessions. For example:

• foreign investments in Greece are protected by article 107 of the Hellenic Constitution and Presidential Decree 2687/1953;

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• Law 1418/1984 in combination with Presidential Decree 609/1985 sets the • • • • •

rules for concessions for public works; Law 1739/1987 concerns the exploitation of water resources by private investors and was extended to geothermal resources in 2003; Law 1815/1988 specifies airport concessions; payments to private sector parties are regulated by Law 2052/1992; Law 2244/1994 in combination with Law 2273/1999 details issues concerning private producers of electricity. This legislation principally focuses on renewable energy production (permits, connection to main distribution grid and pricing); urban transport project financing is regulated under Presidential Decree 159/2000.

The list of laws and regulations reflects governmental policies introduced over time, as well as the fragmented nature of the policy approach which gradually introduced private finance into more sectors. In many ways, Greek government policy on PPP could be described as ad-hoc and ‘scope generated’. That is, the policy addressed specific goals and infrastructure needs and did not present an overall framework for infrastructure and other public domain development. In this context, the primary scope for the last two decades has been to contribute to the EU transport network and to develop modern transport infrastructure in line with Trans-European Networks for Transport (TEN-T). Hence, with the exception of Egnatia Odos (A2 motorway), servicing the east–west axis of northern Greece, most large-scale transport projects in Greece over the last two decades have been delivered through a PPP-type model in two waves. The first wave included: the Athens International Airport; the Athens Ring Road (Attica Tollway) and the Rio-Antirio Bridge. These large-scale projects were tendered and awarded in the late 1990s making Greece in the mid-2000s one of the prominent countries with respect to PPPs in the EU, especially concerning their share over GDP. The successful completion of these transactions led to a broader application of PPPs in Greece’s public infrastructure in an attempt to minimise transaction costs and mitigate construction, operational and financing risks to the private sector. The second wave (awarded between 2007 and 2008) included the so-called ‘axis of development’ motorways. These were the Maliakos–Kleidi Motorway (Aegean Motorways); the Elefsina–Corinth–Patra–Tsakona Motorway (Olympia Odos); the Antirio–Ioannina Motorway (Ionia Odos); the Central Greece Motorway (E65 motorway) and the Corinth–Tripoli–Kalamata Motorway (Moreas). These infrastructure projects constitute the major motorway network in Greece. This second wave also included the Port of Piraeus Transhipment Terminal Concession. There were also a number of failed procurement efforts, such as the Thessaloniki Metro, the Container Terminal of the Port of Thessaloniki, and the submerged tunnel of Maliakos. These large-scale PPP projects were (and continue to be) handled by central government. Regardless of the scale of the projects that might need this central support, in Greece there is low involvement of regional and local authorities in PPP-related financing and decision-making. Data on procurement markets in

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OECD countries indicates that Greece has one of the highest ratios (0.56) of central government to general government spending (Evenett and Hoekman, 2004). The Expert Committee on PPPs (2004), set up by the Ministry of Economy and Finance, reported on a number of obstacles to further PPP implementation in Greece. These included the legal framework, provision of know-how and support to public authorities, absence of a PPP taskforce (or unit), the existing PPP scheme, procedures for the execution of guarantees, the definition of responsibilities between the various authorities, project maturity, budgeting of contracts, financing provisions, taxation, return on equity, and capital security. In September 2005, a PPP Bill was ratified by the Greek Parliament called the PPP Law 3389/2005. The Bill focused on small- to medium-sized projects with a maximum construction value of less than 200 million Euros. Law 3389/2005 defined contractual PPPs for Greece, endorsed the Eurostat classification of PPP assets as being off balance sheet, and included the provisions of the EU Green Paper (2004) on PPPs. The PPP Law 3389/2005 allowed for the development of a pipeline of smaller scale PPP projects promoted by regional and local authorities. Since 2009, the process has slowed down (see www.sdit.mnec.gr) but continues to provide the framework for new regional and urban PPP contracts. In 2013, the upper value limit for projects considered was raised to 500 million euros (Law 4146/ 18 April 2013). In support of PPP projects by local authorities, two more initiatives may be identified. The first is the ‘Joint European Support for Sustainable Investment in City Areas’ (JESSICA). This is an initiative developed by the European Commission and the European Investment Bank, in collaboration with the Council of Europe Development Bank (CEB). JESSICA is an important mechanism of urban regeneration projects financed through land-based financing. In Greece, there is growing interest as public authorities have incurred excessive debt and have lost access to the commercial debt market. However, the use of mechanisms such as JESSICA requires a well-designed land-financing system, planning flexibility, and an efficient system of public administration. This is the most important challenge for the implementation of JESSICA in Greece, given the tight timeframe of the Initiative and the availability of the Structural Funds for the period 2007–2013 (Triantafyllopoulos and Alexandropoulou, 2010). In 2012, the European Investment Bank committed 155 million euros in loans in support of the JESSICA Initiative in Greece (European Investment Bank, 2013). The second initiative is the ‘Thisseas’ (Law 3274/2004) Initiative, which was introduced by the Ministry of Interior, Public Administration and Decentralization (MIPAD). This was a five-year programme for the development of local governments that also aimed at promoting the adoption of local PPPs. Thisseas supported 34 local actions, grouped in the following three sub-programs: (i) organisation and development of municipal public services; (ii) local development and environmental protection; and (iii) social and cultural infrastructure and activities. All three sub-programmes foresaw funding for the elaboration of master plans in order to investigate the potential of implementing proposed partnerships and selecting cases that may be considered for PPPs. A rather important aspect of

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the Thisseas Initiative was that it encouraged the creation of local networks and partnerships between local authorities. This is a crucial factor in creating a more holistic approach to meeting urban needs within regions. By May 2007, municipalities had filed 219 PPP proposals, 136 of which have been approved for funding by Thisseas Initiative with an average budget of approximately 100.000 euros (Karaiskou, 2007). The majority of projects focused on the tourism sector. The financial crisis has had a significant impact on PPP projects and more so on PPPs in the transport sector, as these rely almost exclusively on user fees. This relates to a dual impact on the viability that arises as project revenues have declined due to reduced demand for travel on the one hand, and user demonstrated elasticity to the level of toll tariffs on the other. The impact has been greater for projects under construction. This was also due to the structure of their financing model, as a significant share of the construction cost was to be provided by brownfield toll revenues. As this source of construction financing declined, lenders imposed a ‘draw-stop’, which obliged four of the five motorways awarded in 2007 and 2008 to stop works and enter into a three-year period of renegotiations with the Greek government. In April 2013, the government announced the terms of a new agreement, which included an increase of public funding contribution, a decrease in scope, and the payment of claims. This agreement was ratified in December 2013. In a recent study ‘Greece 10 Years Ahead’, which was sponsored by McKinsey & Company, the Hellenic Bank Association and the Hellenic Federation of Enterprises proposes investment in infrastructure (including transport) as a measure to overcome the crisis (McKinsey & Company, 2012). Financing for such projects can only be secured from private sources.

Financial context for PPP: banking sectors, sources, refinancing, financial institution For the Greek government PPPs are a means for launching investment programmes, which would not have been possible within the available public sector budget within reasonable time (see European Investment Bank, 2005). The 2005 law for PPPs opened the possibilities of more projects to be tendered via this model. The PPP market, only nascent during the first years of PPP application, had developed and matured with a rapid pace in order to keep up with the new project flow and to capitalize on costs and profits. New actors emerged, and older ones became more competitive. In general, aside from seasoned international contractors aiming to capitalize on their previous experience and to enter an emerging infrastructure market, the Greek PPP market is mainly composed of local contractors and, to a lesser extent, strategic investors. Greek banks have also entered the market, enriching their workforce with project finance specialists and obtaining key arranger roles in several PPP deals. The European Investment Bank and European Cohesion and Structural funds provided significant contribution as credit lines and co-financing sources, respectively. Key financing actors are presented herewith.

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• Hellaktor is one of the most active and largest infrastructure groups in Greece

•

•

• •

•

and has been involved in most of the awarded PPPs in Greece, such as the Athens ring road, Elefsina-–Patra, Maliakos–Klidi and Korinthos–Tripoli Motorway concessions. Having capitalized on its PPP know-how and experience, the company has also won PPP deals outside the country (Romania and Russia, among others). Through the group’s energy subsidiary, Hellaktor also participates in Greece’s newly launched waste management PPP programme. J&P Avax is a Cyprus-based construction firm, active in several PPP deals, the most prominent one being the Rion-Antirrion bridge. It also holds a stake in two new concession motorways (Elefsina-Patra and Maliakos-Klidi). The firm also owns a waste management subsidiary (Mesogios) and actively bids for PPPs in Greece and abroad, having been successful in winning an airport privatisation deal (Queen Alia) in Jordan. Gek Terna is an Athens-based construction/energy group that holds a stake in three concession motorways currently in construction (Ionia Odos, E65 and Elefsina-Patra). Through its energy arm (Terna Energy), the group has been successful in winning a waste management PPP in southern Greece, as well as financing several wind power deals via PFI in Europe and the US. COSCO Pacific Limited (a world-leading container terminal operator ranked in fifth position) is the concessionaire of Pier II and III of the Piraeus Container Terminal. The four largest Greek banks, namely National Bank of Greece, EFG Eurobank, Piraeus and Alpha have been involved in every single one of the awarded PPP deals, in lead arranger roles or through syndicated underwriting of the project loans. Key international players actively involved in the Greek market include Vinci (partner in the Rion–Antirrion bridge as well as the Elefsina–Patra and Maliakos–Klidi motorways), Hochtief (major stakeholder in the Eleftherios Venizelos airport, as well as the Elefsina–Patra and Maliakos–Klidi motorways), Ferrovial and Dragados (both partners in the Ionia Odos and E65 motorways). Several international banks, mostly French and Spanish, have also participated as financiers in projects where international contractors were active.

In general, the financing structure in the active PPP projects has been consistent with project financing principles, i.e. 80:20 debt to equity ratios, interest step ups during operation, standard PFI debt terms and covenants combined with reasonably conservative revenue assumptions. A significant share of structural EU funds has also been used to complete the funding mix, ranging from a 20–30 per cent range of total project costs (see previous section). Although there were options to utilize the European Investment Bank’s generally more favourable terms (such as longer debt tenor and reduced interest rates) in the financing of the ‘axis of development’ projects, only the Elefsina-Patra concession was financed (partially) by EIB funds. This approach has changed following the financial crisis. Figure 7.2 illustrates the EIB contribution to transport infrastructure in total and transport PPPs. Recently, the EIB contributed to PPPs in education and waste management/treatment PPP projects.

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1,400 1,200 1,000 800 600 400 200 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13

0

Transport TL

Transport PPP

Figure 7.2 Average 2000-2005 PPP activity as percentage of mean GDP Source: Authors’ compilation, EIB database

Availability payments were used only in a few PPP projects, namely the Athens Telematic System PPP tendered in 2013, whereas the majority of the other projects were exposed to a significant portion of revenue/demand risk. The latter factor played a significant role in the restructuring negotiations that took place during the Greek financial crisis, wherein four major transport PPPs entered talks with the Greek State because distressed revenues (actual and projections) rendered the projects non-viable.

Institutional framework As noted earlier, the new era of PPPs in Greece focused on transport PPPs and was regulated by existing legislation. In the 1990s the Ministry of Infrastructure and Public Works – later Ministry for the Environment, Planning and Public Works (MEPPW) and today Ministry for Development, Competitiveness, Infrastructure, Transportation and Networks (MDCITN) – has been the key institutional player in the PPP programme’s development. Within this Ministry, the General Secretariat of Self & Co- Financed Infrastructure Projects has been the main public entity charged with tendering and awarding large-scale transport PPPs. In a similar approach, PPPs in the port sector are managed by the respective port authorities and the Ministry of Maritime Affairs. Law 3389/2005 on PPPs established a Special Secretariat for PPPs, a unit similar to the PPP Task Force Units set up in other EU Member States. The unit was assigned to the Ministry of Economy and Finance. While the PPP Law regulated many issues with respect to regional and local authority initiatives in relation to PPP projects under 200 million euros (later set to 500 million by Law 4146/2013), it created yet another governance setting. Hence, a multi-governance setting with respect to PPPs was created. In 2012, the restructuring of the public sector brought

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the Ministry of Infrastructure and Ministry of Maritime under the Ministry for Development, Competitiveness, Infrastructure, Transportation and Networks. A year later, Law 4146/2013 assigned the Special Secretariat for PPPs to the same Ministry. Therefore, all PPP related Secretariats are now under the same Ministry. However, multi-governance remains an issue. Overregulation has always been a problem in Greece. Regulation with respect to PPPs is no exception. Prior to Law 3389/2005, there has been significant legislation. In support of PPP implementation (and other private investments), a fast track law was ratified in 2010. More specifically, Law 3894/2010 (as amended by Law 4072/2012) works as an accelerating and transparency-enhancing mechanism for the procedures relating to the implementation of strategic investments in Greece, whether these consist of private–private ventures or PPPs. This Fast Track law accelerates licensing procedures by creating a legally binding timeframe, activating the investment process, and enhancing the efficiency of public bodies’ relevant actions. It applies to investments over 100 million euros or 15 million euros for industrial investments, 3 million euros for projects under the JESSICA fund (Joint European Support for Sustainable Investment in City Areas), and for investments over 40 million euros, which create over 120 new jobs. Finally, the PPP law set out the PPP tendering and negotiation procedures. It also defined the boundaries of PPP applications within the Greek State. More specifically, it stated that activities exclusive to the State cannot be the subject of a PPP and it explicitly references national defence, justice, policing, and the execution of penalties. However, the Law specifically supports regional and local governments. While the PPP law addresses many issues, as identified by the Expert Committee for PPPs (2004), it still leaves some issues in ambiguity. For example, the law fails to define and ‘protect’ society with respect to the notion of ‘public good’ (Koukidis, 2006). Further shortcomings with respect to its scope refer to the boundaries between PPPs and privatisation (Venieris, 2007).

Organisational structure: stakeholders, roles and responsibilities; level of control Central government has institutionally controlled infrastructure-related public procurement schemes mainly through the Ministry for the Environment, Planning and Public Works (MEPPW – today Ministry for Development, Competitiveness, Infrastructure, Transportation and Networks, or MDCITN). This has often caused coordination problems with other central government institutions involved in policy setting (Dimitrakopoulos, 2001). Ports and maritime transport were addressed by the Ministry of Maritime Affairs (now under the MDCITN). One of the major contributions of Law 3389/2005 has been the establishment of the PPP procedures to be carried out by the Special Secretariat for PPPs. These involve:

• the coordination of PPP projects that are promoted or planned by public

entities and the evaluation of projects that may be implemented via a PPP scheme according to the provisions of Law 3389/2005;

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• the elaboration of information received from professional and business entities

• •

• • •

or associations, including the Greek Banking Association, the Technical Chamber of Greece, the Economic Chamber of Greece, and the Association of Contracting Companies; the study of comprehensive proposals elaborated by public or private entities for the construction of works or the supply of services; the monitoring of all financial obligations undertaken by public entities, and especially of the future burden upon the Public Investment Program that may or will result from the payments to be made to partnerships subject to the provisions of this law; the diffusion of expertise to all relevant stakeholders; the standardisation of documents, which can be used for the needs of the contract award procedures; and the standardisation of all kinds of partnership contracts or ancillary agreements, in order to assist public and private entities in formulating the terms and conditions of their partnership contracts.

In practice, the Special Secretariat for PPPs operates in support of regional and local governments as well as public entities, and reflects on a bottom-up approach in contrast to the top-down approach followed in the case of large-scale PPP projects. According to Law 3389/2005, the Special Secretariat for PPPs is responsible for initial project appraisal and prioritisation of projects. More specifically, the Secretariat evaluates the financial and technical parameters, as well as the associated legal and other issues. It then proceeds to draw up a non-binding list of projects and services (‘List of Proposed Partnerships’) that may be implemented through partnerships and may be included in the provisions of Law 3389/2005. For each project or service included in the List of Proposed Partnerships, a brief report setting out the rationale is prepared. With respect to project appraisal and prioritisation, the Technical Chamber of Greece has expressed severe criticism as the law on PPPs does not effectively protect public interest as there are only minimum provisions with respect to bidders’ qualifications, project performance criteria, and project and infrastructure insurance. For projects approved to be delivered via the PPP model, the Special Secretariat would issue tenders for financial, legal and technical advisors. The National Bank of Greece, Attika bank, the Commercial Bank of Greece, Proton Bank (most Banks now bought by Piraeus Bank), Grant Thornton UK, KPMG, Ernst & Young, PKF LLP and a number of Greek consulting companies (Planet, Kantor, Euroconsultants etc.) were the key financial advisors in consortia that were involved. As legal advisors, a number of Greek legal offices were awarded most of the tenders. Technical advisors awarded tenders were some key Greek Technical Consultants as well as W.S. Atkins International, Lloyd’s Register, Obermeyer Planen & Beraten etc. One of the obligations of the Special Secretariat is to introduce standardisation to both tendering and contractual procedures. The unit was set up after the PPP law was put into force (September 2005), only allowing for a few years of operation

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before eventually the country went into recession. However, a pipeline of potential projects was developed which, regardless of the circumstances, are slowly proceeding. This process will eventually lead to forms of standardisation allowing local and regional authorities to deliver projects through PPPs with lower transaction costs.

Extent of use/adoption of PPP Over the last few decades, a number of successful (and unsuccessful) attempts in terms of private financing for the delivery of public infrastructure and services have been carried out. These have been affected under various legislative settings. Examples include:

• Numerous parking facilities in the greater Athens area, as well as in other

• • • • • •

large cities such as Thessaloniki, Chalkida, Agrinio, Larisa and Ioannina. The MEPPW (or MDCITN) had assigned the procurement responsibility to local authorities and other public entities (e.g. the Port Authority of Piraeus and the Athens Metro). Concessions to exploit coastal areas for industrial use. An example is the transshipment port of Astakos in Western Greece. Rights for the operation of casinos. Concessions for the development, operation and exploitation of marinas. Supply and distribution of natural gas. Development of wind farms, small hydro plants and photovoltaic installations and farms. Exploitation of state-owned hotels and touristic exploitation of coastal zones.

As noted earlier, the most prominent feature of the PPPs in Greece has been the two waves of large-scale transport projects. These were addressed in ad-hoc approach in support of the transport infrastructure development programme. User payment was the dominant repayment scheme. The PPP law aimed at creating a pipeline of smaller scale regional PPPs, which were to be repaid through availability schemes. While there was a set process in terms of the proposal, evaluation and approval of the PPP model of delivery of projects, they still remained largely ad-hoc, as local authorities and public entities were the PPP project proposers depending on their needs and the social acceptance of the scheme on a local level. Hence, between 2006 (just after the respective legislation was put in place) and 2008 (economic crisis) over 50 projects entered the pipeline. These represented various sectors as shown in Table 7.2. In 2009 the reconstruction of fire stations was awarded. The crisis had an impact on the flow of PPP projects. Stemming from the initial procedure, two key programmes are now under way: school buildings and waste management/ treatment facilities. In spring 2014 two projects for 10 and 14 School Buildings in the Greater Athens Area were awarded with a concession period of 27 years. The waste management programme includes 12 projects with tendering procedures under

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Table 7.2 Projects to be delivered through PPP as approved between 2006-2008 N

Sector

Approval Date

Project

Earmarked Budget in million Euro

1

Education – Schools

Sep-06

Construction, renovation and maintenance of 27 new school buildings in Attica

150

2

Education – Schools

Sep-06

Construction and maintenance of 31 new school buildings in the Region of Macedonia

116

3

Education – Schools

Mar-07

Construction and maintenance of 23 new school buildings in the Regions of East Macedonia and Thrace, West Macedonia, Epirus and Ionian islands.

63

4

Education – Schools

Sep-08

Implementation of 26 new school buildings in the Regions of Peloponnese, Northern and Southern Aegean and Crete

94

5

Education – Schools

Sep-08

Implementation of 24 new school buildings in the Regions of Thessalia, Western Greece and Sterea Ellada.

69

6

Education – Buildings

Sep-06

Construction and maintenance of new buildings for the University of the Peloponnese

74

7

Education – Buildings

Sep-08

Implementation of the building infrastructure of International Hellenic University.

8

Education – Buildings

Jan-08

Implementation of students’ residence halls for the University of Peloponnese

61

9

Education – Buildings

Jan-08

Implementation of students’ residence halls for the University of Thrace

74,5

10

Health

Mar-07

Construction and maintenance of the Paediatric Hospital of Thessaloniki

324

11

Health

Mar-07

Construction and maintenance of the new Oncological Hospital of Thessaloniki

330

213

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Table 7.2 continued N

Sector

Approval Date

Project

Earmarked Budget in million Euro

12

Health

Mar-07

Construction and maintenance of the new General Hospital of Preveza

109

13

Public Buildings

Sep-06

Construction of an International Conference Center in the Faliro Pavilion (Tae Kwon Do stadium)

54

14

Public Buildings

Sep-06

Construction and maintenance of 3 new prisons

198

15

Public Buildings

Sep-06

Construction and maintenance of two new Courts of Justice

100

16

Public Buildings

Sep-06

Construction and maintenance of 7 new Fire Stations

31,5

17

Public Buildings

Sep-06

Facility management of 4 buildings of the Hellenic Police

36

18

Public Buildings

Mar-07

Construction and maintenance of a Government House for the Prefecture of Fthiotida

28

19

Public Buildings

Mar-07

Construction and maintenance of a Government House for the Prefecture of Trikala

19

20

Public Buildings

Mar-07

Construction and maintenance of 14 new buildings of the Hellenic Police

151

21

Public Buildings

Mar-07

Construction and maintenance of a Government House for the Prefecture of Achaia

30

22

Public Buildings

Mar-07

Construction and maintenance of a Government House for the Prefecture of Corinth

21

23

Public Buildings

Mar-07

Reconstruction of the Domboli building complex for the accommodation of the services of the Region of Epirus

16

24

Health

Aug-07

Implementation of the Rehabilitation and Recovery Centre of Northern Greece

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113

N

Sector

Approval Date

Project

Earmarked Budget in million Euro

25

Public Buildings

Aug-07

Construction and maintenance of the new buildings of the Ministry of Economy and Finance, of sports infrastructure and animation park of the Chalandri Municipality, and construction of buildings for the accommodation of services of the Chalandri Municipality

212

26

Public Buildings

Aug-07

Construction and maintenance of the Administration Park buildings in the city of Alexandroupolis

22

27

Public Buildings

Jan-08

Implementation of 5 sports centers and 2 swimming centers

55,5

28

Public Buildings

Jan-08

Facility Management of the ‘’Evelpidon’’ military school

46,5

29

Public Buildings

Jan-08

Implementation of residences, nursery schools and sports facilities for the Army and the Air Force

30

Public Buildings

Jan-08

Construction and maintenance of a Government House in the Prefecture of Imathia

24

31

Public Buildings

Sep-08

Implementation of 5 sports centres and 3 swimming centres.

50

32

Public Buildings

Sep-08

Implementation of 11 sport centres and 13 swimming centres.

118

33

Public Buildings

Sep-08

Implementation of a Government House for the Region of Peloponnese in Tripoli.

36

34

Public Buildings

Sep-08

Implementation of new building infrastructure for five (5) Police Divisions and two (2) Police Departments.

54

35

Public Buildings

Sep-08

Implementation of building infrastructure for the Police Headquarters.

94

130

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Table 7.2 continued N

Sector

Approval Date

Project

Earmarked Budget in million Euro

36

Public Buildings

Sep-08

Restoration of the Olympic Shooting Centre in Markopoulo, for the accommodation of Hellenic Police services.

55

37

Public Buildings

Sep-08

Implementation of new building infrastructure and facility management of the already existing infrastructure for the Hellenic Police Academy in Amigdaleza.

91

38

Public Buildings

Sep-08

Implementation of the building infrastructure of the Fire Service Headquarters and the 1st Fire Station.

36

39

Public Buildings

Sep-08

Implementation of new building infrastructure of four (4) Catastrophe Management Units (EMAK) and three (3) Fire Services.

64

40

Public Buildings

Sep-08

Implementation of new building infrastructure for the Training Centre and the Fire Mechanic, Fire Testing and Certification Centre of the Fire Department.

155

41

Public Buildings

Sep-08

Restoration of the Old Grocery Market and implementation of an underground multi-stage Parking Place for the Municipality of Chios.

42

Public Buildings

Sep-08

Utilization of the Municipal estate via the implementation of a Welfare Centre for the Elderly for the Municipality of Mikra.

43

Public Buildings

Sep-08

Implementation of a new Government House for the Prefecture of Chalkidiki in Poligiros.

44

Transport – Security Systems

Aug-07

Installation and operation of security systems in twelve (12) Greek ports

6.5

126

Public Private Partnership in Greece N

Sector

Approval Date

Project

45

Transport – Telematics

Sep-08

Implementation of an Integrated Telematics System for providing information to the users of ETHEL (Thermal Bus Company) and ILPAP (Electric Buses of the Athens and Piraeus Region) and managing their fleet.

46

Transport – Telematics

Sep-08

Implementation of an Integrated Automatic Fare Collection System.

47

Waste Management/ Treatment

Aug-07

Implementation of infrastructure for the Integrated Waste Management System in the Region of Western Macedonia - DIA

48

Waste Management/ Treatment

Jan-08

Implementation of an integrated waste-management system in the Prefecture of Salonica

49

Waste Water Management/ Treatment

Aug-07

Implementation of sewerage networks and sewage treatment unit in the Municipality of Rafina

50

Defence – Telematics

Jan-08

Implementation of a flight simulators centre

51

Defence – Telematics

Jan-08

Installation and operation of security systems in 23 ammunition dumps

115

Earmarked Budget in million Euro

way using competitive dialogue. The first was awarded in spring 2014. The total waste management programme is estimated at 2 billion euros. Key project sponsors competing are Greek Construction Companies such as Terna Energy, Toxotis, METKA, ARCHIRODON, INTRAKAT, AKTOR, Mesogeios-J&P Avax. All projects have a concession period of 25–27 years and are co-financed by the Greek State, the Jessica Programme and loans from the EIB.

Types of PPP Most PPPs in Greece have been co-financed by the Greek State with national and European funds. These have been termed by the World Bank as ‘hybrid PPPs’ (PPIAF, 2006). These hybrids have been a driving force in Europe where support from community funds was available. Greece has also followed the general trend with respect to the type of PPPs adopted. The first were concluded as BOT/BOOT

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Athena Roumboutsos and Nikos Nikolaidis

contracts (Grimsey and Lewis, 2005; Hodge and Greve, 2007). New PPPs are mostly Design-Finance-Build-Operate (DFBO) schemes. These trends are considered to continue in the future.

Future developments The Greek PPP landscape is currently undergoing structural and dynamic changes, mainly through the refinancing of the new concession motorways. New PPP project development and future player participation relies heavily on the economic and contractual outcome of the negotiations between stakeholders in these projects. As of 2014, a PPP deal flow is mainly developing in the waste management sector, wherein several transactions are projected to close during the year. Financing new PPPs in Greece will likely prove an expensive endeavour due to several risk-inducing factors, such as reduced liquidity of Greek banks and high-risk premiums sought by international players that would enter the market, as well as budget cuts attributable to the austerity measures the country was forced to take. It is highly likely that new PPP structures will involve more State funds during the development phase, smaller project scale and more lender/sponsor friendly contractual structures.

Conclusions Greece has a long history of using private financing to accelerate infrastructure development programmes. Driven mainly by financial restrictions, the country began to develop a strategy to utilize private financing along with European Structural Funds in the development of its infrastructure as early as the 1990s. However, this strategy has not been followed with consistency, nor with the desired effectiveness: even though hybrid PPP structures were successfully implemented in the initial stages of this application, PPP activity did not take advantage of this initial momentum until almost a decade later. Laws and legal structures were eventually set in place, but over regulation, centralized decision making and the effects of a crippling financial crisis and subsequent recession have fostered rising transaction costs and opportunism, imposing serious challenges on the country’s successful implementation of its growth strategy. Even though the challenges the country faces will require varying degrees of governance reform over a considerable period of time, it is important to note that the overall policy towards PPPs as an effective and economically viable method of public infrastructure and service delivery remains unchanged.

References COM (2004) 327 final, Green Paper on Public-Private Partnerships and Community Law on Public Contracts and Concessions. Dimitrakopoulos, D. (2001) ‘Learning and steering: changing implementation patterns and the Greek central government’, Journal of European Public Policy, 8(4): 604–22.

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European Investment Bank. (2005) Evaluation of PPP Projects Financed by the EIB, Luxembourg: EIB Publications. European Investment Bank. (2013) The EIB in Greece in 2012, Luxembourg: EIB Publications. Evenett, S. J. and Hoekman, B. M. (2004) International Disciplines on Government Procurement: A Review of Economic Analyses and their Implications. Unpacking Transparency in Government Procurement: CUTS International. Expert Committee on PPPs. (2004) Report: Public-Private Partnerships – Self-FinancedCo-Financed Plans and Concession Contracts, Athens: Ministry of Economy and Financial Affairs, General Secretariat for Investments & Development (in Greek). Greek Ministry of National Economy. (2003) Greece 2010 – Strategic Development Plan for Transport Infrastructure, Athens: Author. Grimsey, D. and Lewis, M. K. (2005) ‘Are Public Private Partnerships value for money? Evaluating alternative approaches and comparing academic and practitioner views’, Accounting Forum, 29(4): 345–78. Hodge, G. A. and Greve, C. (2007) ‘Public-Private Partnerships: An international performance review’, Public Administration Review, 67(3): 545–58. Jordi, P. (2008) Institutional Aspects of Directive 2004/52/EC on the Interoperability of Electronic Road Toll Systems in the Community, Basel: Europainstitut der Universität Basel. Kaiser, B. A. (2007) ‘The Athenian Trierarchy: Mechanism Design for the Private Provision of Public Goods’, The Journal of Economic History, 67(2): 445–80. Kamps, C., Leiner-Killinger, N. and Martin, R. (2009) ‘The cyclical impact of EU cohesion policy in fast growing EU countries’, Intereconomics, 44(1): 23–29. Karaiskou, E. (2007) Public–Private Partnerships: an innovative tool for decentralizing the production of public goods in contemporary Greece. In Papers Presented on the 3RD Hellenic Observatory PhD Symposium. Contemporary Greece: Structures, Context and Challenges (Vol. 14). Koukidis, I. (2006) ‘PPPs in the sector of public good services’, in A. Kaisis (ed.), PPPs, Law 3389/2005 on Public Private Partnerships, Collective Edition of the Center of International and European Financial Law. Athens-Komotini: Sakoulas Publ. (in Greek). Koutsoyiannis, D. and A. N. Angelakis (2007) ‘Agricultural hydraulic works in ancient Greece’, in S. W. Trimble (ed.) Encyclopedia of Water Science, Second Edition, pp. 24–27, CRC Press. McKinsey & Company. (2012) Greece 10 Years Ahead, Athens: McKinsey & Company. Papademos, D.L. (1975) The Hydraulic Works in Ancient Greece, Technical Chamber of Greece, Vol. B., Athens, pp. 444–58, 490–98. PricewaterhouseCoopers. (2005) Delivering the PPP promise: A review of PPP issues and activity, PricewaterhouseCoopers LLP. PPIAF (2006) Hybrid PPPs: Levering EU funds and private capital. World Bank report Psaraftis, N. H. and Pallis, A. A. (2012) ‘Concession of the Piraeus container terminal: turbulent times and the quest for competitiveness’, Maritime Policy & Management: The flagship journal of international shipping and port research, 39(1): 27–43. Roumboutsos A. and Anagnostopoulos, K. (2008) ‘Public Private Partnership projects in Greece: Risk ranking and preferred risk allocation’, Construction Management and Economics, 26(7): 751–63. Tassios, T.P. H diaj_aneia kai oi arwa_ioi (Transparency and the ancients) (in Greek), 5 May 2002. To Vima. Triantafyllopoulos, N. and Alexandropoulou, I. (2010) ‘Land-Based Financing of the EU JESSICA Initiatives’, Discussion Paper Series, 16(8): 183–202. Venieris, I. (2007) PPPs, The Contractual Framework, Law Library (in Greek). Veremis, T. (1992) Oikonomia kai Diktatoria, Athens: Sakoulas Publication.

8

Public Private Partnership in Hong Kong Tsun-ip Patrick Lam and Arshad Ali Javed

Introduction The Hong Kong Special Administrative Region (HK SAR) is a part of China and is located at the south-eastern coast of the mainland. The total land area is 1,100 square kilometres with a population of seven million. The dense population and a business hub entail good infrastructure provisions, which were mostly procured in the traditional manner with public funding. Although taxation (which is relatively low to maintain its competitiveness) forms a sizable part of its public coffers, high land sale revenues shore up the administration’s expenditure such that the public sector budget usually has a positive balance. The private sector involvement (PSI) in infrastructure provision is not forced by funding imperatives, but rather PSI is encouraged by the government to provide sustainable infrastructure and efficient service delivery with a wholelife costing approach. Hong Kong is an open economy with no restriction on foreign participation and allows entirely free currency movement; although the Hong Kong dollar is tied to the US green back under a currency board arrangement (US$1 is approximately equal to HK$7.8). Under the one-country-two-systems philosophy, Hong Kong’s legal system is based on common law, while adhering to the basic law as a constitutional document upon return of sovereignty from Britain to China. The HKSAR government’s total commitments for capital projects were over HK$310 billion at March 2013. The estimated capital expenditure for 2013–14 exceeds HK$70 billion (Hong Kong Government 2013). The overall contribution of construction activities to GDP at constant prices was 3.4 per cent in 2011 (Construction Industry Council 2013), having declined from around 5 per cent in the 1980s and 1990s. After the regional and global economic crises, the HKSAR government was determined to revitalise the economy by promoting infrastructure development as reflected in the then Chief Executive’s 2007–08 Policy Address. Ten largescale infrastructure projects are being carried out to consolidate Hong Kong’s status as a global city and to lay a new foundation of sustained development in the future.

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Origin and drivers In Hong Kong, a drive for achieving value for money and efficiency as well as sharing of risk and responsibilities have led to private sector involvement in the procurement of public works. Various forms of PPPs have been implemented since the 1970s, when its first Cross Harbour Tunnel, constructed on a Build-OperateTransfer (BOT) basis, was opened for operation. Since then, a number of transportrelated projects including Eastern Harbour Crossing, Tate’s Cairn Tunnel, Western Harbour Crossing and Route 3 Country Park Section were procured using the BOT model to relieve road congestion and to enhance business activities. To cope with population and urban growth, solid waste management facilities were procured using the design, build, operate (DBO) model, whereas the AsiaWorld-Expo and Hong Kong Disneyland were based on a more generic PPP approach. The latter is a strategic investment by the HKSAR government to boost its tourism industry. Of the ten major infrastructure projects, several were initially earmarked for procurement by PPP, including the West Kowloon Cultural District, Hong Kong–Zhuhai–Macao Bridge (HZMB), High Speed Rail and Cruise Terminal. However, due to various reasons that emerged subsequently (including political controversies of passing benefits to the private consortia, delay due to petitions against environmental impacts, etc.), these projects are now being funded directly by the government, at least as far as the design and construction are concerned. Upon completion, some of these projects may be operated by the private sector. Commercially speaking, the most successful PPPs in Hong Kong are land-oriented. Private developers are eager to participate whenever valuable land (due to scarcity) is made part of the parcel for development or redevelopment. For example, the remodelling of Marine Police Headquarters at the heart of Tsim Sha Tsui (a tourist and business area) represents a successful case of PSI, when a land grant bundled with conservation requirements was offered for bidding. Apart from Hong Kong itself, Hong Kong businessmen also spearheaded into southern China with capital and expertise in the construction of power plants, such as the Shajiao B and Shajiao C power stations, on a BOT basis.

Policy framework for PPP At the height of considering PPP as a possible mode of utilising private sector resources, the HKSAR government’s Efficiency Unit (EU) issued a series of guidance documents under the PSI programme, including Serving the Community by Using the Private Sector – Policy and Practice (Efficiency Unit 2007); Serving the Community by Using the Private Sector: A General Guide to Outsourcing (Efficiency Unit 2008a); Serving the Community by Using the Private Sector: An Introductory Guide to Public Private Partnerships (PPPs) (Efficiency Unit 2008b). These publications, built upon the broader principles contained in the PSI programme, were drawn up after studying overseas PPP examples and are still useful references

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when further PPP projects are contemplated. In the latter guide, the government describes the major benefits of PPPs as follows (Efficiency Unit 2008b, p. 5):

• Increase the provision of better public services by enhancing the quality and • • • • •

quantity of investment in facilities and services. Provide better value-for-money for taxpayers and the community. Enhance efficiencies and develop innovative approaches in the provision of public services. Create investment in high quality facilities which reduce long-term maintenance and operating costs. Manage and lower public cost of risks associated with long-term and complicated projects. Enable stakeholders such as taxpayers, users and employees to enjoy a fair share of the benefits of PPP projects.

Development proposals, including alternative procurement options, are usually generated by the works departments under the Development Bureau. The Bureau is responsible for making policy decisions based on aims and objectives of the projects, resource availability, programme, etc., while gauging private sector interest, and increasingly, factoring in political considerations.

Financial context for PPP The financing community has been instrumental in enabling private sector participation in infrastructure development. Banks in Hong Kong are generally international in ownership and operation. Of the 200 (approx.) authorised financial institutions in operation, over half have foreign capital involvement. Major banks, including those from the mainland, are active in syndicate loans and other project finance activities throughout the region. Limited recourse loans with tenure of 15–20 years for projects are common, with guarantees given by strong corporate backing. Although Hong Kong has an efficient clearing and settlement system for bonds due to government promotion, the trading volume is not as active as shares due to a lack of investors’ appetite. Even when bonds are used for raising funds used in construction (more for real estate activities than infrastructure), they are issued under corporate names with strong asset backing, rather than relying on project incomes. Banks are overseen by the Hong Kong Monetary Authority, which acts in a supervisory role rather than as a central bank. The Basel III Accord is being implemented from January 2013 on a gradual basis, with Capital Adequacy and stringent Liquidity Coverage ratios being stipulated for banks’ active risk and cash flow management. With these prudent measures in mind, banks are very keen to participate in open syndication calls from top-tier developers or they join club deals on a smaller circle basis. During financial crises, lending margins over the Hong Kong Interbank Offer rate or London Interbank Offer rate may shoot high, but underwriting and subscription were more often successful than not.

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Institutional framework The Hong Kong SAR Government is making sure that a transparent and competitive bidding process is followed for PPP projects. The Efficiency Unit is committed to protect the confidential information and intellectual property of private sector bidders. Recently, for major PPP candidate projects, media attention has intensified the public consultation process and the Legislative Council (LegCo) has started to play a key role as well. The LegCo scrutinises and considers the proposals, reflects public views and endorses the Administration’s plans for implementation or otherwise. The LegCo also vets and approves funding proposals in accordance with the provision of the Public Finance Ordinance (Cap 2) and considers legislative proposals including subsidiary legislation (Efficiency Unit 2008b) if needed. In previous BOT-type tunnel projects, since concessions were given to the private sector for operating transport facilities and collecting tolls, specific ordinances had to be enacted (e.g. the Eastern Harbour Crossing Ordinance – Cap 215; Western Harbour Crossing Ordinance- Cap 436, etc.). Other PPP projects adopted a more commercial approach, e.g., the Walt Disney Company and the Government of Hong Kong jointly owned the Hong Kong International Theme Parks Ltd. for investment in the Hong Kong Disneyland Resort. For projects involving the grant of land leases with building opportunities, developers bid with premium offers in return for occupation, building and operation rights for a number of years. The leases may be renewable upon expiry with a premium adjustment. For other projects, the government usually proposes the payment mechanisms, although the bidders are given an opportunity to comment on them. Payment by the government normally consists of a single lump sum amount, or ‘unitary charges’ (e.g. monthly or annual payments), which are linked to the achieved performance standards as well as to the availability of the facilities. These payments may comprise one or more of the following components (Efficiency Unit 2008b, p. 54):

• Amortised capital cost: The client department will not pay anything to the •

• •

consortium until the construction work is completed and the service delivery commences. Service delivery: The contract will specify that the consortium will deliver a range of services and these will be measured using an agreed set of criteria called ‘Key Performance Indicators’ (KPIs), such as opening hours, standard of cleanliness, lighting levels, customer service standards, and employment of appropriate qualified staff. Headcount/shadow toll/throughput: The monthly unitary payment could reflect the number of users of a facility, e.g. the number of swimmers using a swimming pool, or the number of vehicles using a bridge/tunnel. Revenues received from users: The consortium could be paid fees collected directly from users.

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PPP contracts nowadays mostly give the client departments a right to abate, defer, or withhold a specified amount of payment if the contractor fails to perform as required. The payment mechanism works as a powerful incentive and if the contractor would perform better, the chances of re-commissioning might be higher. Usually, KPIs are being used for performance monitoring purpose. Since the common law system applies in Hong Kong, litigation may be dealt with in accordance with precedent cases or relevant statutes, such as the Company Ordinance. Domestic arbitration as well as international arbitration statutes are also in place, with mediation being on the rise as an alternative dispute resolution mechanism. Arbitration was invoked for some BOT projects (such as Eastern Harbour Crossing and the Tate Cairn Tunnel) which sought toll increases that were blocked by legislators. More recent projects (such as the Western Harbour Crossing) have had toll or charge adjustment mechanisms built into their contracts. Audited revenues will be compared with projected revenues regularly, with surplus, if any, going to a Toll Stabilisation Fund. A proposed toll increase would only be considered when this Fund is exhausted in meeting the increased costs.

Organisational structure For each BOT-type tunnel project, the project promoter organises a consortium with equity contributions from shareholders (which may include the government taking up minor share portions), syndicated loans from lenders and construction services from a construction group, normally under a Design and Build arrangement. Several consortia are invited to tender with technical and financial proposals. Upon award of a successful tender, the consortium becomes the concessionaire, which exists in the form of a Special Purpose Vehicle company. The government’s main roles are to monitor quality of design and construction through independent checking engineers and the operational aspects upon completion. An operator is usually part of the consortium or is awarded a contract by the concessionaire for maintenance and operation services. Since the right for direct toll collection was given to the concessionaire, the demand risk rests entirely on the private sector. One interesting aspect about stakeholders in the recent BOT tunnel projects in Hong Kong is that since these concessions straddled 1997 (the year of handover of sovereignty from Britain to China), equity holders include Chinese corporations among local and overseas interests. In other more generic PPP projects, the government invests principally as a joint venture partner, with either the Efficiency Unit acting as a facilitator, or as in the case of AsiaWorld Expo, spearheaded by ‘Invest Hong Kong’, a government department responsible for attracting foreign direct investment into Hong Kong.

Extent of use of PPP adoption To illustrate the nature and extent of PPP adoption in Hong Kong, some of the more recent PPP projects are briefly introduced below.

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Hong Kong’s Asia World-Expo is an international world-class state-of-the-art exhibition centre for hosting meetings, exhibitions, conventions, sports and entertainment events. It is a PPP project offering over 70,000 square metres of rentable space which was built with a budget of HK$2.35 billion with a concession period of 25 years. Since its opening in December 2005, the venue has hosted world-class exhibitions and conferences. The AsiaWorld Expo is a successful PPP project between the Hong Kong SAR Government (majority shareholders) and a private sector consortium formed by Dragages Hong Kong Limited and the Industrial and Commercial Bank of China (Asia) Limited, with the Hong Kong Airport Authority contributing the land. The Hong Kong Government contributed a substantial amount of equity for the construction of the AsiaWorld Expo to make it financially viable and also mobilised private sector finance (LegCo 2008). Being a PPP project, the output specifications of the AsiaWorld Expo demonstrate its sensible emphasis on functionality and versatility rather than sheer scale and elegance. The strategy adopted to cater for future changes lies in the reservation of a piece of land nearby for building another 30,000 square metres when the demand reaches a certain level (Javed 2013). The Kai Tak Cruise Terminal is part of the Kai Tak Development (KTD) after the previous international airport was moved to Lantau Island in 1997. This is one of the ten large infrastructure projects currently in progress in Hong Kong. The Hong Kong SAR Government is planning to develop Hong Kong as a leading cruise hub in the Asia-Pacific region through a modern cruise terminal to fulfil the growing market needs. The project is to build two alongside cruise berths to accommodate various types of cruise vessels including the largest cruise vessels of the world with a gross tonnage weighing up to 220,000 tons. The project’s total estimated development cost is HK$2.3 billion excluding commercial area. Initially it was proposed to be developed using a PPP approach but only a few private sector bidders responded to the Expression of Interest (EOI) and therefore the Hong Kong Government itself funded the new cruise terminal construction and called for ‘design and build’ prequalification and then tenders. Eventually the contract was awarded to Dragages Hong Kong Limited for building the cruise terminal complex. Near completion, the terminal was leased to a cruise terminal operator for operation and maintenance. Hence, private sector finance was not used in construction. During off-peak season, the Cruise Terminal building and operational area may be used for other purposes such as seminars, exhibitions and conventions with prior written approval of the Hong Kong Government (Tourism Commission 2009). Another upcoming development at Kai Tak poised for PPP is a multi-purpose sports complex (MPSC). Major facilities proposed for the HK$40 billion project (HK$23 billion for construction and HK$17 billion lifecycle costs for a 30-year concession period) include a 50,000 seat stadium, a 5,000 seat public sports ground, a 4,000 seat indoor centre, office space of at least 10,000 square metres, commercial space of at least 31,500 square metres, and public recreational facilities in a park setting (PriceWaterhouseCoopers 2012; Lee 2014). Whether or not this project will attract strong private sector interest still waits to be seen.

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The Disneyland Theme Park on Lantau Island in Hong Kong is managed and owned by the Hong Kong International Theme Parks Limited, a joint-venture company between the Hong Kong Government (holds 52 per cent of shares) and the Walt Disney Company (holds 48 per cent of shares). It was opened on 12 September 2005. The Hong Kong Government believes that this is a strategic piece of tourism infrastructure and it has attracted a large number of visitors from the mainland. It is well connected by public transport, with hotel accommodation and catering facilities being operated by the private sector. The Mass Transit Railway Corporation Limited (MTRCL) is a mostly governmentowned (76 per cent) and publicly listed (24 per cent of shares floated in the market) corporation established in 1975. The MTRCL is responsible for the funding arrangement, design, construction, operation and maintenance of the Hong Kong mass transport system. Apart from its core transport business, the MTRCL has been very active in developing properties near to railway stations using a Rail-plusProperty development model, since it is allowed both above-and-below-ground development rights. Under this successful model, the MTRCL pays a market premium (on a green field basis) for the sites. It can either develop properties on its own on top of the stations or more often form joint ventures with developers, with the latter sharing the development costs and profits with the MTRCL. Part of the proceeds from property development is used for railway construction, since pre-sale of properties along railway routes are usually oversubscribed. As far as mass transit is concerned in Hong Kong, MTRCL is a monopoly serving a population of 7 million. The 5.7 km-long Tung Chung Cable Car spanning over several scenic spots on Lantau Island is another concession for design, construction, operation and maintenance awarded to the MTRCL. The operation was out-sourced to another private company for some time until frequent stoppages and a non-fatal accident occurred in 2007. A MTRCL-owned subsidiary then took over the operational tasks. The Hong Kong–Zhuhai–Macao Bridge (HZMB) is a 29.6 km dual three-lane carriageway in the form of bridge cum tunnel linking the Hong Kong SAR, Zhuhai City of Guangdong Province and Macao SAR. The total estimated cost of the Main Bridge is about US$10.7 billion. The Hong Kong SAR government will contribute RMB6.75 billion, mainland China RMB7 billion and Macao SAR RMB1.98 billion, with the Bank of China leading a syndicate of banks providing the rest in the form of loans. All three governments will be responsible for the construction, operation and maintenance of the link roads and border crossing facilities (BCFs) within their respective territories. Initially, the HZMB Bridge was planned to be tendered under a Build, Operate and Transfer (BOT) franchise. However, now it is built using a traditional design and build procurement approach to avoid possible delay and controversies. In the past four decades, numerous new social and economic infrastructure projects have been developed through various forms of PPPs in Hong Kong. More recently, the Hong Kong SAR Government is revitalising old historic buildings under the ‘Revitalising Historic Buildings through Partnership Scheme’ and a number of projects have been awarded to the private sector for revitalising and conservation purposes. Table 8.1 shows some operational PPP/BOT type projects carried out in Hong Kong.

1972

1975

1989

1991

1997

1998

MTRCL

Eastern Harbour Crossing

Tate’s Cairn Tunnel

Western Harbour Tunnel

Route 3 – Country Park section

Status (opening year)

Cross-Harbour Tunnel

Transport Projects

Project name

US$936m (HK$7250m)

US$969 (HK$7500m)

US$277m (HK$2150m)

US$564m (HK$4400m)

Net asset value at US$18bn (HK$144bn)

US$56m (HK$320m)

Approx. Cost

10.1 km road link incl. 3.8km tunnel

2 km immersed tube road tunnel

4 km road tunnel, links New Territories to Kowloon

2 km immersed tubes for road and rail linking Kowloon and Hong Kong Island

Underground train system, surface trains to border, airport railway, light rail transits and cable car

1.9 km immersed tubes for road transport

Project Nature

Table 8.1 PPP/BOT Projects in Hong Kong SAR (all BOTs are 30-year concessions unless otherwise shown)

BOT concession

BOT contract, Traffic 60,452vpd (as of 2012)

BOT contract, Traffic 74,000vpd

BOT contract Traffic 70,720vpd (as of 2012)

Government acting as major shareholder with partial divestiture to the public

BOT- government has 25% stake. Cross Harbour Tunnel Co. Traffic; concession expired.Traffic at 120,000vpd* Currently, a private company is operating the tunnel under management, operation and maintenance (MOM) contract.

Transaction Type

1999

Tuen Mun Trade Terminal

2005

2005

2006

2009

Asia-World Expo

Hong Kong Disneyland Theme Park

Ngong Ping 360 (Tung Chung Cable Car)

North Kowloon Magistracy

Marine Police Headquarters

2003

Heritage conservation projects

2000

Cyberport

Social infrastructure projects

Status (opening year)

Project name

Table 8.1 continued

Land premium at US$ 46m (HK$353m at tender) + retrofitting cost

US$12.9m (HK$100m)

US$129m (HK$1bn)

US$1.8bn (HK$14.1bn)

US$516m (HK$4bn)

US$2bn (HK$15.8bn)

US$258m (HK$2bn)

Approx. Cost

Heritage conservation project; now converted into a shopping mall with a preserved watch tower and buildings

Heritage conservation building

5.7km cable car project

Tourism project

Exhibition/convention centre

24 hectares of land used for offices & residential development

Trade cargo shipment terminal built on 65-hectare site

Project Nature

A 50-year land grant with conservation requirements of 120-year old buildings

Conversion of an unused court building into an art and design college

DBOM, 30-year concession

PPP, 40 year- concession period; publicprivate joint venture

PPP, 25-year concession period

Information technology flagship project on leasehold land

Joint venture between 2 private groups on gov’t allocated land

Transaction Type

*vpd=vehicle per day

Southeast New Territories (SENT), Northeast New Territories (NENT), West New Territories (WENT)

Landfill projects

Central Police Station (CPS) Revitalisation Project

1993

2010

US$774m (HK$6bn)

US$232m (HK$1.8bn)

270 hectares of land with refuse transfer stations for waste collection, transference and disposal at landfills

CPS Compound and adjacent Old Bailey Wing and Arbuthnot Wing to house gallery spaces and will be used as a multi-purpose venue

DBO, 15-year contract

Conserve and revitalise the building into a heritage, arts, cultural, and tourism hub

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Apart from physical infrastructure, PPP has been more recently adopted in the health sector. Because of a shortage of public sector health treatment facilities to cater for the increasingly aging population and to reduce the huge burden on public sector hospitals, the general public can now have a choice to use private sector health facilities and pay a subsidised health treatment fee. The Hong Kong Hospital Authority has initiated several PPP programmes such as the Cataract Surgeries Programme (CSP), the General Out-patient Clinic Public Private Partnership Programme (GOPC PPP), the Shared Care Programme (SCP), the Haemodialysis Public Private Partnership Programme (HD PPP), the Auto-Reply Project & Provision of Radiological Imaging Service and a Pilot Project on Enhancing Radiological Investigation Services through collaboration with private sector healthcare providers.

Types of PPP in Hong Kong The Hong Kong Government not only involved the private sector in BOT projects (which are concession-based) but also in management contracts for publicly funded tunnels and in a maintenance/management contract for the Tsing Ma Control Area (a government-built suspension bridge leading to the new Chek Lap Kok International Airport). The MTRCL is categorised as a partial divestiture because the Government owns the stake of the mass transit monopoly as a major shareholder, with partial distribution of ownership to the general public through share floatation. PPP infrastructure facilities can generally be divided into two major categories (Yescombe 2007): 1

2

Economic infrastructure: facilities for which users are directly charged by the concessionaires who build and fund them, including toll roads, railways, power stations, water and sewage treatment plants, telecommunications, etc. Social infrastructure: facilities built by concessionaires, to whom a government reimburse on an availability basis, including schools, hospitals, prisons, justice facilities, police stations, etc.

In economic infrastructure PPP projects, the concessionaire may be responsible for the design, construction, operation and maintenance of the facilities for the whole concession period. On the other hand, in social PPP infrastructure projects, the concessionaire may be responsible for the design, construction and commissioning of the facilities and the government provides ‘core services’ associated with the operation of facilities, such as the clinical services at a hospital, the teaching services at a school. The concessionaire provides ‘non-core services’ including hard and soft facilities management services. In Hong Kong, there have not been privately built prisons, police/fire stations or judicial facilities to-date. However, there are schools and hospitals built and operated by the private sector, including religious organisations. Some are for profit purposes and others are for charity or social missions.

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Changes in PPP usage and extent over time With a drive for wealth creation and social stability, Hong Kong businesses are in general adaptive to evolving political and social events. Like other major cities, the polarity between the rich and the poor is intensifying. Hence, the government is quite sensitive to allegations made in the media and the grass-root community regarding excessive profiteering and a careful balance needs to be maintained when dealing with the private sector. When affordability for essential commodities and services, such as housing and medical care, is hampered by rising prices, there are calls for the government to intervene; although laissez-faire has been the long standing economic policy. During the Asian Financial Crisis, for example, the government took the unusual action to intervene in the stock market and the monetary market to stabilise the financial system, but did so still largely through commercial operations. After that, market forces resumed as the government stepped out in vigilance. Since the Cross Harbour Tunnel was opened in 1972, the Hong Kong government has built other BOT toll roads and tunnels through an evolving BOT process. In Hong Kong, transport facilities are the prime users of PPP, such as tunnels, roads and the subway system. For tunnels, they all have definite concession periods, at the expiry of which the facilities would revert to government ownership. Several existing tunnels built by the government were also outsourced to the private sector for maintenance and operation under a term contract structure. For those investment vehicles owned by the government in joint venture with the private sector, such as in the case of Hong Kong Disneyland and Asia-World Expo, they are of a long-term basis. For projects involving the private sector on a land lease basis, the tenures are stated on their contracts with the government, beyond which renewals will be dependent on land premium adjustment negotiations. As it stands now, recent major infrastructure projects are being funded by the government for a variety of reasons, including the desired speed of implementation, which would otherwise be hampered by protracted political debates and lobbying. This is especially significant for projects entailing transfer of interest on land, which is getting scarce in Hong Kong. Conservation projects, which need innovative inputs for revival and cultural heritage, are active on the government’s agenda for inviting private sector participation. Even in this sector, the government has to maintain a very careful balance between alleged commercialism and societal equity in the interplay between cash-rich corporations and non-governmental organisations relying on donations and members’ contributions.

Future developments As Hong Kong is increasingly interacting with the mainland and the extra housing needs have been the recent focus of the society, transport and other types of infrastructure related to the provision of housing, such as power and drainage, are in great demand. Environmental improvement works and cultural heritage

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projects are also on the rise. While predominantly public sector works, the government may call for more private sector participation given the right ingredients, such as transparency and public consultation/engagement and the availability of proven private sector expertise. Being an international city, many foreign investors have a business presence and they can respond to calls for Expression of Interest at par with the locals. Possible opportunities exist, for example, in the Harbour Front utilisation and vitalisation, for which Hong Kong is actively learning from good overseas examples. Energy efficiency is another area for which more advanced technology may be deployed to a commercial scale if circumstances permit. District cooling and renewable energy are desirable but their scope may be limited by the congested cityscape. Hence, cavern and underground developments are being mooted.

PPP research and development agenda For PPP to continue contributing to the local community, the bidding mechanism needs to be fine-tuned to allow a wider participation than the top-tier businesses alone. One problem is the creditability of lower tier corporations and social enterprises that affects their financeability. Other issues, such as performance monitoring, also need addressing in order to ensure real gains in efficiency and value-for-money. The overt use of a public sector comparator is not mandatory and often output-based specifications are laden with prescriptive elements. Transfer of knowledge from the private sector is not well structured, compared with Western countries. It often takes a lot of social skill and personal rapport when research efforts are made to collect data and conduct case studies on what are usually regarded as commercially sensitive PPP ventures. While there has been some research on risk ranking, the risk mitigation measures for PPP have yet to be fully explored in terms of the additional cost which the public sector (including users) has to pay for those measures to be put in place. This is an area which collaborative studies with overseas establishments may shed light on Hong Kong and help stakeholders to make the right decision on choosing PPP as a procurement option. The way forward To date, the use of PPP has been instrumental in building much needed infrastructure in a shorter span of time than would have been possible with public funding alone. In parallel with the maturation of this procurement approach, the governance of these projects needs to be carefully reflected upon by governments. On one hand, sufficient incentives need to be given to attract private investment. On the other hand, a situation where windfall profits are transferred to the private sector is to be avoided. Value for money should be ensured, both in terms of financial and quality considerations. In the long run, changes will be inevitable due to economic, social and technological developments. It is imperative that the international research community comes up with improved ways for managing those changes. Finally, in expectation of the return of the facilities to governments at the expiry of PPP

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concession periods, an improved approach for specifying the desirable state of conditions needs to be developed in order that sustainability is achievable.

Conclusions As long as Hong Kong remains a vibrant economy, there will be demands for infrastructure. More recently, with the focus on housing, environmental protection and to some extent, conservation, the scope for private sector participation has become large. Yet, a way has to be found in reducing the transaction cost of doing so and balancing the concentration of market power with concerns for public interest and the expectation for good governance. The adaptability in structuring different types of PPP projects in Hong Kong is quite unique. Unlike the early days of BOT transport projects in the 1980s for which the private sector took the lead, the government has adopted a more participative approach in acting as shareholder or facilitator in the initial start-up, built the facilities and then outsourced long-term operation. Apart from the risk mitigation measures mentioned above which need more in-depth study, a better understanding of user perceptions on the transition between different levels of private sector involvement will enhance the Administration’s decision to find a suitable way forward.

References Construction Industry Council (2013), Hong Kong Construction Industry Performance Report for 2011, Construction Industry Council, Hong Kong. Efficiency Unit (2007), Serving the Community by Using the Private Sector: Policy and Practice – Second Edition, Efficiency Unit, Hong Kong Special Administrative Region Government. Efficiency Unit (2008a), Serving the Community by Using the Private Sector, A General Guide to Outsourcing – Third Edition, Efficiency Unit, Hong Kong Special Administrative Region Government. Efficiency Unit (2008b), Serving the Community by Using the Private Sector: An Introductory Guide to Public Private Partnerships (PPPs) – Second Edition, Efficiency Unit, Hong Kong Special Administrative Region Government. Hong Kong Government (2013), The 2013-2014 Budget, Available at: www.budget.gov. hk/2013/eng/budget16.html (accessed 22 December 2013). Javed, A.A. (2013), A Model of Output Specifications for Public-Private Partnership projects, PhD thesis, The Hong Kong Polytechnic University, Hong Kong SAR, China. Lee, A. (2014), HK$40 billion plan to build Hong Kong’s biggest sports complex, South China Morning Post Publishers Ltd, Hong Kong, Available at: www.scmp.com/news/hong-kong/article/1426670/ hk40-billion-plan-build-hong-kongs-biggest-sports-complex (accessed 13 February 2014). LegCo (2008), Report on the Study of the Development of Convention and Exhibition Facilities in Hong Kong, Legislative Council, Hong Kong. PriceWaterhouseCoopers (2012), Procurement and Financing Options for the Multi-purpose Sports Complex at Kai Tak, Home Affairs Bureau, Hong Kong. Tourism Commission (2009), Kai Tak New Cruise Terminal Proposed Leasing Arrangements, Commerce and Economic Development Bureau, Hong Kong. Yescombe, E.R. (2007), Public-Private Partnerships: Principles of policy and finance, Butterworth-Heinemann, Oxford, UK.

9

Public Private Partnership infrastructure development in India Boeing Laishram and Ganesh A. Devkar

Introduction India is a sovereign, secular, democratic republic with a parliamentary system of government. The Union of India comprises of 29 states and seven union territories with the Central Government operating within the Indian Constitution. The political structure laid down by the Indian Constitution is federal in nature with three tiers of governments at central, state and local government levels. In each tier of government, the responsibilities for making laws, implementing laws, and interpreting laws are delegated to legislature, executive and judiciary, respectively. Across the different levels of government, the legislative powers of the central and state governments are divided into three lists, i.e. union lists, state lists and concurrent lists. At the central government level, the Indian Parliament is competent to make laws on matters enumerated in the union list. State legislatures are competent to make laws on matters enumerated in the state list, while both the Central Government and the state governments have power to legislate on matters enumerated in the concurrent list only. Parliament has power to make laws on matters not included in any list. The key areas that have been included in the union list are major ports, airports, railways, national highways, inland water transport, power generation and interstate transmission, telecommunications, oilfields and mineral resources. The key areas that have been included in the state list are police services, prisons and corrective facilities, regulation of local governments, public health and sanitation, state highways, minor ports, power generation, intra-state transmission and distribution, city roads, water supply and irrigation. The definition of infrastructure includes most of the areas under both union and state lists. As per the Committee on Infrastructure, the term infrastructure is considered to comprise sectors such as electricity (including generation, transmission and distribution); water supply and sanitation; transportation sectors (including roads, bridges, ports, inland waterways, railways, and airports); telecommunications; irrigation; storage; and oil and gas pipeline networks. There is sectoral legislation at the national level in certain areas covered in the union list, such as airports, national highways, major ports, and power which provide the legal and organizational framework for procurement of infrastructure projects through public procurement route. The public procurement system operates through

Public Private Partnership infrastructure in India 133 Article 53 of the Indian Constitution and Central Government (Transaction of Business) route. The detailed guidelines on public procurement are governed by General Financial Rules (GFR) and Delegation of Financial Power Rules (DFPR). Since GFR and DFPR are generic and meant for all the departments, the various ministries of the Central Government have developed their procurement procedures and guidelines drawing heavily upon the guidelines contained in the GFR and DFPR. Most of the time, the public procurement is done by the concerned ministries dealing with infrastructure procurement through competitive bidding or tendering process with the intention to achieve maximum efficiency. The existence of different procurement guidelines and procedures is a major source of confusion among the public procurement officials. In order to bring transparency in public procurement of goods and services (including infrastructure projects), the Central Government passed Central Public Procurement Bill, 2012 to plug the inconsistencies in public procurement arising due to multiplicity of guidelines. Along similar lines, some of the state governments have set up centralised public procurement system to enable the procurement of goods, services, and works by the various departments of the state government, and state public sector enterprises.

Origin and drivers The Central Government has initiated economic reforms in the ’90s to put the country on a high-growth trajectory. The lack of world-class infrastructure and a huge demand-supply gap in the provision of infrastructure services were prominent factors inhibiting achievement of desired economic growth rates. The power sector, for instance, was experiencing 11 per cent peaking deficit, 7 per cent energy shortage, and 40 per cent transmission and distribution losses. With respect to highways, 65 per cent of freight in terms of ton-km and 85 per cent of passenger traffic in terms of passenger-km were carried by the Indian road network. The length of the road network with proper surface had increased from 0.156 million km to 1.517 million km during the period 1950–51 to 1995–96. The corresponding increase in passenger buses during the same period was 13-fold while the goods vehicle-fleet was 22-fold. Besides, significant portion of the road length being single lane pavement, the road network had problems of inadequate road pavement, breadth and thickness and presence of old, weak and narrow bridges and culverts. Similarly, the ports and airports have also been suffering from severe capacity constraints. Rail and road connectivity, and draft of most of the Indian ports were not adequate while the runways, aircraft handling capacity, parking space and terminal buildings were inadequate to meet the rising demand for air traffic. With the aim at reducing the infrastructure deficit, governments have initiated reforms to develop infrastructure. After the initiation of economic reforms, the Central Government has set up an Expert Group on Infrastructure to estimate the investment requirement for infrastructure development. The Group estimated the need to increase the investment in infrastructure from 5.5 per cent of GDP in 1995–96 to 8.5 per cent of GDP in 2005–06. In order to achieve a growth rate of 9 per cent of

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GDP, the committee has estimated the investment requirements for the eleventh Five Year Plan (2007–2012) to be US$ 320 billion, which was later revised to US$ 515 billion. The physical target to be achieved during the plan period has been fixed accordingly for various infrastructure sectors. In highways sector, the physical target for the eleventh Five Year Plan has been development of 6,500 km of six-lane highways in the Golden Quadrilateral (highway network connecting the four metros in India: New Delhi, Kolkata, Chennai and Mumbai) and 6,736 km in North South– East West corridors, four lanes of 12,109 km and 1000 km of expressway. Capacity additions of 485 million MT in major ports and 345 million MT in minor ports, and modernization of four metro and 35 non-metro airports, three green-field airports in North-East India and seven other green-field airports have been envisaged. The physical target for power includes a capacity addition of 78,000 MW and provides access to all rural households. In order to bridge the infrastructure deficit and achieve planned physical targets, the government has estimated that at least 30 per cent of the investment should come from the private sector and suggested adopting a strategy to encourage private participation through various forms of PPP wherever desirable and feasible. The governments have adopted the PPP route as they do not have the financial resources to create capacities in so diverse fields as infrastructure, healthcare, education, and tourism. If they were to mobilize resources through borrowing from multilaterals and bilateral agencies or float government bonds, public borrowing would shoot up sharply resulting in many undesirable consequences for the economy. Another reason why the governments have adopted the strategy for developing infrastructure projects through a PPP route was that the implementing agencies lack managerial and technical resources to build the facilities in an efficient manner. The traditional public procurement process has serious weakness in planning and implementation of projects leading to time and cost overrun. For instance, during the period 1993–94, 60 per cent of central government infrastructure projects were running behind schedule while 57 per cent of the projects were experiencing cost overrun. On the other hand, the overall cost overrun in Central Sector projects costing INR 150 crore (US$ 241.94 million – 1 US$ = INR 62 as on 17 February 2014 and 1 crore = 10 million) and above has reduced to 19.2 per cent in September 2013. Similarly, the percentage of delayed projects also went down to 40.79 per cent during September 2013.

Policy framework for PPP There are various entities involved in the policymaking for PPPs in infrastructure sectors, which comes under the purview of the Central Government. The Planning Commission plays an integrative role in the development of five-year plans, for building a long-term strategic vision of the future and deciding the country’s priorities. It involves the review of experiences from the previous five-year plans with respect to the private sector funding for infrastructure development. Based on these experiences and strategic vision for the current five-year plan, the projections for the private sector funding in the infrastructure sector are developed.

Public Private Partnership infrastructure in India 135 These projections set in motion the broader outlook on private sector involvement in the Indian infrastructure sector. Further, the Secretariat for PPP and Infrastructure (SPI) at the Planning Commission is involved in the development of PPP policies, to ensure infrastructure development targets in different sectors are met. The Cabinet Committee on Infrastructure (CCI) is an institution created for approval and review of policies related to infrastructure sector, and monitor implementation of infrastructure programmes. Due to massive demand of infrastructure in India, the PPP model is a priority policy agenda for this committee. In India, there are different ministries at the Central Government level with the mandate of a specific infrastructure sector. The ministries and related infrastructure sector are as follows: 1 2 3 4 5 6 7

Ministry of Road Transport and Highways: National Highways Ministry of Shipping: Major Ports Ministry of Civil Aviation: Airports Ministry of Urban Development: Urban Infrastructure Ministry of Power: Electricity – Generation, Transmission and Distribution Ministry of Railways: Rail and Metro Ministry of Telecommunications and Information Technology: Telecom

These ministries are involved in the formulation of policies on PPPs in respective infrastructure sectors. The Planning Commission and CCI wield considerable influence on the policy formulation and approval process of these ministries. The Department of Economic Affairs (DEA) at the Ministry of Finance has an Infrastructure and Energy Division, which looks into policy matters related to infrastructure sectors referred by concerned ministries. This division houses a PPP Cell, which is involved in policy, schemes, programmes and capacity building for mainstreaming of PPPs. The influence of different entities, namely Planning Commission, CCI, Central Ministries and Department of Economic Affairs, on the PPP policy formulation and execution process, in many stances, creates policy logjams and administrative hurdles for PPP projects. The PPP policy formulation, coordination and implementation at state government level showcase divergent approaches. In some states, the government departments responsible for infrastructure such as state roads, minor ports, and power takes lead in the formulation of PPP polices related to respective infrastructure sector. The policies come into force after due approval from the state government. However, the PPP policy formulation and adoption at local government level is a complex endeavour. The decision on PPP in urban infrastructure sectors, coming under the purview of local governments as per state municipal legislation, requires approval from municipal council, while the policy decisions of parastatal agencies, established by state governments, pertaining to PPPs are outside the ambit of local governments. The intuitional and policy complexity at the local government level poses a major challenge in mainstreaming of PPPs for urban infrastructure development. The context and types of PPP models in the Indian infrastructure sector are shown in Table 9.1.

Central Government

Roads

National Highways

Central Government

State Government

Minor Ports

Airports

Central Government

State Government

Generation, Intra-state Transmission and Distribution

Major Ports

Central Government

Generation and Interstate Transmission

Power

Ports

Statutory Powers

Infrastructure Sector

National Highways Authority of India, Ministry of Road Transport and Highways, CCI, SPI

Airports Authority of India, Ministry of Civil Aviation, CCI, SPI

State Department of Ports/Maritime, CCI, SPI

Ministry of Shipping, CCI, SPI

State Department of Power/Energy, CCI, SPI

Ministry of Power, CCI, SPI

Policy Making Entities

Table 9.1 PPP Context for Indian Infrastructure Development

Low

Medium

Extent of Use of PPP

Regulatory Authority for Highways*

Airports Economic Regulatory Authority

BOOT, Operate Develop, Maintain and Transfer

BOT (Toll), BOT (Annuity)

High

BOT, BOOT, BOOST

BOT, BOOT

BOOT, Distribution Franchisee Model

BOOT

PPP Models Used

Medium

State Department of High Ports/Maritime, Port Regulatory Authority*

Tariff Authority of High Major Ports, Port Regulatory Authority*

Central Electricity Regulatory Commission and State Electricity Regulatory Board

Central Electricity Regulatory Commission

Regulatory Authority

Central Government

State Government and Urban Local Government

Telecom

Urban Infrastructure

PPP India Database

PPP Toolkits

* Under Consideration

Project Development Funds

Model Concession Agreements

Viability Gap Funds

PPPAC: Central Sectors

Indian Infrastructure Finance Company

State Department of Urban Development, Local Government

Ministry of Urban Development, CCI, SPI

Ministry of Telecommunications and Information Technology, CCI, SPI

Ministry of Railways, CCI, SPI

State Department of Roads / Highways, CCI, SPI

State PPP Legislations

Supporting Institutional / Enabling Frameworks

Central Government

State Government

Railways

State Roads

Indian Infrastructure Debt Fund *

Regulatory Reform Bill *

BOT, Service and Management Contracts

Low

State PPP Nodal Agencies

Divestitures

Joint Venture PPPs

Low

High

BOT (Toll)

Medium

Performance Public Contracts monitoring manuals (Settlement of Disputes) Bill *

PPP Cells: Central Sectors

State Department of Urban Development, Local Government; Municipal Services Regulator*

Telecom Regulatory Authority of India

Rail Tariff Authority*

State Department of Roads / Highways

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Recently, there has been a trend of establishing PPP nodal agencies at state level. These agencies are entrusted with the responsibility of policy formulation and coordination for infrastructure development and PPPs. For instance, the states of Gujarat and Punjab have Gujarat Infrastructure Development Board and Punjab Infrastructure Development Board, respectively while the states of Bihar and Karnataka have Bihar Infrastructure Development Authority and Infrastructure Development Department, respectively.

Financial context for PPP In India, domestic commercial banks, and specialised infrastructure financing institutions are among the major domestic sources for debt financing to infrastructure projects. The domestic commercial banks such as State Bank of India (SBI), ICICI Bank Limited and Industrial Development Bank of India Limited (IDBI Ltd) are among the lending institutions actively involved in financing infrastructure projects. In addition to these lending institutions, other public sector and private sector banks have also become members of syndications formed to extend lending to infrastructure projects. SBI, the largest public sector bank in India, provides a wide range of financial services such as rupee term loan, loan syndication and debt advisory service to the infrastructure projects undertaken by the Indian corporate houses. SBI has a specialised unit, the Project Finance Strategic Business Unit, established to provide a comprehensive range of financial services for new projects as well as expansion, diversification and modernization of existing projects in infrastructure and non-infrastructure sectors. ICICI is one of the largest private sector banks in India. ICICI was formed in 1955 on the initiative of the World Bank, the Central Government and Indian industry representatives with the principal objective to create a development financial institution for providing medium-term and long-term project financing to Indian businesses. ICICI provides a comprehensive range of financial and advisory products including project financing for the infrastructure sectors, corporate finance products, lease finance, guarantees and equity products as well as advisory services. IDBI Ltd is a commercial bank that has played a pioneering role in providing project assistance for fixed capital formation in the country. The origin of IDBI Ltd can be traced to its predecessor entity the Industrial Development Bank of India (IDBI), a development financial institution established by an Act of Parliament in 1964. IDBI was later transformed into a commercial bank in 2004. IDBI Ltd has been providing project finance both in rupee and foreign currencies for green-field projects and also for expansion, diversification and modernization purposes. IDBI Ltd has been actively providing assistance to key infrastructure sectors viz. electricity generation, telecom services, roads and bridges, and ports, and financing infrastructure projects has been one of the focus areas of the bank since the opening of the infrastructure sector to the private sector. The Infrastructure Development Finance Company (IDFC) and Infrastructure Leasing & Financial Services Limited (IL&FS) are among the specialized financial

Public Private Partnership infrastructure in India 139 institutions that have been established to promote infrastructure investment. IDFC, incorporated in 1997, was set up on the recommendations of the ‘Expert Group on Commercialisation of Infrastructure Projects’ commissioned by the Central Government. IDFC has been established with the aim to function as a specialized financial intermediary for infrastructure. One of the structured products that have been designed by IDFC jointly with SBI to promote commercial banks lending is take-out financing arrangement. The take-out financing arrangement invites banks to participate in infrastructure financing for a specific term and at a preferred risk profile that suits their own appetite, with IDFC standing behind the arrangement and willing to take out the obligation after a specific period. IL&FS is one of India’s leading infrastructure development and finance companies. IL&FS was incorporated in 1987 and commenced operations in 1988. IL&FS has been mandated to undertake operations in the business segments such as (i) commercialization and development of infrastructure projects; and (ii) creation of value-added financial services. In order to provide long-term debt for financing infrastructure projects in India, the Ministry of Finance at Central Government evolved a scheme for financing commercially viable infrastructure projects in various sectors such as roads, power, solid waste management, and water supply through a special purpose vehicle called the India Infrastructure Finance Company Limited (IIFCL) in 2006. IIFCL funds viable infrastructure projects, implemented by project company set up on a limited recourse basis, through various modes: (i) long-term debt; and (ii) refinance to banks and financial institutions for loans, with tenor exceeding ten years, granted by them. The extent of funding by IIFCL to the infrastructure projects is limited to 20 per cent of the total project cost. IIFCL advances financing to infrastructure projects based on the appraisal of the projects by the lead bank. The lead bank is also responsible for carrying out regular monitoring, periodic evaluation of compliance with agreed milestones and performance levels, particularly for purpose of disbursement of IIFCL funds. With respect to infrastructure projects implemented through a PPP route, the scheme has accorded priority for lending to PPP projects. In order to avail the funding, it is required that PPP projects should be selected through transparent and competitive bidding; and it is preferred that the PPP projects should be based on standardized/model documents.

PPP institutional framework The Central Government has taken many initiatives for improvement of institutional environment of PPP projects. These initiatives are as follows: 1

2

Public Private Partnership Approval Committee (PPPAC) has been created with the objective to fast track the appraisal and approval of PPP projects of all infrastructure sectors under the purview of the Central Government. The India Infrastructure Project Development Fund (IIPDF) is created for funding potential PPP projects’ project development expenses, which includes costs of engaging consultants for preparation of prefeasibility and feasibility

140

3

4

5

6

7

Boeing Laishram and Ganesh A. Devkar studies, and bid process management. This fund can be accessed by the Central ministries, state government entities and local governments. The Scheme for Support to PPPs in Infrastructure such as Viability Gap Funding (VGF) has been established for infrastructure projects that have high social but an unacceptable commercial rate of return. This scheme provides capital grant up to 20 per cent of the total project costs, to make socially viable project commercially viable and amenable to PPP model. The funding scheme is available to Central Government ministries, State Government entities and local governments. The sponsoring entity, if desired, can provide further 20 per cent of the total project cost. The Secretariat of PPPs and Infrastructure (SPI) has developed model concession agreements (MCAs) for infrastructure sectors such as national highways, state highways, operation and maintenance of highways, urban rail transit systems, non-metro airports, green-field airports, ports, container train operations, redevelopment of railway stations, and transmission of electricity. The adoption of these MCAs is encouraged and in certain sectors like National Highways is mandatory. The model bidding documents for PPP projects are developed by SPI, which includes request for proposal (RFP) for PPP projects, RFP for selection of technical consultants, RFP for selection of legal advisors and RFP for selection of financial consultants. The Department of Economic Affairs (DEA) has developed a PPP Toolkit for five infrastructure sectors, namely state highways, water supply and sanitation, ports, solid waste management, and bus rapid transport systems, with an objective to improve decision making at the Central, state and municipal level. A PPP database for providing information of Indian PPP project is created by the DEA. It provides project related information such as bidding, project benefits and costs, legal instruments, and financial information, covering all infrastructure sectors such as airports, education, healthcare, ports, power, railways, road, tourism and urban development. The DEA has initiated a programme entitled ‘Mainstreaming Public Private Partnerships’ in partnership with Asian Development Bank. The focus of this programme is to improve capacities at different level of governments for conceptualizing, structuring and managing PPP projects. As part of this programme, PPP cells are created at Central Ministries and State government level. The PPP cells focus on tasks such as refining PPP policy and regulatory framework, improving management information system (MIS), determining PPP monitoring arrangements, and risk-sharing arrangements.

Along similar lines as that of the Central Government, state governments have initiated reforms for institutionalization of PPPs. The PPP nodal agencies at state level are playing roles such as providing information and guidance, advisory support and funding, and approval of PPPs. There is a wide variation in roles played by PPP nodal agencies and their organizational structure across different states in India. For example, PPP nodal agencies in the states of Gujarat, Andhra Pradesh and Punjab are autonomous or quasi-autonomous government administrative units with cross-

Public Private Partnership infrastructure in India 141 sectoral focus, while PPP nodal agencies in the states of Tamil Nadu, Karnataka and West Bengal are formed as joint venture with the private sector. Also, the focus of PPP nodal agency in Tamil Nadu is confined to urban infrastructure only. The state governments of Gujarat, Andhra Pradesh and Punjab have enacted legislation for facilitating involvement of private sector in infrastructure development, while other states such as Uttarakhand, Assam, Rajasthan, Orissa and Karnataka have created PPP policies describing their intent and rational behind adoption of PPPs. The state governments have also emulated a few features of institutional framework set up at the Central Government level: 1) PPP project development funds by the states of Karnataka, Maharashtra, Uttarakhand and Rajasthan; and 2) State Level Viability Gap Fund in Karnataka, Rajasthan, and Uttarakhand. The concession agreements for PPP projects make reference to dispute resolution mechanisms in accordance to sectoral regulations and state PPP legislations. In India, often, there are considerable delays in judicial processes, which affect speedy and efficient resolution of disputes in PPP projects. Therefore, the Central Government and State governments have given impetus to alternative dispute resolution such as conciliation, arbitration, expert adjudication and amicable settlement. The regulatory authorities such as Airports Economic Regulatory Authority, Tariff Authority of Major Ports, Central Electricity Regulatory Commission and State Level Electricity Commissions are playing an important role in resolution of disputes in PPP projects. The State PPP legislations have created different dispute resolution mechanisms. For example, the Andhra Pradesh Infrastructure Development Enabling Act, 2001 in Andhra Pradesh and Bihar Infrastructure Development Enabling Act, 2006 in Bihar have established a Conciliation Board for resolution of disputes between private developer and government entities, while Punjab Infrastructure Development and Regulation Act, 2002 have established Punjab Infrastructure Regulatory Authority for adjudication of disputes. The PPP projects comes under the purview of the Comptroller and Auditor General of India, Supreme Audit Institution of India, for ensuring transparency, objectivity and probity of the entire decision-making process involved in PPPs. In the past, the focus of the institutional framework for PPPs was towards improving the quality of the PPP development process and bringing more PPP projects on stream. As many PPP projects have come into operational mode, gradually, the focus is shifting towards post-award issues such as performance monitoring, dispute resolution, and competition. The Central Government has initiated steps towards addressing these issues. These include: 1) Formulation of The Public Contracts (Settlement Of Disputes) Bill 2013; 2) Formulation of the Regulatory Reform Bill 2013; 3) Formulation of the Regulatory Authority for Highways in India (RAHI) Bill 2013; and 4) Formulation of guidelines for institutional mechanism for monitoring of PPP projects.

PPP organizational structure The Central Government Ministries and State Government Departments associated with infrastructure sectors play the role of a concession-granting authority in PPP

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projects. The international competitive bidding is prominently adopted by these entities for selection of a private partner. In the past, many PPP projects were awarded based on negotiation or memorandum of understanding route especially in the power, ports and railways sector; however, the current governmental policy encourages and gives more thrust to competitively bid PPP projects. The public sector entities involve private advisory firms typically at three steps: 1) preparation of feasibility reports; 2) bid process management; and 3) project monitoring. The cost of first two steps is either met by project development funds created by the Central Government as well as state governments or internal funds of public sector entity. The Central Government has created a panel of transaction advisors, to assist public sector entities in accessing advisory services for PPP projects. The public sector entities often cover the costs of project monitoring with internal funds, as presently there are no schemes to cover these costs. The PPP Cell in the Department of Economic Affairs, and PPP nodal agencies at state level, are involved in reviewing and appraising the feasibility studies of PPP projects, bidding process for selecting private partner and post-award performance of PPP project. The private players such as construction organizations, operation and maintenance companies, and engineering organizations come together under the umbrella of special purpose vehicles for bidding of PPP projects. These organizations are expected to contribute financial resources as equity for PPP project. The concession agreement is signed between the special purpose vehicle led by the private consortium, which has submitted the most competitive proposal, and the sponsoring government entity. This arrangement is often called a PPP concession. In certain cases, the sponsoring government entity contributes equity, holding minority stake, to the special purpose vehicle. This arrangement is known as a joint venture PPP. The joint venture PPPs involves a two-level relationship, namely a shareholder agreement between private players and a public entity, and a concession agreement between a public entity and the special purpose vehicle (SPV). The Planning Commission has released a guideline on joint venture PPPs to highlight the complexity arising out of these two level relationships and to suggest steps for addressing issues relating to conflict of interests, accountability of public sector entities and contingent liabilities. Increasingly, the Indian PPP market has been gaining attention of the international infrastructure developers. Some of the international firms involved are: 1) Highways sector: IJM Corporation, Kajima and Taisei; 2) Airports Sector: Malaysia Airports, Zurich Airports and Fraport; 3) Ports Sector: Dubai Ports International, Maersk, P & O Ports, and PSA Singapore; 4) Power Sector: China Light and Power (CLP) and Marubeni Corporation. International private equity firms such as Standard Chartered Private Equity, JP Morgan, Macquarie SBI Infrastructure Fund, Blackstone Group and Xandur Group have invested in Indian infrastructure firms involved in PPP projects.

Extent of use of PPP adoption PPPs are being adopted as one of the preferred modes for development of infrastructure in India. However, the extent of adoption of PPP varies from one

154

352

Roads

Non-Major Ports

Airports

Railways

Power

Urban Infrastructure

Total

1

2

3

4

5

6

87,237 (140.70)

9,801 (15.81)

10,869 (17.53)

197 (0.32)

45,864 (73.97)

20,506 (33.07)*

Source: (Planning Commission 2013a) * Figures in brackets are project costs in US$ billion

15

1

27

155

Projects Cost (INR crore)

Completed Projects

No. of Projects

Sector

Sl. No.

Table 9.2 Status of PPP Projects in India

405

126

130

1

6

13

129

No. of Projects

2,85,912 (461.15)

38,691 (62.40)

1,31,367 (211.88)

594 (0.96)

5,071 (8.18)

31,999 (51.61)

78,190 (126.11)

Projects Cost (INR crore)

Projects Under Implementation

741

331

58

5

12

41

294

No. of Projects

4,19,846 (677.17)

1,54,898 (249.84)

46,203 (74.52)

2,812 (4.54)

16,582 (26.75)

53,788 (86.75)

1,45,563 (234.78)

Projects Cost (INR crore)

Projects in Pipeline

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sector to another. The key infrastructure sectors under the Central Government have experienced considerable infrastructure development via the PPP route. Among these sectors, national highways sector is one of the infrastructure sectors where private sector has actively participated through PPP route. As of 31 March 2012, a total of 105 PPP projects involving an investment of INR 42,506 crore (US$ 68.53 billion) have been completed at Central Government level. These include 68 national highways projects, 30 projects in port sector, four railways projects to enhance port connectivity and three airport projects. Regarding the status of PPP projects under implementation, as of 31 March 2012, 187 projects worth INR 203,156 crore (US$ 327.67 billion) were under implementation, which include 160 highways projects, 22 major ports, two airports, and three railways projects. These sectors envisage an investment of INR 159,798 crore (US$ 257.74 billion) in the form of PPP projects in the pipeline in the Central sector. This includes an investment of INR 68,536 crore (US$ 110.54 billion) in 68 national highways projects, 19 port projects at an estimated cost of INR 8,577 crore (US$ 13.83 billion), 14 PPP projects in airport sector at an estimated cost of INR 24,585 crore (US$ 39.65 billion). The Ministry of Railways is also planning to develop 12 railway projects in PPP mode at an estimated cost of INR 58,100 crore (US$ 93.71 billion). With respect to projects at states level, 352 PPP projects in different infrastructure sectors with a total investment of INR 87,237 crore (US$ 140.7 billion) have been completed while 405 PPP projects at an estimated investment of INR 285,912 crore (US$ 461.15 billion) are currently under implementation as of 31 March 2012. In addition, 741 PPP projects, involving an estimated investment of INR 419,846 crore (US$ 677.17 billion) are in the pipeline. The details of the PPP projects under sectors with respect to the categories viz. completed projects, projects under implementation, and projects in pipeline is shown in Table 9.2. With respect to the completed projects, most of the private investments have focused on non-major ports. Urban infrastructure, comprising municipal solid waste management projects, BRTS, MRTS, and wastewater projects will be the focus for private investments and the majority of PPP projects in the pipeline are relating to this sector.

Types of PPP use in the country The term PPP is used to refer to a spectrum of models ranging from operation and maintenance contract to build-operate-transfer model. The adoption of the PPP route for infrastructure development in a particular sector is normally confined to certain models of PPP only. For instance, the forms of PPP that are normally used for development of national highways projects are confined to build-operatetransfer on toll basis, BOT (Toll), and build-operate-transfer on annuity basis, BOT (Annuity). BOT (Annuity) is the preferred model for road projects development for projects with high traffic revenue risk whereas for projects with sound project economics BOT (Toll) is the commonly used PPP model. In the advanced stages, the revenue-sharing model and public sector grant/subsidy model become popular. Normally for projects with low commercial viability, private sector

Public Private Partnership infrastructure in India 145 involvement is in the form of biding for grant (called viability gap funding) from the government to make the project financially viable. However, for road projects with very sound project economics and highly commercially viable, bidding for the project on BOT (Toll) is based on the amount of revenues the private sector will share with the government. The build-own-operate-transfer (BOOT) model is one of the commonly used PPP models for development of power generation facilities, greenfield airports, and mass rapid transport systems. In case of port projects, though BOT and BOOT are the most commonly adopted PPP options, with respect to some of the non-major ports, build-own-operate-share-transfer (BOOST), a variant of the BOT model is also used in some of the states. Municipal solid waste management is one of the sectors under urban infrastructure wherein the private sector has participated actively through the PPP route. In this sector, the private sector has participated using different PPP models to provide infrastructural services relating to the various elements of the municipal solid waste (MSW) value chain. For collection, transportation, street sweeping and disposal of MSW, service contracts are used that involve the private sector. Management contracts are normally used as the preferred PPP model to transfer the responsibilities for operation and management of infrastructure facilities such as sanitary landfill, and compost plant to private sector. Finally, for either integrated MSW system or integrated processing and disposal facility or MSW processing facility, private sector participation is mostly through a BOOT model. In the case of the water and sanitation sector, PPP models such as design-buildfinance-operate (DBFO) and design-build-finance-operate-maintain (DBFOM) are commonly used for development of projects involving both network and treatment facilities, whereas operation and maintenance (O&M) contract is normally used for operation and maintenance of existing network and/or treatment facilities. However, if the treatment facilities and/or network require huge investment for rehabilitation, the preferred PPP model is either publicly funded design-build-operate (DBO) contract or subsidized BOT/rehabilitate-operate-transfer (ROT). In addition to developments of the economic infrastructure, the PPP route is also used for the development of social infrastructure in some of the states. Private sector entities have participated in the development of social infrastructure in sectors such as education, healthcare, and tourism. Most of the projects in these sectors are of small size and the value of PPP projects in terms of investment in such sectors is miniscule in comparison with the investments in economic infrastructure through the PPP route (amounting to about 2 per cent of investment in economic infrastructure).

Changes in PPP usage and extent over time The Indian Economy has showcased a remarkable resilience to the turbulence caused by the global economic crisis, although the accolades received by India’s monetary policy and financial sector were short lived. The Indian economy started experiencing gloom owing to internal governance factors such as policy paralysis, unstable political environment, widening trade deficit, rapid devaluation of the

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Indian rupee and stagnant economic reforms. The Indian infrastructure sector and PPPs are severely affected by these developments. The financial closure of PPP deals is taking a longer time owing to extensive due diligence exercises and asset liability mismatch faced by the lenders. There is a trend towards shorter reset periods of loans due to changes in the interest rates and lenders are reluctant in making long-term commitments. The financial crisis has drawn attention of governments towards the fiscal risks and contingent liabilities associated with PPP projects. The national highways PPP projects, which are awarded on the basis of highest revenue share or negative grant, are facing challenges in terms of payments to the government, owing to reduction in traffic. The private developers involved in these projects have asked the Central Government for a restructuring of premium payments; however, different government entities such as the Law Ministry, Finance Ministry, National Highway Authority of India (NHAI) and Planning Commission have diverse opinions on resolving this situation. The bleak market sentiments and economic prospects have affected the fresh round of bidding for PPP projects, which experienced poor response from private developers. The NHAI is promulgating to award these contracts under the traditional ‘design-bidbuild model’, with the possible avenue for ‘operation and maintenance PPP model’ after the completion of construction phase. The Central Government has initiated measures to sustain the supply of financial resources, debt and equity, to PPP projects in the road sector. The NHAI has released a notification describing a procedure for substituting existing concessionaires in accordance to a model concession agreement, to address private developers’ concerns over long lock-up periods for equity in existing projects and its affect on bidding for future projects. The interest rate fluctuation and demand for domestic resources for further lending have resulted in a decision by the Reserve Bank of India to allow external commercial borrowings (ECBs) for refinancing of rupee loan availed by private developers, involved in power and road sector, from the domestic banking system. The delay in the provision of environmental and forest clearance has led to the exit of private developers from a few PPP projects. The Central Government has formulated policies to streamline the process of approvals and clearances from both Central and state government entities. Currently, the bidding process for development and operation of container and multipurpose cargo handing terminals in ports has been receiving a poor response from private developers. The dampening of the global economic environment and the investment model adopted by port authorities are two major reasons for this. The highest revenue share is adopted as a bidding criterion for PPP projects. This has resulted in either very low or high revenue share quotations from private developers, indicating unstable bidding practices. The Central Government has been forced to revisit the strategy of using a revenue share model for port projects. The Central government has made an effort towards the creation of a level playing field between Major and Minor Ports by formulating the Draft Ports Regulatory Authority Bill, with a focus on tariff setting and performance monitoring. The Indian airport sector has used the BOOT model for development of greenfield airports at Bangalore and Hyderabad, and the Operations, Management

Public Private Partnership infrastructure in India 147 and Development Agreement (OMDA) Model for improvement of brownfield airports at Mumbai and Delhi. A substantial amount of private investment is invested in either creation or improvement of airport, which is recouped by charging user and airport development fees. Further, the Central Government has decided to use the BOT model for six greenfield airports, and the operation and maintenance model for six brownfield metro airports. In the recent past, the Airport Authority of India (AAI) has undertaken redevelopment and expansion of these six brown-field metro airports. The Central Government has initiated the bidding process to involve private partners for these airports, under the OMDA model for a duration of 30 years. The concession for these airports would be awarded to the private developer quoting the highest revenue share. The rationale behind this model is to ensure management and upkeep of airports, and explore the private sector’s potential to raise significant non-aeronautical revenues and, in turn, reduce passenger fees. The government has initially focused on private sector involvement for power generation, with coal-fired, hydro and renewable energy sources. This is followed by private sector involvement for the reduction of aggregate commercial and technical losses in power distribution. The Central and State governments are envisaging private sector involvement in intra-state and inter-state transmission. Currently, the power plants developed with private sector involvement are reeling under short supply of domestic coal and as a result are forced to use costly imported coal for power generation. These private developers have requested renegotiation of power purchase agreements with the objective of increasing the power tariff in line with the increasing cost of imported coal. The Central Government has created a committee of experts for developing an appropriate pricing formula and appropriate tariff increases. This committee has suggested revision of tariffs to a higher level; the final decision is awaiting the approval of Central Electricity Regulatory Commission. The Central Government has now focused attention towards addressing fuel supply linkages to the power sector. As a result, a decision has been made by the Central Government to use the PPP model for coal mining and establish a coal regulator. The eleventh Five Year Plan (2007–2012) envisaged a substantial amount of private investment in railways sector. The areas are redevelopment of stations, logistics parks, private freight or container trains, energy-saving projects, and loco and coach manufacturing units. The Indian Railways have taken preliminary steps towards involvement of private sector in loco and coach manufacturing units, and container/freight trains. This has received an encouraging response from the private sector in the preliminary step. However, the movement towards further advanced stages is going at a snail’s pace owing to administrative and policymaking delays.

Future developments The Central government has been rigorously developing the infrastructure sector in order to accelerate economic growth of the nation since the tenth Five Year Plan. The investment in infrastructure has increased from 5.04 per cent of the

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GDP in the tenth Five Year Plan to about 7.21 per cent of the GDP in the eleventh Five Year Plan. In spite of these efforts, the infrastructure needs of the country are so huge that there is still scope for tremendous expansion in both the economic and social infrastructure sectors. As per the twelfth Five Year Plan (2012–2017), the investment requirements for infrastructure development has been projected to about INR 5,574,663 crore (US$ 899.14 billion), which is about 8.18 per cent of the GDP. Of the projected investment, 48.14 per cent of the required investment is expected from the private sector, including PPP projects, and sectors where major portion of the investment would be made are the power, and transportation sectors including roads and bridges, ports and airports. The twelfth Five Year Plan aims to add 88,000 MW of additional generation capacity to the power sector, where private sector investment will account for about 53 per cent of the total generation capacity. Most of the previous power generation projects have been confined to the generation of power from non-renewable energy sources while in this Plan the share of power generation from renewable energy is expected to increase to 9 per cent in 2017 and reach 16 per cent by 2030. A major emphasis on adopting PPP for reduction of aggregate commercial and distribution losses in electricity sector has been promulgated by government. Regarding the airports sector, the estimated investment in twelfth Five Year Plan is to the tune of INR 67,500 crore (US$ 108.87 billion) in order to meet the traffic growth projections of both passenger and cargo traffic in this period, of which around INR 50,000 crore (US$ 80.65 billion) is likely to come from the private sector. India’s strategy for achieving faster and more inclusive growth demands greater investments in urban infrastructure. Total capital investments in urban infrastructure have been estimated to be about INR 3,900,000 crore (US$ 6290.32 billion) over the next 20 years. 13–23 per cent of the investment is expected to be raised through the PPP route. However, PPPs in urban infrastructure such as water, sanitation and solid waste often raise concerns about the commercialization of services. Extending PPPs to the social sector projects requires people’s participation in the design and the monitoring of PPP schemes, besides well-drafted concession agreements and strict monitoring to ensure that PPP concessionaires abide by their commitments. Some cities and states have therefore begun to shape PPPs in social sector using an innovative model called people–public–private– partnerships (PPPPs). The Central Government has put in place a number of national strategies and policies that will help to inculcate the principles of sustainability in the development of economic infrastructure. Low carbon strategies for inclusive growth have been outlined by the government for major carbon emitting sectors such as power, transport, industry, buildings and forestry. With respect to the power sector, there exist several initiatives that could reduce carbon footprints and improve the efficiency in this sector such as the generation of power from renewable sources like wind and solar power. The wind energy potential in India has now been estimated at about 103,000 MW. In order to achieve these targets, there is a need for investing in indigenous design and manufacture of turbines suited for Indian’s low wind speed

Public Private Partnership infrastructure in India 149 regime, development of pumped hydro storage, and high power density batteries for complementing wind power. Among the power generation options, solar power presents a unique opportunity for inclusive growth for rural communities, and government has set an ambitious target of setting up 20,000 MW for solar power by 2022. In order to achieve this target, several steps need to be taken to make the sector attractive to investors and financial institutions such as developing innovative institutional structures for operation and maintenance of decentralised off-grid solar power systems, and fiscal and policy initiatives to encourage indigenous manufacturing of components used in solar power generation. With respect to transportation, there has been a modal shift in freight transport from railways to roads. Railways used to carry 88 per cent of total freight at the times of independence while at present it is carrying 40 per cent and share of road freight has increased correspondingly. In order to promote sustainable growth, the focus of infrastructure development in the transportation sector should be on increasing the share of rail freight as road freight has several adverse effects such as worsening air pollution from diesel-powered commercial vehicles and reduced energy security. The Indian Government has therefore initiated the development of 10,000 km of dedicated rail routes over six key corridors connecting India’s four largest cities. The first phase is expected to be complete by 2016–17. Though the PPP regime has been successfully employed in road sectors, the levels of private investments in other transportation sectors such as ports, airports and railways are not encouraging. Private investment through PPP in railways was about 4 per cent of the planned outlay in the eleventh Five Year Plan, which is far less compared with other sectors such as ports – 80 per cent, and airports – 64 per cent. In order to create an environmentally-friendly and economically efficient transport system, it is very much necessary to augment private investment through PPP in railways to develop an effective multi-modal transport system. Besides the land-based freight movement, India has a huge potential for water-borne freight (both inland and coastal), which is the most efficient form of freight transport. India has a long coastline and about 15,000 km of inland waterways but the share of water-borne freight is a negligible 0.3 per cent. This is also one of the areas where an appropriate development strategy needs to be developed to tap the potential of this sector without affecting other uses of the water or waterways.

PPP research and development agenda The agenda for research into PPPs for a holistic infrastructure development in India should focus on the following themes:

• The involvement of people in the design of projects and partnerships is crucial

in urban renewal; unlike in case of large infrastructure projects such as roads, airports, power where the people have a limited role in the governance of the projects and their outcomes. Best practices and model documents for PPP must be deployed for India’s urban management agenda to succeed.

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• The focus on achieving growth in a sustainable and inclusive manner along with

•

•

•

•

•

the emphasis on increasing private investment in infrastructure development through the PPP route lead to a situation where diametrically opposite perspectives of the two key stakeholders (public entity and private investors) could lead to a situation where it would be difficult to achieve the infrastructure development goals. The private parties in PPP projects focus on the financial gains from the investment which can prevent these investments from meeting the social and environmental goals of the infrastructure development. Promoting low-carbon growth in infrastructure sectors demands the need for adopting clean technologies in infrastructure development. On the other hand, clean technologies introduce new sets of risks due to high technology risk. The private sector though is often in a better position to bring in innovative technologies, but the additional risks introduced due to unproven technologies will make the project un-bankable and create difficulties for private investors seeking to raise debt financing. The number of Indian PPP projects entering into their operational phase is steadily increasing. As a result, post-award governance issues such as performance monitoring, tariff changes and regulation have become critical areas. Improvement in these areas necessitates a substantial amount of cooperation with the international research community, for sharing of experiences on how these issues are addressed in various countries. The use of PPPs further increases the complexity of infrastructure provision, owing to diverse dimensions such as project finance, long-term infrastructure planning, relational governance with private sector, technological complexity, stakeholder needs, and changes in role of public administration. Often, each dimension is researched in-depth, with little recognition of overlaps between different dimensions. Therefore, there is an urgent need to research these dimensions from multidisciplinary perspectives, which will require interests and participation of researchers having expertise not only in one dimension but also interests to expand horizons with multidisciplinary research. The Indian PPP market is predominantly dominated by Indian companies, with foreign players’ participation concentrated in telecom, ports and airports sector. On the public sector side, the usage of PPPs is more prominent in a few Central Government ministries and state governments. This indicates that the need for research on the fronts such as entry strategies for foreign players in Indian PPP market, capacity building in Indian public sector entities for involvement in PPP projects, bottlenecks faced by PPP model in laggard infrastructure sectors, and internationalization of Indian companies in global PPP market. The research on this front would require extensive collaboration between public sector, private sector firms – Indian and Foreign, and developmental organizations. It will bring overall benefit to Indian PPP marketplace as well as reduce lags associated research findings and its application or usage in practice. Both Central and states governments have been engaged in building capacities of the public sector entities to equip them to engage the private sector through the PPP route. However, in certain regions of the nation such as the

Public Private Partnership infrastructure in India 151 economically backward north-eastern region of the country, the competent national private players are not willing to undertake projects on PPP routes due to socio-political problems of this region. In order to promote infrastructure development in this region also, governments need to undertake capacitybuilding initiatives for the local private players to enable them to develop small-sized social and economic infrastructure projects along PPP routes.

Conclusions The adoption of PPP models has opened a new leaf in the chapter of India’s infrastructure development. The Central and State Governments have been attracted towards these models, with primary objectives of overcoming fiscal constraints and skill gaps faced in meeting infrastructure needs of growing Indian economy. The PPP way in Indian infrastructure sector has been ushered by various initiatives for creation of enabling policy and institutional framework. Some of these initiatives are the creation of the Cabinet Committee on Infrastructure and Secretariat of PPP and Infrastructure, establishment of PPP Cell in Central Ministries and State level PPP nodal agencies, Regulatory Authorities, State level PPP legislation and funding mechanisms like India Infrastructure Finance Company Limited, India Infrastructure Project Development Fund, and Viability Gap Funding. The governments have also formulated standard documents for bidding and award of PPP projects. Model concession agreements have been formulated for PPP projects in sectors such as highways, airports, power generation, railways, and MRTS. Similarly, model bidding documents have been formulated for request for qualification, request for proposal, and selection of technical, legal, financial and transaction advisers. This standardized framework has been commended for ensuring transparency in the allocation of risks, costs and obligations while minimizing the potential for disputes. These initiatives have resulted in the adoption of PPP models across different infrastructure sectors in India. Few sectors such as National Highways, Ports and Telecom have embraced the PPP model much earlier, while the remaining infrastructure sectors such as airport, urban infrastructure, railways and power have been slowly picking up the PPP bandwagon. There is a wide variation in the types of PPP models adopted in different infrastructure sectors. The development of National Highways has been among the economic infrastructure sectors that have successfully attracted private investment through PPP route. The lessons from successful implementation of National Highways projects through PPP have been used to replicate development of other infrastructure sectors through PPP. To a limited extent, PPPs have been successfully replicated in some of the economic infrastructure sectors such as power generation, airports and ports. However, these sectors are experiencing private investment slowdown on account of increasing complexity and size of the projects, and lack of adequate long-term funding to bridge the increasing funding gap. The experience of PPP projects implementation in the social infrastructure sector is of mixed nature. A sector such as solid waste management is able to attract

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comparatively greater private capital than other sectors such as wastewater and water sectors. These sectors are in great need of both financial resources and technical inputs to meet the challenges of urbanization. Although PPPs are the right medium, the inappropriateness of the current PPP model dictates the need to devise innovative models of PPP which will facilitate greater involvement of the general public not only in operation, but also in design, planning and implementation phases.

References Dutz, M., Harris, C., Dhingra, I. S. and Shugart, C. (2006) India – Building capacities for public private partnerships, The World Bank, Washington D.C. Planning Commission (2008) Definition of infrastructure, Planning Commission, Government of India, New Delhi. Planning Commission (2013a) Draft compendium of PPP projects in infrastructure, 2012, Planning Commission, Government of India, New Delhi. Planning Commission (2013b) Twelfth Five Year Plan – Faster, more inclusive and sustainable growth, Planning Commission, Government of India, New Delhi.

10 Defining Public Private Partnership in infrastructure development within the Indonesian context Andreas Wibowo and Andre Permana Introduction Situated at the geo-strategic crossing point between the Asian and Australian continents and between the Indian and Pacific Oceans, Indonesia is one of the world’s largest archipelagoes, consisting of over 17,000 islands. It is home to more 260 million people (as of 2013), making it the fourth most populous country after China, India, and the US. Based on per-capita Gross National Income, the World Bank reclassified Indonesia from a low to a lower-middle income country as of 2002. With a Gross Domestic Product (GDP) of Indonesian Rupiah (IDR) 8,241 trillion in 2012 (www.bps.go.id; at the time of writing, 1 USD equals IDR 11,000), Indonesia is now one of the 20 largest economies in the world. Despite the recent global economic slowdown, Indonesia has continued to report a consistently strong economic growth of 5–7 percent per annum for the last few years (6.2 percent in 2012 according to World Bank data), an achievement only rivaled by China and India. Given its positive economic outlook, Indonesia regained its investment grade rating from Fitch in 2011 and Moody’s in 2012, which it had lost in 1997 in the wake of the Asian economic crisis. This rating upgrade has put Indonesia back on the radar of international investors. However, this impressive economic growth cannot be sustained if problems of poor infrastructure are not soon resolved. Based on the 2013–2014 Global Competitiveness Report prepared by the World Economic Forum (WEF; www3. weforum.org), the overall quality of Indonesia’s infrastructure was given a score of 4.0 (average = 4.3, with 1 being extremely underdeveloped and 7 being extensive and efficient). With this score Indonesia ranks 82nd out of 148 economies, among the worst of the Southeast Asian countries. Specifically, Indonesia had a score of 3.7 (ranked 78th) in roads, 3.5 (44th) in railroad infrastructure, 3.9 (89th) in port infrastructure, 4.5 (68th) in air transport infrastructure, and 4.3 (89th) in electricity supply. These across-the-board low scores signify a need for immediate improvement. The key challenge is the large amount of upfront capital required. While the growth in the demand for greenfield projects has been remarkable, existing obsolete and deteriorating physical assets are in urgent need of refurbishment and upgrading. The GoI’s budget for infrastructure, however, is severely limited. Although it has been steadily increased over the years, from IDR 91 trillion (1.5 percent of GDP) in

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2009 to IDR 188 trillion (2.0 percent of GDP) in 2013, the amount of available funding for infrastructure development is still far from being sufficient. Severe underinvestment and lack of proper maintenance or operation often result. Coupled with mismanagement and poor decision-making, these issues could lead to a widespread disenchantment with public infrastructure services, as has been confirmed by the WEF’s survey. The GoI must find effective solutions to address this infrastructure bottleneck problem.

Origin and drivers While the GoI alone could not possibly provide all infrastructure requirements, the private sector, with its competitive advantages in terms of skills, knowledge, experiences, and capital could play a more pivotal role by participating in infrastructure financing, construction, and operation or maintenance. Leveraging the private sector would enable the GoI to focus its already constrained budget on other essential activities. The concept of privately financed infrastructure is not new to Indonesia; in fact, privately financed infrastructure existed before Indonesia was even an independent nation-state, dating back to the nineteenth-century Dutch colonial period. For example, early private participation in railways appeared in 1864, when the Dutch government awarded a concession to the Netherlands East Indies (NIS) Railway Company, a privately owned company, to build and commercially operate the 26-km line between Semarang and Tanggung in Central Java (Krishnamurti, 2004). Another example is the two-year water supply concession awarded by the Dutch government to a Dutch businessman in 1890, allowing him to collect water from the Umbulan Spring in Pasuruan and deliver it through a 20-km pipeline (this pipeline still exists today for European residents in Surabaya, see details in Lucas and Djati, 2007). In the post-independence era, private involvement with infrastructure development fluctuated with political changes. Shortly after its independence in 1945, Indonesia struggled with economic problems such as high inflation and unstable exchange rates. Even some years later, Indonesia’s economy was still experiencing little economic growth. The absence of foreign capital – the result of the elimination of foreign economic control in the private sector in 1957 and 1958 by the Soekarno administration (1945–1969) –exacerbated the situation (see details in Touwen, 2008). In 1969 Soeharto took power from Soekarno and called his administration the New Order Regime, differentiating it from Soekarno’s regime, which was also known as the Old Order Regime. Under Soeharto’s administration (1969–1998), the economy gradually started to grow and foreign direct investments were welcomed. Being an oil exporting country at that time, the oil boom in the 1970s allowed Indonesia to receive windfall profits from high oil prices in the international market, which fueled economic expansion. In response to rapid economic growth, the GoI made massive capital investments in infrastructure, with financing initially raised from the government budget alone.

Public Private Partnership within the Indonesian context 155 However, the financial power and scope of the GoI (and state-owned enterprises (SOEs)) did not keep pace with increasing demand, and in the early 1990s the GoI finally opened opportunities for the private sector to invest in infrastructure, which had traditionally been the exclusive province of the public sector and SOEs. The term PPP began to appear as the first concession contracts were awarded in the toll road (1990), electricity (1991), and water supply (1993) sectors. However, the PPP euphoria was short-lived; the economic crisis that hit several Asian countries in 1997 affected Indonesia the worst, throwing the country into economic – and later political – chaos. The depreciation of the IDR and along with increasing interest and inflation rates reached record highs. Consequently, most public infrastructure projects associated with the GoI and SOEs stumbled and finally collapsed; ultimately, only a few projects survived. During 1998–2004 there was no significant progress in infrastructure development. This only really changed in 2004, with the GoI asking for bids for a number of infrastructure projects, including those that had been suspended due to the economic crisis (see details in the next section). International data suggest that the general driving factors for PPP include: significant technological innovations; high indebtedness and stringent budget constraints limiting the public sector’s ability to meet increasing infrastructure needs; the expansion of international and local capital markets, leading to improved access to private funding; and an increasing number of successful international examples of private participation and competition in infrastructure (United Nations Commission on International Trade Law, 2001). In the case of Indonesia, government budgetary constraints are the most pressing reason for implementing PPPs.

Policy and regulatory frameworks By the mid-1990s, dozens of infrastructure projects to be executed as PPPs were offered to investors. However, the procurement processes were often tainted with controversies: most, if not all winning bidders, were closely related to political power holders. This was unsurprising, as Soeharto often designed economic policies to benefit his children and cronies, who were involved in a number of businesses in Indonesia (Levy, 1996; Wie, 2012). The 1997 economic crisis has put enormous pressure on both ongoing and planned PPP projects. The GoI has had to face difficult decisions with regard to the status of these projects. Soon after the emergence of the crisis in September 1997, President Soeharto passed Decree 39, which either put projects associated with the state and SOEs on hold or subjected them to an evaluation. In November 1997, Soeharto released Decree 47 to amend Decree 39. In January 1998, Soeharto issued Presidential Decree 5, which discontinued a number of projects. It must be a special record that three decrees covering the same issue were released within only four months. Two days after Decree 5 came into effect, Soeharto enacted Decree 7 to regulate PPP infrastructure projects. This decree was an important landmark, which paved the way for the upcoming PPP policy and regulatory frameworks. This decree was the first regulation in Indonesia that officially used the term PPP. Further, it was the first legislation to address the fundamental provisions of PPP implementation

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(e.g., responsible authorities, the ‘positive list’ of infrastructure sector, the basic principles, the content of contractual agreements). The decree’s appendix also detailed the procedure for PPP procurement processes, including bidding document requirements and the treatment of non-solicited proposals. Following the worsening political tension, Soeharto was forced to resign in May 1998 after holding power for 32 years. His regime was replaced by the Reformation Order, headed by B.J. Habibie, Soeharto’s vice president. Habibie established a special taskforce to investigate past concession contracts. Based on these taskforce findings, the GoI had to cancel or renegotiate a number of contracts, as they were allegedly the result of corruption, collusion, and nepotism. Habibie was president for only 17 months before he was replaced by Abdurrahman Wahid, the first elected Post-Soeharto president. In May 2000, Wahid issued Decree 64, which revised Decree 39/1997 (with its amendments) to resume projects that had been suspended or placed under evaluation. As with Habibie, Wahid also set up a team (later known as Team Keppres 133) that was mandated to renegotiate 27 contracts with independent power producers (IPPs). However, there was considerable disagreement as to whether this team was successful in its mission to reduce the high electricity tariff that PT Perusahaan Listrik Negara (PLN, State Electricity Company) had to pay. Before completing his term, Wahid was impeached in July 2001 and was replaced by Megawati Soekarno Putri, Soekarno’s daughter and also Wahid’s vice president. Infrastructure policy reforms In October 2004, after being defeated in the presidential election, Megawati Soekarno Putri was succeeded by Soesilo Bambang Yudhoyono. Under the Yudhoyono administration, the GoI embarked upon considerable infrastructure policy reforms. The reform package consisted of action plans and deliverables to create the policy framework for inter-sectoral reform, sectoral and corporation policy reforms to introduce more competition into the infrastructure sector, a regulatory framework to eliminate monopolies and to protect public and private interests, and role allocations for ministers or regional heads as policymakers and regulators (Aswicahyono and Friawan, 2008). One of most interesting issues was the revocation of SOEs monopolies. In the toll road sector, for instance, the issuance of Law 38/2004 enabled other toll road operators to compete head-to-head with Jasa Marga (JM), a SOE toll road operator. Previously, any entity wishing to invest in this sector had to enter into a business–business (B–B) agreement with JM under one of four cooperative models: joint venture, joint operation, revenue sharing, or modified turnkey. However, being a monopoly, JM was allowed to invest on their own without involving any private capital. To regulate the toll road sector, the GoI then established Badan Pengatur Jalan Tol (BPJT; the Toll Road Authority), a government unit headed by an echelon-two government official and operating under the Ministry of Public Works, in 2005. In the transportation sector, PT Kereta Api Indonesia (Indonesia Railway Corporation) lost its monopoly over railways after the enactment of Law 23/2007,

Public Private Partnership within the Indonesian context 157 PT Pelabuhan Indonesia (Indonesia Port Corporation) lost its monopoly over port infrastructure after Law 17/2008, and PT Angkasa Pura lost its monopoly over airport infrastructure after Law 1/2009. However, to date there have been no dedicated units in these sectors that serve regulatory functions in the way that BPJT does for toll roads. This function is at the moment embedded within the responsible technical directorate under the Ministry for Transportation. Indonesia’s water supply sector has adopted a slightly different approach. According to Government Regulation 16/2005, the responsibility for the development of the water supply system rests with either the central or local governments, whichever is necessary to ensure universal water access; however, the execution is undertaken by municipal water utilities. Only if these utilities are unable to improve or expand the necessary water networks under their coverage, can they – subject to government approval – invite private firms or cooperatives to participate in water supply provision under a B–B arrangement. In cases for which the utilities are unable to provide the required water services, the governments can develop, in part or entirely, the water supply systems, and they can then allow the utilities to operate the systems. Greenfield investments by private sector investors are allowed in areas not connected to existing water networks (e.g. specific industrial or residential areas). Similar to the water sector, based on Law 30/2009, Indonesia’s electricity sector gives SOEs (in this case, PLN) first priority to supply electricity to the public before any other commercial entities. In other words, this law grants PLN a first right of refusal (‘The Indonesian electricity system,’ 2012; Wiryawan and Deertz, 2010). For areas without electricity, the state or local governments can offer localgovernment owned enterprises, private firms, or cooperatives the opportunity to supply electricity in these areas. If this offer attracts no interest, the governments can specifically assign PLN to do so under the public-service obligation (PSO) scheme. This scheme is commonplace in the transportation sector. In railways, for instance, the GoI compensates PTKereta Api Indonesia with PSO funds for providing economy-class services at a tariff below the cost of recovery. Likewise, PTPelayaran Nasional Indonesia, which operates sea transport, also receives PSO funds to serve economy-class passengers and routes in remote areas that no other commercial entities have interest in serving. Public–corporate partnership By enacting Presidential Regulation 67 in November 2005, the GoI laid a new foundation for infrastructure development under a non-public traditional public procurement system. This regulation was intended to be a new approach with some modifications of those outlined in Decree 7/1998. One of the most important differences was the use of a more generic term to describe long-term cooperation between the public sector and corporations in general (not only private firms) under a contractual agreement that specified terms and conditions governing the delivery of infrastructure services to end-users: public–corporate partnership (PCP). This term was used in subsequent regulations until recently. State-owned

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enterprises, local-government owned enterprises, private enterprises, and cooperatives were all included under the definition of corporation in this regulation. As such, a PPP was a specific case of PCP. This term adoption fell in line with the spirit of encouraging fairer competition between SOEs and other entities; however, it is somewhat confusing, as the GoI can, at its discretion, still direct special assignments to SOEs to perform cost-recoverable public infrastructure projects. Clear-cut criteria to allocate which projects are endorsed as PCPs and which projects are specifically assigned to SOEs are still to be defined. Additionally, a conflict of interest may result because the GoI, as the owner of the SOEs, has to decide between bids received from both SOEs and private bidders (Organisation for Economic and Co-operation Development, 2012). Another important issue with regard to the implementation of this PCP regulation is that efforts are still needed to harmonize regulations at the national and sub-national government levels. This harmonization would ensure compatible legal bases for contractual arrangements of PPP transactions for specific sectors, especially where local governments are mandated by law to provide infrastructure service. Government support provision Government support may take non-contingent (construction grants, import duty exemptions) and contingent forms. One example includes import duty exemptions for the development of 10,000 megawatt power plants by 2020 by PLN in cooperation with IPPs (Wiryawan and Deertz, 2010). In May 2006 the GoI issued its Minister of Finance Regulation 38 (later known as PMK 38/2006) concerning the operational guidelines for managing risk in infrastructure investments. This regulation covers the following PCP project risks: political risk (e.g., adversarial government-related actions, changes in legislation, convertibility and repatriation restrictions), project performance risk (e.g., rightof-way-associated risk, operational risk), and demand risk. To demonstrate their support, the GoI was willing to share these project risks with project sponsors. By the end of 2010, the GoI issued Presidential Regulation 78 to regulate the guarantee provision for PCP projects. This regulation has at least three important implications. First, it is more restrictive than PMK 38/2010 in terms of guarantee coverage. Guarantee provision is now only possible against risk that is better controlled and managed by Penanggung Jawab Proyek Kerjasama (PJPK; the implementing and contracting authority) or that emerges from either PJPK’s or the governments’ actions. Second, this regulation mandates the state-owned infrastructure company (in this case, PT Penjaminan Infrastruktur Indonesia (PT PII; Indonesian Infrastructure Guarantee Fund, established in 2009) to act as a single clearance agent for any government support provision. Third, this regulation grants PT PII the right of regress against the liable PJPK because PJPK has better control over the guaranteed risk. As an operational guideline, the GoI enacted Minister of Finance Regulation 260/2010, which automatically annulled the

Public Private Partnership within the Indonesian context 159 aforementioned PMK 38/2006 before the latter was ever tested in practice. The passage of this new legislation marks a change in the government’s approach towards covering risk, by moving from a regulatory to a contractual basis in defining risks that government guarantees may cover. In addition to government guarantee, the GoI provides other contingent and non-contingent support in various forms to deal with certain issues that can substantially hinder infrastructure development. In the Indonesian toll road sector, land acquisition has been an ongoing problem, and it is one of the main causes for the slow progress of Indonesia’s toll road development. To protect project sponsors from escalating land-cost risk, in 2008 the GoI, through the Ministry of Public Works, issued Regulation 12/PRT/M/2008 to introduce a land-capping instrument. Under this instrument, a project sponsor only has to incur the land cost of either 110 percent of the land cost that was estimated in the contract, or 100 percent of the estimated land cost plus 2 percent of the total investment cost estimated in the contract, whichever is greater; the GoI is responsible for the remaining cost. As of 2013, the GoI has allocated a budget of IDR 4.89 trillion for this instrument. Regarding the toll road sector, the GoI has initiated the land-revolving fund (LRV) to help project sponsors fund land costs, as commercial lenders are commonly reluctant to disburse loans when land-acquisition-related issues have not been settled. The GoI allocated IDR 2.3 trillion in 2011, IDR 3.9 trillion in 2012, and IDR 900 billion in 2013. However, this allocation does not automatically represent real disbursement, as the land acquisition process is often protracted, and characterized by hard negotiations with landowners and other problems. In order to accelerate progress in the toll road infrastructure, the GoI has set up the land acquisition fund (LAV) to help improve the financial feasibility of PCP projects. From 2011 to 2013, the allotted state budget for the LAV was about IDR 600 billion. Other support options are the Project Development Facility (PDF) and the Geothermal Fund Facility (GFF). The PDF is aimed at helping PJPKs develop their projects before the projects are offered as PCP projects; PCP projects were often ill-prepared, making prospective investors doubtful of their success. The GFF can be used to facilitate adequate site investigation for sound project feasibility studies, so as to reduce exploratory risk for geothermal development activities. The GFF, managed by PT Pusat Investasi Pemerintah (Indonesia Investment Agency), will be made available until 2016. In 2013, it received a total allocation of about IDR 1.1 trillion from the GoI. The GoI is now preparing to adapt the Performance-based Annuity Scheme (PBAS) that is practiced in India (Coordinating Ministry for Economic Affairs, 2013). Under this scheme, upon the completion of a project, the GoI reimburses the private concessionaire, along with operation and maintenance costs for a specified period, based on the achievement of performance specifications. This scheme may be suitable for financing less-bankable infrastructure projects. Most recently, the GoI announced the provision of Viability Gap Funding (VGF), modeled after India’s VGF scheme. This funding aims to help improve the

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viability of financially infeasible, but economically justified, PCP projects. The VGF takes the form of capital grants for construction. Indonesia’s VGF is generally similar to India’s, except with regard to the amount that the GoI can provide. Based on Minister of Finance Regulation 143/2013, the maximum VGF should not dominate the total project cost; in contrast, in India, the maximum VGFis 20 percent of the total cost, with a further possible 20 percent if proposed by the sponsoring government agencies. The amount of VGF will be set as the sole bid parameter in the request for proposals for specific PCP projects, with the bidder of the lowest VGF winning the contract.

Financial context The source of capital for typical major infrastructure projects comes from debt financing (70–80 percent) and equity financing (20–30 percent). In Indonesia’s PCP market, banking institutions still appear to dominate debt financing, with the key players being state-owned banks (e.g., BNI, Mandiri, BRI), large domestic private banks (BCA, BII, CIMB Niaga), branches of foreign banks (HSBC, SMBC, Standard Chartered, ANZ, DBS, ICBC), offshore players, and multilateral development banks (e.g., IFC, ADB; Michael, 2013). This situation is likely to continue as the Bank of Indonesia relaxed the maximum credit limit via Bank of Indonesia Regulation 7/3/PBI/2005, from 25 to 30 percent for banks that lend to SOEs to finance development projects of public interest. Other debt capital providers include export-credit agencies and infrastructure financing institutions, while private equity providers usually act as strategic investors, private equity or hedge funds, or infrastructure financing institutions (Michael, 2013; see Figure 10.1). In general, the market for IDR-denominated financing is liquid, with tenors of up to 15 years (up to 20 years for off-shore projects) depending on the type of institutions. There are a few genuine limited-recourse deals by local players (Michael, 2013; see Table 10.1). A new player that might be an engine for financing Indonesia’s public infrastructure projects is PT Sarana Multi Infrastructure (PT SMI), a non-bank SOE financing institution established in 2009 by the GoI. This institution not only provides flexible and long-term capital (e.g., equity; senior, junior, and convertible loans) but also advisory services for PPP project development, including the management of PDFs (www.ptsmi.co.id). Similarly, Indonesia Infrastructure Finance (IIF) is a quasi-private firm established in 2010 to provide long-term funding for infrastructure projects. The IIF was founded with an initial capital of IDR 1,600 billion from the GoI through PT SMI (IDR 600 billion), Asian Development Bank (IDR 400 billion), International Finance Corporation (IDR 400 billion), and Deutsche Investitionsund Entwicklungsgesellschaft (IDR 200 billion; www.ptsmi.co.id). The IIF also offers a wide range of financial products and services, including senior loans, refinancing, subordinated loans, equity, guarantee, and standby financing, as well as syndication and advisory services (www.iif.co.id).

20–30% Equity financing

Equity

Convertibles

Mezzanine

Subordinated loan

70–80% Debt financing

• • • •

Infrastructure financing institutions (e.g., SMI/IIF)

Private equity / hedge funds

Strategic investors

Source: Michael, 2013

e.g. multilateral member countries, capital markets

e.g. government, multilaterals, private investors, capital market

e.g. multilateral member countries, capital markets

Multilateral development banks Infrastructure financing institutions (e.g., SMI/IIF)

e.g. government, private investors

e.g. deposits (mostly short-term for domestic banks) and capital markets

Sources of fund

Export credit agencies (ECA)

Banks International banks Large domestic banks Local branch of foreign banks Small-to-medium domestic banks

Financing institutions

Figure 10.1 Financial context in public–corporate partnership project development

Inffrastructure project investment

Typical financing mix

Quasi – Equity

Yes

Local branch of foreign banks

Yes

Indonesia Infrastructure Finance (IIF)

Source: Michael, 2013

Yes

Pension funds Yes

Yes

Yes

Large domestic banks

Small-to-medium domestic banks

Yes

International banks

Yes

Yes

Multilaterals

Debt Facilities

Yes

Mezzanine Facilities

Export credit agencies

Type of Institutions

Yes

Yes

Yes

Yes

Yes

Pure Project Finance as Acceptable Structure

Table 10.1 Characteristics of major financing institutions in Indonesia

Yes

Strong Long-term IDR Currency Funding

Yes

Yes

Yes

Require Government Guarantee

Long to medium

Medium

Medium to short

Medium to short

Long to medium

Medium

Long

Can be very long

Tenor

Public Private Partnership within the Indonesian context 163

Institutional framework There are at least eight key stakeholders in PCP project development; these are ministers or lembaga heads, regional heads, or SoE heads (later acting as PJPK); Badan Perencanaan dan Pembangunan Nasional (Bappenas; National Development Planning Agency); Komite Percepatan Pembangunan Infrastruktur Indonesia (KKPPI; Committee for Infrastructure Development Acceleration); Badan Koordinasi Penanaman Modal (BKPM; Investment Coordinating Board); Risk Management Unit-Ministry of Finance (RMU-MoF); Badan Pertanahan Nasional (BPN; National Land Agency); Ministry of Environment (MoE); and PT PII (see Figure 10.2). The flow begins with project identification, selection, and prior prioritization, which is undertaken by ministries, lembaga (institutes, ministry-equivalent agencies), or local governments after a thorough examination and public consultation (Stage 1). These government bodies prepare the list of priority projects and submit them, together with their supporting preliminary studies, to Bappenas. The processes of land acquisition, as well as environmental impact assessment (EIA) and consultations with BPN and MoE, must be initiated at this stage. In the next stage (Stage 2) Bappenas examines the project’s outline business cases and evaluate their level of readiness for offer. Based on a set of eligibility criteria, Bappenas classifies these projects into potential, priority, and ready-for-offer projects and publishes them to gain interest from prospective project sponsors (see Figure 10.3; the list of projects is downloadable at pkps.bappenas.go.id). If necessary, at this stage, some projects must also secure in-principle approval for government support from the Minister of Finance and/or in-principle approval for government guarantee from PT PII. At this stage, pre-feasibility studies are finalized, while the processes of obtaining in-principle approvals from MoF and PT PII, as well as land acquisition and EIA, continue. The final output of this stage is project preparation documents. The project development then continues to the next stage (Stage 3). Once land acquisition issues have been settled, the necessary in-principle approvals have been obtained, and bidding documents have been prepared, the procurement of project sponsors can begin. For this purpose, PJPK sets up a procurement committee to undertake all the procurement processes, from bid document preparation to bid evaluation. Based on the committee’s recommendation, PJPK makes the decision and signs the contract with the winning bidder. The next and final stage (Stage 4) is contract monitoring. Within 12 months (at the latest) after the signing of the PCP agreement, the project sponsor must reach financial closure. If the project sponsor fails to meet this deadline, PJPK can grant another 12-month extension, on the condition that this failure is not due to the project sponsor’s negligence. If this also fails, PJPK is entitled to terminate the agreement and forfeit the bid bond. Once they have met all the procurement requirements, the project sponsor can start implementing the PCP project. Contract implementation, including allocation and disbursement of non-contingent and/or contingent supports, will be routinely monitored.

PJPK, Bappenas, MoE, BPN

Modified from National Development Planning Agency, 2013

Bid implementation

• Government support and/or government guarantee confirmation

• Process for requesting government support and/ or government guarantee

PJPK, Bappenas, KKPPI, BKPM, RMU-MoF, MoE, BPN, PII

Land acquisition process

PJPK, Bappenas, KKPPI, BKPM, RMU-MoF, MoE, BPN, PII

• PCP agreement • Guarantee and regress agreement

Finalization and signing PCP Agreement

Bid preparation

Stage 3 Procurement

• Project preparation document

Figure 10.2 Institutional framework in public–corporate partnership project development

Stakeholders

Project readiness

Completion of pre-feasibility study (Final business case)

Outline business case

Stage 2 Development

Environmental impact assessment process

• List of priority project • Preliminary project reports

Output

Project prioritization

Project identifcation and Selection

Activities

Stage 1 Identification Contract implementation monitoring

PJPK, Bappenas, KPPI, BKPM, RMU-MoF, PII

• Allocation, disbursement, monitoring process of government support and/ or evaluation of guarantee and regress agreement

• Routine monitoring report

Contract implementation monitoring plan

Stage 4 Contract monitoring

Public Private Partnership within the Indonesian context 165 Project classification

Criteria

• • Potential

• • •

•

• •

Listed in PPP Potential Project Plan or proposed by contracing agency as non-solicited projects Legally, technically, and financially feasible based on pre-feasability studies Project-associated risks and their allocation already identified Best option for PPP modality already defined Government supports, if any, already identified

• • • •

Bidding documents already completed PPP procurement team established and ready to execute Procurement schedules already set Government supports, if any, approved

• Priority

Ready for offer

Conformity with the national/regional mid-term development plan and the infrastructure strategic plan Conformity of the project site with the regional spatial planning Linkage across infrastructure sectors and across regional areas Cost recovery potential identified Preliminary studies available

•

Figure 10.3 Public–corporate partnership project classification and criteria Source: National Development Planning Agency (2009)

Non-solicited proposals The GoI also welcomes non-solicited proposals from corporate or foreign-legal entities seeking to invest in potential capital infrastructure projects. These proposals are submitted to and evaluated by the relevant minister, lembaga head, or regional head on the basis of their fitness of public need. The minimum requirements for non-solicited proposals are that the proposed projects are not on the government’s list, must be integrated with the sector plan, and are economically and financially feasible (i.e., do not require any government support). Once approved, non-solicited projects will be included into the master plan. To ensure transparency and fairness, the GoI will request for competing proposals in open biddings. Three compensation options are available: a bid premium, a developer fee, or a right to match, as a recognition for the original proponents’ efforts in developing their proposals. Government guarantee provision The government support provision can be broadly divided into four stages: consultation and guidance; screening; appraisal; and contract structuring. Two stakeholders are involved; PJPK is the contracting agency requiring some form of contingent support, and PT PII is the arm of the GoI that appraises the proposal, structures necessary contracts, and provides the required guarantee (see Figure 10.4). In the screening process, PT PII evaluates prima facie the eligibility of projects for support; for example, if the project will be procured on a competitive

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Indonesia Infrastructure Guarantee Fund (PII)

Start

Collect information on process and guarantee provision

Provide guidance on process and guarantee provision

Screening form: • Cover letter • General description of project • Outline business case

Submit screening form

Evaluate the eligibility of project for gurantee

Guarantee application package: • Request letter • Feasibility study • Project structure • Risk allocation matrix • Agreement draft • Required government guarantee • Required government coverage • Environmental and social impat analysis • Project management plan

Consultation and guidance

Is project eligible for guarantee ?

Issue confirmation to proceed for eligible project

Submit guarantee application package

Y Meet efficient risk allocation principle ?

Evaluate the feasibility of project for gurantee

Y

Issue letter of intent for viable project

Finalize drafts on guarantee agreement and regress agreement

Y

Can risk be covered by guarantee ?

Appraisal

N

N

N

Issue the confirmation to gurantee

End

Screening

Structuring

Reject the guarantee proposal

Figure 10.4 Stages of government support provision

basis in accordance with prevalent regulations or if the project sector is on the positive list, as set forth in Presidential Regulation 67/2005. Given that the project is found to be eligible, PT PII requires PJPK to submit a guarantee application package, appraise it once it arrives, and finally decide whether or not the required guarantee can be made available. If approved, PT PII will issue the commitment to guarantee, which will then be part of the project’s bidding documents. In specific cases for which feasible PCP projects are too big to be guaranteed due to the size of guarantee exposures relative to PT PII’s capital adequacy, PT PII may seek co-guarantees with the Ministry of Finance. The guarantee beneficiary needs to pay a guarantee premium to PT PII, consisting of an upfront fee and recurring fees. The premium rates depend on the size of the investment and risk exposure; indicatively, the upfront fee is about 100 basis points (bps) and recurring fees range between 50 and 100 bps. The coal-fired Central Java Power Plant (2 ´ 1000 MW with a total investment is about IDR 3 trillion) was the first PCP project to receive government guarantee from PT PII. Viability gap funding provision The provision of VGF is an iterative process between PJPK and the VGF committee of the Ministry of Finance (see Figure 10.5). The process begins with the proposal submission by PJPK to the VGF committee, which then evaluates the submission procedures, the substance and completeness of documents, the rationale, and the

Public Private Partnership within the Indonesian context 167 Contracting Agency/PJPK

Submit/revise VGF proposal

VGF Committee

Minister of Finance

Evaluate the VGF proposal Meet requirement ?

Y

Recommend in-principle approval

Issue in-principle approval

N Reject the proposal and request for revision

Report to the Minister of Finance

Figure 10.5 Viability gap funding support provision

required amount of VGF support. If any of these criteria are not met, the committee notifies PJPK, files a request for revision, and reports to the Minister of Finance. If approved, the committee will send the Minister of Finance a recommendation for an in-principal approval. The final decision rests with the Minister of Finance. A VGF facility should be, to the maximum possible extent, only an option of last resort to make a PCP project financially feasible. Coordination mechanism issues Although the sequence of PCP implementation from initiation to implementation is relatively clear, two key questions remain: who will take a lead and, as every stage involves several government bodies, how the coordination mechanism among stakeholders is effectively and efficiently structured. If not adequately addressed, these issues may render PCP projects obsolete before they can even attempt to attract private commitments. The absence of coordination could result in fragmented, sectoral, and institutionally oriented approaches, which might sacrifice value for money. One compelling example is, again, the case of the Umbulan Spring project. This project – with an estimated cost of IDR 1.8 trillion (bppspam.com, accessed 24 January 2014) – stalled for years because of coordination problems among stakeholders, involving the East Java provincial government as PJPK and five municipal governments. These problems repeatedly delayed the procurement of a project sponsor since the initial request for proposals in 2012. Three out of five bidders reportedly withdrew their bid proposals, making the future of this project, as of the time of preparing this chapter (2014), unclear. The presence of a powerful and resourceful government unit is essential to streamline PCP activities. Indonesia had KKPPI, an inter-ministerial committee chaired by the Coordinating Minister for Economic Affairs, but it has tended to hibernate since its establishment in 2005 and now has only a minor role with regard to infrastructure development. Recently, there have

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been efforts to reenergize this committee, although it will take time to see if these efforts succeed.

Organizational structure At the project level, the organizational structure model broadly depends on the nature of investments, whether they are of the retail or wholesale infrastructure type. Retail infrastructure effectively delivers the service to end users, customers, or the general population, while whole infrastructure provides a supply or service to a single entity, usually a government or local entity (Crotty, 1999). In Indonesia, some sectors exclusively use a single model, while others may adopt either. For instance, a special purpose vehicle (SPV) can supply water directly to Perusahaan Daerah Air Minum (municipal water utilities) under a B–B arrangement, with these utilities being the off-takers, or to end-users in areas not covered by utilities. In the electricity sector, there are several options for a SPV: selling electricity to PLN under power purchase agreement, to the regional or local government, to end-users, or for captive use. Retail and wholesale models have a common feature, in that they both center on a SPV, a legal independent entity created by project sponsors to act as the counter-contracting party of PJPK under a PCP arrangement. This SPV will also enter into agreements with various stakeholders. Specific to Indonesian cases, given that a government guarantee is required, PJPK will sign a regress agreement with PT PII. Figures 10.6 and Figure 10.7, respectively, demonstrate typical structures of retail infrastructure (e.g., toll roads) and wholesale infrastructure (e.g., electricity and water supply). Project sponsors

PJPK

Regress agreement

PII

Sh

ar eh

ol

di

ng

PCP agreement

Contracting authority

nte

ara

Gu

Service provision

Supply agreement (if any)

Input supplier

nt

me

ree

g ea

SPV

End-users Fee for service

M O&

Operator

a

Le

Construction agreement

t

en

m ee gr

nd

ing

ag

Contractor

Figure 10.6 Typical structure of retail infrastructure in Indonesia

re e

m

en

t

Creditors

Public Private Partnership within the Indonesian context 169

Project sponsors

Subsidy (for certain user group)

Special assignment

Government

Service provision

PJPK Contracting authority

Fee for service

End-users

Re ar eh

ol

di

ng

gr es

PCP agreement

Sh

s

re e

m

en

t

Supply agreement (if any)

Input supplier

ag

Guarantee agreement

SPV

PII Fee for service

&M

O

Operator

a

Le

Construction agreement

t

en

m

ee gr

nd

ing

ag

re e

m

en

t

Contractor

Creditors

Figure 10.7 Typical structure of wholesale infrastructure in Indonesia

Extent of use for public–corporate partnership adoption The adoption of PCP arrangements is, at present, more focused on the development of economic infrastructure facilities, with very limited applications in social infrastructure services (e.g., schools, hospitals, sport facilities). The PCP regulatory framework for social infrastructure is circumscribed for specific cases, quite often only in the form of municipal government regulations (although these are also not very common). This comes as no surprise, because the participation of profit-oriented entities, especially private investors, in social infrastructure financing and operation tends to be more vulnerable to abuse of commercialization and public exploitation for the benefit of investors. Public skepticism and opposition can increase, especially if the public has long been accustomed to public delivery services for free or at subsidized rates. Taking this sensitivity into account would leave political decisionmakers prone to criticism by the public when engaging PCP models. Based on Presidential Regulation 67/2005, there are opportunities for PCP infrastructure investment in the following eight sectors: transportation (e.g., sea, river, and lakeports; airports; railways and rail stations), roads (e.g., toll roads and toll bridges), irrigation (e.g., raw water distribution), water supply (e.g., raw water intake, transmission, distribution; water treatment), wastewater (e.g., wastewater treatment, primary collector of networks, solid waste facilities such as collection and disposal sites), telecommunications networks, electricity (e.g., generation,

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transmission, distribution), oil and gas (e.g., processing, storage, transportation, transmission, distribution). To attract more capital inflow for these infrastructure sectors, the GoI has made a concerted effort to make domestic and foreign prospective investors feel welcome. The GoI’s aggressiveness in pursuing PCP investment in infrastructure has re-started since 2004. A number of infrastructure events have been organized to gauge private sector and other entities’ interests. In January 2005, for instance, the GoI hosted the Indonesian Infrastructure Summit, at which more than 90 projects with a combined value of USD 22.5 billion across different sectors were offered. This event attracted high interest but few commitments: for example, by the end of 2006, only 3 out of 25 potential toll road projects had successfully gained private funding. The Coordinating Ministry for Economic Affairs seemed to not have a clear-cut strategy with regard to the required regulations, risk guarantees, and pricing strategies (Aswicahyono and Friawan, 2008). After some delays from the original schedule, in November 2006, the GoI held the first Indonesian Infrastructure Conference and Exhibition (IICE), at which ten highly promoted projects, with a combined worth of about USD 4.5 billion, were launched; however, again, external responses remained sluggish. Since 2009, this IICE event has later been an annual agenda for the GoI. Infrastructure market: past and current In 2009 the GoI published the PPP Book (note, this is not the PCP Book) listing 87 projects across different sectors. One year later, the GoI revised the list to contain 100 PPP projects with a total value of more than USD 47 billion (National Development Planning Agency, 2010). In 2011, the GoI dropped 33 projects from the list but added 13 new projects. The updated total number was 79 projects, together worth about USD 53 billion (National Development Planning Agency, 2011). In 2012, the number of PPP projects changed again, following recent developments. At this point in time, the GoI offered 58 projects, with investments totaling USD 51 billion (National Development Planning Agency, 2012). Recently the GoI published the 2013 list, which contains only 27 PPP projects with a total combined value of USD 47 billion (National Development Planning Agency, 2013). Tables 10.2 and 10.3 detail the number and total cost of Indonesia’s PPP projects by status and sector for 2009–2013. Taking the number of projects tendered into account, a substantial number of projects were clearly eliminated and downgraded. One example was the aforementioned Sunda Strait Toll Bridge Project, which was downgraded from ready for offer in 2011 to priority in 2012. However, this is not the only such example, with nine priority projects and 21 potential projects from the 2012 list no longer listed in 2013. Despite this, Indonesia’s infrastructure market still has great potential. Public–corporate partnership modalities In Indonesian toll roads, greenfield investments are almost equivalent to build– operate–transfer (BOT) projects. Under this model, a project sponsor is required to

Public Private Partnership within the Indonesian context 171 build a facility, commercially operate it for a certain concession period, then transfer it back to the host government at the expiration of the concession, usually at no cost. There are a few examples of times when the GoI built toll roads and later contracted their operation out to toll road operators (Model A), or when the GoI and the project sponsor shared the construction costs of toll roads, and the project sponsor was then allowed to operate those roads for a specified concession period (Model B). Table 10.2 Number of Indonesia’s Public–Private Partnership projects (2009–2013) Status

Sector

Year 2009

Ready-for-offer

Prioritya

Potential

2010

2011

2012

2013

Sea transportation

1

1

2

1

0

Air transportation

0

0

1

0

0

Railways

2

0

0

0

0

Toll roads

3

0

2

1

0

Water supply

1

0

6

0

0

Solid waste and sanitation

0

0

2

1

0

Power

1

0

0

0

0

Land transportation

0

0

0

0

1

Air transportation

0

0

0

1

0

Railways

0

0

0

0

3

Toll roads

8

17

17

13

5

Water supply

8

6

0

5

2

Solid waste and sanitation

2

3

2

3

2

Power

0

0

2

4

1

Land transportation

1

2

2

3

0

Sea transportation

5

11

4

3

3

Air transportation

3

7

7

3

2

Railways

13

9

3

3

4

Toll roads

21

18

3

0

3

Water supply

11

18

18

13

0

Solid waste and sanitation

0

3

4

2

1

Power

7

5

4

2

0

87

100

79

58

27

–

4

5

12

21

Total Number of projects under tender processes

Note:a The term priority was changed to prospective in 2013. Summarised from National Development Planning Agency (2009; 2010; 2011; 2012; 2013).

Sea transportation Air transportation Railways Toll roads Water supply Solid waste and sanitation Power Total Land transportation Air transportation Railways Toll roads Water supply Solid waste and sanitation Power Total Land transportation Sea transportation Air transportation Railways Toll roads Water supply Solid waste and sanitation Power Total

Ready-for-offer

34,129.50

24.00 0.00 1,440.00 1,000.00 54.00 0.00 2,000.00 4,518.00 0.00 0.00 0.00 2,474.00 500.00 120.00 0.00 3,094.00 5.00 1,012.00 1,416.50 10,520.00 11,774.00 105.00 0.00 1,695.00 26,527.50

2009

47.298.93

36.00 0.00 0.00 0.00 0.00 0.00 0.00 36.00 0.00 0.00 0.00 7,591.57 521.87 220.00 0.00 8,333.44 274.00 2,859.29 1,557.80 9,547.30 19,261.33 1,327.50 57.27 4,045.00 38,929.49

2010

53,408.10

1,198.50 213.61 0.00 25,670.40 a 311.47 130.00 0.00 27,523.98 0.00 0.00 0.00 8,221.20 0.00 120.00 2,040.20 10,381.40 274.00 2,860.22 1,972.80 4,385.30 1,810.50 1,363.83 50.27 2,785.80 15,502.72

2011

Year

51,205.97

36.00 0.00 0.00 628.00 0.00 100.00 0.00 764.00 0.00 214.00 0.00 32,519.53 a 590.67 150.00 4,716.50 38,190.70 136.00 2,839.12 1,140.00 4,783.00 0.00 1,388.15 203.00 1,762.00 12,251.27

2012

47,337.99

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 21.60 3,531.63 0.00 28,001.68 a 238.84 70.00 1,335.50 33,199.25 0.00 3,721.39 1,010.00 7,488.04 1,645.80 173.50 0.00 0.00 14,138.74

2013

Note: a Including the Sunda Strait Toll Bridge Project, with a total cost estimated at USD 25,000 million; summarised from National Development Planning Agency (2009; 2010; 2011; 2012; 2013)

Grand Total

Potential

Prioritya

Sector

Status

Table 10.3 Project costs of Indonesia’s Public–Private Partnership projects (2009–2013; in USD million)

Public Private Partnership within the Indonesian context 173 While the BOT model is appropriate for financially feasible toll road investments, the two models mentioned in the preceding paragraph are frequently adopted for marginally feasible or infeasible investments. Based on data from the Ministry of Public Works (2010), 20 toll roads with a total length of 732 km and a total estimated cost of USD 7,074.31 million, accounting for 86 percent (of total investment costs) of the total ongoing toll road development, were implemented under the BOT model: one toll road with an estimated length of 9.48 km and cost of USD 262.7 million (3 percent of total investment) was financed under Model A, and two toll roads with total lengths of 179 km and cost estimates of USD 903 million (11 percent of total investment costs) were financed under Model B. Indonesia’s water supply sector usually uses the BOT model for greenfield investments, and the concession model for brownfield investments. Under a concession, an operator has the long-term right to use all utility assets conferred on the operator, including responsibility for all operation and investment (ppp.worldbank. org). Other modalities, such as an operation and maintenance (O & M) contract, joint operation (JO), build–transfer (BT), or build–operate–own (BOO) models are also sometimes applied, although less frequently (see Appendices 1 and 2). In the electricity sector, several options are available, including BOT, BOO, and build–lease–transfer (BLT). Instances include coal-fired power plants in South Sumatera–9 Mulut Tambang (2 × 600 MW) and South Sumatera–10 Mulut Tambang (600 MW), as well as the Karama hydro power plant, all of which were offered in IICE 2012 and will be implemented on a BOT basis. The BOT system is also frequently employed in the transportation and solid waste sectors. A recent example is the Bandung monorail project, with an estimated cost of USD 2.87 billion, which is currently open for investment under the BOT model.

Future development The trend of using the PCP (or PPP, to be specific) model will likely remain positive, without any sign of weakening; the gap between the supply of government funding and demand for infrastructure has tended to widen over time, and this gap must be bridged. In 2011, The GoI promulgated Presidential Regulation 32 on Master Plan Percepatan dan Perluasan Pembangunan Ekonomi Indonesia (MP3EI; the master plan of acceleration and expansion of Indonesia’s economic development) for 2011–2025. The MP3EI, aimed at promoting Indonesia’s competitiveness in global market, will play an integral part in the mid-term development plan for 2005–2025. The MP3EI program identifies six economic corridors that will serve as centers for economic development: Sumatera, Java, Kalimantan, Bali–Nusa Tenggara, and Papua–Maluku. Each area has different comparative advantages and strategic roles. Given the fact that Indonesia is an archipelago, the successful implementation of this program will largely hinge on the availability of efficient infrastructure systems, especially those that support regional connectivity. A rough estimate suggests that this plan will require about IDR 1,650 trillion (40 percent of the total required funds) for infrastructure. Hundreds of projects

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were identified, with 40 of them (with a total combined investment of IDR 340 trillion) classified as priority projects. Again, the GoI’s budget would be insufficient for funding all of these identified projects. The GoI will provide the financing for the majority of the 15 projects breaking ground in 2014 (with an estimated cost of IDR 36 trillion) through the state budget. The other 25 priority projects are tentatively scheduled to begin in 2017 at the latest; the GoI expects the private sector to participate in the development of 14 projects under PPP schemes, has mandated SOEs to pursue two projects, and will undertake the remaining projects using state monies (Coordinating Ministry for Economic Affairs, 2013). The aforementioned examples make it clear that the reliance upon PPPs for public infrastructure procurement will only increase in coming years. From the economic point of view, Indonesia now has a more solid foundation and, hence, increased resilience against fluctuating global economic conditions. International confidence regarding Indonesia’s economy has also increased. Politically, Indonesia is one of Asia Pacific’s most vibrant democracies that has maintained political stability (www.worldbank.org). All these improvements should provide considerable momentum for the GoI to attract long-term interest from prospective private investors. However, this momentum can easily be lost if the GoI does not take a proactive stance. Challenges ahead The biggest challenges facing PPP implementation in Indonesia can be summed up in three Cs: commitment; coordination; and capacities. A strong commitment to sustaining policy continuity is one of the most critical factors determining the success of PPP development (Wibowo and Alfen, 2014a). Changes in administration and external shocks (e.g., the 1997 Asian crisis) will test whether or not the MP3EI program and other infrastructure programs, and by extension PPP development, can sustain themselves in the long run. Infrastructure investments are often politically sensitive and changes in the administration may result in changes in policies, which can affect project sustainability; a high degree of asset specificity would leave private investors with few options if policy changes threatened their interests. Therefore, the GoI’s commitment to maintaining established policies would reduce one of the greatest investment risks and uncertainties in infrastructure: obsolescing bargain risk. In Indonesia, coordination seems to be the hardest word in government decision-making overall, not just regarding PPP infrastructure development. Establishing a dedicated PPP center may be one way to solve this issue. This idea has been present for years, but only recently has the GoI begun the process of establishing such a center. This center has been envisaged as an independent and centralized organization with access to fiscal budget allocation decisions, with the goal of ensuring policy consistency, quality control, and transparency. Such a center would help to establish standards and principles, and to monitor their implementation for compliance (National Development Planning Agency, 2013). However, this center must also be supported by an adequate mandate and have

Public Private Partnership within the Indonesian context 175 sufficient political support (World Bank and Public–Private Infrastructure Facility Advisory, 2007). Finally, the capacity of the public sector is still a challenge. Public sector capacity refers to the ability of the permanent administrative machinery of a government to implement policies, deliver services, and provide policy advice to decision-makers (Polidano, 2000). It is paramount that governments have sufficient awareness of key legal and contractual issues to ensure that projects are properly structured, contracted, implemented, and monitored (Department of Economic Affairs and Asian Development Bank, 2002). Public sector officials, especially those who are part of PPJK, often lack the necessary skills and knowledge regarding PPPs (Wibowo and Alfen, 2014b). The Organisation for Economic Co-operation and Development (2012) recommended that the GoI takes steps to strengthen PJPK’s capacities, with regard to all of the key phases of PPP procurement. International research collaboration Due to its unique and immense investment opportunities, Indonesia should be a promising country-laboratory for PPP-related research and experiments. However, the number of studies centered on Indonesia is limited, and, overall, existing studies do not represent this country’s recent PPP development accurately. The initiatives to promote international collaboration for joint research projects are, unfortunately, minimal. Knowledge exchange with international PPP experts would certainly improve the quality of research efforts. Cross-country studies would bring a more comprehensive understanding of the strengths and weaknesses of each country. Such an initiative would not necessarily lead to a high cost of operation, as advances in information technology now enable effective virtual collaboration. Third-party support (e.g., industry, multilateral organizations) can also promote collaborative research. The establishment of a center for a PPP network – at least at the regional level – would be ideal, connecting countries with common interests and coordinating PPP research activities. While researchers should be the initiative’s backbone, the GoI can also play a more active role in facilitating them via the government-to-government channels that it has.

Conclusions Indonesia’s PPP development is like a roller coaster: it has ups and downs from period to period, at least on the policy level. Rebounding from its lowest level after the 1997 crisis, the development has begun to rise, and it will likely continue unless substantial changes in government policy or external factors stop it. The GoI must harness the momentum it has already gained to attract private-sector investors to be the passengers on this rollercoaster, willing to take a ride (i.e., pursue projects) for the thrill of attractive returns. However, passengers are only willing to get on the ride if they are sure that the structure is safe und supported by a strong foundation. The GoI has made significant efforts, from reforming legal and regulatory framework to providing government support. However, PPP development is still

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progressing very slowly and lagging behind expectations. The GoI needs to be more innovative and aggressive, and strengthening institutional frameworks and capacity building are of paramount importance. The principle of efficient risk allocation – that risk must be borne by the party best able to manage – must be at the heart of PPP agreements between the GoI and private project sponsors. One issue is the allocation of land risk, which has been the biggest problem in major infrastructure projects. In the past, the private sector had to acquire right of way at its own cost and risk. As a result, many projects stalled for years. In 2012, the GoI enacted Law 2 on land acquisition for public interest, which has been effectively in effect since 2013. While this law does not address all land-associated problems, it at least reduces the uncertainties associated with land acquisition. Starting in 2014, all land risk will rest with the GoI. This implies that PJPK can only tender a PCP (or PPP) project if the land issue has been resolved. However, no less important is the introduction of fair, transparent, and competitive procurement methods to ensure that only the most efficient and capable private bidders win contracts. While Indonesia has long-standing experience in PPP application, limited projects have come to fruition. Nevertheless, Indonesia’s experiences can offer some lessons for other governments who are interested in trying the same route to seek private financing for their infrastructure. First, solid macroeconomic performance is necessary but not sufficient; this strength must be complemented by sustainable political support and sound legal, regulatory, and institutional frameworks. Second, good coordination among government stakeholders is essential to expediting decision-making processes. Good coordination requires good communication, which can happen only if government stakeholders speak the same language (i.e., share a basic understanding) about PPP. Third, the readiness of projects for offer is another critical point to successful PPP implementation. Too often, Indonesia’s PPP projects were not well prepared, with insufficient or low quality pre-feasibility data. It is too risky for long-term investors to invest sight unseen, especially in infrastructure investments that require enormous capital. Although many projects may be offered, they will never attract private interest if they lack reliable information. Indonesia still has a way to go toward a mature and developed PPP market. However, recent trends have signaled that Indonesia is, despite a number of challenges, at least on the right track; government stakeholders, academics, and researchers working in the area of PPP assume the responsibility to keep it moving forward. Many issues have emerged that constitute avenues for fruitful future research. Some examples include the economic justification of VGF, the coordination of local government-initiated PPP projects, efficiency comparisons between PPP models and public procurement, the need for the establishment of a PPP center, contingent liability analysis of government guarantees, innovative contracting methods, and mechanisms and procedures for the financial management of local financial obligations. A close link between the government, universities, and research institutions will help foster PPP development in Indonesia, making its market as competitive as other countries’ in the near future.

Public Private Partnership within the Indonesian context 177 Appendix 10.1 Public–corporate partnership water supply projects in operation Project

Modality

Medan

BOT

Batam

Total Investment (in USD million)

Concession Period

Project Sponsor

5

2000 – 2025

Suez and TLM

Concession

100

1996 – 2021

PT Adhya Tirta Batam

Palembang (part)

Concession

5

1998 – 2023

PT Adhya Tirta Sriwijaya

Pekanbaru

JO

10

2005 – 2020

PT KTDP and WFI

North Serang

BOO

1993 –

PT Sauh Bahtera Samudra

Jakarta (west)

Concession

225

1997 – 2022

PT Palyja and PT Astratel

Jakarta (east)

Concession

225

1998 – 2023

PT Aetra Air Jakarta

Cisadane

O&M

1998 – 2023

PT Tirta Cisadane and PT Traya

Tangerang

Concession

1997 – 2022

Bintang Heiten and Gadang Berhad

Lippo Karawaci

BOT

10

1999 – 2024

Lippo Karawaci

Bintaro Jaya

BOO

10

1990 –

Pembangunan Jaya

Cikampek

Concession

2000 – 2025

PT WATTS

Bekasi

BOO

10

1993 –

PT Kemang Pratama

Hyundai Industrial Estate

BOO

5

1994 –

PT Hyundai

Kota Legenda

BOO

2.5

1995 –

PT Cikarang Permai

Bukit Indah Cikarang

BOO

1998 –

PT Bukit Indah

Subang

BOT

2005 – 2025

PT MLD

Gajah Mungkur

–

10

2006 – 2026

PT Tirta Gajah Mungkur

Bawean

BOT

10

2004 –

APAC INTI

Sidoarjo

BOT

1998 – 2023 2005 – 2030

PT Vivendi and PT Hanarida

Badung

BOT

10

1995 – 2020

PT Tirta Artha Buana

Samarinda

BOT

5

2004 – 2029

PT WATTS

Banjarmasin

BT

5

2005 – 2010

PT Adhi Karya

5

2.5

0.5

10 2.5

2.5 3

Source: bppspam.com (accessed January 24, 2014)

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Appendix 10. 2 Investment opportunities in public–corporate partnership water supply projects Project

Modality

Capacity (L / second)

Estimated Cost (in IDR billion)

Bekasi (city)

Concession

300

224

Bekasi (regency)

Concession

450

299

Bandar Lampung

Concession

500

371

Bandung (regency)

Concession

500

172

West Bandung

Concession

200

127

Surakarta

BOT

300

N/A

Jatigede

BOT

6000

3800

Semarang (west)

BOT

1050

824

Karian Serpong

BOT

10000

6900

Jakarta, Bekasi, Kerawang

BOT

5000

1890

Umbulan

BOT / Concession

4000

1800

Source: bppspam.com (accessed January 24, 2014)

References Aswicahyono, H., and Friawan, D. (2008). Infrastructure development in Indonesia. In N. Kumar (Ed.), International infrastructure development in East Asia–Towards balanced regional development and integration (pp. 131–165). Chiba: ERIA. Retrieved January 14, 2014 from: www.eria.org/publications/research_project_reports/images/pdf/PDF%20No.2/ No.2-part2-5.Indonesia.pdf. Coordinating Ministry for Economic Affairs (2013). Laporan perkembangan pelaksanaan MP3EI. Jakarta: Author. Retrieved February 3, 2014 from: http://kp3ei.go.id/uploads_ file/20130617094300.2.%20DAFTAR%20ISI_16%20Mei.pdf. Crotty, P. J. (1999). Major constraints to private sector participation: Retail versus wholesale infrastructure. In Challenges and opportunities in transportation (pp. 75–79). Manila: Asian Development Bank. Department of Economic Affairs & Asian Development Bank (2002). Criticality of legal issues & contracts for public private partnerships. Retrieved February 3, 2014 from: www. pppinindia.com/pdf/dea_ppp_criticality_legal.pdf. Krishnamurti, I. (2004). History of railways in Indonesia. Retrieved January 2, 2014 from: http://keretapi.tripod.com/history.html. Levy, S.M. (1996). Build, operate, transfer: Paving the way for tomorrow’s infrastructure. New York: Wiley. Lucas, A., and Djati, A.W. (2007). The politics of environmental and water pollution in East Java. In P. Boomgaard (Ed.), A world of water: Rain, river and seas in Southeast Asian histories (pp. 321–352), Leiden: KITLV Press.

Public Private Partnership within the Indonesian context 179 Michael, R. (2013). Financing infrastructure projects in Indonesia: Current availability and issues. Retrieved February 1, 2014 from: www.eibd-conference.com/assets/files/ Infrastructure%202013/Infrastructure%20-%20Richard%20Michael.pdf. National Development Planning Agency (2009). Public–private partnerships: Infrastructure projects in Indonesia. Jakarta: Author. National Development Planning Agency (2010). Public–private partnerships: Infrastructure projects in Indonesia 2010–2014. Jakarta: Author. National Development Planning Agency (2011). Public–private partnerships: Infrastructure projects plan in Indonesia 2011. Jakarta: Author. National Development Planning Agency (2012). Public–private partnerships: Infrastructure projects plan in Indonesia 2012. Jakarta: Author. National Development Planning Agency (2013). Public–private partnerships: Infrastructure projects plan in Indonesia 2013. Jakarta: Author. Organisation for Economic Co-operation Development (2012). PPP governance in Indonesia: Policy, process and structure. Retrieved October 31, 2013 from: www.oecd. org/gov/regulatory-policy/Chap%206%20PPPs.pdf. Polidano, C. (2000). Measuring public sector capacity. World Development, 28(5), 805–822. The Indonesian electricity system–A brief overview (2012). Retrieved January 14, 2014 from: www.differgroup.com/Portals/53/images/Indonesia_overall_FINAL.pdf. Touwen, J. (2008, March 16). The economic history of Indonesia. In R. Whaples (Ed.), EH.Net Encyclopedia. Retrieved January 14, 2014 from: http://eh.net/encyclopedia/ the-economic-history-of-indonesia/. United Nations Commission on International Trade Law (2001). Legislative guide on privately financed infrastructure projects. New York: Author. Retrieved January 14, 2014 from: www. uncitral.org/uncitral/en/uncitral_texts/procurement_infrastructure/2001Guide_PFIP.html. Wibowo, A., and Alfen, H.W. (2014a). Identifying macro-environmental critical success factors and key areas for improvement to promote public–private partnerships in infrastructure: Indonesia’s perspective. Engineering, Construction and Architectural Management (accepted for publication). Wibowo, A., and Alfen, H.W. (2014b). Evaluating the importance and performance of government-led critical success factors in PPP infrastructure development in Indonesia. Manuscript submitted for publication. Wie, T.K. (2012). Indonesia’s economy since independence. Singapore: Institute of Southeast Asia Studies. Wiryawan, A., and Deertz, W. (2010). Indonesia’s power sector update: Will the lights go out? (Global Energy, Utilities & Mining Group Indonesia No. 35). Jakarta: PricewaterhouseCoopers Indonesia. Retrieved January 3, 2014 from: www.pwc.com/id/en/. World Bank & Public–Private Infrastructure Facility Advisory (2007). Public–private partnership units: lessons for their design and use in infrastructure. Washington, D.C.

11 Public Private Partnerships in the Republic of Ireland Gail Sheppard

Introduction This chapter traces the decisions that led to the introduction of Public Private Partnerships (PPPs) in the Republic of Ireland (ROI). It examines the motivation behind the decision to involve the private sector, and considers if such decision was part of a political ideology, as a result of policy change brought about by the European Union (EU), or due to a lack of public funding. The chapter traces the timeline leading up to the introduction of PPPs by referencing the key reports, acts and political decisions made. The chapter reviews recent decisions made regarding PPPs in the ROI focusing on the review of PPPs in the ROI by the Comptroller and Auditor General (C&AG).

The origins of privatisation and the rationale for PPPs in the Republic of Ireland Privatisation policies in the Republic of Ireland (ROI) have been driven by pragmatism and have been specific to enterprises rather than having been driven by ideology (Palcic and Reeves, 2004). There is a history of private sector involvement in service and infrastructure delivery in the ROI. Religious institutions have run schools and hospitals (Connolly and Wall, 2009), the East-Link and West-Link toll bridges in Dublin were built in the 1980s and 1990s with private sector involvement, there was some privatisation of local authority refuse collection services during the 1990s (Reeves, 2003), and some state-owned enterprises in Ireland have been privatised since the 1980s. PPPs were formally introduced into the ROI following the recommendations in the Report to the Inter-Departmental Group in Relation to Public Private Partnerships (Farrell Grant Sparks and Goodbody Economic Consultants, in association with Chesterton Consulting, 1998). There was little in-depth analysis at the time of why the Irish government adopted this significant shift in public service and infrastructure delivery (Hearne, 2009). The main motivation appears to have been filling the so-called infrastructure gap and implementing the conservative policies of the Minister for Finance, Mr Charlie McCreevy TD:

Public Private Partnerships in the Republic of Ireland 181 The increasing weight of infrastructural investment, which will be required in the future, coupled with the Government’s commitment of fiscal restraint, has presented an opportunity to seek other ways of financing costly capital needs of the country. Therefore it is my aim to attract greater participation from the private sector in the financing and development of infrastructure projects. (Press release, Minister for Finance, 25 May 1998 quoted in Reeves (2003)) The rationale for the adoption of PPPs may be attributed to the problems associated with the ROI’s infrastructural deficit. This came about from the curtailment of the capital programme followed by a period of rapid economic expansion. The period from the 1980s to the early 1990s saw the curtailment of the public capital expenditure programme, with expenditure in real terms falling each year from 1982 to 1989. The renewal of public capital investment from the late 1980s relied heavily on fiscal transfers from the EU (Reeves, 2003). Between 1993 and 2000 the annual real growth rate of the Irish economy was more than double the average recorded over the previous three decades – over 8 per cent compared with 3.5 per cent. Ireland was the fastest growing economy in the OECD by the year 2000 (Reeves, 2003). Despite the EU injections of investment there were concerns about the need for greater investment in physical infrastructure due to Ireland’s rapid economic expansion. There were also concerns about the prospect of reduced investment by the EU (Reeves, 2003). It is arguable that this prospect of reduced investment was a consequence of the rapid economic expansion. It was accepted that it was important to invest in infrastructure to sustain economic growth. The ROI was limited, however, by fiscal constraints in the form of the Maastricht Treaty convergence criteria, imposed by membership of the single European currency.The criteria stipulated that the budget deficit should not exceed 3 per cent and the ratio of gross government debt to GDP should not exceed 60 per cent. However, Ireland’s budget deficit never went above 3 per cent during the 1990s and the ratio of gross government debt fell below 60 per cent in 1998 and remained there until 2008. In fact, the exchequer current account was in surplus consistently from 1996 to the end of 2007 and the overall exchequer balance was in surplus from 1998 to the end of 2004 with the exception of 2003 (Department of Finance, 2003; Department of Finance, 2012). A similar situation occurred in the UK during this period when economic performance was within the convergence criteria, yet the government pursued a policy of Private Finance Initiative (PFI) (Gaffney et al., 1999), although the UK was not subject to the convergence criteria, as it had not indicated a wish to join the euro. Nonetheless, the Minister for Finance decided to promote PPPs as a means of easing burdens on the exchequer (Reeves, 2003). The unanswered question is why, at a time when the country was fiscally healthy, the Irish government pursued a programme of private sector involvement and an injection of private finance in the delivery of service and infrastructural projects. The National Economic and Social Council highlighted one possible reason for the introduction of PPPs as being the perceived benefits of efficiency gains and

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expertise not available in the public sector (National Economic and Social Council, 1999). This point is discussed later in this chapter. Perhaps political expediency is an alternative reason for the introduction of PPPs as they offer short-term political attractions to governments by providing early project infrastructure and also moving capital expenditure off budget (Hodge et al., 2007). On the global political stage PFI-type PPPs enjoy policy popularity as well as commercial attractiveness. They are an attractive policy for governments that are eager to please markets (ibid.). Political expediency might also have been a function in why the government of the day was receptive to the suggestions of the private sector. In January 1998, the Irish Business and Employers’ Confederation (IBEC) and the Construction Industry Federation presented a detailed submission to the Irish government which argued for the use of PPPs as a means of addressing the infrastructure deficit (Reeves, 2003). The rest of this chapter outlines the key reports and steps taken in the ROI that led to the introduction of PPPs. This approach is similar to the one taken by Ciaran Connolly and Tony Wall (2009) in ‘Public Private Partnerships in Ireland: Benefits, Problems and Critical Success Factors’. Farrell Grant Sparks et al. report In 1998, an interdepartmental group (IDG) was established to advise the ROI government on the potential for PPPs. The IDG commissioned a report to explore the possibility of introducing PPPs into the ROI, particularly in roads. Farrell Grant Sparks and Goodbody Economic Consultants, in association with Chesterton Consulting reported to the IDG in relation to PPPs in July 1998. The report developed criteria for and advised on the issues arising in implementing the PPP concept. Among issues addressed were:

• the criteria to be applied in considering whether to adopt the PPP approach, • • • •

taking account of the economic and budgetary contexts; the determination and prioritisation of the key objectives of the PPP approach, with particular reference to roads projects; the possibilities regarding partial self-financing of projects; the construction of hypothetical cases for comparison purposes using a public sector comparator model (PSC) to illustrate costs and benefits of model cases; the identification of areas where the highest level of savings were likely to arise from the use of PPPs.

The report identified three advantages in PPP procurement: focus on service outcomes rather than the provision of assets; optimum risk allocation; and value for money. The report stated that the PPP approach should not be pursued where it is inappropriate, and it listed criteria that are key to reaching a decision on the implementation of PPPs. The report concluded that PPP is not a panacea to be

Public Private Partnerships in the Republic of Ireland 183 applied in all or even the majority of cases. It should be seen as playing an additional or incremental role, which should not displace existing programmes or plans for exchequer capital spending, that is, traditional procurement. The authors of the report discussed the likelihood of so-called hiccups in implementing PPPs, as experienced by the UK. Their discussions with the Treasury Task Force convinced them of the importance of a central PPP unit to be established in the Department of Finance to oversee the PPP process. This was established in January 1999, and at the same time PPP units were set up in the Departments of the Environment and Local Government, Education and Science and Public Enterprise (Connolly and Wall, 2009). The Central PPP unit (http:// ppp.gov.ie/about-the-central-unit) now comes under the Department of Public Expenditure and Reform. The unit also chairs a high level Steering Committee that oversees progress on the PPP projects announced in the recent Government Stimulus Initiative. The remit of the Steering Committee is:

• to ensure the correct projects are selected and that they can be progressed in • • •

a timely manner; to establish milestones and delivery targets for the projects; to identify ways to streamline PPP processes; and to prepare project reports for government.

A similar approach has been adopted in the South African National Treasury where a dedicated PPP unit has been established. It has the final authority in the approval of PPP agreements (Akintoye and Beck, 2009). The National Economic and Social Council, the National Development Plan 2000–2006 and the Programme for Prosperity and Fairness (1999) In 1999 the National Economic and Social Council (NESC), which advises the government on strategic issues for Ireland’s social and economic development, supported the introduction of PPPs in the ROI and justified it as a means of filling the infrastructure gap: As the pace of economic growth in both developed and developing countries over the last 20 to 30 years has proceeded, infrastructure needs have become more acute. Budgetary pressures have forced governments and other public sector agencies to look for alternative solutions to finance infrastructure. The NESC outlined the use of PPPs in Europe and internationally: In Europe, these pressures have been heightened due to the constraints imposed by the Maastricht criteria and now the Stability and Growth Pact. At the same time, there has been a general thrust towards increased privatisation, with growing recognition that private sector provision of services and functions previously provided directly by the State can be more efficient and

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The NESC highlighted another possible motivation for introducing PPP as being the perceived benefits of efficiency and expertise that is not available in the public sector. Outlining the benefits of PPP, the NESC stated that financing costs are only one element as the public sector can borrow more cheaply than the private sector. The main benefit of PPP is that it offers increased value for money over traditional procurement methods. PPP, it stated, is a mechanism for obtaining private sector efficiency and expertise rather than just a way of funding infrastructure projects. The report stated that PPP is not suitable for all projects and a framework should be developed to assess its appropriateness for different projects. It recommended that the choice between PPP and the conventional procurement approach should be made on the basis of a thorough assessment of value for money. Also, the potential to develop PPP in areas of social and community infrastructure should be explored alongside those that provide an economic benefit, such as toll roads. The PPP approach was endorsed by the Fianna Fáil-Progressive Democrat government of the 28th Dáil (1997–2002), when a number of PPP pilot projects were announced in 1999 by the Minister for Finance, Mr Charlie McCreevy TD, in the areas of roads, schools, sewerage or water treatment schemes, a solid waste facility and a section of the Luas light rail project (Connolly and Wall, 2009). The aim of the pilot projects was to identify issues and problems encountered during implementation and to use the information and learning to develop PPP policy and enhance the PPP process – a ‘learning by doing’ approach. The National Development Plan 2000–2006 (NDP) confirmed the government’s commitment to PPP when it listed the potential for PPP in transport and environmental projects (National Development Plan, 2000). Of the total €22.3 billion investment in physical infrastructure planned under the NDP, a minimum indicative target of €2.35 billion (10.5 per cent) was identified to come from private finance (Reeves, 2003). The social partnership agreement, Programme for Prosperity and Fairness (Department of the Taoiseach, 2000) stated that PPP would make a significant contribution to the implementation of the NDP, drawing on the experience gained from the then current PPP pilot projects. It stated that mechanisms would be introduced, agreed by the relevant social partners, and introduced to deliver efficient, transparent and fair contracts, tendering and contractual procedures for traditional and new – PPP – procurement methods.

Framework for PPPs, PPP legislation and the NDFA In November 2001, the Minister for Finance, Mr Charlie McCreevy TD, launched ‘Framework for Public Private Partnerships: Working together for quality public service’ (Public Private Partnership Advisory Group, 2001). The advisory group comprised representatives of the IBEC, the Irish Congress of

Public Private Partnerships in the Republic of Ireland 185 Trade Unions, the Construction Industry Federation and Forfás as well as the main departments and agencies engaged in the PPP programme. The framework stated that the delivery of projects through PPPs gave an opportunity to maximise the interaction and cooperation between the public and private sectors. The principal features of the framework included statements of the scope, principles and goals of the PPP programme, the identification of key project implementation issues, including the requirement for central coordination of the programme by the central PPP unit, as well as recognition of the critical role of social partnership and stakeholder consultation. Throughout 2001 and 2002 a number of Acts were established to facilitate the financing and future participation of the State in PPPs, including (a) the Transport (Railway Infrastructure) Act 2001, which established the Railway Procurement Agency (RPA), an independent statutory public body with responsibility for procuring new metro and light rail infrastructure and services through PPPs, joint ventures or other means, as determined by the Minister with responsibility for Transport (due to be amalgamated with the National Roads Authority); (b) the State Authorities (Public Private Partnership Arrangements) Act 2002, which facilitated the participation by Irish State authorities in the PPP process by providing certainty regarding the powers of Irish State authorities to enter into PPPs and gave local authorities the power to enter into joint ventures; and (c) the National Development Finance Agency Act 2002 which created an agency that reports to the Minister for Finance and makes it the statutory financial adviser on capital projects in excess of €20 million. By the time the National Development Finance Agency (NDFA) was launched in November 2002, the EU had decided that PPP projects should be assessed case by case and, unless significant risk was transferred to the private sector, the funds raised by the NDFA would still count against the general government balance (Reeves, 2003). The funding of infrastructure development by the NDFA is through long-term debt and equity rather than through alternative means of infrastructure financing. Providers of long-term debt have been the European Investment Bank (EIB), the Council of Europe Development Bank (CEB), the National Pensions Reserve Fund (NPRF) (now to become the Strategic Investment Fund), domestic banks, domestic pension funds and foreign investors. Equity funding has been through the sale of long-term bonds (National Development Finance Agency, 2013b). The proceeds from the sale of State assets are also mentioned as an equity source (National Development Finance Agency, 2013a). The role of the NDFA was expanded with the National Development Finance Agency (Amendment) Act 2007. This extended the functions of the NDFA to allow it to establish a Centre of Expertise for procuring PPP projects on behalf of State authorities. Through this legislation, the NDFA was allocated a new procurement function giving the agency the power to enter into PPPs with a view to transferring them to the relevant State authority, or to act as agents for State authorities for PPP procurement. The NDFA issues formal ‘Value for Money’ opinions on potential projects and actively manages the procurement and delivery stages of PPP projects (Murphy, 2013).

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The remit of the NDFA was extended in September 2012 to allow it to provide contract management services in respect of PPP projects. Where contract management services are provided by the NDFA, the contracting authority generally retains responsibility for certain activities, such as approval and payment of invoices, approval of changes to the project agreement, issuing warning or termination notices to the PPP company, determination of benchmarking and market testing of ‘testable’ services and approval of changes to the ownership structure of the PPP company (C&AG, 2013, paragraph 12.8). The NDFA can be considered as a form of what Philippe Burger, in ‘Policy, Finance and Management for Public-Private Partnerships’ calls a ‘dedicated PPP unit within a national treasury department’. He writes that a dedicated PPP unit will monitor and judge the affordability of a project and act as a regulatory body. It will avoid the ‘free-rider’ issue where a government department may decide to go ahead with a PPP, even though it knows it is not affordable because it knows the government will pick up the tab. A dedicated PPP unit will create a centre of knowledge and expertise that can provide advice and assistance to individual departments (Akintoye and Beck, 2009). In the UK, in the HM Treasury’s ‘A New Approach to public private partnerships’, produced in 2012, there is a call for a stronger Treasury role where equity investment will be managed by ‘a commercially-focused central unit located in Treasury ... managed by individuals with the appropriate professional skills to oversee the investment and make commercial decisions’. Developments since 2007 In the National Development Plan 2007–2013, PPPs were to account for 15 per cent of capital investment in the areas of transport, justice, environment, education, arts/sports/tourism and health. Of the €184 billion investment announced in the plan, 50 per cent came out of the current account. There were concerns at the time that this plan was too ambitious, especially in the context of the excessive size of the construction sector: [This report recommends] an NDP for the 2007 – 2013 period that, while still very ambitious, would be significantly below that envisaged in the multiannual capital framework published as part of Budget 2006. This also implies that the government should run a surplus due to a postponement of some investment, which will be available post-2010 to finance the higher investment programme even if public finance had been hit by an economic slowdown. (Morgenroth, 2013) Since the NDP 2007–2013 was abandoned, capital budgets have been cut successively and now amount to just 50 per cent of what had been planned in 2007, even after taking into account a 25 per cent fall in tender prices (Morgenroth, 2013). Since the advent of the credit crunch in Ireland, 24 PPP projects have been put on hold or cancelled, including Metro North, Dart Underground, and the Dublin Waste to Energy (Poolbeg incinerator) contract (Reeves, 2013b).

Public Private Partnerships in the Republic of Ireland 187 The Infrastructure and Capital Investment 2012–16: Medium Term Exchequer Framework was launched in November 2011. A new coalition government was in place consisting of Fine Gael and the Labour Party. The framework stated that PPPs would continue to have a role to play in the delivery of key social infrastructure projects, additional schools bundles and projects in the health sector. It also stated that private funding had been challenging in recent years but where the PPP model could offer value for money, the Department of Public Expenditure and Reform, in consultation with the NDFA, would continue to access private funding. The Department of Public Expenditure and Reform was established in 2011 when the new coalition government came to power. It took over the functions of public expenditure from the Department of Finance and is responsible for overseeing reform of the public sector in light of the recommendations of the ROIs memorandum of understanding with the EU, ECB and the IMF, the so-called troika, of December 2010. The framework also stated that the European Investment Bank (EIB) has been a supporter of the ROI’s PPP roads programme, schools projects and transport projects (Department of Public Expenditure and Reform, 2011). The Oireachtas Joint Committee on Environment, Transport, Culture and the Gaeltacht conducted an in-depth analysis of the provision of water in Ireland and reported to the Dáil and Seanad in June 2012. This was prompted by the government agreeing to undertake an independent assessment of the provision of water services, to be carried out by PricewaterhouseCoopers (PwC), as part of the ROI’s memorandum of understanding with the troika of December 2010. Responsibility for water services will transfer from the 34 local authorities to Irish Water, a new utility within the Bord Gáis Energy group. The PwC assessment suggested that once Irish Water was well established as a self-funding utility, the government and regulators might wish to introduce competition in water and sewerage services. The Oireachtas Joint Committee expressed concern that Irish Water should remain in public ownership and that considerations of opening the water sector to future competition should not influence the utility’s operating structure when it was established. The Minister for the Environment, Community and Local Government, Mr Phil Hogan TD, stated that water would continue to be a national resource and that it would remain a public utility and a public resource. He stated that private investment would be sought but that there was no danger of privatisation. There would, however, be water charges, commencing in 2014 (Sheridan, 2011).

Recent PPP announcements The Minster for Public Expenditure and Reform, Mr Brendan Howlin TD, announced a €2.25 billion domestic infrastructure stimulus programme on 17 July 2012. Funding was to come from a combination of the National Pensions Reserve Fund, the European Investment Bank/Council of Europe Bank, domestic banks and private investment sources. Further details were announced on 5 June 2013 regarding Phase 1 of this plan which made up the larger part of the stimulus programme. The government also agreed a new pipeline of PPP projects valued at

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€250 million in the areas of schools, energy efficiency and road repairs. In the Minister’s words: Although the public finances are severely constrained, it is important that we build for the future. It is absolutely vital for our long-term well-being and prosperity that children have proper school buildings in which they can learn, that our roads are safe and well-maintained and that local authority housing is as energy efficient as possible. I am delighted to be able to make this funding available. (Department of Public Expenditure and Reform, 2013) A motivation for this PPP programme, apart from developing infrastructure, was to create jobs and stimulate the economy. This was quite different from the motivations for previous PPP programmes. Tenders for projects were required to participate in job-creating measures. The NDFA explained why it was using a PPP programme: 1 2 3 4 5 6 7

There was a borrowing requirement to be ‘off balance sheet’ in accordance with EuroStat rules so as not to affect the general government balance. It would enable risks such as design or construction risk and availability or demand risk to be transferred to the private sector. It was important in the context of the deficit reduction programme and the EU-IMF Programme of Financial Support for Ireland. The programme was sized so that the unitary payment obligations were affordable within budgetary arithmetic. It would have a multiplier effect of investment to stimulate jobs and growth. There would be social and community benefit provisions included. It would have features incorporated to assist SMEs (National Development Finance Agency, 2013a).

To instil confidence and maximise market participation, new measures were introduced such as reducing the timeframe from 21 months to 15 months for preparing PPP projects to the market through to contract award, the reimbursement of bid costs to unsuccessful bidders (agreed by the government in 2012 for Phase 1), a fixed amount to be paid in compensation for cancellation, a compliant tender fee to be paid to a maximum of three shortlisted tenders, and performance bonds to be capped at 12.5 per cent (Department of Public Expenditure and Reform, 2013). The Minister of State for Public Service Reform and the Office of Public Works (Hayes, 2013), also stated that the PPP process would be streamlined, with less documentation and meetings and specimen designs drawn up prior to the bidding process. Similarities can be seen between the announcements in Ireland and the reform measures of PF2 introduced in the UK by HM Treasury in December 2012. Among the reforms were accelerating delivery in order that the tendering phase of PF2 would be no longer than 18 months, the government would have discretion to make a contribution to the failed bid costs of shortlisted bidders, the PFI procurement process would be ‘streamlined’, and steps to be taken to reduce the amount of design work and resulting costs to be carried out (HM Treasury, 2012).

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Value-for-money reports and reviews of PPPs A value for money report (No. 48) of the Grouped Schools Pilot Partnership Project was carried out by the Office of the Comptroller and Auditor General (C&AG) in June 2004. This was the first of the PPP pilot projects to reach the contract stage. The C&AG (2004, p. 11) report stated: The cost comparison exercise – completed in September 2001 – concluded that procuring and running the schools through the proposed PPP arrangement would result in a saving of around 6% compared to procuring and running the schools conventionally. However, the analysis contained errors in relation to the timing and discounting of payments and overestimated the residual value of the school buildings at the end of 25 years. After correcting the analysis for these factors, the report suggested that the Department of Education and Science should have concluded that adopting the PPP approach for procurement was likely to be in the region of 13 to 19 per cent more expensive than conventional procurement and that the deal involved relatively little transfer of risk to Jarvis, the consortium tasked with this project. The report stated that although risks were ‘appropriately retained’ by the public sector, the extent of risk transferred to the private sector was ‘limited’, valued at 6 per cent of the overall estimated cost of procuring the schools by conventional means. The report concluded that it was too early to do a comprehensive comparison of the economy, efficiency and effectiveness of the group of schools built under PPP with a similar group built under the conventional route. Further analysis of the financial commitments under PPP was carried out by the C&AG in chapter 6 of the Report on the Accounts of the Public Services 2011 (September 2012). It discusses a review of value for money in water services (Department of Environment, Heritage and Local Government, 2010) and the impact of risk sharing in roads projects. The report states that PPP procurement is employed only where it is clearly established that it provides best value for money overall. The Department of the Environment, Community and Local Government (DoECLG), the government department responsible for water and waste water (W&WW) PPPs, has stated that when compared with traditionally procured contracts, PPP design, build and operate (DBO) represents average savings in the range of 10 to 20 per cent for project capital costs and 5 to 10 per cent for operational costs, depending on the scale of the treatment plant. The C&AG’s report also states that under PPP, the transfer of all construction stage risks, other than archaeology, is made to the contractor which was not the case under the traditional procurement approach. Under the traditional approach, the employer, that is, the local authority, carried virtually all risks associated with the contract. However, Reeves (2013a) writes that the DoECLG has a stated preference for the PPP model in the water services sector that is at odds with the official guidelines on PPP procurement, which requires that VFM is demonstrated in advance of the

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PPP model being adopted. In the case of a replacement waste water treatment plant along with ancillary facilities, a consultation period allowed stakeholders to review costs, and the subsequent report and recommendation to the DoECLG estimated the whole-life costs to be 2.3 per cent lower under traditional procurement. The DoECLG re-worked the VFM assessment and concluded that the final adjusted cost differential amounted to under 1 per cent in favour of traditional procurement. Nonetheless, they made a final decision to proceed with procurement under the PPP approach (Reeves, 2013a). An example of problems with risk sharing was identified by the C&AG report (2012) in the case of the Clonee-Kells (M3) and Limerick Tunnel PPPs. The contract provides for traffic-related guaranteed payment mechanisms whereby the National Roads Authority (NRA) is obliged to make payments to the PPP company if traffic falls below a certain level. In both cases the shortfalls in traffic volumes relative to the guaranteed thresholds in 2010 and 2011 were significant. The NRA estimated the guaranteed related amount payable in 2012 at €6.7 million. The C&AG report (2012) states that on the assumption that traffic on both routes will grow at an annual average of 2.5 per cent a year, the State will continue to make guaranteed payments to the Clonee-Kells PPP company until 2025. The C&AG report (2012, paragraph 6.48) states ‘Appropriate sharing of project risks is a requirement if PPP projects are to deliver value for money’. The UK is taking a similar approach, as stated in HM Treasury’s ‘A New Approach to public private partnerships’, produced in 2012. It recommends a reform of the way risk allocation is handled. Under PF2, changes will be made to the risk allocation to improve value for money through the retention and management of certain risks by the public sector that were previously transferred under PFI. The C&AG report (2012, paragraph 6.50) also states: VFM appraisals are carried out for all proposed major public investments and a PPP cannot proceed unless it is found likely to deliver better value than traditional procurement. However, few value for money reviews of PPP projects have been published. The C&AG report (2012, recommendation 6.3) recommends that ‘Evaluations of the value for money expected to be achieved through procurement of projects by means of PPP should be published’. The Committee of Public Accounts met on several occasions in late 2012 and 2013 to review PPP commitments under chapter 6 of the C&AG report (2012). However, to date the committee has not carried out any in-depth value-for-money analysis of PPPs. As mentioned, Hodge and Greve (2007) state that PPPs are an attractive policy for governments that are eager to please markets, but they also state that there is a lack of independent evaluators; poor evaluation rigour; poor definition of what they refer to as ‘the “counterfactual”’ against which PPP is judged; evaluations by auditors general who, in most jurisdictions, cannot question government policy; inaccurate discount rates of time-value-of-money estimates of net benefit; inaccurate estimates

Public Private Partnerships in the Republic of Ireland 191 of risk transfers from the public to the private sector; and predicted benefits being estimated at an early stage of a long-term contract, at a time when optimism and political sensitivity are both high. Some of these have been borne out in the C&AG’s value for money report (No. 48) of the Grouped Schools Pilot Project (2004). The Report of the Comptroller and Auditor General and Appropriation Accounts 2012 (September 2013) states that the NDFA has carried out VFM testing on the recent third schools bundle project but the results of the final deal have not been published as it could compromise the NDFA’s negotiating strategy and be detrimental to achieving optimal outcomes for other projects currently being procured. Again, value for money cannot be assessed in the public domain because of commercial sensitivity issues. The Report of the Comptroller and Auditor General and Appropriation Accounts 2012 (September 2013) discusses post-project review of PPPs in chapter 3. Under the Public Spending Code issued by the Department of Public Expenditure and Reform, it is the responsibility of the project sponsor to ensure post-project reviews are carried out for all capital projects valued in excess of €20 million (C&AG, 2013, paragraph 3.20). This requirement applies regardless of whether the project was procured through PPP or by traditional procurement. It states that the aim of reviewing the outcome of the project includes determining whether:

• the basis on which a project was undertaken proved correct; • the expected benefits and outcomes materialised; and • the planned outcomes were the appropriate responses to actual public needs. A post-project review of the Criminal Courts Complex PPP was completed in October 2012 (C&AG, 2013, paragraph 3.28). The aim of the review was to determine whether any stage of the Criminal Courts project could have been done better and any lessons applied to future projects. The review approach concentrated on assessing the processes used rather than the outcome of the project in terms of its impact on court business. The review concluded that all the project objectives had been realised and the project process had been satisfactory. The review suggested that further analysis should be carried out to assess the operational impacts resulting from the delivery of the project. A number of reviews of PPPs are in progress. The Central Expenditure Evaluation Unit of the Department of Public Expenditure and Reform is conducting a policy assessment on compliance in the local authority sector with the VFM procurement model for PPPs in relation to water projects; the Department of Education and Skills is conducting a review of the pilot schools PPP project which became operational in 2003; and the National Roads Authority has indicated that reviews of a number of roads schemes are in progress.

Conclusion Since the foundation of the State, the Republic of Ireland has had private sector involvement in the delivery of services and infrastructure projects. This

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involvement was formalised during the 28th Dáil (1997–2002) under the economic liberalisation policies of the Minister for Finance, Mr Charlie McCreevy, TD. There was a highly visible political commitment at the time to the PPP approach with the backing of the Taoiseach, the Minister for Finance and senior Ministers, although there was no overriding imperative to do so. PPP was introduced after the publication of the Farrell Grant Sparks et al. report (1998). The reasons for its introduction were the infrastructure deficit through underfunding, in tandem with rapid economic expansion and fiscal constraints imposed by the Maastricht Treaty convergence criteria. However, budget deficit and government debt of the time were such that they would have allowed capital expenditure without breaching the convergence criteria. Other reasons for the introduction of PPP therefore might be efficiency gains and expertise not available in the public sector, not to mention political expediency where PPP offered early project infrastructure delivery and the movement of capital expenditure off-balance sheet. During the 28th Dáil, Charlie McCreevy announced pilot projects in roads, schools, transport, water and wastewater. The National Development Plan 2000–2006 confirmed the government’s commitment to PPP when it listed the potential for PPP in transport and environmental projects. The social partnership agreement, Programme for Prosperity and Fairness of 2000 implicitly endorsed PPP and brought in unions and employees for the first time. PPP was further endorsed by the multi-stakeholder advisory group comprising representatives of the Irish Business and Employers’ Confederation, the Irish Congress of Trade Unions, the Construction Industry Federation and Fórfas, which produced the ‘Framework for Public Private Partnerships: Working together for quality public service’ document in 2001. This stated that projects delivered through PPP gave an opportunity to maximise the interaction and cooperation between the public and private sectors. The centralisation of PPP as a procurement method was officially recognised by the formation of the National Development Finance Agency in 2002 which acts as a centre of expertise for PPPs and statutory finance adviser on capital projects in excess of €20 million. The National Development Plan 2007–2013 reaffirmed the government’s commitment to PPP, but some projects have been cancelled as a result of the economic downturn. The new coalition government of 2011 introduced the Infrastructure and Capital Investment 2012–16: Medium Term Exchequer Framework, which states that PPP still has a role to play in the delivery of key social infrastructure projects, schools and projects in the health sector. The domestic infrastructure stimulus programme announced in 2012, part of which is to be delivered through PPP, is an attempt to stimulate the economy, reduce the infrastructure deficit and create employment. The Comptroller and Auditor General has carried out an evaluation of PPPs in the pilot schools project and identified issues with risk sharing in two road transport PPPs, where the State is obliged to make guaranteed payments to the PPP companies involved. The C&AG has stated that PPP procurement should be employed only where it is clearly established that it provides best value for money overall. However, Reeves (2013a) cites one case where the traditional procurement

Public Private Partnerships in the Republic of Ireland 193 approach was cheaper but the PPP was proceeded with. The C&AG has also stated that the NDFA has carried out value-for-money testing but has not published the results because of commercial sensitivity issues. Since the advent of the banking and financial crises of 2007 and the bailout by the EU, ECB and the IMF ‘troika’, the ROI has increased its PPP programme. The State no longer has the funds to finance solely the delivery of services and infrastructure projects and requires private investment. In the absence of valuefor-money audits on current PPP projects, we cannot conclude whether these projects have achieved the objectives initially set out and whether the PPP approach is the appropriate method in which to involve private investment in the delivery of public services. What can be concluded is that the government believed the private sector would deliver projects more economically, efficiently and effectively than the public sector. As the government has continued down the PPP route, as evidenced by the fact that Ireland is among the countries with the largest increase of PPPs relative to GDP over the past five years (along with Spain, the UK, France, Germany and Italy) (Reeves 2013a), it still believes this to be the case.

References Akintoye, A. and Beck, M. (2009) Policy, Finance and Management for Public-Private Partnerships.Wiley-Blackwell, Oxford, p. 82. Connolly, C. and Wall, T. (2009) Public Private Partnerships in Ireland Benefits, Problems and Critical Success Factors. The Institute of Chartered Accountants in Ireland. Comptroller and Auditor General (2004) Report on Value for Money Examination 48, The Grouped Schools Pilot Partnership Project, June 2004. Comptroller and Auditor General (2012) Report on the Accounts of the Public Services 2011, September 2012. Comptroller and Auditor General (C&AG) (2013) Report on the Accounts of the Public Services 2012, September 2013. Department of Environment, Heritage and Local Government (2010) Report on the Value for Money Review of the Water Services Investment Programme 2007–2009, Chapter 5 – Funding and Delivery Model of the WSIP. Department of Finance (2012) Budgetary & Economic Statistics 2012. Economic Division, Department of Finance. October 2012, Available from: www.finance.gov.ie/publications/ data-statistics. Department of Finance (2003) Budgetary & Economic Statistics 2003. Economic Division, Department of Finance. Available from: www.finance.gov.ie/publications/data-statistics. Department of Public Expenditure and Reform (2013) Investing in Infrastructure and Jobs. Department of Public Expenditure and Reform. 5 June 2013, Available from: http://per. gov.ie/2013/06/05/investing-in-infrastructure-jobs/. Department of Public Expenditure and Reform (2011) Infrastructure and Capital Investment 2012–16: Medium Term Exchequer Framework. Department of Public Expenditure and Reform. 2011, Available from: http://per.gov.ie/wp-content/uploads/Infrastructure-andCapital-Investment-2012-2016.pdf. Department of the Taoiseach (2000) Programme for Prosperity and Fairness. Available from: www.taoiseach.gov.ie/attached_files/Pdf%20files/ProgrammeForProsperityAndFairness.pdf.

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Farrell Grant Sparks and Goodbody Economic Consultants, in association with Chesterton Consulting (1998) Report to the Inter-Departmental Group in Relation to Public Private Partnerships. July 1998, Available from: http://ppp.gov.ie/wp/files/documents/miscellaneous/ PPP_Reports/fgs-ppp-report-1998.pdf. Gaffney, D., Pollock, A.M., Price, D. and Shaoul, J. (1999) The private finance initiative: The politics of the private finance initiative and the new NHS. BMJ: British Medical Journal, 319(7204), p. 249. Hayes B (2013) Irish PPPs in the New Economic Environment, Conference Speech, National Convention Centre in Dublin, 21 March 2013. Hearne, R. (2009) Origins, Development and Outcomes of Public Private Partnerships in Ireland: The Case of PPPs in Social Housing Regeneration. Combat Poverty Agency. HM Treasury. (2012) A new approach to public private partnerships. London: The Stationery Office. Hodge, G.A. and Greve, C. (2007) Public-Private Partnerships: An International Performance Review. May/Jun ed. Public Administration Review. Morgenroth, E. (2013) The Irish Public Investment: Past and Present. University of Limerick. The Challenges of Public Private Partnerships in Turbulent Times, 29 May 2013. Murphy, B (2013) Irish Government Stimulus Package and PPP Programme. University of Limerick. The Challenges of Public Private Partnerships in Turbulent Times, 29 May 2013. National Development Finance Agency (2013a) Have Ireland’s PPPs come back to life? NDFA. February 2013, Available from: www.ndfa.ie/Publications/presentations.htm. National Development Finance Agency (2013b) Sourcing Funding Capital Innovative ways to finance infrastructure development.NDFA. January 2013, Available from: www.ndfa.ie/ Publications/2013/SourcingFundingCapitalPresentationJan2013.pdf. National Development Plan (2000) National Development Plan 2000–2006. Dublin: The Stationery Office. National Economic and Social Council (1999) Opportunities, Challenges and Capacities for Choice. Dublin: National Economic and Social Council. Palcic, D. and Reeves, E. (2004) An Economic Analysis of Privatisation in Ireland, 1991 –2003. Journal of the Statistical and Social Inquiry Society of Ireland, XXXIV, pp. 1–27. Public Private Partnership Advisory Group (2001) Framework for Public Private Partnerships: Working Together for Quality Public Services. Public Private Partnership. Reeves, E. (2003) Public-private partnerships in Ireland: Policy and practice. Public Money & Management, JUL, 23(3), pp. 163–70. Reeves, E. (2013a) The not so good, the bad and the ugly: over twelve years of PPP in Ireland. Local Government Studies, 39(3), pp. 375–95. Reeves, E. (2013b) Public-Private Partnerships in Ireland: A Review of the Experience. Nevin Economic Research Institute, 23 January 2013. Sheridan, K. (2011) Down the drain: what’s going wrong with Ireland’s water supply? The Irish Times Weekend Review, 5 November, p. 1.

12 Public Private Partnership in Italy State of art, trends and proposals Nunzia Carbonara, Nicola Costantino and Roberta Pellegrino Introduction In the 2000s a wave of changes affected the Italian public infrastructure market. It is widely accepted that these changes will continue in the next years due to public budget constraints that require alternative funding instruments to avoid blocking of public works with further negative consequences for growth and development. Official estimates of the Ministry of Economy and Finance (MEF) on investments in public works confirm that the investment crisis, which began in 2005, worsened in the period from 2008–2012. Investments in public works have registered a decline by 9.3 per cent in 2012. For the period from 2015–2017 a weak recovery is expected, which will be driven by large infrastructure investments that are expected to start, thanks to ‘tax relief measures for the large works aimed at mobilizing private resources’. In this context the collaboration between the public and private sectors becomes even more important to tackle the crisis. Indeed, without PPPs, public works investment would face a severe contraction in the coming years. In fact, the Observatory of CRESME (Center for Economic Research Social Market for Building and Land) and the Ministry of Economy and Finance estimate that the sector recovery in the next three years will be mainly led by private investment. Another aspect that characterizes the Italian public infrastructure market is related to the size of the public works. The trend of the number and value of bids for public works held shows an increasing decline of the latter (Figure 12.1). Between 2001 and 2004 there was a steady increase of the value of bids due to the stimulus provided by the ‘Objective Law’, which supported large ‘strategic’ infrastructure projects to be implemented by general contractors (e.g., section of the Salerno-Reggio Calabria motorway). The year 2005 was a turning point that saw an overall drop in spending that lasted until 2007. From the second half of 2007, there was a recovery in the number of bids but not in their aggregate value. These dynamics result from a high concentration of resources in few but largescale strategic infrastructure projects. The polarization of the market into large and small works is an aspect of the transformation of the Italian infrastructure

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300 33,4 bn 30,5 bn

250 28,2 26,6 bn

200

22,9 bn

150

20,1 bn 13,3 bn

100

33,102

34,779

25,463

50

24,144

16,769 15,923 14,873

19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13

0

number

value

Figure 12.1 Public works under bid in Italy: number and value (1995-2013)

market that increasingly draws on the experience of the private sector as well as its financial capabilities. The period 2002–2013 shows a growth in the PPP market relative to the public infrastructure market. In 2002, the traditional market for 99 per cent of all public infrastructure projects and 88 per cent of their total value. About ten years later, in 2013, these percentages decreased to 92 per cent and 64 per cent due to the growing diffusion of new contractual solutions (Table 12.1). Comparing the last three years from 2011–2013 with the period from 2002–2009, the size of the new market on the total public infrastructure market increased by 16 per cent for the number of infrastructure projects under bidding and 21 per cent for their value. Within non-traditional procurement, the most successful contractual arrangement is PPP, which accounts for 73 per cent in value of total public works under bidding in the new market (Table 12.2). Italian PPP-based infrastructure procurement has been supported over recent years by the implementation of provisions for procedural simplification and transparency. Additionally, specific measures were introduced to boost PPPs, in particular tax breaks and the rationalization of the project approval procedures. Some important problems persist, however, especially as regards the selection of private contractors and the excessive fragmentation of the public procurement process. Also problems relating to the preparation of contracts and project financing, crucial to reducing the high failure rate of initiatives, still need to be addressed.

30 163 257 100

– service concessions

Building/maintenance and management

Total new market

Design and construction

17.464 17.565 17.822 1,44

Construction

Total traditional market

Total Public Infrastructure Market

% New market on Public Infrastructure Market

1

56

– work concessions

General contractor

94

2002

Public Private Partnership

Awarded

2,87

20.914

20.313

19.791

5

517

601

221

98

272

380

2005

3

515

1.072

457

288

288

615

2009

7,29

14.706

13.634

13.116

Table 12.1 Number and value of public works projects awarded (2002-2013)

8,27

13.859

12.713

12.155

2

556

1.146

401

441

231

745

2010

9,55

13.965

12.631

12.070

561

1.334

436

638

184

898

Number

2011

8,27

14.406

13.214

12.548

1

665

1.192

431

478

239

761

2012

8,33

14.661

13.440

12.817

623

1.221

428

591

156

793

2013

5,07

189.366

179.762

173.846

25

5.891

9.604

3.846

3.108

2.283

5758

total 2002–13

15.089 17.183 12,19

Total traditional market

Total Public Infrastructure Market

% New market on Public Infrastructure Market

Source: CRESME and www.infopieffe.it.

14.397

450

General contractor

Construction

242

Design and construction

2.094

Total new market

21

– service concessions 1.500

570

– work concessions

Building/maintenance and management

594

2002

Public Private Partnership

Awarded

Table 12.1 continued

21,04

29.025

22.919

14.645

2.319

5.955

6.106

1.297

432

4.168

4.809

2005

39,82

26.019

15.657

10.632

1.119

3.906

10.362

2.550

834

6.660

7.812

2009

40,38

24.701

14.727

10.064

1.195

3.468

9.974

1.946

412

7.272

8.028

2010

42,11

25.402

14.704

8.887

5.817

10.698

2.267

1.245

5.031

8.431

Value

2011

36,56

20.692

13.127

7.593

962

4.572

7.565

1.253

2.488

3.434

6.312

2012

35,44

15.951

10.298

6.809

3.489

5.653

2.456

612

2.356

3.197

2013

27,94

270.137

194.672

136.251

16.394

42.027

75.465

20.808

9.205

39.982

54.657

total 2002–13

100 353 689 380

– service concessions

Building/maintenance and management

Total new market

Design and construction

34.373 34.754 35.443 1,94

Construction

Total traditional market

Total Public Infrastructure Market

% New market on Public Infrastructure Market

1

189

– work concessions

General contractor

336

2002

Public Private Partnership

Under bidding

5,19

29.887

28.336

27.499

2

835

1.551

574

469

248

977

2005

Table 12.2 Number and value of public works under bidding (2002-2013)

13,57

18.518

16.005

15.322

2

681

2.513

644

1.265

424

1.869

2009

19,82

18.564

14.885

14.051

834

3.679

649

2.088

640

3.030

2010

20,32

16.769

13.361

12.578

783

3.408

595

2.085

490

2.813

Number

2011

23,18

15.923

12.232

11.377

855

3.691

640

1.994

757

3.051

2012

23,17

14.873

11.427

10.557

870

3.446

545

2.104

567

2.901

2013

8,88

291.884

265.954

257.075

24

8.855

25.930

6.567

12.394

4.772

19.363

total 2002–13

1.216

– work concessions

2.034

Design and construction

20.996 23.665 11,28

Total traditional market

Total Public Infrastructure Market

% New market on Public Infrastructure Market

Source: CRESME and www.infopieffe.it.

18.449

Construction

513

2.669

Total new market

General contractor

1.389

Building/maintenance and management

54

1.280

Public Private Partnership

– service concessions

2002

Under bidding

Table 12.2 continued

24,72

33.113

24.926

17.694

2.581

4.651

8.187

2.109

1.393

3.058

6.078

2005

30,84

26.589

18.388

12.676

1.195

4.517

8.201

2.612

517

4.330

5.589

2009

41,33

30.162

17.697

10.943

6.754

12.465

2.793

1.312

6.133

9.672

2010

49,41

30.459

15.408

9.991

5.417

15.051

1.950

3.446

9.212

13.101

Value

2011

47,01

22.905

12.138

7.809

4.329

10.767

2.983

2.549

4.869

7.784

2012

30,81

20.077

13.891

9.023

4.868

6.186

1.032

2.096

2.279

5.154

2013

29,45

342.130

241.367

172.066

15.899

53.402

100.763

26.783

14.883

51.880

73.980

total 2002–13

Public Private Partnership in Italy

201

Origin and drivers The use of PPP for delivering public infrastructure in Italy is a recent practice that started in the early 1990s. In 1994 and 1998 the Merloni law set the framework for using private sector contractors. However, only later, through Law 144/99, a PPP supporting unit (UFP – Technical Unit for Project Finance) was set, and its role was expanded in 2001. Successively, the Code of Works, Services and Supplies Public Contracts of 2003 encouraged the adoption of PPP by both central and local governments, and public companies, and particularly by the National Autonomous Roads Corporation (ANAS), which manages national roads, as well as by the Italian Railway Network (RFI), which manages national railroads. The first example of an Italian PPP was the ‘Treni ad Alta Velocità’ (TAV), which involved a publicly and privately owned company created in order to carry out a high-speed railway network in Italy. This initiative was supported by new laws on railway services. After that, the use of PPP continued to grow. Italy, like the rest of Europe, was looking to infrastructure investment as a means of restoring growth to its economy. It is a widely held view that effective and accessible infrastructures and public services are prerequisites for economic development and contribute crucially to the competitiveness of countries. Italy suffers from a large infrastructure gap in comparison to some other European countries. Given the difficulty in having recourse to both internal (due to the local governments’ budget constraints) and external (due to the European Structural Funds allocation procedures) funding sources, the use of PPP is now seen as a new way of delivering public infrastructure. According to the Italian state bank ‘Cassa Depositi e Prestiti’ (CDP), the country’s infrastructure needs require, up to 2020, about €340 billion spending, spread across transportation (approximately €50 billion), energy (approximately €180 billion), broadband internet access, and social infrastructure (healthcare and education, for example). To fill these infrastructure needs, the Italian government enacted measures to promote private investment from 2011 onwards with provisions for procedural simplification and transparency. In 2012, the government introduced three laws that update the process through which strategic infrastructure in Italy can be procured and financed. The first of these, the Liberalisation Decree (Legislative Decree 24 January 2012, n. 1), introduces, among other things, a streamlined procurement process including a framework for an ad hoc contract to procure infrastructure assets (‘Contratto di disponibilita’); a new form of PPP. Additionally the law created the possibility for project companies to issue bonds to finance infrastructure projects. The second law, the First Growth and Development Decree (Legislative Decree 22 June 2012, n. 83), inter alia, opened up the possibility of special-purpose vehicles (SPVs) engaged in infrastructure funding programmes to acquire private resources through the issue of securities with a tax regime similar to those for government bonds for a period of three years after the law has been approved. The third law, known as the Second Growth and Development Decree (Legislative Decree 18 October 2012, n. 179), promotes the development of an entrepreneurial culture that is appealing to foreign investment.

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Italian PPP implementation has its own features that distinguish it from other models adopted in Europe and elsewhere. The national experiences reveal that PPP in Italy is less effective and efficient than in many other countries. In particular, with regard to the administrative issues, three main factors have contributed to a delay in the use of PPP: 1) the complexity of the administrative procedures and the distortions of competition due to the so-called ‘right of pre-emption’, which used to discouraged firms to participate in bidding; 2) the difficulty of regulating through contracts a proper allocation of risks, due to the ‘civil law’ system in force in Italy; 3) the high administrative risk characterizing the adjudication procedures. With regard to the financial aspects, the main critical issue is the source of funding for Italian PPP projects. The funding of PPP projects in Italy is generally conducted by banks and rarely involves the capital market as seller of bonds or shares to investors. Bank funding creates disadvantages in comparison to other countries: the interest rate is about 10–11 per cent, while in the UK, for instance, the required spread on the risk-free rate is about 0.75–1 per cent. Italian banks tend to ask for traditional guarantees for financing and this situation has been exacerbated by the recent financial crisis: nowadays, banks require greater spreads and more guarantees in order to grant a loan. The mean duration of the loan has also declined. As for the Italian government’s influence on the use of PPP there are still some shortcomings in the legislative regulation that hinder the effective use of PPP. In particular, problems relate to the preparation of contracts and project financing.

Policy framework for PPP The Italian government has identified as policy priorities the improvement of public spending planning and resource allocation. In line with this, the Italian government has been seeking to attract a greater level of private participation in the ownership and management of infrastructure projects that have historically been owned and managed by the public sector over recent years. This is reflected in a series of government white papers (DPEF):

• DPEF (2000–2003) states that ‘the involvement of the private sector in

• •

financing, building and operating infrastructure and public utility services is a priority and especially for southern Italy’. It is recognized that Private Sector Participation (‘PSP’) in public services brings better design, construction and operational skills, enhancing the quality of the services offered to the end-users. DPEF (2001–2004) notes that the government expects to finance €9 billion of new infrastructures through private funds. The private sector is expected to provide debt financing as well as equity capital. DPEF (2002–2006) places a strong emphasis on infrastructure investment as one of the main drivers of economic growth and fosters the process of liberalization and privatization of public services. It estimates a need for around €50 billion of investment over five years, 50 per cent of which is expected to come from the private sector.

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203

• DPEF (2003–2006) expects Public Administrations to deliver less and less

• •

public services directly. Instead, an increasing proportion of public services are expected to be delivered by private entities operating in a competitive environment. It reinforces the role of Infrastrutture Spa (ISPA) and Patrimonio Spa and identifies a list of 21 ‘strategic’ infrastructure projects to be governed by the provisions of ‘Objective Law’, which is aimed at stimulating the growth of the domestic Italian PPP market. DPEF (2007–2011) focuses on optimising private co-financing and adjusting tariffs in order to make it possible to anticipate or expand priorities. DPEF (2008–2011) states that ‘it is necessary – within the limits of available financial resources – to develop a regulatory framework in coordination with the regional regulatory framework to launch strategic programmes, mainly aimed at boosting the housing supply, to be built not only with public funds, but also through PPPs’.

Public infrastructure projects that can be potentially delivered through PPP have to be included in the triennial Programme on Public infrastructure prepared by the awarding authority (national, regional, provincial, local level) when exceeding the value of €100.000. These plans are generally approved by the Inter-ministerial Committee for Economic Planning (CIPE: Comitato Interministeriale per la Programmazione Economica) – controlled by the Council of Ministers – with the support of the UFP. Although, there are no general or sector-related PPP policy frameworks, the Italian government seems particularly positive towards using PPPs.

Financial context for PPP PPP projects in Italy normally involve the use of private finance, although they can also be financed by a quota of public funding (an example is the Autostrada Cispadana highway). Typical sources of private finance are:

• Equity: contributed by the sponsors. Sponsors normally are the building

• •

contractor and the O&M contractor. Recently, the market has seen the development of equity funds and, although this is not very common, lenders and public authorities may also take a stake in the project company. Subordinated debt: sometimes provided by the sponsors in addition to equity. In limited cases, this may be partially provided by banks by way of junior debt. Bank debt: typically provided by way of senior loan, as no-recourse or limited recourse project financing. Bridge financings are not unusual, pending the permitting and contractual development of the project. The loan is normally syndicated in medium/large projects. Bank loans and international financing institutions are always used to finance national infrastructure programmes (which currently account for approximately 80 per cent of total project finance funding in the country).

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The BreBeMi toll road PPP, for instance, was the largest European PPP transaction completed in the market in the first half of 2013 (€2.3 billion). The project involves the construction of a 62-kilometer motorway between Brescia and Milan under a 20-year real toll concession. Although this transaction provides clear evidence that the revised PPP framework has had a positive impact, allowing the country’s first large greenfield PPP transaction to achieve financial close on a project finance basis, it is financed entirely by bank loans. It is expected that the Tangenziale Est Milano road concession PPP project (€2.2 billion), on target to reach financial close by the end of this year, will also rely on bank funding. The financing is generally granted by banks with extensive experience on such projects. Italian PPP projects are characterized by high leverage; for instance, debt to equity gearing is more than 80:20 for Vigliena port project in Naples and it is estimated from 75:25 to 85:15 for wind energy plant projects. Economic constraints and increasing bank regulation make this financing model ineffective and obsolete. However, the use of other instruments such as selling bonds or shares to investors for PPP projects is not spread in Italy. Recently, the Italian government has sought to foster the use of capital markets to fund infrastructure investments with the First Growth and Development Decree (Legislative Decree 22 June 2012, n. 83), which allows guarantees to be provided to project bonds and attempts to address the investors’ reluctance to invest directly in greenfield projects. The decree identifies international and national financial institutions that can provide such guarantees, including CDP and Servizi Assicurativi del Commercio Estero (SACE: the Italian export credit agency), along with foundations and private funds. However, the shift to bond financing from bank loans is likely to be gradual, for two reasons: first, investors have up to now been reluctant to invest in infrastructure projects due the lack of data and their inexperience with this asset class. Second, the Italian project bond market remains untested and market participants will, in our view, take some time to get acquainted with the new legislation. The financial crisis has made more complex the access to capital and credit markets. This is mainly due to the following aspects:

• the difficulty in receiving funding and the substantial increase of the bank spread; • the reduction in the duration of funding; and • the requirements of strong guarantees by banks and the increase in equity to debt ratio if compared to the past threshold levels.

We expect the funding structure for Italian infrastructure projects to vary depending on their size:

• Small projects (less than €100 million) will be mainly financed through loans •

provided by banks or placed privately with institutional investors, as we observe in the UK. Midsize projects (€100 million–€300 million) will be financed through a combination of funding sources. While commercial banks will retain a significant market share, we believe long-dated debt to be deployed in these

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•

205

projects will more likely be funded from alternative or non-bank sources, including project bonds. Large projects could offer the most likely opportunities for financing through project bonds. This is because large-scale transactions typically need a larger group of investors than small or midsize projects, and because the revised tax relief, particularly in connection with the cost of registering the security package (previously as high as 2 per cent for bond issuance), is more materially attractive.

Institutional framework, e.g. contractual, legal, governance In Italy there is no specific legislation on PPPs. Being a Civil Law country, a bulk of new rules have been issued over the last 15 years to introduce PPP schemes similar to those used in the UK, and to fine-tune and harmonize them with the detailed Italian legislative framework governing public services and the planning of new infrastructures. In particular, three milestones in this process may be identified: 1

2

3

Merloni Ter: after many minor steps and attempts, the first set of rules that addressed PPP issues was introduced at the end of 1998, by way of an amendment to the Public Works Act: Law 109/94, known as the Merloni Law. Law 415/98 was the second restatement of the Merloni Law and was then named Merloni Ter. It introduced a BOT concession scheme, and a number of measures to ring-fence the project risk and make it bankable on a no-recourse basis. It also introduced a new procedure to allow private initiatives, called promotore (sponsor). Objective Law: between December 2001 (Law 443/01 and CIPE resolution 21/12/01) and August 2002 (Legislative Decree 190/02), the so-called Objective Law was enacted to promote the development of PPP for strategic infrastructures, to streamline their approval process, to introduce more flexibility in the contract schemes, and to facilitate project financing. The Code of Works, Services and Supplies Public Contracts (Law no.163/2006): the Code was enacted in April 2006 to implement in Italy EU Directives 2004/17 and 2004/98 and to restate in a single piece of legislation the various acts relating to the Merloni Law and the Objective Law. It defines PPP as contract, between a contracting authority and one or more operators, aimed at the execution of works and the supply of services.

In addition to the Code, there are laws concerning specific industry sectors, such as Law 36/94 known as the Galli Law for water projects; and Regional acts governing PFI/PPP schemes of Regional competence. The Code provides elements that regulate PPPs, in particular: 1 2

Norms to regulate the non–competitive procedures for projects below €40.000 (Art.125). Rules of compensation to guarantee a minimum revenue to the concessionaire (Art.143).

206 3 4 5 6

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Nunzia Carbonara et al. Procedures for the unsolicited proposals (Art.153). Requirements to be satisfied by the sponsors to apply to the tender (Art.153– Art.38). Definitions of contract termination events, involving Grantor default, the Concessionaire default, or Convenience or Force Majeure (Art.158). Provisions for step-in rights for lenders. The step-in right allows the lenders to designate a substitute in the case of termination of the concession for reasons due to concessionaire default (Art.159). Compensation provisions in the event contract termination (Art.160).

There are no standard ex ante evaluation procedures for project appraisal and prioritization. The Public Sector Comparator (PSC) is still scarcely used by the public administration. Public sector organizations use different approaches to the evaluation of projects and take on different levels of responsibility during the stages of the project cycle. In particular, in the pre-tender stage the PPP-support unit UFP is involved in project approval, by verifying and establishing the feasibility of the PPP project. After approval, the tendering procedure is generally managed by task forces established by the national or local government. After signing the PPP contract, the responsibility for the contract management is usually assigned to a specific team, created by the national or local administration. Furthermore, the supervision of the contract is delegated to a central government unit – the Italian Supervisory Authority of Public Contracts, AVCP, established in 1994 (Law 109/1994). This unit supervises public procurement, both at national and regional level, in order to ensure compliance with the principles of fairness and transparency in awarding procedures, the effective and appropriate execution of contracts, and compliance with the competition rules set out in each tender. In Italy, a standard contract exists only for PPP projects in the hospital sector. Standard tender procedures refer to PPP projects in general and are not specific for the different sectors. For concessions, the Code (art.143) sets out the details of the procedure for the selection of the private party. In particular, the law provides different kinds of procedures to be used to award public contracts, and defines the criteria to select the best tender based on the lowest price and and/or the most economically advantageous bid. For PPPs, the Code (art.153) sets out the details of the procedure for the selection of the private party. In particular, three different procedures are defined: 1

One stage procedure: in order to ensure the completion of works supply or services delivery, the contracting authority launches an open call for tenders. Any interested economic operator (Sponsor) may submit a tender. The contracting authority ranks the tenders that apply with a preliminary, definitive and executive design, and negotiates possible amendments to the preliminary project with the best Sponsor. In case of failure of negotiation, i.e., the preferred Sponsor does not accept the suggested amendments, the contracting authority starts the negotiation with the second best tenderer, by asking for the same amendments to the project.

Public Private Partnership in Italy 2

3

207

Two stage procedure: the contracting authority launches an open call for tenders. It selects the best offer and launches a second tender on the basis of the project previously selected in order to select the concessionaire. If there aren’t better offers, the Sponsor of the best offer wins the competition, otherwise it starts a negotiation. If the public authority doesn’t launch the tender within the deadline, any interested party can submit a proposal. In this case, the following procedures can be applied: a

b

If the preliminary project requires changes, the contracting authority may conduct a competitive dialogue with the Sponsor aimed at developing more suitable alternatives capable of meeting its requirements. If the preliminary project does not require changes, the contracting authority may issue a contract of grant (ex Art.143 of the Code) or launches an open call for tenders following the two-stage procedure.

Based on different payment mechanisms (cost-compensation and user-contribution) characterizing the PPP projects, it is possible to distinguish between ‘hot’ and ‘cold’ assets. We talk of a ‘hot’ asset when the private partner will receive the cost-compensation directly from the users of services (and/or assets), while a ‘cold’ one requires the public authority to pay the private partner for the services provided. In most cases, economic infrastructure can be categorized as ‘cold’ assets, where payments are based on usage volumes or demand; while social infrastructure can be categorized as ‘hot’ assets. For the latter projects (such as hospitals, schools, prisons), revenues mainly involve an annual fee paid by the public authority, and only partially by end-user’s payments based on demand (which concern only non-core activities, such as parking, restaurant, and so on). Italian PPPs often use public grants as the main financial support when the project cash flows do not assure their financial and economic viability. Some examples are: Florence Tramway, Hospital of Castelfranco Veneto and Montebelluna, New Mestre Hospital, where public contribution is respectively 52 per cent, 25 per cent, 42 per cent of the total investment.

Organizational structure The use of a project company as a Special Purpose Vehicle (SPV) to ring-fence the risk of the project and to enhance its bankability was introduced in Italy in 1998. It is now regulated by Art. 156 of the Code. Upon being awarded a concession, the concessionaire has the right to set up an SPV in the form of a company with a legal personality. Such an SPV may replace the original awardee as the concessionaire, to all effects. If a grant/price is paid to the concessionaire during the construction phase, the SPV’s shareholders are jointly and severally liable, with the SPV, for any reimbursement of the payment received. However, this liability may be avoided if the SPV provides the granting

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authority with a suitable bank or insurance advance payment bond, to be released upon the issue of the test certificate and the acceptance of the work by the granting authority. The shareholders who contribute to the concessionaire’s qualification requirements are bound to remain in the SPV and to ensure the correct performance of the concessionaire’s obligations (within the limits described above), until the issue of the works’ test certificate. Banks and institutional investors may take and sell the SPV’s shares at any time and without limitation. An SPV may issue bonds secured by a mortgage on its assets without the limitations imposed by the Civil Code for an ordinary commercial company. The number and composition of the company may vary from project to project. In many Italian PPP projects, the SPV is mainly or totally composed of local or national government and/or public companies. Examples are Malpensa 2000, Florence Tramway. For instance, in the Emilia Romagna region, the mean value of private participation is only about 17.7 per cent. One of the public stakeholders involved in most large PPP projects is the bank ‘Cassa Depositi e Prestiti’ (CDP S.p.A.), which is a joint-stock company where the share capital is held 70 per cent by the Italian Ministry of the Economy and Finance and 30 per cent by Italian banking foundations. The CDP’s mission is to foster the development of public investment, local utility infrastructure works and major public works of national interest, ensuring adequate returns for its shareholders while preserving long-term financial and economic balance. The CDP may raise funds through the issuance of securities, borrowing and other financial operations without State guarantees. The two main procuring authorities for the number and size of projects are ANAS S.p.A. and RFI. The other most frequently involved procurement authorities include: central government; the Regions, Municipalities and Provinces; water authorities; local health authorities; and other local bodies. Certain regions, such as Lombardy, have incorporated special companies to act as awarding authorities for PPP schemes in place of other local authorities. In Italy, PPP is supported at the national level by the UFP, which promotes the use of project finance to raise private capital for public infrastructure. UFP was established in 1999 (Law 144/1999), bringing together a team of project finance specialists within the Italian Treasury and CIPE. Its mission is to provide projectfinancing expertise to public administrations. UFP is funded by government budget, is directly controlled by the Department of Planning and Coordination of the Economic Policy (DIPE), belonging to the Council of Ministers, and supports the CIPE in evaluating PPP projects. The major tasks of UFP are technical support, promotion of PPP arrangements and approval of all PPP projects at national level, or projects that involve support from budget or state-owned infrastructure. In particular, UFP provides:

• Technical assistance: provision of technical, legal and financial assistance to public authorities. It provides support in the evaluation of infrastructure projects financed by private capitals; and brokers collaboration with institutions, organizations and associations.

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• Green lightning of PPP projects. • Promotion: promotes within national and local government the use of project •

financing for public infrastructure delivery. A central repository of knowledge: collecting and sharing of data, documentation, and relevant information on PPP projects, in order to improve knowledge and expertise on PPPs in both public and private sides.

Extent of use of PPP adoption

14000

3500

12000

3000

10000

2500

8000

2000

6000

1500

4000

1000

2000

500

0

0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

years total capital value (ml 1)

Figure 12.2 Number and value of PPP bids

number of bids

number of bids

Total capital value (ml 1)

Data on the PPP market show a positive trend in the period 2002–2013. The value of PPPs as a share of total public infrastructure market increased from 5.4 per cent in 2002 to 25.7 per cent in 2013, and in terms of the number of bids from the 0.9 per cent to the 19.5 per cent in the same period. Figure 12.2 shows the number of PPP projects by value and by number of bids in the period 2002–2013. Figure 12.3 shows the trend in the same period of the number and values of awarded PPP projects. Overall between January 2002 and December 2013, a total number of 19.363 PPP projects have been called for tender, with a value of approximately €73.4 billion. There has been an increase of bids from 336 with a value of €1.3 billion in 2002 to more than 2.901 bids with a value of €5 billion in 2013. The last two years, as noted above, have been characterized by a sharp decline in the value of bids. These trends indicate that the financial crisis has increased the difficulties in finding financial resources, especially for large-value transactions, but, also confirm the interest of the government in PPP as a tool for public infrastructure procurement. As for the awarded PPP projects, from January 2002 to December 2013, a total number of 5.758 projects has been awarded, with a value of almost €55 billion. This marks an increase from 94 awarded projects with a value of

Nunzia Carbonara et al. 1000 900 800 700 600 500 400 300 200 100 0

9000 8000 7000 6000 5000 4000 3000 2000 1000 0

number of awarded PPPs

Total capital value (ml 1)

210

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

years total capital value (ml 1)

number of awarded PPP projects

Figure 12.3 Number and value of awarded PPP projects

€594 million in 2002 to 793 project awards with a value of € 3.2 billion in 2013. Even in this case the last two years have been characterized by a significant decline in the value of bids. Figures 12.4 and 12.5 show the number and value of PPP bids classified by sector. An extensive use of PPP contracts is made for power projects, characterized by 2.527 bids and a total capital value of almost €16.671 billion. Other sectors with a relevant amount of PPP projects include sporting facilities, hospitals, urban developments, and other regional activities. Less numerous but economically much more significant are PPP projects in the transport sector. In the period from 2002 to 2012 transport PPP projects reached a value of about €30.000 million and amounted to 44.6 per cent of the total value of PPPs. urban development power sporting facilities trading parking cemetary tourism others urban regeneration schooling and welfare leisure health seaport and harbour transport 0

500

1000

1500

number of bids

Figure 12.4 Total number of PPP bids by sector (2002-2011)

2000

2500

3000

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transport power health urban regeneration parking others sporting facilities cemetary schooling and welfare seaport and harbour trading urban development leisure tourism 0

5000

10000

15000

20000

25000

30000

total capital value (ml 1)

Figure 12.5 Total capital value of PPP bids by sector (2002-2011)

Table 12.3 shows the number and value of PPP projects under bidding classified by macro-sector. PPP activities in the essential services sector (networks for energy, water and telecommunications, cemetery infrastructure, and services for the urban hygiene) saw a significant slowdown in the number of bids (from 784 to 574; -27%) but a growth in terms of value (from €2.5 billion to €2.7 billion, +8%). These dynamics are driven by network infrastructure projects for the production of electricity (mainly photovoltaic systems), public lighting, for the distribution of gas, water and telecommunications, which, compared to 2012, present a reduction of about one third in the number of bids but a doubling in their value (from €676 million to nearly €1.4 billion). For basic services (transportation, health, schooling and welfare), we observe a significant increase in the number of bids (from 195 to 266 bids, +36%) with a marked decline in their total value (from €7.8 billion to €5.2 billion, -73%). Finally, as for the macro-sector of urban regeneration (which includes the reorganization of sub-urban areas, marinas, urban design and public parks, cultural, sports and leisure centers, trade and crafts, office, sports facilities, parks, recreation, tourism, other works of redevelopment of city and region), the number of bids has remained relatively stable (from 2.072 to 2.061; -0.5%) with a significant increase in their value (from €830 million to €1,2 billion, +47%).

Types of PPP in Italy Italian law allows both contractual PPPs (concession, sponsoring and financial lease) and institutional PPPs (companies owned by both private and public shareholders) (UTFP, 2009). Contractual PPPs are when the relationship between the two partners is based purely on their agreements; institutional PPPs are when a company owned by the two partners coordinates the activities implied by the contract. The institutional PPPs are employed prevalently for complex projects.

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Table 12.3 PPP market by macro-sector: number and value of bids (2002-2013) Macro-sector

2002

2005

2009

2010

2011

2012

2013

total 2002-13

Number Essential services

117

205

364

830

633

784

574

4.566

Basic services

35

38

162

168

188

195

266

1.380

Urban requalification

184

734

1.343

2.032

1.992

2.072

2.061

13.417

Total

336

977

1.869

3.030

2.813

3.051

2.901

19.363

Incidence of PPP on public works (%) Essential services

1,6

3,6

10,1

20,4

18

22,8

21

7,8

Basic services

0,2

0,3

2,2

2,5

3

3,7

5

1,2

Urban requalification

1,4

6

17,9

26,6

28,1

28,8

30

11,3

Value Essential services

463

2.993

1.325

4.047

3.780

2.518

2.728

23.507

Basic services

350

1.755

3.080

4.721

8.241

4.437

1.206

38.427

Urban requalification

467

1.331

1.184

904

1.080

830

1.220

12.046

1.280

6.079

5.589

5.154

73.980

Total

9.672 13.101 7.785

Incidence of PPP on public works (%) Essential services

11,7

44

26,2

53,1

54,3

41,7

52,8

35,2

Basic services

2,8

10,5

21,3

30,4

48

40

14,3

20,8

Urban requalification

6,4

13,9

16,7

12,9

17,1

14,4

18,9

13,2

Source: www.infopieffe.it

According to the Italian juridical framework we can distinguish three main types of PPP: 1) public works concessions; 2) service concessions; 3) other PPP forms. For work concessions, two awarding procedures are identified:

• Work concession under public initiative (Art. 144 of the Code) whereby the

•

Public Administration (PA) invites tenders to a restricted/open procedure on the basis of a preliminary draft, a business plan and a concession contract. The PA evaluates tenders following the criterion of the most economically advantageous tender. Work concession under private initiative/Project financing (Art. 153 of the Code) whereby the project is designed and presented by a Sponsor on the

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basis of a Prior Information Notice (PIN) by the PA. Following the selection of the best proposal, the PA puts the Sponsor proposal out to tender and identifies the Concessionaire. According to Italian law, PPP schemes applicable to work concessions include Build-Operate-Transfer (BOT), Design-Build-Operate-Transfer (DBOT), DesignBuild-Finance-Operate (DBFO), Design-Build-Finance (DBF, defined General Contractor (GC) scheme, where GC is also involved in the search for funding). Service Concessions are contracts of the same nature as public service contracts, except that the provision of services consists either solely of the right to exploit the service or the right plus payment. In the third residual category, we consider the institutional PPP, where public– private companies provide public services. In this category there are several PPP schemes, each governed by specific statutory provisions. Some schemes are based on the incorporation of private public companies, such as Joint Enterprises (Società Miste), governed by Art. 113 of Legislative Decree 267/00 (Restatement of Local Authorities laws), to carry out public services; and the Urban Transformation Enterprises (STU- Società di Trasformazione Urbana), governed by Art. 120 of Legislative Decree 267/00, for the re-qualification of urban areas. Table 12.4 shows the segmentation of the PPP market in Italy with respect to the types of PPP, reporting the number and value of the PPP projects awarded over the period 2002–2013. Driving the PPP are mainly public works concession contracts and services concessions. The latter are more numerous – with 12.394 projects under bidding throughout the period 2002–2013 which accounted for 64 per cent of the PPP market – but mainly related to small-sized projects. Public works concessions by contrast are less numerous (25 per cent of total PPP) but of greater value with about €52 billion representing 70 per cent of total value of PPP awarded projects (see Table 12.5). Compared to 2012 there was an overall negative trend for public works concessions, which declined both in number (-25 per cent) and value (-53 per cent). This is due primarily to the collapse of large-size PPP projects with an amount of more than €50 million (-65 per cent). The trend of other PPP forms is characterized by a decrease of the number of bids and a growing value. On the contrary, service concessions grew in number (+5.5 per cent) and decreased in value (-17.8 per cent). According to CRESME data, between 2002 and 2011, more than 50 per cent of the number of projects delivered through the PPP were for developing social infrastructures (schools, community/civic facilities, housing, etc.). Although less numerous, projects for economic infrastructures accounted for 79 per cent of the total value of PPP projects, with a primacy of the transport sector. This indicates that PPP in Italy has mainly been used to develop small-sized social infrastructure projects, such as sporting facilities, schooling, public lighting, social housing. Yet, the largest PPP projects have been related to the development of economic infrastructure.

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Table 12.4 PPP Market by types: number and value of awarded PPP projects (2002-2013) Types of PPP

2002

2005

2009

2010

2011

2012

2013

total 2002-13

Number – Work concessions

56

272

288

231

184

239

156

2.283

Under private initiative

13

128

135

79

55

77

40

971

Under public initiative

43

144

153

152

129

162

116

1.312

– Service concessions

30

98

288

441

638

478

591

3.108

Other PPP

8

10

39

73

76

44

46

367

Total

94

380

615

745

898

761

793

5.758

Value – Work concessions

570

4.168 6.660 7.272 5.031 3.434 2.356 39.982

Under private

436

1.321 5.821 6.410 2.215 2.908

Under public initiative

134

2.847

839

862

2.816

– Service concessions

21

432

834

412

1.245 2.488

612

9.205

Other PPP

3

209

318

344

2.155

229

5.471

Total

594

525

390

339

27.283

2.018 12.698

4.809 7.812 8.028 8.431 6.312 3.197 54.658

Source: www.infopieffe.it.

Table 12.5 PPP Market for types: number and value of PPP under bidding (2002-2013) Types of PPP

2002

2005

2009

2010

2011

2012

2013

total 2002-13

757

567

4.772

Number Public works concessions

189

248

Service concessions

100

469

Other PPP forms

47

260

Total

336

977

424

640

490

1.265 2.088 2.085 1.994 2.104 12.394 180

302

238

300

230

2.197

1.869 3.030 2.813 3.051 2.901 19.363 Value

Public works concessions

1.216 3.058 4.330 6.133 9.212 4.869 2.279 51.880

Service concessions

54

1.393

517

1.312 3.446 2.549 2.096 14.883

Other PPP forms

11

1.627

742

2.227

Total Source: www.infopieffe.it.

444

367

779

7.217

1.281 6.078 5.589 9.672 13.102 7.785 5.154 73.980

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Changes in PPP usage and extent over time In 2012, due to the financial crisis and public budget cuts, the Italian PPP market experienced a slump. In 2012, the number of under-bidding projects decreased by 40.6 per cent compared to the previous year of 2011 (an amount of €13.1 billion under bidding in 2011 compared to €7.8 billion in 2012). The origin of this slump is the slowdown in the large infrastructure PPP projects (over €50 million) that in one year decreased by 43.3 per cent. The year 2013 continues to show a negative trend but with some recovery signals (-33.8 per cent against -40.6 per cent). The Italian government has reacted to the financial crisis by implementing a set of measures. For example, government funds for PPP projects have been increased in order to tackle the effects of the financial crisis. In particular, the government has increased the Infrastructure Fund with a further amount of €5 billion to be invested in school safety, prison building, archaeological and museum infrastructure, environmental recovery and strategic and mobility infrastructures.

Future developments Although PPP is becoming more widely used in public infrastructure, there are some inefficiencies that arise in practice because of administrative risk, procedural complexity that distorts competition, and inefficient allocation of risks between the public and the private sectors. In order to address and resolve these shortcomings, interventions are required. As regards the role of the public sector, there is a need to improve competence and know-how of the public sector in relation to PPP. This includes specifically:

• improving basic skills of public administrators required to develop and manage • • • •

PPP projects; adopting adequate tools to assess the feasibility, affordability and sustainability of projects; developing standard contract templates; adopting adequate procurement procedures to award the bids; and adopting adequate risk management practices to efficiently allocate and mitigate risks.

As regards the private system, the small size of Italian construction firms and the fragmentation of the public work construction market represent an obstacle for concessionaires to participate to PPP projects, as a single entity or in partnership, thus limiting the competition within the PPP market. We observe that the average number of participants in a bidding process is less than three. Such a low level of competition not only negatively affects the performance of the PPP project, but also discourages lenders that perceive a high financial risk when it is difficult to substitute a concessionaire who is not compliant with a contract. As regards financial issues, interventions that can contribute to the successful implementation of PPP in Italy are the following:

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• encouraging the development of alternative project financing schemes, such •

• •

as bonds; providing security instruments to facilitate access to credit, thus enabling the success of financial closure for strategic infrastructure. An example is the Guarantee Fund for Public Works recently launched by the CDP and devoted to large infrastructure projects; increasing the involvement of public banks in order to obtain low-interest loans; introducing forms of bank lending support.

A PPP research and development agenda for Italy The importance of research on PPPs is great as these projects influence our society and do so over a long time period. Nevertheless, in Italy research on this topic is fragmented and scarcely supported by government funding. Except for national observatories on PPP, such as the CRESME observatory or the Project Financing National observatory, universities and research centres researching on PPP themes, (such as risk management, financing and funding, infrastructure development, contracts and public policy), are scarce. Because it is important that research is conducted in a coordinated and shared manner, the establishment of research centres for Public Infrastructure development should be the first step of the Italian PPP R&D Agenda. These could lead research activities on specific topics, thus overcoming the current fragmentation and minimizing the duplication of efforts. Considering the state of art of worldwide research on PPP, the EU research agenda and the specific needs of the Italian PPP, the main research streams that need to be developed include: Process • Develop transparent evaluation techniques for PPP tenders. • Develop new methods to assess the value for money in PPP projects. Risk

• Develop new, and enhance current, theories for efficient risk allocation and • • •

develop mechanisms for applying such theories in practice. Analyse risks associated with various projects, investigate past projects to statistically establish the likelihood of certain events occurring, and establish appropriate strategies to mitigate them. Examine the relationship between the use of non-recourse finance and the skewed risk profile to which lenders are exposed. Develop quantitative risk evaluation techniques.

Finance and funding • Investigate the most appropriate funding mechanisms for different PPP projects. • Develop a methodology for determining an appropriate discount rate to be used in assessing Public Sector Comparator.

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Infrastructure development • Explore mechanisms to facilitate innovation in design, service delivery and operation and maintenance. • Develop structured measures to quantify the life expectancy and value of both existing and new infrastructure assets. • Develop specific linkages between technical design and long-term project success. PPP contracts • Develop standard forms of PPP contracts that include a certain degree of flexibility. • Develop techniques to assist ongoing contract management of complex PPP agreements. Public policy • Develop a mechanism to match an organizations risk profile and propensity to the structure of the project delivery systems. • Examine the influence of the policy framework on the success of potential PPP projects. • Investigate mechanisms to appropriately engage communities when considering PPP projects. Application of PPP concepts • Investigate specific case studies to drawn best practices in implementing PPPs.

Conclusions The analysis of PPP adoption in Italy reveals that, although it is a relatively recent practice, its use has now widely spread. Data on the PPP market show a positive trend in the last decade with a sharp decline in the last two years due to the financial crisis. Nevertheless, there are still some shortcomings, related to administrative, financial and legal issues that make the application and use of PPP less effective and efficient in Italy than in some other countries. In order to overcome these limitations, different interventions are required in order to strength the practices and advance the body of knowledge. We recommend the following measures to be implemented by the main PPP stakeholders: (i) public sector should develop policies in support of PPP, enhance the PPP legal framework and strengthen the project management skills in the body of PA; (ii) banks should extend their involvement in PPP transactions; and (iii) private firms should develop strategies to overcome the limitations due to their small size. On the knowledge side, we recommend that research activities focus on crucial aspects of PPP, so as to give policymakers advanced tools facilitating the design and implementation of future infrastructure PPP projects.

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References Antellini Russo F. and Zampino R. (2012). Infrastructures, Public accounts and Public Private Partnerships: Evidence from the Italian Local Administrations. Review of Economics and Institutions, 3(1). Banca d’Italia, (2013). Annual Report – Ordinary Meeting of Shareholders, 2012–119th Financial Year. Report. Bicchieri N. and Vigliano F. (2007). Italy. In: The International Comparative Legal Guide to: PFI/PPP Projects 2007. Published by Global Legal Group. Carbonara N., Costantino N. and Pellegrino R. (2013). A Three-Layers Theoretical Framework For Analyzing Public Private Partnerships: The Italian Case. Organization, Technology and Management in Construction · An International Journal, 6(2), pp. 799–810. Cresme, (2011). 10 Anni di Partenariato Pubblico Privato in Italia. Report (in Italian). Iossa E. and Antellini Russo F. (2008). Potenzialità e criticità del Partenariato Pubblico Privato in Italia. Rivista di Politica Economica, pp. 125–58. Rossi M. and Civitillo R. (2014). Public Private Partnerships: a general overview in Italy. Procedia – Social and Behavioral Sciences, 109, pp. 140–49. Standard & Poor’s (2013). Italy Looks To Institutional Investors To Support Its Infrastructure Financing. Report: www.standardandpoors.com/ratingsdirect, November 11. Unioncamere (2014). Il Partenariato Pubblico Privato e l’edilizia sostenibile in Italia nel 2013. Report (in Italian). Unità Tecnica Finanza di Progetto (UTFP), (2009). “100 Questions and Answers”. Report. Unità Tecnica Finanza di Progetto (UTFP), (2010). “Partenariato Pubblico Privato in Italia. Stato dell’arte, futuro e proposte”. Report.

13 Public Private Partnership in Japan Yuji Nemoto

Introduction Infrastructure development in Japan has been carried out mainly via public works. The reason for this is that during the period of rapid economic growth in the 1960s and 70s there was a steady increase in tax revenue that made private funding unnecessary. At the beginning of the 1990s when the Japanese economy experienced a recession, tax revenue declined and private infrastructure funding gained attractiveness. As a consequence, four approaches to Public Private Partnership (PPP) gained prominence in Japan. First there is a form of PFI, which had been introduced in the UK as a means for sharing the risk between the private and government sectors. In 1999 a special PPP law was enacted. Subsequently, additional forms of PPP were created. The second approach to PPP in Japan is a designated administrator system where the government retains ownership of infrastructure and the private sector conducts only the administration. In the third approach a commercialization test is carried out where the government and private sectors competitively bid and the one with the higher comprehensive evaluation wins. Lastly there is a form of public real estate, where little-used or unused land or buildings owned by the government and local municipalities are taken over by cooperative arrangements. Presently these four methods are the major PPP methods in use in Japan. Today, the infrastructure that was developed in the 1960s and 1970s is deteriorating and requires renovation. In regards to this, the Shinzo Abe cabinet announced a 2013 “PPP/PFI Action Plan” which seeks to promote PPP/PFI.

Origin and drivers PPP in Japan up to the 1970s In the period of rapid economic growth of the 1960s and 70s there was an increase in tax revenue, which meant that there was little need to rely on private funding as a means of infrastructure procurement. As the nation had always done, local municipalities used the increased tax revenue for many kinds of infrastructure. Most of the now existing infrastructure

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was developed over a short period of time during this era. This kind of quick development is surely rare in other countries. As a consequence of this affluence, the quality of life of Japanese people rose in a short time. Due to this, there was wide approval in Japan of rapid growth itself. However, secondly because the infrastructure was all developed over a relatively short period of time, there will also be a concentrated pattern of the deterioration. PPP in Japan in the 1980s In the 1980s, an economic bubble occurred in Japan and stock prices rose rapidly. The Prime Minister of the time, Yasuhiro Nakasone, strove for a small government following the model of the Thatcher administration in the UK and introduced so-called third sector procurement into infrastructure development. This can be described as a rudimentary form of PPP. The meaning of third sector in this context referred not to nonprofit organizations as is usually the case, but rather to joint public–private corporations that conducted infrastructure development. It was hoped that in the model the private and public sectors would share roles, but in actuality, based upon the optimistic prediction that projects would succeed in the midst of the bubble economy, the projects were started with almost no advance analysis and allotment of risk. PPP in Japan in 1990s After the collapse of the economic bubble at the beginning of the 1990s increased market risk caused many of these corporations to go bankrupt. As a consequence, the Japanese government recognized that it was essential to analyze risk in advance and to create contracts that clearly allocated roles. At that time Japan looked at the PFI model, which was starting to show results in the UK. In 1999 PFI was introduced via lawmaker-initiated legislation with the support of majority and minority party members. PPP in Japan in 2000s PFI introduced previously ignored concepts of risk and contracts into public procurement in Japan. This new way of thinking was not limited to PFI but also spread into many other fields. A representative example was the designated administrator system wherein the government would retain ownership of infrastructure and the private sector would be responsible for administration. Another example is a form of commercialization test that allows the government and private sector organization to competitively bid, with contracts being awarded to whoever received the higher comprehensive evaluation. Lastly there is a form of Public Real Estate, where little-used or unused land or buildings owned by the government and local municipalities are taken over by cooperative arrangements. Presently these four methods are the major PPP methods in use in Japan.

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PPP in Japan in 2010s A total of 30 public facilities that were constructed during the 1960s and 70s became unusable due to deterioration, even though they were not affected by the tsunami in the Great East Japan Earthquake on March 11, 2011. There were also reports of collapsed bridges and agricultural damns, and in December 2012, the Chuo Expressway Sasago tunnel’s ceiling boards caved in, killing nine people. This disaster was attributed to the corrosion of metal bolts holding up the ceiling boards. There are also other reports of accidents caused by deterioration such as road cave-ins, water and sewage pipe damage, and damage to traffic signs. Many of these events are attributable to the fact that these structures were erected 40–50 years ago and are now no longer fit for purpose. Budget gap in infrastructure renovations Based on this writer’s calculations, current public works budgets for maintaining currently existing infrastructure are between 30 and 40 percent below actual needs. Historically, such shortfalls had been addressed by issuing large volumes of government bonds, but currently Japan’s debt dependence exceeds 230 percent of its nominal GDP, which is the highest level among all OECD countries. In order to renovate infrastructure without depending on public debt, it is essential to rely on private funding. This is where expectations for PPP/PFI emerge. Treatment of public works by the Democratic Party administration The Democratic Party administration, which was established in 2009, charged the Liberal Democratic Party with having promoted unnecessary public works and set forth policies that drastically curtailed public works funding from the beginning. This was expressed in the political slogan “from concrete to people.” This view was correct in that some investment had indeed been unnecessary. But it can be rued that it was a big mistake to go so far as to reduce funding to address the infrastructure deterioration issue, which came to a head immediately after the administration changed. Infrastructure deterioration countermeasures by the Abe cabinet The Liberal Democratic Party/New Komeito coalition government (Prime Minister Shinzo Abe), established itself directly after the Sasago tunnel accident of 2012. In 2013 this administration introduced a plan for infrastructure longevity renovations, while making it clear that all government agencies and municipalities were to work on the issue of infrastructure deterioration. From 2014 onwards all municipalities were instructed to make plans based upon this policy. These plans were to include estimates of future expenses for the maintenance of existing infrastructure and of the public works budgets that would be securable in the future for each municipality. Where there was a shortage,

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municipalities are expected to proactively introduce reorganization and cooperate with each other in order to cover said shortage. These plans are to be decided on by 2015, and there is a possibility that this will create an opportunity for a reform of Japan’s municipal governments. Roles of PPP/PFI The government, municipalities, and private companies have recognized that covering the cost of all required extensive infrastructure renovations with public works is impossible. Therefore the Shinzo Abe cabinet announced a 2013 “PPP/ PFI Action Plan” while taking steps to promote PPP/PFI. The Action Plan states that the target amount for PPP/PFI projects will increase to 10–12 trillion yen. This amounts to 3–4 times of past PPP/PFI expenditure and is generally regarded as being very ambitious. In the “Integrated Management Plan for Public Facilities, etc.” mentioned below there is also a requirement to proactively utilize PPP/PFI.

Policy framework for PPP Legal framework of Japan’s PPP Japanese PFIs are governed by the PFI Act of 1999; the designated administrator system is covered by Revised Local Autonomy Act, enacted in 2003; and commercialization tests are governed by the Public Services Reform Act of 2006. The PFI Act has undergone multiple revisions. The 2011 revision adopts concessions (the Japanese term for which is “administration rights of public works, etc.”) whereby ownership of infrastructure stays in the hands of government while administration rights are transferred to private companies. The consignment of business has come to be conventionally conducted within the scope of local municipalities. The designated administrator system increases the level of freedom of business consignment consignors, and can also be seen as granting the same rights as concessions. It can be said that in Japan no overall legal framework such as PPP-supporting legislation that promotes PPP exists, while the 2013 “PPP/PFI Action Plan” represents an outline of the government’s objectives. Legal frameworks used by local municipalities and policy drafting process Local municipalities do not utilize a specific legal framework for PPP, but rely on the aforementioned systems to promote PPP. PFI is handled by The Council for the Promotion of the Private Finance Initiative. This same council is in charge of the “PPP/PFI Action Plan.” As part of the organizations prescribed by the PFI Act, there exist the Council for the Promotion of the Private Finance Initiative, which is composed of neutral academic experts, etc., (and of which this author is a member), and the Committee for the Promotion of the Private Finance Initiative, which is composed of

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concerned cabinet ministers. These organizations are tasked with draft policy documents and promoting a unified approach to PPP. Leading government implementers The assignment of roles is generally such that policy is developed by the government while actual operational decisions are made by local municipalities. Put another way, it could be argued that no matter how the government attempts to promote PPP/PFI, it cannot be implemented unless individual municipalities take assertive action. As stated above, the government is working on promoting PPP/PFI via the announcement of a target amount, but PPP/PFI is not proceeding as much as hoped, which may also be a manifestation of fears that public works budget will be reduced by the stated amount.

Financial context for PPP Because the finance system of local municipalities in Japan is unique, a number of special procedures have been put in place as follows:

• System of tax allocated to local governments. Local municipalities in Japan are

•

•

•

able to cover their basic needs via a system of tax allocations that correct imbalances in public finance. In this system, consideration is given such that regions with relatively low tax revenue will be given support from the nation’s local government tax allocations for amounts that are seen as necessary for infrastructure as per standard requirements from a national viewpoint. Assistance payments/subsidies. Even for cases of infrastructure that are not covered by tax allocation, the nation has systems for assistance payments/ subsidies. A certain proportion of the amount needed for infrastructure maintenance can be covered by such assistance payments/subsidies. Municipal bonds. If tax allocations and assistance payments/subsidies still leave a shortfall, municipal bonds can be issued. Large-scale municipalities may sometimes make public offerings of municipal bonds, but most municipalities issue these through local financial institutions. As they are a form of debts, municipal bonds naturally accrue interest, but they are usually less costly than the SPC procuring funds in the market. The low interest rates of municipal bonds is due to the fact that, under the current Japanese legislative system, even if the issuing municipality suffers financial collapse, the funds are guaranteed by the national government, and the financial institutions who are the creditors bear no responsibility. This creates a situation where even municipalities in poor financial condition benefit from the “implicit guarantee of the government” and issue bonds at near the same interest rate as municipalities in good financial condition. Future financial prospects. The government is aware of the moral hazard created for borrowers and lenders by this “implicit guarantee,” and restrictions have been put in place through the Local Municipalities Public Finance Soundness Act which requires the approval of the government when the

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Yuji Nemoto actual debt expenditure ratio is 18 percent or greater. The aforementioned infrastructure deterioration issue is one of the main factors affecting municipal finances, and there is increased awareness that it is not possible to overcome this with simple debt dependence. However, it can be argued that the market has to recognize this fact, and address it by increasing the interest rates of municipal bonds of municipalities with poor fiscal soundness.

Institutional framework, e.g. contractual, legal, governance Approval of the government. Infrastructure projects that the nation administers require the consent of the national government as administrator. However, PPP/ PFI infrastructure that is administered by municipalities do not require approval from the national government. This means that a municipality can approve this, unless, as in case of the construction of airports, it is a matter that requires national consent (irrespective of whether the project is procured via PPP/PFI or otherwise). The practical guidelines promulgated by the Government of Japan Cabinet Office for the implementation of PFI projects are as follows:

• • • • • •

Guidelines for PFI operations implementation process. Guidelines for risk allocation, etc., in PFI operations. Guidelines for Value For Money (VFM). Guidelines for contracts. Guidelines for PFI projects monitoring. Guidelines for administration rights of public works and administration business of public works.

These guidelines for PFI are generally more detailed than those for other forms of PPP, which can be implemented according to provisions of the Local Autonomy Act and other laws. In 2013, the Cabinet Office revised the following PFI guidelines:

• Guidelines for Concession Right and Operation of Public Facilities (new): the • •

Concession Guidelines. Guidelines for the PFI Project Implementation Process (revised): the PFI Procurement Process Guidelines. Guidelines for Contracts – Matters to be considered in PFI Project Contracts (revised): the PFI Contract Guidelines.

Organizational structure Stakeholders: construction groups, clients, financial institutions, etc In case of municipal PPP/PFIs stakeholders include municipalities that utilize the infrastructure, the private companies who build and maintain the infrastructure, the financial institutions who supply the funding, and the taxpayers who do not

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directly use the infrastructure but are charged for it through their taxes (in the case of a service purchase model). Because public finance has become tighter in Japan in recent years there is a trend toward giving more respect to the will of taxpayers and not just the users. Stakeholder representations: roles and responsibilities Municipalities usually have a department in charge of infrastructure. Other stakeholders have no direct representation. The Japanese parliament (Diet) is supposed to represent taxpayers, but in reality they often act as representatives for a small number of users. Public companies are entities that are influenced by PPP/ PFI procurement, but they often do not act on this because there is a danger of unfairness in competition. Nature of SPV or equivalent Outside PFI, SPVs are established in rare situations. In PFIs proper, the SPV is the representative company, and the point of contact with the municipalities. There is limited central government control of PPP projects and a unit to promote specific PPP projects does not exist.

Extent of use of PPP adoption Some 428 PFI projects have been implemented to date. Of these, 69 have been commissioned by the national government, 320 by local municipalities, and 39 by others (independent administrative corporations, etc.). Designated administrators are involved in 73,476 activities, and all of these are local municipalities. There are no statistics on commercialization tests or PREs, which are mostly used by local municipalities. In terms of area of activities these PFIs fall into the following categories:

• • • • •

PFI Total number: 428 Education/culture:144 Medicine/environment: 75 Government office buildings: 57 Roads/parks/water and sewage pipes: 51

Designated administrators comprising a total of 73,476 activities are:

• parking, large-scale parks, water facilities, sewage disposal facilities, cable • •

television facilities, etc. with 23,046 activities; prefecture/city meeting halls, cultural halls, museums, art museums, nature houses, sea/mountain houses, etc. with 15,102 activities; and stadiums, baseball grounds, gymnasiums, tennis courts, pools, ski courses, golf courses, swimming areas, government-run lodging, lodging and recreation facilities, etc. with 14,602 activities.

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Amount of investment in PPP – past, ongoing and planned Total expenditure on PFI amounts to 4.2819 trillion yen. Figures on planned items are not announced during planning. Also, there are no figures regarding the expenditure on designated administrators. Because designated administrators do not have ownership of infrastructure, they are not in the same category as PFIs.

Types of PPP in Japan Most Japanese PFIs, including all forms such as BTO, BOT, BOO, and BT, which are governed by contracts are usually of around 20 years’ length. PPP/PFIs are used in Japan for the implementation of projects whose policy goal is the provision of a public service. This includes the regeneration of local economies, the allocation of roles between the government (local municipalities, national government, public institutions, etc.) and private sectors (private companies, NPOs, citizens, etc.) in connection with facility construction/ ownership, operation administration, and fundraising. On such occasions, the Japanese approach rests on the two principles of (1) planning of risk and return and (2) governance by a contract. Based on this, PPPs in Japan can be classified as follows. 1

2

3

Public service type PPPs: All or part of public services that are implemented by the private sector. This includes PFIs, designated administrators, commercialization test, etc. Public assets utilization type PPPs: The private sector purchases or rents assets possessed by the public sector and conducts private sector activities. This includes PRE, and the practice of converting closed schools into offices or hotels, etc. Regulation/induction type PPS: This involves the use of regulation/ deregulation, assistance payments, etc., in order for help the private sector create services that are desired by the public sector.

According to the US National Council for Public-Private Partnerships (NCPPP) definition, a PPP is a contractual agreement between a public agency (federal, state or local) and a private sector entity. Through this agreement, the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and the rewards potential in the delivery of the service and/or facility. The World Bank’s definition places focus on the parts where private funding can be involved. This itself has meaning, but because there are many aspects other than funding where the skill of the private sector can be brought in, the scope can be broadened, so as to include for instance the designated administrator system (which does not involve private ownership, but, because it involves private administration, is a form of PPP).

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Future developments As mentioned above, the infrastructure deterioration issue is a very serious issue in Japan. According to this writer’s calculations, the budget for simply renovating the existing infrastructure is 30 to 40 percent per year higher than current provisions. Simply procuring this amount even in the private market is extremely difficult. Before financing, we should consolidate the infrastructure so as to reduce the required amount as much as possible and develop technology to reduce future costs. At Toyo University we refer to this method as economized infrastructure and we are working on research and development on this. There are a several patterns of “economise” infrastructure including:

• Compacting: If people went from living far away to living nearby, the network

•

•

infrastructure cost would be reduced. If schools, libraries, and nurseries, were put into one multipurpose building, public use facilities such as entrances and hallways could be economized. Decentralized processing: Places with low population density require a system that fits their needs rather than a high capacity network infrastructure. Examples include delivery of water with a water wagon rather than through pipes, distribution of books through a mobile library rather than via a library. By changing fixed costs into variable costs in such ways, it will be possible to reduce costs when the population further decreases in the future. Preventative maintenance: By focusing on the maintenance of the infrastructure, the life cycle cost can be greatly reduced.

Many of these measures cannot be implemented without the technologies and services of private companies.

PPP research and development agenda There are a number of situations where the construction of new infrastructure is not really necessary, but where future maintenance of the currently existing infrastructure must be carried out. Considering what to do with each infrastructure separately (be it renovating and continuing use, scrapping and renewing, discontinuing and eliminating, or substituting with some other infrastructure, etc.), development guidelines to assist in such decisions is a very important PPP research and development theme.

Conclusions In Japan, there are no major restrictions on the promotion of PPP. However, it is frequently easier to procure through traditional means, which has resulted in fewer PPPs being developed than expected and led to the burden for public finance becoming larger. As already mentioned, the current administration (of Prime Minister Shinzo Abe) has created a PPP/PFI Action Plan and has announced its intention to

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actively promote it by such means as demanding integrated management plans for public facilities from local municipalities. Infrastructure development is a major requirement for many nations and the issue of infrastructure deterioration is bound to arise in other countries, especially those countries where infrastructure development was carried out rapidly in the latter half of the twentieth century. And when that arises, what Japan is doing now will surely be a very useful reference.

14 Public Private Partnership in Malaysia Suhaiza Ismail

Introduction Information on Malaysia Malaysia covers a total area of 330,803 square kilometres. It is divided into Peninsular Malaysia, which consists of 12 states; namely, Johor, Kedah Kelantan, Malacca, Negeri Sembilan, Pahang, Perak, Perlis, Penang, Selangor, Terengganu, and the Federal Territory of Kuala Lumpur and Putrajaya; and Sabah and Sarawak on the Island of Borneo. It lies between latitudes 1 degree and 7 degrees north and longitudes 100 degrees and 120 degrees east. Kuala Lumpur is the capital city of Malaysia while Putrajaya, which is situated 25km south of Kuala Lumpur, is Malaysia’s administrative centre. The population of Malaysia in 2013 was 29.7 million. It is a multi-ethnic country with three main ethnic groups – Malay, Chinese and Indian. Other important groups include the indigenous people of Sabah and Sarawak, which include the Kadazan, Dusun, Bajau, Murut, Iban, Bidayuh and Melanau (Economic Planning Unit, 2013). Malaysia gained its independence from Britain on 31 August 1957 and practises a system of Parliamentary democracy. It has three levels of government – federal, state and local. A constitutional monarch (the Yang Di-Pertuan Agong or King) heads Malaysia while federal legislative powers are vested in the Parliament: the Dewan Rakyat (House of Representatives) and the Dewan Negara (Senate). The Perdana Menteri (Prime Minister) heads the Federal Cabinet and holds executive power. Each state has a Dewan Undangan Negeri (State House of Representatives). The members are elected in a similar manner to the Federal House of Representatives and a Menteri Besar (Chief Minister) leads the State Executive Councillors. In terms of the judiciary, Malaysia’s law can be classified as written law (the Federal and State Constitutions, Legislation enacted by Parliament and the State Assemblies) and un-written law (law found in cases decided by the Courts and local customs). In addition, one other important source of law in Malaysia is Muslim (Shariah) Law. Muslim law is applicable to all persons who are Muslims and relates mostly to family and estate matters. Table 14.1 provides key statistics concerning Malaysia’s economy for the period from 2011 to 2014.

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Table 14.1 Key statistics on Malaysia 2011

2012

2013(e)

2014(f)

Population (Million)

29.0

29.3

29.7

30.1

Labour Force (million)

12.6

12.9

13.2

13.6

Employment (million)

12.3

12.5

12.8

13.1

3.1

3.2

3.1

3.1

Nominal GDP (RM billion)

884.5

941.2

987.7

1,056.7

Nominal GNI (RM billion)

862.6

905.2

955.1

1,027.1

Real GDP growth rate (%)

5.1

5.6

4.5-5.0

5.0–5.5

Per capital income RM

29,783

30,859

32,144

34,126

Per capital income US$

9,733

9,991

10,265

10,898

15,190

16,530

16,743

17,173

3.2

1.6

1.6*

2.0–3.0

Merchandise exports (RM billion)

699.6

703.2

700.3

717.5

Merchandise import (RM billion)

548.0

577.6

610.9

633.5

Current account of BOP (% of GN)

11.9

6.3

2.8

2.3

Exchange rate (RM/US$)

3.06

3.09

3.13

n.a

Unemployment rate (%)

Per capital income PPP (US$) Inflation (% p.a.)

Notes (e) Estimate (f) Forecast * Data for Jan-Sept 2013 n.a. (not available) Source: Economic Planning Unit (2013)

Public sector infrastructure procurement in Malaysia Generally, there are three types of government procurement system in Malaysia – direct purchase, tender (open and closed tender) and direct negotiation (Ministry of Finance, 2013). Direct purchase is mainly for transactions worth less than RM50,000. Closed tenders are used for procurements costing between RM50,000 and RM500,000. For procurements costing above RM500,000, the open tender system should be used. Direct negotiation is only used when necessary, such as due to urgent purchase or when only one supplier is available. In principle, the appointed contractor must be an expert, well known for their credibility and offering a good price (Ministry of Finance, 2013). Government procurement is meant for procuring works, supplies and services. Infrastructure procurement is part of the works contracted to the public sector. The Ministry of Finance has financial authority at the federal government level while for the state government, financial authority is vested in the respective chief ministers and the state financial officers under the direction of the chief ministers.

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At the local government level, the Council of each local or municipal government has the financial authority. The laws and regulations concerning government procurement in Malaysia include the Financial Procedure Act 1957 (Revised 1972), Treasury Instructions, Government Contract Act 1949, Treasury Circulars and Federal Central Contract Circulars (Ministry of Finance, 2013). The key principles of government procurement in Malaysia include public accountability, transparency, value for money, open and fair completion and fair dealing.

Origin and drivers Malaysia was severely affected by the global economic recession of the early 1980s. At that time, the state-led approach to development that had been practised in Malaysia for some years came under increasing attack. Market mechanisms were considered to be better alternatives in terms of efficiency and faster economic growth. As a result, in the mid-term review of the Fourth Malaysia Plan (1981– 1985) the government decided to reduce its role in the economy and instead foster the involvement of the private sector. In 1983, privatization was declared to be a vital component of the government’s economic policy. The policy outlined the planned shift of some of the functions that were traditionally performed by the public sector to the private sector. Generally, privatization referred to changing the status of a business, service or industry from the state, government or public ownership to private ownership. There were two crucial aims of privatization in Malaysia. Firstly, to reduce the government’s presence in the economy, thereby decreasing public spending. Secondly, through privatization, market forces were to be allowed to determine the direction of economic activities, and, thus, lead to improved efficiency (Eighth Malaysia Plan, 2001). Between 1983 and 2003, a total of 474 projects were privatized in different sectors of the economy using different modes of privatization. These included: i) sale of equity; ii) sale of assets; iii) lease of assets; iv) management contracts; v) build-operate-transfer (BOT); vi) build-ownoperate (BOO), and vii) management buy-outs (Economic Planning Unit, 2006). The government reported positive outcomes from privatization in terms of a reduction of financial and administrative burden and improvements in efficiency and in the provision of public services (Jomo and Syn, 2003; and Siddiquee, 2006). The Eighth Malaysia Plan reported that more than RM28 billion of the government’s capital expenditure was saved as a result of privatization (Eighth Malaysia Plan, 2001). Subsequently, to strengthen the role of the private sector, the Public Private Partnership (PPP) scheme was unveiled in Malaysia under the Ninth Malaysia Plan (9MP). One of the aims of introducing PPP in Malaysia was to streamline the implementation process of the existing privatization programme. The Malaysian Government defined PPP as: the transfer to the private sector the responsibility to finance and manage a package of capital investment and services including the construction,

232

Suhaiza Ismail management, maintenance, refurbishment and replacement of the public sector assets… which creates a standalone business. The private sector will create the asset and deliver a service to the public sector client. In return, the private sector will receive payment commensurate with the levels, quality and timeliness of the service provision throughout the concession period. (Ninth Malaysia Plan, 2006)

As reported in the 9MP report, the PPP is employed for infrastructure and services development projects in two circumstances. First, PPP can be utilized if it makes government projects more efficient and if risk and reward is equitably shared between the government and the private sector. Second, PPP is to be used where government support enhances the viability of private sector projects in strategic or promoted areas (Ninth Malaysia Plan, 2006). Under the 9MP, 425 projects worth RM20 billion have been delivered via PPP. The breakdown of the total allocation for the various sectors are as follows: RM9.5 billion for education; RM1.6 billion for the housing sector; RM878 million for healthcare; and RM634 million for the transport sector. The use of PPP to deliver public services and facilities was further emphasized in the Tenth Malaysia Plan (2010) with more projects identified to be delivered using the PPP mode. The development of the PPP programme in Malaysia can be summarized as shown in Figure 14.1. PPP was chosen as a procurement method in Malaysia because it helps the government provide services to the public with the assistance of the private sector, while indirectly addressing the government’s budget restraints. Statistics have shown that from 1983 to December 2012, 592 projects were successfully implemented through partnership with the private sector. As a result, the government was able to reduce the number of its personnel by some 113,487, the jobs of which were transferred to the private sector, and earned RM6.48 billion

FOURTH MALAYSIA PLAN, 1981 • Malaysia incorporated policy

FIFTH MALAYSIA PLAN, 1985 • privatization programme

Figure 14.1 Development of PPP in Malaysia

NINTH MALAYSIA PLAN, 2006 • Private Finance programme to encourage greater participation of the private sector in the government projects

TENTH MALAYSIA PLAN, 2010 • more development projects to be implemented using the PPP scheme

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through the sale of government equity and assets. Moreover, the PPP programme contributed to estimated savings in the government capital and operating expenditure of RM174.6 billion and RM9.25 billion, respectively (Economic Planning Unit, 2013). It has been suggested that private sector skills and expertise help the government provide an integrated solution for the provision of public infrastructure and services, such as highways, schools and others. In addition, the implementation of PPP is seen as assisting the Malaysian economy by accelerating the economic growth due to the increase in private investment and market expansion. PPP implementation also enables the government to reduce its borrowing by utilizing the savings realized though the proceeds from the sale of equity and assets as well as the income generated from private corporate tax. These savings, together with income from private corporate tax, strengthen the public sector’s financial position and allow for the reallocation of resources to the most vital sectors, such as education and the health sector (Seventh Malaysia Plan, 1996; Khairuddin, 2007). Conversely, reservations for using PPP in developing public facilities in Malaysia include concern about the complexity of PPP projects, which may cause difficulty in achieving value for money (VFM). Moreover, the long-term nature of PPP concession, may remove the flexibility of the government to change any policies relating to the PPP projects in response to the changing environment. For example, should the policies in education change, the government could not close down a PPP university since they are bound to the long-term concession period with the private sector. Another concern about the implementation of PPP is the possibility of the government bearing the cost of contract variations.

Policy framework for PPP When privatization was introduced in Malaysia in 1983, a guideline called the Privatization Policy was published in 1985, which provides a clear guidance for implementing privatization in Malaysia (Fifth Malaysia Plan, 1985). Subsequently, the Privatization Master Plan was established to provide an action plan for fostering the usage of privatization in order to boost the economy of the country (Sixth Malaysia Plan, 1991). In addition, the master plan offers the future direction of the privatization programme in Malaysia. Since the official announcement of PPP in 2006, the following policies and guidelines have been established by the relevant section in the 3PU called the ‘PPP Policy Section’: 1 2 3 4

PPP Guidelines Changes in Concession’s Shareholdings Guidelines PPP Micro Programme Guidelines Facilitation Fund Guidelines (Unit Kerjasama Awam Swasta, 2009, 2011 and 2012a and 2012b)

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The ‘PPP Guidelines’, which were published in 2009, contain information concerning the principles for adopting PPP, key characteristics of PPP, contractual structure of PPP projects, roles and responsibilities of contractual parties involved, guidelines for submitting PPP proposals, and the general evaluation criteria of the proposals and process flow of a PPP project that starts from the call for PPP proposals and ends with project implementation. Due to the broad coverage of the document, the guidelines given are only brief. The ‘Changes in Concession’s Shareholdings Guidelines’ that were made publicly available in 2011 have the following objectives: 1 2 3

to standardize the process of changing shareholdings of the concessionaire or the SPV; to highlight the factors and elements to be considered in changing the shareholdings; and to ensure efficiency and transparency in the changing process of the shareholdings.

The document offers details of the process and procedures to be followed in the event that the SPV or concessionaire of a PPP contract wants to change the structure of its shareholdings during the concession period, either to increase the company’s capital or for the allotment of shares. There are two guidelines published by the 3PU that are related to financing PPP projects. The ‘PPP Micro Guidelines’ was published in 2012 due to the introduction of PPP Micro programme by the government. In essence, a fund called the PPP Micro fund was established for assisting small-scale businesses in running their business. Another important set of guidelines for PPP implementation in Malaysia is the ‘Facilitation Fund Guidelines’, which was established in 2013. The two documents outline the qualification criteria for applying for funding assistance from the government for financing a PPP project, scope of PPP financing using the fund and procedures for applying for the fund. Although the 3PU, which is the main monitoring body for PPP, is based at the federal level, similar guidelines are also applicable to PPP projects that are implemented at the state and local government levels.

Financial context for PPP Under the Ninth Malaysia Plan (2006), the government identified 425 projects to be delivered via PPP worth RM20 billion. In financing these projects, the Employees Provident Fund (EPF) was instructed by the government to provide a loan to the special purpose vehicle (SPV) named PFI Sdn. Bhd., which was set up to take on the responsibility for implementing these PPP projects. This SPV is a wholly-owned subsidiary of the Ministry of Finance and is accountable for executing the projects initially identified. For PPP projects other than the projects initially identified under the Ninth Malaysia Plan, the private sector companies or the SPVs are responsible for securing funding from financiers to finance the projects. In encouraging the

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private sector involvement in PPP projects, the government initiated the ‘Facilitation Fund’ to assist SPVs in the finance of PPP projects. Essentially, the rationale of the government for creating the fund is as follows: 1

2 3

to bridge the viability gap in private sector investment in the implementation of high value projects that have positive spill over effects as well as high strategic impact on economic development; to become a catalyst for private investment in strategic sectors; and to rationalize the government’s involvement in business and increase participation of the private sector in the economy.

Through the Facilitation Fund, the government will provide support in the form of a grant or adjustable grant to finance the development of basic infrastructure projects, such as access road, bridges, utilities and land acquisition for highway projects. Generally, the fund is limited to 10 per cent of the total project cost and the distribution is made on a reimbursable basis or progressive payment. It is expected that more PPP projects can be undertaken through the Facilitation Fund. The Facilitation Fund will consider those projects: 1 2 3 4 5 6

that include investment that has a high impact on the economic growth and has added value and high multiplier effects; that have the potential to create sustainable employment opportunities for Malaysian citizens, particularly at the management and professional levels; that have the potential to contribute towards enhancing the country’s economic competitiveness; that are technically feasible and commercially viable on a standalone basis; for which the value of the project investment (fixed investment) is not less than RM100 million; that have a strategic value in line with the strategic thrusts outlined under the Five Year Development Plan.

Institutional framework PPP governing bodies When the privatization policy was launched in 1983, a Privatization Section (initially known as the Privatization Special Task Force) was established and was put under the Economic Planning Unit of the Prime Minister’s Department. The main function of the Privatization Section is to act as the secretariat of the Privatization Committee, which is involved in the finalizing and confirming of proposals for privatization (Public Private Partnership Unit, 2013). In 2009, after the official introduction of PPP under the Ninth Malaysia Plan, the Chief Secretary of the government, announced the establishment of a new unit under the Prime Minister’s Department known as the Privatization and Private Finance Initiative Unit, which is now known as the Public Private

236

Suhaiza Ismail

Partnership Unit (3PU). The 3PU is headed by a Director General and has the following main functions: 1 2 3 4 5

To legislate PPP policies and strategies according to the suitability of the time and the country’s economic situation. To plan, coordinate, control and evaluate the implementation of PPP projects. To evaluate the technical and financial aspects of the PPP proposals and to seek approval from the cabinet. To discuss the terms and conditions of the PPP agreement with the related parties involved in a PPP project with the help of the National Legal Department. To render advisory services to the government and private sector companies on matters related to PPP (Public Private Partnership Unit, 2013).

In addition, the 3PU is also responsible for increasing the understanding of the concept and various modes of PPP, to ensure compliance with the proper practices and governance structure, and to increase the capabilities of officers in handling PPP projects. The 3PU also chairs a special committee, named, the Public Private Partnership Committee, which was established to handle the PPP project proposals. The members of the committee comprise representatives from the Ministry of Finance, Attorney General’s Chamber, Economic Planning Unit, Department of Land and Minerals Director General, Property Valuation and Services Department and the implementing agency. The specific roles of the Public Private Partnership committee are as follows:

• • • •

to act as the parent committee; to discuss the project proposals from the Steering Committee; to decide on project proposals for Cabinet approval; and to conclude the concession agreement terms and conditions, and negotiations with the successful bidders.

The 3PU plays an active role in coordinating, processing and negotiating a PPP project proposal up to the agreement signing stage. The contract management and project implementation monitoring will then be handed over to the ministries/ agencies entrusted by the Cabinet. In strengthening the aspect of large-scale PPP project implementation, the 3PU established a monitoring unit called the ‘Monitoring and Secretariat Section’, which is responsible for monitoring and overseeing the project’s construction works implementation through a periodical report from the agencies involved. However, the PPP project monitoring and evaluation role is generally carried out by the agencies responsible. PPP procurement process Figure 14.2 provides a step-by-step process flow of a project delivered via PPP, which begins with the call for development project proposals up until the implementation of the PPP project.

Public Private Partnership in Malaysia

Reject to be considered under conventional/ privatisation approach

No

1

Cell circular on national development plan to all ministries/agencies

2

Submission of PPP proposals by ministries/agencies

3

Consideration and evaluation of PPP proposal and submission to Cabinet for approval in principal

Yes 4

Ministries/agencies prepare bidding documents and invitation to bidders

5

Ministries/agencies to shortlist 3 companies for submission to Public−Private Partnership Unit

6

PPP committee to evaluate and endorse the best company based on ministries/agencies submission

No Reject

237

Yes Reject

No

Approval in principle from the Cabinet for the selection of the company

7 Yes

Reject

No

8

Negotiation of terms and conditoins with the selected company

9

Memorandum to the Cabinet on finalized terms and conditions Yes

10

Signing of PPP agreement

11

Project implementation

Figure 14.2 PPP process flow

PPP proposal: information required and evaluation criteria In preparing the PPP project proposal, the typical information required to be included comprise the justification for the proposal, business and financial plans, evidence of financial stability and capability, proposed payment mechanism and risk matrix (Unit Kerjasama Awam Swasta, 2009). Figure 14.3 summarizes the required components of a PPP proposal. In evaluating proposals for PPP projects, the important elements considered by the Public Private Partnership Committee include the following: 1 2 3

Output specification can be clearly identified and quantified. Economic life of the asset or service should be at least 20 years. Projects with the risk of technological obsolescence (technology used will be superseded in the short term) will not be considered.

238 • •

•

• •

•

• •

Suhaiza Ismail An executive summary of the submission An evidence of financial stability and statement of financial capability, including access to capital (debt and equity), and Letters of Support from potential lenders A statement of performance capability that includes an overview of overall experience, experience in similar projects, senior mangement expertise, expertise of those staff members who who will work on the project, ability to obtain necessary resources and references Results of economic, financial and engineering feasibility studies, including SCBA (socio-economic cost benefit analysis) A businees plan, including: partnership structure; duration of the proposed partnership; ownership (present and future); terms of payment; maintenance costs; reserves that need to be kept by the private partner; risk management, including that of force majeure; risk transfer from the government to the private sector partner; economic benefits to the government A financial plan, including: detailed cost schedule; financial structure; potential partner’s sources of funding; how improvements, upgrades and modifications will be financed; pro forma financial statements (include in the submission a softcopy of the financial models) The PPP modality options and the preferred option, concession period, risk analysis and allocation and financing scheme The proposed payment mechanism based on service-delivery output specifications and KPIs. For infrastructure or service delivery partnerships where public user fees will be a source of revenue, a detailed year-by-year description of future user fees and their justifications. Include results of public interest surveys, if any

Figure 14.3 Typical information required for PPP proposals

The project sponsor must be financially strong with the paid-up capital of the special purpose vehicle (SPV) being at least 10 per cent of the project value (Unit Kerjasama Awam Swasta, 2009). In addition, the Attorney General or the Legal Division of the Ministry/Agency should be consulted to ensure that the standard clauses of the contract/concession agreement follow the format of the PPP agreement and show a win–win situation. In addition, all the legal aspects concerning the possession or sale of land by the government need to be thoroughly examined in evaluating proposed PPP projects (Unit Kerjasama Awam Swasta, 2009). PPP payment mechanism Payment rendered to the private sector is dependent on project completion, whereby the payment will only be released once the project has been completed according to agreed standard. The payment covers building and maintaining costs, return on equity and cost of financing. Payment will be in terms of lease payment, which will be affected if the services and maintenance provided are not according to a level that is acceptable to the

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government agency. In particular, if there is any damage that affects the quality of the service rendered, the cost of repairing the damage needs to be paid by the company. Failure to do so will result in the company incurring a penalty levied by government agencies.

Organizational structure: PPP contractual structure Generally, the formal PPP contract is between the public sector and a private sector consortium, which is known as the Special Purpose Vehicle (SPV). The SPV is an entity that manages and carries the PPP contract and deals, which comprises the contractor, financier and creditors of the PPP project. Figure 14.4 provides a common structure for a PPP contract. Each contractual party carries specific roles and responsibilities throughout the PPP contract period. The SPV, who is one of the key parties in the PPP contract, has the responsibility to secure funds for the building and maintenance of the PPP project, to make payments to the subcontractors, financiers and other creditors and to deliver the identified services to the public sector according to the levels, quality and timeliness of the service provision. Moreover, the SPV should also make sure that the assets are well maintained and available for use throughout the concession period and to ensure that the constructed assets/facilities are Customer

Operation

Payment

Special Purpose Vehicle (SPV)

Finance debt

Debt provider

equity

Construction investor

equity

Facilities Management investor

equity

Other investor

Service delivered

Carried out under contract Government

Construction contractor

Figure 14.4 PPP contractual structure

Facilities Management operator

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transferred to the public sector in the specified condition at the end of the concession period. In terms of the responsibility of each member of the SPV, the financier who is part of the SPV team has the key role of financing the PPP project by a combination of equity and debt. For construction contractors, the major responsibility is to carry out construction works according to the agreement with other SPV members and the government. Facilities management operators have the crucial role of carrying out comprehensive facilities management of the public assets according to the contract. Conversely, the public sector or the government, which refers to the ministries that commission the PPP project, is directly involved in the contract with the SPV. The public sector (i.e. the related ministry/agency) is responsible for identifying, assessing and prioritizing projects for implementation via PPP. Moreover, the public sector prepares and manages the projects for the bidding process by interested bidders. As a regulator, the public sector needs to provide clear objectives, as well as the scope of the projects, output specifications, payment mechanism and KPIs for each PPP project. The public sector is also responsible for ensuring that risks are distributed optimally between the public sector and the private sector companies involved. Equally important, the public sector needs to manage the contracts involved, to monitor the performance of the private sector throughout the concession period and ultimately to safeguard the public interest.

Extent of use of PPP adoption As of 31 December 2012, a total of 592 PPP projects had been signed, and, currently, are at various stages of development. Out of the total number of PPP projects, 542 are existing projects while the remaining 50 are new PPP projects that were procured using various modes of PPP. Figure 14.5 describes the distribution of PPP projects based on sector from 1983 to 2012. As shown in Figure 14.5, construction has the highest number of projects delivered via PPP (22 per cent or 130 projects). This is followed by the transport, storage and communications sector and the manufacturing sector with 13 per cent and 11.8 per cent out of the total PPP projects, respectively. In total, the market capitalization value of the PPP projects, as at 31 December 2011, was reported as RM234 billion, which was equivalent to 16 per cent of the total Bursa Malaysia capitalization value (Economic Planning Unit, 2013). In terms of the allocation for PPP projects, RM20 billion was allocated by the government under the Ninth Malaysia Plan (2006) using the Employees Provident Fund (EPF) to finance the projects. The RM20 billion was allocated for different projects from different sectors, as follows: RM9.5 billion for education; RM1.6 for housing sector; RM878 million for healthcare; and RM634 million for the transport sector. Besides the RM20 billion allocation from the EPF, there were also PFI projects carried out and funded using other sources (Jayaseelan and Tan, 2007). Under the Tenth Malaysia Plan (2010), another 52 high impact projects worth RM63 billion have been implemented using the PPP

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Transport, storage and communications 13.0% Construction 22.0%

Agriculture and forestry 5.4% Electricity, gas and water 7.0%

Manufacturing 11.8%

Mining and quarrying 3.4% Other services 9.0%

Wholesale and retail trade, hotel and restaurant 10.0%

Government services 8.3%

Finance, real estate and business services 9.5%

Total projects: 592

Figure 14.5 Distribution of privatized projects based on sector

procurement method, which includes the Greater Kuala Lumpur/Klang Valley (KL/KV) Project and the building of the 2,300 km Pan Borneo Highway linking Sabah and Sarawak.

Types of PPP in your country In Malaysia, PPP modes can be grouped into two categories. The first category covers new projects procured using the mode of build-operate-transfer (BOT), which is the most common mode; build-operate-own (BOO); build-lease-transfer (BLT); build-lease-maintain-transfer (BLMT); land swap and private finance initiative (PFI). The second category involves existing projects that are delivered using modes, such as corporatization, outright sale, Lease of Assets (LOA), and management contract. Table 14.2 below offers a brief description of each PPP mode under both categories and examples of projects delivered via each of the PPP modes.

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Table 14.2 Mode, description and examples of project Mode and Description

Example of Project

1. Build, Operate, Transfer (BOT) The private sector constructs, operates and maintains the facility, and, during the concession period, the private sector is entitled to collect revenue in terms of direct charges to the users of the facility (usually the public) or indirectly from the Government who act as an intermediary. At the end of the concession period, the facility will be transferred to the government.

Rail project (i.e PUTRA Light Railway Transit (LRT) Project)

2. Build, Operate, Own (BOO) This method requires the private sector, on behalf of the Government, to build and operate the facility. When the concession period ends, the private sector provider will own the facilities.

A power purchase agreement between the government of Malaysia and Tenaga Nasional Berhad (TNB).

3. Build, Lease, Transfer (BLT) Under BLT, the private sector is required to build and operate the facilities required by the Government. In return they will receive monthly lease payments as a payment for the leased facilities for a certain period agreeable by both contracting parties. At the end of the concession period, the facilities will be transferred and owned by the Government.

The development of Putrajaya (i.e the Federal Government Administrative area).

Port development at Port Klang and Tanjung Pelepas

4. Build, Lease, Maintain, Transfer (BLMT) BLMT uses the same method as BLT with the additional requirement where the private sector needs to maintain the leased facilities throughout the concession period. 5. Land Swap Land swap is the method where the developer will construct the facilities required by the Government (i.e. infrastructure, technical buildings, non-technical buildings) for a substitute or the government swap the cost for the development of specified facilities with land that will be granted by the Government to the private sector (for them to develop under their own decision and requirements once the facilities have been completed and handed to the Government). The land that has been swapped by the Government as a means to pay for the cost of facilities developed (i.e. buildings) is normally high in value and will provide great advantage to the private sector (Ibrahim, 2007).

Kuala Lumpur Central Rail Station

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Example of Project

6. Private Finance Initiative (PFI) Is where the private sectors design, build, finance and operate facilities based on the specifications of outputs determined by the public sector. The public sector will purchase the capital items from the private sector and enter into a long term contractual agreement for the construction of facilities by the private sector on behalf of the public sector. At the end of the period, the project ownership will be transferred to the public sector (Ninth Malaysia Plan, 2006).

UiTM university campus Gombak Integral Terminal Transit, MARTRADE exhibition centre

7. Corporatisation It involves transferring government assets and liabilities from the government department to a commercial type company owned by the government. Therefore, the legal status of the government department or statutory body will be changed to a company governed by the Companies Act, 1965.

Corporatization of a public university MARA Technology University, Shah Alam.

8. Outright Sale: Sales of Equity (SOE) and Sales of Asset (SOA) SOE and SOA involve divesting part of the government’s equity/asset to private institution. The SOE is where all three organizational components (assets, management responsibilities and personnel) are transferred to the third party. The SOE may be 100% or partial depending on the decision of the government. Meanwhile, SOA may not involve all three components stated (assets, management responsibilities and personnel).

Malaysia Airlines System (MAS) Perusahaan Otomobil Nasional (PROTON)

9. Lease of Assets (LOA) It involves the transfer of the right to use the assets of a public entity for an agreeable amount of payment. The rights to use the asset will continue according to the specified period. This mode usually applies to government assets that are large and have a strategic value like airports and seaports. Even though there is no change in ownership at the end of the concession period, the asset can be acquired with an arrangement agreed by both parties once the concession period ends.

Leasing of parking area by the Municipal Council of Petaling Jaya to a private company.

10. Management Contract (MC) It utilises the private sector management expertise to manage a Government facility in return for a fee. The private sector experts bear the management responsibility but the government asset (facility) remains in the public sector.

Penang bridge

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Future developments Realizing the contribution of the PPP programme to the development of the country’s public infrastructure and facilities, the government has shown continuous support for PPP. This is evidenced in the government’s plans and policies that give emphasis to the use of PPP. In particular, in the Tenth Malaysia Plan, which covers the government’s plan for the country’s infrastructure development for the period from 2011 to 2015, it has been highlighted that PPP will be extensively intensified with 52 large-scale projects to be delivered via PPP. In addition, several strategies have been announced to strengthen the implementation of PPP in Malaysia. These strategies include: 1 2

3 4

Monetization of public sector assets through outright sale, joint venture and long-term lease of land with commercial potential. Putting in place rigorous checks to ensure that prospective companies meet a minimum set of criteria including financial standing, track record and management excellence. Strengthening the monitoring framework to ensure successful implementation of PPP projects. Adopting value for money drivers, such as optimal risk distribution, whole life costing, output specification, competition and performance based payment mechanism. (Tenth Malaysia Plan, 2010)

Moreover, the establishment of the Facilitation Fund under the Tenth Malaysia Plan also shows government support for PPP. In the Economic Transformation Plan (ETP), which was introduced in September 2010 with the objective of accelerating the achievement of developed-nation status by 2020, the private sector is expected to take the lead in implementing the ETP initiatives, and PPP has been identified as one of the mechanisms to be utilized in the pursuit of the ETP objective (Performance Management and Delivery Unit, 2013). Although the government’s present focus for PPP in Malaysia is on infrastructure projects, in the future, more PPP projects will be used in other sectors, including education, telecommunications and renewable energy. Moreover, the International Finance Corporation for Singapore and Malaysia is currently negotiating with the private sector to embark on PPP projects in other countries, particularly other developing countries (Berita Harian, 2013). Due to the importance of PPP for the economic development of the country, PPP is labelled as ‘Malaysia’s Third Way’ of procurement.

PPP research and development agenda Despite continuous support and emphasis on PPP as a mode for delivering public infrastructure in Malaysia, there are areas in which potential research can be conducted. In particular, research areas relating to PPP in Malaysia include the following:

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2

3

4

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Accounting for PPP. The government of Malaysia has committed to implement full accrual accounting by 2015. Although there is an international public sector accounting standard for PPP (that is, the International Public Sector Accounting Standard (IPSAS) 32 – ‘Service Concession Arrangements: Grantor’ on the recognition, measurement and disclosure of service concession assets and related liabilities, revenues and expenses by the grantor i.e. public sector entity), due to the unique characteristics of PPP in different countries, there will be issues in adopting the standard for Malaysian PPP. Hence, in preparing for the movement towards accrual accounting it is timely for researchers to investigate how PPP should be appropriately accounted for in the government’s book according to the accounting standards. Besides IPSAS 32, an alternative reporting framework may be developed to suit the Malaysian PPP context. Performance evaluation. It is equally important to embark on research and development in the area of PPP performance evaluation. There are at least two potential research agendas. Firstly, applied research to develop appropriate evaluation mechanisms for PPP at various procurement stages. For instance, PPP feasibility studies, proposals evaluation framework, and a mechanism to evaluate PPP during the construction period and operation stage. Secondly, research could be carried out to assess the PPP projects that are currently at the construction and operating stages. Guidelines for PPP implementation. In terms of the practice and technical application of PPP, the relevant authorities may want to consider improving the existing guidelines on PPP implementation in terms of clarity and the details of the information provided, in addition to developing new guidelines on other related areas in PPP. Transparency and accountability. Due to the complexity of the contractual structure of PPP projects, the issue of transparency at the various stages of the PPP process, including the evaluation of PPP proposals, list of shortlisted bidders, performance of PPP projects at the construction and operation stages, is crucial and needs attention from researchers as well as the implementation authorities. Similarly, accountability issue in relation to PPP need to be given due attention by researchers.

Conclusions Despite the clear direction of the Malaysian government in adopting PPP as one of the key procurement mechanisms, there are constraints in implementing PPP. A study by Ismail and Harris (2014) revealed that lengthy delays in negotiation, lack of government guidelines and procedures on PPP, higher charges to direct users, lengthy delays because of political debate, and confusion over government objectives and evaluation criteria are the top five problems associated with PPP in Malaysia. Although currently there are a few guidelines on PPP implementation in Malaysia, the guidelines are too brief and may not be that useful to the users. As insufficient guidelines may lead to poor quality PPP projects, it is important to have sufficient

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guidelines, particularly for the tendering and contract basis; an effective supervisory framework; and a strong regulatory basis. The lengthy time consumed by the negotiation process of PPP procurement may lead to a higher cost being incurred. Political interference is also an important factor to be considered as it reflects the scenario in Malaysia in which political intervention in PPP project implementation is always present. In relation to the confusion of government objectives and evaluation criteria, this is possibly due to insufficient PPP implementation guidelines, which causes a lack of conformity in the detailed objectives of the government and the evaluation criteria, which need to be addressed by the private sector to secure the PPP projects. The government, therefore, needs to provide clear objectives and methods while highlighting the progress achieved and addressing the future direction of the PPP programme in Malaysia. In conclusion, PPP is a useful mechanism for supporting the rapid economic development of Malaysia to ensure the public enjoy quality services and facilities at the best cost to the public sector. At the same time, a conducive environment and the necessary support should be provided to the private sector to encourage a win–win situation between the government and the private sector provider without burdening the public as the end user of the facilities provided.

References Berita Harian (2013). ‘PPP in Malaysia is the Best in East Asia’, Berita Harian Newspaper, 30 October 2013. Economic Planning Unit (2013). ‘The Malaysian Economy in Figures 2013’, Prime Minister’s Department: Malaysia. Eighth Malaysia Plan (2001). ‘Chapter 7 – Privatization’. Available online: http://unpan1. un.org/intradoc/groups/public/documents/APCITY/UNPAN017508.pdf (Accessed 10 October 2013). Fifth Malaysia Plan. (1986). ‘Fifth Malaysia Plan (1986-1990)’. Available online: www.epu. gov.my/fifth-malaysia-plan-1986-1990 (Accessed 10 October 2013). Ismail, S. and Harris, F. A. (2014). Rationales for Public Private Partnerships (PPP) Implementation In Malaysia. Journal of Financial Management of Property and Construction, 19(3), 188–201. Jayaseelan, R., and Tan, M. (2007). ‘PFI cure for all ills?’ The Edge Malaysia, 72–74. Jomo, K. S. & Tan Wooi Syn. 2003. Privatization and renationalization in Malaysia: A Survey. 1–46. Khairuddin A. R. (2007). Private Finance Initiative (PFI): Concept and Method of Procurement for Construction Projects: with Specific Reference to Malaysia, IIUM Press: Malaysia. Ministry of Finance (2013). ‘Malaysia’s Government Procurement Regime’, Ministry of Finance, Government Procurement Division: Malaysia. Ninth Malaysia Plan, (2006). ‘Ninth Malaysia Plan (2006-2010)’. Available online: www. epu.jpm.my/rm9/html/english.htm (Accessed 6 June 2013). Performance Management and Delivery Unit (2013). ‘Overview of Economic Transformation Programme’. Available online: http://etp.pemandu.gov.my/About_ETP-@-Overview_of_ ETP.aspx (Accessed 12 October 2013). Public Private Partnership Unit (2013). ‘Objective of Public Private Partnership Unit’. Available online: www.ukas.gov.my (Accessed 1 December 2013).

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Siddiquee, Noore Alam (2006) “Public management reform in Malaysia: Recent initiatives and experiences”, International Journal of Public Sector Management, Vol. 19 Iss: 4, pp. 339–358. Sixth Malaysia Plan (1991). ‘Sixth Malaysia Plan (1991-1995)’. available online: www.epu. gov.my/en/sixth-malaysia-plan-1990-1995 (Accessed 10 October 2013). Tenth Malaysia Plan (2010). ‘Tenth Malaysia Plan (2011-2015)’. Available online: www. pmo.gov.my/dokumenattached/speech/files/RMK10_Speech.pdf (Accessed 7 June 2013). Unit Kerjasama Awam Swasta (2009). ‘Public private partnership (PPP) guidelines’. Available online: www.ukas.gov.my/html/themes/miu/content/ppp_bi_131109.pdf (Accessed 7 June 2013). Unit Kerjasama Awam Swasta (2011). ‘Changes in Concession’s Shareholdings Guidelines’. Available online: www.ukas.gov.my/documents/10157/7c11befc-83164f7d-9d1e-c097e496a201 (Accessed 10 June 2013). Unit Kerjasama Awam Swasta (2012a). ‘PPP Micro Programme Guidelines’. Available online: www.ukas.gov.my/c/document_library/get_file?uuid=f6fa62f7-c3c7-476b-88b2ee6d266a4679&groupId=15223 (Accessed 7 June 2013). Unit Kerjasama Awam Swasta (2012b). ‘Facilitation Fund Guidelines’. Available online: www.ukas.gov.my/documents/10157/161bfe3b-c35d-4fb8-abf5-3a7d5d5861a5 (Accessed 7 June 2013).

15 The state of Public Private Partnership in Nigeria Martin Oloruntobi Dada and Olukayode Sunday Oyediran

Introduction Nigeria is Africa’s largest country in terms of population. The last census conducted in the country (2006) put the population at about 140 million (Infrastructure Concession Regulatory Commission (ICRC), 2014). With an annual growth rate of 3.5 per cent the current population (2014) is estimated at about 160 million. The country has a land mass of 98.3 million hectares. Nigeria is the sixth largest producer of petroleum in the world; but the country has witnessed a cycle of booms and busts with respect to oil revenues and how they had been expended. Despite its economic potential, Nigeria has huge infrastructure deficits that affect the quality of life of its citizens. There is an infrastructure deficit in virtually every sector except in the telecommunication sector, which was privatised and deregulated in 2002. The deficit in infrastructure has been variously ascribed to years of underinvestment and lack of maintenance (ICRC, 2009). For example, some of the nation’s airports and highways were built in the 1970s without subsequent concomitant additions and upgrades, despite increased traffic volume and demand. Further examples abound. Nigeria’s road sector is in dire need of improvement with respect to construction of new roads and repair of existing stock. Accident statistics are among the highest in the world. Nigeria has a total road network of 193,200 km of which the Federal Government owns 17 per cent, the states 16 per cent and the local governments 68 per cent. As at 2007, only 35 per cent of federal roads were in good or very good condition. As at March 2011, the figure declined to 26.5 per cent signalling further deterioration that was attributed to inadequate funding and maintenance (Federal Ministry of Transport, 2013). As at 2011, the installed capacity in the Nigerian electricity sector was about 4800 MW, but with only about 3000 MW being generated. Power outages in Nigeria amount to 320 lost days a year. Over US$ 13 billion is spent annually to fund generators (Sanusi, 2012). A total of 48 countries in sub-Saharan Africa with about 800 million inhabitants generate roughly the same power as Spain with a population of 45 million. Additionally, the US alone generates about 550,000 megawatts for its 260 million inhabitants; the UK 43,000 MW for 60 million;

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South Africa 23,000 MW for 45 million and Argentina 9500 MW for 32 million. Nigeria generates 3877.4 MW for her 150 million (Abiola and Adebayo, 2011). The housing deficit is about 17 million units: this figure refers to housing units that do not meet the minimum requirements of the UN standard of a dwelling unit with reference to quality and liveability. The government provider approach has not been able to address Nigerian housing needs (Ibem and Aduwo, 2012). The overall view of the infrastructure situation in Nigeria is underscored by the fact that Nigeria developed a national integrated master plan that identified a need to invest US$ 2.9 trillion in investment for the next 30 years to bridge the infrastructure gap. Of this amount transport, energy, information-communication technology (ICT) and water, which are set to receive the greatest priority in respect of resources and time lines, require 2.3 trillion US dollars (ICRC, 2009; Philips, 2014; Nigerian Economic Summit Group – NESG, 2014).

Origin and drivers Infrastructure needs and gaps: why PPPs? Whether it is economic infrastructure such as transport, energy, telecommunications or social infrastructure for health and education, the gap between demand and supply in Nigeria is wide in comparison to many other nations. Table 15.1 shows the level of infrastructure stock of some countries in comparison with Nigeria’s. Table 15.1 indicates that Nigeria lags behind Brazil and India in infrastructure stock. Additionally, Nigeria’s health infrastructure is still underdeveloped. Indeed, the country tops medical tourism in Africa with citizens leaving the shores of Nigeria for medical attention (The Punch, 2014a). The Nigerian infrastructure gap is a problem that presents both a challenge and an opportunity. A part of the problem is that some of the existing infrastructure is aging without adequate maintenance. There is also the additional need for the provision of new infrastructure. For a country whose ambition it is to join the league of industrialised or developed nations as encapsulated in policy documents such as Vision 20:20:20, but which lacks enough public resources to achieve this vision, the use of PPP seems inescapable. Other reasons for embracing PPP is the presumed need to free government funds for spending on social services, the need Table 15.1 A comparison of Nigeria’s stock of infrastructure with Brazil and India Country Population Area (millions) (km2)

Telecoms Electricity Rail (millions) (megawatts) (km)

Roads (Km)

Airports (Number)

Brazil

198.74

8514877 191.78

43.88

28857

India

1166.08

3287263 464.84

76.17

63,327 3,316,425 349

Nigeria

149.23

923,768

2.19

3505

64.27

Source: ICRC (2009) as cited by Sanusi (2012), p.12

1,751,868 4000

193,200

56

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to take advantage of the perceived relative efficiency of the private sector in the delivery and management of infrastructure, and the need to take advantage of synergy and collaboration (leading to innovation) among parties that have different perspectives. These are part of the larger reasons given in literature for the use of PPP in other nations. Heightened expectations of citizens for infrastructure and quality of life that have accompanied participative democracy are also drivers for government to act or be seen to be acting in this area. These expectations, moreover, must be seen against the context of the history of failure in the management and provision of infrastructure in Nigeria. At the end of the Nigerian civil war (1967–70), the then Federal Government embarked on a mission called the three Rs, which included reconciliation, rehabilitation and reconstruction. In the early 1970s, Nigeria had ambitious national development programmes that accompanied the ongoing oil boom. This period witnessed the construction of many of the highways and bridges seen today in Lagos together with the establishment of several industrial enterprises. By 1977/78 there was a gale of nationalisation of business enterprises that accompanied the implementation of the Nigerian Indigenisation Decree of 1978. The second republic was ushered in in 1979 and aborted in 1983. The military held power until 1993. From 1983 to 1993, the national currency was devalued and a structural adjustment programme was adopted. Some government enterprises were privatised with the government partly or fully divesting from them. The privatisation of those enterprises in the early 1990s was like a game of self-reversal with respect to the 1977/78 policy on indigenisation and nationalisation. While some public enterprises had indeed failed or underperformed, eating into the national budget and underscoring government’s need for divestment, some were privatised for the simple reason of government wanting to leave business to the private sector. Indeed, the slogan then to justify government divestment from some of its establishments was that ‘government has no business of being in business’. Some enterprises that had either failed or underperformed and were subsequently wound up included Nigerian Airways, and the Nigerian National Supply Company. The third republic was aborted and the fourth republic started in 1999. The advent of democracy in 1999 opened the space for popular participation in government and raised expectations of citizens with regard to infrastructure development. The civilian regime commenced restructuring and economic reforms of liberalisation and deregulation, including monetisation policies. The reforms cut across several sectors including the financial services sector where banks were consolidated to be able to support developmental processes in the country. The reforms of the financial sector positioned Nigerian banks to be players in high net worth development projects. As at 2014, three Nigerian banks were reported to be among the top 500 global brands (NESG, 2014). The combined effects of democracy, deregulation and digitisation have been associated with an inflow of foreign direct investment into Africa (which includes investment in infrastructure) with Nigeria being a major beneficiary (Philips, 2014). This situation has been further supported by the aggressiveness of the Federal and state governments in rolling out different versions of transformation

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programmes with varying levels of success. These programmes carry along incentives and connote competition by the states for investment. In this context, the abundance of land in some states and the ability of states to self-regulate with respect to PPP have opened the space for the use of this procurement approach. The reforms in the Nigerian banking sector have allowed banks to become major stakeholders in the PPP process in the country. They have started playing a major role in the purchaser-side of the power sector by providing financial advisory services, playing lead arranger role and providing guarantees to distribution and generation companies as well as to participants of the Nigerian National Integrated Power Project (NIPP). The banks provide utility collection and cash management services while providing additional funding sources (The Punch, 2014b). Nigerian banks also offer these services to other sectors such as the Lagos Homes Ownership Scheme, the first home ownership system on mortgage basis at a state level in Nigeria. This scheme is a PPP arrangement with banks playing strategic roles. Applicants are required to pay 30 per cent initial deposit and pay the remaining values within ten years at an interest rate of 10 per cent. Other attractive procurement methods that could have filled the infrastructure gap There are two ways of thinking about remedying the Nigerian infrastructure crisis. The first involves procurement from the construction industry whereby infrastructure is obtained right from design to completion. The second approach concerns itself with the financial perspective and considers the financing options that can address Nigeria’s infrastructure gap. As a result of institutional policies that required competitive bidding for public projects, the traditional form of procurement in Nigeria has historically been predominant. The traditional method, where designs and construction are contractually and organisationally separated, required contractors to tender for government projects after which decisions were made on the basis of competitive tenders. It is believed that in the process, a fair and equitable value will be obtained in pricing and other parameters. This procurement form has been assumed to have inbuilt safeguards that promote accountability and transparency, but not necessarily economy. However, weaknesses of the traditional method, especially a lack of shared commitment, have resulted in some project participants colluding and seeing public projects as part of the sharing of the Nigerian ‘national cake’. Nigeria thus witnessed frequent project abandonment and in the process lost billions of naira, a situation that contributed to it embarking on reforms of its public procurement processes. The limitations of the traditional method gave rise to advocacy in literature for integrated and collaborative methods. However, for the provision of public infrastructure in Nigeria, these integrated and collaborative methods (such as design-and-build or its variants, partnering, strategic alliances, and relational contracting), despite their strengths, have been scarcely used. This is partly due to the legal, institutional or policy obstacles that created limitations for such methods except in some security and specialist contexts.

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The traditional procurement method and integrated and collaborative methods have their strengths and weaknesses. However none of these methods, except contractor-finance (which can be seen as a form of PPP) addresses the major economic issue of raising funds for implementing public sector projects in such a way that the private and public sector entities coalesce into an independent organisation (through a special purpose vehicle) in which there is a shared commitment among the parties. Additionally, tender evaluation on the basis of economic value (not just price) is not a criterion in the traditional procurement process. Thus in traditional procurement, bids are assessed as successful on the basis of some predetermined variables that usually include the iron triangle of cost, time and quality. In PPP, more rigorous analyses are done and where the issue has to do with value for money, PPPs often become preferable. This is also understandable as the PPP evaluation process analysis usually covers the whole project lifecycle. The above issues, especially paucity of funds and need for collaboration, have led the Nigerian Federal Government to rework the institutional and legislative framework of public sector procurement to include PPP. Outside conventional procurement methods such as traditional, integrated and collaborative approaches, from the financial approaches, an alternative method that could have filled the Nigerian infrastructure gap is public finance. Regular budgetary allocation, raising of government (sovereign) bonds and pension funds could also have been used as funding sources for public projects. Nigeria has over N2.3trillion (about US$ 14.4 billion; $1 is approximately N160) in pension funds as at 2012, which yield predictable streams of income matching long-term liabilities (Sanusi, 2012). The Nigerian Pension Commission has adjusted their regulations and guidelines to permit a portion of pension funds to be spent on infrastructure projects. There is little risk attached to some of these funds. While governments in Nigeria have the capacity to borrow funds in a competitive way, the volume of borrowing within a given timeframe is restricted by law. At the federal level, Nigeria has a fiscal responsibility act that stipulates requirements for government spending. It also has a Debt Management Office that guides on debt levels. Furthermore, development finance institutions (DFIs) in Nigeria have additional mandate for financing development projects and for acting as facilitator of finance. The DFIs, required to support economic developments in various sectors, are owned by the Central Bank of Nigeria and the Federal Ministry of Finance. The DFIs include: Bank of Industry, Federal Mortgage Banks of Nigeria, Nigeria Export-Import Bank, Bank of Agriculture, Infrastructure Bank (formerly Urban Development Bank of Nigeria Plc.), and National Economic Reconstruction Fund (NERFUND). Ordinarily some of these DFIs should have partly filled the infrastructure gap. However, their actions have been constrained by poor corporate governance (including lack of autonomy), low capitalisation, inadequate skill and manpower and poor business models (Sanusi, 2012). Additionally, while public finance for infrastructure projects could be acceptable, other social commitments of government will affect the volume of projects it can embark on.

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Opposition and support for PPPs PPP as a multi-stakeholder project delivery concept is fast taking root in Nigeria. There is growing support for the use of PPP for infrastructure procurement and service delivery at various levels of government (federal and state) in Nigeria. The Federal Government has established a commission for PPP in Nigeria to interface with all its Ministries, Departments and Agencies (MDAs). Some states in Nigeria have created PPP laws and offices while several others are in different levels of adoption and use of PPP. Specifically, states in Nigeria that have established PPP frameworks and enabling environments include: Lagos, Bayelsa, Delta, Rivers, Akwa Ibom, Abia, Cross River, Edo Ekiti, Benue, Sokoto, Zamfara, Niger, Kaduna, Bauchi, and Yobe. An enabling environment in this context involves the following: existence of a PPP law or policy, establishment of a PPP office, successful undertaking of projects, and existence of a public procurement law (Detail Commercial Solicitors, 2012). Lagos State leads other states by having its first PPP law for roads and highways in 2005 and by also embarking on the first ever highway PPP project in West Africa – the 50-kilometre Lekki Epe toll road. Contractors and financiers support PPP as a viable alternative for infrastructure procurement. This is understandable as the projects and the packaging give an assured source of income. However, some citizens and stakeholders especially end users oppose PPP. Opposition by these stakeholders is not based on them judging the affected projects as unimportant, but on their fear that the method may be a conduit for official corruption. Oppositions also arise when end-users feel that they have not been adequately consulted or catered for in PPP projects such as highways that require tolling when alternative routes have not been provided. This was one of the reasons why there was opposition to the initial tolling required on the 50-kilometre Lekki-Epe road construction in Lagos. An example of non-transparency that elicits reservation among citizens is the understanding that in the power sector, the actual amount expended or dedicated to addressing Nigeria’s power problem is unknown. The Nigerian federal executive and legislative arms could not reconcile the amount of money spent on the power sector between 1999 and 2007 (Abiola and Adebayo, 2011), when there were allegations or counter allegations. Opposition to the use of PPP is usually not too pronounced before financial closure or award of contracts, but rather emerges during construction and operation stages. The Lagos-Ibadan expressway (about 160 km, initially concessioned at about N87 billion in 2008), a strategic expressway that links Lagos to other parts of the country was to be executed via PPP. Following delays of about three years in commencing the project by the concessionaire, some governments of the South Western States of Nigeria complained and wanted to take over the project. Even though the Federal Government did not oblige them, it eventually took over the project in 2013. The opinions adduced by those who wanted the contract revoked, included delays, the frequency of accidents on the road, and the economic losses and security threats to lives and property due to the state of the road.

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The Lekki Epe Expressway in Lagos State that was executed through PPP also encountered opposition. While the project was embarked upon partly to address the traffic gridlock in that axis of the state, some stakeholders protested and took the government to court arguing that there was no alternative road and that, while the project was yet to be finished, the government was already collecting tolls on part of the road. The argument of the protesters was that the toll was their money that was being used to fund an uncompleted project. They also argued that they were already paying taxes to government and that this should suffice (Dada, 2013). Policy outcomes The potential desirable policy outcomes of PPPs include economic, social, environmental improvements and value for money. Specifically, some selected outcomes for the use of PPP in the country include: 1 2 3 4 5

Projects executed with transparency and competitiveness to achieve value for money for the public and a fair value of return for investors. Accelerated investment in public infrastructure and upgrading of existing infrastructure to satisfactory standards. Development of capacity to plan for and implement PPP projects. Ensuring balanced regional development. Meeting Nigeria’s infrastructure needs to support overall economic development.

Policy framework for PPP Nigeria by its nature operates a dual PPP regime which involves: the federal governmental authorities and the states. The Federal Government of Nigeria has developed a policy framework for PPP in Nigeria (ICRC, 2009). Some states have created similar frameworks or taken steps towards providing an enabling environment for PPP. The Federal Government established the Infrastructure Concession Regulatory Commission in 2005 by act of Parliament and thereafter developed its National Policy on PPP (N4P) in 2009. The Commission was inaugurated in 2008. The ICRC is an inter-ministerial agency whose board reports to the President of the country. This indicates the high level of support and visibility the ICRC and consequently PPP issues receive from the government. The policy was launched at a public forum on PPP for Africa in Abuja in 2012. The policy framework guides the procuring entities in the MDAs at the Federal level on the use of PPP. The framework is also supposed to be a guide to other national sub-entities in PPP procurement. The PPP policy is divided into 12 parts with supplementary notes. The goal of Nigeria’s N4P is to ‘provide clear and consistent process for all aspects of PPP project development and implementation from project identification, evaluation, selection, to procurement, operation, maintenance and performance monitoring’ (ICRC, 2009, p. ii). The policy states a clear commitment of the Federal Government to see that PPP practices conform to best practices and that

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the participation of the private sector follows a transparent process so that all contracts are completed in conformity with the act and are thus legal and enforceable. It also assures investors that they will be able to recover their expected returns subject to compliance with the ICRC Act. This commitment of the Nigerian government is one of the key prerequisites for the success of PPP in the country. The government pledges to create an enabling environment for PPP and to ensure a fair return to private investors for the project risks they will take on. The policy also addresses the need for an increased role of the financial services sector in assisting in PPP procurement. The policy articulates an appropriate institutional framework. This framework addresses the linkages of the policy with various arms of government or stakeholders (such as the MDAs, National Planning Commission, the Federal Ministry of Finance, the Debt Management Office, the Office of the Accountant General of the Federation, Bureau of Public Procurement, Bureau of Public Enterprises) and the roles and responsibilities expected of them. The ICRC leads the policy development and implementation at the federal level, while the respective PPP units, in states that have got such, lead the policy development and implementation in their states.

Financial context for PPP Nigeria’s banking sector and its role in PPPs The Nigerian banking sector has gone through a series of reforms in a bid to support national development. Between 1999 and 2007, a financial services sector reform was conducted to enhance the capability of Nigeria’s banks and financial service providers to support the country’s Vision 20:20:20 and other developmental agenda. The reforms saw the consolidation of Nigerian banks into fewer but stronger brands with an increased capital base of a minimum of 25 billion naira (up from the earlier 2 billion naira requirement). The reforms also cut across the entire financial sector including insurance and the capital market. Nigerian banks participated in the development of the telecommunications sector after its privatisation in 2002. Developments in the financial sector equipped Nigerian banks to engage in loan syndication for public and private projects. From 2009 to 2013, further reforms were introduced into the banking sector. These reforms included cashless banking, the use of Point of sales (POS) and associated platforms. The Central Bank takes measures to protect the economy and currency. All these reforms are aimed at enhancing greater transparency, efficiency, stability and liquidity, which are needed to support a successful PPP regime and reduce participants’ risk. Funding PPP projects in Nigeria are financed through multiple sources from both local and international organisations. The Central Bank of Nigeria has established a Power and Aviation Infrastructure Fund. This is to help infrastructure funding on a long-term basis in view of the prohibitive rates of lending offered by commercial

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banks that sometimes exceed 12 per cent (Ngbewelu, 2012). The Investments and Securities Act 2007 allows organisations to raise long-term finance from the capital market. The Nigerian Pensions Commission has also reviewed its regulations for some part of pension funds to be used on infrastructure projects. Funding for PPP projects can involve corporate finance or private finance. In some PPP projects such as housing sponsored by Nigerian indigenous property developers, corporate finance has been used. In some other PPP projects, project finance has been adopted. Thus local, international, syndicate, private equity funding styles have been used for PPP projects in Nigeria. The projects are funded through equity, senior debt or government support. Recently, Nigeria proposed that from its sovereign wealth fund, through its Sovereign World Investment Authority, it could engage in the funding of some developmental projects. Funding from multilateral organisations whether at federal or state level, however, requires federal government guarantees. In an attempt to tackle the challenge of mass housing, several initiatives at facilitating the use of PPP are being explored at various levels of government. Apart from provision of equity in kind in terms of land and other physical infrastructure in some instances, the Federal Government of Nigeria in January 2014 launched the Nigeria Mortgage Refinance Company (NMRC), a PPP initiative set to bridge the funding cost of residential mortgage in the country. The goal of the NMRC is to drive down the cost of borrowing for residential mortgages from the existing 20–23 per cent to the low double digit or high single digit levels. The World Bank has pledged a provision of $300 million at zero interest rate and 40-year tenure with 10 years of grace. Other proposed sources of funds for the NMRC include pension funds and funds from the private sector. Some states have bought into the vision. For the Nigerian power infrastructure, the World Bank provides partial risk guarantees (PRG). This amounts to US$ 250 million to support certain payments for gas to the International Oil Companies, in order to inject investor confidence in the sector, boost the credit rating of the market operator the Nigerian Bulk Electricity Trader (NBET), and facilitate major investments across the power sector value chain. Up to US$ 175 million has been ring-fenced to finance investments in the transmission and distribution sides of the value chain. This involves deposits by NBET of three months’ worth of power purchase agreement (PPA) value into an escrow account followed by the issuance of a letter of credit (LC) for amounts equivalent to 12 months PPA payments on a rolling basis. Thereafter the LC is backed by a sovereign guarantee and the World Bank PRG. The LC then revolves with amounts reinstated when a payment is made to NBET following a drawdown. The LC after 12 months has recourse to the World Bank under the PRG (Ngbewelu, 2012).

Institutional framework Nigeria operates a federal structure with 36 states and a federal capital territory, Abuja. The ICRC Act of 2005 vests the ICRC with the power to warehouse all PPP contracts at the federal level and to monitor compliance with the act. The act

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gives federal MDAs power to initiate and prepare PPP projects for eventual decision by the Federal Executive Council. The Federal Executive Council is the highest decision-making body of Nigeria’s federal executive arm. The council is chaired by the country’s President and has the federal ministers as members. The initiation of a PPP project passes through several stages up to the Full Business Case level. The Federal Executive Council gives approval before the MDA is empowered to enter into the PPP contract. Regarding financing arrangements, there are interactions between the MDAs, the Federal Ministry of Finance, the Debt Management Office, among others, to ensure there is no default in payment. Sometimes, when there is no certainty that financial obligations can be met by the MDA, a dedicated escrow account is opened for the project. Even where multilateral organisations are involved in state projects, they will necessarily route this payment through the Federal Ministry of Finance. In this way, all loan commitments on any infrastructure project from sources outside Nigeria are adequately covered. Depending on the nature or sector of a PPP, the government can fund PPPs via equity and subordinated loans, guarantees, tax exemptions, government bonds and subsidies, among others. While the ICRC Act 2005 has not been explicit in terms of its relationship with the Public Procurement Act (PPA) 2007, the ICRC is adopting the principles enunciated in the PPA act. The PPA Act uses methods such as benchmarking to get the best value for a project. However, integrating all processes into the PPP may create more delays. The ICRC and Bureau of Public Procurement (BPP) are collaborating to develop procedures for PPP projects. The PPA allows for government to pay interest in the event of default in payment after 60 days. There are standard templates that have been developed by the ICRC. The standardised templates make uniform information available or require uniformly presented information from interested parties. There are sample templates for request for proposals, option analysis, sample tables of contents for outline business case, sample checklists, draft codes of conduct for bid evaluation panel members, among others. Some of these templates are made available on the ICRC website. The aim of this is to make PPPs attractive to lenders and financiers in terms of project ‘bankability’. There are also provisions in the ICRC Act of 2005 for resolving disputes. The act allows investors to recoup their full investment and provides for planning, monitoring and coordination of infrastructure projects. Other laws are also aimed at ensuring that investors and other parties are not unfairly treated. The Nigerian Investment Promotion Commission Act provides for the protection of investments such that if government expropriates or nationalises an enterprise there is prompt payment of compensation. Disputes that arise in relation to PPP investments are resolved either under the provisions of the Arbitration and Conciliation Act 2004 or under the auspices of the International Center for the Settlement of Investment Disputes in Washington. Nigeria is a model law country; the enabling environment for prosecution of PPP schemes exists in Nigeria with laws to protect investment.

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Stakeholder representation and management Stakeholders are the group of people that influence, or are influenced, by a project. The nature of stakeholders in a project will normally depend on the type of project. The following stakeholder groups have been identified by the ICRC in Nigeria for Federal Government PPP projects: Federal Ministries, Departments and Agencies, office of the Secretary of the Government of the Federation, Central Bank of Nigeria; Private sector partners: concessionaires, business and professional associations; Development Partners: World Bank, international donor agencies and multilateral institutions; civil society, media consultants and the contractors; the general public and the Board and staff of ICRC. The level of government control of PPP projects at the federal government level in Nigeria is situated in the ICRC Act and related guidelines (http://ppptoolkit. icrc.gov.ng/the-enabling-environment-for-ppps/major-ppp-responsibilities-ofgovernment). Nigeria has a robust concession law and institutional framework. The regulations made pursuant to the law indicate the specific and available sectors for private sector participation in PPP and give a broad-ranging definition for infrastructure. The PPP law details the contract awarding process and relates this process to the requirements of the Nigerian Public Procurement Act of 2007. The Public Procurement Act (that has been modified in some states of the Federation) focuses on procedures for procuring goods and services for the Federal Government of Nigeria. The principles of the Public Procurement Act are used in the awarding process for PPP projects/contracts. Here, the PPP is just a specialised procurement path for procuring some select infrastructures and services.

Extent of use of PPP Core sectors for use of PPP Since the adoption of the ICRC Act 2005, virtually all sectors of the Nigerian economy have witnessed the adoption of PPPs. This is more so because the definition given to infrastructure in the act is not restrictive. The definition of the Act gives the Federal Executive Council the power to declare specific sectors as ones that require PPP infrastructure projects. Specifically, the act defines infrastructure as including: development projects that before the commencement of the Act were financed, constructed or maintained by the government and which after the commencement of this act may be wholly or partly implemented by the private sector under an agreement pursuant to this act including power plants, highway, seaports, airports, canals, dams, hydroelectric power projects, water supply, irrigation, telecommunications, railways, interstate transport system, land reclamation projects, environmental remediation and clean-up projects, industrial estate or township development, housing, government buildings, tourism development projects, trade fair complexes, warehouses, solid waste management, satellite and ground receiving stations, information technology networks and database infrastructure, education and health facilities, sewerage, drainage, dredging and other infrastructure and development projects as may be approved from time to time by the Federal Executive Council.

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Number of PPP projects While the definition covers virtually every sector, the application of PPP in Nigeria has centred primarily on the energy, transport and telecommunications sectors. This is understandable because the Nigerian government has made energy, transport and communications priority areas in the implementation of its integrated infrastructure master plan. As such, the leading sector of private sector participation in infrastructure provision is in the telecommunication sector. Table 15.2 shows the number of projects and value of investments by sector type. While the data covers the period from 1990 to 2012, the figures could increase when 2013 transactions are included. Table 15.2 indicates that as of 2012 the number of PPP projects in the country in the selected sectors stood at 52. Their classification on sectorial basis is also reflected in the table. The table indicates that an investment value in the region of US$30.3 billion has been made in the three sectors between 1990 and 2012. While this value is low relative to the infrastructure needs in the country, it is worth noting that there is an upward trend or renewed interest in PPP in Nigeria. A greater proportion of the investments came to the country after the return to democracy in 1999. This suggests and concurs with the expectation that investments increase in an environment of predictability of decision making in a country. Table 15.2 Sector analysis of PPP projects on the basis of number and value (1990-2012) S/N

Sector

Subsector

1

Energy

Electricity

5

1246

Natural gas

3

679

Total Energy

8

1925

Telecommunications

18

25,116

Total Telecoms

18

25,116

Airports

1

200

Railroads

1

6

Roads

1

382

Seaports

23

2771

Total Transport

26

3359

0

0

52

30,300

2

3

4

Telecommunications

Transport

Water and sewerage Total

Number of projects

Source: http:/ppi.worldbank.org/explore/ppi_exploreCountry.aspx?countryID=33

Total Investment (US$ millions)

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The number of PPP projects reported in Table 15.2 for Nigeria is the same as for South Africa; however the investment values are different. South Africa recorded first investments in telecommunication in 1993 while Nigeria did so in 1991. While South Africa is an upper income country with a GNI per capita of 5,760, Nigeria’s value stood at 930. The value of infrastructure investment in South Africa for the same period stood at US$ 40.076 billion. It should, however, be realised that this data does not include PPP in the housing construction sector. The housing gap in Nigeria has attracted much attention and initiatives are being taken at the federal and state levels to bring the private sector into housing development. The Katampe project in Abuja valued at about US$ 390 million is an example of this. The Lagos State government is using PPP to drive its recently inaugurated home ownership scheme. The home ownership scheme is a mortgage arrangement where allottees pay 30 per cent on first instalment and the remaining payment is spread over ten years. Longer time ownership of PPP projects The longer time ownership of PPP infrastructure depends on the type of PPP projects being embarked on. In a concession contract, the ownership will revert to the public sector after the concession period. The sector that is mostly affected in this regard is the transport sector. The Nigerian telecommunications sector has many Greenfield projects where the government will only regulate. The Nigerian electricity sector is also witnessing reforms. The government formally unbundled the Power Holding Company of Nigeria and subsequently handed over the distribution companies (DISCOS) and generating companies (GENCOS) to private sector investors. The handing over of the DISCOS and GENCOS took place on 1st November 2013. Because of the nature of electricity transmission where new technology may not be easily applied (unlike in greenfield telecommunication projects), the federal government handed over the transmission company to Manitoba Hydro International on a management and lease contract basis for a period of 15 years. In the housing sector, the long-term ownership of houses being built on PPP arrangement in Lagos under the Lagos Homes program will revert to the allottees. Opportunities and rewards There are opportunities and rewards for PPP engagement in Nigeria. Despite challenges that Nigeria faces as a nation which include corruption, insecurity, large gaps between the rich and the poor, Nigeria is attracting foreign direct investments. Opportunities exist in every sector of the economy. The number of PPP project proposals from the Federal government and the states and even unsolicited ones are on the increase (Ngbewelu, 2012). While it is acknowledged that some of these proposals may not meet bankability tests, they are nonetheless indicative of possibilities in the PPP market in Nigeria. In Lagos State alone many PPP projects are being proposed or executed: the Blue Line, Eko Atlantic City,

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and Lagos CHOIS project in the housing sector. This is in addition to the Bus Rapid Transport Scheme (BRT) that is used to convey passengers, which has also eased traffic in the city. The benefits of PPP investments have included: a forum for unleashing the capacity of the private sector; easier integration of socioeconomic activities such as reducing Lagos traffic congestion. The Lagos BRT concept was used to remove rickety ‘Molue’ buses from the highway, but with a novel arrangement of making the ‘Molue’ owners part owners of the BRT buses. Additionally, the number of advanced or ongoing infrastructure projects even at state levels is a testimony to renewed interest in PPP. The PPP project pipeline at federal and state levels in virtually every economic infrastructure sector is increasing. The second Niger Bridge, Abuja –Kaduna-Kano road, Abuja Light Rail I & II, the Katampe Housing Project in Abuja, the Lekki-Epe International Airport, Lagos Blue Line projects are a select few PPPs in different phases of planning/development. They are ambitious projects that have the potential to promote socio-economic development.

Types of PPP in Nigeria: Classification along World Bank categories Various types of PPP exist in Nigeria. Using the World Bank categorisation, the types of PPP are concessions, management and lease contracts, Greenfield projects, and divestitures. The Nigerian policy documents on PPP do not align with the categorisation of divestitures, especially full privatisation, as PPP. The argument is that full privatisation is a transfer of equity to new owners (ICRC, 2009). Infrastructure projects in the four sectors of energy, transport, telecommunications, water and sewerage are listed in Table 15.3 below. The transport sector has the highest number of concessions (24), which is followed by energy sector (1). The telecommunication sector has the highest number of Greenfield projects (16), while the transport sector (2) has the least. The dominant infrastructure with respect to PPP investment is the economic infrastructure. It is true that the Nigerian government has got a national policy on Table 15.3 Total number of projects by type and primary sector (1990-2012) S/N

Sector

1

Energy

1

1

6

0

6

2

Telecommunications

0

1

16

1

18

3

Transport

24

0

2

0

26

4

Water and sewage

0

0

0

0

0

25

2

24

1

52

Total

Concession

Divestiture

Greenfield Projects

Management and lease contract

Source: http:/ppi.worldbank.org/explore/ppi_exploreCountry.aspx?countryID=33

Total

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PPP for health, however much of the focus of the private sector has been on economic infrastructure. The government of the country is moving away from the commanding height concept where government is seen as a sole or major provider of infrastructure services.

Changes in PPP usage and extent over time The usage of PPP in Nigeria via any of the options within the World Bank classification can be related to socio-economic and socio-political developments in the country, including larger macro-economic changes and the global financial crisis. Between 1990 and 2013, Nigeria transited from military rule to democratic regimes. Investment in the telecommunication sector was done by Mobile Telecommunications Services Limited (MTS) and was brought to a financial close in June 1992. Thereafter there was no new investment in the telecommunications sector until June 1997 when Multilinks had its financial close. Nigeria experienced a political crisis with the annulment of the June 1993 presidential election results. The crisis lingered for some years until 1999. Within the period of the crisis, Nigeria had a pariah status among nations. This political risk affected investment in physical assets. However with the advent of democracy this situation improved. Between 1999 and 2004 the sectors that experienced investments through PPP were the energy and the telecommunications sectors. From 2005, the sector that witnessed the highest number of PPP investments was the transport sector. 2005 was the year that the ICRC Act was passed; and development of the national policy followed later. The ICRC laws and its companion policy documents reduced arbitrariness, thereby reducing the risks in PPP projects. Investors have greater certainty of the safety of their investments. The global crisis had a minimal impact on the Nigerian banking system. This was because Nigerian banks had gone through a period of consolidation before the financial meltdown. The capital market was however exposed to shocks attributed to corruption. The reforms and intervention efforts in the financial services sector stabilised the sector such that they are now playing roles as either lead arrangers or as sources of loans for PPP projects. The Central Bank of Nigeria has established an Infrastructure office and released a Power and Aviation Infrastructure fund (about US$2billion) to be administered by the Bank of Industry for onward lending to deposit money banks at a maximum interest of 1 per cent and disbursement at concessionary rates not more than 7 per cent to clients/projects. Between 1999 and 2013, Nigeria had three presidents. The regimes were: President Olusegun Obasanjo (1999 to May 29, 2007); President Umaru Yar Adua (May 29 2007–2009); President Goodluck Jonathan (2009–May 29, 2015). One of the presidents served in acting capacity from 2009 to 2011. The regime of the late President Yar Adua suspended some projects in the power sector. These included the Nigerian Integrated Power Projects. The National Assembly too took time to review some privatisation and concession contracts of the Federal Government. These changes in governments affected the progress or status of some of these projects. This is an aspect of political risk in PPP projects.

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Future developments of PPP in Nigeria Future infrastructure needs and opportunities for investors Nigeria’s infrastructure needs will continue for many years to come. The needs are in all sectors of the economy. This is not only because Nigeria is a developing country, but also a country that has slacked in meeting these needs over time. Nigeria has a vision to be among the top 20 economies. Nigeria’s population continues to increase, which will put further pressure on existing facilities and raise demand for new infrastructure. There is increasing legislative support for PPP that will encourage the growth of the PPP market. The present under capacity in the Nigerian public and private sector to prepare and manage PPP projects creates opportunities for an increased number of professional advisers along technical, financial and legal lines. The opportunities for local investors are also increasing. This is reinforced by the provisions in PPP laws for the presentation of unsolicited proposals to government. In the process, innovation can be brought in. Additionally, success stories of some PPP projects could encourage other investors to join the trail. The success story of the BRT scheme in decongesting Lagos traffic, the transformation of the Lekki-Epe highway along the Lekki Peninsular, the Eko Lagos suspension bridge are further pointers to the potentials of PPP. Development strategy Officials operating PPP in Nigeria from both the public and private sector need capacity building in the area of project prioritisation and planning, preparing bankable proposals, using appropriate financial models, understanding how their portion of the project fits into the overall national development framework, appraising projects on sound value-for-money basis, and administering projects fairly and exhibiting political will of implementing good laws and policies. They also require skills to communicate clearly and ensure adequate disclosure. At the federal level, there is a PPP resource centre that is charged with developing capacity. There may also be a need to have specialised courses or training on PPP, managing projects in many phases and the whole lifecycle appraisal of projects.

PPP research and development agenda An agenda for PPP research and development in Nigeria will involve the following: an examination of critical implementation challenges to the use of PPP and the necessary and sufficient conditions for the success of PPP projects. This is because Nigeria has not lacked robust laws (which are necessary), yet there are problems with the application and enforcement of some laws. Another possible research agenda is to investigate the extent to which part ownership of PPP projects (by users and other stakeholders) can contribute to its success during construction and operation. How can integrating users promote the success of the project in an environment of agitation, volatility, militancy and resistance to government or public projects? The near total successful phasing out of rickety ‘molue’ buses in

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Lagos State with introduction of BRT with a strategy whereby some of the owners of the ‘molue’ buses have a stake in the BRT is a case that deserves wider and closer investigation. How to resolve affordability questions on PPP projects that do not get long-term funding, demands investigation. There are already complaints that some mortgage or PPP schemes are costly in view of low-income levels of some strata of society. At an international level, there may be a need to investigate the relationship between predictability of governments (stable and functional institutions, or otherwise) and investment in PPP. Since many PPP projects take time from planning to operation and thus cut across generations, where the initiators in the public and private sector may not be available during operation, there is need to investigate strategies and structures that are needed to keep and transfer the history, experience and knowledge on the projects.

Conclusions The need to bridge Nigeria’s infrastructure gap that cannot be filled by conventional budgetary allocation and other public funding mechanisms justifies the adoption of PPP. While there is already a sound legal framework for this at the Federal level and in some states of the federation, there are also constraints. The constraints include: low capacity for PPP project implementation, political interference and a perception of corrupt tendencies on the part of government officials which elicits opposition to new PPP projects. It is recommended that these issues are addressed. Government should demonstrate political will to ensure transparency and accountability in all procurement matters to build trust. Additionally, there should be rigorous capacity building for all levels of the PPP process. It is further recommended that civil societies and representatives of end users should be involved not just as stakeholders but part owners of PPP projects so as to secure more cooperation and build confidence in the users. There is a need to have specialised training for staff involved in the PPP processes. The Nigerian public service at the Federal level already has a Procurement Officers cadre to actualise the Public Procurement Act 2007. A career structure needs be created for PPP staff and there must be a systematised body of knowledge for the training of these staff. In this regard, a multidisciplinary academic or professional programme, preferably at postgraduate level, on PPP procurement can be established in Nigerian universities. This could also be an area of cooperation between the research community and the industry.

References Abiola, A.G. and Adebayo, F.O. (2011). Towards a public-private partnership in the Nigerian power sector: Challenges and prospects. Paper presented at the 4th annual Nigerian Association for Energy Economics/International Association for Energy Economics (NAEE/IAEE) International Conference on Green Energy and Energy Security: Options for Africa at Sheraton Hotel and Towers Abuja, 27–29 April 2011.

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Dada, M.O. (2013). Client and contractor organizations’ assessment of design-bid-build procurement practice in Nigeria, Civil Engineering Dimension, 15(1), pp. 1–10. Detail Commercial Solicitors (2012). Where are we? The ICRC and its retinue, Nigeria PPP Review, 1(1), pp. 1–6. Federal Ministry of Health (2005). National policy on public-private-partnership for health in Nigeria, Federal Secretariat, Abuja. Federal Ministry of Transport (2013). Draft Green paper on Fed roads and bridges tolling policy for public consultation. Available online: www.icrc.gov.ng/Draft2020Green20Paper2020For20Consultation.pdf (accessed 25 February 20140. Ibem, E.O. and Aduwo, E.B. (2012). Public-private partnerships (PPPs) in housing provision in Ogun State: opportunities and challenges. In S. Laryea, S.A. Agyepong and W. Hughes (Eds) Proceedings of the 4th West African Built Environment Research (WABER) Conference, 24–26 July 2012, Abuja, Nigeria, 653–62. Infrastructure, Concession Regulatory Commission (2009). The National Policy on Public Private Partnership. Available online: www.icrc.gov.ng/ (accessed 25 February 2014). Infrastructure, Concession Regulatory Commission (2011). A report of the activities of the Infrastructure, Concession Regulatory Commission and the audited accounts for the Year ended 2011, The Presidency, Abuja. Available online: www.icrc.gov.ng/ (accessed 24 February 2014). Ngbewelu, P.O. (2012). Privatisation and public private partnership in Nigeria. PPPPR FBN Capital Ltd, 67–72. Nigeria Economic Summit Group – NESG (2014). US$2.9 trillion needed to build infrastructure, NESG Research Morning News, Thursday, February 27, 2014. Philips, F. (2014). Development must be engineered. Keynote address presented at the investiture of the 15th President of Association for Consulting Engineering of Nigeria, University of Lagos, Nigeria, February 26. Sanusi, L.S. (2012). The role of development finance institutions in infrastructure development: what Nigeria can learn from BNDES and the Indian Infrastructure Finance Company, Keynote address presented at the 3rd ICRC PPP Stakeholders’ Forum, 18 July 2012, Abuja. The Punch (2014a). Nigeria tops medical tourism in Africa, says Jonathan, The Punch, Tuesday 11 March, p. 9 The Punch (2014b). Ecobank to boost power supply with $25billion, The Punch, 24 February 2014, p. 34.

16 Portugal’s experience with Public Private Partnerships Joaquim Miranda Sarmento and Luc Renneboog

Introduction Over recent decades, Portugal has experienced impressive economic development. This was particularly the case after it entered the European Community (later European Union – EU) in 1986: the country’s economic and social indicators rose from a level indicating underdevelopment towards the European average (since the expansion of the EU in 2004). Portugal has made a great effort over the past 25 years to close the wide infrastructure gap. In several areas (such as education, health, water and sanitation), but particularly in transport (highways, bridges) Portugal has developed a high infrastructural density. Until the mid-1990s, traditional procurement was utilised for most of these investments, but then Public Private Partnerships (PPPs) emerged as an important mechanism. The purpose of this chapter is to describe the Portuguese experience in relation to PPPs, to discuss how the PPP programme was organised, and to address the motives behind the decision to use a PPP. As one of the leading countries using PPPs, the Portuguese experience is impressive, relevant, and worthy of study. However, there has been little discussion and research, with just a small number of studies published.

How and why were PPPs used in Portugal Three decades ago, the infrastructure gap in Portugal was visible in almost all the infrastructure areas (including transport, health, education, energy, and water and sanitation). The government adopted different strategies for each sector. Health and education relied mostly on direct public investment, partly also financed with EU funds (although the use of PPP to build hospitals also occurred in recent years). In water and sanitation, ports, and energy, the model relied on private investments, which were combined with concessions to the private sector, while the end-users paid tariffs or tolls for the service. No public funds were involved, neither in the construction nor the operational stage. The public sector invested directly (involving also EU funds) in public urban transport and railways (with only two exceptions). In transport, the use of PPPs was mainly concentrated on highways and bridges.

Portugal’s experience with Public Private Partnerships 267 Portugal has used PPPs intensively to build an extensive highway network. This network increased by 700 per cent between 1990 and 2007, similar to Ireland (+900 per cent) and Greece (+500 per cent) (Cruz, 2011). By 2012, Portugal had constructed 2,700 km of highways aiming to reach 4,000 km by 2014. This places Portugal among the countries with the highest density of highways in Europe; Portugal accounts for a density of 28.4 km/1,000 km2 versus the European average density of 15 km/1,000 km2 (Cruz, 2011). According to the European Investment Bank (EIB), Portugal was responsible for 3 per cent of a total of 1,340 PPP projects in Europe and 7 per cent of a total of €254 billion of investment. As Portugal only accounts for around 1 per cent of Europe’s GDP, further calculations (Sarmento and Reis, 2012) show that Portugal leads in the use of PPPs across Europe. Why did the government choose PPPs to build most of the highway network? The first highways were built (at the end of the 1980s and beginning of the 1990s) by a state-owned enterprise called BRISA (that was privatised in the late 1990s) and had sufficient traffic to be financially viable. However, by the end of the 1990s, the highways that were still at the project stage had insufficient traffic to be profitable. Therefore, the option to allow the private sector to build these highways was not present. These investments would require exclusive financing by public funds, or a PPP scheme in which payments to private companies were made mainly (or exclusively) by the public sector. Two other factors drove the decision to adopt PPPs: Portugal was entering the Euro Zone, and was facing a public deficit of 3 per cent of the GDP by 1999. Second, reallocation of EU funds to other fields reduced the funds available for the Portuguese road infrastructure. Hence, PPPs emerged mainly because of budget constraints, although the public sector was also expecting that the private sector would improve the quality and efficiency of the infrastructure. Portugal launched two waves of PPPs in the road sector: The first wave consisted of the so-called SCUTs highways, with seven different PPPs, contracted between 1999 and 2001 (SCUTS stands for ‘semcustospara o utilizador’, meaning that there is no costs to users as government pays a shadow toll). The SCUTs extend over a total of 930 km of highways, funded originally with shadow tolls, with the central government public budget stepping in to pay the private consortia in lieu of the users. After a few isolated projects between 2002 and 2006, the second wave of road PPPs was launched between 2007 and 2009 with the Portuguese government asking for public bids for seven new highway projects under the supervision of the national public roads concessionaire, Estradas de Portugal (EP). EP is an entirely state-owned company that became the concession grantor, which explains why these roads are referred to as ‘sub-concessions’. The health sector has also turned to PPP schemes in recent years. Since 2002, Portugal used an innovative PPP scheme to build four new hospitals (Braga, Cascais, Loures and Vila Franca de Xira). Yet, these PPPs were complex and subject to controversy as each hospital has two different PPPs: (i) The first one deals with the construction and management of the hospital facilities under a 30-year contract with an availability payment (PPP payment is a fixed annual rent, as long as the hospital is in condition to be used by the second PPP) whereas (ii) the second one takes care of the clinical services under a ten-year contract with payment based on

268

Joaquim Miranda Sarmento and Luc Renneboog

production. The reason why this model is considered innovative and complex is that in the international experience PPPs only apply to the construction and management of the infrastructure, and not to medical services (Basílio, 2011). More detailed information on these PPPs can be found in Table 16.2. Doubts about the efficiency and value for money of PPPs have been raised in Portugal (Sarmento, 2010). Several Court of Audit reports questioned whether public payments were overvalued when compared with the value of the assets and services provided by these PPPs projects. Given the size of the public payments for assets and services, several researchers have concluded that PPPs were used mainly to put public investment outside the perimeter of the public budgets (Marques and Berg, 2010; Sarmento, 2010; Sarmento and Reis, 2012). In 2011, Portugal was forced to ask for financial rescue from the troika (EU, ECB and IMF). As we will see, the memorandum of understanding of the financial rescue packages included several measures regarding PPPs. Usually, the use of PPPs is based on the argument that without PPPs, constructing those assets rapidly would not have been possible due to budgetary constraints (Monteiro, 2005). In addition, the PPP construction creates a guarantee to the public sector that highways in particular will be maintained for at least 30 years. It seems that on the highways constructed and maintained in PPP projects, accident rates have dropped by more than 50 per cent in the last 15 years. In addition, supporters of PPP argue that these investments had reduced regional asymmetries (although there is no clear evidence of that).

The policy framework According to Portuguese legislation, a PPP is defined as a long-term contractual agreement with a private entity that assumes the responsibility to build and maintain infrastructure or a service while being compensated by the public sector (the definition excludes projects with less than €25 million investment and less than three years for development). This definition is close to the EU definition of a contractual PPP (European Commission, 2004). However, at a regional and local level, authorities have been using institutional PPPs by creating specific companies of which the majority of the capital is public, to develop PPP projects. It is important to distinguish between PPPs and concessions: in the Portuguese context, a concession does not involve any public funds as it transfers the assets to the private sector, but it is not a privatisation either because the period over which the private sector is allowed to exploit those assets is finite. In this chapter, we limit ourselves to analysing PPPs at the central government level.

The financial conditions of PPPs Until Portugal’s entry into the Euro Zone in 1999, the domestic financial market was limited and less developed than that in other European countries. There was little experience with project finance and credit could only be attracted for relatively short maturities (most of the loans had a maturity of not longer than

Portugal’s experience with Public Private Partnerships 269 three years). Domestic banks dominated the financial market and major international banks were just starting to see the Portuguese market as an attractive investment opportunity. In this context, the European Investment Bank (EIB) was an essential tool to finance these large projects. That bank did not only offer loans at a lower interest rate when compared with the market at that time, but also loans with longer maturities. The EIB also provided expertise and rendered international credibility to the PPP programme. It was an important factor in encouraging international banks to participate in PPPs in Portugal. Table 16.1 summarises the financial data for the 35 PPP projects in Portugal. Overall, debt represents around 70 per cent of the total investment, which is typical of this type of project. The EIB accounted for 34 per cent of the total debt (and even more so for the older projects). Credit risk was considered low (mainly because the government retains the traffic risk), and therefore spreads are 1–2 per cent above Euribor in almost all projects. Additionally, the debt service cover ratios (DSCR) were low: 1.1–1.3. (The level of debt that can be raised for a project is based primarily on its ‘projectedability’ to pay interest and repay loan principal instalments, with a comfortable margin of safety. To assess this margin of safety, lenders calculate cover ratios, namely the DSCR. The DSCR represents the ability of the project to assure the debt service. The DSCR is equal to the interest payments plus debt amortisation as a percentage of free cash flow. In order to reduce the credit risk senior lenders require a minimum DSCR in each project.) To cover the interest rate risk, most PPPs signed swap contracts to fix interest rates over the loans’ maturities, which amount to around 20–25 years. However, the 2008 financial crisis had a significant impact in the access to credit for the PPP programmes in Portugal. While half of the commercial bank credit was coming from foreign banks for projects at the end of the 1990s and beginning of 2000s, domestic banks, particularly the state-owned bank (‘CaixaGeral de Depósitos’) financed almost completely the 2007–2009 projects. As banks play a fundamental role in the financing of PPPs, their influence is significant in the design phase and the concept of the projects. However, banks only accept to lend with high leverage, low spreads and low DSCR and long maturities, because they assess that projects had low risk. In most PPPs, bank intervention allocated traffic risk to the public sector. In other cases, such as the Fertagus railway, the banks’ participation led to a traffic band system to protect the PPP in case of low traffic.

The institutional framework The first PPP law (decree-law 86/2003), established the general regime of a PPP: the definition, concept, preparation, bid, adjudication, changes, audit and global monitoring. Along with this law, a 6 per cent discount rate was fixed to evaluate public investments. The PPP law was amended in 2006 (decree-law 141/2006), with the goal to promote a better cooperation between the Ministry of Finance and the sectorial ministries, and to improve the mechanisms of controlling the use

2000

2000

2000

2001

2001

2002

2007

2007

2008

2008

2008

Scut da Costa de Prata

Scut do Algarve

Scut Interior Norte

Scut das Beiras Litoral-Alta

ScutNorteLitoral

Scut Grande Porto

Grande Lisboa

Douro Litoral

AE Transmontana

Douro Interior

Tunel do Marão

2000

Brisa

2004

1999

Oeste

1999

1999

Norte

Scut da Beira Interior

1995

Lusoponte

Litoral Centro

Year

PPP

940

800

784

1.200

256

763

317

1.020

726

295

492

774

587

4.096

415

1.570

897

Capex

288

753

575

1,090

172

580

156

920

649

232

400

747

526

2,395

289

947

448

Total Debt

69

94

73

91

67

76

49

90

89

79

81

97

90

58

70

60

50

Debt %

52

---

289

350

105

300

---

470

324

130

190

359

263

698

80

450

150

Debt EIB

18

0

50

32

61

52

0

51

50

56

48

48

50

29

28

48

33

EIB debt as % of total Debt

Eur + 0.4

-----

Eur + 0.4

Eur + 2.0

Eur + 2.0

5.80

-----

6.19

Eur + 0.15

6.75

6.50

6.40

5.10

Eur + 1.50

4.90

6.10

11.60

EIB interest rates

27

----

27

24

25

27

----

26

30

25

25

25

24

20

21

25

5

EIB debt maturity

68

753

286

740

67

280

156

450

325

102

210

388

263

1.697

209

497

298

Debt commercial banks

1.00

1.50

1.60

1.10

1.00

1.20

1.35

1.25

1.30

1.30

1.20

1.00

1.20

n.a

0.50

1.20

7.55 (a)

Debt spreads

27

27

27

24

27

27

25

24

30

23

25

20

24

n.a

15

28

21

Debt maturity

1.37

1.20

1.28

1.23

1.52

1.37

2.10

1.39

1.39

1.70

1.42

1.30

1.59

n.a

1.25

1.43

1.40

DSCR

6.69

7.59

6.71

5.92

6.39

9.33

8.78

10.45

9.59

9.08

8.43

7.35

n.a

n.a

10.6

8.81

11.20

Project IRR

Table 16.1 PPP financial data This table presents financial data for the 35 PPPs in Portugal. Na signifies “not available”. “Capex” represents the total amount of investment in the project (at current prices). “Total debt” represents the amount of capex finance trough debt. “Debt EIB” represents the amount of debt finance by EIB. All this values are in millions of Euros. Values for “project IRR” are the ones preview in each PPP case base at the moment of the contract

2009

2009

2009

2010

----

1999

2002

----

2008

2008

2009

2009

2009

2009

2010

2010

2006

2006

-----

2006

-----

BaixoTejo

LitoralOeste

Algarve Litoral

Pinhal interior

Total road sector

Fertagus

MST

Total railway sector

Hospital de Cascais EGEST

Hospital de Cascais EGED

Hospital Braga EGEST

Hospital Braga EGED

Hospital Loures EGEST

Hospital Loures EGED

Hospital VF Xira EGEST

Hospital VF Xira EGED

CA SNS

CMFRS

Total health sector

SIRESP

TOTAL PPP

20,079

126

623

3

4

103

30

125

46

156

59

74

23

502

388

114

18,801

1.244

622

529

437

561

14,330

90

383

2

3

73

5

79

32

105

10

57

18

157

53

104

13,698

1,135

167

500

339

390

71

71

59

66

75

56

17

63

70

67

17

77

78

31

14

91

73

91

27

95

78

70

Source: own table, based on Portuguese Ministry of Finance data

2009

BaixoAlentejo

4.710

---

0

---

---

---

---

---

---

---

---

---

---

0

---

---

4.710

300

---

---

---

200

33

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

34

26

0

0

0

51

-----

-----

-----

-----

-----

-----

-----

-----

-----

-----

-----

-----

-----

----

-----

-----

-----

Eur + 1.1

-----

-----

-----

Eur + 0.9

-----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

17

----

----

----

27

7.792

90

385

2.5

3.5

73

5

79

32

105

10

57

18

157

53

104

8,988

835

167

500

339

190

-----

1.50

-----

1.50

1.25

4.25

3.50

3.00

2.75

1.75

1.50

1.25

0.75

-----

1.38

0.90

-----

2.75

1.60

2.50

1.90

2.00

-----

13

-----

4

3.5

14

5

27

10

11

4

26

8

-----

20

20

-----

17

21

28

28

27

----

1.10

----

1.10

1.15

1.17

1.05

1.20

1.10

1.21

1.10

1.21

1.30

----

1.05

1.20

----

1.21

1.46

1.23

1.20

1.45

----

9.69

-----

11.27

13.66

10.69

14.44

10.11

8.53

n.a

7.91

5.74

7.91

----

7.66

7.80

----

9.81

8.01

7.23

15.9

7.23

272

Joaquim Miranda Sarmento and Luc Renneboog

of public resources in PPPs. Additionally, it introduced the obligation (which was not followed, due to a political decision, in the road sector PPPs between 2007 and 2009) for the inclusion of a public sector comparator (PSC). According to Sarmento (2010) the PSC is based on estimates of full costs, revenues and risks, set out in cash flow terms, discounted at the public sector rate to determine the net present value (NPV), and after that compared with the discounted value of payments (along with risks and costs retained by the public sector) to the private supplier. The public sector comparator is therefore the financial difference between the two procurement options for the same project (Grimsey and Lewis, 2005). Finally, it changed several dispositions regarding the risk allocation and the renegotiation process. The last amendment in 2012 (decree-law 111/2012) focused on centralising the PPP process in the Ministry of Finance in order to increase the transparency and control over PPPs, and at the same time expand the central government’s powers over regional and local PPPs. Most of these changes follow the measures agreed by the troika programme. A variety of other laws complement the main PPP legal framework: budgetary law – Law 91/2001, last changed by the Law 37/2013 (concerning public expenditure), code of public contracts (Law 18/2008), and the road (Decree-law 380/2007) and the health (Decree-law 185/2002), sector legal frameworks. Before making a decision to develop a public investment through traditional procurement or PPP, the Portuguese government is obliged to create a taskforce to study and analyse the project. The taskforce report is a necessary starting point for the launching of a PPP as it comprises the main characteristics of the technical, legal and financial issues for each project. The procurement process for PPPs in Portugal follows several stages. The process starts with the opening of a tender procedure that contains the following information and conditions: PPP contracting procedures and specifications, analysis of the options that determine the configuration of the project, project descriptions and financing, demonstration of the public interest to justify the choice of using a PPP, demonstration of affordability of costs and risks, and an environmental impact statement (Verhoest et al., 2013). Given that the PPP involves vast amounts of investment, it is mandatory to make an international announcement and publish the tender in the Official Journal of the European Community. After receiving the bidders’ proposals, the government makes a first evaluation. The evaluation criteria are of a technical and financial nature. In most of the projects, the criteria are: (i) minimising the public financial input (around 30 per cent of the final award classification); (ii) the technical quality of the proposal (in terms of conception, project, construction and exploration, worth around 50% of the classification); and (iii) the service quality and security. The best-qualified bidders are shortlisted and a round of negotiations starts. At the end of the negotiation process, two bidders are allowed to present their best and final offer. After a final evaluation of these proposals, the Finance Minister and the Sector Minister make a joint decision on the winning proposal. The ultimate stage is the signing of the PPP contract between the government and the

Portugal’s experience with Public Private Partnerships 273 private party. As there is no contract template, each PPP agreement is a tailormade contract based on the tender specifications. In the 35 Portuguese PPPs, we have found a variety of payment mechanisms (see Table 16.2 for a description by project). In the road sector, there are some PPPs with payment based on levying tolls whereby the private party bears all the traffic risks (Brisa, Oeste, Lusoponte, Douro Litoral e Litoral Centro). But in all the other road projects, the payments to the private sector are based on availability, and the toll revenue goes to the public sector. This decision has a single purpose: to make EP have commercial revenues, in order to be able to be consider it outside the perimeter of consolidation of the state budgeting. That way, it ensures that EP starts collecting so-called ‘market revenues’ and stops it being funded exclusively through direct contributions from the state budget. With ‘market revenues’, the government is allowed, under EU public accounting rules (ESA2010), to leave EP out of the consolidation perimeter of the government, which will significantly ease deficit calculations for the Portuguese government. In the two railway PPPs, their revenues depend on the tolls. As for the health sector, as we have seen, for each hospital there are two PPPs: one responsible to build and maintain the infrastructure, being paid by availability. The other PPP is responsible for the medical services. In this second PPP, payments are made according to the clinical production, but with an annual cap on public payments. Prices for each clinical service or act are according to a price system equal to the one used for National Health Service hospitals. Another important issue in the contractual and governance framework is the contract renegotiations. We found a total of 254 renegotiation events from 1995 to 2012 (see Table 16.2). This abnormally high frequency of renegotiations raises the question whether they should be considered as a natural part of a long-term contract or they are an undesirable feature that reduces PPPs’ efficiency and value for money. In Portugal, PPP renegotiations (also called financial rescue agreements – FRAs), occur when a specific event previewed in the contract occurs and affects the financial conditions of the PPP. Normally, the contract conditions include: unilateral changes from public sector (this is, decisions from government, without private sector agreement, that change the contract or the concession terms, including changes in the project or contract, in price tolls and specific sector legislation), force majeure events, archaeological findings, expropriations of land necessary to build the infrastructure (particularly relevant in highways), administrative delays or changes in the environmental requirements. In some PPPs, despite the allocation of demand risk to the private sector, there is a minimum traffic guarantee. Usually a traffic band system is set up, whereby the concessioner has the right to ask for a FRA if traffic is below the lower band. This was the case for the Fertagus railway during its first years of operation. Some changes in conditions are foreseen in the contract (for instance, tariff adjustments to inflation), and are hence not reasons for renegotiations. Only when substantial departures occur from the situation on which the original contract is based, then the contract can be amended legally following renegotiations.

110

127

155

173

120

1999 36

1999 30

2000 35

2004 30

1999 30

2000 30

2000 30

2000 30

2002 30

2007 30

2007 27

2008 30

2008 30

2008 30

2009 30

Oeste

Brisa

Litoral Centro

Scut da Beira Interior

Scut da Costa de Prata

Scut do Algarve

Scut Interior Norte

Scut das Beiras Litoral-Alta 2001 30

2001 30

Norte

ScutNorteLitoral

Scut Grande Porto

Grande Lisboa

Douro Litoral

AE Transmontana

Douro Interior

Tunel do Marão

BaixoAlentejo

345

242

186

29

129

23

56

174

92

1.099

85

175

17

1995 30

Lusoponte

Km

Year Nº begin years

PPP

0

0

0

0

0

Availability 645

Availability 432

Availability 851

Availability 820

Availability 0

Availability 0

Availability 791

Availability 478

Availability 1.143

Availability 800

Availability 390

Availability 549

4

n.a

11

14

9

Availability 8

Availability 5

Availability 9

Availability 7

Availability 5

Availability 9

Availability 12

Availability 9

Availability 13

Availability 5

Availability 9

Availability 13

50

0

0

47

0

0

0

79

0

70

82

0

20

0

n.a

10

0

57

100

100

85

100

45

82.5

82.5

100

82.5

100

100

82.5

100

0

n.a

80

80

53

0

0

15

0

0

17.5

17.5

0

17.5

0

0

17.5

0

10

n.a

10

20

0

0

0

0

0

55

0

0

0

0

0

0

0

0

90

n.a

10

0

47

Nº % capital % capital owned by shareholders owned by Construction Banks Other foreign shareholders shareholders groups

Availability 6

Tolls

Tolls

Tolls

Tolls

Tolls

NPV Type of public Payment payments

Availability 946

Tolls

Tolls

Tolls

Tolls

Tolls

Type of Payment

30

4

5

5

7

10

7

19

7

5

11

12

10

18

7

11

12

32

Nº renegotiations

Table 16.2 Portuguese PPP data This table presents the main data for the 35 PPPs in Portugal, regarding the PPP characteristics (year, nº years of concession, km – in roads and railways, nº of beds – in hospitals and the type of payment – tolls, availability or service). It also presents the NPV of public payments (in € millions) based on the PPP contract year and using the 6% legal discount rate. Regarding the PPP shareholders, presented are the nº shareholders, the percentage of capital owned by foreign shareholders, and the percentage of capital owned by construction groups, banks or other type of shareholders.

109

520

2009 30

Algarve Litoral

1999 11+9 54

2002 30

----

Year Nº begin years

MST

Total railway sector

PPP

-----

TOTAL PPP

-----

-----

285 693 478 372

Service

Service

Service ----

14.913

307

2.425

33

39

Availability 134

Service

Availability 155

Service

Availability 137

Service

Availability 7

----

Tolls

Tolls

----

1 5 3 5

----

Service

----

Service

Service

----

5

----

1

1

Availability 5

Service

Availability 6

Service

Availability 7

Service

Availability 1

Service

15

----

21

0

----

0

45

20

25

----

45

0

----

80

100

0

----

0

0

----

20

0

0

0

----

55

100

----

0

0

100

75

----

15

----

0

0

0

0

9

25

0

0

0

0

----

0

----

0

0

34

10

66

0

49

10

100

0

----

0

----

100

100

0

0

15

0

0

0

0

100

----

100

----

0

0

66

90

19

100

51

90

0

0

% capital owned by Nº % capital shareholders owned by Construction Banks Other foreign shareholders shareholders groups

----

4

5

----

Availability 9

Availability 9

Availability 4

NPV Payment public payments

53

53

0

Availability 99

Service

Payment

----

1.686 ----

n.a

n.a

280

424

705

277

Nº beds

68

Tolls

Tolls

Source: own table, based on Portuguese Ministry of Finance data

-----

2006 15

SIRESP

2010 30

Hospital VF Xira EGED

------- ------

2010 10

Hospital VF Xira EGEST

Total health sector

2009 30

Hospital Loures EGED

2006 4+3

2009 10

Hospital Loures EGEST

2006 7

2009 30

Hospital Braga EGED

CA SNS

2009 10

Hospital Braga EGEST

CMFRS

2008 30

Hospital de Cascais EGED

Hospital de Cascais EGEST 2008 10

----

14

12.128

Availability 1.665

Availability 539

Availability 1.144

Availability 935

4.310 ----

Fertagus

----

2010 30

----

Pinhal interior

Total road sector

273

2009 30

LitoralOeste

70

2009 30

BaixoTejo

254

3

1

0

1

0

0

0

0

0

0

0

0

Nº renegotiations

17

16

1

233

9

2

4

6

276

Joaquim Miranda Sarmento and Luc Renneboog

The PPP’s organisational structure The PPP stakeholders are both the public and private sectors. The former comprises, besides the government (the Ministry of Finance and the Ministries of e.g. Transport or Health), also the sector regulators (IMT for transport – formerly INIR for roads and ERS for health), the Ministry’s of Finance internal audit committee (IGF) and the Court of Audits. In the road sector, EP, as mentioned previously, holds the concession for the national road network and manages all PPP contracts. On the private side, the main stakeholders are the sponsors and the lenders. In the road sector, most sponsors are construction companies (the main construction groups operating in Portugal are Mota-Engil, Soares da Costa, Edifer, Teixeira Duarte, Somague, Tecnovia and Ferrovial, which provide most of the roads’ PPPs capital), reflecting the vertical integration of this business. Most of the capital comes from Portuguese companies, but foreign companies (mainly Spanish) have also participated. Table 16.2 shows the percentage of capital owned by foreign shareholders, as well as how much capital is owned by construction companies, banks, or other parties. In the health sector, three groups prevail: Mello owns two hospitals (Braga and Vila Franca), and ‘ES Saúde’ (Loures) and HPP (Cascais) own one each. All these companies were Portuguese at the moment of the bidding (since then, HPP has been acquired by a Brazilian group). While the intensive use of PPPs may have eased the burden in the public budget during the investment stage (as they are an ‘off balance-sheet operation’), the future payments to the private sector represents a heavy financial burden for the public sector. Additionally, it is important to dwell on the rapid pace with which these contracts were set up. The novelty of the experience, added to the fact that the governments were not prepared for the level of complexity some of these contracts entailed. In addition, until 2003 there was no proper legal framework, which led the Ministry of Finance to take a rather passive stance in relation to PPPs. Until 2012, the managerial and legal competence related to PPP was divided between the minister of finance and line ministers. At the minister of finance level two entities intervene in the PPP process: Parpública and DGTF (‘DirecçãoGeral do Tesouro e Finanças’ – General Directory of Treasury and Finance). Parpública (a public sector holding company), was given the mission to advise, promote, and evaluate PPPs and develop public services with higher quality and efficiency. It is also the entity responsible for technical support of the Ministry of Finance in PPP procedures. DGTF also falls under the authority of the Ministry of Finance and its purpose is to monitor PPPs and focus on the long-term budget impact and fiscal (budgetary) sustainability. The ministries of transport and health also have their PPP units. The existence of these several units leads to a dispersion of resources and a lack of coordination in the public sector. Therefore, and following the best international practices (OECD, 2010), by 2012, a centralised PPP unit (UTAP) was created in the Ministry of Finance and absorbed all the above separate entities.

Portugal’s experience with Public Private Partnerships 277

The use of PPPs Thirty-five PPP projects were launched in four sectors: roads (22); railway (2); health (10); and security (1). Figure 16.1 shows the numbers of PPPs launched by year. A total of €20 billion was invested between 1995 and 2014 with the road sector accounting for almost 94 per cent of this investment and railways and health representing 3 per cent each. In 2014, no new projects are undergoing tendering. The future payments due by the state to honour these contracts are estimated to represent an annual effort of a little above 0.5 per cent of GDP until 2030, but between 2014 and 2020, these payments will amount to 1 per cent of GDP (Figure 16.2). Using the 6 per cent legal discount rate that is used by public sector to evaluate projects, the payments for 2014 and beyond have a net present value of €20 billion, representing around 12 per cent of the current Portuguese GDP (see Table 16.2). In each PPP, the private sector builds the assets but the legal owner is the public sector. The PPP asset is the concession contract, recognised in the private company balance sheet as an intangible asset. For this purpose, Portugal follows international accounting standards, mainly the IFRIC 12 – Service Concession Arrangements. 40

35

35 32 30

25

24

20

Accumulated

19

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Figure 16.1 Number of PPPs

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Figure 16.2 PPP public payments

Types of PPP In Portugal, a legal distinction exists between a concession and a PPP. The concession model is used in sectors such as water and sanitation, energy, ports, and airports), and follows very closely to the classification provided by the World Bank: ‘A private entity takes over the management of a state-owned enterprise for a given period during which it also assumes significant investment risk.’ No public funds are invested. In contrast, PPPs are based on investments of public funds during the operation period but not during the construction and investment stages. PPPs in Portugal have been used in Greenfield projects, with the private sector assuming responsibility for the design, building, financing and operational stages (referred to in literature as a ‘DBFO’ model. At the end of the PPP period, the asset has a residual value of zero for the private sector as they have been written off, and are then transferred to the public sector.

The main changes in the PPP process Before 2008, Portugal experienced for a decade yearly budget deficits of around 5 per cent of the GDP resulting from significant increases in public spending without economic growth. The 2008 financial crisis led to a fast budgetary deterioration. At the time, the Portuguese government launched the ‘sub-concession’ highway wave, arguing that public investment was a response to the crisis. However, the domestic bank system was weak while foreign investments in large-scale projects dwindled (EPEC, 2009). By 2011, following the sovereign debt crisis in Europe, and the bailout of Greece and Ireland by the troika, Portugal too needed to ask for financial assistance.

Portugal’s experience with Public Private Partnerships 279 There were several items regarding PPPs in the memorandum of understanding signed between the Portuguese government and the troika.

• First, there should be a ‘re-budgeting’ to preclude the use of PPPs as an off-budget

•

•

alternative for public investment, and the Portuguese government should account for the PPP liabilities in the public debt (from the MoU: ‘The general government perimeter will cover the State, Other public bodies and entities, Social Security, SOEs and PPPs reclassified within the general government and local and regional administrations’). PPPs are thus to be reclassified as a government responsibility and monitored on the public budget execution monthly report (from the MoU: ‘Enhance the existing monthly reporting on budgetary execution on a cash basis for the general government, including on a consolidated basis. The monthly reporting perimeter currently includes the State, Other public bodies and entities, Social Security, regional and local governments and it will be progressively expanded to include all SOEs and PPPs reclassified within the general government and local governments’). Second, there was an increase in the monitoring of PPPs contracts by means of a comprehensive audit and a risk assessment to strengthen its legal and institutional framework (from the MoU: ‘Publish a comprehensive report on fiscal risks each year as part of the budget, starting with the 2012 budget. The report should outline general fiscal risks and specific contingent liabilities to which the Government may be exposed, including those arising from Public-Private Partnerships (PPPs), SOEs and explicit guarantees to the banks’). Third, a renegotiation of these PPPs to reduce the public payments started in 2013.

As the road sector represents three-quarters of the total budget effort on PPPs, solutions to reduce the future public payments related to PPPs will necessarily have to address contracts in this sector. In early 2014, these negotiations were not yet concluded, and focus either on the roads already in operation and the ones still in construction. For the first ones, there will be a reduction in the maintenance services, in the debt costs, and in the private profitability. As for the private sector, the main benefit comes from reducing the net working capital for the debt service cover ratios (with the banks’ agreement). This will provide liquidity to the owners (most of them construction companies facing financial difficulties). For the roads in construction, opening in 2014, there was already a reduction in the investment. The Portuguese government expects to reduce around 30 per cent of the payments during the life of the contract.

Future developments Despite the enormous effort over the last 20 years to close the infrastructure gap, Portugal still needs to continue to invest in some areas, such as health, water, and sanitation or railways. As tight budgetary restrictions will last for at least another decade, governments will continue to use PPPs. In Portuguese-speaking countries (Brazil, Angola or Mozambique), the Portuguese experience could be an interesting example to improve upon (Basílio, 2011).

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Considering some failures of some of the PPPs in Portugal, it is necessary for the public sector to improve the procurement framework along with the public administration’s capacity to address the complexity of these contracts (Curristine, Park and Emery, 2008; IMF, 2008). In addition, the budgetary process of PPPs needs to be more reliable and transparent. Decisions will have to be based on value for money, and not on the off-balance sheet temptation. It is necessary to have a complete and robust public sector comparator and a review on the risk allocation process. Increasing public sector strength in the renegotiations is also a critical issue.

Research on Portuguese PPPs Few studies have been conducted so far on the Portuguese PPP experience. Two studies cover the renegotiation experience: one at the central government level (Cruz e Marques, 2013a) and the other at a local level (Cruz and Marques, 2013b). The budgetary risks that can arise from Portuguese PPPs are analysed by Monteiro (2005). Because of the budgetary constraints created by the PPP public payments, an innovative solution was proposed by Sarmento and Reis (2012), namely that the government should buy the contracts. The studies on the SCUTS were conducted by Basílio (2011) and Sarmento (2010); the former on efficiency and the latter on the (lack of) value for money by means of a public sector comparator simulation. Because of the large number of projects, PPP research in Portugal is expected to grow in the future. Especially the abnormal frequency of renegotiations deserves more interest as does the PPP’s efficiency relative to other forms of public procurement. In particular for the health sector, contract analysis, accountability, risk analysis ought to be examined in order to generate policy recommendations. An international comparison with other countries, particularly those also in a difficult budgetary situation with a high use of PPPs (such as Greece, Ireland or Spain) is warranted.

Conclusions The Portuguese experience with PPPs in terms of value for money, affordability, and accountability, is mixed. For one side, the use of PPPs have allowed for an intensive infrastructure programme in transport, along with an increase in the quality and security of the road network. Also, as traditional procurement is usually subject to cost deviations, the use of PPPs has helped reduce that problem. On the other side, the use of PPPs has led to strong opposition by the public opinion and some economic and political sectors, which have put a burden on the further development of new PPPs. Has the PPP phenomenon reached its end in Portugal? Probably not. The budgetary constraint will remain binding for at least another decade, which makes PPP the only alternative for large infrastructure investments. As an example, it is likely that a PPP scheme will be used to build the new ‘East area Lisbon hospital’. However, it is necessary to understand the reasons for the unsuccessful PPPs before continuing its use. We can identify seven main questions in relation to the use of PPPs in Portugal: 1) Is it useful to have a large number of projects (and

Portugal’s experience with Public Private Partnerships 281 investment) in a short period of time? (2) Does the government possess the necessary management skills to set up and follow up the complex PPP contracts and processes? (3) Is the public management of the tender process sufficiently strict and does the regulation provide a sufficiently strong supportive framework (note that the public sector comparator was only introduced in 2006)? (4) Is the use of PPPs sufficiently traded off against other types of public investments (e.g. are PPPs only seen as an off-budget operation or do other reasons apply?)? (5) Are the financial assumptions in the PPP contract sound and is the subsequent budgetary control sufficiently strict? (6) Is the risk appraisal and allocation over the public and private sector sufficiently clear? and (7) How come that in a vast majority of the PPPs, the contract terms were renegotiated which has led to a systematic increase in the payments by the public sector (Reis, 2013). The above questions were triggered by problems that have arisen in Portuguese PPPs. Essentially, three main problems have arisen. First, the basic corporate financial principle of separating the investment decision from the financial decision was not followed in many cases. As there was abundant and relatively cheap credit (until 2008), most investments did not follow economic or social rationality (for example, most of the highways do not have the minimum traffic required for such type of road). Second, most of these PPP contracts did not show value for money. First, the risk allocation to the private sector was low (not giving the incentives for private efficiency). Second, given the annual payments for a 30–40 year period, when compared to the cost of the investment and to the public sector comparator, traditional procurement would have been far less expensive, even given the public sector’s tendency to be less efficient (Sarmento, 2010). Third, the budgetary constraints induced by an intensive use of PPPs in a short period of time raises concerns about high repayments by the public sector for a long period. This reduces the fiscal/budgetary space and creates obstacles to the consolidation of public finance, particularly to the reduction of annual budget deficits.

References Basílio, M. D. S. B. (2011). Infrastructure Public-Private Partnerships: Risk factors and agents’ participation. UTL. Cruz, C. and Marques, R. (2011). O Estado e as Parcerias Público Privadas: Edições Silabo. Cruz, C. O. and Marques, R. C. (2013a). Exogenous determinants for renegotiation of public infrastructure concessions. J Constr Eng Manag, Submitted. Cruz, C. O. and Marques, R. C. (2013b). Endogenous determinants for renegotiating concessions: evidence from local infrastructure. Local Government Studies, 39(3): 352–74. Curristine, T., Park, C.-K. and Emery, R. (2008). Budgeting in Portugal. OECD Journal on Budgeting, Vol 3. EPEC. (2009). European PPP report 2009. In E. P. E. Center (Ed.). European Commission. (2004). Green Paper on public-private partnerships and Community law on public contracts and concessions. Grimsey, D. and M. K. Lewis (2005). ‘Are Public Private Partnerships Value for Money? Evaluating Alternative Approaches and Comparing Academic and Practitioner Views’, Accounting Forum, 29, pp. 345–48.

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IMF, R., C B. (2008). Avoiding the Portuguese Trap. In I. S. R. R. f. C. E. a. t. Baltics (Ed.): The Baltic Times. Marques, R. C. and Berg, S. (2010). Revisiting the Strengths and Limitations of Regulatory Contracts in Infrastructure Industries, ASCE. Monteiro, R. S. (2005). Public-private partnerships: Some lessons from Portugal. The European Investment Bank Papers, 10(2), pp. 72–81. OECD. (2010). Dedicated Public-Private Partnership Units: A Survey of Institutional and Governance Structures, OECD. Reis, R. F. a. S., Joaquim Miranda (2013). A ascenção e queda das PPP em Portugal, Parcerias Público Privadas: Experiências, desafios e propostas: 145–57. Rio de Janeiro: LTC. Sarmento, J. M. (2010). Do Public-Private Partnerships Create Value for Money for the Public Sector? The Portuguese Experience. OECD Journal on Budgeting, 1, pp. 93–119. Sarmento, J. M. and Reis, R. F. (2012). Buy back PPPs: An arbitrage opportunity. OECD Journal on Budgeting, 12(3), pp. 1–14. Verhoest, K., Carbonara, N., Lember, V., Petersen, O. H., Scherrer, W. and Hurk, V. d. (2013). Public private partnerships in transport: trends & theory, P3T3.

17 Public Private Partnership in Switzerland Jennifer Firmenich

Introduction Switzerland, a country of 8 million inhabitants in the middle of Europe, has been a federal state since 1848. Power is shared between the central state (the ‘Confederation’) and 26 regional states (the ‘cantons’). The distribution of power is highly decentralized. The Federal Constitution specifies the responsibilities attributed to the federal state. All other tasks are the cantons’ responsibility. Each canton has to assign responsibilities between itself and municipalities, except for some tasks that are explicitly assigned to municipalities by the Confederation. A far-reaching reform was undertaken in 2008, reducing the number of tasks assumed jointly by the Confederation and the cantons and therefore introducing a clearer separation of power. According to the Federal Statistical Office, general government expenditure amounts to 189.4 billion CHF in 2013 including social security. In 2011, the Confederation accounted for 32.74 per cent, the cantons for 40.7 per cent, the municipalities for 22.4 per cent, and social insurances for the rest of total expenditure. The final accounts of public administration were positive at all levels. By the end of 2011, the debt ratio dropped to 35 per cent. A total of 8.8 per cent of public administration expenditure was used for transport and telecommunications and 3.2 per cent were used for environmental protection and spatial planning (www.statistics.admin.ch, 6 February 2014). In the executive branch of the federal government (Federal Council) seats have been shared between the four main political parties since 1959: Free Democrats; Swiss People’s Party; Socialist Party; and the Christian Democrats. The central role of direct democracy is another specificity of Swiss federalism. Most cantons resort to mandatory or optional financial referenda for administrative or legislative acts involving substantial expenditure. The referenda allow citizens to exert control over expenditure proposed by the legislative branch. There is scientific evidence that mandatory financial referenda significantly reduce the size of cantonal spending and are associated with lower debt at local level (Funk and Gathmann 2009). The political landscape at all levels is relatively stable. The ‘magic formula’ divides the seven seats of the Federal Council among the four ruling parties. In parliament the four governing parties have a large majority in both chambers. Those members

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of parliament that support alternative infrastructure procurement belong to the right, centre right, and centre left wing parties. At lower government levels, a majority of the population as well as the politicians have a preference for the public delivery of basic services, such as water supply and wastewater disposal, solid waste treatment, health services, education, and social services. A certain acceptance for non-traditional procurement can be observed for non-essential services, such as internet or television signals. It is a widely shared opinion that public administration, public enterprises, and railway operators are pretty efficient. Due to the decentralized structure of Swiss government and administration, information regarding infrastructure procurement is widely spread. The most relevant institution regarding past, actual and potential PPP projects is the Swiss PPP Association (SPA 2014).

Origin and drivers According to Bolz et al. (2011, p. 4 onwards), public–private cooperation in a very broad sense (partnering) has a long tradition in Switzerland:

• private entities were involved in building and operating public infrastructures; • cooperative arrangements do involve public and private enterprises at the •

federal, cantonal and municipal level; and there is a strong variety of associations, that are non-profit public foundations, and private foundations with public purpose.

The legislation formed the necessary foundation for such structures. In general Switzerland can be seen as very fertile soil for public–private cooperations. A general overview of PPP in Switzerland is given by Lienhard (2006). Bolz et al. (2011, p. 4 onwards) suggest that the first modern discussion of PPP in Switzerland dates back to the end of the 1980s. Attention to PPP increased since 2000 due to the strong implementation of PPPs in other countries. This led to the foundation of the Swiss PPP association in 2006 (SPA 2014). In the last 15 years, the number of projects with a partnership character increased. In particular, sports arena projects with further commercial use have come to be seen as pilot projects in that regard. This type of project is usually characterized as ‘investor project’. PPP projects in a narrow sense, meaning procurement of public infrastructure over the lifecycle with design, construction, financing, operation and maintenance were considered by a couple of public entities, but were never actually realized. The first and only Swiss PPP project in a narrow sense is an administrative centre that includes a regional prison procured by the canton Berne. The contract was signed in 2009 and has been operational since 2012. In theory, PPP projects should be implemented when the Public Sector Comparator (PSC) indicates efficiency gains in comparison with traditional procurement. In practice however, it can be observed that PPP becomes popular when governments have a funding problem and try to avoid the initial capital investments by pursuing the PPP route. At this point it should be noted that, while Switzerland in general is in a very comfortable financial position, the canton of Berne is one of the few public

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entities that encounter some financial difficulties. At this stage the canton has announced that it does not intend to continue considering PPPs as a procurement alternative, because the preparations are perceived as being too expensive. The most attractive form of procurement in Switzerland was and is traditional procurement. On the one hand, the government usually has sufficient resources for infrastructure procurement, even for mega projects such as a new Gotthard road tunnel, for example. On the other hand, the Swiss public administration is considered relatively efficient and effective. As a consequence it is generally difficult for private companies to demonstrate sufficient efficiency gains when applying the PSC, in particular since the interest level increased as a consequence of the financial crisis. PPP in Switzerland is considered an option only after positive ‘adequacy test’ and after demonstrating better value for money than the PSC. Support for the PPP concepts comes mostly from the industry (for example www.economiesuisse.ch) and the Swiss PPP Association. Opposition comes mostly from Swiss governments and administrations that might be affected by PPP procurement. The policy outcomes are described in the following section.

Policy framework for PPP The Swiss PPP policy and the levels of government policy as described in the following paragraphs are mostly based on Jeanrenaud (2013, chapter 2.1 and 2.2). Swiss legislation relates to the following points:

• The Federal Constitution states that service delivery may be delegated to • •

(independent) public or private organizations (Swiss Confederation 1999, Art. 178 al. 3). Since 2009, federal government financial regulations explicitly mention PPP as a strategy for service regulation (Swiss Confederation 2006, Art. 52a). In 2009, the federal administration specifically addressed the question of alternative infrastructure procurement methods. This led to a guideline on the use of PPP, explaining what should be considered as a PPP project, what the regulatory background is, when federal agencies should consider the PPP option and when not to (‘adequacy test’), and lastly, how to compare traditional procurement with a PPP approach using the PSC (Swiss Confederation 2009).

There is no PPP support unit at federal level, but a Centre of Competence for Public Procurement that provides information on PPPs (CCPP 2014). In 2006, some federal, cantonal and municipal units as well as representatives from the industry founded the Swiss PPP Association (SPA 2014). The Association is meant to be a think tank and a competence network for all levels of government and industry. It centralizes information about PPP, provides technical assistance and expertise, and supports knowledge transfer. Furthermore, the Swiss PPP Association investigates and promotes potential areas and project types for the application of PPP. The Swiss PPP Association has an annual budget of around CHF 400,000, two full-time employees and a network of experts.

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The Swiss administration on federal level consists of seven departments. The most relevant departments for infrastructure procurement are the Federal Department of the Environment, Transport, Energy and Communications (www. uvek.admin.ch). This department contains among others the Federal Road Office (www.astra.admin.ch) and the Federal Office for Spatial Development (www.ara. amdin.ch). The Federal Office for Buildings and Logistics (www.bbl.admin.ch) is situated within the Federal Department for Finance (www.efd.admin.ch). The national road network (about 1800 km) is under the exclusive responsibility of the federal government. The primary road network (2262 km) is under the responsibility of the Confederation and the cantons. Cantons receive federal grants for construction, maintenance and operation. Other roads are financed by revenue of cantons and municipalities. However, the federal government still provides grants for these roads as well. The rail network is divided into a national network operated by Swiss National Railways (www.sbb.ch/en/home.html, 6 February 2014) and local networks operated by licenced transport companies. Airport and port infrastructure are nowadays funded through user fees. This is summarized in Table 17.1. Table 17.1 Decision-making levels and funding sources in Swiss transportation Transport mode

Type

Decision-making level

Source of funding

Road

National network

Federal level

Federal

Main roads

Cantonal level

Cantonal with federal grants

Cantonal roads

Cantonal level

Cantonal

Municipal roads

Municipal level

Communal & cantonal support possible

Long distance traffic

Railway companies & federal level

Passenger & freight revenue, federal compensations

Regional traffic

Cantonal & federal level

Passenger revenue, federal & cantonal compensations, federal Infrastructure Fund

Metropolitan traffic

Cantonal & municipal level

Passenger revenue, federal & cantonal compensations, federal Infrastructure Fund

Airport

International airports

Federal & cantonal level

User fees

Port (Rhine river)

Cargo port

Cantonal level (2)

User fees

Railway

Source: Jeanrenaud, 2013, p. 73

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The funding of the Swiss road and railway network is complex. This might be one of the reasons why public bodies prefer traditional public procurement. Another reason is the relatively strong financial position of public bodies in Switzerland. Furthermore, it can be observed that Swiss public bodies are very reluctant to give up decisionmaking power as would be necessary for PPPs. Interest for PPPs exists at municipal and cantonal level rather than at federal level. The federal government shares the opinion that smaller and less complex projects procured by lower administrative levels are more suitable for PPP. However, a joint group PPP was formed in the federal parliament in March 2013. The group’s goal is to ensure that PPP will be assessed more systematically for infrastructure procurement and long-term service provision.

Financial context for PPP Bolz et al. (2011, p. 55) note that PPP projects are virgin soil for Swiss banks. This relates in particular to the pre-financing of future public payments and the characteristic financing of construction works with long-term payback periods. The banks show development potential in particular regarding the required due diligence for PPP projects, the design of contractual step-in-rights, and the understanding of risks related to complex infrastructure projects. Detailed information regarding the financial context of the one PPP project (in a narrow sense) or other PPP projects is not available. The contract of the PPP project in Berne included the following tasks and services (SPA 2014):

• • • • •

planning, construction and financing of the buildings and sites; operation and maintenance of buildings and sites; cleaning of building and sites; organizational services; and catering.

Institutional framework, e.g. contractual, legal, governance Bolz et al. (2008), as well as Lienhard and Marti Locher (2010), suggest that there is no specific legislation on PPP, but the given legislation allows for PPPs in principle. However, the actual implementation is substantially complicated by certain given legal constraints. The most important obstacles are:

• prohibition of global percentage bids, which complicates the negotiation of • •

complex contracts; PPP incompatible subvention possibilities; and limitations on the collection of user fees or provision of services that exceed a certain administrative level.

Jeanrenaud (2013) cites the absence of a legal foundation to impose a toll on the Swiss road network as a further obstacle to applying PPP to road infrastructure. At the

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moment, a toll would violate basic principles of the constitution. A shadow toll, on the contrary, would be possible within the existing legal framework. This legal framework provides more scope regarding PPP on a federal level as compared to a cantonal level. This relates especially to legislation regarding financing and procurement. Switzerland’s general procurement law constitutes the legal framework for the country’s procurement activities. It consists of the federal procurement law and the 26 cantonal procurement laws. At federal level, legislation includes the Federal Act on Public Procurement and the Regulation on Public Procurement. Competitive dialogue was introduced at federal level on 1 January 2010 (Swiss Confederation 2010, Art. 26a) additionally to negotiated procedures (Swiss Confederation 2010, Art. 26). Negotiated procedures and competitive dialogue are forbidden in any public procurement process on cantonal level. A Swiss peculiarity is direct democracy. Projects are usually initiated by the executive and will be declined or confirmed by the legislative. This holds for federal, cantonal and municipal level. If a project has certain characteristics, or if individuals or groups take the initiative, the project will be voted on a referendum. This can take place on federal, cantonal, and municipal level. Some PPP projects in Switzerland have been rejected already by referenda (for example an indoor swimming pool in the municipality Altstätten or a prison in Canton Vaud (see SPA 2014)). In case of the PPP project in Berne, the executive (Regierungsrat) agreed to a PSC analysis for the planned construction in February 2006. From May to September 2006, a tender procedure for the required consultants was initiated. In September 2006 a cantonal referendum agreed to the administrative reforms that would require the new administrative building. The final location was fixed by the executive in December 2006. In June 2007, the PSC was approved and the PPP procurement was initiated. The PPP tender started with a pre-qualification phase from September 2007 to March 2008. In April 2008 the legislative of the Canton Berne (Grossrat) approved the planned PPP procurement in three stages. In March 2009, the legislative approved the availability fee necessary for the funding of the private project financing. The contract was finally signed in November 2009. This project showed that PPP is possible within existing laws and without explicit PPP legislation. Such legislation, however, would simplify the implementation of PPP projects and therefore reduce transaction costs. Standard templates have not been developed yet.

Organizational structure According to SPA (2014), the Swiss PPP project was realized in a partnership between:

• the Canton Berne as public client; • the ‘Zeughaus PPP AG’ as private consortium, consisting of: – – –

Marti Invest AG BAM Deutschland AG Hälg Facility Management AG.

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Marti Invest AG and BAM Deutschland AG were responsible for construction and Hälg Facility Management takes over operation and maintenance for 25 years after finishing of construction. The cash flow model and financing plan were developed by a consortium of seven Swiss banks under the leadership of UBS AG. No further information is available about the nature of the special purpose vehicle (SPV) or the level of government control.

Extent of use of PPP adoption Based on a strict definition, only one PPP project has been realized in Switzerland so far. This is a decentralized administrative centre and a regional prison in the canton of Berne. The investment volume amounts about 150 Mio. CHF and the long-term owner is the public represented by the canton Berne. This project is characterized by:

• long-term cooperation; • an efficient realization of public infrastructure in comparison with traditional • • •

procurement; life-cycle orientation (design, construction, financing, operation and maintenance); holistic optimization; and partnership and substantial risk transfer from the public to the private partner.

The Swiss Confederation (2009, p. 2) defines PPP in a broader sense according to a number of criteria:

• fulfilment of a public task; • at least one public and one private partner participate; • costs, risks and responsibilities are shared between partners, whereas the • • •

private sector takes a significant share of risks and responsibilities; performance standard (function, quality, time, etc.) are given but not the way of realization; contractual long-term cooperation (at least three years); and at least part of financing is provided by the private partner.

If PPP is seen in this broader sense, a number of PPP projects were realized in Switzerland already. The Swiss PPP Association keeps track of these PPP projects under www.ppp-schweiz.ch/de/ppp-wissen/ppp-projekte-in-der-schweiz/ (see Table 17.2). According to that list, 17 Swiss PPP projects were realized or are on their way. Thereof, five projects were sport arenas, four service projects, and two multi-use building(s). The other sectors are shown in Table 17.2. Investment volumes ranged from nearly nothing for service projects, to up to 300 Mio. CHF for the sport arena in Lucerne. While all sport arenas have an investment volume of at least 150 Mio. CHF, the investment volume for other projects did not exceed 50 Mio. CHF. In case of the one Swiss PPP project in the canton Berne, the public remains owner of all buildings and sites at any point of time. In case of PPP-related service

Sector Multi-use building Sport arena + commercial uses Retirement home

Administrative building & regional prison

Sport arena + commercial use Sport arena + commercial use Biogas plant Sport arena + commercial use Service project information platform

Project name (English translation)

Bâtiment Skylab (Skylab building)

Stades de Bienne (Bienne stadium)

Seniorenzentrum Bubenholz Opfikon (Retirement centre Bubenholz Opfikon)

Kantonales Verwaltungszentrum Neumatt, Bern (Cantonal administration centre Neumatt, Berne)

Stadion Aarau (Aarau stadium)

Sportarena Allmend Luzern (Sport arena Allmend Lucerne)

Biorender AG

Stadion Neufeld, Bern (Neufeld stadium)

Compasso

Table 17.2 Overview Swiss PPP projects in a broader sense (SPA 2014)

since 2009

since 2010

since 2011

since 2011

since 2012

since spring 2012

expected in 2015

expected in 2015/2016

expected in 2016

Timing (Begin of operation)

Unknown

Unknown

Ca. 25 Mio. CHF

Ca. 300 Mio. CHF

Ca. 150 Mio. CHF

150 Mio. CHF

Ca. 36 Mio. CHF

Ca. 200 Mio. CHF

Ca. 150 Mio. CHF

Investment volume

Service project tourism Health Services project administration

Sport arena + commercial use Education

Multi-use building Long-distance heating Service project marketing

SchweizMobil (SuisseMobile)

Radiologie Luzern Land AG (Radiology Lucerne Land AG)

EWID-Zuweisung im Rahmen der Registerharmonisierung (Adminstrative harmonization)

Stadion “La Maladière”, Neuchâtel (“La Maladière” stadium, Neuchâtel)

Kaufmännische Berufsschule Langenthal (Commercial trade school Langenthal)

Überbauung Rathausplatz Baar (Buildings town hall square Baar)

Chauffage à distance Onex (Long-distance heating Onex)

Greater Zurich Area GZA

since 1999

since 2002

since 2004

since 2007

since 2007

since 2008

since 2008

since 2008

Budget 2008: 4.2 Mio. CHF

Ca. 45 Mio. CHF

Ca. 42 Mio. CHF

Ca. 20 Mio. CHF

Ca. 220 Mio. CHF

Unknown

3.3 Mio. CHF

Ca. 12.5 Mio CHF

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projects it can be observed that both public and private partners participate in the project entities created. As can be seen in Table 17.2, all Swiss PPP projects were realized either as buildings or service contracts. Jeanreanaud (2013) notes that in the transport sector traditional infrastructure procurement is still the rule. Until now, no PPP transport project has been implemented. In a few cases, the PPP option was assessed but eventually rejected (for example Transrun). PPP is still an option in some projects at planning or pre-planning stage (Geneva Lake crossing, railway tunnel Hergiswil, second tube of the Gotthard road tunnel). At first sight it is surprising that in an area with huge investment need, not a single PPP project was realized so far. Several reasons might be relevant. Firstly, there is no funding shortfall. Even the construction of a second Gotthard road tunnel tube could be financed without having to impose a toll. Secondly, the Swiss parliament would not accept PPP as a means of circumventing the ‘debt brake’ (a budget rule that prohibits the running of a structural deficit). Thirdly, the federal administration is not convinced of the superiority of PPP over traditional infrastructure procurement in terms of efficiency and effectiveness. The Swiss federal administration has good management skills for infrastructure projects. It is a widely shared opinion that efficiency gains through private management probably would not be large enough to compensate for higher financial cost. Fourthly, the potential for efficiency gains is limited due to network complexity and the highly regulated environment. Fifthly, the financing is complicated because a number of issues are often unclear at the beginning of a project, including:

• what grants and compensations from different government levels and multiple •

sources apply; what the exact financial participation of the various parties is (Swiss National Railways, the Confederation, Infrastructure Fund, etc.).

The amounts available are furthermore subject to negotiation as well. This creates an uncertainty that is not entirely compatible with the constraints of project finance. All companies apart from Swiss National Railways (public enterprise) transporting passengers professionally must obtain a concession. These concessions are not used for optimal risk sharing between the public and private sector, and are also not aimed at improving efficiency or creating value for money. There are legal instruments to control and coordinate the various actors of the railway network. The owners of these LTCs are usually public bodies on cantonal or municipal level and the infrastructure is (mostly) financed with taxes.

Types of PPP Most of the PPP projects in a broader sense that include construction (in particular sport arena projects) qualify as ‘investor model’. This is characterized by the fact that the investor takes:

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• responsibility for financing; • the ownership; and • most risk associated with the project, in particular, market risks. The PPP project of the canton Berne is the only project, where financing was done by the SPV, the ownership stays with the public client, and where risks associated with the project are allocated between all parties. This project is characterized as DBFO, but the operation and maintenance applies only to the administrative building, while the prison is only maintained by the private partner.

Changes in PPP usage and extent over time Jeanrenaud (2013) states that the recent financial crisis and economic downturn had a certain negative effect on public budgets on all government levels. The overall impact of the crisis on Swiss public budgets, however, was relatively mild. Even at the lowest point, the budgets still showed a fiscal surplus, even though it was a smaller one. The long period of stagnation in the 1990s, when Switzerland had the weakest growth in Western Europe had a much worse impact on budgets, in particular on cantonal and municipal budgets. Regarding PPP, the main consequence of the financial crisis concerns the impact on the interest rate spread. Until 2007, the interest rate differential between public and private capital lending was rather small. This spread is larger now and, thus, it is more difficult to prove PPP efficiency gains that compensate for the high costs of private financing. A considerable PPP project pipeline has not yet been developed in Switzerland. Therefore, no notable changes can be reported in the PPP sector.

Future developments Switzerland has one of the best infrastructures worldwide. Future infrastructure needs might stem from:

• modernization of the existing infrastructure; • the goal of a 2000 watt society and the consequent need for renovation and • • •

modernization of building infrastructure; as an economically strong country, Switzerland encounters strong immigration which leads to a demand for more infrastructure; participation in the NEAT (Alp Transit) development, which led to the construction of the Gotthard rail tunnel for example; potential need for further tunnels to manage the renovation of existing ones, in particular with regard to the existing Gotthard road tunnel.

There is no doubt that Switzerland will have substantial future infrastructure needs to keep or improve its infrastructure level. There is no doubt cooperation between public and private entities will further develop in Switzerland.

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Switzerland is one of few countries that seem to follow the guiding principle to apply PPP only when it can show substantial advantage (value for money) in comparison with traditional procurement. The PPP procurement is (at the moment) not driven by financial bottlenecks as it is often the case elsewhere in the world. Typical for Switzerland, new developments are not fast and radical but take place slowly on the basis of consensual assessment by multiple stakeholders. Any investor coming to Switzerland will have to get used to the Swiss way. Typically, foreign companies either buy Swiss companies or create close cooperative agreements to establish themselves in the Swiss market. This applies to PPP as well as other construction projects. Many infrastructure projects are given to local or Swiss bidders. Foreign companies hardly ever win a bid and if so it is usually because of lacking domestic expertise or capacity.

PPP research and development agenda Even though PPP in a narrow sense could not be established in practice yet, there are PPP research activities in Switzerland. The most active Swiss research facility for PPP is the Institute of Construction and Infrastructure Management at the ETH Zurich. Further facilities include the University of Berne and the University of St. Gallen. Swiss research projects about PPP deal among others with:

• development of business models (Oliver Behnen, 2004); • Swiss PPP success factors (Marc Ehrensperger, 2007); • regional street maintenance in Switzerland (Jennifer Dreyer, 2008) in • • •

cooperation with public municipalities; analysis of risk allocation mechanisms (Tanja Pohle, 2011) in cooperation with municipalities; risk allocation and risk bearing capacity testing (Jennifer Firmenich, 2014) in cooperation with STRABAG; and PPP project selection for sponsors (Stefan Weissenböck, ongoing).

Many of these research projects were conducted in cooperation with potential PPP players. Furthermore, Prof. Gerhard Girmscheid from ETH Zurich has been publishing regularly on PPP since 1998. An overview of his work and most of the projects named above can be found on www.ibi.ethz.ch. More Swiss research activities can be found on the website of the Swiss PPP Association (SPA 2014). Over the years the Swiss PPP Association covered in its publications different fields of the Swiss economy that might be of potential interest for PPP. After the completion of the first and only PPP project in Switzerland a thorough case study was assembled and published in 2011 to support know-how transfer (Bolz et al. 2011). At European level the COST initiative (www.ppptransport.eu/) represents an international research collaboration regarding PPP in transportation. Swiss participants are Prof. Andreas Lienhard from the University of Berne and Prof. Claude Jeanrenaud from the University of Neuchâtel.

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Conclusions One reason for Switzerland’s economic success is its political stability. Another reason is its unique capability to integrate and benefit from cultural diversity. Lastly, Switzerland has a strong and successful tradition in finding its own way, the Swiss way, of doing things. In this regard it might be difficult to just transfer a concept to Switzerland that was successful elsewhere. It seems to be the most likely scenario that Switzerland will continue developing public–private cooperations where these fit its specific needs, as it has done in the pre-PPP times. Here and there, PPP projects might show up as special variations of this partnering. As long as the financial situation in Switzerland stays comfortable, however, PPP projects will only be implemented if substantial value-for-money gains can be proven to governments and taxpayers. In Switzerland it does not happen that infrastructure is planned for political reasons and is then procured with PPP because of a public financial shortfall. Many countries could learn from the integration of taxpayers and many multiple stakeholders in decision-making. They can learn from the variety of alternatives that are usually considered, analysed and compared to ensure the selection of the best possible option.

Acknowledgements The author thanks Andreas Lienhard, Heinz Gut and Urs Bolz for helpful feedback.

References Bolz, U., Häner, I., Keusen, U., Bischof, M. and Lienhard, A. (2008) Gesetzgeberischer Handlungsbedarf in der Schweiz. Verein PPP Schweiz / Swiss PPP Association (eds.). Schulthess, Switzerland. Bolz, U., Kunzmann, M. and Wilhelm, T. (2011) Public Private Partnership (PPP) – Praxisleitfaden Hochbau. Verein PPP Schweiz / Swiss PPP Association (eds.). Schulthess, Switzerland. CCPP (2014) Centre of Competence Public Procurement / Kompetenzzentrum Beschaffungswesen Bund. Available online: www.bbl.admin.ch/bkb/02540/02542/index.html?lang=de (accessed 6 February 2014). Funk, P. and Gathmann, C. (2009) Does direct democracy reduce the size of government? New evidence from historical data 1890 -2000. CESifo working paper, No 2693. Jeanrenaud, C. (2013) PPP Country Profile Switzerland. In: Public Private Partnerships in Transport: Trends & Theory (P3T3) – 2013 Discussion Papers – Part I: Country Profiles. Verhoest, K. et al. (eds.) COST office, Italy: 69–86. Lienhard, A. (2006) Public Private Partnerships (PPPs) in Switzerland: experiences – risks – potentials. In: International Review of Administrative Science (IRAS), Vol. 72, 4/2006, London: pp. 547–63. Lienhard, A. and Marti Locher, F. (2010) Public Private Partnership im Verfassungsrecht. In: PPP – Was fehlt zum Durchbruch? Lienhard, A. and Pfisterer, T. (eds.). Schulthess, Zurich. Swiss Confederation (1999) Federal Constitution of the Swiss Confederation of April 18 1999. Swiss Confederation, Switzerland. Available online: www.admin.ch/ch/e/rs/1/101.en.pdf (accessed 6 February 2014).

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Swiss Confederation (2006) Finanzhaushaltsverordnung / Ordonnance sur les finances de la Confédération.Swiss Confederation, Switzerland. Available online: www.admin.ch/opc/ de/classified-compilation/20052508/index.html (accessed 6 February 2014). Swiss Confederation (2009) PPP-Weisung der Bundesverwaltung. Swiss Confederation, Switzerland. Availableonline:www.ppp-schweiz.ch/tl_files/downloads/parlament_verwaltung/2009_02_26_ PPP_Weisung_der_Bundesverwaltung.pdf (accessed 6 February 2014). Swiss Confederation (2010) Verordnung über das öffentliche Beschaffungswesen. Swiss Confederation, Switzerland. Available online: www.admin.ch/opc/de/classified-compila tion/19950538/201008010000/172.056.11.pdf (accessed 6 February 2014). SPA (2014) Swiss PPP Association / Verein PPP Schweiz. Available online: www.ppp-schweiz. ch/de/ (accessed 6 February 2014).

18 Public Private Partnership in major Taiwan infrastructure projects Jui-Sheng Chou, H. Ping Tserng, Kuo-Chi Tseng and Chieh Lin Introduction Taiwan, also known as Formosa, is an island located in the middle of the West Pacific coast and East Asia. The country has an area of 36,193 km2 and a population of 23 million. In 2012, total nominal GDP was US$ 475.259 billion, and GDP per capita was US$ 20,403. Table 18.1 shows that Taiwan is ranked among the top countries in the world for competitiveness. According to the World Competitiveness Yearbook published by IMD (Institute for Management Development; www.imd. org/), its overall performance rankings ranged from sixth to eleventh during 2010–2013. The legal framework of Taiwan allows public works to be financed publically (e.g., taxation) or privately (e.g., Public Private Partnerships, PPPs). Chou et al. (2015) reported that PPPs have become an effective procurement strategy for providing public services and that several countries use PPPs to reduce their infrastructure budgets and to stimulate their economies (Chou et al. 2015). Statistical data show that the total value of publicly financed construction projects in Taiwan was US$ 14.12 billion (1US$=NT$ 30) in 2012 (PCC 2013). The total value of privately financed projects was over 10 percent of that for public works. This figure is comparable to the figures reported for countries recognized by the Public–Private Infrastructure Advisory Facility (www.ppiaf.org/) as having successfully completed PPP programs, e.g., the UK, Australia and Korea (Tserng et al. 2012). From Table 18.1 Taiwan competitiveness ranking Year

Overall performance

Economic performance

2013

11

16

2012

7

2011 2010

Corporate efficiency

Basic infrastructure

8

10

16

13

5

4

12

6

8

10

3

16

8

16

6

3

17

Source: IMD (http://www.imd.org/).

Government efficiency

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2000–2012, more than 900 privately financed contracts with a total investment value approximating US$28 billion were signed. The abundant experience of Taiwan in promoting PPPs provides a valuable reference at the individual project level and at the overall environment level. For example, the Taiwan High Speed Rail (THSR) is the first HSR project performed by the build-operate-transfer (BOT) in the world and is also the first HSR BOT project to begin service. The lessons learned in Taiwan provide a valuable reference for privately financed HSR projects, including issues relating to drafting an attractive tender documentation in the pre-contract stage and the implementation of contract management in the post-contract stage (Chou et al. 2012). At environment level, the techniques, tools and processes used by the Taiwan government to promote its PPP policy and programs are publicly available and well documented. Since the process used to establish a PPP environment has been highly transparent in Taiwan, policymakers in other countries should consider their socioeconomic differences when investigating Taiwanese model to draft PPP strategies or measures.

Origin and drivers The concept of PPP in Taiwan can be traced back to the Chinese Qing dynasty over a century ago when Governor Liu Ming-chuan petitioned the government to permit the private sector to raise money for constructing railroads from northern to southern Taiwan. The plan was to use land allocated by the government to raise private funds for purchasing rolling stock and for constructing tracks and facilities. Once construction was completed, the railroad was to be operated by the private corporation with official oversight. This BOT idea was not approved at that time due to socio-economic considerations, but construction was later completed using government funds. On July 23, 1998, the Ministry of Transportation and Communications (MOTC) signed a 35-year “Construction and Operation Contract” and a 50-year “Station Development Contract” with the Taiwan High Speed Rail Corporation (THSRC) to establish the highest-profile BOT case in Taiwan. The high-speed rail link from north to south Taiwan began providing service on March 2, 2007 and, as of November 2013, the system was serving an average of more than 100,000 passengers daily (Chou and Yeh 2013; Tseng and Lin 2011). Based on the valuable experience obtained in the first mega PPP project (i.e., THSR), the “Act for Promotion of Private Participation in Infrastructure Projects” was promulgated in 2000 and became the institutional framework for PPPs in Taiwan. The Act allows private organizations to invest in widely varying infrastructure types, including environmental pollution prevention facilities; sewerage, water supply and water conservancy facilities; cultural and education facilities. This Act has had a large role in guiding the implementation of PPP in Taiwan (Chou et al. 2012; Zheng and Tiong 2010), and the Taiwanese government expects the act to improve financial budgeting in the infrastructure domain. This ‘outside-the-box’ budget strategy was the main reason why the Taiwan government adopted PPP. Official data shows that private capital is urgently needed to fill the gaps in public construction budgets. For example, since 2008, the

Public Private Partnership in Taiwan projects 299 Taiwanese government has rolled out “The i-Taiwan 12 projects (i means LOVE in Taiwanese language),” with a total expected investment of NT$3.99 trillion over eight years. Of this amount, government investment is expected to cover two thirds (NT$2.79 trillion), and the remaining amount is expected to be covered by private capital. A recent report reveals that the public budget shortfalls will be approximately NT$41 billion, NT$96 billion, NT$61 billion and NT$49 billion in the years 2013–2016, respectively (Council for Economic Planning and Developing 2014). Chou et al. (2012) suggested that relieving budget deficits in infrastructure financing has been central to the development of PPPs in Taiwan (Chou et al. 2012). They designed a questionnaire to identify the 15 key drivers for adopting PPP strategy. The respondents were asked to rate their key drivers of motivation on a five-point Likert scale, i.e., 1 – not significant, 2 – less significant, 3 – significant, 4 more significant, and 5 – most significant. Table 18.2 shows that the top two drivers were “solve the problem of public sector budget restraint” and Table 18.2 Ranking of the key drivers of PPP in Taiwan Rank

Key drivers

Mean*

Standard deviation

1

Solve the problem of public sector budget restraint

4.19

0.97

1

Reduce public money tied up in capital investment

4.19

0.87

3

Accelerate project delivery

4.13

0.92

4

Accelerate project development

4.11

0.80

5

Provide an integrated solution (for public infrastructure/services)

4.05

0.74

6

Transfer risk to the private partner

3.94

1.04

7

Facilitate creative and innovative approaches

3.86

1.05

8

Improve maintainability

3.70

0.97

9

Reduce the total project cost

3.66

1.01

10

Benefit local economic development

3.63

1.13

11

Reduce public sector administration costs

3.50

0.98

12

Cap the final service costs

3.45

1.07

13

Improve buildability

3.42

1.10

14

Provide non-recourse or limited recourse public funding

3.41

1.08

15

Transfer technology to local enterprise

3.00

1.10

*Note: 1—Not significant; 2—Less significant; 3—Significant; 4—More significant; and 5—Most significant.

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“reduce public money tied up in capital investment.” However, this research also recognized the important role of efficient consideration. The third driver is “accelerate project delivery,” the fourth is “accelerate project development,” and the fifth is “provide an integrated solution (for public infrastructure/services).” Government policy to encourage private investment in public construction projects has been consistent regardless of the ruling party. For example, in 2004 President Chen, Shui-Bian declared, “Government cedes functions which can be accomplished by private firms”; in 2005, the then Premier Hsieh, Chang-Ting declared, “The government has to cook even without the rice, which can only be accomplished through private participation”; in 2006, the then Premier Su, TsengChang declared, “Practical appraisal, careful implementation, effective management, implement PPP policy substantially”; in 2008, President Ma, Ying-Jeou proposed a policy “One third of i-Taiwan 12 projects will be carried out through PPP”; in 2009, then Premier Wu Dun-Yi gave three principles for 1. PPP universal test was released 2. First PPP implementation review conducted 3. First professional training program launched for consultants 4. Guidance of executing standard operating procedcure published

200 Open transportation facilities for PPP Open power supply facilities for PPP

Open refuse incinerator for PPP

No. of signed contracts

150 BOT contract of THSRP signed

1. Act for PPP promulgated Open 13 sectors for PPP 2. A national PPP unit (PPP taskforce) was established to promote PPPs

100 1. First professional training program launched for public servants 2. First conference on PPPs investment opportunties held by PPP taskforce

1. Screening of categories for priority implementation 2. Establishment of a project evaluation system (PPP universal test) 3. Providing incentive measures for public servants such as contract-signing bonuses 4. Seminar was held in cooperation with foreign government so as to absorb the experience

1. Standardization of PPP contract published by PPP taskforce 2. Committee for the promotion of PPPs established under Executive Yuan supported by PPP taskforce

94 95 96 97 98

99 00

1. White paper PPPs published 2. Responsibilities of National PPP Taskforce planned to increase: Pre-contract quality control and post contract dispute mediation

1. Second PP implementation review conducted 2. First international conference on PPPs investment opportunities held

50

0

1. THSR started service 2. Guidance of financial issues published

First operation manual and case studies published

01

02

03

04

05

Figure 18.1 Simplified diagram of Taiwan PPP regime in 1994-2009

06

07

08

09

Public Private Partnership in Taiwan projects 301 promoting PPP: a correct and feasible goal, a legally transparent process, and an outcome that benefits the general public. One objective of these policy statements is to make the public official understand the necessity of implementing PPP because they are familiar with the conventional government procurement method and may be reluctant to adopt the new method. Another objective is to build the confidence of potential investors. In response to this policy, government regulations have been enacted to encourage the use of a PPP for all new public mega-construction projects. The “Assessment Mechanisms for Promoting Private Participation in Infrastructure Projects” require each government agency to assess the feasibility of private finance in order to reduce the burden on public budgets in planning stages. Figure 18.1 lists the key measures taken by the Taiwan government together with results in terms of the number of projects signed according to Tserng et al. (2012). Notably, the role of the central government evolved from regulator to leader of PPP activities for the entire public sector. Thus, its technical support function moved from a passive supervisory role into an on-site service that directly facilitates project progress. Its policy promotion function was transformed to enable access to potential investors and project stakeholders via conferences and face-toface interviews. By compiling and selecting suitable PPP projects, this system passes investment information promptly to potential registered investors (PCC 2012).

Financial context for PPP A PPP project is typically financed by a combination of equity and debt. Holders/ promoters are entitled to share profits but only after lenders receive their due interest. In a winding up, they are entitled to the balance of the realized net assets after lenders have been paid; thus, promoters may receive nothing in return for investment in a failed project. Therefore, sufficient equity for the promoter has been identified as a key factor in the success of a PPP project (Tserng et al. 2014) due to self-interest consideration. However, an excessively high equity ratio demanded by the government would limit the willingness of private firms to participate in bidding. Promoters in Taiwan generally require up to 30 percent equity. Regarding debt, project finance is the ideal way to implement PPP projects. However, two recent studies (Carrillo et al. 2008; Chan et al. 2010) reported that a key obstacle to promoting PPP is the difficulty of finding financial partners due to their limited interest in PPP projects. Thus, the long and complex procurement process, from preferred bidder stage to financial closing stage, may cause substantial delays. Lenders with limited knowledge of PPP may prefer investments (e.g., bond issues) other than loans to PPP projects unless their loan is well secured (Tserng et al. 2012). The Taiwanese financial sector is generally reluctant to finance PPP projects because these may be too risky to the financial institution. The Taiwanese government has conducted a series of training activities to increase the interest of financial institutions in financing projects and to provide the required skills. However, because the market of project financing is still developing, a special

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purpose vehicle may not get a loan from financial institutions unless it is well secured by the mother companies or by collateral. One example is the THSR project, in which the financing is guaranteed by a governmental debt guarantee (GDG). Indeed, whether to provide GDG in PPP projects can be a major policy dilemma. In the package proposed by the consortium for financing the THSR project (MOTC 2010), total capital investment was US$ 13.54 billion financed through equity (US$ 3.45 billion) and debt (US$ 10.09 billion). During contract negotiations, the government authority agreed with the consortium that no loans would be made without a GDG. Thus, the bailout cap set in the direct agreement and signed by the government authority, the Project Company, and the lenders was US$ 10.83 billion. The agreement for the US$ 10.74 billion loan to the Project Company was then signed. According to the government authority, the vast social and economic benefits expected from the project justified the GDG for the THSR project (Tserng et al. 2014). Another justification was that it avoided delays caused by switching to alternative procurement approaches such as conventional public financed approach. The internal and external values of early completion to the public clearly outweighed the contingent government liability. As in many other countries, the Act allows step-in rights to a PPP to encourage the participation of financial institutions. According to the article, the authority in charge may suspend the contract during the construction or the operation of a PPP project for the following reasons: a serious delay in work schedule, major defects in quality of the construction work, poor operation, or other grave events. However, the authority in charge cannot suspend the contract if the financial institution, the guarantor or any other institution designated by the financial institution or the guarantor is approved by the authority in charge to take over the construction and/or the operation. Given the important role of financial institutions in the success of a PPP project, their recommendations are always considered when formulating relevant government policy. For example, insurance companies have recently proposed expanding the use of insurance funds to financing for PPP projects. Regarding the issue of the share of refinancing gains, concerns have been raised about earlier contracts for purchasing power from independent power plants. The government and the public require the concessionaire to reduce power rates if the interest rate decreases. Another issue is the effect of the GDG on the interest rate for the THSR project. The original interest rate was fixed at approximately 8 percent (Cheng 2010), which is much higher than the current market rate. After the government provided administrative aid in negotiating with the lending banks, the refinancing package was completed on January 8, 2010. The interest rate and grace period were modified in the syndication agreement for the restructured NTD 382 billion (about 12.7 billion USD; 1 USD is equal to about 30 NTD) loan. For example, the fixed interest rate was changed to a floating interest rate, which was calculated as the average of base lending rates for major leading banks. In 2010, the interest rate ranged from 1.7875 percent to 2.0211 percent (THSRC 2010). The number of untenable interest payments has significantly improved. Generally, however, allocation of refinancing gains is not an important issue in

Public Private Partnership in Taiwan projects 303 Taiwan because most BOT projects in Taiwan are self-financed, i.e., no government funding is provided, and the government does not receive profits accruing to private institutions.

Institutional framework Formal institutions are classified as “contractual” and “legal.” For contractual aspects, the Taiwanese Ministry of Finance provides model contracts for each PPP type, e.g., BOT, BOO (build-own-operate), OT (operate-transfer), etc. It also provides standard operating procedures and training programs for authorities in change, thus improving processing efficiency and quality. In the case of the government payment mechanisms, a few projects were designed with this mechanism. One example is the Nanzih BOT wastewater treatment project. Zheng and Tiong (2010) classified payments for treatment services to the Nanzih project company as capacity payments and output payment. The capacity payment is based on the designed capacity, including capital recovery charges and fixed operation and maintenance (O&M) charges and the output payment is based on the quantity of wastewater treated, including variable O&M charges. In the case of a default, clauses in the model contract protect the property of investors from being expropriated without compensation. According to the model contract, the agreement is terminated in the event of changes to government policy. Additionally, the government entity must return the amount of the remaining performance bond after deducting all default penalties or other debts payable by the project company. If termination occurs during the construction period, the government entity must also compensate the private company for the construction budget and all expenses relating to the termination of the relevant agreements under this project. If the termination occurs during the operation period, the government entity or any other designated third person may purchase the assets and any rights obtained by the private company under this project at a price to be determined by the appraiser. If the cause of termination is attributable to the private company, the termination is handled in the same spirit. Another legal change was the Act for Promotion of Private Participation in Infrastructure Projects, which was promulgated on February 9, 2000 to improve the domestic environment for PPP. The Act expands the scope of private participation to include social and labor facilities that mainly benefit the public and major facilities for tour sites and other highly commercial business facilities. This new act relaxes the past legal restrictions on land acquisition, fundraising, and other areas; provides financing, tax benefits, and other incentives; lays out reasonable standards for the rights and obligations to be codified in concession agreements between the government and private institutions; and sets clear evaluation and supervision procedures for the authorities in charge. According to the official report (PCC 2014), the underlying principles of this Act include the following:

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• Embodiment of general-type legislation. The Act applies alike to all industries, •

•

•

sectors, and development plans. It also provides the flexibility needed to delegate administrative authority to the government officials implementing the projects. Embodiment of the civil contract concept. The Act adopts the principle of civil contracts under which rights and obligations between the government and private sector are stipulated in the concession agreement to reflect the spirit of equal cooperation in the partnership and to facilitate “win–win” investment conditions. Maximization of private participation. The scope of infrastructure development in which private participation is permitted is extremely broad and includes various participation models, including BOT, BTO (buildtransfer-operate), ROT (rehabilitate-operate-transfer), BOO, or OT. Additionally, private entities may also propose their own plans for participating in infrastructure projects. Allowing unsolicited proposals enables the private sector to discover investment opportunities and gives full rein to its creativity in planning investment projects. Maximization of government carefulness. For a complete proposal, feasibility studies and preliminary planning should be performed for all infrastructure projects in which the government plans for private participation; from the viewpoint of private sector, the feasibility of private investment should be evaluated carefully and, in consideration of the special characteristics of the infrastructure project, commercial incentives should be incorporated in the preliminary plan.

Organizational structure The National PPP Taskforce was established in 2000 under the Public Construction Commission (PCC) which is the highest administrative organ in charge of public works development in Taiwan. At that time, PCC was also the competent authority under the PPP act. In response to the growing importance of PPP, the Taskforce was formally restructured in 2013 as the Department of Promotion of Private Participation in the Ministry of Finance (see Figure 18.2). The details of its evolving role are discussed by Tserng et al. (2012). This organization is mainly in charge of the following matters related to promotion of PPP: (a) establishing and promoting relevant policies and frameworks; (b) collecting, publicly announcing, and conducting statistical studies of relevant information and data; (c) providing professional training; (d) coordinating agencies responsible for operation of the relevant authorities in charge, and supervising and evaluating agencies in connection with the relevant infrastructure projects; (e) processing complaints. Moreover, in the cabinet-level Committee set up to facilitate the PPP process in 2002, the premier is its convener, and the deputy ministers of each ministry of the central government are the commissioners. This mechanism is used to solve problems that require cross-ministerial coordination and negotiation through the Committee. It also enables the government to make decisions efficiently by addressing investment obstacles encountered by private institutions in a timely manner.

Public Private Partnership in Taiwan projects 305 Committee for the promotion of private participation in infrastructure projects, Executive Yuan

Coordination task force

Central government authority-incharge promotion committee

County (City) government authority-incharge promotion committee Implementing agency of individual project

Implementing agency of individual project Implementing agency of individual project

Figure 18.2 Structure of government organization in charge of promoting PPP

For the private side, the National Council for Promotion of Private Participation in Infrastructure Investments of the Republic of China (NCPPP-ROC) was established in 2009. The goals of this non-profit-organization are to improve the theory and practice of PPP, supporting related industries development and personnel training, promoting the exchange of domestic and international PPP experience, ensuring sound development of PPP projects, and accelerating the national economic development. The council members include academic institutions, professional consulting firms, law officers, and bankers. Regarding organizational issues in individual PPP projects, many studies agree that the key factor in the success of a PPP project is optimal risk allocation between public sector and private sector (Grimsey and Lewis 2002; Li et al. 2005; Tang et al. 2010; Zhang 2005). The 37 potential risks listed by Kao et al. (2010) were used in the survey for exploring risk allocation preference in Taiwan PPP projects (Chou et al. 2012; Kao et al. 2010). As in the previous survey, the objective was to use a Likert scale to identify responsibilities for risks taken by the participating parties. Respondents were asked to indicate whether a risk was borne by the private sector, by the public sector, or by both sectors as follows: 1 – government takes sole responsibility; 2 – government takes most responsibility; 3 – both parties take equal responsibility; 4 – private sector takes most responsibility; and 5 – private sector takes sole responsibility. Table 18.3 shows the risks sorted by rank. The mean values for the 37 risks ranged from 1.73 to 4.55. The respondents indicated that the three main risks for the private sector (the three items with the highest mean values) are: “Delay in supply,” “Operation cost overrun” and

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Table 18.3 Preferred allocations of risk factors for PPP projects in Taiwan Risk factors

Mean*

Standard deviation

Rank

Delay in supply Operation cost overrun Technology risk Private investor change Financial risk Construction completion Lack of consortium expertise Foreign exchange and convertibility Competition (exclusive right) Interest rate Market demand change Ground/weather conditions Payment risk Residual assets risk Inflation Construction/operation changes Tariff change Organization and coordination risk Subjective evaluation Supporting utilities risk Environmental protection Improper contracts Insufficient financial audit Approval and permit Third party reliability Force majeure Public/political opposition Expropriation and nationalization Uncompetitive tender Corruption Tax regulation changes Government’s intervention Poor political decision making Immature juristic system Government reliability Change in law Land acquisition

4.55 4.34 4.30 4.25 4.11 4.00 3.89 3.80 3.78 3.72 3.70 3.66 3.58 3.48 3.47 3.39 3.34 3.27 3.27 2.98 2.91 2.84 2.78 2.75 2.69 2.66 2.56 2.34 2.34 2.31 2.27 2.17 2.08 2.00 1.97 1.83 1.73

0.83 0.91 0.87 0.87 0.80 0.84 1.30 0.91 0.90 0.84 0.79 0.78 1.00 0.94 0.91 0.92 0.84 0.57 1.01 1.05 0.85 0.65 1.15 1.02 0.91 0.67 0.83 1.21 1.09 1.14 1.07 1.15 1.01 1.04 1.19 0.94 0.96

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

*Note: 1–Government takes sole responsibility; 2–Government takes most responsibility; 3–Both parties take equal responsibility; 4–Private sector takes most responsibility; and 5–Private sector takes sole responsibility.

Public Private Partnership in Taiwan projects 307 “Technology risk.” The three main risks for the government (those with the smallest mean values) are “Land acquisition,” “Change in law” and “Government reliability.” The distribution of those mean values represent a Taiwanese perspective on a desirable allocation of risks in PPP projects. Regarding government control of PPP contracts, the target is to provide the government supervision and administration needed to safeguard the public interest while still allowing private companies to be creative. For example, the Act for PPP allows the private institutions to set the fare rate and the schedule and method for fare adjustment in the financial plan submitted where an infrastructure project is a public utilities enterprise. Before execution of the concession agreement, the fare clauses must be approved by the relevant authorities in charge of the utilities concerned. Notably, the government cannot require the private institution to provide favorable treatment for a reduced fare price unless otherwise required by an applicable law; a private institution cannot transfer the concession obtained under the concession agreement nor shall it make such concession as the object for execution in a civil action, unless it is approved by the authority in charge. If the private institution evaluated by the measures stipulated in the concession agreement is a well-operated private institution, the authority in charge may, upon expiration of the operation period, give the private institution a priority to enter into a contract to continue the operation of the infrastructure project concerned.

Extent of use/adoption of PPP From 2000, when the Act for PPP came into force, to 2012, 985 PPP contracts were signed according to official statistics released by the Ministry of Finance (2013). The total investment value of the contracts is expected to reach NT$840.8 billion, and reductions to personnel and operating expenses during the contract period have been estimated at NT$ 800.3 billion. Increased tax revenue and royalties are expected to contribute an additional NT$ 541.7 billion to the government finances, and the contracts are expected to create approximately 140,000 jobs. After excluding contract values for particular huge cases, an analysis of annual PPP contracts shows that, each year, an average of 90 cases are signed with an average total value of NT$56.3 billion. A sectoral analysis shows that transport sector projects comprise the largest number of contracts (341 cases, or 35 percent of the total number of contracts) and the largest total value (NT$421.9 billion, or 50 percent of total contract value). The transport sector has a big role in Taiwan because of the large scale of some transport projects such as transportation terminals, harbors and aviation facilities. Another contributing factor is the numerous parking lot facilities implemented by the OT model. Cultural and educational facilities accounted for 219 projects with a comparatively low total value (NT$23.7 billion) since most projects in this sector are OT projects that do not require a huge capital investment. Most contracts were for the operation of parking lot facilities, swimming pools, cafeterias, accommodation and other facilities for schools. The OT projects also included cultural venues such as museums and exhibition centers. Table 18.4 compares the contracts and their values.

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Table 18.4 Signed PPP contracts by sector Public works sector

No. of Cases

Transportation facilities

341

34.62

421.9

50.18

Environmental pollution preventation facilities

16

1.62

5.3

0.63

Sewerage facilities

8

0.81

58.8

7.00

Water supply facilities

1

0.10

1

0.12

Water conservancy facilities

4

0.41

1.8

0.21

135

13.71

22.1

2.63

Social welfare facilities

27

2.74

12.1

1.44

Labor welfare facilities

9

0.91

0.2

0.03

219

22.23

23.7

2.82

Major facilities for tour-site

71

7.21

56.9

6.77

Power facilities

11

1.12

23.2

2.76

1

0.10

2.4

0.29

Sport facilities

39

3.96

30.1

3.58

Park facilities

26

2.64

0.3

0.03

9

0.91

28.4

3.37

18

1.83

45

5.35

Major hi-tech facilities

1

0.10

0

0

Development of new town

0

0

0

0

Sanitation and medical facilities

Cultural and educational facilities

Public gas and fuel supply facilities

Major industrial facilities Major commercial facilities

% of total

Contract value (NT$ billion)

% of total

Agricultural facilities

31

3.15

8.8

1.05

Other

18

1.83

98.8

11.75

Total

985

100

840.8

100

An analysis of authorities in charge shows that 52 percent of all cases (59 percent of total contract value) were administered by the central government. The analysis also shows that the ratio of cases and total contract value administered by the central government fell gradually as the PPP activity of local governments increased. This indicates that both central and local governments often use PPP to deliver public services.

Public Private Partnership in Taiwan projects 309

Types of PPP in Taiwan Models that enable private institutions to participate in infrastructure projects include the OT model, which comprises at least 50 percent of total PPP cases. In an OT case, the government invests in building the infrastructure project and then commissioning a private institution for its operation. Thus, the amount of private investment in such cases is usually small as the contract values of total OT cases is only about 1 percent of that of total PPP cases. However, BOT, BOO or ROT cases may require the involvement of private firms in financing and construction, and the scale of such undertakings may be quite large and may require much greater private investment than in OT cases. At NT$ 443.9 billion, BOT cases accounted for 53 percent of total PPP investment. Table 18.5 shows the statistical data for private participation models classified by the Act for PPP, and Table 18.6 shows their World Bank classifications. Table 18.5 Signed PPP contracts by model of private participation Model

No. of Cases

% of total

Contract value (NT$ billion)

% of total

BOT

88

8.93

443.9

52.80

OT

490

49.75

11.5

1.37

ROT

170

17.26

12.5

1.48

BOO

29

2.94

67.4

8.01

BTO

4

0.41

1

0.12

Others

204

20.91

304.5

36.22

Total

985

100.00

840.8

100.00

Data period: 2000-2012.

Table 18.6 Signed PPP contracts by World Bank classifications Classification

No. of Cases

Management and lease Contracts

606

61.52

14.2

1.69

Concessions

172

17.46

12.8

1.52

Greenfield projects

207

21.02

813.8

96.79

Total

985

100.00

840.8

100.00

Data period: 2000-2012.

% of total

Contract value (NT$ billion)

% of total

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Future developments On average, PPP projects worth over NT$ 100 billion are open for bidding annually in Taiwan. To maintain this level, and to expand the benefits of PPP in stimulating economic development, the Taiwanese government has continuously explored the feasibility of various types of private participation and private capital investment. The definition of infrastructure projects has expanded along with the scope of PPP cases being promoted. The government is actively attracting private capital for widely varying projects, including urban renewal of public lands, creation of superficies on public land, and joint development of state-owned enterprises land and Mass Rapid Transit stations (Ministry of Finance 2013). In the case of THSR, which is one of the largest PPP projects in Taiwan, additional surveys and research are needed to achieve further improvements in the quality and ex post project performance perceived by passengers (Chou and Kim 2009). Further research is also needed to investigate organizational perspectives such as employee involvement, employee satisfaction, work performance, management commitment, employee loyalty, and combinational impacts on operational performance and the long-term profitability of passenger transportation services (Chou et al. 2011). Feasibility studies of PPP models in other countries are also needed to improve the risk allocation mechanisms between public and private sectors. Additional issues are proactive strategy deployment and preliminary countermeasures in PPP project dispute early-warning systems (Chou and Lin 2013). Early PPPs in Taiwan tended to be self-financed projects. In those projects, private firms took on the cost of construction and operation, and revenue from user fees and ancillary commercial facilities ensures a financial viability of projects in the absence of government investment or payment. To expand the scope of private participation into non self-financed projects such as social welfare infrastructure projects, the Taiwanese government has recently begun studying the UK private finance initiative (PFI) model. Some pilot projects have been started on a trial basis. The Taiwanese government is also assessing the feasibility of including a wider range of capital investment sources into PPP projects, including investment from the insurance industry, and the feasibility of securitizing real estate and financial assets of PPP cases, to activate funding for new PPP cases. As a member of the international community, Taiwan has begun exporting its PPP expertise. In addition to investing in PPP in neighboring countries, Taiwanese experts will begin assisting other countries in establishing laws and institutions needed to facilitate PPP development. For example, during the 2013 meeting of the APEC Finance Ministers, the APEC economies agreed to seek access private financing for economic infrastructure and to establish an APEC PPP Experts Advisory Panel reflecting the diversity of APEC economies to enhance infrastructure development in the region. A pilot PPP centre will also be established by the Ministry of Finance in Indonesia. By sharing the experiences of the Panel and the APEC pilot project in Indonesia, APEC members expect to improve their own capacity to design and deliver effective, bankable PPP projects (PCC 2013). This initiative will enable Taiwan to share its PPP knowledge with the APEC members.

Public Private Partnership in Taiwan projects 311

Conclusions The PPP is an emerging international trend and Taiwan is no exception. Continuously accumulating experience and feedback are the keys to increased effectiveness in implementing PPP cases in any country. Early attempts may fail due to lack of experience, but a continuous process of review, consulting and training can improve implementation quality and secure the public interest. International exchange and learning are also indispensable to developing of successful PPP practices. The PPP experience and potential market in Taiwan are worthy of widespread attention. By using PPP methods, the government can attract private capital to realize public works projects. Aside from the essential issue of financial feasibility (i.e., the “Bankable or Terminate” criterion), one should also bear in mind that the projects are “public works.” That is, success requires comprehensive preparatory planning, transparency and fairness during the tender process, quick and effective conflict resolution during the post-contract stage, and responsiveness to public opinion.

References Carrillo, P., Robinson, H., Foale, P., Anumba, C., and Bouchlaghem, D. (2008). Participation, Barriers, and Opportunities in PFI: The United Kingdom Experience. Journal of Management in Engineering, 24(3), pp. 138–45. Chan, A., Lam, P., Chan, D., Cheung, E. and Ke, Y. (2010). Potential Obstacles to Successful Implementation of Public-Private Partnerships in Beijing and the Hong Kong Special Administrative Region. Journal of Management in Engineering, 26(1), pp. 30–40. Cheng, Y. H. (2010). High-speed rail in Taiwan: New experience and issues for future development. Transport Policy, 17(2), pp. 51–63. Chou, J. S. and Kim, C. (2009). A structural equation analysis of the QSL relationship with passenger riding experience on high speed rail: An empirical study of Taiwan and Korea. Expert Systems with Applications, 36(3), Part 2, pp. 6945–55. Chou, J. S., Kim, C., Kuo, Y. C., and Ou, N. C. (2011). Deploying effective service strategy in the operations stage of high-speed rail. Transportation Research Part E: Logistics and Transportation Review, 4(4), pp. 507–19. Chou, J. S., and Lin, C. (2013). Predicting Disputes in Public-Private Partnership Projects: Classification and Ensemble Models. Journal of Computing in Civil Engineering, 27(1), pp. 51–60. Chou, J. S., Tserng, H. P., Lin, C., and Huang, W. H. (2015). Strategic Governance for Modeling Institutional Framework of Public-Private Partnerships. Cities: The International Journal of Urban Policy and Planning, 42, Part B, pp. 204–211. Chou, J. S., Tserng, H. P., Lin, C., and Yeh, C. P. (2012). Critical factors and risk allocation for PPP policy: Comparison between HSR and general infrastructure projects. Transport Policy, 22, pp. 36–48. Chou, J. S., and Yeh, C. P. (2013). Influential constructs, mediating effects, and moderating effects on operations performance of high speed rail from passenger perspective. Transport Policy, 30, pp. 207–19. Council for Economic Planning and Developing (2014). Available online: www.cepd.gov. tw/m1.aspx?sNo=0017239 (accessed Jan. 3, 2014).

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Grimsey, D., and Lewis, M. K. (2002). Evaluating the risks of public private partnerships for infrastructure projects. International Journal of Project Management, 20(2), pp 107–18. Kao, T. C., Lai, Y. C., and Shih, M. C. (2010). Privatization Versus Public Works for High-Speed Rail Projects. Transportation Research Record: Journal of the Transportation Research Board, 2159(-1), pp. 18–26. Li, B., Akintoye, A., Edwards, P. J., and Hardcastle, C. (2005). Critical success factors for PPP/PFI projects in the UK construction industry. Construction Management and Economics, 23(5), pp. 459–71. Ministry of Finance (2013). PPP and Public Construction Operational Effectiveness (2002 to 2012). Government Report, Taiwan. Ministry of Finance (2013). “Promotion of Private Participation.” Available online: http:// ppp.mof.gov.tw/ppp.website/English/Introduction/View.aspx (accessed Dec. 24, 2013). MOTC (2010). Taiwan High Speed Rail (HSR) Projects, Bureau of High Speed Rail, Ministry of Transportation and Communications, Taiwan. PCC (2012). “Press Release: Diverse Introduction of Private Funds to be Invested in Infrastructure Projects (in Chinese).” Public Construction Commission, Taiwan. PCC (2013). “The Implementation Results of Government Procurement in 2012 (in Chinese).” Public Construction Commission, Taiwan. PCC (2014). Actuating the Win-Win-Win Code, Promotion of Private Participation in Infrastructure Project. Available online: http://ppp.mof.gov.tw/PPP.Website/English/ Downloads/File/BOThandbook.pdf>. (accessed Jan. 15, 2014). Tang, L., Shen, Q., and Cheng, E. W. L. (2010). A review of studies on Public–Private Partnership projects in the construction industry. International Journal of Project Management, 28(7), pp. 683–94. THSRC (2010). Latest Information: The Ridership Reach 3.6 Million High in this July (in Chinese, 2011-08-01), Taipei, Taiwan. Tseng, H. P., and Lin, C. (2011). A Century of Building, A Decade of Private Participation in China. The Chinese Institute of Engineers 100th Anniversary Special Commemorative Publication, Taiwan. Tserng, H. P., Ho, S. P., Chou, J. S., and Lin, C. (2014). Proactive Measures of Governmental Debt Guarantees for Facilitating Public-Private Partnership Project. Journal of Civil Engineering and Management, 20(4), pp. 548–60. Tserng, H. P., Russell, J., Hsu, C., and Lin, C. (2012). Analyzing the Role of National PPP Units in Promoting PPPs: Using New Institutional Economics and a Case Study. Journal of Construction Engineering and Management, 138(2), pp. 242–49. Zhang, X. (2005). Critical Success Factors for Public–Private Partnerships in Infrastructure Development. Journal of Construction Engineering and Management, 131(1), pp. 3–14. Zheng, S., and Tiong, R. (2010). First Public-Private-Partnership Application in Taiwan’s Wastewater Treatment Sector: Case Study of the Nanzih BOT Wastewater Treatment Project. Journal of Construction Engineering and Management, 136(8), pp. 913–22.

19 PPP development in Thailand Nakhon Kokkaew

Introduction Located in the center of mainland Southeast Asia, Thailand has a population of more than 66 million people, with a total area of approximately 513,000 km2, which is about the same land area as Spain or France. Prior to the 1960s, Thailand was primarily an agricultural country. In 1961, for the first time in its history, Thailand adopted a national economic development plan, a six-year plan, aiming to systematically shift the country’s economy from agriculture to industry by capitalizing on its low labor costs. Thailand’s GDP grew during the mid-1980s and 1990s on average by about 8–9 percent per year (see Figure 19.1). In part, this was because of the country’s commitment to a free enterprise economy and its openness to foreign investment. However, in 1997, the country experienced its worst economic recession to date, triggered by a foreign exchange crisis, known as the 1997 Asian financial crisis. This financial crisis brought the Thai economy to its knees, forcing the government to devalue its currency (Thai baht, THB) and to seek support from the IMF. Several years later, in the early 2000s Thailand’s economy began a modest recovery, thanks to the then government’s Keynesian approach of stimulating economic activities through public investment in infrastructure projects. This significantly helped to offset depressed spending in the private sector. For example, from 2002–2007, 20

20

15

15

10

10

5

5

0

0

–5

–5

–10

–10

–15 1995

–15 1998

2001

2004

Figure 19.1 Thailand GDP annual growth rate Source: Trading Economics and NESDB, Thailand

2007

2010

2013

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Nakhon Kokkaew

Thailand’s GDP growth averaged at about 5 percent. However, the global economic downturn in 2008 cut Thailand’s exports severely, which in turn caused its economic growth to fall to about 2 percent. Following the 2008 economic downturn, Thailand’s economy rebounded strongly with GDP growth reaching 7.8 percent and 6.4 percent in 2010 and 2012, respectively. This was in part due to loose monetary policy by the US Federal Reserve, which caused the inflow of capital into Thailand’s bond and equity markets. As the US Federal Reserve slowly unwinds its policy, increased capital outflow from the Thai markets can be expected. This may hinder the country’s economic growth because Thailand has employed debt-funded domestic demand since 2009 to promote economic growth. In 2013, Thailand experienced a mild recession, and in 2014 the Bank of Thailand projected that the GDP may grow a scant 3 percent. To counter the current recession, the Thai government plans to stimulate economic growth by increasing the level of infrastructure spending, especially in transportation projects. Another reason for the government’s move to invest in infrastructure is to improve the country’s logistics in order to increase its economic competitiveness in the Southeast Asian region. This is particularly important because the ASEAN Economic Community or AEC, similar to the EEC, is scheduled to take effect in 2015, which will intensify competitive pressures. Although its improved infrastructure has been a major driver of the country’s rapid economic growth over the past three decades, Thailand, according to a study by the World Bank, is still facing a series of infrastructure challenges. This includes the need to “catch up” with economic development (within the country and with the competing economies), to manage growing urban areas, and to ensure sufficient basic services for the poor. In the past, most of the infrastructure developments in Thailand were responses to demand rather than being forward-looking. The initial challenges of availability and accessibility have largely been met. The next step for Thailand, as suggested by the World Bank’s study, is to put more emphasis on quality of service delivery, management, and sound regulation. Thailand’s major infrastructure development strategies, according to the current National Economic and Social Development Plan of 2012–2016, are as follows: (1) development of high quality infrastructure and logistic systems to enhance the efficiency of domestic and international connectivity consistent with international standards; (2) energy security through an increased use of clean energy and alternative energy sources, leading to overall improvement in energy efficiency; (3) increased private participation in infrastructure investment and the provision of public services; and (4) thorough analysis of financial capacity, readiness for implementation, response to people’s needs, balance between quantity and quality of investments, distribution of infrastructure investment between rural and urban areas, the potential of the country for growth, and risk management. Thailand politics In spite of good progress towards economic growth, the political situation in Thailand remains a worry. A kingdom until 1932, Thailand has since been a

PPP development in Thailand

315

constitutional monarchy with a parliamentary form of government. The country’s politics is, however, plagued by instability. Despite strong support from almost all political parties in Thailand, investment in infrastructure has occasionally been disrupted, especially with regard to megaprojects such as mass rapid transit systems. This is largely due to the governing party’s intervention in, or revision of, investment plans to suit its interests and to cater to its political bases. To address this problem, there is now an attempt to decouple infrastructure investment plans from political intervention by establishing a national infrastructure investment plan backed by law. (That is, future governments would be compelled to carry out those projects that have been specified in the national investment plan.) However, there continues to be strong opposition from the public, academics, and some key government officials to this solution due to their concerns over increasing public debt levels, given that the majority of funding will come from borrowing. Public sector infrastructure procurement Thailand’s public sector usually finances civil works through: 1 2 3 4

5

fiscal budgets; retained incomes of state-owned enterprises (SOEs); local currency borrowing; external borrowing from international organizations, such as the International Bank for Reconstruction and Development (IBRD), Asian Development Bank (ADB) and Japan International Cooperation Agency (JICA); and Public Private Partnerships (PPPs).

Recently, Thailand has introduced a new kind of financing called an infrastructure fund. Unlike PPP projects, which are governed by the Private Investment in State Undertaking Act B.E. 2556 (A.D. 2013), infrastructure funds are regulated by the Securities and Exchange Commission (SEC) of Thailand. Both PPP concessionaires and government agencies (mainly state-owned enterprises) can raise new capital for the investment in infrastructure projects using infrastructure funds. In the near future, following the establishment of ASEAN infrastructure fund (AIF), Thailand will also be able to receive monetary support from the AIF for cross-border infrastructure projects and those infrastructure projects that are aimed at promoting greater regional integration.

Origins and drivers of PPP in Thailand Following the change in its constitution from absolute monarchy to constitutional monarchy in 1932, Thailand from the 1930s through the 1970s invested insufficiently in the country’s infrastructure. This may have been because the country was still in the early stages of governing and its politics were still in infancy. The country was ruled by military governments with only brief periods of democracy interspersed (Gomez-Ibanez, 1997). In 1988, a major shift occurred when the

316

Nakhon Kokkaew

Chat Thai Party under the leadership of General Chatichai Choonhavan won the election. Under Mr Choonhavan’s administration, Thailand began to invest significantly in its critical infrastructure such as highways, telecommunications network, and the development of the Eastern seaboard of Thailand. Mr Choonhavan’s government was unable to fund these infrastructure projects solely using the government balance sheet. Instead, the majority of the funding was from external borrowing. This led to a significant increase in the country’s public debt. In addition to foreign borrowing, the government invited foreign companies and Thai construction companies to invest directly in the country’s infrastructure, chiefly large-scale transportation projects in Bangkok which were meant to address severe traffic problems. Examples of early privately funded projects include the Second Stage Expressway (BTO) and the Bangkok’s BTS SkyTrain (BOT). One of the results of infrastructure-driven growth in the late 1980s was an increase in economic growth to a level never before experienced by the country: GDP grew about 10 percent on average. However, even such economic growth failed to keep Mr Choonhavan’s government in power for a full four-year term. This was mainly because there was strong criticism about the lack of transparency in the selection processes of private participants. After the end of his government in 1991, the then-interim technocratic government responded to the lack of transparency in private participation in state undertakings by enacting the first PPP legislation. This was named the Private Participation in State Undertaking Act in 1992 (the PPSU Act 1992). Motivation Since 1992, Thailand has increased its infrastructure spending using the government budget, which hit a record high share of 40 percent of all government spending in 1997, as shown in Figure 19.2. But, after 1997, the year of the Asian financial crisis, the government began reducing its infrastructure spending to as little as 12 percent of its fiscal budget in 2010.

40 35 30 25 20 15 10 1990 1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Figure 19.2 Thailand’s Infrastructure investment as a percentage of fiscal budget Source: The Ministry of Finance

2012

PPP development in Thailand

317

Despite the decrease of government investment spending from the late 1990s to the early 2000s, the country’s total investment had actually increased because private investment more than filled the financing gap (see Figure 19.3). For example, between 1999 and 2011, investment as a percentage of the country’s GDP ranged from 18 to 23 percent. Two-thirds of that total was from private investment. Despite its improved infrastructure, Thailand still faces challenges in terms of the quality and the distribution of infrastructure. For example, according to the World Economic Forum, in 2013, the country’s overall infrastructure is ranked sixty-first in the world from 148 countries reported, and eleventh of countries reported in Asia. Today, there is an effort by the government to speed up investment in order to improve the quality of the country’s infrastructure, to reduce logistics costs, and to enhance regional connectivity. It is estimated that about THB4 trillion is needed for the country’s megaprojects over the next seven years (2012–2013) (Lee, 2013a). This has motivated the government to explore virtually all options of finance for these megaprojects, beyond borrowing or bond issuance. Two contemporary forms of private participation in Thailand are Public Private Partnerships (PPPs) and infrastructure funds (IFs). For government borrowing, the capacity of the government to borrow is governed by the country’s Public Debt Management (PDM) Act B.E. 2548 (A.D. 2005) and is overseen by the Public Debt Management Office (PDMO) under the Ministry of Finance (MOF). The PDM Act requires that public debt does not exceed 60 percent of GDP (PDMO, 2013). The reason for this limit is mainly to control government borrowing, since the country suffered from excessive borrowing in the 1990s, which contributed to the 1997 Asian financial crisis. The country’s public debt level over the past decades is shown in Figure 19.4. Public debt to GDP in 2012 was about 45.5 percent, which is well below the capped level of 60 percent. Accordingly, there is still room for more public borrowing. However, as Thailand currently experiences an economic slowdown, 45 40 35 30 32

25

23

20 15

Public investment 12

11 12 13 14 15 17 17 17 17 17 15 16 17

10 5

10 9

9

7

7

6

6

6

6

6

6

6

6

5

5

99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11

5

19

97 98 19

19

19

96

0

Figure 19.3 Thailand’s total investment per GDP Source: Thailand’s National Economic and Social Development Board

Private investment

318

Nakhon Kokkaew

09

08

10 20 11 20 12

20

20

06

05

04

03

02

01

07

20

20

20

20

20

20

20

20

9

8

7

00 20

19 9

19 9

19 9

19 9

6

65 60 55 50 45 40 35 30 25 20 15 10

Figure 19.4 Thailand’s public debt level as a percentage of GDP

increasing the level of public debt could expose the country to financial risks such as credit ratings downgrades (Thailand’s credit ratings in 2013 by Moody’s and S&P stand at Baa1 and BBB+, respectively). Reduction in the government debt load is another reason why the government is encouraging private investors, both domestic and foreign, to participate in the country’s infrastructure developments. To demonstrate the government’s commitment to promoting private participation in the country’s infrastructure investment, the Thai government has recently reformed its PPP law. In addition, the country has launched a new initiative of quasi-equity instruments, or infrastructure funds, which are potentially an important catalyst for future PPP projects in Thailand. Infrastructure needs and gaps Presently, the government is trying to stimulate economic growth with its ambitious infrastructure spending plan and major infrastructure projects, mostly transportation projects such as urban mass transit, high speed trains, and intercity motorways. The government units responsible for the country’s fiscal budget, the Bank of Thailand, and the agency responsible for economic planning, the National Economic and Social Development Board (NESDB), have provided reports on infrastructure needs and gaps. The Bank of Thailand has estimated that the country would need to invest at a level of 5.5 percent of GDP (about THB 0.5 trillion per year) in order to improve the quality of its infrastructure to the average of countries in the Asia Pacific region in the next ten years. It has also stated that the government can only afford infrastructure investments at 3.5 percent of GDP; the remaining 2.2 percent of GDP must come, if at all, from private sources. The NESDB, in turn, recently estimated that Thailand will need to invest THB 4.2 trillion in infrastructure projects during the period of 2014–2020 in order to compete in the current global market. Of this total, 71 percent will be allocated to

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transportation projects, 22 percent to energy projects, 5 percent to utility projects, and 2 percent for communication projects, as presented in Figure 19.5. Of this amount, THB 2.2 trillion will be raised mainly through bond issuing. The financing gap of THB 2 trillion will be financed using the government budget, PPPs, and infrastructure funds (Lee, 2013a). Over the seven-year period (2014– 2020), it is estimated that such infrastructure investment will boost GDP growth by an additional 1 percent every year. In Thailand Infrastructure Report Q4 2013 by Business Monitor International (BMI), it is estimated that the government is likely to make a direct investment of 70 percent of the planned infrastructure scheme for seven years, with the remaining 30 percent to be invested by the private sector. For example, in upgrading the country’s railway, the government plans to make investments in civil infrastructure and the private sector will invest in the rolling stock of the railway system. Other attractive forms of procurement The quasi-equity instrument known as the infrastructure fund is a new form of procurement that could fill the financing gap in Thailand. The infrastructure fund was first introduced in 2011. The fund is a type of mutual equity fund established to mobilize funds from general and institutional investors for investment in Thailand’s infrastructure projects. Infrastructure funds are believed to provide some distinct advantages over projects financed solely by state-owned enterprises through budget borrowing or bond issuing and/or private investor financing (Sethsathira et al., 2012). The first advantage is that infrastructure funds provide project developers with alternative sources of funds for their projects and thus reduce their borrowing needs. Another advantage is that both retail and institutional investors can invest in the country’s infrastructure projects in the form of “investment units.” Communication: 2% Utility: 5%

Energy: 22%

Transportation: 71%

Figure 19.5 Allocation of THB4.2 trillion in Thailand’s plan for infrastructure investment from 2014 to 2020

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Infrastructure funds are governed by the Securities and Exchange Commission (SEC). Both Thai state-owned enterprises and concessionaires in PPP projects may use infrastructure funds for raising new capital for the following types of infrastructure projects: 1 2 3 4 5 6 7 8 9 10

rail transit systems; water supply; electricity; deep sea ports; road/expressway/toll-way/concession ways; airports/airfields; waterworks; communications; natural disaster prevention systems; and alternative energy.

The fund can invest in infrastructure projects in a variety of ways, including by investing directly in the assets themselves, by purchasing the asset, or by transferring the asset into the fund. The key concept of the infrastructure fund is that a Project Company or Special Purpose Vehicle (SPV) can sell “rights to future revenues” and project asset to investors in the form of investment units of the infrastructure fund. Proceeds from the sale of rights to future revenues will be treated as revenues of the Project Company or SPV, which then can use this new capital to expand its operation or to build a new facility. The main goals of introducing the infrastructure fund are to exploit the Project Company’s experience, technology and expertise in managing project and to introduce new players (such as financial institutions, pension funds, and retail investors) into infrastructure investment. Investors, on the other hand, who currently experience very low yield in the money market, may buy into this type of assets, which potentially provide long term and stable yields through dividends and may additionally profit from the growth of the assets themselves through capital gains. The typical structure of an infrastructure fund is illustrated in Figure 19.6. Asset Management Company Dividends/ capital gains Investors Investment in fund’s units

Infrastructure fund

Future revenues

Infrastructure projects

New capital Fund supervisor

Figure 19.6 Typical structure of infrastructure funds

Project owners

new projects

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Examples of infrastructure funds that have achieved financial closure include a $ 2.1 billion BTS Mass Transit Growth Infrastructure Fund (BTSGIF) backed by fare revenues from Bangkok’s SkyTrain, a $2 billion Amata B.Grimm Power Infrastructure Fund (ABPIF), and True Telecommunications Growth Infrastructure Fund (TRUEIF), which raised $1.8 billion in 2013 for investment in telecom towers and fiber-optic network across Thailand. Although the country’s new PPP Act was enacted into law in 2013 and aims to increase investment in PPP projects, market participants expect infrastructure funds to play the biggest role in financing infrastructure projects in Thailand during the coming years (Lee, 2013b). However, because of the newness and complexity of infrastructure funds, the success of infrastructure funds in Thailand will depend largely on the performance of existing funds. Moreover, one concern over infrastructure funds in Thailand is that the real asset or the project itself is not transferred to the funds. Thus, the value of the fund will be depreciated over time, becoming zero at the end of fund’s life.

Case Project: Bangkok BTS Mass Transit Growth Infrastructure Fund The Bangkok Transit System Corporation (BTSC), a project company, was formed in 1992 to develop an elevated transit system known as BTS SkyTrain, the first private mass transit in Thailand, to reduce congestion in Bangkok under a 30-year, build-operate-transfer (BOT) arrangement, with an estimated cost of $1 billion. The government-shouldered major responsibilities such as providing the right of way and approving fare increases, while the private sector is responsible for design, financing, construction and operation of the project. The project began operations in 1999. More than a decade after the operation began, the profit of the project company running the BTS SkyTrain has increased significantly because of strong growth in ridership, which almost quadrupled over ten years (total ridership in 2000 was about 55 million, while in 2013 it increased to 200 million). The success of the BTS SkyTrain bolsters the BTSC’s confidence in extending its route. The extension, of course, requires new capital from lenders, shareholders or both. Instead of raising new capital from lenders and shareholders, the project company turned to infrastructure funds as the preferred source of the required capital. The fund successfully raised $2.1 billion from investors in 2013 through the Stock Exchange of Thailand, and is listed as BTSGIF. The structure of the BTSGIF fund is depicted as shown Figure 19.7. BTSGIF invested in future net revenues (farebox revenue minus related operating costs and capital expenditure) of BTS SkyTrain to be generated from the 23.5-km core network. The management company and fund supervisor of the fund are BBL Asset Management Company and Standard Chartered Bank PLC, respectively. Under the contract, the fund also agrees to pay incentives to the Project Company BTSC so as to motivate the Project Company to operate the project more efficiently and to control O&M costs.

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Other shareholders

2.54%

97.46% 33.33%

Manage and operate BTS SkyTrain System

Bangkok Mass Transit System PLC (BTSC)

Dividend Limited gurantee

66.67%

Incentive fees

Standard Chartered Bank (Thai) PLC (as Fund Supervisor)

Fund Supervisor Appointment Agreement

Proceeds from sale of Sale Revenue Sale Revenue

Public unitholders

The Fund

Fund scheme prospectus

BBL Asset Management Company (as management company)

Investment advisory committee

Figure 19.7 The structure of BTSGIF Source: Adapted from BTSGIF Prospectus

Why the choice of PPP Limited tax revenue and the debt ceiling on public finance means that Thailand cannot fund investment using conventional procurement methods. For purposes of comparison, Thailand’s entire tax revenues in 2011 was about $43 billion, and it is estimated that $53 billion is needed for investment in surface transport infrastructure alone over the coming decade. This financing gap increasingly requires alternative financing methods such as PPPs. In the past, Thailand, like many countries, employed PPPs for the reason that it could not fund all needed infrastructure projects solely by using its balance sheet. Recently, however, it has become evident that that the private sector tends to provide better services to the public, whereas government agencies and stateowned enterprises have struggled to improve the quality of their services, despite receiving a substantial amount of the financial support. Indeed, some government agencies such as the State Railway of Thailand (SRT) face a chronic budget deficit. For instance, the Airport Rail Link, connecting Suvarnabhumi Airport and central Bangkok, operated by SRT Electrified Train (SRTET) under the SRT, has been compared unfavorably with other mass rapid transit systems such as the BTS and the MRT. This perception of government agencies’ inefficacy helps reinforce the belief in Thailand that private companies may often be better placed than the government when it comes to providing infrastructure.

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Despite good reason for using PPP, the country sometimes falls into the common PPP trap of shunting projects that do not fit the government budget into the PPP model without careful study. One example of this trap is the unsuccessful implementation of Bangkok Elevated Road and Train System (BERTS). The project was approved and constructed without a thorough project study, and the project was terminated during construction in1998. Opposition and support Unlike privatization, which faces strong opposition, PPPs in Thailand have proved to be a viable tool for infrastructure developments, and they have been targeted less by opponents. Still, the public and NGOs continue to oppose PPPs in hydropower projects and fossil fuel power stations such as coal-fired power plants. In the domain of infrastructure projects such as toll roads and urban mass transit, PPPs have been particularly welcomed, as it is appreciated that the private sector is better equipped to manage such projects. Moreover, the incompetency of some state-owned enterprises in providing services helps boost positive attitudes towards PPPs. Despite the public’s support of these types of infrastructure projects, there is a concern about their affordability and accessibility for low-income people. Moreover, private investors are more likely to cherry-pick profitable projects, leaving unprofitable projects for the government to tackle. One of the consequences is that many PPP projects in Thailand are concentrated in urban and economic areas where demand for services is high, and well-to-do customers can afford the services. This issue has prompted the NESDB to outline in the current national economic plan the need for equality of infrastructure investment distribution between rural and urban areas. Policy outcomes Outcomes of PPP policy in Thailand have been mixed. Despite government efforts to promote PPP projects, the pace of PPP implementation is slower than it should have been. This is largely due to the old PPP law, the PPSU Act 1992, which complicated the approval process. However, the success of certain PPP projects such as the BTS SkyTrain has bolstered the confidence of government and private entities. The government, in response to criticism about the outdated PPP law, reformed and passed a new PPP law. Meanwhile, current investors in such SPVs as the BTSC, a BTS SkyTrain operator, are optimistic enough to expand its operation, based on past performance and the newly improved PPP law. The new PPP law has only recently been enacted, but it is expected that there will be a change in policy outcomes. If the country gets the first PPP projects under this new PPP law right, it will send a positive signal to the private sector and reinforce confidence in the country’s policy on PPP.

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Policy framework for PPP The country’s leading agency responsible for the development and implementation of PPP policy is the State Enterprise Policy Office (SEPO) of the Ministry of Finance (MOF). The SEPO and the Bank of Thailand have succeeded in improving PPP implementation process by revising the PPP law, making the approval process more transparent and streamlining PPP processes. Under the new PPP law, a clear definition of what is considered to be a PPP project has been finally given. The country is also developing a “PPP Master Plan” which outlines the pipeline of strategic PPP projects that the government is committed to procure in the future. One innovation that may support the country’s PPP implementation is the introduction of infrastructure funds. In Thailand, PPPs under the Act on Private Investment in State Undertaking B.E. 2556 (A.D. 2013) are defined as “jointly investing with a private individual by any means or entrusting a private individual to invest solely by means of licensing or granting concession or granting rights in any manner whatsoever.” The value of projects considered to be PPPs under the PISU Act 2013 is estimated at 1000 million baht or more. In the past, the main impetus to PPP implementation in Thailand was that the government was unable to meet the demand for infrastructure using conventional public finance. Accordingly, opportunities were given to the private sector to participate in Thailand’s public undertakings, chiefly in large infrastructure projects such as the Don Muang Tollway, a 21-kilometer toll road from central Bangkok to Don Muang Airport and the Second Stage Expressway System, a 38.5-kilometer elevated toll road network. Although PPP is seen as an alternative approach to infrastructure procurement, the supervising agency is now required to compare the value and effectiveness of traditional government procurement methods with PPP approaches, based on the concept of value for money (VfM). This may significantly improve PPP project selection in Thailand. Moreover, the practice falls in line with the deeper goal of PPP policy, which is efficiency. As stated in a study report by the Asian Development Bank (2007), the use of PPP should not merely serve to bypass public debt constraints to allow infrastructure to be built sooner. PPP introduces the possibility of taking the best of both: the low borrowing cost of a country, combined with the more efficient management, implementation, operation and maintenance of the private sector. This is especially true for Thailand, which is able to borrow at historically low interest rates, but which suffers from structural and efficiency problems within government agencies. Government support To attract private investment in infrastructure, government support may be needed, especially in Greenfield projects for which risks are difficult to quantify and mitigate. Under the PISU Act 2013, the only monetary support for PPP projects is through the project development fund (PDF), which is still in the process of establishment.

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Project risk allocation Risk allocation is key to the success of any PPP project. The government in some projects assumes responsibility in land acquisition. For example, the government was responsible for land acquisition of BTS SkyTrain, MRT Blue Line, and MRT Purple Line. Compared with other countries such as India, government retention of responsibility for land acquisition in Thailand has greatly helped avoid delays in construction. This is because of eminent domain powers: the government is allowed to acquire land or immovable assets for public utilities or in the public interest according to the Expropriation of Immovable Property Act B.E. 2530 (A.D. 1987). In the transport sector the government transfers all operational risks such as ridership to the concessionaires. This risk allocation practice may affect future PPP projects such as high-speed trains in which demand uncertainty may pose a significant threat to a project’s financial success.

Financial context of PPP In the past, international banks and multilateral institutions such as the Asian Development Bank and the International Finance Corporation (IFC) have led the financing of most PPP projects in Thailand, with local commercial banks and developers filling the financing gap. For example, in the case of BTSC, the German’s development bank KfW alone loaned $424 million, while local Thai banks loaned $548 million. The IFC also gave $70 million in assistance. Recently, despite the 2008 financial crisis, major Thai commercial banks have managed to maintain good liquidity. Four major Thai banks that are actively engaging in project finance are Bangkok Bank, Kasikornbank, Siam Commercial Bank, and Krung Thai Bank. Good levels of liquidity for these major banks provide them with opportunities to increase their roles in the country’s PPP projects. In addition, as international banks lost their appetite for South East Asian project financing, Thai and other regional banks have stepped in to fill the space. Syndicated loans are commonly used to finance large-scale PPP projects. With increasing government support for renewable projects, the Thai banking sector has begun to take the lead in financing. For example, Kasikornbank, a local Thai bank, launched a 5-billion baht solar power infrastructure fund in order to finance up to seven solar farm projects. In addition, it is now likely that PPPs in Thailand will go hand-in-hand with infrastructure funds, with the banking sector leading implementation of the funds. The government is also trying to increase the level of the banking sector’s participation in developing PPP projects through market-sounding efforts. For instance, the banking sector is invited to engage in the government’s market sounding in high-speed rail projects in order to seek comments on suitable PPP schemes for the projects and to use the comments and feedbacks received to further refine the project’s keys aspects. International financial institutions (e.g., the World Bank and the IMF) and international bodies (e.g., the World trade Organization or WTO) strongly

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influence Thailand’s PPP policies and institutional frameworks. For example, based on complaints from international investors, the WTO (2012) urged the Thai government to reform its PPP law. The government took heed of the WTO’s suggestion and reformed the law in 2013.

Institutional framework Thailand has a long history of deploying PPPs for its infrastructure investments. For the purpose of classification, PPP developments and implementation in Thailand can be divided into three generations: (1) before 1992; (2) 1992–2013; and (3) from 2013 to present, as illustrated in Figure 19.8. In the first generation, the ability of the private sector to participate in public projects depended on the discretion of a front-line ministry and final decision by the concerned minister. There were no specific rules. In the absence of specific rules governing PPP projects, results varied widely. Examples of PPP projects undertaken in this period include Don Muang Tollway, a 21-kilometer toll road from central Bangkok to Don Muang Airport, the First Stage Expressway System, the Second stage Expressway System, and Bangkok Elevated Road and Train System (BERTS) also known as the “Hopewell project,” which was suspended during construction of the project in 1992, and eventually terminated in 1998. In 1992, Thailand’s first PPP legislation, called the Act on Private Participation in State Undertaking BE 2535 (the PPSU Act), was enacted. Examples of PPP projects implemented under the PPSU Act 1992 include Bangkok’s BTS SkyTrain, underground mass rapid transit (MRT), and telecommunications operated by the concessionaires AIS and TelecomAsia (now True Corp.). To a certain extent, the 1992 The first PPP law, the Private Participation in State Undertakings (PPSU) Act B.E. 2535, was enacted Examples of projects: • Bangkok BTS SkyTrain • Underground MRT • AIS Mobile, Telecom Asia No PPP Law

PPSU Act 1992

Examples of projects: • Don Muang Tollway • Second Stage Expressway System • Bangkok Elevated Road and Train System (BERTS)

2013 Enactment of the new PPP law, the Private Investment in State Undertaking (PISU) Act B.E. 2556 PISU Act 2013 Examples of projects: • High speed rail (HRS) • Extension of BTS SkyTrain network • Extension of underground MRT network • Intercity motorway

Figure 19.8 PPP developments and implementation in Thailand

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327

PPSU Act helped improve the PPP environment in Thailand, particularly in preventing corruption related to project screening and selection of the concessionaire. However, over two decades after its first implementation, the PPSU Act 1992, essentially an anticorruption measure, appeared to be an obstacle rather than a promoter of PPP implementation in Thailand. For instance, projects undertaken under the law were hobbled by its bureaucratic red tape, which prolonged the approval process. This was considered a major cause of delay in implementing PPP projects in Thailand. In recognition of this, a new PPP law called the Act on Private Investment in State Undertaking B.E. 2556 (A.D. 2013) (the PISU Act 2013) was proposed and then enacted in 2013. In this third generation, the new PPP law is now favorably viewed by both academics and active investors, as it improves the regulatory framework for implementing PPP projects in Thailand, at least from a theoretical point of view. Major challenges faced by the government in implementing PPP projects under the PISU Act 2013 include: (1) the establishment of Central PPP Unit, similar to the Private Investment Center of Korea or Partnerships UK; (2) the development of PPP Master Plan; (3) the creation of Project Development Fund (PDF) to aid project feasibility studies; and (4) the inclusion of contract amendments and guidelines for post-contract project management. Currently, the State Enterprise Policy Office (SEPO) under the Ministry of Finance (MOF) acts as the central PPP secretariat office. In fact, the PISU Act 2013 was prepared by the SEPO and the Bank of Thailand. The SEPO is currently in charge of setting up the Central PPP Unit and in selection of PPP Committee. Government approval processes of a PPP project under the PISU Act 2013 can be divided into three stages: (1) submission; (2) implementation; and (3) supervision and monitoring (see Figure 19.9). Compared with the PPSU Act 1992, the approval process of a PPP project under the new PPP law is more streamlined. The time for the whole project approval is expected to be just about a year. This is largely because time limits are imposed on several approval processes. For example, after the responsible project agency submits a study report of a proposed project, the corresponding line ministry has at most 60 days to decide whether or not to approve the project being proposed. Unlike most developed countries such as the United Kingdom, Australia and New Zealand which have standardized PPP contracts, Thailand has not yet developed standardized PPP contracts. However, under the PISU Act 2013, the SEPO has been charged with responsibility to develop standard PPP contract terms. The tentative standard contract will include the following nine subjects (Nonthasoot, 2012):

• project duration; • the nature of service and proceedings of the project; • service fees and charges, methods of payment for the private party and the •

project agency; cases where modifications can be made to the nature of the service under the project, change of the contract parties, contractors, subcontractors, and transfer of claims;

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• assets of the project, including ownership, and the calculation of project value; • force majeure and implementation of the project in the case of force majeure, • • •

including payment for damages; termination, procedure for determination and compensation for damages; guarantee, insurance and compensation for damages sustained; and dispute settlement.

(1) Project submission process Project agency Project of greater than 1000 million baht

Responsible Ministry (≤60 days) Resubmit Project agency State Enterprise Policy Office Disagree (≤60 days)

Commitee of Private Investment in State Undertaking Approved (2) Project implementation process

Invitation for private participation

Private entities

Appointed Committee (selection of a private entity Responsible Ministry (≤90 days)

State Enterprise Policy Office (≤90 days)

Council of Ministers (final approval) Not approved Approved (3) Supervision and monitoring Projection construction and operation

Figure 19.9 Approval process of proposing PPP projects under the PISU Act 2013 (Kokkaew et al., 2013)

Approval process ≈ 7–12 months

Project studies and analyses in topics specified by the Committee of Private Investment in State Undertaking

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In some PPP contracts, a non-compete clause (NCC) has also been included. The inclusion of this provision proved to be trouble for the country in practice. For example, recently the German construction company Walter Bau AG which had invested in the Don Muang Tollway Plc. (the project company of the Don Muang Tollway), filed charges against the country for failing to prevent the construction of alternative and toll-free roads. The German company was awarded 36 million euros in damage caused by Thailand’s interference with the project’s return. As for standardizing organizational structures, Thailand is still in the process of establishing a central organization called the PPP Central Unit responsible for developing guidelines and standards for further PPP developments and supervising project implementation. In terms of the influence of the country’s legal system on PPP policies and implementation, it is unfortunate that the current legal system does not provide good direct support for PPP implementation. For example, under the current law, the country cannot issue any direct guarantee or monetary support such as minimum revenue guarantees (MRGs). Therefore, PPP-related legal issues need to be studied so as to facilitate PPP implementation in the country.

Organizational structure Private participants in the country’s PPP market are construction companies, developers, and financial institutions. Two leading Thai construction companies are CH. Karnchang and Italian-Thai Development. Active international construction companies in the country’s PPP projects include the Japanese company Kumagai Gumi and German companies DYWIDAG and Walter Bau AG. Multilateral financial institutions are, for example, the Asian Development Bank and the IFC. Private developers include Thanayong and BECL. The public agency responsible for overseeing PPP policies and activities in Thailand is the State Enterprise Policy Office (SEPO). However, under the PISU Act 2013, a governmental body called the Central PPP Unit, similar to the Private Investment Center of Korea or Partnerships UK, will fully take over responsibility. With the prime minister as chair, the committee of this PPP unit comprises 15 members, including the minister of finance (MOF), the undersecretary of the MOF, the secretariat of the National Economic and Social Development Board (NESDB), the director of the budget bureau, the director of the public debt management office, and five expert members, three of whom must have expertise in the field of accounting and finance, law, and engineering. The PPP committee is charged with four major tasks: (1) preparation of the PPP Master Plan for cabinet approval; (2) review of project proposals and initial endorsement of such proposals; (3) development of by-laws mandated by the law, such as the requirement for a feasibility study; and (4) interpretation of issues related to the PISU Act’s provisions (Nonthasoot, 2012).

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Extent of use/adoption of PPP PPPs in Thailand are particularly prevalent in the energy sector, telecommunication sector, and transport sector. The appropriate type of PPP arrangements depends largely on the nature of the project being implemented and the relevant government authority. The most common types of PPP arrangement in Thailand are BOT, BTO, BOO, and DBOM. In the energy sector, the Electricity Generating Authority of Thailand (EGAT) invests THB 363,000 million in PPP power generation projects with independent power producers (IPPs). Under the power purchase agreement between the EGAT and IPP, all electricity generated by the IPP is sold to the EGAT only. Most of the PPP power generation projects in Thailand are under Build-Own-Operate (BOO) arrangements (Susangarn, 2007). In the telecommunication sector, the National Telecommunication Commission (NTC), an independent regulatory body, is responsible for issuing licenses to private service providers. Currently, the country is under a build-transfer-operate or BTO agreement with three mobile service providers: Advance Info Service (AIS); Total Access Communication (DTAC); and TRUE. In the transportation sector, the Department of Highway (DOH), the Expressway Authority of Thailand (EXAT), the Mass Rapid Transit Authority of Thailand (MRTA), and the State Railway of Thailand (SRT) under the Ministry of Transport have been involved in granting concessions to private sector participants. The DOH entered into a 25-year BTO contract with Don Muang Tollway Plc., and the EXAT granted a 30-year BTO contract to BECL, a project company. Currently, there is a huge opportunity for private participation in Thailand, as the government is to increase infrastructure spending, especially in transportation projects, with the goal of improving the quality of services and reducing logistics costs. Government, on the other hand, has shown a strong commitment to PPPs by improving the PPP regulatory framework, specifically in streamlining approval and implementation processes of PPP projects. Moreover, there are more options for private investors who may want to invest in Thailand’s infrastructure indirectly via infrastructure funds, which are mainly owed by the project sponsors of existing PPP projects, who may use the new capital for financing the expansion of its project. Besides allowing private investors to gain a stable and relatively attractive return (expected to yield about 5–6 percent per annum), investing in infrastructure funds can also benefit from tax waivers for dividends and capital gains over a fixed timeframe. These stable revenue-producing projects should be attractive to such funds as mutual funds and pension or retirement funds.

Types of PPPs Based on the World Bank categorization, PPP can be divided into: a

Concessions. A private entity takes over the management of a state-owned enterprise for a given period during which it also assumes significant investment risk.

PPP development in Thailand b

c

d

331

Management and lease contracts. A private entity takes over the management of a state-owned enterprise for a fixed period while ownership and investment decisions remain with the state. Greenfield projects. Has four categories: (i) build, lease, and own; (ii) build, own, transfer, or build, own, operate, transfer; (iii) build, own, and operate; and (iv) merchant project, where a private entity or a public–private joint venture builds and operates a new facility for the period specified in the project contract). Divestitures. Full (100 percent) or partial government transfers of the equity where a private entity buys an equity stake in a state-owned enterprise through an asset sale, public offering, or mass privatization program.

The total number of PPP projects by type and by total investment in Thailand is shown in Table 19.1 and 19.2, respectively. Table 19.1 Total number of projects by type and primary sector Sector

Concession

Divestiture

Greenfield project

Management and lease contract

Total

Energy

0

4

76

0

80

Telecom

0

0

8

0

8

Transport

4

1

9

3

17

Water and sewerage

9

1

5

1

16

13

6

98

4

121

Total Source: The World Bank

Table 19.2 Total investment in projects by type and primary sector (US$ million) Sector

Concession

Divestiture

Greenfield project

Management and lease contract

Total

Energy

0

2,176

16,380

0

18,556

Telecom

0

0

18,416

0

18,416

Transport

77

439

3,060

0

3,576

Water and sewerage

104

61

658

7

831

Total

181

2,676

38,515

7

41,378

Source: The World Bank

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Current ongoing PPP projects in Thailand included:

• Under feasibility study: High speed train ($ million), MRT dark green line, • • •

inter-city Bang Pra In – NakhonRatchasima ($2600 million), Bang yai – Kanchanaburi Motorway ($1500 million). In private section process: MRT blue line (extension), MRT purple line, and Sri-Rat outer ring Expressway ($786 million). Contract awarded: MRT dark red line ($712 million), BTS dark green line ($912 million). Under construction: There are many project under construction, including, MRT purple line ($1950 million), the extension of MRT blue line ($2740 million), BTS light green line ($240 million).

Examples of planned PPP projects include intercity motorways (e.g., Hat Yai-Sadao Motorway PPP project), urban rail transits in Bangkok, and the construction and operation of high-speed trains.

Changes in PPP usage and extent over time Historically, the country employed PPP mainly in energy, telecommunication, and transport sectors. In the energy sector, there is a shift of private participation from conventional electrical generation to renewable energy production. Government subsidies such as Feed-in-tariff (FIT) for very small power producers (VSPPs) could help attract more private investors into the country’s renewable investment. In the transport sector, PPP will increase its role in the development of mass rapid transit systems in Bangkok. Change nature of country risk profile and their effect on PPP In a BMI report on Thailand’s infrastructure, the country received poor scores for policy continuity and legal framework – attributable primarily to political turmoil and the lack of creditors’ legal rights to facilitate lending, respectively. In the past, investments in infrastructure have been disrupted, especially megaprojects such as mass rapid transit systems in Bangkok. This is mainly due to the governing’s party intervention in, or revision of, investment plans to suit its interests and cater to it political base. It is thus likely that the increased political instability of late 2013 to 2014 may significantly affect or delay the awarding of PPP contracts. Thailand’s fiscal position, compared to other countries in the region, is still benign with respect to fiscal risk. However, the country’s public debt is projected to grow, so the country’s increasing fiscal imbalance could expose the country to greater credit risk, making it more costly for the government to borrow and to invest jointly with private entities in planned PPP projects. However, as already mentioned, the country has improved its PPP law, making the investment in PPP projects easier. This has improved the country’s regulatory risk profile.

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Sectorial and project types changes PPP projects in Thailand have been actively implemented in energy, transport, and communication sectors. In the future, energy and transportation will be dominant players for PPP. In the energy sector, a growing number of electrical generation projects will focus on renewable energies. As for the transport sector, PPP will be mainly utilized for mass rapid transit systems, instead of elevated toll roads. Impact of financial crisis and special provisions arising from this to cope with the crisis The 1997 Asian financial crisis led to decreased private investments, as well as a decline in PPP activities in Thailand. In the recent global financial crisis of 2008, there was scant impact of the crisis on the country’s PPP projects. No special provision was therefore proposed to cope with the 2008 global financial crisis. Key changes in government and government priorities – impact on PPP development The priority seems to be for transportation and energy projects, as the country is positioning itself to become the logistics hub of the region, and as the country’s economic growth requires more energy consumption. Notwithstanding attempts to finance certain transportation projects such as high-speed trains using government borrowing in order to speed up the construction and operation of the projects, the country’s Public Debt Management Act 2005 makes it harder for the government to finance these projects with borrowed money. An alternative option is to implement these projects under PPP arrangements. However, the financial viability of these projects is still questionable because of the overly rosy prediction of ridership. To attract private investors to invest in these Greenfield projects, government support and risk sharing is essential for financial closure.

Future developments Outlook on future infrastructure needs In order to improve the quality of the country’s infrastructure to at least the average level of the Asian Pacific countries, the Bank of Thailand estimated that a total of THB 5.5 trillion is needed for infrastructure investment, as shown in Table 19.3 and Figure 19.10. Thailand’s GDP in 2012 was THB 11.375 trillion. Therefore, the investment of THB5.5 trillion represents roughly 50 percent of GDP, so it would be impossible for the country to finance these projects using its own budget and borrowing, even combined. If the investment is scheduled to be spent on a ten-year plan, the size of the needed investment as a share of GDP would fall to about 5 percent. According to the Bank of Thailand about 2 percent of GDP has already been allocated for infrastructure programs during the period of 2010–2015. Therefore, the country would need an additional of 3 percent of GDP from retained earnings of SOEs and PPPs.

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Table 19.3 Expenditure on infrastructure in Thailand over the next 10 years Thailand

Asia Pacific

Needed investment (million baht)

Electricity (kWh/person)

2,055.5

4,783.3

3,023,325

Road (km/sq.km)

0.350

0.670

2,058,542

Railway (km/sq.km)

0.009

0.014

69,255

Electric locomotive (km/1000 sq.km)

0.090

0.172

143,684

Telephone mainlines (number/1000 person)

104.0

380.0

73,609

Telephone mobile (number/1000 person)

920.0

974.0

7,201

Internet (number/1000 person)

209.0

696.0

129,883

Total needed investment

5,505,499

Source: Bank of Thailand (BOT)

Telephone mobile: 0.13%

Internet: 2.36%

Telephone mainlines: 1.34% Electric locomotive: 2.61% Railway: 1.26% Road: 37.39%

Electricity: 54.91%

Electricity Road Railway Electric locomotive Telephone mainlines Telephone mobile Internet

3,023,325 2,058,542 69,255 143,684 73,609 7,201 129,883

Figure 19.10 Future infrastructure needs for Thailand (million baht)

Future political, social and economic developments impact on PPP It is undeniable that political tension in Thailand in recent years, which may extend a few more years, may have a severe impact on new PPP projects. However, the country’s economic expansion and the region’s economic integration in 2015 requires investment in infrastructure. This would to some extent affect PPP projects in Thailand. The demand for better social welfare such as in healthcare also puts a strain on government. With the new PPP law broadening the scope of PPP application to social infrastructure, it may be expected that new healthcare systems will be implemented as PPPs.

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Opportunities for local and international investors There is a huge opportunity for both local and international investors to participate in the country’s PPP projects. They may become direct players in PPP projects, or they may invest in “infrastructure funds” issued by the current Project Company, which can use the money for new PPP projects. This latter approach could attract new investors, both local and international, into the country’s PPP projects, as the old players already dominate the existing PPP projects in Thailand. Current PPP players in Thailand include commercial banks and construction contractors. Development strategy Critical to the success of the PISU Act 2013, the country’s new PPP law, is the establishment of PPP Central Unit responsible for overseeing PPP policies and activities in Thailand. This PPP Unit is to be charged with the creation of the country “PPP Master Plan,” which is to serve as a blueprint for the country’s PPP implementation. Projects under the PPP Master Plan will be given highest priority. To speed up the study of these PPP projects in the Master Plan, a project development fund (PDF) will be set up as a revolving facility to aid the development of proposed PPP projects. Targeted at raising 2 billion baht, the fund will be used to sponsor feasibility studies and terms-of-reference drafts prior to the approval of projects. The above-mentioned strategies are designed to improve and expedite the implementation of PPP projects in Thailand.

PPP research and development agenda Thailand has employed PPPs mainly for large economic infrastructure projects, which tend to be concentrated in the economic regions such as Bangkok and Eastern seaboard. However, the engine of economic growth in the future lies in the utilization of the country’s resources in the upcountry. Implementing PPP in this new territory may prove to be difficult, but, with appropriate government support, it can help government-driven development reach its full potential. Moreover, novel risk allocation between the government and the concessionaire needs to be thoroughly studied in the context of the country’s changing risk profile.

Conclusions Thailand is no stranger to PPPs, employing them since the 1980s. However, the pace of PPP implementation is slower than it should have been. Major constraints for PPP developments and implementation are the PPP law itself, the legal system of the country, and political intervention. With regard to the PPP law, the country recently reformed its PPP law, which is now favorably viewed by practitioners and academics. Current PPP policies and implementation must also comply with the country’s legal system, which to some extent does not provide a good framework for PPP implementation. The biggest hindrance to the promotion of PPP in Thailand

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is political instability, which seems to have intensified in recent years. There are talks of decoupling infrastructure investment plans from political intervention by establishing a national infrastructure investment plan backed by law. However, a consensus will not be reached any time soon, given the political situation the country is facing. A few features of PPP development in Thailand that may be useful for other countries are that a proper PPP regulatory framework is vital for implementation processes (it can slow the implementation if designed poorly); that in some domains the private sector provides better services than government agencies; and that financial liquidity of the banking sector, together with innovative financing techniques such as infrastructure funds, may help benefit PPPs in the long run by providing the capital required to construct and operate new PPP projects. As for the research domain for supporting PPP policies and implementation in the country, alternative forms of government support in social PPPs such as healthcare systems or in economic PPPs such as high-speed rails are worth investigating because the country cannot provide any direct monetary support to the concessionaires given current legal constraints.

References ADB (2007).Thailand: A Study on Legal Framework for the New PPP Legislation and the Amendments of the PPSU Act. TA 4940 (THA), Manila, the Philippines. Gomez-Ibanez, J. (1997). Bangkok’s Second Stage Expressway.Case Program C15-97-1401.1. Kennedy School of Government, Harvard University. Kokkaew, N., Sunkpho, J., and Alexander, D. (2013). Thailand’s New Public Private Partnership Law: A Cure to the Problem? European Procurement & Public Private Partnership Law Review, 2, pp. 143–50. Lee, A. (2013a). Thailand PPP Law May Unleash Infrastructure Investment, International Financial Lew Review, May 2013. Lee, A. (2013b). Thailand’s new infrastructure funding tool. International Financial Law Review, June, pp. 21–22. Nonthasoot, S. (2012). A New Public Private Partnership Law of Thailand: An Initial Review. NACC Journal, July 2012, 170–94. PDMO, the (2013).Moving Forward: 2-Trillion-Baht Projects Driving Thailand to Match Global Standards, Thailand’s Ministry of Finance. Sethsathira, S., Boonsong, S., and Manussiripen, P. (2012). Investing in Infrastructure Funds, Hedge Fund Monthly, Baker & McKenzie. Susangarn, C. (2007). Public Private Partnership in Thailand: Past Experiences and Future Prospect. In: the Asia-Pacific Ministerial Conference on PPPs in Infrastructure, 4–6 October 2007, Republic of Korea. World Trade Organization, WTO. (2012). Trade Policy Review Body – Trade Policy Reviewed – Report by Thailand, Geneva, Switzerland.

20 Public Private Partnership in Turkey M. Talat Birgonul, ˙Irem Dikmen and Cem Galip Ozenen

Introduction Public investment in infrastructure plays an important role in Turkey. Turkey needs to undertake significant investment to efficiently provide education and healthcare services; develop the social and physical infrastructure required to ensure competitiveness and sustainable growth; protect the environment; generate compliance with the EU accession criteria; and close the developmental gaps between the developed countries and Turkey as well as among the regions of Turkey. Public sector fixed capital investment in Turkey was expected to increase by 5.4 per cent in real terms in 2013. During this period, the distribution of public sector fixed capital investments was to be as follows: 51.7 per cent by the central government, 28.5 per cent by local administrations, 15.7 per cent by operators of State Economic Enterprises (SEE), 1.2 per cent by the institutions in the process of privatization, 0.1 per cent by the Bank of Investment and Development for Municipalities, and 2.8 per cent by institutions with revolving funds and social security institutions (T.R. Ministry of Development, 2013a). In 2013, the share of the transportation and agricultural sectors in public sector fixed capital investment was expected to decrease relative to the previous year, while the share of the tourism sector was expected to stay the same and the shares of all other sub-sectors were expected to increase. Private sector fixed capital investments were estimated to increase by 7.1 per cent in real terms in 2013. It was expected that this would be accounted for by increases in the shares of energy, manufacturing, education and health sectors, with the share of mining staying the same and the shares of all other sub-sectors decreasing. In 2012, public investment focused on improvements of the economic and social infrastructure, taking into consideration sectorial, regional and projectbased priorities. In the 2012 Investment Program (T.R. Ministry of Development, 2012a), 22 billion USD1 was allocated to a total of 2,622 projects. Within these projects the transportation-communication sectors had the largest share with 31.5 per cent, followed by education with 15.5 per cent, agriculture with 14.5 per cent, energy with 9.8 per cent, and the health sector with 5.6 per cent. The total share of mining, manufacturing, tourism and housing projects in the public investment allocations in 2012 was 6.6 per cent.

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Of the 2,622 projects included in the 2012 Investment Program, 696 projects with a cost of 5.2 billion USD were to be started and completed during the year. Furthermore, 212 new multi-year projects with a total project cost of 4.7 billion USD and a 2011 budget allocation of 0.7 billion USD were included. The number of public infrastructure projects, which includes projects in the irrigation sector, in Turkey is large by comparison to existing limited resources. Factors such as a lack of a systematic project cycle approach and the insufficient capacity of public institutions during project preparation, implementation, monitoring and evaluation can lead to problems in the execution of such projects. Furthermore, Turkey needs to undertake maintenance-replacement; maintenancerepair, rehabilitation and modernization investments to preserve the existing capital stock. In Turkey there are opportunities to increase the amount of funds available for public investments and to improve efficiency in the future. This is based on the fact that: (i) EU funding offers additional resources for public investment and contributes to the creation of project preparation, implementation, monitoring and evaluation capacities; (ii) due to its increased credibility, Turkey is benefiting from international sources that provide project loans with favourable conditions; (iii) new strategic plans for public institutions and the strategies laid down in sectoral strategy documents will allow for better prioritization and appraisal of projects; (iv) Public Private Partnership (PPP) models are frequently utilized effectively; and (v) most local investments are left to the responsibility of local administrations. Due to the adoption of a private sector-based development model in the 1980s, public investments in industry in particular has dwindled. This has allowed infrastructure investment to gain greater prominence in the central investment budget. The sectors which benefited from this include the transportation, water and energy sectors. In addition to public resources, alternative financial models such as PPP have been used to fund infrastructure investment. The first legal regulations that supported the creation of infrastructure projects and services by the private sector were passed in the 1980s, and the next section discusses the origin and drivers of PPP in Turkey.

Origin and drivers PPPs include a variety of arrangements, all of which involve the collaboration of public and private sectors. PPPs are contractual arrangements of varied nature where the two parties share rights and responsibilities during the duration of a contract. Different forms of PPPs exist involving various combinations of public and private sector finance and exposure to project risk. The various arrangements often reflect the different appetites for risk of project partners and the role of the private party in such projects can vary depending on the sector and the nature of the market (Farquharson et al., 2011). PPP is usually defined as a long-term, contractual partnership between the public and private sector. PPPs involve the financing, designing, implementing and operating of infrastructure facilities or services that were traditionally provided by the public sector.

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Historically, the demand for infrastructure has been high in Turkey. During the last few decades, the increasing pace of urbanization together with continued economic growth have led to a high demand for virtually all types of infrastructure investments and services. For the last 15 years, total investment expenditures have constituted 20 per cent of the GDP on average (Figure 20.1). On average, four-fifths of the total investments are realized by the private sector and the remaining one-fifth comes from public investments. Public investment has frequently helped keep total investment at a stable level so as to sustain a desired level of growth. Despite the increase in expenditures, Turkey’s infrastructure stock still lags behind other OECD and EU countries, not only in terms of quantity but also quality. Compared to other middle income countries, Turkey performs reasonably well in terms of infrastructure investment largely due to increased government emphasis. However, some international reports (The World Bank, 2009 and 2011) reveal that there is a need for further improvement in infrastructure especially in specific sectors such as sanitation, railways and ports, if Turkey is up with developed countries. In line with global trends, Turkey’s economy has developed significantly. Turkey underwent a process of creating a legal framework of PPP at the beginning of the 1980s. Specifically, Law No: 3096 was prepared to permit corporations other than government institutions to build energy production facilities by using the BuildOperate-Transfer (BOT) model. This was first initiated by Turgut Ozal, Prime Minister, in 1984 (Dikmen et al., 2005). However, in the immediate period following the passage of this law, PPP neither received much attention from policymakers and politicians nor did it find extensive application except in the energy sector. This changed with the ninth Development Plan (2007–2013) when the application of PPP re-gained momentum and important high-value infrastructure projects were implemented via various PPP models. As a consequence of this strong political commitment by the Turkish government, demand for PPP infrastructure projects is expected to rise unless a severe global and/or domestic financial crisis occurs. During the first two decades of PPP implementation in Turkey some bottlenecks were experienced due to poor coordination between various actors and the

Per cent of GDP

25 20 15 10

12.2 13.6 17.5 17.6 18.9 17.9 16.1 13.1

15

18

16.3 15.4 15.7

Private investments Public investments

5 4.9

3.8

3.8

3.2

3.8

3.9

4.1

4.1

4.3

4.1

4.2

4.6

4.4

09 20 10 20 11 20 12 20 13 20 14

08

20

07

20

06

20

05

20

04

20

03

20

20

20

02

0

Figure 20.1 Per cent share of investments Source: Ministry of Development

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immaturity of the regulatory framework. Due to these bottlenecks, road projects were delayed and the appetite of foreign investors for investing in Turkish PPP decreased. Many different laws, regulations, council of minister decisions, projects and contracts from the 1980s were cancelled by the constitutional court and the state council because they were found to be contrary to other types of legislation which was in force. Many projects experienced cancellations and delays and conflicts occurred with local or foreign investors whose contracts were cancelled. This led to the payout of significant compensation packages. Tenth Development Plan targets by 2023 Turkey entered a period of rapid growth since 2001 and is becoming one of the world’s largest ten economies and is increasing the amount of exports to 500 billion USD by 2023 are among the country’s stated targets. It has been estimated that the 2011 population of 74 million will increase by 14 per cent to reach 84 million by 2023. Significant infrastructure investments will be needed to meet increasing future demand. Some of the future plans include: Irrigation of 8.5 million hectares of irrigable lands, land and consolidation of 13 million hectares; reaching a capacity of 36.603 MW in hydroelectric power plants and an overall energy capacity of 125.000 MW; building 10.000 km of track for a high-speed train railway network and 15.052 km for the conventional railway network; constructing 29,000 km of dual carriage roads and 7,500 km of motorways; ensuring a 100 per cent enrolment rate in pre-school and primary education; and building city hospitals with a total capacity of 38,000 beds. To meet these increased infrastructure investments, several strategies and targets have been developed in the tenth Development Plan. The four main targets are as follows: Target 1: Qualified Human Resources, Strong Society. Target 2: Innovative Production, High and Stable Growth. Target 3: Sustainable Cities and Environment. Target 4: International Cooperation for Development. Investment strategies are discussed under ‘Target 2: Innovative Production, High and Stable Growth’, which can be summarized as below:

• The main goal is to maximize the contribution of public investments for • •

fostering economic growth, supporting private sector investments, reducing regional disparities, increasing employment and welfare of the country. At the end of the planning period, the share of public sector fixed capital investment of GDP and the share of capital expenditure of the central budget will be expected to reach 4.8 per cent and 11.1 per cent, respectively. Public and private sector investments will be addressed within a holistic approach for achieving high and stable growth performance.

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• Public investment will be intensified in economic and social infrastructure • •

areas where the private sector is unable to provide investment. The focus will be on infrastructure investments that support productive private sector activities. Within public investment, including projects using PPPs, education, health, drinking water, waste water, science-technology, transportation and irrigation sectors will be prioritized.

Policy framework for PPP In Turkey, PPP and alternative financial models have been used in addition to public resources in order to meet the country’s increasing needs of infrastructure. It has been estimated that the number of approved Build-Operate-Transfer and Build-Lease projects reached 166 with a total investment value of about 58 billion USD by the end of 2013. The new Development Plan for Turkey (T.R. Ministry of Development, 2013b) predicts that for investments financed from public resources, the share of the transportation sector will decrease because some motorways, big seaports, airports and railroad stations are being carried out via PPP. The share of the public health sector in investments is also predicted to decrease as a result of the extensive use of PPP for city hospitals and health campuses. Turkey’s tenth Development Plan (DP), covering the 2014–2018 period, is one of the key policy papers the Turkish parliament has approved. According to the DP, the lack of strategy on PPP is a major problem. A strategy paper is now being prepared for the implementations of PPP projects. The Ministry of Development (MoD) is responsible for the preparation of this strategy and will cooperate with the Ministry of Finance and Treasury as well as with the other line ministries, NGOs and private parties. Turkish PPP legislation has a fragmented structure and Turkey does not have a sole PPP law at the present time. In the future PPP legislation will be part of a framework law so as to combine the scattered PPP legislation currently in force. An effective monitoring and evaluation system will also be needed in order to improve the PPP policies and implementations.

Financial context for PPP In PPP projects, the most distinctive feature is the provision of funding by the private sector, making funding, budgeting and expenditure important for the success of a PPP project. In Turkey, the biggest obstacle is the lack of funding for PPP projects. There are many resources for the funding of PPP projects. One of them is bank credit and more than one bank can provide financial support for the projects. Supply of credit can also involve foreign and domestic banks. In terms of project financing, bank credit risk analysis should be effective and efficient, because the loan repayment relies on the project income.

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Currently domestic banks are not willing to supply long-term funding, because their funding structure is based on short-term deposits. Therefore, PPP projects need to draw on capital from foreign sources. European banks are a source of long-term funding while National Development Banks also supply long-term credit for the funding of infrastructure investments in PPP. Foreign investors can supply funding through their export credit agency. Foreign investors can also obtain funding from multilateral institutions such as International Finance Corporation (IFC) and European Bank for Reconstruction and Development (EBRD). With direct agreements to be signed between the banks and public institutions, several of these organizations have become stakeholders in PPP projects with an authority to intervene directly in the project. This situation arose in connection with the Gebze-Izmir Motorway and Bosphorus Tube Crossing projects and also some hospital projects. In project finance, lenders and investors rely on either ‘non-recourse’ or ‘limited recourse’ cash generation to repay their loans and earn a return on their investments. In addition, many projects are funded jointly by regional development agencies such as the World Bank, International Finance Corporation, European Bank for Reconstruction and Development, African Development Bank and the Asian Development Bank. These international organizations provide some guarantees to the international banks and thus reduce the resource problems associated with the financing of such projects. The critical point is insurance for banks and lenders that are waiting to refinance PPP projects. PPP projects must be insured against many risks, including force majeure risks by an insurance provider.

Institutional framework PPP project contracts have a unique and complex structure and are unique legal documents, which include project feasibility specifications as well as contingency analysis because the parties need to foresee potential future problems. Turkish PPP legislation is disjointed and differs across sectors while supporting the implementation of only a limited number of potential PPP models. For example, no legal framework for Rehabilitate-Operate-Transfer model is defined. Thus, such projects are often executed within existing limited legal regulations. Another major problem is that, the existing legislation does not cover sectors such as justice and culture. Turkish legislation in relation to PPP includes (T.R. Ministry of Development, 2012b): Build-Operate-Transfer

• Law Number 3096, Assignment of Institutions other than Turkish Electricity •

Administration to Electricity Production, Transmission, Distribution and Trade, 1984. Law Number 3465, Assignment of Institutions other than General Directorate of State Highways to Highway (with tolls) Construction, Maintenance and Operation and Regulation, 1988.

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• Law Number 3996, Performance of Certain Investments and Services within • •

the framework of Build-Operate-Transfer, 1994. Law Number 5393, Performance of Municipalities’ Investments and Services within the framework of Build-Operate-Transfer, 2005. Law Number 5302, Performance of Special Provincial Administrations’ Investments and Services within the framework of Build-Operate-Transfer, 2005.

Build-Operate

• Law Number 4283, Establishment of Electricity Production Facilities with

Build-Operate Model and their Operation and Regulation of Electricity Sales and Regulation, 1997.

Build-Lease-Transfer (BLT)

• Law Number 6428, Concerning the Construction of Facilities, Renovation of • •

Existing Facilities and Purchasing Service by the Ministry of Health by Public Private Partnership Model, 2013. Decree Number 652, Authorising the Ministry of Education to construct and operate new schools under the BLT model, 2011. Law Number 6428, Authorizing the Higher Education Credit and Hostels Institution to construct and operate new hostels under the BLT model, 2010.

Transfer of operating rights/long-term lease

• Law Number 4046, Privatization Law (Article 18), 1994. • Law Number 5335, Authorizing the State Airports Authority to Totally or •

Partially Transfer its Airports to the Private Sector through Long Term Leasing or Transfer of Operation Rights Methods, 2005. Law Number 6455, Authorizing the Ministry of Customs and Trade to Totally or Partially Transfer its BOT Custom Gates and Logistic Centers to the Private Sector through Transfer of Operation Rights Methods, 2013.

The Ministry of Development, Ministry of Finance, the Treasury, the High Planning Council, and the Directorate of Privatization Administration have various tasks in PPP implementation. The High Planning Council, which is composed of various ministers and meets under the chairmanship of the Prime Minister, investigates the feasibility of Build-Operate-Transfer and Built-Lease projects and makes authorization decisions. The Ministry of Development monitors and evaluates the PPP projects, matches BOT project stock with sectoral strategies and national policy documents and ensures the coordination between related parties. It conducts administrative functions for the High Planning Council. The Ministry of Finance (MoF), allocates budget appropriations to public institutions and monitors budgets. The Ministry of Finance also executes real estate allocations. In addition, monitoring, accounting and reporting of commitments are carried out by the Ministry of Finance.

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The Undersecretariat of Treasury plays an important role in PPP procurement as broker for the supply of international credit for infrastructure projects. The Treasury negotiates and signs financial agreements with international creditors within the context of Law number 3996 and covers liabilities in line with Public Debt Law number 4749. It also conducts risk assessments and monitors PPP projects. Preparation stage in PPP projects In the Turkish PPP system, the most commonly used model is BOT. It is important to know how BOT projects are submitted. In the preparation stage, governmental institutions make a needs analysis within the framework of strategy documents such as development plan, sectoral strategies and programs. The second step involves the preparation of feasibility analysis. Then the institution requests authorization from the High Planning Council (HPC) on the basis of a feasibility report. The implemenation process of PPP projects is depicted in Figure 20.2. SECTORAL PRIORITIES MENTIONED IN STRAGEGY DOCUMENTS

PROJECT DEFINITION

FEASIBILITY ANALYSIS

REQUEST FOR AUTHORIZATION

Financial analysis Economic analysis Legal analysis Public sector comparator

Figure 20.2 Preparation stage

Authorization stage in PPP projects Where administrative services are provided by the Ministry of Development (MoD), the HPC authorises the BOT proposals of the public institutions. The HPC includes eight economy related ministers who are supervised by the Prime Minister. Public institutions submit their proposals through a related ministry, and municipalities submit them through the ministry of internal affairs. After this, PPP projects are being evaluated by MoD, MoF and Treasury with coordination by the MoD, and evaluations are then reported to the HPC by the PPP Department (Figure 20.3).

PUBLIC INSTITUTIONS

Figure 20.3 Authorisation stage

RELATED MINISTRY

HIGH PLANNING COUNCIL

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345

Approval stage in BOT projects If a proposed project is approved by the HPC, the tendering stage begins. Government institutions make tenders, select private partners and sign a draft contract. The procedure, which is shown in Figure 20.4, is concluded when the relevant Minister approves the draft contract.

TENDERING PERIOD

SELECTION OF PRIVATE PARTNER

APPROVAL OF THE RELATED MINISTER

SIGN THE DRAFT CONTRACT

Figure 20.4 Approval stage

Approval stage in BLT school projects In the BLT model, a draft contract is signed directly by the client authority, who is typically the Director General. Unlike BOT model, the draft for these project does not require a Minister’s approval (Figure 20.5).

TENDERING PERIOD

SELECTION OF PRIVATE PARTNER

THE DRAFT CONTRACT SIGNED BY SPENDING AUTHORITY

Figure 20.5 Approval stage for BLT school projects

Organizational structure Duties, responsibilities and the number of partners can differ in PPP projects. The project company whose organization is governed by legislation of the host country is usually one of the stakeholders. According to Turkish legislation, the project company must be a legal entity in order to be active in Turkey. According to the law, the company should be a joint-stock company. If fundamental changes occur, these should be pre-approved by a public authority. Banks also have major roles in the PPP process. Foreign banks and domestic banks can syndicate in order to finance large projects. Syndicated credit is now commonly offered in Turkey. Many international institutions such as the World Bank, the International Finance Corporation (IFC) and the European Bank for Reconstruction and Development (EBRD), the African Development Bank and the Asian Development Bank are funding PPP projects. In order to reduce funding problems for projects, these institutions give guarantees to international banks to protect them against project risks. Public institutions are responsible for preparing tender documents, clarifying the institutional framework and identifying the functions to be performed by each party before embarking on a project. Contractors and sub-contractors are often

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key sponsors of PPPs in line with the magnitude of construction, rehabilitation and/or maintenance works. Due to the diversity and the complexity of issues involved in the design and implementation of PPPs, both private and public sector seek consultancy services from qualified advisors in fields where their in-house resources cannot provide the necessary advice. Insurance companies are also crucial actors in the project finance framework as they usually back all the major risks, that lenders and the public sector require to be covered. Finally, expert auditors are responsible for ensuring that construction work is performed to acceptable standards and in accordance with the specifications.

Extent of use/adoption of PPP In Turkey, PPP models, such as Built-Operate-Transfer, Built-Operate, BuiltLease, Transfer of Operational Rights, have been implemented in various sectors since 1984. A total of 148 projects received authorization from the High Planning Council (HPC) up to the present within the scope of laws number 3996 and 6428. A total of 53 project contracts have been signed, 30 of which are in operation while the remaining 23 are under construction. Customs facility and marina projects rank first among signed project contracts, while airport projects rank second. A total of 11 projects were authorized by the HPC in 2012 and 2013, eight of which are in the health sector. In addition to these projects, 24 highway service facilities projects and 25 energy projects, which are not subject to the HPC authority, have been carried out through the BOT model. There are also 43 Transfer of Operating Rights (TOR) and five Build-Operate (BO) projects in the energy sector, which are already in operation. Operation rights for 16 ports were transferred to the private sector by the Directorate of Privatization Administration, five airports were transferred by the General Directorate of State Airports Authority and one airport by the Undersecretariat for Defense Industries. A total of 173 project contracts were signed as of June 2013 and the energy sector ranks first with 73 projects, followed by highways (29), ports (21) and airports (17). In total, there are 150 realized PPP projects; 79 BOT, 5 BO and 66 Transfer of Operating Rights (TOR) as shown in Table 20.1. Currently, 18 BOT and 5 BL projects are under construction as shown in Table 20.2 (T.R. Ministry of Development, 2013c). Looking at ongoing PPP projects in operation and under construction, the 2013 contract value is about 36.280 million USD (Table 20.3), while the total value of the projects under construction amounts to about 53.547 million USD (Table 20.4). Regarding the sectoral distribution of signed contracts, energy production facilities are most frequent with 73 projects. The transportation sector accounts for 47 per cent of the total project number with 80 projects. The distribution of the contract numbers by sectors is shown in Figure 20.6.

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Table 20.1 Distribution of PPP projects in operation by sector BOT

Built-Operate

Built-Lease

TOR

25

–

–

–

Airport

9

–

–

6

15

Harbor

3

–

–

17

20

Marina

8

–

–

–

8

Custom and Border Gate

7

–

–

–

7

Urban Infrastructure

2

–

–

–

2

Health

–

–

–

–

–

Energy

25

5

–

43

73

Total

79

5

0

66

150

Total

Motorway

Total 25

Table 20.2 Distribution of PPP projects under construction by sector BOT

Built-Operate

Built-Lease

TOR

Motorway

4

–

–

–

4

Airport

2

–

–

–

2

Harbor

1

–

–

–

1

Marina

5

–

–

–

5

Custom and Border Gate

6

–

–

–

6

Urban Infrastructure

–

–

–

–

–

Health

–

–

5

–

5

Energy

–

–

–

–

–

Total

18

0

5

0

23

When the distribution of contract values is analysed by sector, airport projects account for more than half of the total investment (51.681 million USD), mostly because of Istanbul’s new airport project that was tendered in 2013 (Table 20.5). The total value of the PPP projects over the years is given in Figure 20.7.

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Table 20.3 Distribution of project values in operation by sector (million USD) BOT Motorway

Built-Operate

Built-Lease

TOR

Total

124

–

–

–

124

Airport

5.072

–

–

7.694

12.766

Harbor

50

–

–

1.853

1.903

Marina

213

–

–

–

213

Custom and Border Gate

200

–

–

–

200

1.307

–

–

–

1.307

Health

–

–

–

–

–

Energy

2.680

3.938

–

13.149

19.767

Total

9.647

3.938

–

22.695

36.280

Urban Infrastructure

Table 20.4 Distribution of project values under construction by sector (million USD) BOT

Built-Operate

Motorway

10.522

–

Airport

38.915

Harbor Marina

TOR

Total

–

–

10.522

–

–

–

38.915

75

–

–

–

75

58

–

–

–

58

160

–

–

–

160

Urban Infrastructure

–

–

–

–

–

Health

–

–

3.817

–

Energy

–

–

–

–

–

49.730

–

3.817

–

53.547

Custom and Border Gate

Total

Built-Lease

3.817

Public Private Partnership in Turkey 80

349

73

70 Number

60 50 40

29

30

21

17

20

13

13

10

5

2

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oj

pr

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Sectors

Figure 20.6 Contract amounts by sectors Source: Ministry of Development

Table 20. 5 Percent distribution of contract values by sectors (Million USD) Project Amount (million USD)

Project Amount (%)

Motorway Projects

10.646

11,85

Airport Projects

51.681

57,53

Harbor Projects

1.977

2,20

Marina Projects

270

0,30

Border Gate Projects

359

0,40

Industrial Facility & Urban Infrastructure Projects

1.307

1,46

Health Facility Projects

3.816

4,25

Energy Production Projects

19.766

22,01

Total

89.826

100,00

M. Talat Birgonul et al.

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 1994

million USD

350

Figure 20.7 Total value of contracts by year (Million U.S. Dollars) Source: Ministry of Development

Types of PPP PPPs include a range of agreements, which can be described in different ways. Many PPPs involve new infrastructure assets that are often called ‘greenfield’ projects. Descriptions of common PPP nomenclatures and asset types are given below (the descriptions are extracted from the ‘Public-Private Partnerships Reference Guide’ of the World Bank (The World Bank, 2012). Under a BOT project, the private company owns the project assets until they are transferred at the end of the contract. By contrast, in a Build-TransferOperate (BTO) contract, asset ownership is transferred once construction is complete. Rehabilitate-Operate-Transfer (ROT) is another PPP contract type. ‘Rehabilitate’ may take the place of ‘build’ where the private party is responsible for rehabilitating, upgrading or extending existing assets under ROT and the type of asset is existing infrastructure. ‘Concession’ is used for a range of types of contract and in the PPP context. A concession is mostly used to describe a setup that involves a ‘user-pays’ model. For example, in Brazil, the ‘concession law’ applies only to full user-pays contracts. On the other hand, ‘concession’ is sometimes used as a catch-all term to describe a wide range of PPP types; for example, all recent PPPs in Chile have been implemented under a ‘concession law’ and includes contracts where the government pays. The main PPP models used in Turkey include the following: Build-Operate-Transfer Law Number 3996, Article 1 aims to address investments and services which require high technology and large amounts of funding. According to Article 3, investment costs and future profits are paid to the equity company or a foreign company by public institutions or service beneficiaries (which buy the products or services produced).

Public Private Partnership in Turkey

351

Build-Lease-Transfer Law Number 6428, Article 1 defines the procedures and principles for the provision of some services which require high technology or capital, within the framework of PPPs. The facilities commissioned by the Ministry of Health and its affiliated institutions are built or renovated by providing easements of convenience on public lands for a period not exceeding 30 years in accordance with the standards determined in a preliminary project, preliminary feasibility study and other documents. Decree Law 2011/652 states that educational facilities for the Ministry of Education, are to be built on public lands by real or private legal persons designated in a procurement process in return for leases for a specific price and a period not exceeding 49 years (in accordance with the preliminary project setup and basic standards defined by the Ministry). Law Number 351 regarding dormitories and related facilities for the High Planning Council, are to be built on public lands by real or private legal persons designated in a procurement process in return for leases for a specific price and a period not exceeding 49 years (in accordance with the project and basic standards to be defined by the Institution). Build-Operate Law Number 4283 governs the construction and operation of electricity power plants in the ownership of production companies and the selling of electricity in accordance with the principles and procedures that are to be designated. Transfer of operating rights Law number 4046 allows the transfer of operating rights of Public Enterprises and Organisations as a whole or their active assets for goods and services production, for a specific time and specific conditions.

Future developments It is expected that the lessons learned regarding the PPP project implementation in various sectors will play an important role in attracting foreign investors. In the future major infrastructure projects can be carried out under legislative amendments that intend to increase participation of the private sector in Turkey’s infrastructure. Considering the effect of the global financial crisis it can be assumed that preparation, planning and approval processes for PPP projects will have to be considered more carefully in Turkey than in the past (as is the case in other countries). The PPP process and the long-term fiscal liabilities affiliated with it must be designed and managed correctly. For this reason, a monitoring and evaluation system is essential in order to keep track of the budgetary effects of PPP projects. There are plans to improve planning, implementation, monitoring and evaluation processes for public investment projects in Turkey (T.R. Ministry of Development, 2013b).

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PPP research and development agenda For developing countries such as Turkey, a complex legal framework can be a major impediment to PPP procurement; thus, research in this area is needed. Moreover developing tools/methods to measure/forecast financial viability of PPP projects is also a high priority research topic as investors as well as public institutions need guidance in this area.

Conclusions Ensuring the utmost level of cooperation with the private sector in infrastructure development is a matter of priority for Turkey. The fragmented structure of existing legislation and the lack of a well-structured PPP framework law seem to be the weakest points of the current system. Meanwhile a very ambitious PPP pipeline is being implemented in part without a national strategy and the necessary detailed guidance. The tenth Development Plan, however, reveals that government is aware of those issues.

Note 1 1 USD = 1,7354 TL from Annual Program 2012.

References Dikmen, I., Birgonul, M. T. and Ataoglu, T. (2005). ‘Empirical Investigation of Organisational Learning Ability as a Performance Driver in Construction’, Chapter 10, in Abdul Samad Kazi (ed.) Knowledge Management in the Construction Industry: A SocioTechnical Perspective. Farquharson, E., Mastle, C. T., Yescombe, E. R. and Encinas, J. (2011). How to Engage with the Private Sector in PPP in Emerging Markets, The World Bank. The World Bank. (2012). Public-Private Partnerships Reference Guide Version 1.0. The World Bank. (2009). Business Environment and Enterprise Performance Survey. The World Bank. (2011). Logistic Performance Index. T.R. Ministry of Development. (2012a). Investment Program, Ankara. T.R. Ministry of Development. (2012b). Legislation related with Public Private Partnerships, Ankara (in Turkish). T.R. Ministry of Development. (2013a). Annual Program, Ankara. T.R. Ministry of Development. (2013b). 10th Development Plan 2014-2018, Ankara. T.R. Ministry of Development. (2013c). Advances in PPP Projects, Ankara (in Turkish).

21 Perspectives on the future of Public Private Partnership in the UK Darinka Asenova and Matthias Beck

Introduction During the past two decades the UK has played a leading role in the development and application of Public Private Partnerships (PPP) based infrastructure procurement through its Private Finance Initiative model. This model had been developed during the last years of the Major government and expanded during the early years of the Blair government. The banking and economic crisis of 2007–09 has created major challenges to the use of PPP in the UK, making the sustainability of past levels of PPP investment and the future direction of PPP-based infrastructure procurement in that country uncertain. This chapter summarises key developments in UK PPP up to the crisis; reviews the economic issues that have led up to the crisis; discusses the immediate impact of the crisis on the UK PFI and PPP market together with the transition arrangements that were put into place by the Brown government; and, lastly, looks at recent initiatives taken by Cameron’s Conservative-Liberal coalition government under the designation of Private Finance 2 (PF2). One of the main points of this chapter is that the UK PPP landscape has been characterised by two contradictory developments. On the one hand, the general approaches within which PPPs/PFIs could be implemented have evolved and become more differentiated; allowing a greater number of public sector clients to utilise these procurement mechanisms. On the other hand, the contractual framework of UK PPP/PFI and its regulatory setting have remained largely unaltered. There are some indications that in its most recent incarnation UK PFI, as envisaged by the new PF2 programme of 2000, attempts to address the more fundamental contractural shortcomings of UK PPP by stipulating public sector equity provision and reducing the length of service contracts.

The development of UK PPP until the crisis UK PFI investment initially increased rapidly from under £1 billion in 1996 to a peak of nearly £7 billion in 2000. For the seven years from 2000 to 2007, PFI investment remained high, fluctuating between £5 and £7 billion per annum (excluding the failed London Underground PFI project). In terms of projects

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signed, it peaked in 2006 with 70 projects. The year 2007 saw a steep decline in the value of signed UK PFI projects to slightly over £3 billion, which continued in the following years (Timmins, 2011). In terms of sectoral composition, PFI investment in transport exceeded that in other sectors for most years, followed by community/housing-related PFIs, education-related PFIs and, lastly, PFIs in the health sector. As previously noted, the period from circa 2000 up to the credit crunch of 2007/08 was also characterized by government efforts to develop new forms of PPP procurement within the existing PFI framework which would allow a greater range of public sector clients to utilise PPP. This section focuses on the plurality of procurement approaches that the UK developed largely in the run-up to the credit crunch. As regards the impact of these developments on public services provision, we note that since the 2008/09 economic recession the UK government has come to face a pronounced dilemma where plans for increased spending on public service infrastructure are undermined by difficulties in obtaining commercial bank loans for Private Finance Initiatives (PFIs) and similar ventures. Meanwhile many private companies involved in the construction and management, of (PPPs) facilities also experienced severe financial problems. Both factors are now limiting the uptake of these new PFI-type procurement mechanisms. Partly in an attempt to avoid the negative connotations associated with PFI, the New Labour Government developed a number of project and financing arrangements that resemble to various degrees the standard PFI model, but differed in terms of some financial and governance aspects. Accordingly, we have seen the development of a number of PFI spin-off procurement mechanisms such as Local Improvement Finance Trusts (LIFT), Express LIFT and Procure 21 in health; Building Schools for the Future in Education; and specifically in Scotland, various forms of non-profit PFI. The salient feature of these novel variants of PFI is their attempt to address various perceived problems in the application of the original PFI model to certain contexts (such as the smaller scale of projects in Primary Care) by modifying some aspects while preserving its key characteristics. While some of these new procurement approaches found widespread use, others were slow in developing and, in the case for of the Building Schools for the Future programme, were cancelled. Additional complexity is added to the UK PPP landscape on account of the fact that some devolved governments, notably that of Scotland, have introduced their own approaches to PPP that centre primarily on controlling private sector returns from PPPs. In Scotland, as elsewhere in the UK, PFI has contributed during the past 20 years to significant investments in the school estate that has improved the teaching and learning experience of staff and students. Specifically, a total of £5 billion had been invested in building more than 200 schools and refurbishing others by 2008. The minority Scottish National Party government came to power in 2007 and decided to disassociate itself from PFI by introducing the Scottish Futures Trust (SFT), described as a version of non-profit PFI (see below). The devolution of powers to the Scottish Government has thus added a new dimension

The future of Public Private Partnership in the UK 355 to UK PPP development in that Scotland’s moratorium on conventional PFIs has created momentum to explore alternative approaches to infrastructure and services procurement. A major incentive for the use of PFI in the UK was that the PFI spending was ‘off balance sheet’ prior to the introduction of the International Financial Report Standard (IFRS) in April 2009. This separated PFI transactions from government accounts and so relieved them from centrally controlled budgetary allocations and cash limits on public sector expenditure (Bovis, 1999). Therefore, it was perhaps not surprising that the Treasury’s announcements throughout 2000 emphasised that it envisaged a continuation of this type of procurement, while suggesting that a wider range of PFI-type options with alternative financial and contractual arrangements should be explored. The non-profit distribution (NPD) model The NPD-type structural arrangements have been used by some local authorities in England since the 1990s for the provision of leisure and other cultural services. The Scottish National Party government publicly rejected the standard PFI and saw NPD as a better and more politically viable option. The main reasons for the advocacy of NPD are related to the possibility for capping ‘excessive’ private sector profits, while reducing business rates and tax liabilities; other important considerations are related to wider participation of community stakeholders in the decision-making process, as well as incentives related to possible cost-efficiencies and productivity gains. The NPD is defined by three broad principles including (SFT, 2008: 4):

• enhanced stakeholder involvement in the management of projects; • no dividend-bearing equity; and • capped private sector returns. Risk transfer remains a central pillar of NPD, and despite the lack of equity capital in these schemes, the client should, in principle, aim for a level of risk transfer (to the private sector) similar to the level achieved via standard PFI; as the finally negotiated level of risk transfer determines the contractual rate of return. A preliminary analysis conducted by Hellowell and Pollock (2009) indicates that NPD did not resolve the long-standing problems of the standard PFI such as high transaction costs, questionable risk transfer, inadequate market competition, prolonged and expensive negotiations. Perhaps, the NPD model remains too similar to its PFI predecessor to be able to resolve its shortcomings. Schools procurement In 2003 the Department for Children, Schools and Families (DCSF) decided to increase capital investment in England and Wales through a programme known as Building Schools for the Future (BSF). The overall value of this 15-year programme

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was estimated at £55 billion. Together with provision of modern ICT facilities, it proposed the rebuilding of over half of the school estate, 35 per cent being structurally remodelled, the rest being refurbished (NAO, 2009). A specialized body, Partnership for Schools (PfS) was created to improve local authorities’ procurement activities and provide central programme management. BSF is not a capital finance method as such, but it involves long-term partnership arrangements between public and private sector organisations and it relies heavily on private finance (NAO, 2009). Within BSF, the PFI option is used only for building new schools, while the refurbishment of old schools relies on conventional financing methods. A National Audit Office report identified a range of potential problems related to BSF such as overly optimistic assumptions and expectations regarding the timescale and the cost estimates (NAO, 2009). At the time, the NAO noted that there was a delay of 21 months and possible cost overruns in the range of £10 billion. A subsequent report by the House of Commons Public Accounts Committee (PAC, 2009) confirmed that the BSF created expectations that could not be met. According to the report (PAC, 2009), of the 200 schools originally planned to be completed by December 2008, only 42 actually had been, while the overall completion of the programme was more likely to be 18 years rather than the initially planned 15. Following severe criticism, the Conservative–Liberal Democrat Coalition government abandoned the BSF programme. The Hub initiative The Scottish government announced the first pilot Hub initiative worth £64 million, in August 2009 for building and renovating health centres, schools and other public facilities in the South East of Scotland (PPP Bulletin, 2009a). Similar to the standard PFI, the Hub involves private sector partners in the co-management of projects over a period of 20 years (Dinwoodie, 2009). Contractors enter a partnership agreement comprising the SFT, local councils and other public sector bodies located in the Hub area. The Hub scheme resembles other ‘PFI-lite’ schemes such as LIFT and BSF, which were already in operation in England and Wales, and the guidance document explicitly recognizes that the Hub is virtually identical to some existing arrangements (Scottish Executive, 2006: 23). Scottish government guidance gives special attention to the enhanced opportunities for joint working, service integration and for meeting the premises’ development needs of a range of community partners. Specifically, the Hub approach intends to create opportunities for local stakeholders to have a real stake in long-term service development. The other perceived benefits from the initiative are rather similar to the potential benefits of a standard PFI, such as the possibility for efficient procurement, VFM, property ownership and central support. Through the Hub initiative, the SFT aims to adopt a flexible and pragmatic approach to the funding of capital projects, which is essential particularly in the current economic environment.

The future of Public Private Partnership in the UK 357 LIFT and Express LIFT The Local Improvement Finance Trust (LIFT) initiative was launched in England in 2000 as part of the NHS’s ‘World-Class Commissioning plan’ aimed at addressing long-term under-investment in primary care (i.e. family doctor/general practitioner) facilities. One of the principal technical innovations of LIFT was to allow Primary Care Trusts (PCTs), as clients, to contract with private sector partners on a long-term, rather than a project basis. In 2008 the existing LIFT scheme was replaced by its successor Express LIFT where public sector clients choose their partners from a range of seven pre-selected companies that had participated in a national bidding round in early 2009. In essence, LIFT and Express LIFT represents an attempt to simplify the contracting procedures associated with PFIs and in so doing reduce overheads and up-front bidding costs. While LIFT has been described as a qualified success, it is still perceived by many public and private sector organisations as being overly bureaucratic and cumbersome. This issue has been partially addressed by the introduction of Express LIFT, which envisaged a reduction in the time required for negotiations from one to two years to three to six months. Additionally, some researchers have highlighted concerns over the poor quality of some LIFT buildings, together with an increased risk exposure of public sector organisations through local rent variations and other complex property-market issues. Perhaps most important, recent research on the financial structure and performance of LIFTCos has indicated that these schemes may have allowed private sector partners to continue to reap excessive profits which, in turn, may have resulted in affordability gaps for PCTs (Beck et al., 2009). In conclusion, prior to the crisis PFIs were well-embedded in renewal of the UK’s public sector infrastructure and have delivered many positive achievements in terms of service provision. However, there were ongoing concern about excessive costs and profits. Such concerns led to new PFI/PPP contracts making provision for profit sharing between Special Purpose Vehicles (SPVs) and public sector clients. However, existing contracts could not be rewritten and new contracts were still seen as too inflexible, being binding for 25 years or more and so lacking the flexibility to deal with inevitable changes in service requirements over the long term. PFIs were also seen as contrary to the public service ethos, seeking to promote profits rather than the welfares of service users. Accordingly critics of UK PFIs have continued to highlight contractual and service failures and the lack of significant risk transfer. In this context, a small number of projects where private sector partners received financial assistance in order to prevent project failure has attracted a significant amount of adverse publicity. As noted above, attempts were made to develop separate forms of PFI-lite contracts in the devolved decision-making of the post-1999 UK territories of England, Scotland and Wales. Forms of PFI-lite contracts now vary by UK territory and by public service within any one territory. Even in England, the form of PFI-lite varies quite markedly between local government and the English NHS.

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The most significant advantage of PFI from the perspective of the UK government seems to have been the off-balance-sheet nature of PFIs. However, the introduction of the IFRS in April 2009 seems to have significantly reduced scope for this creative accounting of the public finances. Additionally, when private sector funding was very severely reduced by the 2007–09 credit crunch, the collapse (or near collapse) of major PFI-funding banks, and their consequently greatly increased reluctance to take on risk exposure over such extended periods of time triggered a fundamental rethink of UK PPP arrangements. At the same time, the very high public finance costs of worldwide economic recession and of bank bailouts by governments has severely restricted the availability of public finance to replace the much-diminished private finance. A return to traditional procurement funded directly by the public sector is therefore not feasible.

Economic background of the credit crunch The term ‘credit crunch’ has come to describe the collapse in bank lending as the cost of (both retail and wholesale inter-bank) credit became prohibitively expensive or simply unavailable during 2007–09. The origins of the credit crunch can be traced to lax regulatory regimes for banks, weak central bank safety nets for banks facing liquidity problems, growth of the much less heavily regulated shadow banking system, rapid innovation in financial products as banks competed aggressively for business, and the increasingly substantial international movements of capital. In the period leading up to this crisis, financial innovation was encouraged by banks and other financial institutions that paid substantial annual bonuses to their directors and other employees to reward increased short-term sales of new financial products. Enjoying increased annual dividend payments financed by the resulting rapid growth of bank turnovers and profits, shareholders generally did not question the long-term sustainability of this expansion. The 2007–09 credit crunch differed from previous crises on account of the increasing use of ‘securitisation’, whereby banks and other financial institutions packaged together mortgage debts and sold them on to other financial institutions both in their home countries and abroad. This included the ‘sub-prime mortgages’ later subject to high default rates in the US, UK and elsewhere. Meanwhile, loan originators quickly sold sub-prime loans to other financial institutions which, in turn, repackaged and sold them to investors as innovative financial products (e.g. collateralised debt obligations) paying higher rates of interest than offered by banks. Such financial innovation went hand-in-hand with the growth of non-bank financial institutions, these being less regulated than banks. With hindsight, there is now evidence that in pursuit of high profits, banking regulators, directors of banks and shareholders allowed banks to expand too rapidly and to buy and sell exotic investments (including mortgage-backed bonds) that they themselves poorly understood. This was paralleled by a lack of financial transparency and a poor appreciation of the increasingly risky nature of banking operations; which, in turn, encouraged banks to move rapidly from traditional

The future of Public Private Partnership in the UK 359 (relatively safe) retail banking into (higher risk) investment banking (see, e.g., Crotty, 2007 for a detailed analysis of the developments, which led him to predict the current crisis in April 2007). Fears about these developments, meanwhile, were countered by assurances within financial academia that sophisticated modern risk management techniques – such as widespread agreement on the use of VAR (value at risk) models – had made practices safe which had formerly been considered too risky (Davis, 2003). These views were shared by senior financial regulators who, like Alan Greenspan (2004, cited from Crotty, 2007) attributed the paradox of high financial firm profits notwithstanding intense financial market competition, not to dangerous risk taking, but rather ‘to the development of a far more flexible, efficient, and hence resilient financial system than existed just a quarter-century ago’. In reality, however, the risks associated with the extensive securitisation were unclear and most banks lacked a sophisticated understanding of their total risk exposure. Investors who thought they were holding high-grade debt (rated AAA by the credit-ratings agencies) became exposed to rising rates of default in the US sub-prime mortgage market. For some time this process was masked by financial globalisation that created a new type of ‘toxic liquidity’ by allowing investors in other countries to buy ‘toxic debt’. In this process, banks, pension funds, insurance companies and other financial institutions across the globe that had bought debt to diversify their financial portfolios and so supposedly reduce risk (being less exposed to a recession in their own countries) were inadvertently acting as a ‘transmission mechanism’ for recessions to spread like a virus from one country to another (the collapse of Icelandic banks in late 2008 being a case in point). Together with US financial institutions, those of the UK had been among the most aggressive drivers of securitisation. As a consequence of this the UK experienced perhaps the globally worst levels of financial services instability during the crisis, which – due to the relatively large size of this sector – necessitated immense government subsidies to this sector; with total peak support amounting to £1,162 billion and cash outlays of £133 billion (NAO, 2014). As a consequence of these measures, the UK central government had to abandon its own fiscal rules, namely the ‘golden rule’ (borrow only for capital, not current expenditure) and the ‘sustainable investment rule’ (net public debt no greater than 40 per cent of GDP). This precarious situation, in turn provided justification for a series of austerity measures that allowed the UK government to reduce its budget deficit (as percentage of GDP) from 11.5 per cent in 2009 to 6.3 per cent in 2012; the comparative figures for Germany being a deficit of 3.1 per cent for 2009 and a surplus of 0.2 per cent (Eurostat, 2013). In order to rebalance UK public finances cuts in total public spending of 0.1 per cent per year in real terms over the Spending Review period beginning 2010 have been estimated by the Institute of Fiscal Studies (Chote, 2009). Between 2011 and 2014, the real reduction in investment spending could amount to 17.3 per cent per year. By limiting the availability of private sector financing by changing the overall economic environment and by adversely affecting the public finances, the credit crunch has had widespread implications for the delivery of public services in the UK and specifically for the PFI/PPP type arrangements.

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PPP and the credit crunch During the 2007–09 credit crunch, the financial system moved from highly speculative lending to a drastic reduction of the availability of finance. As banks became more risk averse in their lending, it also became more difficult and expensive to secure project finance and this affected the number of projects reaching financial close of contracts. In the first two years of the crisis this posed particular problems for the Labour government which had staked much of its recovery plans on fast-tracking projects in its PFI pipeline, with PFI projects being additionally seen as a means for protecting vulnerable sectors such as the construction industry (Hellowell, 2009). Thus, in March 2009 the Labour government announced that it had earmarked bridging loans of between £1 billion and £2 billion for the years 2009–10 for the rescue of PFI projects (Hayman, 2009; Hencke, 2009, Milmo et al. 2009). Moreover, Labour reiterated its commitment to PFI as a means of coping with the expected ‘cash freeze’ in public sector capital expenditure from 2011 (Gribben, 2009). As a consequence of these measures the UK government’s Infrastructure Finance Unit (dubbed ‘the Treasury bank’) for some time lent directly to PFI projects and also indirectly to them via government-owned banks. These measures elicited widespread criticism, with Liberal and Conservative politicians (then in opposition) questioning the legitimacy of these measures, especially when it became known that, rather restricting its support to bridging loans, the Treasury bank occasionally provided the full amount of senior debt required by a PFI project, underwrote bank debt or provided equity bridging loans. Notwithstanding questions about the economic efficacy of these measures in light of the severe problems faced by the UK PFI market, these actions faced severe conceptual objections. While historically the often high costs of PFI were justified on account of the transfer of risk from the public to the private sector (see, e.g., Broadbent, Gill and Laughlin, 2005), this was no longer possible under the new system of ‘double subsidy’. Accordingly, with banks receiving subsidies and guarantees, virtually all risks had been transferred to the public sector, undermining the very idea that risk transfer would create important incentives for a prudent structuring of deals by the private sector partners (with financiers relying on government guarantees or subsidies in case of financial loss or project default). The idea that the combination of the high cost of PFI projects (see, e.g., Froud and Shaoul, 2001; Shaoul, 2009) with guarantees and subsidies would push the real cost of PFI beyond what was politically defensible, was aptly expressed by the then General Secretary of the Trades Union Congress (TUC) who noted that such an arrangement allowed for the privatisation of the profits and the nationalisation of losses (Leftly, 2009); especially as main PFIs were being financed by the now largely government owned and taxpayer subsidized banks Halifax Bank of Scotland (HBOS) and Royal Bank of Scotland (RBS). When Cameron’s new Conservative–Liberal Democrat coalition government was formed in May 2010, it abandoned one of Labour’s least effective PFI variants – the Building Schools for the Future Programme (BSF) – while stating that it

The future of Public Private Partnership in the UK 361 would continue to support PFI where this was appropriate. Despite assurance that PFI would be supported where it was appropriate only 32 PFI projects reached financial close in 2008 and 38 in 2009 (Adams, 2011), as compared to 59 PFI deals in the 12 months to the end of 2005 (Monaghan, 2005). BSF, which was intended to allow for the construction of 1,421 new schools over 20 years at a cost of £55 billion, was officially cancelled in July 2010, with government-given assurances that the 706 new school buildings and services that already had contracts signed would go ahead (Curtis, 2010). Commenting on this decision, the Conservative Secretary of State for Education – Michael Gove – noted that the scheme had been hit by ‘massive overspends, tragic delays, botched construction projects and needless bureaucracy’ and that ‘some councils which entered the process six years ago … [had] only just started building new schools’ (Curtis, 2010). Taking a more positive view of PFI, the Coalition announced in April 2011 that it would press ahead with 11 Department for Education projects and 17 at the Department for Communities and Local Government (Adams, 2011). Despite these assurances the PFI market softened further into the early months of 2012 and appears to have only recently entered a period of recovery (Gardiner, 2012).

The post-crisis approach to PPPs (PF2) Following the widespread concern that the public sector was not getting value for money and taxpayers had not received a fair deal, the coalition government in the UK conducted extensive consultations with industry (as a part of the ‘call for evidence’) on perceived and actual PFI failures and on the key features of its replacement model. In response to this consultation, in December 2012, the HM Treasury published a document entitled ‘A new approach to public private partnerships’, which summarized the findings and the new measures to be introduced. The key weaknesses of the PFI model were summarized as follows (HM Treasury, 2012): 1 2 3 4 5

time and cost overruns reducing value for money for the taxpayer; inability of the procuring authority to make contractual alterations during the operational period due to the lack of contractual flexibility; lack of transparency in terms of both the future liabilities created for the public authority and the investor returns; inappropriate risk transfer leading to high risk premium being charged to the public sector; excessive profits made by equity investors have created widespread concerns about the value for money of projects.

It was, moreover, argued that the inappropriate application of PFI had affected value for money. Additionally, there was a suggestion that the previous PFI credit regime had undermined genuine options appraisal leading to sometimes skewed decision-making and use of PFI in cases where there was insufficiently clear long-term financial profile.

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Recognised areas of strengths of PFI, meanwhile, were identified in relation to access to private sector project management skills, growing innovation and risk management expertise and activities related to ensuring that assets were maintained to a high standard throughout their lives. Following this analysis, the government announced its new PF2 model. The main novel aspect of PF2 is that the government will become a minority equity project co-investor, leading to a potentially better alignment of interests between the contractual parties. Other potential benefits of this include more collaborative partnership working, better allocation and management of risk, more transparent project information and contribution to strategic decision making. There is also an expectation that public sector equity provision will improve the achievement of value for money through the more appropriate management of project risk and the fact that the public sector will share investment returns, thus reducing the overall projects cost to the public sector. As concerns the lack of available credit, the government announced that it would create mechanisms to encourage investors with long-term investment horizons, such as pension funds, to enter into in PPP projects at an earlier stage rather than at project refinancing stage. Considering the thorough lending conditions, the government argues that this could also be eased via loan guarantees and credit support products provided by commercial banks, the EIB and other financial institutions. Overall there is an expectation that institutional investment will become an important source of finance for PF2. Under the PF2 model, the Shareholders’ Agreement sets out the governance arrangements for project delivery, including the parties who are shareholders in the SPV, the distributions of equity return, as well as the right of the public sector equity provider to appoint a local level observer to the Board (with voting rights and a fiduciary duty). Importantly, the target equity return of the public sector is matched to a market rate. A new PF2 Equity Unit within the Treasury has now been set up to transform the way government manages PPPs. Investment will be made on the same terms as those agreed by the private sector for a particular project. Two draft project agreements have been consulted upon, one for the Education Funding Agency (EFA) model designed for the Priority Schools Building Programme (PSBP) and the Treasury’s own template Standardisation of PF2 Agreements, both issued at the end of 2012 (Hart, 2013). Overall it is yet too early to judge whether the proposed PF2 system represents a more attractive option to public sector clients and the private sector, than did the earlier PFI-based model. Clearly, PS2 brings with it some radical changes as concerns the contractual structure of UK PPP. How these changes will affect actual behaviour patterns in terms of a hopefully more prudent and cost-aware procurement of PPP projects in the UK, however, remains to be seen.

Conclusion The UK is one of the pioneers of PPP. Many of the now common techniques for the analysis and implementation of PPPs, such as the Public Sector Comparator

The future of Public Private Partnership in the UK 363 or the SPVs were originally introduced in the UK and later on adopted by other countries. Against this background of initial innovation it is somewhat surprising to see how wedded the UK has become to its PFI approach and how comparatively little innovation the country has experienced in this context. Even where variants of PFI have been introduced, these have largely stuck to the original format of upfront financing, limited financial engagement by the public sector and lengthy 20- to 30-year contract. A notable exception to this is Scotland, where devolution and the election of a new government has opened the path to new approaches centred on greater financial transparency, control and the sharing of expertise. While often disputed in terms of their usefulness, some of these approaches can act as a valuable source of information about possible alternatives to the now widely criticised traditional PFI format. This is all the more the case, since much of this learning has taken place within UK boundaries and can readily be transferred to other UK regions. Perhaps what is to be hoped most for is that academics and policymakers will support a broad debate about the future of PPP which will centre on real alternatives instead of seeking to fix an approach which is likely to remain widely unpopular.

References Adams, S. 2011. Coalition is Sticking to ‘Wasteful’ PFI Funding. London: The Daily Telegraph. 18 April. Beck, M., Toms, S., Greener, I., Mannion, R., Brown, S., Fitzsimmons, D. and Lunt, N. 2009. The Role and Effectiveness of Public – Private Partnerships (NHS LIFT) in the Development of Enhanced Primary Care Premises and Services. Southampton: National Co-ordinating Centre for NHS Service Delivery and Organisation (NCCSDO). Bovis, C. 1999. Who’s Afraid of the Private Finance Initiative? The Private Finance Initiative Journal, 3(6): 20–23. Broadbent, J., Gill, J. and Laughlin, R. 2005. Risk, Uncertainty and Accounting: The Case of the Private Finance Initiative in the UK’s National Health Service. Critical Perspectives on Accounting Conference, New York, April. Chote, R. 2009. Two Parliaments of Pain, Institute of Fiscal Studies, http://www.ifs.org.uk/ publications/4509, accessed 15 July 2009. Crotty, J. 2007. If Financial Market Competition is so Intense, Why are Financial Firm Profits so High? Reflections on the Current ‘Golden Age’ of Finance. Political Economy Research Institute, Working Paper Series, Number 134, University of Massachusetts, Amherst. Curtis, P. 2010. School Building Programme Scrapped in Latest Round of Cuts. London: Guardian, 5 July. Davis, S. 2003. Investment Banking: Addressing the Management Issue., New York: Palgrave. Dinwoodie, R. 2009. South-East Set to Pilot New Approach to Public Buildings. London: The Herald, 4 July 2009, pp. 6. Eurostat. 2013. News Release, 64/2013. Luxembourg. Froud, J. and Shaoul, J. 2001. Appraising and Evaluating PFI for NHS Hospitals. Financial Accountability and Management, 17(3): 247–70. Gardiner, J. 2012. Exclusive: PFI Project Count Plunges 85% After Policy Review. London: Building.co.uk, 10 May.

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Gribben, R. 2009. Government Plans for New PFI ‘Bank’ Criticised. London: The Daily Telegraph, 2 March. Hart, J. 2013. PFI: Will Mark II be any Better? London: Construction Manager, July/August. Hayman, A. 2009.£13 Billion Rescue Plan for PFI Projects. London: Regeneration and Renewal, 9 March. Hellowell, M. 2009. Loss of Initiative. London: The Guardian, 4 February. Hellowell, M. and Pollock, A. 2009. Non Profit Distribution. Social Policy and Society, 8(3): 405–418. Hencke, D. 2009. Treasury Rescues Big Building Projects with £2 billion Injection. London: The Guardian, 3 March, 12. HM Treasury. 2012. A new Approach to Public Private Partnerships. London: HM Treasury. Leftly, M. 2009. Treasury’s New Man to Review the Future of ‘Broke’ PFI Schemes. London: The Independent on Sunday, 22 March, 78. Milmo, D., Inman, P., and Durrani, A. 2009.A Bridge too far for PFI Schemes. London: The Guardian, 18 April. Monaghan, A. 2005. Treasury Puts Some Numbers on Next Year’s PFI Market. London: Building.co.uk, issue 45. NAO. 2009. The Building Schools for the Future Programme: Renewing the Secondary School Estate, London: National Audit Office. NAO. 2014. Taxpayer Support for UK Banks. http://www.nao.org.uk/highlights/taxpayersupport-for-uk-banks-faqs/ accessed Jan, 2014. London. PAC. 2009. Building Schools for the Future. London: House of Commons. PPP Bulletin. 2009. Scotland’s Hub Project up and Running. http://www.pppbulletin.com/ news/view/14792, accessed on 6 July 2009. Scottish Executive. 2006. Building Better Local Services Together: Your Guide to the Hub Initiative. http://www.scotland.gov.uk/Resource/Doc/924/0041326.pdf, accessed on 10 August 2009. SFT. 2008. NDP Explanatory Note, November. Edinburgh: The Scottish Government/ Scottish Futures Trust. Shaoul, J. 2009. Financial Black Holes: Accounting for Privately Financed Roads in the UK, Report to ICAS, Edinburgh. Timmins, N. 2011. Public Finances: A Divisive Initiative. London: Financial Times, 7 August.

22 Public Private Partnerships in the US transportation sector Ahmed M. Abdel Aziz and Giovanni C. Migliaccio

Introduction The United States is a federal republic based on a Constitution ratified in 1789. At the federal level, the US relies on a legal system based on English common law, which is also used at the state level (except for the State of Louisiana whose legal system was influenced by early French and Spanish settlers). With a large geographical footprint (third worldwide) and a large population (fourth worldwide), the US also carries immense economic power with a Gross Domestic Product (GDP) of $16.72 trillion in 2013 (first worldwide). A close analysis of the GDP per capita better reflects the economic intensity of the US and its infrastructure needs. Among the top 100 countries for GDP per capita, only four have more than 100 million inhabitants, including the US (thirteenth), Japan (thirty-sixth), Russia (seventy-seventh) and Mexico (eighty-eighth). To support this human activity, a large infrastructure is in place, including energy production and distribution facilities, telecommunication networks, solid waste management facilities, water management systems, and transportation facilities and networks.1 Energy and telecommunication infrastructures are crucial to the economic and technological success of the US. Telecommunication networks include main lines (139 million users), mobile base stations (310 million users), and internet access points (245 million users). This sector is mainly privatized and under public scrutiny to limit the risk of monopolistic or cartel behaviors. The energy sector includes a larger set of infrastructure facilities able to handle both energy production and distribution. Energy production is mainly a privatized and highly regulated subsector. Electricity production amounts to about 4.1 trillion kWh, which makes the US the second worldwide energy producer after China. Whereas electric utilities have been cited as the first example of Public Private Partnerships (PPPs) in the US (Southard 2010), this subsector is now mostly privatized and subject to strict public scrutiny and regulations. Another major component of US-based energy infrastructure is the massive, privately owned pipeline network for natural gas (~2 billion km) and petroleum (~240,000 km). In the US, the amount of solid waste to be handled is staggering at 251 million tons per year. This requires a massive infrastructure for solid waste management (SWM) that also composts or recycles about 25 percent of the total solid waste.

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SWM facilities include landfills (~1,900), waste-to-energy projects (86), material recovery facilities (633), transfer stations (N/A), and yard trimming composting facilities (~3,100). This infrastructure sector has only recently seen some use of PPPs.2 Water management infrastructure can be grouped into two areas: clean water and drinking water. Clean water facilities include treatment plants, force mains, pumping stations and distribution networks, which are mainly municipally owned. Drinking water facilities include reservoirs, dams, treatment plants, trunk mains, plumbing stations and distribution networks. Ownership of these facilities is more diversified with 43 percent being publicly owned whereas the remaining are either privately owned (33 percent) or ancillary to other businesses (24 percent). Public– private ownership of these facilities stands at only 3 percent. Among larger systems (serving more than 10,000 people), there is a predominance of public ownership (90 percent).3 4 The transportation infrastructure sector is maybe the most complex in the US, and includes airports (~13,500), heliports (~5,300), ports, waterways (~41,000 km), railways (~225,000 km), and roadways (6.5 million km).5 Emergent use of PPPs for transportation infrastructure in the United States represents the main theme of this chapter. As mentioned above, some infrastructure sectors are fully privatized in the US while others have been mostly publicly owned and managed. The focus of this chapter is on roadway infrastructure, which currently seems the most dynamic sector in term of PPP adoption in the US.

Infrastructure procurement in the US The United States has a vast transportation infrastructure that heavily relies on highways and bridges in both rural and urban areas. The roadway network includes principal (e.g. interstate, freeways, and expressways) and minor arterials, major and minor collectors, and local roads. The US Federal Highway Administration (FHWA) records that this network has 4.1 million miles of public highways and 604,493 bridges, which carried around 3 trillion vehicle miles travelled (VMT) in 2010 (USDOT 2013). One quarter of the network miles is eligible to receive federal funds and is designated as federal-aid highways; the other three quarters are local roads. As a critical component of the federal-aid highways, the national highway system (NHS) amounts to around 162,698 miles of interstate highways, freeways, and expressways. Federal-aid highways carry 85 percent of the total VMT. Similarly, the NHS with only 4 percent of the total miles carries approximately 44 percent of the total VMT in the United States. Based on road length, 3.3 percent are owned by the federal government, 19.2 percent are owned by state agencies, and 77.5 percent are owned by local authorities and counties. Bridge ownership is almost equally divided between local and state governments (USDOT 2013). New highways and bridges are predominately delivered through design-bidbuild (DBB) delivery method. To improve project constructability, and time and cost control, design-build (DB) delivery was introduced in the US transportation sector in the 1990s. As of 2013, DB was authorized in nearly all the states. Another

Public Private Partnerships in US transportation 367 delivery system that is also gaining popularity is construction management general contracting (CMGC), which is also called construction management at risk (CMR). DB and CMGC/CMR provide some protection against the design, completion and cost overrun risks. However, they do not allow the private sector to contribute to the financing, operation or maintenance phases and, therefore, the incentive for better performance is mainly based on the provisions of the construction contract. In a deviation from this norm, alternative delivery and financing routes under the broader umbrella of PPPs are now evolving in the United States. These PPPs provides opportunities for the private sector to be more fully involved in some or all of the project phases including planning, design, construction, financing, operation, and maintenance, and to be responsible for some of the risks inherent in these phases. The USDOT defines PPP as: Public-Private Partnerships (P3s) are contractual agreements formed between a public agency and a private entity that allow for greater private sector participation in the delivery and financing of transportation projects. Typically, this participation involves the private sector taking on additional project risks, such as design, finance, long-term operation, maintenance, or traffic revenue. P3s are undertaken for a variety of purposes, including monetizing the value of existing assets, developing new transportation facilities, or rehabilitating or expanding existing facilities. (USDOT 2013) Several PPP arrangements have been developed, including for example, Design-BuildFinance-Operate-Maintain (DBFOM), Build-Transfer-Operate (BTO), DesignBuild-Finance (DBF), Design-Build-Maintain (DBM), and Design-Build-Operate (DBOM). Given the traditionally prevalent role of DBB, DB is also often referred to as a PPP and seen as a form of PPP with the lesser involvement by the private parties. In 1989, the Dulles Greenway project in Virginia was the first U.S. road project with a private financing component among the most recent wave of PPP projects. By the end of 2013, the number of PPP projects had reached 130 according to the Public Works Financing Newsletter. The following sections analyze several aspects of how PPPs have emerged in the roadway transportation sector and been implemented in the United States, including topics related to the origin, policies, financing, support and oppositions, institutional framework, and several other topics of interest.

Origins and drivers How and why it started: motivation Traditionally, for a project to proceed toward construction, funding must be available through state or federal (e.g. the federal Highway Trust Fund – HTF) allocations. A project would compete for funding with other projects in the state, and it may take several years until it receives funding. Once the project is built, its future operation and maintenance (O&M) will also compete for funding against other facilities in operation. Today the existing portfolio of transportation facilities

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is aging, and state and federal funds are lacking due to declining revenue sources and some long-term effects of the 2008 economic recession. As a result, a serious backlog is affecting US infrastructure; as stated by the American Society of Civil Engineering in its “Failure to Act” economic report (ASCE 2011): In 2010 the deficiencies in America’s surface transportation systems cost households and businesses nearly $130 billion. This included approximately $97 billion in vehicle operating costs, $32 billion in travel time delays, $1.2 billion in safety costs and $590 million in environmental costs. Since the 1980s, the federal and state governments have been looking into this chronic scarcity of funds and have realized that sustainable and reliable sources of funds must be sought out. For that, the federal government has enacted several laws with provisions for (a) tolling the federal-aid highways (after being prohibited to do so for long time), (b) allowing federal debt and credit assistance to state governments, and (c) allowing the private sector to participate in the delivery and financing of infrastructure through PPPs. Infrastructure needs and gaps As societies grow and cities expand, the need for infrastructure increases. The increase in population and businesses and their associated revenues (e.g. taxes and fees), however, may lag behind until the infrastructure is developed. Further, the collected revenues may not be directly used or matched for the development and maintenance of the infrastructure over its lifecycle. The result is that capital and maintenance projects may have to wait for years until they get funded. Consequently, the existing infrastructure can become overused, and investment starts to accumulate. The US Department of Transportation (USDOT) explained that various shortcomings of the traditional transportation funding system were leading states to search for alternatives other than fuel taxes (USDOT 2008). These shortcomings included poor system performance, growing resource and revenue scarcity, poor investment decision making, contradictory policy goals, and lengthy development cycle. Poor infrastructure conditions Over the years and particularly since the 1980s, the physical structure and operational performance of highways and bridges have been at the center of attention at all government levels due to the seriousness of the physical conditions, substandard operational performance, and the insufficiency of federal and state funds to carry out all much needed capital improvements and maintenance work. This has been documented by the American Society of Civil Engineers (ASCE) in a series of report cards. ASCE (2013) collected and analyzed data of 16 categories of infrastructure, including for example, bridges, roads, transit, rail, and ports. Since 1989, the roads have been rated in “Poor conditions (D)” and bridges in “mediocre conditions (C)” (see Table 22.1).

Public Private Partnerships in US transportation 369 Table 22.1 ASCE rating of bridges and roads since 1989 (ASCE 2013) Category

1989

2001

2005

2009

2013

Roads

D–

D+

D

D–

D

Bridges

C–

C

C

C

C+

Before ASCE developed this system, the USDOT has kept track of the status of the highways infrastructure. Starting in 1993, integrated biannual conditions and performance reports (C&P) on highways, bridges, and transit were submitted to the US Congress. The latest report found some improvements in highways and bridges, but also highlighted a significant backlog (USDOT 2013). For instance, the percentage of deficient bridges fell to 25.9 percent in 2013, down from 30.7 percent in the previous report. Still, it was reported that more than 30.8 percent of the bridges had exceeded their 50-year design life. For highways, more than 40 percent were experiencing congestion, and around 43 percent of the National Highway System vehicle miles travelled had an international roughness index that was greater than 95, which equals to a less than “Good” classification. Current expenditures The USDOT 2013 report also provided a detailed account of transportation expenditure. In Table 22.2, total current expenditures on transportation are listed at $193 billion, which was almost equally split between capital outlays (i.e., new Table 22.2 Direct expenditure for transportation (non-transit) in 2010 (USDOT 2013) Highway Expenditures (Billions of D ollars 务 _______________________________________ Federal______ State_______ Local_______ Total______ Percent Capital Outlay Noncapital Expenditures Maintenance Highway and Traffic Services Administration Highway Patrol and Safety Interest on Debt Subtotal

$0.8

$72.6

$26.8

$100.2

48.8%

$0.3 $0.0 $2.4 $0.0 $0.0 $2_7

$13.0 $9.0 $8.8 $8.7 $7.0 $46.4

$20.1 $6.5 $4.9 $9.4 $2.9 $43.7

$33.4 $15.4 $16.2 $18.1 $9.8 $92.9

16.2% 7.5% 7.9% 8.8% 4.8% 45.2%

Total, Current Expenditures Bond Retirement

$3.6 $0.0

$119.0 $8.1

$70.5 $4.1

$193.0 $12.3

94.0% 6.0%

Total, A ll Expenditures

$3.6

$127.1

$74.6

$205.3

100.0%

Funded by Federal Government* $0.8 Funded by State or Local Govts* $0.0 Total________________________________ $0.8

$42.1 $30.4 $72.5

$1.4 $25.4 $26.8

$44.4 $55.8 $100.2

44.3% 55.7% 100.0%

$3.6 $0.0 $0.0

$42.1 $81.9 $3.1

$1.4 $23.4 $49.8

$47.1 $105.3 $52.9

22.9% 51.3% 25.8%

Total________________________________ $ 3 ^ _______$127.1_______ $74.6______ $205.3

100.0%

Funded by Federal Government* Funded by State Governments* Funded by Local Governments*

* Amounts shown in italics are provided to link this table back to revenue sources shown in Exhibit 6-1. These are nonadditive to the rest of the tabte, which dassifies spending by expending agency.

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land acquisition, design/engineering, new construction, reconstruction, resurfacing, and rehabilitation) and noncapital expenditure (i.e., maintenance, highway and traffic services, administration, etc.). These expenditures represented 1.1 percent of the $17.3 trillion GDP. Current expenditure on transportation has been increasing over the years in nominal dollar terms. Table 22.3 shows an average 5.1 percent annual rate of change between 2000 and 2010. Total expenditure has been increasing over the years at an average annual rate of 5.3 percent due to a higher amount of bond retirements, as shown in Table 22.4. In 2010, the $205 billion total expenditure was funded by federal government at 22.9 percent, state governments at 51.3 percent, and local governments at 25.8 percent. Transportation backlog Despite $205.3 billion investment, the backlog for required highways investment reached $372.7 billion, and the backlog for bridges reached $106.4 billion; creating a backlog totaling $479.1 billion for system rehabilitation (i.e., reconstruction of existing highway lanes and bridges, resurfacing, and rehabilitation). An additional backlog of $225.9 billion investment would be needed for system expansion (i.e., new construction of highway and bridges and adding new lanes for existing highways), and $103.1 billion for system enhancement (i.e., safety enhancements Table 22.3 Annual transportation expenditure (non-transit) (USDOT 2013)

2000 Capital Outlay Maintenance and Traffic Services Administration Highway Patrol and Safety Interest on Debt

$61.3 $30.6 $10.0 $11.0 $4.6

H ighw ay E xpenditures, B illio n s o f D ollars 2002 2004 2006 2008 $68.2 $33.2 $10.7 $11.7 $5.4

$70.3 $36.3 $12.7 $14.3 $5.8

$80.2 $40.8 $13.1 $14.7 $6.6

$90.4 $45.9 $17.8 $17.3 $8.5

Bond Retirement__________________ $ 5 J ______ $ 6 ^ ______ $ 8 £ _____ $8J_______ $8.6

2010

A n nual Rate o f Change 2010/2000

$100.2 $48.8 $16.2 $18.1 $9.8

5.0% 4.8% 4.9% 5.1% 7.9%

$12.3______ 9.2%

Table 22.4 Funding sources for transportation (non-transit) (USDOT 2013)

2010

A nnual Rate o f Change 2010/2000

$37.6 $52.8 $90.4

$44.4 $55.8 $100.2

5.4% 4.7% 5.0%

$39.8 $96.6 $52.2 $188.5

$47.1 $105.3 $52.9 $205.3

5.5% 5.3% 5.0% 5.3%

H ighw ay Funding, B illio n s o f D ollars 2002 2004 2006 2008

___________________________________ 2000 C apital O utlay Funded by Federal Government $26.1 Funded by State or Local Govt's $35.2 Total____________________________ $61.3

$31.5 $36.7 $68.2

$30.8 $39.5 $70.3

$34.6 $45.6 $80.2

Total E xp enditures Funded by Federal Government $27.5 Funded by State Governments $62.7 Funded by Local Governments $32.6 Total___________________________ $122.7

$32.8 $69.0 $34.1 $135.9

$33.1 $72.8 $41.6 $147.5

$36.3 $77.4 $49.8 $163.5

Public Private Partnerships in US transportation 371 traffic control facilities, and environmental enhancements). The total estimated investment amounted in 2010 to $808.2 billion (USDOT 2013). Future investment needs Looking at a planning horizon of 20 years, the USDOT (2013) examined a number of scenarios to predict the transportation capital investment requirements from 2011 to 2030. The first scenario is to “sustain the 2010 spending”; this calls for $100.2 billion per year, which represent $2.0 trillion at constant dollars, or $2.5 trillion with 2 percent inflation, and $3.1 trillion with 4 percent inflation. The second scenario calls for “maintain conditions and performance” to the level of 2010; this calls for $100.2 billion at 2010 which goes down to $74.9 billion by 2030, which represent $1.7 trillion at constant dollars, or $2.1trillion with 2 percent inflation, and $2.6 trillion with 4 percent inflation. The third scenario is an “improve conditions and performance scenario”; this calls for $100.2 billion at 2010 which increase to $197.8 billion by 2030, which represents $2.9 trillion at constant dollars, or $3.7 trillion with 2 percent inflation, and $4.7 trillion with 4 percent inflation. It is worth noting that this scenario does not reduce the value of a continuing backlog. Along with the USDOT estimates of future investment requirement from 2011 to 2030, the ASCE (2011) “Failure to Act” economic report projected that, between 2010 and 2040, an annual investment of $196 billion would be needed for highways and bridges. Depletion of tax revenues and its impact on the federal highway trust fund Public highways infrastructure is generally funded through federal and the state and local governments, as shown in Figure 22.3. The general sources of funds include user charges, which include fuel taxes, vehicle taxes and fees, tolls, and other sources such as property taxes, investment income, bond issues, and general fund appropriations. The main funding sources for all government levels are fuel and vehicle taxes, which account for more than 40 percent of the total funds collected. With the heavy reliance on fuel and vehicle taxes, investments for highways have become susceptible to regional and national economic conditions, and to other factors such as the development and use of fuel-economy, electric, and hybrid vehicles. These can lead to substantial reduction in the tax revenues to all levels of government, which along with the increased demand for capital and maintenance projects can trigger funding gaps and investment shortages. For example, the recession of 2007–2009 was accompanied by a reduction in vehicles miles traveled and a corresponding reduction in the federal fuel and vehicle tax revenues from 38.9 billion in 2007 to 34.6 billion in 2009. Funds from the federal government are provided through the Highway Trust Fund (HTF) and made available to the federal-aid highways. Since its inception in 1956 the HTF has acted as the collecting hub for the motor-fuel and motorvehicle taxes and fees. With declining fuel and vehicle tax revenues, the HTF

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fund has suffered shortfalls from time to time and starting in 2008 its balance was declining; the federal government had to intervene and transfer money from the treasury general fund – $40.4 billion in 2008, $6 billion in 2013, and $12.6 billion in 2014, and more other transfers expected in the future. To increase the stability of the fund, more revenue sources are constantly sought, for example by increasing fuel and vehicle tax rates (currently set at 18.4 percent), associating taxes to the VMT instead of fuel consumption, and seeking additional transfers from the general fund. Other attractive forms of procurement that could have filled the gap The infrastructure gap has widened over time as a result of two factors. The previously described scarcity of public funding (i.e., funding gap) has reduced the ability to meet the increased need for additional capacity on certain corridors and endangered the upkeep of the existing roadway network. As a result, the backlog has grown. In addition, projects, when approved for funding, often take a long time to see completion (i.e., delivery gap). To date, the funding gap has been partially addressed through an increase in public-backed credit assistance, which has an alternative to the use of private funds, which may have slowed down the adoption of types of PPPs that include private financing. To address the delivery gap, public agencies in the US have increasingly relied on DB project delivery, which is seen as the “mildest” form of PPP. However, the use of DB has only permitted the fast-tracking of the most urgent projects, while it has not addressed the infrastructure gap at large (although the use of integrated forms of delivery, such as DB is seen as a requirement for a successful use of other types of PPPs). For instance, California proposed in 2008 to implement an infrastructure delivery and financing policy. While strongly relying on private fundraising for its implementation, this proposal also tried to address lengthy delivery periods through the increased use of design outsourcing and design-build delivery, while promoting the development of an engineering workforce within the State through higher education programs.6 7 Why the choice of PPPs Adding to poor conditions of infrastructure, a reduction in tax revenues after the 2008 recession has motivated state and federal governments to start looking for alternative sources of funding and financing options. Various reasons have been cited to support this new interest in PPPs (FHWA 2010, USDOT 2008), including that PPPs can:

• Expand the financial capacity of public agencies by providing access to private •

capital (e.g. equity contributions, commercial loans, and private placements) that can add to or substitute the public investments needed for infrastructure. Increase total debt capacity particularly if public agencies were constrained by legal limits on the amount of debt that would be issued.

Public Private Partnerships in US transportation 373

• Assist in the management of traffic congestion and system unreliability by • • • •

providing high-quality, well managed projects and better performance. Accelerate the delivery of public infrastructure. With PPP, it becomes possible to build infrastructure that would otherwise be delayed for several years. Assist in saving the time and cost of projects compared to traditional projects. Allow the allocation for risks to the party best able to control and manage the risk. Provide for better asset management and on-time and on-budget delivery.

Opposition and support for PPP Oppositions PPPs have seen opposition from different entities that have raised several issues.

• The labor union opposition to PPPs is quite well known. Employed-labor in

•

•

public positions voiced concerns over levels of employment, wages, pension, working conditions, and collective bargaining rights. For example, the Professional Engineers union in California described PPP as “A bad deal for taxpayers.” The union objected to the use of PPP for the Presidio Parkway (Doyle Drive Replacement) arguing that it lacked safeguards that would ensure the public agency involvement and inspection. The California Supreme Court, in November 2011, rejected an appeal from the union and allowed the state to contract with a PPP company. The trucking industry also opposes PPPs due to its long-time opposition to charging tolls on interstate highways. The American Trucking Association (ATA) prefers increasing fuel taxes to charging tolls on highways (US Policy 2012). The public has often opposed tolls on existing public infrastructure assuming that roads have been already paid for through taxes and other fees. For example, Minnesota TH 212 was vetoed down by one of four cities adjacent to the road which rejected tolling the highway.

Concerns PPPs are not business-as-usual for public agencies that are used to work with the traditional DBB delivery. In 2004, the USDOT stated that, “Obstacles [to PPP] including legal, financial, political, and cultural hurdles are often encountered in the formation of these partnerships” (USDOT 2004). Recent government concerns include (USDOT 2004; NCSL 2010):

• The loss of government control during the PPP contract terms. Losing the

ability to make decisions on nearby roads (e.g. rehabilitation or building new roads) was a concern that led some states including California, Florida, Arizona, and North Carolina to prohibit the non-compete clause in their PPP

374

• •

•

Ahmed M. Abdel Aziz and Giovanni C. Migliaccio contracts. California had to terminate one of its PPP contracts (SR91) and bailout the project at $207 million. Excess private profits led some states to cap the rate of return, and/or to enforce sharing the extra profits. The risk of default or bankruptcy of the PPP project has been of some concern. Public agencies might carry the burden of default/bankruptcy and would find itself in a position where it must pay for the project, call for a re-lease with another private company, and/or invoke a substitute clause to transfer the project to the lenders. Bankruptcy is real in PPP and has already been experienced by the Las Vegas Monorail, Southern Connector in South Carolina, and the South Bay Expressway in California. The lack of transparency of PPP projects has been identified as a major concern by 30 percent of public state officials participating in a survey by the NCSL (2010).

Government and Congress Review of PPPs Despite the federal government’s substantial efforts in promoting PPPs, there were a number of reports that cautioned the use of PPPs. These reports came from the Government Accountability Office (GAO 2008), the Congressional Budget Office (CBO 2012), and the Office of Inspector General (OIG 2011). GAO, an office of the United States Congress, had worries about the economic efficiency and the protection of public interests under PPPs. GAO (2008) cautioned that PPP would be more costly than traditional procurement, and that the public sector might gave up a measure of control (e.g. in influencing toll rates) under PPPs. GAO highlighted the importance (a) to evaluate there is national interest in PPP particularly if there are broader domestic implications (e.g. on interstate commerce), (b) to protect the public interest (e.g. through upfront analysis), (c) to control or prevent the excess revenues in PPPs, and (d) to review and critically analyze the rates of return to private investors in highway PPPs. Similarly, the Congressional Budget Office (CBO) expressed concerns about PPPs and questioned their effectiveness in reducing the time and cost of projects (CBO 2012):

• CBO argued that there was not enough data to ascertain the effectiveness of

•

•

PPPs in reducing time and cost of projects compared to the traditional delivery system. It suggested that only small numbers of studies found that PPPs have built highways slightly less expensive and slightly more quickly compared to the traditional approach which could not be generalized to other projects. Realizing that PPPs generally include a DB stage and an O&M stage, CBO studied the DB stage and concluded that using DB appeared to slightly lower the cost of projects and to allow their quicker completion. CBO argued, however, that the savings in costs appeared to be concentrated among larger, more complex projects (more than $100 million). Regarding the O&M stage, CBO argued it would be difficult to compare the efficiencies in O&M between a PPP and the traditional approach. In analyzing

Public Private Partnerships in US transportation 375 data of the Chicago Skyway and the Indiana Toll Road, CBO found a reduction close to 10 percent in the annual O&M expenditures in the PPP approach. However, CBO questioned that this reduction would be attributed to the use of lower labor costs (i.e., replacing old employees with new who earned between 25 percent and 40 percent less), and the reduction in overall traffic volumes. The Office of the Inspector General of USDOT (OIG 2011) surveyed a number of PPP projects and concluded that, “PPPs have several financial disadvantages when compared to traditional public sector financing. Specifically, PPPs have a higher cost of capital than traditional public financing, and they incur certain tax obligations that do not exist for public entities.”

Policy framework for PPP History of PPP in the US Since the late 1980s, PPP started slowly to play a role in the development of the US highway infrastructure. During that time, the backlog of highway and bridge deficiencies was increasing and there were budget deficits at different levels of government. During the early 1980s, the United States experienced an economic recession, which led the government to cut its budget and increase corporate taxes. This affected the highway infrastructure sector. As reported by CBO (1999), the federal government started to load much of the infrastructure spending on the states and local governments. Over the same period, the number of bridges classified as structurally deficient was increasing. The Highway Trust Fund (HTF) was unable to meet the demand and in 1982 the rate of the fuel taxes supporting the Fund was increased from 3 cents to 9 cents per gallon. During the 1980s, however, HTF was still unable to meet the needs of the Federal-Aid highways. Private participation in the delivery of infrastructure would generally require the imposition of user charges (i.e., tolls). One of the main problems was charging tolls on public highways due to a 70-year-old prohibition of such tolls on federal highways. In 1985, CBO (1985) prepared a study to examine the costs and benefits of toll financing and to identify criteria to use tolls. In 1987, Congress authorized under section 120 of the Surface Transportation and Uniform Relocation Assistance Act, a toll-facilities pilot program which allowed a number of states to build toll roads with a 35 percent maximum participation of federal assistance, however with no projects on the interstate highway system (Congress 1987; GAO 1990). The States included Delaware, Georgia, Pennsylvania, California, Florida, South Carolina, Texas, West Virginia, and Colorado. The pilot public toll-road program was the precedent for PPPs and the subsequent federal acts that started in the 1990s. In 1990, the Federal Highway Administration initiated the Special Experimental Project Number 14 (SEP-14) to explore alternative approaches to the overall project development process – contracting, right-of-way acquisitions,

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project finance, and compliance with the FHWA’s National Environmental Policy Act (NEPA) requirements. The Design-Build (DB) delivery system was one of the significant approaches explored by SEP-14. Since its inception, 32 states experimented with DB under SEP-14.8 This initial success led the FHWA to issue a DB Final Rule in 2002, which approved the use of this delivery method on federal-aid projects. In parallel with the 1980s federal efforts, two states pursued the use of tolls on state highways using PPPs. Virginia was a pioneer with its Virginia Highway Corporation Act of 1988, which provided for the Dulles Greenway in 1989. California was on the same track with its Assembly Bill 680 in 1989, which authorized the DOT to enter into agreements for four transportation demonstration projects; the $126 million 10 miles State Route 91 was the first of the projects to move forward and its agreement was signed in 1991. Official government policy (federal and states) Realizing the shortfalls in funds, tolling highways and PPPs started to slowly emerge as potential avenues for infrastructure funding and operation. In 1991, a significant change came with the signing of the Intermodal Surface Transportation Efficiency Act (ISTEA), which was authorized for six years at a total funding of $155 billion. ISTEA included various provisions for PPP use and tolling of road facilities. The act allowed public agencies to enter into an agreement with a private sector entity to design, finance, construct, and operate transportation facilities, allowed private ownership of toll road facilities, and required public agencies to use toll revenues to pay for the debt, to pay reasonable return on investment of the private entities, and to pay for the costs of O&M of the toll facility. Subsequent to the ISTEA, the 1998 Transportation Equity Act for the 21st Century (TEA-21) and its amendments and corrections in the TEA-21 Restoration Act of the same year furthered policy formulation on PPPs. A total of $199 billion was committed to surface transportation. TEA-21 introduced and reinstated pilot programs in innovative finance; these included credit assistance (loans, guarantees, lines of credits) through Transportation Infrastructure Finance and Innovation Act (TIFIA), State Infrastructure Banks (SIBs), and federal matching flexibility. In 2005, the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) was authorized. SAFETEA-LU provided funding at a total of $244.5 billion. This Act focused on transportation issues of national significance including safety, equity, innovative finance, congestion relief, efficiency, and environmental stewardship. SAFETEA-LU made it easier and more attractive to use PPPs by expanding the eligibility of projects for private activity bonds (tax-exempt for highways), providing additional flexibility to use tolls, and by rolling out TIFIA and SIB loan policies. Among the improvements, SAFETEA-LU initiated tolling pilot/demonstration programs: this included a new Interstate System Construction Toll Pilot Program which allowed states to charge tolls for construction of three projects on the Interstate highways,

Public Private Partnerships in US transportation 377 and a new Express Lanes Demonstration Program which allowed 15 projects to utilize congestion tolls. SAFETEA-LU also established a program to provide grants to states for projects of national and regional significance ($500 million or more). Among the selection criteria was how much the project would leverage the federal investment through PPPs. SAFETEA-LU authorization was set to expire in 2009 but was extended to June 2012. Moving Ahead for Progress in the 21st Century Act (MAP-21) is a new law signed in 2012. MAP-21 refined and built on the programs and innovative finance tools of its predecessors ISTEA and SAFETEA-LU. MAP-21 encourages the private sector, PPPs, and provides for a substantial increase of the TIFIA program. MAP-21 allowed the mainstreaming of tolling of new Interstates and added lanes on existing Interstates, which was previously allowed only as pilot program under SAFETEA-LU act. MAP-21 amended the Tolling Provision of Section 129 of Title 23 United States Code to permit federal participation on the same basis as in the construction of toll-free highways. This applies, for example, to the initial construction of new toll highways (interstate and non-interstate), initial construction of new lanes on highways and interstates and converting them to toll facility subject to the toll-free lanes after construction to be no less than before construction, conversion of high occupancy vehicle lane to toll facility, and the reconstruction, restoration, or rehabilitation of a highway on the Interstate System if the number of toll-free lanes after construction is not less than that before construction. MAP-21 also provided for public and private ownership of the toll facilities, e.g. using PPPs (Congress 2012). Leadership for PPP policy In the United States, decisions on whether to use PPPs are in the hands of state and local governments. However, the federal government is still the main driver for promoting and influencing states to use PPP. Federal efforts and legislative provisions can be summarized as follows:

• Constraints on tolling new federal-aid highways were removed. • Federal tax exemptions were extended to private activity bonds. • Federal credit assistance, TIFIA, SIBs, and other financial tools, which • •

encouraged states to use PPP and assisted private sector in securing finance at favorable terms, were established. MAP-21 provided for streamlining PPP by requiring the US Secretary of Transportation to develop best practices for how the states would deal with the private sector in PPPs and to develop standard PPP transaction model contracts. FHWA developed a legislation model for the states to use when developing their own PPP legislations.

By January 2013, 33 states and one territory authorized the use of PPP. The number of enabling states, however, is subject to change since some of the states may let their authorization expire without renewal.

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Financial context for PPP In the United States, state and local governments decide how to fund highway projects, and usually provide around 55 percent of the investments (USDOT 2011). Tables 22.2–22.4 provide information on the funding trends. When a delivery system entails no private financing (e.g. traditional DBB, DB, and DBOM), highway development is usually funded through public sources – the state and local tax revenues, state and local fees, and/or federal funds/grants. If the funds are not available or not sufficient, money would be borrowed through public debt, which will eventually be paid using future tax revenues and/or tolls. When the delivery system entails private financing (e.g. DBFOM), funding is made available using private equity and/or private debt, both of which would be paid in the future using tolls and/or government payments. US financial institutions have historically played a major role in national and international PPP markets. In 1992, the Bank of America was underwriting a $600 million syndicated loan for one of the first BOT projects in the UK, the Second Severn Bridge. With the rise of the PPP market in the United States, domestic investment banks and institutional investors started to look at the opportunities associated with taking an active role in PPP financing. Foreign investors have also participated in the financing of US-based PPPs and it has been suggested that nearly every large-scale PPP project had at least one international bank in its financial structure. A widespread tendency to overestimate the demand generated by PPP projects has, however, severely affected the economic viability of many projects. While several projects are on track, some have experienced refinancing, others have renegotiated the terms with the government, and others filed for bankruptcy. CBO (2012) mentioned that private equity investors in privately financed PPPs were not achieving the return they were expecting, which could partially explain why no major highway projects have been financed exclusively through private sources since 2002. This could also explain why the public share, through federal credit assistance (e.g. TIFIA) has been on the rise. Private financing Most of the early 1990s PPP projects in the United States were financed through private debt and private equity. Private equity is usually provided by private sponsors and private equity funds, while private debt is underwritten by commercial and investment banks and/or institutional investors. Major investment banks for US-based PPPs include Bank of America, Merrill Lynch, JP Morgan, Barclays, BNP Paribas, Credit Agricole, Deutsche Bank, Scotiabank, Macquarie Group, Goldman Sachs, and Morgan Stanley. Institutional investors represent another source or private financing and are geared to take a greater role in the future. They include insurance companies and pension funds, such as CIGNA Investments, Prudential, the California Public Employees’ Retirement System (CalPERS), and the California State Teachers’ Retirement System (CalSTRS). These investors

Public Private Partnerships in US transportation 379 usually look for stable long-term returns that would result from investing in a viable PPP project. A good example of that is the Dallas Police and Fire Pension System, which partnered with Cintra Concessions and Meridiam Infrastructure to form the concession company for the North Tarrant express lanes in Texas. The Dulles Greenway in Virginia is an example of private sector financing. Dulles Greenway was a 43-year DBFOM 14-miles toll road built between 1993 and 1995 at $350 million to connect Dulles International Airport and Leesburg, Virginia. The private company, TRIP II, provided $40 million in equity, obtained $258 million private placement bonds from ten institutional investors (led by CIGNA Investments, Prudential Power Funding Associates, and John Hancock Mutual Life Insurance Company), and obtained the rest in private commercial debt (construction loans) from three banks (Barclays, NationsBank, and Deutsche Bank AG). The initial concession was due for transfer by 2036, however, with traffic being less than expected the Virginia DOT in 2001 extended the concession by 20 years to 2056. In 2005, the Australian Macquarie Infrastructure Group purchased TRIPP II for $617.5 million. Macquarie increased the financing through the placement of private stock in Australia and through the Macquarie Global Infrastructure Total Return Fund in New York. The project operator initially was the Italian-based company, Autostrade. Public financing Most of the recent PPPs in the United States are financed by both private and public debt. In 2002, a survey by CBO (2012) revealed that PPPs were rarely making profits and suggested that there were not enough toll revenues to pay for the project debt. The private companies realized the difficulty of raising finance in the PPP market and there was a decline in the use of PPPs. With TEA-21 and SAFETEA-LU, the federal government provided federal assistance credits and facilities that would allow private companies to obtain commercial loans at favorable terms. These federal facilities proved to be significant following the 2007–2009 economic recession when obtaining private credits was difficult, resulting in nearly all recent PPP projects having at least one of the following federal assistance facilities (USDOT 2004; FHWA 2014):

• GARVEEs are debt-financing instruments (e.g. bonds and notes), which are

•

issued based on the promise of future Federal-aid grants. GARVEEs can be issued by a state, political subdivision, or a public authority. GARVEE was introduced in the NHSD act of 1995. By 2013, a number of 33 states, D.C., and Puerto Rico had already used GARVEE with a total of $17.05 billion. Private Activity Bonds (PAB) are debt instruments issued by state or local government on behalf of a private sector sponsor/entity for highway projects. PAB allows the private sector to tap the lower financing costs of tax-exempt municipal bonds. PAB for highways was allowed with the passage of the SAFETEA-LU in 2005. By 2014, around $4.5 billion PAB bonds were issued for 11 projects and $4.7 billion allocations have been approved for seven projects.

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• TIFIA provides low-cost, flexible loans and other credits assistance to projects.

•

•

TIFIA was part of the pilot program of TEA-21 act of 1998 and expanded with the SAFETEA-LU act of 2005. TIFIA has been a significant assistance to PPPs as it allowed private sponsors to get improved access to the capital markets and to obtain flexible repayment terms and favorable interest rates. TIFIA federal credits could be made as direct loans, loan guarantees, and standby lines of credit. SIB was initially authorized as a pilot program under the National Highway System Designation (NHSD) act of 1995. It was authorized for four states under the TEA-21 of 1998 and expanded with the authorization of the SAFTEA-LU in 2005. SIBs are revolving funds that are capitalized with Federal-aid funds and matching state funds. SIB can provide to public and private sponsors loans and credit enhancement in the form of letters of credit, lines of credit, and loan guarantees. As of 2012, more than 1,000 projects have used SIBs in 33 states (Puentes and Thompson 2012). Section 129 “Toll Roads, Bridges, Tunnels, and Ferries” of the United States Code, Title 23 “Highways” was amended after the 1991 ISTEA act which allowed federal participation in a state loan to a toll project. The 1995 NHSD act expanded the participation to non-toll projects. Section 129 loans, however, were not used since its inception except for two projects. The first was the $700 million President George Bush Turnpike, Texas, which received a $130 million Section 129 loan. The second was the $63 million second span of the Blue Water Bridge crossing, Michigan, which experienced $45 million Section 129 loan.

The Central Texas Turnpike System (CTTS) is an example of public–private financing. This infrastructure program includes three interconnected tollways. The State Highway 130 (segments 1–4) was the backbone of the CTTS. To deliver this project, Texas Turnpike Authority (TTA) utilized a PPP contractual arrangement named Comprehensive Development Agreement to contract out design-build services to Lone Star Infrastructure, a joint venture of Fluor Corporation, Balfour Beatty Construction and T.J. Lambrecht Co. As part of this agreement, TTA had the possibility to exercise a maintenance option before the end of construction. The total cost of the CTTS was $3.25 billion and was secured through a public financing mix, which included first tier revenue bonds/notes ($1,358 million), a TIFIA loan ($900 million) that was used to retire Bond Anticipation Notes [BANs] in 2007 and 2008, state funding ($520.1 million), local contributions and funds for right-of-way acquisition ($286.5 million), and accrued interest ($185.2 million).9 CTTS encountered similar issues to similar PPPs by initially experiencing a toll shortfall that led to a request for higher subsidies from the state in 2011. However, only a year later, Standard & Poor’s lifted its credit rating into the A category citing a good outlook on toll revenue. Cost of finance PPP private financing has frequently been criticized for higher costs of finance when compared to public financing. Higher costs of finance were claimed for

Public Private Partnerships in US transportation 381 cancelling several projects in California, following Assembly Bill 680 (USDOT 2004). With the passage of SAFETEA-LU in 2005, private financing got a boost when Private Activity Bonds were authorized with the status of tax-exemption that assisted in lowering the interest rates on private debt. Recently, CBO (2012) concluded that the cost of financing a project privately is about the same as publicly financed projects, taking into consideration the costs of risk borne by the taxpayers and of interest subsidies, forgone revenues from depreciation, and transaction costs.

Institutional framework (contractual, legal, governance) In the US, the policies that regulate the public contracts for transportation are well established at all government levels when it comes to working with the traditional DBB delivery. For PPPs, the case is different, and it is hard to generalize on the contractual, legal, and governance issues of PPPs since PPP and PPP-statutes are still evolving and experiences vary among the states. PPP approval process Federal agencies have taken an active role in encouraging and facilitating use of PPPs by state and local governments. Since ISTEA in 1991, nearly all the federal surface transportation authorization acts have increased support for PPPs without federal approval rights on PPP projects. However, if the project is a federal highway, then federal requirements must be satisfied when it comes to title 23 of the United States Code, National Environmental Policy Act (NEPA), and several other environmental laws and regulations. NEPA is a big hurdle that needs to be managed for proper and timely implementation of PPPs. Policies and approvals for the use and implementation of PPPs are set at the state level. In 2013, PPPs are authorized for use in only 33 states and one territory. Within these states, the legislation differs on whether the executive units (e.g. state DOT) would need to get approval from the legislature for every PPP project or the approval would be granted to the executive units. In some states, such as Delaware and Missouri, approval can be obtained from certain committees or committee chairs. Part of the approval process involves the consideration of the public opinion on proposed PPPs. NEPA process by default requires the public to be involved to provide comments on the pros and cons of a proposed project. In some cases communities can veto the project, which requires private sponsors to work on convincing the public and stakeholders of the merits of a project PPP standard legislative models In a step to assist states in developing their own PPP acts, the FHWA developed a working draft for a PPP model legislation10 based on a 2010 survey of existing PPPs statutes. The model provided the core provisions that should be considered when developing a state’s own PPP legislation. In a more comprehensive effort, the

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FHWA developed a PPP Toolkit,11 which provides guidance documents and analytical tools to assist policymakers, legislative and executive staff, and the transportation professionals in the initiation of PPP acts and in the implementation of PPP projects. The toolkit addresses four areas: legislation and policy; planning and evaluation; procurement; and monitoring and control. In a similar effort, in 2010, the National Council of State Legislatures (NCSL) developed a toolkit for legislators,16 which included a summary of the major state PPP statutes and nine principles to guide state legislators “making important policy decisions about PPPs.” While state PPP legislations have common provisions, the major differences are around the following issues (NCSL 2013)12 13:

• the government level that would be authorized to use PPP (DOT and/or local • • • • • • • • • •

authorities); project limitations (pilot/demonstration or any project); geographic location (particular cities or localities); the type of PPP arrangement (DB, DBF, DBFO, DBOM); the use of non-compete clauses; the use of private finance (WA State does not allow private finance); the toll-rate-setting authority (state, private company, or both); the use of unsolicited PPP proposals (allowed or not allowed); whether the state law permits state/federal funds to be combined with private funds; if state approval is required for each PPP project; if toll revenue bonds are allowed.

PPP standard procurement and contract models PPP authorizations by state legislatures or state executive units (e.g. DOTs) usually follow a multi-stage procurement process for the selection of a PPP private entity. This process is often shaped around three sequential requests for expression of interest, qualifications, and proposals. However, different paths are available especially when a project is proposed by an industry partner (see later description of unsolicited proposals). According to the American Bar Association (ABA), 17 states and hundreds of local authorities have adopted the ABA Model Code for Public Infrastructure Procurement14 developed in 2007, which provides provisions for DB, DBOM, and DBFOM PPP arrangements. Contractors’ proposal are usually evaluated with a mix of price and non-price weighted criteria with a scoring system (pass/fail or point system) to identify the one offering the best value15. Recently, the authorization act of 2012, MAP-21, provided an amendment to Section 112(b) Letting of Contracts of Title 23 Highways of the United States Code. This amendment allowed for two-phase contracts, and for contractor’s selection based on qualification, experience, and best value. After the selection and evaluation of a private partner, a contract is awarded. However, there is no standard contract for the different PPP arrangements in the US. Some states (e.g. Texas and California) refer to the contract as a Comprehensive Development Agreement (CDA). In 2012, MAP-21 act included provisions

Public Private Partnerships in US transportation 383 requesting the USDOT to develop standard PPP model contracts to assist the States in their PPP initiatives. This move went into the realization stage in 2014 when the FHWA website provided for public input and conducted listening sessions for the proposed model contracts.16 PPP payment mechanisms Payment mechanisms other than the traditional capital payments and usage payments (e.g. toll revenues) are quite new in the United States. Traditional and DB projects are generally paid to the contractors using capital payments as the project progresses. Finance-based PPPs often use tolls to compensate the contractors for risks associated with demand and revenue. With the advancement of, and the reliance on, federal credit assistances (e.g. TIFIA), compensating the private entities started to shift toward performance-based payments, the availability payments. Also, when toll revenues would not be sufficient to pay for a project debt, availability payments would be used. Availability payments have been used on six projects by five states between 2009 and 2013. A review of these projects has shown that out of six projects, five were DBFOM and one DBFM, four were highways, one was a tunnel, and one was a rail project. For example, I-595 managed-lanes project in Florida established a $65.9 million annual maximum availability payment over 35 years to compensate the contractor for the DBFOM project. The project cost was $1.83 billion in present value terms based on 2009 dollar. However, these initial utilizations of availability payments in the United States could be considered an initial step toward a more comprehensive design of payment mechanisms that would combine a mix of payment approaches (e.g. capital, usage, availability, O&M, safety, and user satisfaction) into a project-specific payment mechanism aligned with the agency’s objectives for using PPP.

Organizational structure PPP government unit As previously stated, state governments play a major role in PPP implementation by providing legislative authority to state and local agencies that act as the implementers of the policy. It is rare to find a legislative act that establishes a separate state PPP unit (P3U) or entity within the state governments. Commonly, a P3U would be established as a unit that would take one or all of the following roles: policy development, education, implementation and procurements, and project approvals. In the United States, state and highway agencies (e.g. state DOTs) are usually the agencies that implement PPPs; however, they do that through their regular legal, procurement, design, construction, and operations divisions, without having a dedicated P3U. There would be some offices established within state DOTs to educate and promote PPPs, but not dedicated to manage the actual legal and procurement activities. It is uncommon to find a

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state P3U like the internationally known, Partnerships BC, Partnerships UK, and Partnerships Victoria. Examples of states that have PPP offices include Washington, Georgia, and Colorado whereas states with dedicated P3U include Virginia, California, and Michigan. Institutional and jurisdictional differences, together with a state-specific industry response to PPP, have produced a variety of organizational approaches to using PPP by states and local governments. A P3U’s main scope is to support other agencies to procure projects through PPP (Istrate and Puentes 2011). Different paths to institutionalize PPP adoption are described in Figure 22.1. One path is to first establish a PPP unit (step 1a) which when correctly implemented would lead to a statewide approach to PPP; basically, this involves the creation of a PPP programmatic blanket as the one provided by the Virginia’s P3U or the Office of Transportation PPPs in their published guidelines.17 The PPP programmatic blanket (step 1b) can be customized by peripheral units to implement PPP on a project-by-project basis (step 1c). Sometimes, a P3U has developed a draft blanket, tested it on a pilot project, and used this experience to revise and finalize the programmatic guidelines (loop 1e). Similarly, there were cases where a P3U used a pilot project to test PPP and develop a blanket once a decision to pursue PPP more aggressively was made (path 1d). For instance, the Texas Turnpike Authority (TTA) initially acted as a champion for PPP implementation and facilitated the first use of a public financed PPP based on design-build-maintain for the SH130 Segments 1–4 project by the Austin district. Once this project was underway, TTA recruited or secured the collaboration of district staff that had developed organizational knowledge on PPP implementation and tasked them to develop statewide guidelines and disseminate their knowledge among other districts. Some states have established a P3U, which would generally lack the power or the resources to implement PPP and, therefore, simply act as state-level office or facilitator. An example of this approach is the PPP Office in Washington DOT.18 Established in 2005, this office administers the state’s Transportation Innovative Partnership Program (TIPP) under the oversight by the Washington State Transportation Commission. TIPP allows transportation-related projects and programs of all modes to be eligible for PPP use. Another approach has been to treat PPP implementation on a project-byproject basis (step 2a). In this situation, a project-specific organization is assembled. This approach has been commonly used to pilot the use of PPP before making further commitments, such as constituting a P3U. However, this approach often serves as the springboard for the establishment of a P3U or the reinforcement of an existing unit. Under this approach, the pilot project knowledge and staff are used as basis for creating a P3U (step 2b). Whereas Utah DOT only recently obtained PPP legislative authority, the successful implementation of DB for the I-15 Corridor Reconstruction project created a positive environment for evaluating and adopting innovative contracting methods. UDOT Innovative Contracting Unit (ICU) initially led these efforts. A peculiarity of Utah DOT is that, the ICU has over time blended into its division as the use of innovative delivery was institutionalized and became applicable to all projects.

Public Private Partnerships in US transportation 385 State Government 3a 2a

1a PPP program

PPP unit

1d

1b

2b

3b

Portfolio of PPP projects

1c 1e Single PPP project

PPP programmatic blanket

3c

1e

Figure 22.1 Common PPP implementation paths

Lastly, some states have pursued the use of PPP with the goal of delivering a set of projects. In these cases, a program-specific unit (step 3a) is established to develop a programmatic approach (step 3b) to be used for the delivery of a portfolio of projects (step 3c). This approach has usually been adopted in response to specific state- or region-wide policies to deliver a large number of projects over a short period of time. While only a few instances of this approach can be cited, this approach usually relies on a specific unit that would oversee and/or manage projects within the portfolio even if not all the projects would be technically delivered through PPPs. Different from a P3U, this unit would have an expiration date and be dissolved once the established scope has been accomplished. A couple of notable examples are the Oregon DOT’s and Missouri DOT’s bridge improvement programs. Under the first, ODOT selected Oregon Bridge Delivery Partners (OBDP), a joint venture of HDR and Fluor, to manage the OTIA III State Bridge Delivery Program. OBP acted as the program manager for this $1.3 billion program charged with repairing or replacing 365 aging bridges across the state. OBDP could adopt any of the delivery methods available to the agency, including traditional DBB, DB and CMGC/CMR to select and contract out the actual project execution. In this case, the partnership was in terms of program delivery and did not involve private financing. Missouri DOT (MoDOT), instead, retained the program management for the replacement or rehabilitation of a large portfolio of 802 bridges under the Safe and Sound Bridge Improvement Program. After identifying 248 bridges for rehabilitation and pursuing a traditional DBB for them, MoDOT awarded a single DB contract for the replacement of the remaining 554 bridges to a joint-venture of Kiewit Western Company, Traylor Bros. Inc., and United Contractors Inc., which entered in design agreements with HNTB Corporation and LPA Group Inc. This portfolio approach was pursued in absence of a real state P3U.

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Nature of SPV or equivalent This section utilizes three recent PPP initiatives to provide an overview of emergent approaches to select a private SPV as well as of common stakeholder representations, roles and responsibilities. Selection of SPV Various paths exist for a public agency to select a special purpose/project vehicle (SPV) with the following being the emerging approaches in the US19:

• Solicited 2-step procurement leading to a development agreement: This path is

•

•

pursued to select a SPV with a specific scope. The public agent initiates a formal process to solicit statements of qualifications and interests, shortlist qualified potential SPVs, issue a request for proposals, select a SPV based on its submitted proposal, and award a contract. The East End Crossing PPP project followed this route. The Indiana Finance Authority (IFA) initially issued a request for qualifications, then, ranked the six entities that had submitted a statement of qualifications, and invited four of them to submit a proposal. Finally, IFA selected a SPV based on a best value approach that strongly relied on net present value evaluations. Solicited 1-step or 2-step procurement leading to a pre-development agreement (PDA): This path is pursued to select a SPV that will help the public agent to move the project forward (e.g., obtain environmental clearance, complete feasibility analysis, etc.). The public agent initiates a formal process to solicit statements of qualifications and interests, select a SPV based on its qualifications and, usually, cost-sharing of the development phase, and award a two-phased contract. Initially, the SPV provides professional services aiming to move the project. Then, the public agency enters in sole-source negotiations with the SPV once the project is authorized to proceed. A recent example of this procurement route is the proposed Mid-Currituck Bridge, which is the first non-DB PPP in North Carolina by the North Carolina Tollway Authority (NTCA). In April 2009, NCTA entered in a PDA with Currituck Development Group, led by ACS Infrastructures, Dragados, Lochner-MMM, and Arup. At the completion of the NEPA process, NCTA will negotiate with the SPV for the design, construction, financing, operations, and maintenance of the project. Unsolicited proposals: This path is initiated by a private entity that submits an unsolicited project proposal. If the proposed project meets the interests of the public agency, the public agency will usually open the competition to other interested parties and change the scope as it fits. A recent example of this route is the North commuter rail line in Denver. The Regional Transportation District of Denver (RTD) had reached its debt capacity, but there was extreme political pressure to build north. In February 2012, Regional Rail Partners (RRP), a joint-venture of Graham, Balfour Beatty, and Hamon

Public Private Partnerships in US transportation 387 Constructors (GBBH) submitted an unsolicited proposal, which was determined to have technical merit. Almost four months later, RTD issued a request for competing proposals. After a competitive process, GBBH was awarded a DB contract. Stakeholders representations, roles and responsibilities Stakeholders management is a crucial issue in PPPs. Stakeholders could be defined to reflect outside-of-contract agencies and communities who would be affected by the development of the project. In some PPP projects, communities have vetoed down the development of PPP, and therefore the management of stakeholders became an important issue in PPP. Stakeholders could also refer to the members of the PPP private company; as the members are usually in a joint venture, they need to have an internal consortium agreement that defines the roles and responsibilities of each member. This section is devoted to this type of stakeholders. An example is the Louisville-Southern Indiana Ohio River Bridges Project, a partnership between the states of Kentucky and Indiana aiming to improve transportation between the two states across the Ohio River by building two bridges and the highways that connect them. Under this partnership, the State of Kentucky is delivering the Downtown Crossing (DC) through a design-build contract with Walsh group whereas Indiana is using a long-term concession for the East End Crossing (EEC). The Indiana Finance Authority (IFA) selected WVB East End Partners for the development, design, construction, financing, operation and maintenance of the EEC bridge and associated roadways. WVB East End Partners will operate the EEC for 35 years beyond the construction period (3.6 years). All six teams submitting statements of qualification for this project included 2–3 equity members with at least an equity member listed as responsible for either construction or operations and maintenance (O&M). Other non-equity members included engineering and architecture design firms, O&M firms, general and specialty contractors, financial entities and advisors, law firms, public relations consultants, general staffing firms, material suppliers, and technology providers. WVB East End Partners is a consortium of Walsh Investors LLC, VINCI Concessions, and Bilfinger Project Investments. Whereas the other teams included about a dozen of members, WVB team had the most complex organizational structure with a total of 24 members distributed among equity, construction, design, O&M, and various consultants and advisors. Contributing equally to $82 million of equity for the special purpose vehicle, the three equity members represent the investment or development branch of three major construction groups: Walsh (USA Headquarters), Vinci (France Headquarters) and Bilfinger (Germany Headquarters). Figure 22.220 shows WVB organizational chart. Additional funds were provided through tax-exempt activity bonds (PABs), including both short-term ($210 million) and long-term ($485 million) debt. Walsh and Vinci also constituted a joint venture that entered in a $763-million lump-sum design-build contract with the SPV. Jacobs engineering

Subcontractors Milestone Contractors Haydon Bridge Company Bizzack Construction, LLC James H Drew Adultam

International Bridge Technologies, Inc. American Structurepoint, Inc. Buckland & Taylor Ltd. Stantec Earth Exploration Freysselnet RWDI Macdonald Architects

Advisory agreements

Senior debt providers ($700 million)

Guthrie/Mayes PCSI

Consultants

Subcontracts

Senior debt agreements Tax-exempt PABs

External advisors Latham & Watkins (Legal) Granherne/KPR (Technical) Moore McNeill (Insurance) Ernst & Young (Tax) Operis (Model Audit)

KPMG (Financial) Nossaman (Legal) Ice Miller (Legal) Parsons Transportation Group (Technical) Operis (Model Audit)

External advisors

Figure 22.2 East End PPP organization. Adapted from: Ciambrone, G. (2013). East End Crossing of the Louisville-Southern Indiana Ohio River Bridges Project. Presentation to William O. Lipinski Symposium On Transportation Policy & Strategy 2013, Northwestern University, Evanston, IL, USA.

Subconsultants

Subcontracts

Subcontracts

Walsh Construction Co. (60%) VINCI Construction Grand Projects (40%)

Walsh Construction Co. VINCI Construction Grand Projects

Design–Build agreement

WVB East End Partners

Advisory agreements

Lead contractor

Design agreement

PPP agreement Special Purpose Vehicle

Advisory agreements

Shareholders agreement

IFA

Lead engineering firm

External advisors Scotiabank (Financial) Mayer Brown (Legal) Bingham Greenebaum Doll (Legal) Willis (Insurance) Ernst & Young (Tax) Operis (Model Audit)

Equity owners ($82 million) Walsh Investors LLC (33%) VINCI Concessions (33%) Bilfinger Project Investments (33%)

P3U

Public Private Partnerships in US transportation 389 entered in a design agreement with the design-builder and acted as the single of point of contact with a large pool of consulting firms. The concession agreement prescribed that WVB would self-perform or subcontract all O&M obligations with the support of Vinci Concessions. Stakeholder representations in the EEC carry many similarities with other US-based PPPs. The SPV is usually an equity partnership between a foreignbased construction, operations and/or financial group and a US-based construction group.

Extent of use of PPP adoption and changes in PPP usage and extent over time

Billion $

In the United States, various forms of PPPs have been used for economic infrastructure (transportation, freight rail and water) whereas PPP is mostly unknown to social infrastructure (schools and health care). A review of the number of US-based PPP projects by infrastructure sector reveals that investments in roads and rails are prevalent (see Figure 22.3), but water and building sectors have contributed to a majority of projects (see Figure 22.4) (PWF 2013, 2014). In the rest of this section, the extent of use of PPP in the transportation sector is discussed for the period between 1989 and 2013 using a collection of project data from the newsletters of Public Works Financing (PWF 2013, 2014) and the Federal Highway Administration (FHWA 2014). Since 1989, the number of PPP projects has been increasing over the years and reached 131 projects across 29 states by the end of 2013, as shown in Figure 22.5, with highways and bridges (102 projects) being the majority and tunnels and mass transit rail systems contributing to a lesser extent. The annual total contract values also increased, as shown in Figure 22.5, reaching a cumulative total of $83 billion by the end of 2013. At peak, 120 100 80 60 40 20 0 Roads

Rail

$ planned and funded since 1985

Water

Buildings

$ funded by 10/13

Figure 22.3 Investments in PPP projects in infrastructure sectors Data for graph obtained from Public Works Financing [www.pwfinance.net] as of 10/2013

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250

number of projects

200

150

100

50

0 Roads

Rail

Water

Planned and funded since 1985

Buildings

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Figure 22.4 Number of PPP projects in infrastructure sectors Data for graph obtained from Public Works Financing [www.pwfinance.net] as of 10/2013

$14

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–6 2015

Total number of projects

Figure 22.5 Transportation PPP projects and total contract values for given years Data for the graph compiled from Public Works Financing newsletters (PWF 2013, 2014) and the Federal Highway Administration (FHWA 2014)

Public Private Partnerships in US transportation 391 contracts for 12 PPP projects with a total contract amount of $12 billion were awarded in 2009 in the last year of the recession. PWF (2014) has recently reported that 16 projects are in different procurement stages and are expected to be awarded soon. Across states, only 29 states have utilized PPP among the 33 that have enacted PPP legislation. Six states (Florida, California, Texas, Virginia, North Carolina and Colorado) have awarded 75 PPP projects for a contract value of $47.2 billion (see Figure 22.6). Florida and California are the frontrunners in terms of number of projects with 17 and 16, respectively, whereas only four states have awarded PPP contracts for more than $6 billion: Texas ($13 billion), Virginia ($12 billion), California ($10 billion), and Florida ($6 billion). Figure 22.7 shows that 23 states had used PPP for 1 to 5 projects, two states for 6 to 10 projects, two states for 11 to 15 projects, and two states for 16 to 20 projects. Figure 22.8 shows that 23 states had awarded PPP contracts equal or less than $5 billion, four states between $5 and $10 billion, and only two states have awarded more than $10 billion of PPP contracts. As shown in Figure 22.9, most projects (i.e., 80–61 percent) had a contract value of $500 million or less, 24 projects (18 percent) had a contract value between $500 million and $1 billion, 15 projects valued between $1 and $1.5 billion, and four projects were greater than $3 billion. 18

$14

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FL CA TX VA NC CO SC MN NJ OR NY WA AZ IN NV UT

$0

States Number of projects

Total contracts value

Figure 22.6 States and their projects and project value (rounded $) Data for the graph compiled from Public Works Financing newsletters (PWF 2013, 2014) and the Federal Highway Administration (FHWA 2014)

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23

Number of states

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Figure 22.7 States with given PPP project range Data for the graph compiled from Public Works Financing newsletters (PWF 2013, 2014) and the Federal Highway Administration (FHWA 2014

14 12

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Number of states

10 8 6 4 4 2 2 0 $1,000

$5,000

$10,000

$15,000

Total cost range of all PPPs (million $)

Figure 22.8 Number of states with given PPP value range Data for the graph compiled from Public Works Financing newsletters (PWF 2013, 2014) and the Federal Highway Administration (FHWA 2014)

Public Private Partnerships in US transportation 393 90 80

80

Number of states

70 60 50 40 30

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Figure 22.9 Number of projects for contract value range (million $) Data for the graph compiled from Public Works Financing newsletters (PWF 2013, 2014) and the Federal Highway Administration (FHWA 2014)

Types of PPP in the US On the topic of infrastructure, the World Bank has proposed a spectrum to be used for categorizing different PPP approaches based on the degree of involvement of the private sector. According to this approach, PPP would, at minimum, involve a contract for civil works, goods or services with a private entity. On the other end of the spectrum, a PPP could reach, at maximum, a full or partial divesture of the public sector. Whereas the implementation of PPPs in the US transportation sector is significantly behind that of other parts of the developed world, the types of PPP contractual arrangements in the US can be aligned with those generally recognized worldwide by the World Bank. The analysis of project data collected from PWF (2013, 2014) and FHWA (2014) revealed that, over the period between 1989 and 2013, ten arrangements were used in the United States, including four non-finance arrangements (DB, DCMW [design, construction management, and warranty], DBM, DBOM) and six financebased arrangements (BF, DBF, DBFOM, DBFM, BOO, Long Term Lease). DB was the most used arrangement by 64 percent of the projects followed by the concessiontype DBFOM at 13 percent, as shown in Figure 22.10. At the state level, there was a significant variance in number of arrangements being used with each state having used at least two arrangements. Figure 22.11 shows how common each different arrangement was among states. DB was again the most common with 79 percent of the states using it, followed by the concession-type DBFOM being used by 24 percent of the states. Florida experimented in four PPP arrangements: DB (seven projects), DBF (seven projects), DBFOM (two projects), and BF (one project). California limited its use to two arrangements: DB (13 projects) and DBFOM (three projects).

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Texas used three arrangements: DB (six projects), DBFOM (five projects), and DB and DBOM (one project each). Virginia used four arrangements: DB (six projects), DBFOM (four projects), and BOO and Long Term Lease (one project each). 70%

64%

Percentrage of projects

60% 50% 40% 30% 20% 13% 8%

10% 1%

5%

1%

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2%

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se

O Lo

ng

TL

ea

BO

FM DB

M FO DB

DB

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F

BF

M O

M

DC

M

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W

DB

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Figure 22.10 Percentage of projects using PPP arrangements, 1989-2013 Data for the graph compiled from Public Works Financing newsletters (PWF 2013, 2014), and the Federal Highway Administration (FHWA 2014)

90%

79%

80%

23 Number of states

20

70% 60%

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50% 40%

10 5

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gT

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FO

M

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M O DB

M DB

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0% DB

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Figure 22.11 States use of PPPs Data for the graph compiled from Public Works Financing newsletters (PWF 2013, 2014), and the Federal Highway Administration (FHWA 2014)

Public Private Partnerships in US transportation 395 Non-finance based PPPs The analysis of project data revealed that finance and non-finance based PPP arrangements have been used in the United States. Among 131 projects, 70 percent (92 projects) were non-finance PPP arrangements, including DB, DBM, DBOM, and DCMW (design, construction management, and warranty). In terms of total value of contracts, these arrangements accounted for 58 percent ($48 billion) of the total value of PPPs. The majority of the projects were DB at 8421 projects (64 percent) and a total contract value of $41.2 billion (~50 percent), while only six projects were DBOM with DBM and DCMW at one project each. There were seven major states that had five or more DB projects: California (13 projects), Florida, North Carolina, and Colorado (seven projects each), Texas and Virginia (six projects each), and Minnesota (five projects), as shown in Figure 22.12. DBOM was another PPP arrangement used to a lesser extent. Only six projects used DBOM with a total contract value of $5.85 billion. New Jersey accounted for three of the six projects, while Texas, Nevada, and New York accounted for one project each. Finance-based PPPs Among the 131 projects, 30 percent (39 projects) were finance-based, including BF, DBF, DBFOM, DBFM, BOO, and Long Term Leases. The $35 billion total contract value of these arrangements accounted for 42 percent of the total value of PPPs. Figure 22.13 illustrates the distribution of the projects among the different finance-based PPPs. 14

13

DB

12

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10 8 6 4

7

7 7 6 6 5 4

4 3 3

2

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FL CA TX VA NC CO SC MN NJ OR NY WA AZ IN NV UT DC MO NM OH PR AK AL IL MA MD RI GA KY

0

3

2

States

Figure 22.12 States use of DB projects Data for the graph compiled from Public Works Financing newsletters (PWF 2013, 2014), and the Federal Highway Administration (FHWA 2014)

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$25,000

17

$20,813

Number of projects

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$20,000

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$15,000

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$10,000

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1 $384

$403

0

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DBF

DBFOM

DBFM

BOO

LongTLease

PPP finance-based arrangement

Figure 22.13 Finance-based PPPs – number of projects and contract values Data for the graph compiled from Public Works Financing newsletters (PWF 2013, 2014), and the Federal Highway Administration (FHWA 2014)

The predominance of the concession-type PPP, DBFOM, is shown by a contract value of $20.8 billion (~60 percent) over 17 projects (44 percent) even if DBFOM’s contract value is about half that of the DB arrangement. The DBFOM arrangement has been used by seven states: Texas (five projects), Virginia (four projects), California (three projects), Florida (two projects), and Colorado, New York, and Indiana (one project each), as shown in Figure 22.14. The DBFOM arrangement has been used for 13 highways (five were managed lanes), two tunnels, and two rail projects. Two DBFOM projects went through bankruptcy 6

Number of projects

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FL CA TX VA NC CO SC MN NJ OR NY WA AZ IN NV UT DC MO NM OH PR AK AL IL MA MD RI GA KY

0

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1

States

Figure 22.14 States use of DBFOM arrangement Data for the graph compiled from Public Works Financing newsletters (PWF 2013, 2014), and the Federal Highway Administration (FHWA 2014)

Public Private Partnerships in US transportation 397 proceedings: the SR 125 in San Diego, California, and the Camino Colombia bypass in Texas. The use of federal credits assistance in the form of TIFIA has been used for 11 out 17 projects to partially finance the projects.

Future development While PPPs is still evolving in the US, the current economic and infrastructure conditions provide for a strong future use of PPPs. As with the MAP-21 authorization act, the US Budget for Fiscal Year 2015 suggests significant development for PPPs in the near future. The Budget includes “Building a 21st Century Infrastructure” that proposes various policies including a four-year surface transportation reauthorization of $302 billion, the elimination of tax loopholes to refill the Highway Trust Fund, the creation of a National Infrastructure Bank and enacting America Fast Forward Bonds to support increased investments in infrastructures, and the reduction of red tape in the infrastructure permitting process. Overall, the continuing trend of shrinking budgets and increasing infrastructure backlog as explained earlier is clearing the way toward a heavy use of PPPs in the US. Future development in the use of PPP depends largely on dealing with a set of issues. The most prominent challenge is related to how to integrate and manage PPPs with the NEPA process. NEPA takes time and many of the private companies prefer to work on projects that have been already environmentally approved. Another issue is the streamlining of PPPs with the long-range transportation planning of the states; that is how and when PPPs can be considered in the planning process particularly when the plans must identify how the projects will be funded. It is unlikely that the legal and financial considerations will still be a big hurdle since many of these issues are addressed by authorization acts at the state and federal levels. Similarly, the requirements for a culture change in the way public agencies do business, e.g. in getting expertise in financial feasibility assessments, financial modeling, risk transfer analysis, public sector comparator, and preparation of O&M cost forecasts, will be addressed over time when the states start to build experience with PPP. The reader may get better appreciation of these by consulting a 2013 research done for the Strategic Highway Research Program, SHRP2 (2013). There is no doubt that the federal government will continue its efforts toward encouraging the market for PPP. A significant step was made on July 17, 2014 when the “President announced a government-wide initiative to increase infrastructure investment and economic growth by engaging with state and local governments and private sector investors to encourage collaboration, expand the market for public–private partnerships (PPPs) and put federal credit programs to greater use. Starting with the transportation sector, this initiative will harness the potential of private capital to complement government funding. A major part of the initiative is the new Build America Transportation Investment Center [BATIC] at the Department of Transportation. This center will serve as a one-stop shop for state and local governments, public and private developers and investors seeking to utilize innovative financing strategies for transportation infrastructure projects.”23 It is envisioned that BATIC will serve as a central federal PPP unit and

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it is expected that development of local state PPP central units will follow. The move into PPP also reached the water and wastewater market when the President signed in June 2014 on the Water Resources Reform and Development Act (WRRDA). WRRDA provided for the use of PPP in pilot projects and for federal credit assistance (secured loans and loan guarantees) through a new Water Infrastructure Finance and Innovation Act (WIFIA; similar to TIFIA). Future infrastructure in the US seems to be headed toward more and more PPPs.

PPP research and development agenda It is hard to say that there is a particular nationwide, federal, or state-level agenda for PPP research. However, the US Congress in its 2012 MAP-21 act provided for the development of best practices to help the states in their PPP initiatives, development of standard contracts, and strategies for dealing with the private sector. Based on real needs, the trend for PPP research would include: 1 2 3 4

5

Educating states on the value of PPPs for infrastructure development. Development of tools to assist states in implementing PPP at the different government levels. Development of tools to evaluate PPP proposals, and selecting contractors on a multi-criteria basis. Evaluating projects for possible endorsement of PPPs, developing detailed financial models, working with public sector comparators, analyzing risks over the project lifecycle, and establishment of a reasonable private sector return for PPP projects. Development of payments mechanisms, e.g. performance-based payments.

Generally, along with the academic research in PPPs, there are two streams of research efforts. The first stream includes efforts by governmental research bodies, e.g. Transportation Research Board (TRB) and the state-level research offices (e.g. University Transportation Centers). These efforts have explored the potential of PPP systems by studying early implementations to synthesize and disseminate lessons and investigate the problems that would be encountered from their use. The second stream includes efforts by government, Congress, or legislative offices internally or with contracted consultants. These efforts have tried to explore PPPs, review the implementation, and/or develop PPP guidelines for the states. Examples of these offices are: Congressional Budget Office (CBO), Government Accountability Office (GAO), Office of Inspector General (OIG) of the USDOT, and Office of Policy and Governmental Affairs (OPGA).

Conclusions In the US, the recent wave of PPPs for the development of public infrastructure has been evolving since the late 1980s. Over the last century, states and local

Public Private Partnerships in US transportation 399 governments have successfully delivered highway projects using the design-bidbuild (DBB) method. Being accustomed to the traditional delivery, it is no surprise that only 33 states and one territory have authorized PPPs, and only 29 of the states have actual experience with at least one PPP project. The United States initiated a debate on the use of PPPs since the 80s as other countries did. Afterward, the US has, however, proceeded at a slower pace than United Kingdom, Australia and Canada. In the US, PPP adoption has been affected by a series of rapid accelerations and subsequent withdrawals. However, recent trends suggest PPP growth is sustainable for a number of reasons, including a series of structural changes. The continued deterioration of the highways infrastructure provides for PPP to take a greater role to provide a speedy way to meet the needed capital improvements and maintenance projects. The dwindling of federal and State funds due to declining fuel taxes is another pressing factor that will also allow for more PPPs. More importantly, the increased reliance on the federal credit assistance programs and tools (e.g. TIFIA, SIBs, and PABs) will provide for more PPPs since financing can be obtained at favorable terms. This factor by itself would provide for PPPs to be streamlined at the States level and would encourage more states and localities to authorize and use PPPs. Whereas the latest US budget identify a tax-based approach to refill the National Highway Trust Fund, it also forecast a significant reduction of non-defense discretionary spending, which includes critical investments in infrastructures. In fact, this budget line item is expected to go from the current 3.2 percent of GDP to a 2.2 percent in 2024, which is shockingly low when considering that it averaged 3.8 percent over the previous 40 years. This dramatic reduction of federal discretionary funds is expected to act as a powerful driver toward PPPs.22

Notes 1 2 3 4 5 6 7 8 9 10 11 12 13

See www.cia.gov/library/publications/the-world-factbook/geos/us.html See www.epa.gov/osw/nonhaz/municipal/pubs/2012_msw_dat_tbls.pdf See water.epa.gov/aboutow/ogwdw/upload/2005_02_03_gapreport.pdf www.unitedwater.com/uwppp.aspx See www.cia.gov/library/publications/the-world-factbook/geos/us.html See http://gov.ca.gov/news.php?id=8177 See www.cenews.com/post/322/schwarzenegger_proposes_public DB Effectiveness Study www.fhwa.dot.gov/reports/designbuild/designbuild.htm See www.fhwa.dot.gov/ipd/project_profiles/tx_central_turnpike.htm FHWA model legislation working draft www.fhwa.dot.gov/ipd/pdfs/legis_model_0610.pdf FHWA PPP toolkit: www.fhwa.dot.gov/ipd/p3/toolkit/index.htm NCSL PPP toolkit: www.ncsl.org/documents/transportation/PPPTOOLKIT.pdf FHWA PPP Key elements: www.fhwa.dot.gov/ipd/p3/state_legislation/state_legislation_ key_elements.htm 14 ABA 2007 Model Procurement Code: http://apps.americanbar.org/dch/committee. cfm?com=PC500500 15 See NCHRP report on best-value procurements http://onlinepubs.trb.org/onlinepubs/ nchrp/nchrp_rpt_561.pdf 16 FHWA PPP model contract: www.fhwa.dot.gov/ipd/p3/resources/model_p3_contracts.htm

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Ahmed M. Abdel Aziz and Giovanni C. Migliaccio

17 See www.vappta.org/ 18 See www.wsdot.wa.gov/Funding/Partners/ 19 Girard M. (2014). Public Private Partnerships: Opportunities for Early Contractor Involvement. Presentation to Transportation Research Board 93rd Annual Meeting, Washington, D.C., January 12–16, 2014. 20 Ciambrone, G. (2013). East End Crossing of the Louisville-Southern Indiana Ohio River Bridges Project. Presentation to 2013 William O. Lipinski Symposium On Transportation Policy & Strategy, Northwester University, Evanston, IL, January 28, 2013. See www. transportation.northwestern.edu/docs/2013/2013.01.28_LipinskiSymposium_Ciambrone.pdf 21 The number of projects in the analysis included a collection of projects reported in the newsletters of Public Works Financing (PWF 2013, 2014) and projects reported on the website of the FHWA (2014). It is to be noted that a study done for the FHWA in 2005 (www.fhwa.dot.gov/reports/designbuild/designbuild.htm) addressed the innovative delivery of projects in the Special Experimental Project Number 145 (SEP-145). This study mentioned that the number of states that used DB was 32 and the number of DB projects was 140. However, no records of those states or projects were given in the report. The 84 DB projects and the total 131 PPP projects used in the analysis of the current study (chapter) are recorded and in public domain in the mentioned reference of PWF and FHWA. 22 See www.brookings.edu/blogs/the-avenue/posts/2014/03/07-obama-budget-cities-katz 23 See www.dot.gov/buildamerica

References American Society of Civil Engineers, ASCE, (2011). Failure to Act – The Economic Impact of Current Investment Trends in Surface Transportation Infrastructure, ASCE, Washington, DC, www.asce.org/reportcard American Society of Civil Engineers, ASCE, (2013). 2013 Report Card for American’s Infrastructure, ASCE, Washington, DC, www.infrastructurereportcard.org Congress (1987). H.R. 2 (100th): Surface Transportation and Uniform Relocation Assistance Act of 1987, United States Congress. www.govtrack.us/congress/bills/100/hr2/text Congressional Budget Office (CBO) 1985. Toll Financing of U.S. Highways, United States Congress CBO, Washington, D.C. Congressional Budget Office (CBO) (1999). Trends in Public Infrastructure Spending, United States Congress CBO, Washington, D.C. Congressional Budget Office (CBO) (2012). Using Public-Private Partnerships to Carry Out Highway Projects, United States Congress CBO, Washington, D.C. General Accounting Office (GAO) (1990). Highway Financing Participating States Benefit Under Toll Facilities Pilot Program, United States General Accounting Office, Washington, D.C. General Accounting Office (GAO) (2008). Highway Public-Private Partnerships – More Rigorous Up-front Analysis Could Better Secure Potential Benefits and Protect the Public Interest, United States General Accounting Office, Washington, D.C. Federal Highway Administration (FHWA), (2010). Public-Private Partnership Concessions for Highway Projects: A primer. Innovative Project Delivery, FHWA, Washington, D.C. Federal Highway Administration (FHWA), (2014). Innovative Program Delivery. Available online: www.fhwa.dot.gov/ipd/index.htm (accessed February 17, 2014). Istrate, E. and Puentes, R. (2009). Investing for Success Examining a Federal Capital Budget and a National Infrastructure Bank, Brookings Metropolitan Policy Program, December 2009. Available online: www.brookings.edu/research/reports/2009/12/10-infrastructurepuentes (accessed March 13, 2014).

Public Private Partnerships in US transportation 401 Istrate, E. and Puentes, R. (2011). “Moving Forward on Public Private Partnerships: U.S. and International Experience with PPP Units,” Brookings-Rockefeller Project on State and Metropolitan Innovation, December 2011. Available online: www.brookings.edu/ research/papers/2011/12/08-transportation-istrate-puentes (accessed March 13, 2014). National Conference of State Legislatures (NCSL) (2010) Public-Private Partnerships for Transportation – A Toolkit for Legislators. NCSL, Washington, D.C. Office of Inspector General (OIG), (2011). Financial Analysis of Transportation-Related Public Private Partnerships. Office of Inspector General, USDOT, Washington, D.C. Public Works Financing (2013). U.S. & Canadian Transportation Projects Scoreboard. Public Works Financing (2014). PWF’s P3 Research Roundtable. January, 2014. Puentes, R. and Thompson, J. (2012). Banking on Infrastructure: Enhancing State Revolving Funds for Transportation, Brookings Institute. Southard, K. (2010). U.S. Electric Utilities: The First Public-Private Partnerships? Public Contract Law Journal, 39(2), pp. 395–410. Strategic Highway Research Program (SHRP) (2013). The Effect of Public-Private Partnerships and Non-Traditional Procurement Processes on Highway Planning, Environmental Review, and Collaborative Decision Making, a research done by Parsons Brinckerhoff and Nossaman LLPP and HS Public Affairs. United States Department of Transportation (USDOT), (2004). Report to the Congress on Public-Private Partnerships. USDOT, Washington, D.C. United States Department of Transportation (USDOT), (2008). Innovative Wave: An Update on the Burgeoning Private Sector Role in U.S. Highway and Transit Infrastructure. USDOT, Washington, D.C. United States Department of Transportation (USDOT), (2013). 2013 Status of the Nation’s Highways, Bridges, and Transit: Conditions & Performance – Report to Congress. USDOT, Washington, D.C.

Index

1997 financial crisis 313, 333 2007–09 financial crisis 278, 293, 314, 358–61 A11 road project, Belgium 48 Abe, Shinzo 221–2 adoption of PPP see extent of use/adoption of PPP agricultural projects, Taiwan 308 airport projects: Australia 27–30; India 134, 136, 143, 146–7; Switzerland 286; Turkey 346–9 Alberta 62 American Society of Civil Engineers (ASCE) 368–9 American Trucking Association (ATA) 373 Asia World Expo 123, 126 asset lease arrangements: Canada 68; Malaysia 243 Australia 19–44; barriers to PPP 37, 38–41; Bendigo Hospital, Victoria 30, 31–5; context 21; future developments 37, 38–41; healthcare projects 30, 31–5; institutional/governance framework 20–1; National PPP Guidelines 20; origins and drivers for PPP 21–3; overview 9; problems with/solutions for PPP 36–7; process and principles of PPP 24–5; rail projects 27–30; risk management 27–30; road projects 19, 27–30; sustainable PPP infrastructure rating system 37, 41–2; transportation projects 19, 27–30; value of completed PPPs 22; value-for-money drivers 23 AVCP see Italian Supervisory Authority of Public Contracts Bangkok Elevated Road and Train System (BERTS) 326

Bangkok Transit System Corporation (BTSC) 321–3 banks: Greece 105–7; Hong Kong 120; India 138; Indonesia 162; Italy 202, 203, 208; Nigeria 250, 251, 255, 262; Portugal 269; Thailand 318, 325; Turkey 342, 345; United Kingdom 358–9, 360; United States 378 Belgium 45–58; extent of use/adoption of PPP 52–3; financial context 48; Flemish PPP Knowledge Centre 51; future developments 54–5; hybrid PPP models 51–2; institutional/governance framework 49–51; legal framework 49–50; Liefkenshoek tunnel project 46; organisational structure 51–2; origins and drivers for PPP 46–7; overview 9; policy framework 47–8; political structure 45; public sector comparators 50; research and development agenda 55–6; road projects 46, 47, 48; taxation 49; types of PPP 53; usage and extent changes in PPP 53–4 Bendigo Hospital, Victoria 30, 31–5 BERTS see Bangkok Elevated Road and Train System BLT see build-lease-transfer bond financing 64, 78, 204 BOO see build-operate-own BOT see build-operate-transfer Brazil 249 BreBeMi toll road, Italy 204 British Columbia 61, 66 BRT see Bus Rapid Transport Scheme BSF see Building Schools for the Future programme BSOT see build-subsidise in operationtransfer BT see build-transfer

Index BTSC see Bangkok Transit System Corporation BTS Mass Transit Growth Infrastructure Fund (BTSGIF), Thailand 321–3 BTS Sky Train, Thailand 321–3 Building Schools for the Future (BSF) programme, UK 354, 355–6, 360 build-lease-transfer (BLT) projects: Malaysia 242; Turkey 343, 345, 351 build-operate-own (BOO) projects: Malaysia 242; Taiwan 309 build-operate-transfer (BOT) projects: China 76, 82–3; Hong Kong 121, 122, 125–7; India 144–5; Indonesia 170–3; Malaysia 242; Taiwan 298, 303, 309; Thailand 321–3; Turkey 342–5, 350, 351 build, own, operate, transfer (BOOT) projects: Greece 101; India 145 build-subsidise in operation-transfer (BSOT) projects 84 built-transfer (BT) projects 76 business service advisors 65 Bus Rapid Transport Scheme (BRT), Nigeria 261, 263–4 C&AG see Comptroller and Auditor General Cabinet Committee on Infrastructure (CCI), India 135 Canada 59–73; asset lease arrangements 68; bond financing 64; dispute resolution 65–6; extent of use/adoption of PPP 67–8; financial context 63–4; future developments 70–1; infrastructural deficit 59; institutional/ governance framework 65–6; organisational structure 66–7; origins and drivers for PPP 60; overview 9–10; pension funds 64; policy framework 61–3; population 59; procurement 61, 65, 71; provincial governments 61; research and development 71–2; road projects 68; transportation projects 68, 70; types of PPP 68–9; usage and extent changes in PPP 69–70; wastewater treatment projects 62–3 Canadian Council for Public Private Partnerships 4, 69 CCI see Cabinet Committee on Infrastructure Central Texas Turnpike System (CTTS) 380

403

changes in PPP usage over time see usage and extent changes in PPP Chesterton Consulting 182 China 74–88; bond financing 78; buildoperate-transfer projects 76, 82–3; build-subsidise in operation-transfer projects 84; built-transfer projects 76; contract structure 80; economy 74; energy projects 81, 83; extent of use/ adoption of PPP 80–2; financial context 77–8; future developments 86; gas projects 84; institutional/governance framework 78–9; legal framework 78–9; National People’s Congress 77; organisational structure 79–80; origins and drivers for PPP 75–6; overview 10; policy framework 76–7; population 74; private sector investment 77; projects by primary sector/subsector and type 81, 83; rail projects 84; research and development 86; risk allocation 79; road projects 83; sewage treatment projects 81, 82, 83; subnational construction authorities 79; subsidy mechanisms 78; telecommunications sector 81, 83; tender evaluation 79; transportation projects 74, 81, 83; types of PPP 82–4; usage and extent changes in PPP 84–5; wastewater treatment projects 81, 83, 84 Choonhavan, Chatichai 316 Coalition government, UK 360–1 Community Support Framework Programmes, Greece 102 compacting 227 Comptroller and Auditor General (C&AG), Republic of Ireland 189, 190 conservation projects 126–7 construction management general contracting (CMGC) 367 consultants 65 contract models/structure: China 80; Malaysia 239–40; United States 382–3 corporatisation 243 COSCO Pacific Limited 106 Criminal Courts Complex PPP, Republic of Ireland 191 CTTS see Central Texas Turnpike System DBB see design-bid-build debt service cover ratios (DSCR), Portugal 269 decentralized processing 227 defence projects, Greece 115

404

Index

definitions of PPP 2–3, 4 Democratic Party, Japan 221 Department of the Environment, Community and Local Government (DoECLG), Republic of Ireland 189–90 design-bid-build (DBB) delivery method 366 development finance institutions (DFIs), Nigeria 252 Disneyland Theme Park, Hong Kong 121, 124, 126 DoECLG see Department of the Environment, Community and Local Government Don Muang Tollway Plc, Thailand 329 drivers see origins and drivers for PPP DSCR see debt service cover ratios Dublin 180 Dulles Greenway toll road, Virginia 379 Economic Transformation Plan (ETP), Malaysia 244 economized infrastructure 227 energy projects/sector: China 81, 83; India 136, 143, 148–9; Indonesia 157, 171, 173; Italy 210, 211; Nigeria 248–9, 256, 260; Taiwan 308; Thailand 330, 333; Turkey 340, 346–9; United States 365–401 Espoo, Finland 92, 94, 95 ETP see Economic Transformation Plan EU see European Union Europe 2020 Project Bond Initiative 48 European Union (EU) 181, 266, 268, 337 Express LIFT (Local Improvement Finance Trusts), UK 357–8 extent of use/adoption of PPP: Australia 38–41; Belgium 52–3; Canada 67–8; China 80–2; Greece 110–15; Hong Kong 122–8; India 142–4; Indonesia 169–73; issues/questions 8; Italy 209–11, 212; Japan 225–6; Malaysia 240–1; Nigeria 258–61; Switzerland 289–92; Taiwan 307–8; Thailand 330; Turkey 346; United States 389–93, see also usage and extent changes in PPP Farrell Grant Sparks report 182–3 Federal Highway Administration (FHWA), US 381–2 FHWA see Federal Highway Administration financial context: Australia 28; Belgium 48; Canada 63–4; China 77–8; Finland

92–3; Greece 105–7; Hong Kong 120; India 138–9; Indonesia 160–2; issues/ questions 7; Italy 203–5; Japan 223–4; Malaysia 234–5; Nigeria 255–6; Portugal 268–71; Republic of Ireland 189–91; Switzerland 287; Taiwan 301–3; Thailand 325–6; Turkey 341–2; United States 378–81 financial crises 105, 107, 278, 293, 313, 314, 333, 358–61 financial rescue agreements (FRAs), Portugal 273 Finland 89–99; financial context 92–3; future developments 98; health sector projects 95; infrastructure ownership arrangements 89; institutional/ governance framework 93–4; Lempäälä urban development 96–8; Ministry of Employment and the Economy 90; Municipality Finance PLC 92–3; municipal PPPs 95; organizational structure 93–4; origins and drivers for PPP 90–2; overview 10; pension funds 94; procurement 90; road projects 91–2, 95; school construction projects 95; state PPPs 95; transportation projects 91–2, 95; types of PPP 94–5; urban development projects 96–8; usage and extent changes in PPP 94–5; wastewater treatment projects 95 Finnish Association of Local and Regional Authorities 98 Flemish PPP Knowledge Centre 51 FRAs see financial rescue agreements future developments: Australia 37, 38–41; Belgium 54–5; Canada 70–1; China 86; Finland 98; Greece 116; Hong Kong 129–30; India 147–9; Indonesia 173–5; issues/questions 8; Italy 215–16; Japan 227; Malaysia 244; Nigeria 263; Portugal 279–80; Switzerland 293–4; Taiwan 310; Thailand 333–5; Turkey 351; United States 397–8 GARVEEs (debt-financing instruments), United States 379 gas projects, China 84 GDGs see governmental debt guarantees Gek Terna 106 Geothermal Fund Facility (GFF), Indonesia 159 governance see institutional/governance framework

Index governmental debt guarantees (GDGs), Taiwan 302 Greece 100–17; banks 105–7; Community Support Framework Programmes 102; defence projects 115; economy 100; extent of use/adoption of PPP 110–15; Fast Track Law 108; financial context 105–7; future developments 116; Gross Domestic Product 100; health sector projects 111–12; institutional/ governance framework 107–8; legal framework 103, 104, 108; motorway projects 103; organizational structure 108–10; origins and drivers for PPP 101–2; overview 10–11; policy framework 102–5; road projects 103; school construction projects 111; Special Secretariat for PPPs 108–10; ‘Thisseas’ Initiative 104–5; transportation projects 103, 114–15; types of PPP 115–16; urban development 104; waste management projects 110–15 Greenspan, Alan 359 Habibie, B.J. 156 harbor projects see port projects health sector: Australia 30, 31–5; Finland 95; Greece 111–12; Hong Kong 128; Italy 210, 211; Portugal 267–8, 276 Hellaktor 106 heritage conservation 126–7 Highway 407, Ontario 68 highway projects see road projects Highway Trust Fund (HTF), United States 371–2 Hong Kong 118–31; Asia World Expo 123, 126; banks 120; build-operate-transfer projects 121, 122, 125–7; Disneyland Theme Park 121, 124, 126; extent of use/adoption of PPP 122–8; financial context 120; future developments 129–30; health sector projects 128; heritage conservation projects 126–7; institutional/governance framework 121–2; Kai Tak Cruise Terminal 123; landfill projects 127; Legislative Council 121; Mass Transit Railway Corporation Limited 124, 128; organizational structure 122; origins and drivers for PPP 119; overview 11; policy framework 119–20; research and development 130–1; road projects 124, 129; transportation projects 119, 124, 125–6,

405

129; tunnel projects 121, 122, 124, 125, 129; types of PPP 128; usage and extent changes in PPP 129 Hong Kong–Zhuhai-Macao Bridge (HZMB) 124 housing, Nigeria 249, 260 Howlin, Brendan 187, 188 Hub initiative 356 hybrid PPP models 51–2 hydroelectric power projects, Turkey 340 HZMB see Hong Kong–Zhuhai-Macao Bridge ICICI Bank Limited 138 ICRC see Infrastructure Concession Regulatory Commission IDBI Ltd see Industrial Development Bank of India Limited IDFC see Infrastructure Development Finance Company IIF see Indonesia Infrastructure Finance IIPF see Institute of International Project Financing IL&FS see Infrastructure Leasing & Financial Services Limited India 132–52; airport projects 134, 136, 143, 146–7; banks 138; build-operatetransfer projects 144–5; Cabinet Committee on Infrastructure 135; energy projects 136, 143, 148–9; extent of use/adoption of PPP 142–4; financial context 138–9; future developments 147–9; government ministries 135; infrastructural deficit 133; institutional/ governance framework 139–41; National Highway Authority of India 146; Nigeria comparison 249; organizational structure 141–2; origins and drivers for PPP 133–4; overview 11–12; policy framework 134–8; political structure 132; port projects 136, 143, 146; procurement 133; rail projects 137, 143, 149; research and development 149–51; road projects 136, 143, 146; state governments 140–1; sustainability principles 148; telecommunications sector 137; transportation projects 136–7, 143, 146, 149; types of PPP 144–5; urban development 137, 143, 148; usage and extent changes in PPP 145–7; waste management projects 145; water treatment projects 145

406

Index

Indonesia 153–79; banks 162; buildoperate-transfer projects 170–3; challenges of PPP implementation 174–5; coordination mechanism issues 167–8; economy 153, 155; electricity sector 157, 173; energy projects 157, 171, 173; extent of use/adoption of PPP 169–73; financial context 160–2; financing institutions 162; future developments 173–5; Geothermal Fund Facility 159; government support provision 158–60, 165–6; infrastructural deficit 153; infrastructure market 170; institutional/governance framework 163–8; legal framework 155–60; non-solicited proposals 165; organizational structure 168–9; origins and drivers for PPP 154–5; overview 12; policy framework 155–60; project classification and criteria 165; project costs 172; Project Development Facility 159; public–corporate partnership term 157–8; rail projects 157, 171; research and development 175; retail infrastructure 168; road projects 159, 171, 173; Soeharto administration 154, 155–6; stakeholders 163, 164; stateowned enterprises 155, 156, 158; toll roads 159, 171, 173; transportation projects 157, 159, 171, 173; viability gap funding 159–60, 166–7; waste management projects 171; water supply projects 157, 171, 173, 177–8; wholesale infrastructure 169 Indonesia Infrastructure Finance (IIF) 160 Industrial Development Bank of India Limited (IDBI Ltd) 138 Infrastructure and Capital Investment 2012–16, Republic of Ireland 187 Infrastructure Concession Regulatory Commission (ICRC), Nigeria 254, 256–7, 258 Infrastructure Development Finance Company (IDFC), India 138–9 Infrastructure Finance Unit, UK 360 infrastructure funds, Thailand 319–23 Infrastructure Leasing & Financial Services Limited (IL&FS), India 138–9 Infrastructure Partnerships Australia 21 Infrastructure Sustainability Council of Australia (ISCA) 37, 41–2 Institute of International Project Financing (IIPF) 5

institutional/governance framework: Australia 20–1; Belgium 49–51; Canada 65–6; China 78–9; Finland 93–4; Greece 107–8; Hong Kong 121–2; India 139–41; Indonesia 163–8; issues/ questions 7; Italy 205–7; Japan 224; Malaysia 235–9; Nigeria 256–7; Portugal 269–75; Republic of Ireland 184–7; Switzerland 287–8; Taiwan 303–4; Thailand 326–9; Turkey 342–5; United States 381–3 Intermodal Surface Transportation Efficiency Act (ISTEA), US 376 Ireland see Republic of Ireland irrigation projects, Turkey 340 ISCA see Infrastructure Sustainability Council of Australia ISTEA see Intermodal Surface Transportation Efficiency Act Italian Supervisory Authority of Public Contracts (AVCP) 206 Italy 195–218; banks 202, 203, 208; bond financing 204; energy projects 210, 211; extent of use/adoption of PPP 209–11, 212; financial context 203–5; future developments 215–16; health sector projects 210, 211; institutional/ governance framework 205–7; legal framework 205–7; market segmentation 213, 214; organizational structure 207–9; origins and drivers for PPP 201–2; overview 12–13; policy framework 202–3; port projects 210, 211; PPP market by macro-sector 212; public works awarded/under bidding 195–200, 213, 214; rail projects 201; research and development 216–17; road projects 204; school projects 210, 211; service concessions 213; special purpose vehicles 207–8; toll roads 204; transportation projects 201, 204, 210, 211; types of PPP 211–14; urban development/regeneration projects 210, 211; usage and extent changes in PPP 215; value of PPP bids 209–11, 212 J&P Avax 106 Japan 219–28; budget gap in infrastructure renovations 221; Democratic Party administration 221; economy 220; extent of use/adoption of PPP 225–6; financial context 223–4; future developments 227; government

Index promotion of PPP 223; infrastructure deterioration 221–2; institutional/ governance framework 224; investment in PPP 226; legal framework 222–3, 224; organizational structure 224–5; origins and drivers for PPP 219–22; overview 13; policy framework 222–3; research and development 227; special purpose vehicles 225; stakeholders 224–5; taxation 223; types of PPP 226 Joint European Support for Sustainable Investment in City Areas (JESSICA) 104 Kai Tak Cruise Terminal, Hong Kong 123 labor unions 71, 373 Labour government, UK 354, 360 Lagos 253–4, 263–4 Lagos-Ibadan expressway 253 landfill projects 127 land swaps, Malaysia 242 lease of assets (LOA): Canada 68; Malaysia 243 legal framework: Belgium 49–50; China 78–9; Greece 103, 104, 108; Indonesia 155–60; Italy 205–7; Japan 222–3, 224; Republic of Ireland 184–7; Switzerland 287–8; Taiwan 303–4; Thailand 326–7; Turkey 341; United States 376–7, 381–2 Legislative Council (LegCo), Hong Kong 121 Lekki-Epe expressway, Lagos 253, 254 Lempäälä urban development, Finland 96–8 Liefkenshoek tunnel project, Belgium 46 LOA see lease of assets Local Improvement Finance Trusts (LIFT), UK 354, 357–8 Maastricht Treaty 181 Malaysia 229–47; build-lease-transfer projects 242; build-operate-own projects 242; concerns about PPP 233; contractual structure 239–40; corporatisation 243; Economic Transformation Plan 244; economy 229–30; evaluation criteria for PPP projects 237–8; extent of use/adoption of PPP 240–1; Facilitation Fund 235; financial context 234–5; future developments 244; information requirement for PPP projects 237–8;

407

institutional/governance framework 235–9; land swaps 242; lease of assets 243; management contracts 243; organizational structure 239–40; origins and drivers for PPP 231–3; overview 13; payment mechanisms 238–9; policy framework 233–4; political structure 229; population 229, 230; port projects 242; procurement 230–1, 236–7; Public Private Partnership Unit 235–6; rail projects 242; research and development 244–5; sales of asset 243; sales of equity 243; special purpose vehicles 234–5, 239–40; transportation projects 242; types of PPP 241–3; university projects 243 management contracts (MCs), Malaysia 243 MAP-21 see Moving Ahead for Progress in the 21st Century Act Mass Transit Railway Corporation Limited (MTRCL), Hong Kong 124, 128 MCs see management contracts Ministry of Employment and the Economy (MEE), Finland 90 motorway projects: Greece 103; Turkey 347–9, see also road projects Moving Ahead for Progress in the 21st Century Act (MAP-21), US 377 MSW see municipal solid waste municipal bonds 223 Municipality Finance PLC, Finland 92–3 municipal solid waste (MSW) management, India 145 National Audit Office (NAO), UK 356 National Council for Promotion of Private Participation in Infrastructure Investments of the Republic of China (NCPPP-ROC) 305 National Council for Public Private Partnership of the USA 4 National Development Finance Agency (NDFA), Republic of Ireland 185–6, 188, 191 National Development Plan (NDP), Republic of Ireland 184, 186 National Economic and Social Council (NESC), Republic of Ireland 183–4 National Environmental Policy Act (NEPA), US 381 National Highway Authority of India (NHAI) 146

408

Index

National People’s Congress (NPC), China 77 NBET see Nigerian Bulk Electricity Trader NCC see non-compete clauses NCPPP-ROC see National Council for Promotion of Private Participation in Infrastructure Investments of the Republic of China NDFA see National Development Finance Agency NDP see National Development Plan NEPA see National Environmental Policy Act NESC see National Economic and Social Council NHAI see National Highway Authority of India Nigeria 248–65; banks 250, 251, 255, 262; Bus Rapid Transport Scheme 261, 263–4; civilian government 250, 262; development finance institutions 252; electricity sector 248–9, 256, 260; extent of use/adoption of PPP 258–61; financial context 255–6; housing 249, 260; infrastructural deficit 248–52; Infrastructure Concession Regulatory Commission 254, 256–7, 258; institutional/governance framework 256–7; military rule 250; number of PPP projects 259–60, 261; opposition and support for PPPs 253–4; origins and drivers for PPP 249–54; overview 13–14; ownership of PPP projects 260; policy framework 254–5; population 248; procurement 251–2; research and development 263–4; road projects 253, 254; sector analysis of PPP projects 259; stakeholders 258; telecommunications sector 262; toll roads 253; transportation projects 253–4, 261, 263–4; types of PPP 261–2; usage and extent changes in PPP 262 Nigeria Mortgage Refinance Company (NMRC) 256 Nigerian Bulk Electricity Trader (NBET) 256 NLGFA see Nordic local government funding agencies NMRC see Nigeria Mortgage Refinance Company non-compete clauses (NCC) 329 non-profit-distribution (NPD) model, UK 355

Nordic local government funding agencies (NLGFA) 92 NPC see National People’s Congress NPD see non-profit-distribution model OMDA see Operations, Management and Development model Ontario 61, 66, 71 operating rights transfer, Turkey 343, 351 Operations, Management and Development (OMDA) model, India 146–7 organizational structure: Belgium 51–2; Canada 66–7; China 79–80; Finland 93–4; Greece 108–10; Hong Kong 122; India 141–2; Indonesia 168–9; issues/ questions 8; Italy 207–9; Japan 224–5; Malaysia 239–40; Portugal 276; Switzerland 288–9; Taiwan 304–7; Thailand 329; Turkey 345–6; United States 383–9 origins and drivers for PPP: Australia 21–3; Belgium 46–7; Canada 60; China 75–6; Finland 90–2; Greece 101–2; Hong Kong 119; India 133–4; Indonesia 154–5; issues/questions 7; Italy 201–2; Japan 219–22; Malaysia 231–3; Nigeria 249–54; Portugal 266–8; Republic of Ireland 180–4; Switzerland 284–5; Taiwan 298–301; Thailand 315–21; Turkey 338–41; United States 367–73 Ottawa 62 PABs see private activity bonds payment mechanisms: Australia 27; Portugal 273; United States 383 PCP see public–corporate partnership PDF see Project Development Facility PDM see Public Debt Management pension funds: Canada 64; Finland 94; Nigeria 256 PFIs see Private Finance Initiatives PLCs see public limited companies policy framework: Belgium 47–8; Canada 61–3; China 76–7; Greece 102–5; Hong Kong 119–20; India 134–8; Indonesia 155–60; issues/questions 7; Italy 202–3; Japan 222–3; Malaysia 233–4; Nigeria 254–5; Portugal 268; Switzerland 285–7; Thailand 324–5; Turkey 341; United States 375–7 port projects: India 136, 143, 146; Italy 211; Malaysia 242; Switzerland 286; Turkey 347–9

Index Portugal 266–82; banks 269; contract renegotiations 273; debt service cover ratios 269; economy 266; financial context 268–71, 278; financial rescue agreements 273; future developments 279–80; health sector projects 267–8, 276; institutional/governance framework 269–75; number of PPPs 277; organizational structure 276; origins and drivers for PPP 266–8; overview 14; payment mechanisms 273; policy framework 268; procurement 272; public sector comparators 272; rail projects 273; research and development 280; road projects 267, 268, 273, 276, 279; SCUTS highway projects 267; transportation projects 267, 268, 273, 276, 279; types of PPP 278; usage and extent changes in PPP 278–9; value-formoney 268 power sector see energy projects PPP see Public Private Partnerships PPP government unit, United States 383–5 private activity bonds (PABs) 379, 381 Private Finance Initiatives (PFIs): Malaysia 243; United Kingdom 3, 353–64; weaknesses of 361 procurement: Canada 61, 65, 71; Finland 90; India 133; Malaysia 230–1, 236–7; Nigeria 251–2; Portugal 272; Thailand 315, 319–21; United States 366–7, 372, 382–3 Programme for Prosperity and Fairness, Republic of Ireland 184 Project Development Facility (PDF), Indonesia 159 PSC see public sector comparators Public Debt Management (PDM), Thailand 317–18 public limited companies (PLCs), Belgium 47 public perception risks, Australia 29 Public Private Partnerships (PPP): definitions 2–3, 4, 226, 231–2; project types 5–6; rationale for 1, see also types of PPP Public Private Partnership Unit (3PU), Malaysia 235–6 public sector comparators (PSC): Australia 23, 26, 27; Belgium 50; Portugal 272; Switzerland 284–5 public–corporate partnership (PCP), Indonesia 157–8

409

Quebec 61–2, 71 Queensland, Australia 21 rail projects: Australia 27–30; China 84; India 137, 143, 149; Indonesia 157, 171; Italy 201; Malaysia 242; Portugal 273; Switzerland 286, 287; Taiwan 298, 302, 310; Thailand 321–3, 326; Turkey 340 regulations see institutional/governance framework; legal framework rehabilitate-operate-transfer model, Turkey 342 Republic of Ireland (ROI) 180–94; Comptroller and Auditor General report 189, 190; Criminal Courts Complex PPP 191; Department of the Environment, Community and Local Government 189–90; Farrell Grant Sparks report 182–3; financial context 189–91; infrastructural deficit 181; Infrastructure and Capital Investment 2012–16 187; institutional/governance framework 184–7; legal framework 184–7; National Development Finance Agency 185–6, 188, 191; National Development Plan 184, 186; National Economic and Social Council 183–4; origins and drivers for PPP 180–4; overview 12; Programme for Prosperity and Fairness 184; project announcements 187–8; reviews of PPPs 189–91; road projects 180, 190; toll bridges 180; transportation projects 180, 190; value-for-money reports 189–91; water supply projects 187 research and development: Belgium 55–6; Canada 71–2; China 86; Hong Kong 130–1; India 149–51; Indonesia 175; Italy 216–17; Japan 227; Malaysia 244–5; Nigeria 263–4; Portugal 280; Switzerland 294; Thailand 335; Turkey 352; United States 398 risk allocation/management: Australia 25–30; China 79; Taiwan 305–7; Thailand 325 road projects: Australia 19, 27–30; Belgium 46, 47, 48; Canada 68; China 83; Finland 91–2, 95; Greece 103; Hong Kong 121, 122, 124, 125, 129; India 136, 143, 146; Indonesia 159; Italy 204; Nigeria 253, 254; Portugal 267, 268, 273, 276, 279; Republic of Ireland 190; Switzerland 286, 287, 292; Thailand 326; Turkey 346–9; United States 365–401 ROI see Republic of Ireland

410

Index

Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU), US 376–7 sales of asset (SOA), Malaysia 243 sales of equity (SOE), Malaysia 243 SBOT see subsidise in build-operatetransfer school projects: Finland 95; Greece 111; Italy 211; Turkey 345; United Kingdom 354, 355–6, 360–1 Scotland: Hub initiative 356; Private Finance Initiatives 354–5 SEPO see State Enterprise Policy Office service concessions 213 sewage treatment projects: China 81, 82, 83; Taiwan 308, see also waste management projects; wastewater treatment projects SOA see sales of asset SOE see sales of equity Soeharto, Thojib N.J. 154, 155–6 solar power 149 solid waste management, India 145 South Africa 260 special purpose vehicles (SPVs): Italy 207–8; Japan 225; Malaysia 234–5, 239–40; Thailand 320; United States 386–7 Special Secretariat for PPPs, Greece 108–10 SPVs see special purpose vehicles ‘stamp zoning’ 96 State Enterprise Policy Office (SEPO), Thailand 324, 327 state-owned enterprises (SOEs), Indonesia 155, 156, 158 sub-prime mortgage market 358, 359 subsidise in build-operate-transfer (SBOT) projects 84 subsidy mechanisms, China 78 sustainability principles, India 148 Switzerland 283–96; airport projects 286; extent of use/adoption of PPP 289–92; federal government 283, 286; financial context 287; financial crisis 293; future developments 293–4; institutional/ governance framework 287–8; legal framework 287–8; organizational structure 288–9; origins and drivers for PPP 284–5; overview 14; policy framework 285–7; political structure 283–4; port projects 286; public sector comparators 284–5; rail projects 286,

287; research and development 294; road projects 286, 287, 292; transportation projects 286–7, 292; tunnel projects 292; types of PPP 292–3; usage and extent changes in PPP 293 Sydney 27–30 Taiwan 297–312; agricultural projects 308; build-operate-own projects 309; build-operate-transfer projects 298, 303, 309; competitiveness ranking 297; economy 297; energy projects 308; extent of use/adoption of PPP 307–8; financial context 301–3; future developments 310; governmental debt guarantees 302; institutional/governance framework 303–4; i-Taiwan projects 299, 300; legal framework 303–4; National PPP Taskforce 304; organizational structure 304–7; origins and drivers for PPP 298–301; overview 14–15; rail projects 298, 302, 310; risk allocation 305–7; self-financed projects 310; sewage treatment projects 308; transportation projects 298, 302, 308, 310; types of PPP 309; wastewater treatment projects 303; water supply projects 308 Taiwan High Speed Rail (THSR) 298, 302, 310 Tampere, Finland 96 TAV see Treni ad Alta Velocità taxation: Belgium 49; Japan 223; United States 371–2 TEA-21 see Transportation Equity Act for the 21st Century telecommunications sector: China 81, 83; India 137; Nigeria 262; Thailand 330; United States 365 tender evaluation, China 79 TEN-T see Trans-European Networks for Transport Texas Turnpike Authority (TTA) 384 Thailand 313–36; banks 318, 325; build-operate-transfer projects 321–3; economy 313–14; energy projects 330, 333; extent of use/adoption of PPP 330; financial context 325–6; financial crisis 313, 314, 333; future developments 333–5; government priorities 333; Gross Domestic Product 313–14; infrastructure funds 319–23; infrastructure investment 316, 334; infrastructure needs 317,

Index 318–19, 334; institutional/governance framework 326–9; investment opportunities 335; legal framework 326–7; opposition and support for PPPs 323; organizational structure 329; origins and drivers for PPP 315–21; overview 15; policy framework 324–5; political situation 314–15, 334; procurement 315, 319–21; projects by type/primary sector 331; public debt level 317–18; rail projects 321–3, 326; research and development 335; risk allocation 325; road projects 326, 329; special purpose vehicles 320; State Enterprise Policy Office 324, 327; telecommunications sector 330; toll roads 326, 329; transportation projects 321–3, 326, 329, 330; types of PPP 330–2; usage and extent changes in PPP 332–3 theme parks 121, 124, 126 ‘Thisseas’ (Law 3274/2004) Initiative, Greece 104–5 THSR see Taiwan High Speed Rail TIPP see Transportation Innovative Partnership Program toll roads: China 83; Hong Kong 122, 129; India 144; Indonesia 159, 171, 173; Italy 204; Nigeria 253; Republic of Ireland 180; Thailand 326, 329; United States 379 trade unions 71, 373 trains see rail projects Trans-European Networks for Transport (TEN-T) 103 transfer of operating rights, Turkey 343, 351 Transportation Equity Act for the 21st Century (TEA-21), US 376 Transportation Infrastructure Finance and Innovation Act (TIFIA), US 380 Transportation Innovative Partnership Program (TIPP), US 384 transportation projects: Australia 19, 27–30; Canada 68, 70; China 74, 81, 83; Finland 91–2, 95; Greece 103, 114–15; Hong Kong 119, 124, 125–6, 129; India 136–7, 143, 146, 149; Indonesia 157, 159, 171, 173; Italy 201, 204, 211, 216; Malaysia 242; Nigeria 253–4, 261, 263–4; Portugal 267, 268, 273, 276, 279; Republic of Ireland 190; Switzerland 286–7, 292; Taiwan 298, 302, 308, 310; Thailand 321–3, 326, 330; Turkey 340, 346–9; United States 365–401

411

Treni ad Alta Velocità (TAV), Italy 201 trucking industry 373 TTA see Texas Turnpike Authority tunnel projects: Australia 27–30; Belgium 46; Hong Kong 121, 122, 124, 125, 129; Switzerland 292 Turkey 337–52; airport projects 346–9; banks 342, 345; build-lease-transfer projects 343, 345, 351; build-operate projects 343, 351; build-operate-transfer projects 342–5, 350; economy 340; energy projects 340, 346–9; extent of use/adoption of PPP 346; financial context 341–2; future developments 351; hydroelectric power projects 340; infrastructure investment 337–8, 339; institutional/governance framework 342–5; irrigation projects 340; legal framework 341; motorway projects 347–9; operating rights transfer 343, 351; organizational structure 345–6; origins and drivers for PPP 338–41; overview 15; policy framework 341; port projects 347–9; PPP projects by sector 347–9; rail projects 340; rehabilitateoperate-transfer model 342; research and development 352; road projects 347–9; school projects 345; Tenth Development Plan 340–1; transportation projects 340, 346–9; types of PPP 350–1; urban development/ regeneration projects 347–9; value of contracts 350 types of PPP: Canada 68–9; China 82–4; Finland 94–5; Greece 115–16; Hong Kong 128; India 144–5; Italy 211–14; Japan 226; Malaysia 241–3; Nigeria 261–2; Portugal 278; Switzerland 292–3; Taiwan 309; Thailand 330–2; Turkey 350–1; United States 393–7 unions, labor 71, 373 United Kingdom (UK) 353–64; banks 358–9, 360; Building Schools for the Future programme 354, 355–6, 360; Coalition government 360–1; financial crisis 358–61; Hub initiative 356; Infrastructure Finance Unit 360; Labour government 354, 360; Local Improvement Finance Trusts 354, 357–8; non-profit-distribution model 355; overview 15–16; PF2 model 361–2; school projects 354, 355–6, 360–1

412

Index

United Nations (UN) 4 United States (US) 365–401; banks 378; Congressional reviews of PPPs 374–5; construction management general contracting 367; contract models 382–3; contract values 393; design-bid-build delivery method 366; economy 365; energy infrastructure 365; expenditure for transportation PPPs 369–70; extent of use/adoption of PPP 389–93; finance-based PPPs 395–7; financial context 378–81; future developments 397–8; government policy/reviews 376–7; Highway Trust Fund 371–2; history of PPPs 375–6; infrastructure investment 389; infrastructure needs 368–9, 371; institutional/governance framework 381–3; legal framework 376–7, 381–2; non-finance based PPPs 395; number of PPP projects 390, 391; opposition and support for PPPs 373–5; organizational structure 383–9; origins and drivers for PPP 367–73; overview 16; payment mechanisms 383; policy framework 375–7; PPP government unit 383–5; private financing 378–9; procurement 366–7, 372, 382–3; public financing 379–80; research and development 398; special purpose vehicles 386–7; stakeholders 387–9; taxation 371–2; telecommunications sector 365; toll roads 379; Transportation Infrastructure Finance and Innovation Act 380; Transportation Innovative Partnership Program 384; transportation projects 365–401; types of PPP 393–7; usage and extent changes in PPP 389–93; water supply projects 366; water treatment projects 366

university projects, Malaysia 243 urban development/regeneration: Finland 96–8; India 137, 143, 148; Italy 211; Turkey 347–9 usage and extent changes in PPP: Belgium 53–4; Canada 69–70; China 84–5; Finland 94–5; Hong Kong 129; India 145–7; issues/questions 8; Italy 215; Nigeria 262; Portugal 278–9; Switzerland 293; Thailand 332–3; United States 389–93, see also extent of use/adoption of PPP US Department of Transportation (USDOT) 368, 373–4 value at risk (VAR) models 359 viability gap funding (VGF), Indonesia 159–60, 166–7 Via-Invest PLC 47 Victoria Comprehensive Cancer Centre, Australia 30, 31–5 Wahid, Abdurrahman 156 waste management projects: China 81, 82, 83; Greece 110–15; India 145; Indonesia 171; Taiwan 308; United States 365–6 wastewater treatment projects: Canada 62–3; China 81, 83, 84; Finland 95; Taiwan 303 water supply projects: Indonesia 157, 171, 173, 177–8; Republic of Ireland 187; Taiwan 308; United States 366 water treatment projects: India 145; United States 366 wind energy 148–9 World Bank 6, 226, 393 WVB East End Partners 387–9 Yudhoyono, Soesilo Bambang 156