European Bank for Reconstruction and Development Update on Best International Practices in Public Private Partnership with Regards to Regional Policy Issues Review Report November 2005 BEST INTERNATIONAL PRACTICES IN PUBLIC PRIVATE PARTNERSHIP WITH REGARDS TO REGIONAL POLICY ISSUES Review Report BEST INTERNATIONAL PRACTICES IN PUBLIC PRIVATE PARTNERSHIP WITH REGARDS TO REGIONAL POLICY ISSUES Review Report Contents Section Page Glossary 1 Summary 3 1. Introduction 7 Study Background 7 Definition of Group A and Group B Countries 7 Review Methodology 8 2. Review of Best Practices (Group A) 11 Australia 11 Hungary 22 Netherlands 29 Portugal 40 United Kingdom 47 3. Review of Best Practices (Group B) 53 Croatia 53 Czech Republic 61 Romania 70 4. Summary of the Impacts of PPPs on Central Government Accounts 75 5. Bibliography 84 Appendix A – Concepts and Definitions 88 Introduction 90 Successful PPPs 90 Regional Fiscal Policy 91 PPPs and Regional Fiscal Policy 93 Appendix B – PPP Project Experience 98 Appendix B – 1 Australia 100 Appendix B – 2 Hungary 106 Appendix B – 3 Netherlands 123 Appendix B – 4 Portugal 129 UPDATE ON BEST INTERNATIONAL PRACTICES IN PUBLIC PRIVATE PARTNERSHIP WITH REGARDS TO REGIONAL POLICY ISSUES Review Report Appendix B – 5 United Kingdom 134 Appendix B – 6 Croatia 148 Appendix B – 7 Czech Republic 151 Appendix B – 8 Romania 154 Appendix C – The Maastricht criteria 164 Appendix C – 1 The Maastricht criteria 166 Appendix C – 2 European Models for Municipal Debt Control 168 Appendix D – Decentralisation in Czech Republic 172 Appendix D – Decentralisation in Czech Republic 174 Appendix E – PPP Related Legal Issues in Czech Republic 178 Appendix E – PPP Related Legal Issues in Czech Republic based on Atkins previous involvements in the Country 179 List of Tables Table 2.1 – The Approval Process 16 List of Figures Figure 2.1 – Structure of the Australian Constitution 12 Figure 2.2 – Australian Context of PPP 15 Figure 3.1 – Regions and Districts of the Czech Republic 62 Figure B-1.2 – City Link Project Structure 101 Figure B-4.1 – Scheme Shareholders 130 Figure B-4.2 – Financial Structure 130 Figure B-4.3 – PPP Structure of Beiras Litorale Shadow Toll Scheme 132 - 1 - BEST INTERNATIONAL PRACTICES IN PUBLIC PRIVATE PARTNERSHIP WITH REGARDS TO REGIONAL POLICY ISSUES Review Report Glossary BOO Build Own Operate BOOT Build Own Operate Transfer BOT Build Operate Transfer DBFM Design Build Finance and Maintain DBFO design Build Finance and Operate EC/EU European Community / European Union EMU European Monetary union ERDF European Regional Development Fund EUROSTAT European Union Department of Statistics and Accounting Regulation GDP Gross Domestic Product HSL High Speed Line IFI International Finance Institutions ISPA Instrument for Structural Policies for pre-Accession NGO Non Governmental Organisations OECD Organisation for Economic Co-operation and Development PFI UK Private Finance Initiative PPP Public Private Partnership PSC Public Sector Comparator SAPARD Special Accession Programme for Agriculture and Rural Development SCUT Portugal Shadow Toll Road Programme SPV Special Purpose vehicle VNG Association of Netherlands Municipalities - 1 - BEST INTERNATIONAL PRACTICES IN PUBLIC PRIVATE PARTNERSHIP WITH REGARDS TO REGIONAL POLICY ISSUES Review Report - 2 - BEST INTERNATIONAL PRACTICES IN PUBLIC PRIVATE PARTNERSHIP WITH REGARDS TO REGIONAL POLICY ISSUES Review Report Summary This report summarises the review of best international practices in Public Private Partnerships with regards to Regional Policy issues. The review was based on desk research and was carried out using all resources available to Atkins including the web, Atkins library and phone interviews with PPP centres in a selected sample of countries. When undertaking the review it appeared that a number of PPP transactions, particularly from countries at early stages of implementing PPP, were not reported, or reported but without any critical reviews of the experiences. Views on this missing information were briefly given by the interviewees from the PPP centres. From the review of best practice in countries where PPP is widely used, and in the Czech Republic chosen for the case study, the following comments could be made: The Australian PPP experience is generally considered to be successful, and is well advanced particularly in the Transport sector. As one of the pioneering countries in introducing PPP, Australia established a robust PPP legislation and policy frameworks from the outset which created a favourable environment for the private sector involvement particularly from the international major investors, thus providing the required level of competition to ensure best value for money. One of the catalysts of success of the Australian PPP transactions at the local levels is the tight budgetary discipline leading to low debt levels among local authorities which led to their high credit worthiness and to high market confidence. However, to achieve this, central and local governments adopted minimum debt level policies favouring over many years fully privately finance schemes. This explains the concentration of PPP schemes in urban areas where high demand secures high and fast returns on investments. This approach may not be applicable to other countries where infrastructure is mostly supply driven, aimed at driving the local and regional economic development. In Hungary municipalities have already experienced the use of BOT schemes in waste water management. The results were mixtures of success and failure. In general terms municipalities of bigger size, more stable sources of revenue and with highly skilled and knowledgeable public sector procurement officers in contract negotiation and management have carried out better deals than smaller municipalities lacking such skills. In legal terms, Hungarian municipalities may independently enter into PPP contracts without prior central government approval. In practice, there have been minor PPP projects initiated by municipalities, namely in public utility services, though these do not qualify as PPPs in the true sense (BOT). Not having the right of full sale of the utilities, municipalities often outsource the related services under a PPP contract to a service provider company, in which the municipality retains 49% of ownership. - 3 - UPDATE ON BEST INTERNATIONAL PRACTICES IN PUBLIC PRIVATE PARTNERSHIP WITH REGARDS TO REGIONAL POLICY ISSUES Review Report In summary, traditional PPP projects are rare among Hungarian municipalities although there have been a number of initiatives in various areas of development aimed at getting the private sector involved in one form or another. The Dutch experience with PPPs is very recent and was initiated with the creation of PPP centre in year 2000 to pave the way for government departments to use PPP as a method of achieving value for money services procurement. The Dutch Government has adopted a very precautious approach to municipal involvement in borrowing to ensure control over the country overall debt and deficit levels. In practice municipalities can freely borrow in the open market, issue bonds and guarantees under the condition that the currency is Euro (requirement by law) and after approvals from the province or the central government. In addition, to guarantee a loan for an investment, the European state aid rules apply. The Central Government intervenes to control municipal and provincial future debt levels, only if the national EMU-shortage is in danger. Information about the EMU-shortage of municipalities and provinces is regularly collected by the Central Bureau of Statistics. As a consequence, The Netherlands as well as its provinces and municipalities enjoy credit rating of triple A. Such cautious approach, while ensuring local authorities’ solvency, have though limited their PPP experience to projects with highly predictable risk profiles requiring limited guarantees and thus limited risk transfer to the private partner. In Portugal PPPs have become useful tools for the government to develop public infrastructure. Shadow toll road concession schemes were the first to be procured in this way. This allowed a rapid programme of road construction to be achieved at a time when public sector budgets for new capital investment were heavily constrained. The objective was not only to enhance the availability of the road infrastructure, but also to compensate for regional economic imbalances and generate employment opportunities, with the smallest possible initial financial contribution from the government. After the success of these infrastructure projects, the focus switched to the construction of football stadiums mostly for the Euro 2004 games. Currently programmes for hospitals and rail infrastructure are underway. Further opportunities will also arise as the Lisbon Metro is being expanded to link in with various overland commuter lines and the Lisbon Airport. At the local level, PPPs have already been used by Portuguese Municipalities for the provision of water supply, waste treatment, energy (wind farms) and urban public transport services. Other services are still provided through corporations, including local transport (metro, tram, bus companies), where the state holds the majority of shares. Though, given the social orientations, most of such corporations’ services are subsidised and rarely break even, where the subsidies are co-funded by the European Community. The decision making is entirely carried out by Municipalities who have full freedom