Annexes to COM(2009)615 - Mobilising private and public investment for recovery and long term structural change: developing Public Private Partnerships - Main contents
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| dossier | COM(2009)615 - Mobilising private and public investment for recovery and long term structural change: developing Public Private ... |
|---|---|
| document | COM(2009)615  |
| date | November 19, 2009 |
Provision of risk capital — equity participation in TEN-T projects
Up to 1 % or € 80 million of the TEN-T budget can be invested in projects in the form of equity or quasi-equity through a dedicated infrastructure fund. The Commission is currently exploring options for using this instrument to invest in the 2020 Fund for Energy, Climate Change and Infrastructure (Marguerite)[26] which targets a fund size of € 1.5 billion.
3.6. Risk Sharing Finance Facility and Competitiveness and Innovation Programme
The Risk Sharing Finance Facility (RSFF), an innovative credit risk sharing scheme jointly set up by the European Commission and the EIB, as well as the financing instruments under the Competitiveness and Innovation Programme (CIP), support public private partnerships in the areas of research, technological development, demonstration and innovation.
Both RSFF and financial instruments of the CIP have proved their success:
- Since the launch of RSFF in July 2007, € 4.4 billion in loans have been approved for investments in R&D and innovation. The European Economic Recovery Plan foresees an accelerated implementation of RSFF.
- By the end of the second quarter of 2009, under the CIP, partnerships with the private sector were concluded in 16 agreements with venture capital funds from 14 countries. For the guarantee instrument, partnerships with public and private organisations resulted in 16 agreements with financial intermediaries from 10 countries. By the end of first quarter 2009, over 30 000 SMEs had received financing supported by the instruments.
3.7. PPPs outside the EU
The EU has made also contributions to PPPs outside the EU. For example, the Global Energy Efficiency and Renewable Energy Fund is a PPP offering risk sharing and co-funding opportunities for commercial and public investors in developing countries. Currently funded by the European Commission and the German and Norwegian governments, it will invest in private equity funds that specialise in providing equity finance – financing in return for shareholdings – to small and medium-sized regional projects and enterprises. In the enlargement process the EC has also participated in PPPs through programmes such as ISPA and Phare. Guidelines were elaborated to this effect in 2003 to address issues of concern for external cooperation[27].
In negotiations with our trade partners, the European Commission seeks to enlarge transparency and obtain market access commitments for PPP as it does with traditional public procurement contracts when dealing with government procurement in free trade and other bilateral agreements. The most recent achievement in this respect is the inclusion of Build Operate Transfer (BOT) contracts and work concessions in the FTA to be concluded with South Korea. This is also the case in negotiations with third countries, which are party to the WTO Government Procurement Agreement (GPA).
4. CHALLENGES: WHY ARE PPPS NOT REACHING THEIR FULL POTENTIAL?
4.1. Challenges in the current crisis[28]
The recent crisis has had a major negative impact on PPP projects since (i) there has been a marked reduction in the availability of bank lending and other forms of credit for PPPs, and a significant deterioration of the financial conditions offered for PPP lending, a development associated with a change in the assessment of risk of PPP projects on the part of banks, and (ii) some national governments and regional authorities have reduced or put on hold their PPP programmes.
The development of PPPs is, therefore, currently being restricted by:
- significant increases in the cost of debt for PPP projects as a consequence of the credit crunch;
- the substantially reduced maturities being offered by banks[29] on their debt;
- the fact that committed finance is only available at the end of the procurement process .
Faced with this situation, responses in Member States vary. Some authorities have decided to reduce, or temporarily suspend, their PPP programmes. However, others are taking supporting measures, ranging from state guarantee schemes, which have been introduced in France, Belgium and Portugal, to new public sector debt facilities introduced in the United Kingdom, Germany and France. A number of public authorities are also modifying the management of procurement of PPP projects or simplifying national public procurement rules and practices, which often go beyond the minimum procedural requirements of Community rules in this field. These developments reflect governments’ commitments to ensure that PPPs play a more important role in investment — a role that will become still more important as public finances remain under pressure for the foreseeable future[30].
Reduced access to finance may also have an impact on the effectiveness and extent of competition in the public procurement process. The fact that there is not enough banking capacity in the market to support two or more fully funded bids, and that banks are unwilling to commit significantly in advance of contract signature, has significant implications for procurement. The issue is therefore how to ensure that deals are still closed, and that the public sector gets the best value for funding while not infringing the public procurement rules. The Commission will explore ways to deal with these difficulties (Section 5).
At the EU level , the European Council of 11 and 12 December 2008[31] supported the use of accelerated procedures during 2009 and 2010, recognising the exceptional nature of the current economic situation and the need to accelerate public spending during the crisis[32].
The Commission has also put in place a ‘Temporary Community framework for State aid measures to support access to finance’[33], which contains a number of relevant provisions for PPPs. It provides a flexible complementary instrument allowing Member States to intervene where general measures, interventions in line with market conditions and interventions under the normal state aid rules are insufficient to respond to the exceptional conditions created by the crisis.
4.2. Challenges inherent to complex procurement models such as PPPs
There are a number of inherent difficulties in setting up PPPs, which need to be addressed more broadly:
- They may require committing significant resources at the preparation and bidding stage and often involve important transaction costs.
- They require a set of specific skills within the public sector , involving the preparation, conclusion and management of contracts. The range of complex financial arrangements required for PPPs and the relative lack of expertise in such matters may limit the capacity of the public sector to deliver good PPPs. Training and assistance are therefore necessary to accumulate the necessary knowledge for the sound preparation of PPP projects.
- In cases involving Community funding , in the short term Member States may view PPPs unfavourably compared to grant funding for projects procured and implemented through traditional means. The long-term benefits of potentially greater efficiency from private sector participation tend to be forgotten when seen against the more urgent need to meet the requirements of EU procedures. Moreover, a level playing field between public and private management of public infrastructure and services in the allocation of EU funding to investment projects should be guaranteed. To this end, rules and practices should be reviewed in order to ensure that there is no discrimination in the allocation of funds for investments projects in which the private sector participates.
- PPPs require long-term governmental commitment and political will to sharing investment in major projects with the private sector. In particular, the possibility of future changes in policy in various regulatory domains (environment, local authorities' autonomy, fiscal policy, economic policy) may introduce uncertainty into the procurement process and can increase costs.
- Successful PPPs need to be designed to allow private partners the potential to generate a return proportionate to the risks they undertake. Since risks are shared with public partners, returns should also be shared. Bidding processes must be competitive and require an appropriate regulatory and financial framework at national level. Public entities should have flexibility in the types of agreements they can conclude, and retain the possibility to award contracts according to value for money, provided for by the best mix of private and public risk allocation.
4.3. Specific challenges of Joint Technology Initiatives
PPPs in the research field are oriented towards coordinating public and private investment into generating new knowledge and technological breakthroughs. The outputs are therefore less predictable and tangible than for the procurement of infrastructure and services, but potentially enormous.
The first five JTIs were set up as "Community bodies", according to Article 185 of the Financial Regulation, subject to rules and procedures, such as the Framework Financial Regulation for Community bodies, the staff Regulations and the Protocol on privileges and Immunities, which were conceived in the interest of minimizing risks for European public funds rather than facilitating co-investment with private partners in research in fast-moving markets. These JTIs will soon become operationally autonomous and the new instrument responds to a need that the industrial research community has highlighted. At the same time, the partners express the view that the instrument could be implemented more effectively if the set-up and operational procedures were simplified and the legal and administrative framework better tailored to PPPs operating close to the market.
These concerns should be addressed properly to make sure that the existing JTIs deliver on their promises and do not hinder the interest of the private sector in new JTIs in fields where PPPs are necessary. The Commission therefore intends to explore alternative models that could lead to a more streamlined process for setting up and implementing public-private partnerships in European research. In the light of the first experience with JTIs and in view of setting-up new long-term PPPs, the Commission will consider all options in reviewing the legal framework and the financial rules (as well as the operational procedures) to provide a simple and cost-efficient model, based on mutual understanding, true partnership and risk sharing.
Moreover, contributions from the main EU research and innovation programmes (FP7, CIP) directly to PPPs can only be made through grants or public tenders. This is a limitation where the most efficient form of cooperation would be an investment. To improve investment in innovation, the Commission will explore options to allow PPPs to make investment decisions that include Community funds.
5. THE WAY FORWARD: WHAT NEEDS TO BE DONE?
To release fully the potential of PPPs as a tool for facilitating economic recovery and building sustainability, competitiveness and high quality public services for the future as well as maintaining high level of environmental standards, the Commission intends to build an effective and enabling co-operation framework between public and private sector. Drawing on a dialogue with all relevant stakeholders through a dedicated PPP group to be set up by the Commission, a series of actions will complement Member States’ actions to remedy the obstacles to the development of PPPs and to promote their use. These proposed actions will focus, on the one hand, on the Community instruments and regulatory framework, and on the other hand, on enhanced measures aimed at improving the access to financing of PPP initiatives and increasing the EIB's role in financing essential projects. The ultimate decision to use PPPs lies with the Member States' public authority and it is for the Member States to review the national framework as necessary to enable it. The Commission will:
1. Improve access to finance for PPPs through :
- Reinforcing and broadening the scope of the Community instruments currently available to support PPPs, such as LGTT and EPEC and other initiatives that, although not specifically aimed at PPP schemes, can support the implementation of PPP projects (JASPERS, JESSICA, RSFF, Marguerite Fund).
- Coordinating closely with the EIB in order to explore possible ways to increase the Bank's participation in EU infrastructure financing, in particular regarding key initiatives in the EU with socio-economic and European added value (e.g. cross-border projects, environmentally friendly initiatives, etc.). The EIB should also be supported in its efforts to make full use of the multiple instruments available for PPPs and to integrate PPPs as one of the core objectives of the Bank. Furthermore, the EIB is invited to further develop and implement guarantee instruments to facilitate the financing of PPPs, by promoting the role of the capital markets, institutional investors and the public sector as liquidity providers for PPP schemes.
2. Facilitate the setting up of PPPs through public procurement of PPPs by :
- Examining the impact of the Community crisis response on the availability of finance for infrastructure investment, including the need for an adjustment of procurement programmes and processes to take account of reduced access to finance.
- Completing ongoing impact assessment and other preparatory work with a view to considering a legal proposal in the area of concessions in 2010.
3. Ensure proper debt and deficit treatment of PPPs through:
- Examining the implication on the ‘balance sheet’ treatment of PPP assets of revised financing arrangements and issue clarifications on the existing accounting treatment in national accounts of PPP contracts.
- Providing guidance on the accounting treatment of guarantees provided in the context of PPP schemes.
- Continuing to provide clear advice to Member States on the statistical recording of individual PPP contracts, should they request it.
4. Improve information and disseminate relevant expertise and know-how , by:
- The Commission will issue guidance on the legal and methodological issues involved in combining EU funds with PPPs, in particular in the framework of the JASPERS initiative, in order to facilitate and increase the uptake of PPPs in structural funds. Guidelines on the applicability of PPPs for simpler forms of PPP such as Design-Build-Operate contracts will also be issued.
- Pilot PPP projects that could serve as models of best practices, good governance and solutions should be developed and replicated on a wider scale with the use of technical assistance elements of relevant funding programmes.
- Working with the European PPP Expertise Centre (EPEC) to identify means to deliver enhanced long term support to those Member States that seek to use PPP to optimise their use of structural and cohesion funds as a component of programmes of investment. EPEC should be strengthened and be developed into a platform for the exchange of information and best practices and act as a focal point for a European network of national bodies established to support PPPs. It can also complement the role of JASPERS and the Commission, both of which support individual grant applications and projects. Options to promote better project preparation and design projects that are better suited for private sector involvement will be explored.
- Disseminating good practice , in cooperation with EPEC, in order to enhance public sector management capability and reduce PPP costs. For example, EPEC has developed an analysis of potential remedial actions to support PPP initiatives in the prevailing circumstances of the financial markets[34].
- Working with Member States to identify provisions in national legislation that prevent or hinder setting up PPPs , as part of the implementation of the European Economic Recovery Plan. Where the EU funding is involved, it should be ensured that there is no discrimination in the allocation of funds to investments projects depending on the management of the project, be it private or public. The Commission will examine together with Member States the EU and national rules and practices and present its findings, accompanied by proposals for modifications, where appropriate, by the end of 2010.
5. Address the specific challenges of JTIs and financing for innovation by:
- Moving the current JTIs rapidly to autonomy and examining the lessons learnt, while at the same time exploring options for streamlining the legal and administrative framework applicable to JTIs. While ensuring the protection of the EU's financial interests, the objective should be to strike the right balance between control and risk and be flexible enough to permit an efficient partnership with the private players, ensuring the protection of the EU's financial interests based on an equitable sharing in the costs and benefits
- Taking a strategic perspective with JTI leaders and other stakeholders to identify what the specific obstacles are and how they can best be addressed, including changes in the Community rules that govern them, such as the Financial Regulation, as necessary. A report including policy recommendations will be presented in the coming months. On the basis of the recommendations of this report, the Commission will propose a new framework for JTI , which could be based on private law bodies. This new framework will be taken into account in the revision of the Financial Regulation, which will be presented during the first half of 2010.
- Working with the EIB group and other stakeholders to see how the financial instruments could be strengthened in order to improve finance for innovation. This work should also examine whether and how the participation by the EU in private law bodies could be facilitated as a means to delivering our innovation policy goals. The output of this work could be included in Commission proposals for a new innovation policy, due to be presented in early 2010, and taken into account where appropriate, in the coming revision of the Financial Regulation.
The Commission will take stock of the results of these initiatives aiming at improving the EU framework for PPPs before the end of 2011 and if necessary, propose new initiatives.
6. CONCLUSION
Developing PPP as an instrument becomes critical as the financial and economic crisis is taking its toll on the ability of the public purse to raise adequate financial means and allocate resources to important policies and specific projects. The interest of the public sector in innovative financing instruments has increased and so has the political readiness to create conditions for more efficient ways of delivering infrastructure projects, whether in the transport, social, energy or environmental sectors. On the other hand, the private sector's interest in pursuing PPPs could be limited by the prevailing regulatory framework and new economic constraints, as well as other longer established underlying factors such as limitations in the public sector's capacity to deliver PPP programmes in many parts of Europe. In order to ensure that PPPs continue to play a role in the longer term, in particular five key actions are indispensible in 2010:
- The Commission will set up a PPP group inviting relevant stakeholders to discuss their concerns and further ideas with regard to PPPs. Where appropriate, it will issue guidance assisting Member States in reducing the administrative burden and delays in the implementation of PPPs: in this context, it will explore ways to facilitate and to speed up the attribution of planning permits for PPP projects.
- The Commission will work with the EIB with a view to increasing the funding available for PPPs , by re-focussing existing Community instruments and by developing financial instruments for PPPs in the key policy areas.
- The Commission will review the relevant rules and practices in order to ensure that there is no discrimination in the allocation of public funds, where Community funding is involved, depending on the management of the project, be it private or public. It will make proposals for amendments, where appropriate.
- The Commission will propose a more effective framework for innovation, including the possibility for the EU to participate in private law bodies and directly invest in specific projects .
- The Commission will consider a proposal for a legislative instrument on concessions, based on the ongoing Impact Assessment.
The actions set out above aim at creating a supportive Community framework for PPPs designed to meet the needs of citizens, furthers Community goals through a prospective analysis and ensures that actual delivery meets these needs.
[1] Almost all Member States have been speeding up major on-going or foreseen infrastructure projects.
[2] The Commission launched a consultation on PPPs in 2004 (COM(2004) 327) and reported on the results of the consultation in 2005 (COM(2005) 569)
[3] Three PPPs were for instance identified in the European Economic Recovery Programme: factories of the future, energy-efficient buildings, green cars.
[4] The drop in PPPs having achieved financial close in the first 9 months of 2009, is about 30 % from last year, both in volume and number, EPEC research, October 2009.
[5] Based on work within EPEC, UNECE, IMF, WB, and OECD.
[6] Greece, Ireland, Netherlands, Spain, the United Kingdom: Guidebook on Promoting Good Governance in Public-Private Partnerships, UNECE 2007, p. 20.
[7] France, United Kingdom idem.
[8] The prevailing model for private sector involvement in the environmental sector has been that of public service concessions.
[9] According to a global survey by Siemens in 2007, PPPs only account for about 4% of all public sector investment.
[10] For instance in the case of market interconnectors, projects contribution to the security of supply objectives and energy research cooperation
[11] A recent report (October 2009) by the National Audit Office (NAO) in the UK updates the earlier 2003 "PFI construction performance report". This report confirms the overall better performance of PPP vis a vis conventional procurement in respect of on budget (65 % of PFI projects) and on-time delivery (69 %). When costs over-run were incurred, they were caused by the authority or third party requests in 90 % of cases. In addition, 91 % of completed projects were rated by key users as very or fairly good in term of construction quality and design.
[12] These conclusions are upheld by an EIB internal review published in 2005, based on a detailed review of 15 PPP" Evaluation of PPP projects financed by the EIB", http://www.bei.europa.eu/projects/publications/evaluation-of-ppp-projects-financed-by-the-eib.htm.
[13] Results of a global study on the impact of private sector participation in water and electricity distribution (May 2009) show that private sector delivers on expectations of higher labour productivity and operational efficiency, http://www.ppiaf.org/content/view/480/485/.
[14] Canoy et al. (2001) underscore that risk sharing arrangements within PPP provide an instrument to create incentives for both parties to increase efficiency of the project.
[15] Eurostat News Release 18/2004: Treatment of public-private partnerships and ESA95 Manual on government deficit and debt 2004 Edition: Chapter on Long term contracts between government units and non-government partners (Public-private partnerships).
[16] For public contracts or works concessions below the thresholds, Treaty principles apply (transparency, equal treatment, non-discrimination).
[17] Directive 2004/17/EC of the European Parliament and of the Council of 31 March 2004 coordinating the procurement procedures of entities operating in the water, energy, transport and postal services sectors ( OJ L 134, 30.4.2004, p. 1-113). Directive 2004/18/EC of the European Parliament and of the Council of 31 March 2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts ( OJ L 134, 30.4.2004, p. 114–240).
[18] Judgement of 26 April 1994, case C-272/91, Commission v. Italy (Loto); Judgement of 9 September 1999, case C-108/98, RI.SAN; Judgement of 7 December 2000, case C-324/98, Telasutria Verlags; Judgement of 21 July 2005, case C-231/03, Consorzio Aziende Metano (Coname); Judgement of 13 October 2005, case C-458/03, Parking Brixen; Judgement of 6 April 2006, case C-410/04, Associazione Nazionale Autotrasporto Viaggiatori (ANAV); Judgement of 18 July 2007, case C-382/05, Commission v. Italy (Municipal waste produced in the Region of Sicily).
[19] Article 171 TEC allows the Community to set up Joint Undertakings for the efficient execution of Community research, technological development and demonstration programmes.
[20] PPPs can in particular drive further development of the pan-European energy research cooperation and will be promoted through the recently adopted Commission Communication on Investing in the Development of Low Carbon Technologies (SET-Plan), COM(2009)519
[21] According to DG REGIO survey, 7 Member States have experience of PPP with a Structural Fund component.
[22] Joint Assistance to Support Projects in European Regions.
[23] Joint European Support for Sustainable Investment in City Areas.
[24] Joint European Resources for Micro to Medium Enterprises.
[25]8BPVWXvw Motorway schemes ‘IP4 Amarante — Villa Real’ and ‘Baixo Alentejo’ in Portugal, and the A5 Autobahn A-model PPP in Germany.
[26] The proposal for creating such fund which would invest in the core infrastructure areas of EU interest was endorsed by the European Council in December 2008.
[27] http://ec.europa.eu/regional_policy/sources/docgener/guides/ppp_en.pdf.
[28] Material in this section draws on analysis by the European PPP Expertise Centre (EPEC) as part of its work on the impact of the credit crisis on PPPs. EPEC was established as a joint initiative by the Commission, Member States and EIB. Further details are available at www.eib.org/epec.
[29] Maturities of 7 to 10 years are now the market standard. Previously, maturities of 25 to 30 years were not uncommon for major infrastructure projects.
[30] Support measures for PPPs might constitute state aid, which needs to be notified to the Commission.
[31] Point 11, 8th indent.
[32] IP/08/2040 of 19.12.2008.
[33] OJ C 83, 7.4.2009, p. 1.
[34] C.f. European Expertise Centre- EPEC-publication "The financial Crisis and the PPP market, potential remedial actions" of August 2009 at www.eib.org/epec.