Original publication: November 2017
Authors: CSIL, Centre for Industrial Studies, Milan: Gianni Carbonaro, Gelsomina Catalano, Laura Delponte, Silvia Vignetti
supported by (case studies) Filippo Addarii and Fiorenza Lipparini (PlusValue), Dariusz Zwierzynski
Short link to this post: http://bit.ly/2kjCCBt

Aim

The objective of this study is to describe how Public-Private Partnerships (PPPs) have been used in the context of Cohesion Policy by looking at the reasons for pursuing such an approach, the variety of implementation agreements and the expected outcomes.

 

Challenges in assessing PPP performances

The definition of PPPs in international practice encompasses a variety of long-term contractual arrangements. According to most definitions, including that used by Eurostat, only projects that bundle construction and operational aspects are considered to be PPPs. There are two drivers behind the PPP approach: the need to cope with limited public resources and the need to close the gap in physical infrastructure. It is expected that PPPs can bring savings in public resources, while improving the quality and efficiency of public spending. However, the superior performance of PPPs can be questioned by examples of poor outcomes, unbalanced risk allocation between public and private partners, and the opportunistic use of PPPs as a way to circumvent public debt constraints. Fiscal incentives can bias the value for money (VfM) assessment when public budgets are constrained by debt limits.

The use of PPPs remains controversial, since any judgment of the performance of PPP projects is too dependent upon specific circumstances. Existing literature supports the idea that PPP projects perform better in the construction phase (i.e. they are concluded on time and on budget), but also points to many open issues concerning the real long-term costs of PPPs for the public sector, and ultimately for taxpayers.

PPP markets in Europe

The PPP market had increased steadily until 2007 when it started to decline after the financial and economic crisis, which created liquidity shortages that substantially increased the cost of private finance. The UK has the largest European market. Other large PPP markets emerged in France, Spain, Portugal, Germany and Greece. The transport sector, and in particular road projects, claim the lion’s share of the European PPP market. The macroeconomic significance of PPPs remains relatively small. In countries with large infrastructure gaps, such as Greece, Portugal or Spain at the beginning of the 1990s, PPPs were used for financing mega projects. Since the financial crisis, tougher limits and controls on public expenditure have reduced the appetite for mega projects, which are now implemented more sporadically.

PPP in Cohesion Policy

A blended PPP project is a PPP arrangement where part, or all, of public funding is provided for the project by the European Regional Development Fund (ERDF) or the Cohesion Fund (CF). Expectations related to PPP added value are based on a more efficient and effective use of resources and on the need to improve the result orientation of Cohesion Policy.

The development of a systematic EU strategic framework incorporating the PPP approach to public investments of European interest has taken shape since the early 1990’s. However, it was only under the 2007-2013 financial perspectives, that the use of PPP to leverage EU funds became a more explicit objective of the Structural Funds regulatory framework. Opportunities for a wider application of PPP in the achievement of Cohesion Policy objectives were provided in the current programming period, when a number of PPP-specific provisions were introduced by the CPR (Common Provisions Regulations) to remove existing obstacles to the use of PPPs in Cohesion Policy.

Two of the main routes to support PPPs are via operations classified as major projects and via the establishment of Financial Instruments (FIs). Typically, a combination of Cohesion Policy grants and other sources of financing is applied to major projects that generate a revenue. A more extensive use of FIs in Cohesion Policy is likely to generate more blended PPP projects. The choice of the blending mechanism depends on the specific characteristics of the project and integrates several elements, including VfM considerations, the need to achieve a balanced and resilient risk-sharing structure and the need to strike a balance between the different interests and incentives of the multiple stakeholders involved in a PPP.

Implementation of PPPs in Cohesion Policy

Despite a more favourable EU legislative framework in 2014-2020, the number of blended PPP projects indicates that the use of PPP operations in Cohesion Policy remains limited. However, the actual number of PPP blended projects is likely to be underestimated due to the lack of systematic data collection for small and medium-sized blended PPP operations. There is no clear correlation between the level of development of the national PPP market and the use of PPPs in the implementation of Operational Programmes (OPs).

The new provisions included in the CPR bring about improvements in a number of regulatory constraints that generated an excessive risk burden for managing authorities (MAs) and private partners engaged in PPP operations. An important novelty concerns the possibility of using ESI Fund co-financing for availability payments, which are due to the private partner upon termination of construction work. However, many of the difficulties in developing PPP approaches in Cohesion Policy remain and are linked to the complexity of combining the two processes.

Other factors limit the use of PPPs in Cohesion Policy, including the very perception of the advantages of using PPPs in the delivery of services of general interest. MAs often do not have the in-house capacity to design a robust and viable PPP approach, although some learning effects are already evident, especially in countries where the use of blending is more mature. Some forms of standardization of contracts and procedures is possible, especially in small-scale PPPs in specific sectors, but most PPPs are structured in transaction-specific ways.

The evidence on whether a PPP approach can be conducive to higher levels of EU fund absorption is not conclusive. The focus on achieving expenditure targets does not generally work for the PPP approach. The availability of ERDF/CF has sometimes acted as an alternative to the effort to mobilise private funds via a PPP approach, rather than a way to leverage them.

Institutional support for using PPP in Cohesion Policy

With respect to promoting the combination of PPP and Cohesion resources, the EIB (European Investment Bank) has played three key roles: provision of advisory and technical assistance services, direct financial support (e.g. co-financing of Cohesion Policy projects) and indirect support via fund management services (e.g. mandates to manage ERDF-supported holding funds). Since the beginning of the financial crisis, the EIB, together with the EC, has expanded the provision of directly managed financial instruments that can also be used in combination with Cohesion Policy resources. These instruments are generally designed to improve the bankability of PPP projects.

Most Member States (MS) have set up centrally managed PPP units, but MS experience of blended PPP projects remains limited. Thus far, only Greece has managed to integrate the PPP approach more systematically in the delivery of Cohesion Policy objectives. Poland and Croatia have recently undertaken to promote the use of the PPP approach more widely in the delivery of OPs.

Insights from the case studies

The availability of EU contributions was key to achieving the PPP financial close, because it mitigated the operation’s risk profile. In some cases, it also helped to improve the projects’ design quality or their welfare implications. The case studies show that PPPs are useful instruments to conclude projects on time and on budget, whereas the assessment of project outcomes is mixed, depending on the time period considered and on the parameters used for performing such an assessment.

Recommendations

PPP should be seen as one possible option for pursuing Cohesion Policy objectives, while sound VfM considerations should guide the selection of the most appropriate procurement option. Since approaches to VfM are still fragmented and not well known to stakeholders, it is necessary to develop sound methodologies to perform such analyses. In the specific case of blended PPP projects, VfM should also cover the specific value added of the procurement route for the achievement of the Cohesion Policy objectives. Both the European Parliament (EP) and national authorities should promote a more strategic approach to the development of PPP project pipelines, along with encouraging the development of technical skills and capabilities for performing VfM analyses and managing PPP contracts. The public debate on the advantages of using PPPs in Cohesion Policy should be better informed by data and expost performance assessments.

Link to the full study: http://bit.ly/602-010

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