An EU challenge: Building a valuable PPPs approach in the EUs 10 New Member States Plock, Poland Dec

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An EU challenge Building a valuable PPPs
approach in the EUs 10 New Member States
Plock, Poland December 6th , 2004
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Foreword (1)

• An infrastructure gap at the municipality level
• The World Bank estimated the infrastructure
  investment needs for the New Member States to be
  euro 65 billion over the next 15 years
  
• It cites Poland as the country with the highest
  amount of infrastructure investment needs around
  euro 21 billion (followed by Czech republic,
  Bulgaria, Romania, Hungary, Slovakia, Estonia,
  Slovenia, Lithuania and Latvia)
• With some 70 of these investment requirements
  being at municipal or regional levels of
  government.
  
• While PPPs do not offer ready made solution to
  all procurement issues, there is a growing
  evidence, as more PPPs are procured and delivered
  in more countries around the world, that PPPs can
  deliver significant improvements in overall
  value for money.

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Foreword (2)

• The EU has recognised that the current state of
  EU procurement laws does not provide sufficient
  legal certainty in the areas of PPPs. It is the
  reason why the Commission has published a Green
  Paper in May 2004 and an extensive consultation
  regarding the development of a comprehensive but
  practical procurement environment for PPPs.
• Our presentation will not describe the multiple
  contributions, reports, analysis triggered by the
  PPP concept. Our approach will only be based on
  concrete facts and on different approaches
  already implemented by the Veolia Environnements
  Group in the 10 New Member States and candidates
  states (which are in many respect the same as in
  other part of the world).

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Table of content

• Part I
• Despite the PPPs recognised advantages for the
  public sector to exploit, in the 10 New Member
  States
  
• A still confused understanding of the concept,
  especially at the Municipalities level
  
• A still complex PPP financing sources
• PPPs arrangements are still at an early stage of
  development
  
• Part II
• However, despite this relative understanding and
  implementations difficulties
  
• The Veolia Environnements Group has already
  developed different PPP arrangements
  
• Supported by a flexible approach in order to
  bring the added values required by municipal
  public services

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• Part I

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A rather confused understanding of the PPP
concept and its added value
There is no simple and synthetic definition for
PPP PPP is an umbrella notion covering a wide
range of economic and contractual agreements
Assets ownership
Tariff collection
Form of the contractual agreement
Risk assessment
Public
Public
Management service contracts
(2 to 5 years)
Public (Sovereign and Subsovereign risk)
Specific services
Public
Public
Public (Sovereign and Subsovereign risk)
Design-Build-Operate (DBO)
New assets
Private
Build-Operate-Transfer (BOT)
(10 to 30 years)
Until transfer private After transfer public
Public
Public (Subsovereign risk)
Public
Private
Lease contract (7 to 15 years)
Management and new assets
Private
Private
Concession contract (15 to 50 yea
rs)
Private
Private
Private
Private
Asset sales (perpetuity)
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A complex PPP financing approach
Numerous financing sources
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Evaluation of financial institutions approach to
PPP financing

• A new trend
• From privatisation and BOT models (during the
  1990s) involving mainly a private operator risk
  (and its balance sheet support)
  
• To Concession Lease contract DBO models
  involving a more direct sub-sovereign risk !
  
• Which is now visible in EU and promoted by IFI
  like EBRD
  
• Illustration evolution of EBRDs infrastructure
  portfolio
  
• Risk portfolio 1997 2003
• Sovereign 82 37
• Municipal 16 36
• Private 2 27
• Such evolution illustrates
• An improved perception of the Municipal risks
• An imaginative risk approach instead of a direct
  Municipality's guarantee, the Municipal Support
  Agreement which does not increase the Municipals
  indebtedness

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The financing issues are made more complex with
the increase level of EU grants and funding

• The magnitude of the increase creates a
  fundamental challenge to New Member States will
  they be able to absorb the levels of EU funding
  for which they are now eligible ?
• Before May 2004, the 10 candidates Member States
  where eligible to Instrument for Structural
  Policies for Pre-Accession (ISPA) (1) which
  represented a yearly grants funding of around
  Euro 700 to 900 million. (The projects financed
  should be either environment or transport
  infrastructure).
• Since May 2004, the 10 New Member States are
  eligible to the Cohesion and Structural Funds.
  
• Total funding Commitments to EU 10 accession
  countries (Euro million)
  
• Cohesion Fund 1997 2003 2006 Total
• Transport 1,178 1,358 1,725 4,261
• Environment 1,178 1,358 1,725 4,261
• Total 2,356 2,717 3,450 8,522
• Structural Fund (4,711) (5,433) (6,900)
• (1) Together with PHARE

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Total Infrastructure Funding EU 10 Accession Cou
ntries 2004 2006 ( million)
(Cohesion Funding)
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Hybrid financing are difficult to put in place
due to

• The sheer complexity of combining the separate
  (if not contradictory) requirements of PPPs and
  EU funding in one project structure and
  procurement within the context of national public
  sector procurement requirements
• The necessity to complement the EU grant funding
  (up to 85 of the projects cost) by a
  co-financing from other budget or long term bank
  lending (mainly by EIB or EBRD).

The new Member States are not inclined to face
longer procurement timetables which are
associated with PPPs and grant financing.
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PPP is still at an early stage of penetration
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Conclusion Part I a reluctance due to

• The perceived complexity, high costs, intense
  resource requirements and long preparation of
  PPPs PPPs do not offer ready made solution to
  all procurements issues
• The necessary institutional capacity and
  capability to assess the value for money offered
  by bidders in many cases, the only evaluation is
  based on price with a very little or no
  assessment of the quality of alternative
  solutions and, hence, on the overall economic
  value
• The potentially negative perceptions of voters
  (and of the public service existing managers)
  regarding the private sector involvement and its
  consequences on the tariff, new management style,
  new financial discipline,

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• Part II

Veolia Environnements approach to build a
valuable PPP in the 10 New Member States and
Candidates States
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An already existing concrete presence through
different PPPs arrangements
Global involvement  30,000 employeesInvested
euro 600 million  directly (equity) or
indirectly (borrowing)
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The VE presence in the 10 New member States (and
candidates) is supported by a clear but flexible
approach to PPP concept
The approach

• PPPs should be only considered if it can be
  demonstrated that
  
• They will achieve additional value compared with
  other approaches
  
• There is an effective implementation structure
• The objective of all parties can be met within
  the partnership
  
• The PPPs scope should be clear
• Strategy organisation and control should always
  stay in public hands
  
• General management and implementation
  responsibilities can be outsourced to a partner
  either public or private
  
• The outsourced operator should be able to
• Combine short term management and long term
  vision
  
• Develop human resources incentives training,
  staff organisation,
  
• Optimise OPEX and CAPEX
• When operation is optimised, financing is
  easier
  
• Long term vision on cashflowes (business plan)
• Transparency on the risk sharing (and
  responsibilities) structure

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1rst illustration Building new assets (BOT or
DBO)
The single project approach
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2nd illustration The global concession
From a  single project approach to a
 corporate approach  - Ex Bucharest
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2nd illustration Lease contract
Mixing the  Municipal risk approach  with the
 Private operator technical and managerial
capability  - Ex Czech Republic
Lease contract (fees)
Private operator Management Company Maintenance
investements
Water assets Company Infrastructures investments
Municipality
100
Optimization of the cashflows/OPEX/ CAPEX balance
through the lease fee and tariff
Consumers (Volume tariff)
Lenders
Donors
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3rd illustration Combining lease contract and
new assets financing
Water Assets Cy Existing assets New assets
Municipality
Private Operator
100
Lease (fee) contract (1)
Prepayment of the PV of X years of Lease fee (2)
 Municipal support Agreement 
Consumers (Volume x Tariff)
Lenders for new assets
Donors

• Three remarks
• The private operator can participate to the
  financing of new assets which it will operate by
  paying in advance the present value of X years of
  an additional lease fee
• Lenders may pledge Lease (1) and (2)
• Lenders may benefit from a Municipal Support
  Agreement

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4rth illustration The DBO Concession model
How to combine IFI financing Commercial Banks
financing and a PPP agreement
I.F.I.
Long term lending
Long term lending
Long term lending
Municipal Public Utility
State
Municipality
Grants
51 ownership
Concession agreement

• Private operator
• Local investors

New Cy Building new asset
Operators company

• Equity 30
• Debt 70

49 Ownership (OM PPP agreement)
IFI and Commercial Banks
Such a model allows the Municipality to remain
the owner of the new assets, to combine long term
IFI sovereign lending with commercial lending,
and to benefit from a private operator technical,
managerial and financial expertise.
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Whatever the form of PPP, the main long term
objective should be to optimise the public
service cost structure
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Conclusion
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Conclusion (1)

• The PPP market already exists in many Member
  States and Candidate States and Veolia
  Environnement has already a vast and diversified
  experience.
• For PPPs to develop in an efficient and effective
  way, a number of conditions should be present
  
• Demonstrable, strong, clear, long term political
  will
  
• A good understanding at a political and policy
  level of what PPPs are and where they are
  appropriate and how to implement them (how they
  should be structured and procured)
• An appropriate level of public sector
  institutional capability and capacity to be able
  to develop and undertake complex prospects and
  procurements
• A suitable enabling environment or framework in
  the following areas legislative, regulatory,
  commercial and financial

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Conclusion (2)

• Combining PPP approach with the requirements of
  EU grand funding provides a considerable
  challenge to the Member States, the EU and the
  IFIs. To day, given the difficulty of developing
  and implementing such hybrid structures, member
  States (Municipalities) are rather reluctant to
  take this challenge.
• In that respect, Veolia Environnement is uniquely
  equipped to assist the 10 New Member States (and
  candidates) Municipalities in explaining and
  demonstrating not only its technical expertise
  but also to share a great experience in
  optimising PPPs structure and financing.

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Thank you for your attention