EN Official Journal of the European Union C 234/52

Opinion of the European Economic and Social Committee on The role of the EIB in public-private partnerships (PPPs) and their impact on growth

(2005/C 234/12)

On 27 April 2004, the European Economic and Social Committee decided to draw up an opinion under Rule 29(2) of the Rules of Procedure, on The role of the EIB in public-private partnerships (PPPs) and their impact on growth.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 16 February 2005 (rapporteur: Mr Levaux).

At its 415th plenary session of 9 and 10 March 2005 (meeting of 10 March 2005), the European Economic and Social Committee adopted the following opinion with 153 votes in favour and 5 abstentions.

1. Introduction

1.1 This opinion draws heavily on a background paper prepared by the EIB for the EESC in July 2004 (1).

1.2 European countries currently use the public-private partnership model (PPP) (concessions and other types of contracts) in very different ways. The term PPP covers a wide range of situations; according to the European Investment Bank (EIB) ‘the key feature of a PPP is that it involves a risk sharing relationship between public and private promoters, based on a shared commitment to achieve a desired public policy outcome’.

2. Issues surrounding PPPs and the EIB's role

2.1 A European history

2.1.1 2000 years ago, the physical transport of mail throughout the Roman Empire, the ‘vehiculatio’ was the responsibility of the emperor, while the local authorities were responsible for the ‘stationes’, i.e. postal stations. The contract drawn up after calls for tenders by the local authorities and managers of these huge ‘post houses’ conferred responsibility upon the latter for their construction, upkeep and operation for five years — a ‘lustrum’ — a fairly typical duration for contracts in Roman law, frequently occurring in the area of land ownership (including ‘precaria’ contracts). It would take twelve centuries for this type of contract to re-emerge. Not only Emperor Augustus's postal service was based on a concession contract, the system was used for the building of ports, thermal baths, marketplaces and even roads.

2.1.2 In the 19th century, the European railway network was built entirely through concession contracts, and not only for railway building and construction works but also for various other public services such as the supply of water, gas and electricity, household refuse collection, telephones, etc.

2.1.3 Moreover, in most Member States, public procurement law stems from the law of concessions.

2.1.4 In the 20th century, the concession contract has enabled not only the building of motorways and car parks but also water supply systems, museums, airports, tramways, underground railway systems transport, facilities for urban areas, the refurbishing of schools and hospitals, etc.

2.1.5 Many countries have begun to use PPPs and the EESC has prepared a brief summary in its opinion (2) on the Green Paper on public-private partnerships and community law on public contracts and concessions which was adopted on 27 October 2004.

2.2 Description of the EIB's action plan

2.2.1 ‘The European Council in October 2003, invited the Commission and the EIB to explore how best to mobilise public and private sector financing support of the Growth Initiative, and how to give further consideration to a number of initiatives which should assist in the development of PPPs.

2.2.2 The Commission, with the support of the Bank, thereafter prepared a series of measures that were incorporated into the Growth Initiative that was endorsed by the European Council in Brussels in December 2003. The proposals focused on the creation of the right regulatory, financial and administrative conditions to boost private investment as well as the mobilisation of Community funding, allied with an invitation to Member States to continue refocusing public expenditure towards growth-enhancing areas without increasing public budgets.

2.2.3 The EIB's proposals to the Council focused on the provision of substantial additional resources both for TENs and i2i (3), the two key sectors covered by the Growth Initiative (4). The EIB undertook to (…): — use its best endeavours to expand the range of financial instruments used including particularly financing for PPPs (…); — develop its institutional links with the Commission; with Member States; with specialist financial institutions (including National PPP Task Forces), as well as with the banking and capital markets in support of increased public and private-sector financing of these high-priority sectors.

2.2.4 The EIB's commitments made under the Growth Initiative were a natural evolution and step up of measures already taken by the Bank over the previous ten years, to encourage greater private-sector financing of public infrastructure. (...)’.

2.2.5 In its opinion on the Green Paper on public-private partnerships and Community law on public contracts and concessions (5) the EESC highlighted significant discrepancies between the Member States in terms of recourse to PPPs. It also notes that local and decentralised public authorities often take a more pragmatic approach to developing PPP programmes than central government.

3. The EIB's review of the development of PPPs in Europe

3.1 The characteristics of PPPs

3.1.1 ‘The term “public-private partnership (PPP)” has been in general use since the 1990s; there is, however, no single European model of a PPP (...).

3.1.2 Provision of new investment in infrastructure in Europe is increasingly being carried out under a range of PPP structures based on the principle of private sector risk taking participation in the provision of public infrastructure through payment by the users or by raising a charge on public funds commensurate with the service provided or with the risk transferred to the private sector. Typical examples of such public infrastructure are airports, railways, roads, bridges, tunnels, environmental facilities (such as waste incinerators and water treatment plants) and public buildings including government offices, schools, hospitals and prisons. (…)’. Appendix 1 illustrates the extent to which ‘PPP programmes, legal systems and government organisations [had] developed within EU-25 (…)’ at the end of 2003.

3.1.3 ‘The core objective for the public sector of a PPP programme is to harness private sector skills in support of improved public sector services’. (…) ‘PPPs are therefore often characterised by the public sector: — entering into contracts to acquire services, rather than procuring an asset; — specifying the service requirement on the basis of outputs, not inputs; — linking payments to the private sector to the level and quality of services actually delivered; — often requiring a “whole life” approach to the design, building and operation of project assets where it is clear that these components cannot be delivered more cheaply by making separate provision for them; — seeking optimal risk transfer to the private sector, based on the principle that risks should be managed by the party to a transaction best able to manage the relevant risk; — requiring the private partner to be responsible for raising some or all of the investment finance required for the project when it is clear that the higher financing costs are offset by the reduction of other costs and the rapid delivery of services; — utilising diverse payment mechanisms, such as market revenue, shadow tolls, capacity availability payments and so on.’

3.2 Drivers for PPP developments in Europe

3.2.1 PPP structures (...) can be means of delivering infrastructure developments across Europe. (…) Provided that the public and private sectors fully exploit their advantages and the potential synergies to be gained from cooperation, PPPs can contribute to improved quantity and quality of public services.

3.2.2 PPPs offer the opportunity to capture private sector efficiencies and introduce appropriate risk-sharing mechanisms between the public and private sector. Unfortunately this has not always proved to be the case, especially for large IT projects. The ability to transfer and ultimately align risks and rewards within project structures has proved critical to the ability of PPPs to deliver improved Value For Money to the public sector (…).

3.2.3 Alongside reforms to public procurement rules, this had enabled the private sector to respond positively to these new opportunities to become involved in the delivery and operation of public infrastructure across many EU countries (…).

3.2.4 This also gives smaller private companies (including SMEs) the ability to participate in large scale projects (and to access long term finance) in a way that would have been problematic in conventional private sector ‘balance sheet financed’ procurements (…).

3.2.5 In response to the financial problems suffered by the public sector as a result of a political approach that favours the private rather than the public sector and which, in certain countries, has for years neglected the necessary investment in public services, the key to improving public services is a higher level of investment and the ability to push forward projects that might not have been possible to finance under classical procurement procedures. However an innovative approach to financing capital projects for the public sector can provide better value for money than PPPs.

3.2.6 The EIB emphasises that ‘Given that many such projects are classified as “on balance sheet” for government deficit accounting purposes under ESA 95 guidelines (6) the question of government accounting treatment is but one of the many factors that may be taken into account by governments in their decisions to authorise an overall PPP programme and it is certainly not the most important’. The EESC points out that Eurostat (7) has established rules for recording PPP projects in the national accounts of Member States. These rules take account of: — arrangements for transferring construction risks from the public to the private partner; — criteria for project delivery; — and, occasionally, user demand.

3.2.7 The EESC acknowledges that PPPs have developed considerably; however, many obstacles need to be overcome before public authorities in the Member States can use such partnerships on a regular basis.

3.3 PPPs and Value For Money

3.3.1 ‘The key consideration for governments in launching a PPP programme should be ensuring Value For Money (VFM). (...) The “no service/no pay” principle should ensure that the private partner is incentivised for timely delivery and operation of project assets. (...). In certain countries, traditional public procurements sometimes suffer from significant construction delays and cost overruns but the same problems have also beset some PPPs. Related to this, where life-cycle maintenance obligations fall to the private sector, operators are incentivised to optimise capital and maintenance spends over the project duration (…)’, but there have also been examples of operators exploiting their contracts when there have been unexpected changes in circumstances or where forecasts of costs have proved to be inaccurate.

3.3.2 The value to the public sector of risk transfer needs to be demonstrated on a ‘case-by-case’ basis in each project in accordance with an agreed methodology generally referred to as a Public Sector Comparator (PSC). (…) Mechanisms for the diffusion of best practice such as the creation of PPP Task Forces and specialised units and the use of widely agreed benchmarking tools to measure Value For Money can also be extremely helpful (…). The EESC points out that several Member States have set up teams of experts to set up PPP contracts and identify best practices. Furthermore, it recommends wider use of systematic comparisons between projects that are managed by public authorities and ones that are managed by private undertakings (cost, performance, etc.). It also recommends that a body of high-level experts be responsible for coordination at European level.

4. EIB involvement in PPPs

4.1 Financing principles

4.1.1 ‘First and foremost, the Bank requires that all PPP projects supported by it are financially robust, economically and technically viable, meet the Bank's environmental requirements and are competitively tendered in accordance with EU procurement rules (…).

4.1.2 Wherever possible, EIB becomes involved in projects at an early stage, prior to commencement of procurement with the Bank working on a non-exclusive basis with all bidders (...) during the bidding phase. This ensures that bidders compete inter alia on the extent to which they pass the financial benefits of EIB participation on to the public sector.

4.1.3 The Bank's principle of providing complementarity with other funders (…) is maintained in (…) structures (…)’.

4.1.4 Therefore, ‘many EIB loans to PPP projects are either bank guaranteed or monoline insured, whether to maturity, or with release once the project has a proven operating record (…)’.

4.1.5 ‘The credit quality of the Bank's PPP portfolio is underpinned by the public sector support for the payment streams to many PPP projects. Indeed, in many projects (such as the UK PPP hospitals and schools), payment obligations lie solely with the public sector and concessionaires are not subject to any form of “demand risk”. PPPs also typically benefit from strong regulatory and contractual frameworks. (...) Finally, although the volume of PPP activity has increased (see Appendix 2), the loan amounts involved remain relatively limited compared to overall lending volumes (...)’.

4.1.6 The EESC notes that the EIB funds between one sixth and one half of the total investment in PPP projects.

4.2 The Bank's exposure to PPPs

4.2.1 EIB exposure by sector

‘In 2003, the Bank provided debt financing of a total of EUR 2.7 billion to 17 new PPP projects. On a portfolio basis, this took EIB's overall nominal and risk weighted exposure to PPPs to EUR 14.7 billion and EUR 5.9 billion respectively. The largest exposure in the PPP portfolio (...)’ is set out in Appendix 3, Table A.

4.2.2 EIB exposure by country

Country exposure is shown in Appendix 3, Table B. ‘Risk-weighted exposure is currently concentrated in the UK, Portugal and Spain’.

4.3 Loan maturities

‘Loans to PPPs are characterised by long amortising maturities’. (Appendix 3, Table C).

4.3.1 Breakdown of EIB exposure by loan maturity

‘As of 31 December 2003, 83 % (nominal) and 87 % (risk-weighted) of PPP exposures related to loans with maturities of 20 years and above. The longest loan maturities are found in social infrastructure (principally hospitals which are characterised by long economic lives and strong public sector covenants) and the urban development and local transport sectors where loan tenors typically range between 25 and 30 years (...)’. The EESC emphasises that because of the long maturities it will be some time before the early PPPs are concluded. It is not therefore possible at this stage to come to a definitive judgment on their value. Furthermore, circumstances inevitably change over such a long timescale. The rigidity of PPPs can therefore restrict the flexibility of the public sector to respond to new developments which are in the public interest. (8)

4.3.2 Future EIB exposure

This displays ‘a trend towards an increase in loan maturities for PPP projects (9). (...) It is also to be noted that such extended terms are becoming the norm required by the public sector, reflecting the need for loans to match, even if conservatively, PPP projects' revenue profiles.’

5. Lessons learned from the EIB's experience of PPPs

5.1 The selection, appraisal and monitoring of PPP projects

‘Experience has shown the benefits of early dialogue between the Bank and the relevant public authorities to identify the most suitable projects: (...)’, enabling it ‘to focus much of its PPP activity on priority sectors (TENs, education and i2i, health) and in regional development areas. PPPs have made additional demands on the Bank's appraisal, structuring and negotiating capacity (...)’.

5.2 Procurement and state aid issues

5.2.1 ‘Appropriate, competitive procurement is one of the key conditions for success of a PPP. The tendering process can be a complex exercise, requiring highly-skilled people on both public and private sides. In some cases, the development of a PPP can involve long and costly negotiations; in other cases (often in countries with experience of concessions) it may be possible to simplify procurement whilst retaining competitive pressures. Review of the procurement procedure is an essential part of EIB due diligence on PPP projects (…)’.

5.2.2 The EESC considers it necessary that, in order to contribute to a climate of healthy competition, projects supported by the EIB should respect European competition law, particularly legislation on public aid. The EESC recalls its stand on the subject in its opinion on the above-mentioned Green Paper (10).

5.3 The performance of PPP projects

5.3.1 ‘National audit authorities have given particular attention to the performance of, as well as the Value For Money from many PPP projects financed in their respective areas of responsibility (...)’. To assess the performance of PPP projects, the Committee suggests using all the available studies carried out in all the countries with PPP projects. Although the United Kingdom has used this instrument most to finance public services, other countries also have experience. Moreover, studies from all available sources should be used for a comprehensive assessment, particularly as regards the experience of the social partners, particularly the trade unions, of trends in working conditions, and that of consumers with regard to the quality of services.

5.3.2 ‘Appendix 4 presents extracts from reports from the UK National Audit Office (11). These indicate that the performance of UK PPP projects has been generally good, particularly in respect of cost and time performances on major infrastructure, albeit with some weaknesses in the early schools projects; they have also been most helpful in pointing out difficulties or errors made, notably in the IT sector which has generally proven an unsatisfactory sector to date for PPPs. Similar reports (12) are also available from other national audit bodies; the recent — and critical — report of the Portuguese Tribunal de Contas on the SCUT programme (13) is a relevant example.

5.3.3 The EIB's overall experience is that the performance of the projects it has financed has been good. In terms of construction, projects have generally been completed by the target completion dates set out in the project contracts. Within the portfolio, just one project has fallen significantly behind schedule (...).

5.3.4 In general, projects have achieved anticipated levels of operational performance within six to twelve months of the commencement of operations (...). Release and refinancing tests applicable to EIB projects have normally been met at the appropriate time’.

5.4 Sectoral priorities

5.4.1 ‘As indicated above, it is a consistent observation that the initial focus of PPP procurement in most countries is on the transport sector. Thereafter, countries often make a progressive migration towards other sectors (such as education, health, energy, water and waste treatment) where the techniques of PPP procurement are being seen to be equally valuable (...).

5.4.2 For example, the UK has placed considerable emphasis on the importance of PPP structures in the social sectors of education and health — the largest in the history of the National Health Service. Since 1997, 64 PPP hospital projects with a capital value of GBP 11.1 billion (EUR 15.7 billion) have been approved by the Department of Health in the UK to commence procurement. Of these, 27 schemes with a value of GBP 3 billion (EUR 4.3 billion) have been completed and are operational, or are in construction (...).

5.4.3 At least three other countries in Europe (Portugal, Spain and Italy) are now bringing forward substantial PPP programmes in the health sector.

5.4.4 It is also notable that national PPP programmes often commence with relatively large, central government promoted projects, with subsequent development of smaller (sometimes repetitive) projects at local or regional government level’.

5.4.5 The Committee points to the need to take a comprehensive approach to research, development and innovation in the European Union's economic policy. The Committee takes the view that the potential of the European Investment Bank is not exploited to the full in this area. It therefore wishes to encourage it to direct a sizeable amount of its resources into this sphere, especially to applied research and innovation. This requires a creative use of all of the EIB's instruments — including PPP — in the area of research, which in most cases could well be considered a public service.

6. Comments on payment in PPP structures

6.1 ‘There is considerable diversity in the structuring of payment mechanisms for PPP projects in the EIB's portfolio, reflecting the diversity of PPP structures in Europe (...)’.

6.2 Government payments play a vital role. ‘In some cases, concessionaires have been directly incentivised to improve safety (through effective maintenance, improved lighting and so on) by payments-related to accident rates.

6.3 In practice, the Bank has noted a general tendency for the public sector to move from toll-based to availability-based payments in transport PPPs, however, the ability to use the different payment mechanisms inherent in PPP structures to achieve differing policy objectives and optimise risk-sharing is a key characteristic and strength of the PPP (...).

6.4 Given the willingness of the Commission to use Structural/Cohesion Funds to part-finance the public sector contribution in appropriate cases in the new Member States, collaboration of the work of National Task Forces with DG Regio and other Commission services is also highly desirable (...)’.

7. Value added of EIB expertise in PPPs

7.1 ‘EIB has brought significant added value to the PPPs it has financed. From a financial perspective, the long loan maturities and capital grace periods offered by the Bank are particularly appropriate for major infrastructure given the long economic lives of the assets being financed and the typical evolution of cash flows over the project life (...).

7.2 Furthermore, the cost of EIB funds enhances public sector Value For Money from these deals. By strengthening the economics of projects, these features also benefit other participating financiers (...).

7.3 In this context, the EIB's high standard of due diligence, as well as its commitment to holding project debt until maturity (i.e. no selling down or syndication of debt which is common amongst other senior lenders), offers considerable stability, robustness, experience and added value to the public sector.

7.4 The Bank's ability to undertake upstream advisory work with public sector bodies on the development of PPP programmes or on individual priority flagship projects, either directly or indirectly (for example, through sharing or experience or secondments), has also been highly valued by the public sector where this has been done to date (...).

7.5 Related to this, the Bank's participation in a project, given its unique status as an “impartial” not-for-profit financier with a public policy mission and considerable technical expertise, can have an important effect in building confidence between the public and private parties to a transaction. One example of the Bank's catalytic influence is the Tagus Bridge project, the flagship project of the Portuguese PPP programme, where this role has been particularly recognised.

7.6 Finally, the EIB has also been able to develop innovative and flexible financing structures for PPP projects. (...). As set out in the Growth Initiative, the Bank is also working on the further development of an extended range of financial instruments such as Guarantees; Junior and Mezzanine Debt; Infrastructure Funds and extending its use of Securitisation as appropriate to facilitate the increased participation of the private sector in the provision of public infrastructure. These innovations, along with the value attached by other lenders to the Bank's due diligence, are contributing to the Bank's role as a catalyst for other sources of funding (...)’.

7.7 The EESC notes that the EIB can lend its support to public authorities by reducing costs and applying a strict policy of project evaluation and risk transfer in the implementation of PPP projects in Member States.

8. Conclusions

8.1 The EESC welcomes the EIB's significant contribution to PPP development and to supporting growth and the improvement of public services in the Member States by providing the funds necessary to carry out work in the following areas: — ‘trans-European networks and the modernisation of transport infrastructure; — school and university education; — primary and secondary healthcare; and — environmental improvement (...).’ However, the EESC recommends that the EIB should also include funding for applied research and innovation, including patents, which give the EU world-wide primacy.

8.2 In its opinion on the Green Paper on public-private partnerships and community law on public contracts and concessions (14) the EESC stressed the need to: — maintain labour, health and accessibility standards for facilities which were set up through PPPs. The EIB should ensure that these standards are maintained during the various stages of design, development and management of the projects that it co-finances; — maintain healthy competition between public and private bodies. The EIB should therefore rigorously ensure equal competition (legal and fiscal) between public and private bodies. State aid in particular should not hamper contract award procedures; — systematically evaluate PPP projects by using a set of criteria that reflect the financing costs of the various options available to deliver public services and the experience gained by all the players involved, including employees and consumers.

8.3 The EESC considers that all bodies of public experts in the various Member States should cooperate amongst themselves and with the EIB so that they can forward to the Commission accumulated experience of best practices and launch a debate on how to improve the European legal framework.

8.4 Given the scale of the EIB's exposure and its experience of PPPs, the EESC suggests that once a year the Ecofin and Competitiveness Councils discuss a report on PPPs, jointly presented by the EIB and the Commission.

Brussels, 10 March 2005. The President of the European Economic and Social Committee Anne-Marie SIGMUND

(1) The EIB's role in Public-Private Partnerships (PPPs), European Investment Bank, July 2004. This document was prepared for the EESC study group and can be requested by e-mail from the EESC Secretariat: eco@esc.eu.int.

(2) EESC opinion - Public/private concessions and partnerships OJ C 120 of 20.5.2005 - on the Green Paper on public-private partnerships and community law on public contracts and concessions – COM(2004) 327 final.

(3) The i2i programme is designed by the EIB Group to provide mid- to long-term loans, equity participations and counter-guarantee structures, and reflects the objectives of the Lisbon Strategy. Further information is available on the EIB website at www.eib.org.

(4) See the note submitted to the ECOFIN Council of 25 November 2003 – Document CA 03/515.

(5) EESC opinion - Public/private concessions and partnerships OJ C 120 of 20.5.2005 - on the Green Paper on public-private partnerships and Community law on public contracts and concessions – COM(2004) 327 final.

(6) For example, in the UK, approximately 60 % of all PPP transactions are accounted for “on balance sheet”.

(7) Eurostat decision on deficit and debt - treatment of public-private partnerships, news release STAT/04/18 of 11 February 2004.

(8) In its opinion on Public/private concessions and partnerships, OJ C 120 of 20.5.2005, the EESC decided to conduct a long-term analysis, based on the results gained from experience.

(9) Nearly 30 % of such future exposures have amortising maturities in excess of 30 years.

(10) EESC opinion - Public/private concessions and partnerships OJ C 120 of 20.5.2005 - on the Green Paper on public-private partnerships and Community law on public contracts and concessions – COM(2004) 327 final.

(11) Available at www.nao.org.uk.

(12) www.tcontas.pt/pt/actos/rel_annual/2003/ra-2003-res.pdf.

(13) The report is available at www.tcontas.pt.

(14) EESC opinion - Public/private concessions and partnerships OJ C 120 of 20.5.2005 - on the Green Paper on public-private partnerships and community law on public contracts and concessions – COM(2004) 327 final.