Combining PPPs with EU grants

Radek Czapski, Operations Officer

PPPs in InfrastructurePPPs in Infrastructure

This presentation benefitted from contribution by MM. Cledan Mandri-Perrot, Michel Noel and Sophie Sirtaine (World Bank Specialists)

Ample EU funding is available for infrastructure Programming Period: 2007-

2013 Cohesion Instruments:

€308bn EU grant funds Up to 85% project costs Public Infrastructure

(transport, environment, municipal)

Major projects: > 50m transport etc. > 25m environment

Concerns: New Member States

absorption capacity Project quality

EU Grant funding should dominate

public sector investment in NMS Source: European Investment Bank, presentation by Hugh Goldsmith, PPP Coordinator, Projects Directorate, March 2008

Rationale for PPPs – The EIB’s view Why?

Balance sheet treatment à la mode Cost & date certainty of

construction contracts Operational performance Private sector skills Leverage of private

finance Public procurement reform

Why not? Maturity of Legal

Framework Project preparation time &

cost in n+2 context Efficient scale of co-

financing Enhanced public sector

capacity requirements Poor experiences in New

member States

Value-for-MoneySource: European Investment Bank, presentation by Hugh Goldsmith, PPP Coordinator, Projects Directorate, March 2008

PPPs in Europe have been used successfully…

There are few examples which combine EU grant funding with private finance, e.g. Price Waterhouse Cooper Report on Hybrid PPP (2006)

Key challenge is how to bring together public and private funding and thus leverage EU resources

Use of EU Grants can allow: Economic & Social Cohesion Dealing effectively with externalities Acquis compliance Affordability:

To users To paying agency / taxpayers

Cost recovery policy: User Charges v Taxes

…although to varying extent in Western Europe …

Source: PPIAF / PricewaterhouseCoopers, Hybrid PPPs, 2006

… and in the NMS

Source: PPIAF / PricewaterhouseCoopers, Hybrid PPPs, 2006

So what do we mean by ‘hybrid’ projects…..

Until 2007, hybrid PPPs have been implemented using two main routes

Project ring-fencing

National underwriting of EU grants

Project ring-fencing relies on “divisible” projectsRoad project example

The Constanta Water and Wastewater Project used such ring-fencing scheme

National underwriting of EU grant was also used, as for the Athens Ring Road

For existing projects, it is likely to be difficult to attract EU grants

Would need to prove that existing PPPs meet all requirements set in Council Resolution and other relevant legislation

Accounting treatment of grant might complicate how it is integrated into asset base (if at all)…

Sector specific directives would also apply e.g. Water Framework Directive

For new single PPP projects, EU grants can be used in similar ways as prior to 2007 …

1. Capex subsidy model

National

EU Grant

Private

constructionconstruction

operationsoperations

savingssavings Unitary payments or Unitary payments or

user chargesuser charges

………………....

2. Parallel co-financing / project ring-fencing

Component AComponent A

Component BComponent B

National

EU Grant

Private

Single operations SPVSingle operations SPV

………………....

Private

Separate construction Separate construction contractscontracts

… provided all Council Resolution requirements are met

3. Payment subsidy

Private

constructionconstruction

operationsoperations

EU grants

………………....

??

20152015

The FEI structure probably offers the main avenue for future hybrid PPPs

Financial Engineering Instrument (Urban Development Fund)

NationalEU Grant Private

projectsprojects

Option 1: EU as co-investor in Urban Development Fund

Based on articles 43-46 of Commission Regulation 1828/2006 and article 44 of Council Regulation 1083/2006

Holding Fund

NationalEU Grant Private

projectsprojects

Option 2: EU as co-investor in Holding Fund

Urban Development Fund 1 Urban Development Fund 2

NMSs could consider establishing a local infrastructure equity fund as FEI

Fund invests equity in project companies established as joint ventures (JVs) with local governments (regions, municipalities) Fund managed by independent fund manager selected by

competitive tendering Fund manager selected on the basis of track record in raising

equity and in supporting local governments in project development and management of municipal assets

Fund capital originating from fund manager, domestic and international institutional investors, IFIs

Fund manager required to bring in its own equity alongside third party shareholders to incentivize project identification and development

Fund aims at balanced and diversified portfolio of investments

Fund has controlling stake in JVs (not necessarily majority)

The proposed structure presents several advantages

Enables to attract EU grant at three potential levels holding fund local government FEI

Enables to attract institutional investors in holding fund Diversified portfolio of infrastructure investments Investment leveraged with EU grant and IFI funding Appetite tested in feasibility study in Romania Successful examples in UK and other OECD countries

Enables to attract PPP sponsors Investment leveraged with EU grant and fund equity investment

Enables implementation of coherent local infrastructure program

Concluding remarks - 1

Issues are still uncertain

1828 Regulation is a start but not a finish line

Legal precedent (i.e. jurisprudence or case law) will likely set agenda (e.g. Stade Halle case)

Creativity is required

Use of Technical funds to pay for specialist input e.g. EIB is a plus

Concluding remarks - 2

Uncertainties still exist on: Definition of public vs. private expenditure Treatment of availability payments Co-financing rate calculation Private beneficiary as “initiator” Timing of application & grant decision Implications of N+2 rule to availability schemes

From a procurement perspective, the following still needs to be considered: Models for grant blending in different sectors Appropriate tender/bid criteria

THANK YOU!

PPPs in Infrastructure