Europe: PPPs show "widespread shortcomings and limited benefits"

While Public-Private Partnerships (PPPs) have the potential to achieve faster policy implementation and ensure good maintenance standards, an audit of such projects in the European Union shows "widespread shortcomings and limited benefits", says a Special Report (09/2018) by the EU Court of Auditors.

The report of the Luxembourg-based EU Court of Auditors, dated 20 March, became available here last week.

The full report, with footnotes and references, can be found here.

The Organisation for Economic Co-operation and Development (OECD), in the "Principles of Public Governance of Public-Private Partnerships" (2012), defines Public-Private Partnerships (PPPs) as "long term contractual arrangements between the government and a private partner whereby the latter delivers and funds public services using a capital asset, sharing the associated risks."

This broad definition, the EU Court of Auditors says, shows that PPPs can be designed to achieve a wide array of objectives in various sectors, such as transport, social housing and healthcare, and can be structured under different approaches.

The three main PPP categories are: (a) concessions, where, typically, final users of the service pay the private partner directly, with no (or reduced) remuneration from the public sector; (b) joint-ventures, or institutional PPPs, where both the public and private sector become shareholders in a third company; (c) contractual PPPs, where the relationship between the parties is governed by a contract.

[Over the last decade or two, PPPs were promoted and pushed in developing countries via policy advices and/or conditionalities by the IMF and the World Bank, regional development banks, and other funding agencies of the UN system.
And in many instances, the Transnational Corporations based in the developed countries, or domestic enterprises with TNC links, become the concessionaires, partners in joint ventures in the developing country or the parties to a contractual PPP.

[The problems identified in the report of the EU Court of Auditors, while focussed on PPPs in the EU and its members, are present by several orders of magnitude in developing countries, whose governments and bureaucracies have less expertise and experience in negotiating such PPPs. SUNS]

In the audit report, surveying the workings and outcomes of several PPPs in EU members, the report of the Court of Auditors concludes that there is a high risk that PPPs will not contribute to the expected extent to the aim to implement greater part of EU funds through blended projects including PPPs.

Public-Private Partnerships (PPPs), the report notes, harness both the public and the private sector to provide goods and services conventionally supplied by the public sector, while easing the tight budget constraints on public spending.

The auditors say: "We found that despite PPPs having the potential to achieve faster policy implementation and ensure good maintenance standards, the audited projects were not always effectively managed and did not provide adequate value for money. Potential benefits of PPPs were often not achieved, as they suffered delays, cost increases and were under-used, and resulted in 1.5 billion euro (of) ineffective spending, out of which 0.4 billion euro (were) EU funds."

"This," the report of the auditors adds, "was also due to the lack of adequate analyses, strategic approaches towards the use of PPPs and institutional and legal frameworks. With only few Member States having consolidated experience and expertise in implementing successful PPP projects, there is a high risk that PPPs will not contribute to the expected extent to the aim to implement greater part of EU funds through blended projects including PPPs."

PPP projects harnessing both the public and the private sector, the report says, provide goods and services which are conventionally supplied by the public sector, while easing the stringent budgetary constraints placed on public expenditure.

Since the 1990s, a total of 1,749 PPPs worth 336 billion euro have reached financial close in the EU. Most PPPs have been implemented in the field of transport, which in 2016 accounted for one third of the entire year's investment, ahead of healthcare and education.

However, to date EU funds have been little used for PPPs.

Although the Commission's policy has been encouraging the use of PPPs for some years (e.g. the Europe 2020 strategy) as a potentially effective means of delivering projects, "we identified that during the 2000-2014 period just 84 PPPs, with a total project cost of 29.2 billion euro, received 5.6 billion euro in funding from the EU."

Structural and Cohesion Fund grants were the main EU source of funding, followed by financial instruments - often in cooperation with the European Investment Bank (EIB).

The Auditors examined 12 EU co-financed PPPs in France, Greece, Ireland and Spain in the fields of road transport and Information and Communication Technology (ICT).

The visited Member States accounted for around 70% of the total project cost (29.2 billion euro) of EU-supported PPPs.

"We assessed whether the audited projects were able to exploit the benefits PPPs are expected to deliver, whether they were based on sound analyses and suitable approaches and whether the overall institutional and legal frameworks within the visited Member States were adequate for the successful implementation of PPPs."

"Overall," the Auditors say, "we found that:

  • PPPs allowed public authorities to procure large-scale infrastructures through a single procedure, but they increased the risk of insufficient competition and thus putting contracting authorities in a weaker negotiating position.
  • Procuring PPPs typically requires negotiating on aspects that are usually not part of traditional procurement and therefore takes up more time than traditional projects. One third of the 12 audited projects were, with their procurement duration of 5-6.5 years, affected by considerable delays.
  • Similarly to traditional projects, also the majority of the audited PPPs were subject to considerable inefficiencies in the form of delays during construction and major cost increases.

    Overall, seven out of the nine completed projects (with aggregate projects costs of 7.8 billion euro) faced delays ranging from two to 52 months.

    Moreover, an additional amount of almost 1.5 billion euro in public funds was necessary to complete the five motorways audited in Greece and Spain, around 30% of which was provided by the EU (corresponding to 422 million euro).

    "We consider this amount to have been spent ineffectively in terms of achieving the potential benefits."

  • More importantly, in Greece (which is by far the largest recipient of EU contributions with 59% of the total EU-amount or 3.3 billion euro), the cost per km of three assessed motorways had increased by up to 69%, while at the same time the project scopes were reduced by up to 55%.

    This was mainly due to the financial crisis and to poorly prepared projects by the public partner, resulting in premature and insufficiently effective contracts with private concessionaires.

  • The large scope, the high cost and the long duration of typical infrastructure PPPs require particular diligence.

    "However, we found that prior analyses were based on over-optimistic scenarios regarding future demand and use of the planned infrastructure, resulting in project rates of use, below forecasts, of up to 69% (ICT) and 35% (motorways). This does not take into account the pending risk of the heavily underused motorways in Greece after their completion."

  • On a positive note, nine completed audited projects have shown good levels of service and maintenance and have the potential to keep these levels for the remaining project duration.
  • For most of the audited projects, the PPP option was chosen without any prior comparative analysis of alternative options, such as Public Sector Comparator, thus failing to demonstrate that it was the one maximising value-for-money and protecting the public interest by ensuring a level playing field between PPPs and a traditional procurement.
  • The risk allocation between public and private partners was often inappropriate, incoherent and ineffective, while high remuneration rates (up to 14%) on the private partner's risk capital did not always reflect the risks borne.

    In addition, most of the six audited ICT projects were not easily compatible with long contract durations since they were subject to rapid technology changes.

Implementing successful PPP projects, according to the audit report, requires considerable administrative capability that can be ensured only through suitable institutional and legal frameworks and long-lasting experience in the implementation of PPP projects.

"We found that these are currently available only in a limited number of EU Member States. Therefore, the situation does not match the EU's aim to implement greater part of EU-funds through blended projects, including PPPs."

Combining EU funding with PPPs entails additional requirements and uncertainties.

Moreover, the possibility of recording PPP projects as off-balance-sheet items is an important consideration for the choice of the PPP option, but the practice also risks undermining value-for-money and transparency.

The Court of Auditors adds:

"We therefore recommend the following:

(a) not to promote a more intensive and widespread use of PPPs until the issues identified are addressed and the following recommendations successfully implemented;

(b) to mitigate the financial impact of delays and re-negotiations on the cost of PPPs borne by the public partner;

(c) to base the selection of the PPP option on sound comparative analyses on the best procurement option;

(d) to establish clear PPP policies and strategies; and,

(e) to improve the EU framework for better PPP project effectiveness."

By Chakravarthi Raghavan. Chakravarthi Raghavan is the Editor Emeritus of the SUNS.

Source: South-North Development Monitor (SUNS). SUNS #8660 Thursday 12 April 2018.