Public-Private Partnership in Creating a Knowledge Economy:

the “Sunrise Valley” case

J.R. LazutkaVilnius University

Sunrise Valley: Short History

09/01/2002, VilniusA Memorandum of Understanding was signed by leading Lithuanian businesses, universities and public institutions

Sunrise Valley: Short History• Sunrise Valley was formally incorporated as a

public enterprise in May 2003.• Founding stakeholders in Sunrise Valley included

Vilnius University, Vilnius Gediminas Technical University and leading companies in key target sectors – such as Alna (IT), Bitė (TC), Ekspla (HiTech).

• In February 2004 Vilnius City Municipality became a stakeholder.

Sunrise Valley Mission

To ‘put Lithuania on the map’ as a

location for world-class businesses

engaged in knowledge intensive

activities

Sunrise Valley Mission• To achieve its mission, Sunrise Valley will:

– Provide high quality sites and premises suitable for technology-driven businesses;

– Combine physical infrastructure with the provision of a range of specialist support services;

– Promote networking between the universities and businesses located at ‘Sunrise’ Valley, between the businesses themselves, and with partners elsewhere in Lithuania and worldwide.

Sunrise Valley Main Objectives• Helping transform Vilnius into a ‘Knowledge City’ • Capitalising on the research strengths of Lithuanian

universities; • Improving industry-higher education linkages; • Encouraging technology transfer and the commercialisation

of publicly funded research; • Fostering a culture of entrepreneurship; • Creating new employment and wealth creation opportunities

for university graduates, scientists and researchers; • Attracting new foreign direct investment (FDI) in high value

added activity areas.

Sunrise Valley Former Projects

• SINO (Support to the Innovation Structure) – 2003-2004

• PHARE PPF (Sunrise Valley – Breaking Grounds) – 2004-2005

• BRIDGE (part of EU EUROPRACTICE initiative) – 2004-2005

Sunrise Valley Current Projects• Sunrise Enterpreneurship School (funded

by ESF – 1.1 MLt) – 2006-2008

• Technology Transfer Center (funded by ERDF – 1.3 MLt) – 2006-2008

• Sunrise Science and Technology Park (funded by: ERDF – 10.5 MLt; Vilnius City Municipality – 6 MLt; bank loan – 12 MLt)

Sunrise Science and Technology Park • Territory of 0.6 ha owned by Sunrise Valley

on gratuitous lease basis; • Up to 14.000 sq m for STP and incubator (2

buildings) in period of 2006-2008

Sunrise Valley – Expansion Territory• Territory of 1,8 ha; • Up to 40.000 sq m of building space• Second development phase – 2008-2015

Some Important Questions to be Answered

• Which procurement mechanism should be adopted to raise the financing for infrastructure development – public-private partnership or conventional financing? What are the implications in terms of financing structure, revenue generation etc.?

• What are the most appropriate sources of financing in respect of – a) capital infrastructure development and – b) operating costs?

What role will subsidies play in relation to (a) and (b)

Financing Infrastructure: Two Options• Publicly financed route - a public works contract would be

put out for public tendering. Following an evaluation of tenders from construction companies, appoint a private sector contractor to design and build the infrastructure. The public sector would finance and operate the infrastructure.

• Public-private partnership route - following a public procurement process, a public-private partnership agreement would be signed and a private concessionaire would be appointed to design, build, finance and operate the infrastructure. A revenue-sharing agreement would need to be agreed between the parties setting out the proportion of rental income that would be given to public enterprise Sunrise Valley versus the concessionaire.

Funding and management of infrastructure

Feasibility study & demand-side assessment

Feasibility study & demand-side assessment

Assessment of Phase 1 infrastructure development needs

Assessment of Phase 1 infrastructure development needs

Territorial planning and pre-design proposals

Territorial planning and pre-design proposals

Technical project to prepare SF applicationTechnical project to

prepare SF applicationPublic procurement

procedure for technical project

Public procurement procedure for

technical project

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Option 1 –Incubator &

Business/science centre publicly

financed

Option 1 –Incubator &

Business/science centre publicly

financed

Option 2 – Incubator & Business/science

centre financed using public-private partnership *

Option 2 – Incubator & Business/science

centre financed using public-private partnership *

* - possibility of part speculative, part pre-owned space for private sector

Public procurement

process

Public procurement

process

Signing PPP

agreement

Signing PPP

agreement

Private sector carry out design and building work. Public sector finance and operate. SV manages the

leasing of space

Private sector carry out design and building work. Public sector finance and operate. SV manages the

leasing of space

Private sector design, build, finance and operate. Revenue-sharing agreement

Private sector design, build, finance and operate. Revenue-sharing agreement

Public procurement

process

Public procurement

process

400,000 lts City Municipality

Law on Concession

Public Works Contract - Advantages• Speed – in absence of a framework for the use of PPP in

Structural Funds in Lithuania, launching a public works tender and appointing a contractor may prove quicker than more innovative procurement mechanisms

• Keeping things simple / avoiding risk – the legislative framework for PPP is only just evolving in Lithuania. Given delays encountered in ‘operationalising’ Sunrise Valley, advantageous to keep procurement mechanism simple. Given lack of experience in LT in implementing PPP, there may be additional unforeseen risks

• Lack of need for PPP - there is likely to be sufficient funding to finance of Sunrise Valley’s development with public money alone i.e. VCM, the Ministry of Economy and ERDF. Sunrise Valley does not therefore need to attract additional private finance.

• Control – Sunrise Valley may have more control over the implementation process than under PPP

Public Works Contract - Disadvantages• Absence of leverage on public funds – unlike PPP, public

works contracts will not leverage in additional financing from the private sector. Arguably, this could be interpreted as a sub-optimal use of public funds; and

• Human resource implications – under a public works contract, once the construction work has been finished, managing / operating the buildings will become the responsibility of the public sector organization which commissioned the contract. Sunrise Valley will therefore have to invest time & resources in managing and operating the infrastructure – could be a distraction from its core business.

Public Private Partnership - Advantages

• Public sector defines the outputs, not the inputs;• Transfer of risk to private sector (assuming managed

effectively);• Leverages additional finance from private sector so state

budget is less encumbered;• Greater certainty over future operational costs;• Framework in place to ensure that quality standards are

adhered to – e.g. penalties when standards fall;• Can accelerate project implementation; • Assets are returned to public sector after fixed period i.e.

are handed back at the end of the contract.

Public Private Partnership - Disadvantages• Higher cost of private sector capital; • Contracts more detailed to eliminate all possible risks.

This takes comparably more time than public works contracts/ has HR implications;

• Long-term contracts e.g. 30 years or so may reduce the flexibility of the public sector;

• Danger of PPP being used for the wrong reasons i.e. because it is “fashionable”;

• In some instances, traditional public procurement may have advantages over PPP;

• Obstacles in absorbing EU Structural Funds.

Obstacles in Absorbing Structural Funds

• The absence of a framework for using PPP in combination with SFs;

• Inconsistency between the Law on Concession and the Law on Public Procurement ;

• The short duration of the SFs programming period; • The comparatively long duration (12-18 months) of the process

involved in appointing a concessionaire under the Lithuanian Law on Concession;

• The N+2 rules which set out rules with regard to the commitment and disbursement of SFs. Under the de-commitment rule funding may be lost given the time period it can take under the Law on Concession to appoint a concessionaire;

• Operational costs may not be eligible under SFs rules for the current programming period (although rental income may be collected, other costs for operating the infrastructure on behalf of public enterprise Sunrise Valley may be ineligible).

Development of Sunrise Valley: Joint Venture (capital and services provider)/1

• Sunrise Valley is the builder and owner of the park buildings• Private partner is the financier and operator of the park directly or

through establishment of a separate legal person

• Additional funds from the banks to be attracted for the project

• Private partner is the lessee of the premises having the right to sublease

• Public tender for selection of the private partner to be launched

• According to the Lithuanian legislation other entity may develop infrastructure on the land plots held on gratuitous lease basis by Sunrise Valley, only in case Sunrise Valley is the co-developer and resulting co-owner of such infrastructure (at least formally)

Development of Sunrise Valley: Joint Venture (co-owner of infrastructure)/2

• Contributions of the parties to the joint venture:– In kind contribution of Sunrise Valley (works, gratuitous lease of

land, other obligations)– Financing arranged by the private partner

• The building to be developed – joint ownership of Sunrise Valley and private partner according to pre-agreed proportions

• Private partner is the operator of the park

• Pubic tender for selection of the private partner to be launched

• In case if private business intends to become a stakeholder of Sunrise Valley there is no possibility to get return on investment (profit must be reinvested into Sunrise Valley’s further development)

Development of Sunrise Valley: EU SFs

• According to EU structural funds private business may participate in the project financed from the funds only as providers of goods, services and works (e.g. operator of the park)

• Public procurement rules to be applied

• Prohibition to change type of activity and ownership of property created using EU structural funds (5 years after the end of the project)