public private partnerships in central and eastern … private partnerships in central and eastern...

Public Private Partnerships in Central and Eastern Europe:

Are the same benefits available as in the U.K.?

A project submitted in partial fulfilment of the

requirements for the degree of

Masters of Business Administration

At the University of Westminster

Marylebone Campus

By Albrecht Meyer

Date of submission: 23rd August 2007

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Word count 12,166

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Table of Contents

1 Introduction ............................................................................................ 8 1.1 Research Area.....................................................................................................8

1.1.1 History of PPP.............................................................................................. 8 1.1.2 Current Needs of PPP in Emerging Markets ................................................. 9

1.2 Objectives ........................................................................................................10 1.2.1 Focus Area ................................................................................................. 10

2 Literature Review.................................................................................. 12 2.1 PPP in General ..................................................................................................12

2.1.1 PFI ............................................................................................................. 13 2.1.2 PPP Benefits and Disadvantages.................................................................. 13

2.2 Focus on CEE Countries ...................................................................................14 2.2.1 Construction market .................................................................................. 15 2.2.2 Legal framework ........................................................................................ 16 2.2.3 Funding ...................................................................................................... 16 2.2.4 Governance................................................................................................ 16

3 Research Methodology and Data Collection .......................................... 17 3.1 Questionnaire and Survey Methodology ............................................................17

3.1.1 Component A - Benefits of PPP.................................................................. 20 3.1.2 Component B - Differences between PPP in CEE and the UK..................... 20 3.1.3 Component C - Differences between PPP markets in the UK and Eastern Europe 21

3.2 Methodology.....................................................................................................22 3.2.1 Approach ................................................................................................... 22 3.2.2 Structure.................................................................................................... 22 3.2.3 Scope ......................................................................................................... 23 3.2.4 Questionnaire Structure ............................................................................. 25

4 Evaluation of Survey Data...................................................................... 27 4.1 Generic Results .................................................................................................28

4.1.1 Projects...................................................................................................... 28 4.2 Results by Categories........................................................................................30

5 Comparison of PPP Benefits in CEE and the UK ................................... 31 5.1 Combining the data...........................................................................................31

5.1.1 Component A - Benefits of PPP.................................................................. 32

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5.1.2 Component B – PPP Project Differences .................................................... 40 5.1.3 Component C – Market Environment......................................................... 53

6 Conclusions and Recommendations ...................................................... 69 6.1 Conclusions ......................................................................................................69

6.1.1 Findings...................................................................................................... 70 6.1.2 Research Answer........................................................................................ 72

6.2 Recommendations.............................................................................................72 6.2.1 EU level ..................................................................................................... 72 6.2.2 Country level ............................................................................................. 73 6.2.3 Further research ........................................................................................ 73

7 References ............................................................................................ 75

8 Appendices ........................................................................................... 78 8.1 Appendix 1 – Subject Codes and Survey Questions ...........................................78 8.2 Appendix 2 – Survey Questionnaire ..................................................................80 8.3 Appendix 3 – Survey Results .............................................................................86

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Table of Figures

Figure 1: Research question – ‘Level 1’. ............................................................................. 8 Figure 2: Possible alternatives for governments to deliver public services......................... 11 Figure 3: Methodology structure...................................................................................... 18 Figure 4: Research component questions – ‘Level 2’. ....................................................... 19 Figure 5: Subjects regarding benefits of PPP – ‘Level 3’. ................................................... 20 Figure 6: Subjects regarding differences in PPP projects – ‘Level 3’. ................................. 21 Figure 7: Subjects regarding differences in PPP markets – ‘Level 3’. ................................. 21 Figure 8: CEE countries included in the survey. ............................................................... 23 Figure 9: Overview of organisation types included in the survey....................................... 25 Figure 10: Number of Reference Projects by involved organisation type and country of

project location. ....................................................................................................... 28 Figure 11: Number of Reference projects by type and location. ....................................... 29 Figure 12: Directions of comparisons and component scopes of the analysis. ................... 32 Figure 13: Component A differences................................................................................ 38 Figure 14: Component A findings in brief. ........................................................................ 40 Figure 15: Component B differences. ............................................................................... 51 Figure 16: Component B findings in brief. ........................................................................ 53 Figure 17: Component C differences. .............................................................................. 65 Figure 18: Component C findings in brief. ........................................................................ 68

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Abstract

Typical advantages of PPP constructs, e.g. pre-agreed monthly payments

without the need to spend money on the construction itself, are very

attractive to governments facing the need of heavy infrastructure

investments. This is especially visible in the UK since the 90s, where PPP has

proven to be a success story. Now the model is also increasingly attractive

to governments of emerging markets with the challenge to improve

infrastructures fast enough in line with the growing economies.

The goal of this study is to explore if the same benefits of the PPP model that

have been witnessed in the UK are available in Central and Eastern Europe.

The methodology used as a basis for this study is an online questionnaire on

characteristics of PPP projects in CEE targeted towards PPP experts from

various organisation types.

The findings suggest that PPP benefits are equally available to CEE countries,

if there is the same amount of government support as in the UK.

The recommendations are to provide similar support on EU level to enable

cross transfer of expertise and to ensure that benefits can be applied to all

CEE countries. On national level Public Sector Comparators and quality

checks should be used more frequently and design consultations carried out

more effectively to achieve a higher degree of availability of PPP benefits.

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List of abbreviations

Acronym Term BOT Build, Operate, Transfer CEE Central and Eastern Europe DBFO Design, Build, Finance, Operate EBRD European Bank for Reconstruction and Development RIBA Royal Institute of British Architects CABE Commission for Architecture and the Built Environment EIB European Investment Bank PPP Public Private Partnership(s) PFI Private Finance Initiative PSC Public Sector Comparator

Chapter 1 – Introduction

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1 Introduction

1.1 Research Area

This research explores the benefits and disadvantages of public private

partnerships (PPP) in infrastructure and building procurement in Central and

Eastern Europe (CEE) and tries to answer if the often stated benefits of such

partnerships are equally available to these markets as in the UK, where this

form of procurement has a much longer history. Thereby the research

question, as shown in Figure 1, is at the highest of three ‘Levels’ of analysis

that will enable a component based approach, as presented in chapter 3

‘Research Methodology and Data Collection’.

“Are the same benefits of PPP available in Central and Eastern Europe as in the U.K.?”

Figure 1: Research question – ‘Level 1’.

1.1.1 History of PPP

The philosophy of private organisations being appointed to deliver public

services has its history in the 17th century in Europe with concessions, water

supplies and turnpike trusts (Morledge et al., 2006, p. 196).


9

Whereas in the UK PPP is a common form of procurement of public

buildings such as schools and hospitals as well as infrastructure such as public

transport and motorways, this form of procurement is new to the countries

in CEE and is welcomed by governments allowing them to outsource the

financing and technical aspects of running public services.

In the UK this procurement has been used since the introduction of the

Private Finance Initiative (PFI) in 1992 and considerable experience has been

gathered since. In CEE such procurement was looked at only after the

communist area had ceased and new legislation was introduced. In many

cases this was carried out in a rushed manner due to urgent needs to

upgrade infrastructure and public budgets not holding sufficient funds.

1.1.2 Current Needs of PPP in Emerging Markets

The advantage of a pre-agreed monthly payment, without the need to spend

money on the construction itself, is very attractive to governments of

emerging markets that need to improve their infrastructures fast in line with

their growing economies. In CEE countries, the need for PPP exists in

parallel with the economic restructuring from centrally-led markets to a free

market economy with privatisation and deregulation steps. In order to allow

the governments to use PPP in their countries, new procurement systems,

legislation and guidelines have been introduced or are about to be issued.


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1.2 Objectives

The objectives of this research are to investigate the suitability of PPP as a

procurement vehicle to meet the infrastructure needs in CEE and to explore

whether the typical benefits of PPP available in the UK are equally applicable.

In the construction sector it is known and debated that PPP can lead to

solutions that lack design quality. Whereas in the UK initiatives from

professional bodies such as the Royal Institute of British Architects (RIBA)

and the Commission for Architecture and the Built Environment (CABE)

have resulted in a generally high level of quality of projects, these influential

groups may not be equally predominant in CEE.

1.2.1 Focus Area

The goal of the research is to find or suggest starting points as to where,

how and which measures could be implemented in order to ensure that PPP

benefits, to public authorities and the public at large, are available for

projects in Central and Eastern Europe.

For the purpose of this research we focus on the comparison of PPP and

conventional procurement as two of a range of alternatives, as shown in

Figure 2, which serve to enable public authorities in providing their service

duties.


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Comparison used in this

research

conventional procurement

forms

privatisation types

outsourcingPPP

Government service / function(e.g. hospital, motorway, prison, rail track)

Theoretical range of alternatives available

Figure 2: Possible alternatives for governments to deliver public services.

The research question focuses on the benefits for the public in both forms,

the public authorities as the client as well as the public as end users. We are

not investigating the benefits for the private partners as private firms have

the choice whether to participate in a particular PPP or not, whereas the

public authority very often has got no choice other than using a PPP, due to

limited budgets and expertise, in order to continue delivering its service

duties for the increased demand.

The further goal of this study is to find or suggest starting points concerning

where, how and which measures could be implemented in order to ensure

that PPP benefits are available for projects in Central and Eastern Europe.

Chapter 2 – Literature Review

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2 Literature Review

2.1 PPP in General

PPP is one of many forms of building procurement and the PFI development

in the UK has influenced risk-distribution and value for money for alternative

procurement forms (Morledge, et al., 2006). There is an extensive literature

on PPP, with particular reference to the UK; see Broadbent and Laughlin

(2003) for an overview. The policy and financing aspects of PPP are

intertwined and PPP benefits would be undermined if both were not fully

understood (Yescombe, 2007). The complexity of PPP requires that

stakeholders be managed alongside risks and opportunities (Akintoye et al.,

2003), while the blurred division between private interest and public

responsibilities necessitates a clear and well defined regulatory framework,

especially in developing markets (Pongisiri, 2002; Jamali, 2004).

A significant amount of literature stems from individual experts within

organisations involved in PPP, especially in the CEE markets where there is a

large interest of organisations to promote PPP and transfer skills and

knowledge to prospective project participants.


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2.1.1 PFI

PFI is now firmly embedded in UK procurement whereby bidding costs are

much higher as compared to conventional procurement and value for money

and refinancing issues can be rewarding for both parties on successful

implications, which are not always the case (Morledge, et al., 2006).

2.1.2 PPP Benefits and Disadvantages

There is a large consensus amongst scholars that ideology and accounting are

still the main drivers for PPP, so that in practice the value added often fails to

match the ideal (Spackman, 2002; Klijn and Teisman, 2003) especially if the

intended cooperation is weak (Bult-Spiering and Dewulf, 2006). The degrees

of ‘PPP readiness’ of countries globally is defined by the risks of lack of

political commitment and regulatory framework (Cheatham and Oblin,

2007).

For any project, a careful assessment of positive and negative factors

influencing the attractiveness of PFI procurement should precede any

acceptance of such procurement (Li, et al., 2005). The attractiveness can be

further evaluated by focusing on the actual requirements that governments

have to fulfil which are categorised in the three dimensions of rights,

obligations and liabilities (Abdel-Aziz and Russell, 2001). Such obligations

might be in conflict with short term interests of private parties and such


14

conflicts need to be addressed or checked against alternative strategies, such

as decentralisation, before expanding PFI (Ghobadian et al., 2004), especially

in healthcare (Barr, 2007). A further crucial point in achieving mutual benefits

with PPP, risk allocation to those parties that can carry it best, is presented

by the same authors in a further article (2005a) and Ng and Loosemore

(2007) find that risks are often not allocated carefully to the most

appropriate parties which result in cost increases and delays, therefore not

allowing the key benefit of value for money. If risks are allocated

appropriately and if strong competition is available, then value for money is

achieved, especially on large projects due to scale economies of transition

costs (Low, Hulls and Rennison, 2005).

2.2 Focus on CEE Countries

The literature in the area of PPP with specific focus on CEE is currently fast

evolving in line with the development of these new markets and the first

projects implemented. A brief overview of the PPP market in Europe,

including the CEE countries, is presented by DLA Piper (2007) where an

interesting view emerges that not only experience from the UK can be

transferred to the CEE but in return the UK can learn from the successes of

long-term concessionaire operator groups (DLA Piper, 2007). AMA Research

Ltd (2002) has previously covered the area of PPP in CEE on a country by

country analysis in a report containing checklist data such as legislation, key


15

contacts and case projects, which has, due to costs and the fast changing

nature of these markets, not been consulted.

The consensus amongst scholars is that transition countries are highly

interested in PPP due to the possibility to fill the infrastructure gap of lack of

quality and quantity of service provisions within the fast growing economies

without capital expenditure which is limited by EU and Maastricht

requirements (Howcroft, 2004; Snelson, 2007), whereby the role of the EU

should be to manage successful implementation (Howcroft, 2004) by

promoting PPP without over-legislating (European Information Service,

2005).

2.2.1 Construction market

The much needed large scale projects, such as the construction of 717km of

motorways by 2015 in Bulgaria (Chiltern Magazine Services, 2006, p. 4) will

require foreign private companies to take a greater role in the provision and

management of public services (Economist Intelligence Unit, 2007). Sleight

(2003) finds that PPP with a typical concession of 30 years is not suitable for

railways as procurement. Despite the benefits at first sight for satisfying the

infrastructure needs as presented by Sleight (2005 p. 27) and Kovac (2003).

Briggs (2005) reports on lessons from a failure in the Czech motorway

project and the resulting difficulty to find new support from any political

party.


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2.2.2 Legal framework

Weak legislation in CEE is slowing down the implementation of PPP but the

World bank and the European Bank for Reconstruction and Development

(EBRD) are key stakeholders in consulting on new law (Public Private

Finance, 2005) and there is a new EU initiative to clarify rules on PPP in the

EU (Public Private Finance, 2006). Zverev and Zatezalo (2007) find that only

few countries have high quality concession law.

2.2.3 Funding

Large funds are available from the EBRD, some of which is invested in PPP

projects (Velikov, 2007). Up to 2003 inclusive, the EIB (2004) had signed

14.7bn Euro in loans to special purpose vehicles that undertake PPP projects.

2.2.4 Governance

Bult-Spiering and Dewulf (2006) argue that most individuals involved have

short term political and financial interest and therefore a strategic approach

to PPP needs to be taken.

Chapter 3 – Research Methodology and Data Collection

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3 Research Methodology and

Data Collection

3.1 Questionnaire and Survey Methodology

Due to the complex nature of PPP the research question has been broken

down into components and subcomponents which are then used to

formulate questions for the survey. The results of these sub-components are

then combined into the components and then into the conclusions for the

research question. The structure of this methodology is presented

diagrammatically in Figure 3.


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Research Question

Conclusions and Recommendationsfor Research Question

Survey Questionnaire

A: PPP BenefitsB: PPP Project characteristics

C: Market environment

A1 A2 A6… B1 B2 B15 C1 C2 C13… …

A1 A2 A6… B1 B2 B15 C1 C2 C13… …

Conclusions for A:PPP Benefits

Conclusions for B:PPP Project

characteristics

Conclusions for C:Market

environment

‘Level 3’:IndividualSubjects

[Chapter 3,Chapter 5]

‘Level 2’:Components[Chapter 5]

‘Level 1’:Research Question

[Chapter 6]

‘Level 2’:Components[Chapter 3]

‘Level 1’:Research Question

[Chapter 1]

Figure 3: Methodology structure.

For the purpose of enabling a precise research approach to the research

question, the same has been broken down into three component questions

(‘Level 2’) as shown in Figure 4.


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Component Question Component Code

What are the benefits of PPP in the UK? A

What are the differences between PPP in Western Europe and those in Central and Eastern Europe?

B

What are the differences of the markets surrounding PPP between Western Europe and Eastern Europe?

C

Figure 4: Research component questions – ‘Level 2’.

The above questions are further split into subject elements (‘Level 3’), as

presented in the following three sections. These subjects have been used to

formulate the survey questions. A copy of the web-based questionnaire can

be found in Appendix 2 – Survey Questionnaire.

It is worth noting that many participants have a vested interest in PPP and

the results are therefore analysed in the light of existing literature, which, in

some cases, is also written by some of the participants.

The fact that PPP as a procurement form has a far shorter history in CEE will

make like-for-like comparisons in the research difficult, especially as most

organisations in CEE, as Snelson (2007, p. 31) points out, have their own

interpretations of PPP, apart from the classic definition of ‘risk being shared

by those best able to manage it’.


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3.1.1 Component A - Benefits of PPP

As stated in the introduction, the focus of this research is on the benefits for

the public authority as client as well as the end-user. The main benefits for

this public realm can be broken down in separate items as shown in Figure 5.

‘Level 3’ Subject of Component A - Benefits of PPP Item Code

Whole life costing encourages contractors to think 25 years ahead, hence encouraging long term overall cost efficiency.

A01

PPP encourages delivery on time as private consortium is only receiving payment once the object is ready to use.

A02

PPP is a catalyst for reforming public services. A03PPP allows for innovation due to the nature of output specification (i.e. contract not being prescriptive).

A04

PPP provides value for money (payment for service delivery, not the building / infrastructure itself).

A05

the risk is allocated to those parties that can handle it best. A06

Figure 5: Subjects regarding benefits of PPP – ‘Level 3’.

3.1.2 Component B - Differences between PPP in CEE and the UK

PPP projects may differ in various aspects with the most obvious

characteristics presented in Figure 6. The scope of these subjects is the

project, whereas the aspects of their environment are part of Component C.

‘Level 3’ Subject of Component B - Project Characteristics Item Code

types of project used (hospitals, transport, water/sewage) B01BOT-models used B02Public sector comparator as benchmark B03length of procurement time B04contractual provision for changes during preferred bidder stage B05quality of aesthetics B06functionality B07design control or supervision by an independent design institute (e.g. CABE in U.K.) B08


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design involvement by project participants B09design involvement by user and/or community B10Incorporation of innovation by contractor B11service standard of facility B12quality control of built facility and service offered B13contractual agreements/procedures for changes B14Risk types on the project B15

Figure 6: Subjects regarding differences in PPP projects – ‘Level 3’.

3.1.3 Component C - Differences between PPP markets in the UK and Eastern Europe

The differences between markets in Western Europe and countries in CEE

are mainly characterised by the transition from planned economies to free

market economies and recent EU accessions. Differences that can affect PPP

are presented in Figure 7.

‘Level 3’ Subject of Component C - Market Environment ItemCode

law/regulation for PPP C01availability of professional organisations to share local market knowledge C02best practice guidelines C03government support for PPP C04stage of competition law implementation C05track record of PPP projects in the country C06construction skills available C07access to EU funds and other development funds C08competition amongst contractors / operators C09competition amongst design firms / engineers C10availability of alternatives to PPP C11main drivers / forces to use PPP C12government needs for PPP projects C13

Figure 7: Subjects regarding differences in PPP markets – ‘Level 3’.


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3.2 Methodology

3.2.1 Approach

Despite the fact that PPPs are slowly initiated and of a long duration with

only a few projects per country, the questionnaire method has been

adopted, as opposed to a case study approach in order to achieve a sample

size that allows for statistical calculations. In the variety of countries a case

study in one country might not represent the general situation in all CEE

countries, which is asked for by the research question.

3.2.2 Structure

The subjects will be used to formulate the survey questions. Their results

will be first evaluated at ‘Level 3’ and later re-combined with a combined

evaluation at the ‘Level 2’ questions, before their results will finally be

analysed with regard to the research question on ‘Level 1’.

The key which links the individual questions to their original subject on ‘Level

3’ can be found in ‘8.1 Appendix 1 – Subject Codes and Survey Questions’.

However, in some cases, e.g. market risks and project risks, survey questions

refer to more than one of the subjects.

For the purpose of achieving an easy to answer questionnaire, the structure

of the three component questions, as derived from the research question,


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has been transformed into a structure more appropriate to typical PPP

elements and project phases, covered on individual web-pages within the

survey.

In order to strengthen or validate the questionnaire results, these are

combined with secondary data, if available, to achieve triangulation (Gill and

Johnson, 2002, p. 201) mainly on the ‘Level 3’.

3.2.3 Scope

Countries

The questionnaire has been designed for individuals involved in PPP projects

in CEE countries as shown in Figure 8, even if these individuals are based in

organisations outside these countries.

EU Member EU Candidate Other Bulgaria Czech Republic Estonia Hungary Latvia Lithuania Poland Romania Slovakia Slovenia

Croatia Former Yugoslav Republic of

Macedonia

Albania Montenegro Russia Serbia Ukraine

Figure 8: CEE countries included in the survey.


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PPP Types

The scope of PPP for the purpose of this research only includes projects of

physical structures such as infrastructure and buildings including their

maintenance. Therefore it does not include special forms of service PPP such

as education partnerships, IT projects or pure financial partnerships such as

microfinance initiatives. We will only look at PPP as an alternative to

conventional procurement and not at further alternatives such as

privatisation, even if in some cases this might be a viable alternative, e.g. for

airports. Similarly we will not try to assess which rights, obligations and

liabilities as defined by Abdel-Aziz and Russell (2001 p. 891) the public

authorities have and if PPP, as compared to conventional procurement, will

provide a better or worse solution to meeting these requirements.

Participants of Questionnaire

Due to the nature of PPP projects being large, complex and long term, there

are a variety of stakeholders involved, ranging from the policy making

government to the end-user of the facility. The questionnaire was sent to

specific individuals that have been identified from literature and on the

internet, rather than posting the questionnaire on portals where a large

amount of visitors would dilute the few expert answers based on relevant

experience of managing PPP in CEE. The different types of stakeholders

approached are presented in Figure 9.


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Organisation group Organisation types Authority (as PPP client) • municipalities

• local government • port and airport authorities

Consultant • lawyers • quantity surveyors • accounting firms

Contractor • general contractors • specialist contractors

Design firm, engineering firm • architects and planners • engineers

Funder/Investor • development banks • investors

Government • government bodies • EU Commission

Operator • operators Professional/Interest Group • associations

• professional bodies • other NGOs

Research Institute • universities • research institutes

Figure 9: Overview of organisation types included in the survey.

3.2.4 Questionnaire Structure

The questionnaire asked the respondents 3 questions about their

organisation and 29 questions about the most recent PPP project in CEE

they have been involved in, which was referred to as Reference Project. The

structure is designed to allow for the four purposes of a questionnaire

(Hague, 2002, p. 106) of (i) drawing accurate information from respondents,

(ii) providing a structure that applies to all types of respondents (see Figure

9), (iii) providing a standard form in which the facts are written down, and

(iv) facilitating data processing.


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In total 223 individuals from 133 organisations have been approached by

email and invited to complete the survey online and to pass the email on to

further experts if they so wish .

By using the techniques for self-completion questionnaires recommended by

Hague (1993, p. 101-110) the incentive has been offered to send the findings

of the survey, in order to improve the response rate, and individuals have

therefore also been allowed to only partially complete the questionnaire as it

was expected that many individuals might not be in a position to answer all

questions. The underlying rationale was that for the aggregate several

partially completed questionnaires will provide a better result than too few

completed questionnaires at all.

Chapter 4 – Evaluation of Survey Data

27

4 Evaluation of Survey Data

Following the approach of the identified individuals and organisations the

survey has been filled out by 74 individuals, but has been entirely completed

by 31. Although the questionnaire has been answered by experts for PPP the

results should be treated with caution as for some countries the results are

based on a small number of datasets. The individuals relate their experience

to one particular project, as asked by the questionnaire, and not to the

average of all projects. This approach has been chosen in order to allow

cross-tabulation in order to find patterns which would not be able to

discover if the participants had been asked for general experience across the

whole range of projects.

From all respondents 27.3% were from public organisations (21.8%

government and 5.5% authorities as clients) and 5.5% from research

institutes and the remainder from private organisations (56.3%) and NGOs

(10.9%). Figure 10 gives a graphical representation of the number of

projects by the type of organisation involved in these projects and the

location of the project. The summary of all respondents’ answers can be

found in ‘8.3 Appendix 3 – Survey Results’.


28

Figure 10: Number of Reference Projects by involved organisation type and country of

project location.

4.1 Generic Results

4.1.1 Projects

The majority of Reference Projects have been in Hungary (11.7%), Poland

(10.4%) and the Czech Republic (9.2%) with the most common type of

projects being roads (41.4%), schools (17.2%) and water and sewage


29

projects (10.3%). The complete range of projects and their location is

graphically presented in Figure 11.

Figure 11: Number of Reference projects by type and location.

It should be noted that some projects are in their early stages, either

procurement or construction, so that not all answers could be answered.


30

4.2 Results by Categories

We employ the most widely used statistical measure of association, cross-

tabulation analysis (Baker, 2003 p. 310), in order to find apparent patterns of

association. This will be carried out in the following chapter in order to

analyse the results of each subject to enable better comparison with PPP in

the UK e.g. regarding certain project types.

Chapter 5 – Comparison of PPP Benefits in CEE and UK

31

5 Comparison of PPP Benefits

in CEE and the UK

In the following we compare the results of the survey with equivalent

secondary data on PPP in the UK. The survey data is partly supported by

secondary data. This comparison is carried out for each individual subject of

all three research components.

5.1 Combining the data

In order to investigate the differences between PPP in the UK and in CEE

(the main level of comparison) it is necessary to look at differences between

PPP and conventional procurement forms (secondary level of comparison) in

order to achieve a better understanding of these main differences, as

illustrated in Figure 12. Such conventional procurement forms vary by

country an can include standard forms of building contracts, design-and-build

contracts and partnering contracts, all of which exist in some countries but

not in all, and therefore do not allow for complete like-for-like comparisons.

Chapter 5 – Comparisons of PPP Benefits in CEE and UK

32


forms


forms


forms


forms

UK Market CEE Markets

PPP procurement


forms

PPP procurement


forms

Secondary direction of comparison

(comparison not part of this survey)

Component B

Component C

Component A

Main direction of comparison

Secondary direction of comparison

Figure 12: Directions of comparisons and component scopes of the analysis.

5.1.1 Component A - Benefits of PPP

In the following, those survey results that relate to PPP benefits, partly

supported with additional secondary data, are compared with secondary

literature on the equivalent issues for PPP in the UK and summarised in an

overview table before the key differences are further analysed.


33

A01: Whole life costing encourages cost efficiency

Applicable to both, CEE and the UK, the costs for PPP are higher as

compared to conventional projects due to the risks carried by the private

sector, the costs of the loan structuring and the private sector’s higher

financing costs (Thomson, et al., 2005 p. 3).

CEE:

In the minority of cases (28.9%) a Public Sector Comparators (PSC) was

used on the Reference Projects. Many countries have no project with a PSC

used, which is seen as an essential tool for whole-life costing and to get a

comparison with a conventionally procured equivalent project. Only in

Slovakia, Latvia and Poland has there been relatively frequent use of PSC.

The survey also reveals that maintenance budgets not being ring-fenced

count for 17.5% of all risks on PPP in CEE. As such budgets are essential to

keep the project running in the desired scope, the achievement of cost

efficiency seems limited in most CEE countries.

UK:

Whole-life costing is seen as a benefit of PPP as the investors will be

responsible for construction, operation and service delivery (Yescombe,

2007, p.21). PSC are used in 84% of the cases analysed by Low et al. (2005,

p. 2) and budgets are effectively ring-fenced for maintenance of these assets.


34

A02: Delivery on time

CEE:

A slight majority of the participants (37.5%) states that conventional

procurement would have been faster on the Reference Project, as compared

to those who disagree with that (29.2%). Whereas in Slovenia and the three

Baltic States the participants on average think that conventional procurement

would have been slower, the opposite can be said for participants with

Reference Projects in Albania, Slovakia and the Ukraine. Snelson (2007, p.

33) points out that some legislation in place in transition countries requires

permissions for certain activities in PPP projects that can be lengthy to obtain

and thereby making this form of procurement much longer. This can be seen

in the example of the Bulgarian airport of Gorna Oriachovista where

concerns of necessary investments before PPP implementation are causing

debate and delay (Wirtschaftsblatt, 2007, p. 10).

UK:

The key principle of concession contracts of ‘no service / no pay’ is not only

ensuring value for money but is also an incentive for the private firm to

deliver the project on time however PPP take longer to prepare due to their

complexity (European Investment Bank, 2004 p. 4-5). According to Pitt

(2006, p. 364) with PFI, only 24% of projects are late, as compared with

70% under conventional procurement.


35

A03: Catalyst for reforming public services

CEE:

According to the survey the governments have been the main drivers, far

ahead of all other forces, to use PPP on the Reference Project despite the

fact that this form of procurement is in such an early stage of implementation

in CEE, whereas private operators are also seen as main initiators in Bulgaria,

Estonia and Slovakia.

UK:

In the UK PPP is seen to act as catalyst for reforming public services

(Cheatham, et al., 2007 p. 2) which can happen in various ways such as

creating transparency in costing, introducing procurement skills and

management skills (Yescombe, 2007, p. 25-26).

A04: PPP allows for innovation

CEE:

With 63.6% agreeing that the use of PPP on the Reference Project

stimulated innovation or different approaches to achieve the specified design

this benefit seems to be available in most of the projects, except some road

schemes.

UK:

This is similar to PPP in the UK, where it is seen as one of the benefits of

PPP by allowing the contractor to compete in offering unique and creative


36

approaches to the delivery of the required project (Birnie, 1999; NS, 2000;

in Akintoye et al., 2003, p. 7).

A05: PPP provides value for money

CEE:

The survey reveals that the payment models on most projects (47.6%) are a

mixture of payment for use and a fixed payment for availability (e.g. shadow

tolls and availability for toll roads). Roads are of all types of payment models,

whereas water and sewage are all of a mixed model, consisting of a fixed and

a use dependent part. Therefore in not all of the projects is value for money

achieved, especially with the rare use of PSC.

Due to long set-up times and transaction costs value for money is particularly

effective if the concession runs over a long time, which seems to be valid in

CEE with examples being the Varna and Bourgas Airports, which show that

concession periods can be as long as 35 years (Sofia News Agency, 2006).

UK:

In the UK a majority of authorities considered PPP to be good or excellent

value for money (Low et al., 2005 p. 3). The associated benefit of an off-

balance sheet asset requires that the risks, for both project completion and

either project use or project availability, are transferred to the private sector

in accordance with the guidelines published by Eurostat (Thomson et al.,

2005 p. 3).


37

A06: Risk is allocated to those who can handle it best

CEE:

Even if more participants (44.4%) agree that risks are allocated fairly, as

compared to those that disagree (33.3%), this is not a clear cut result. In

CEE risk allocation it is often interpreted as simply passing risk to the private

sector and with this concept such countries frequently find problems

(Snelson, 2007 p. 31).

UK:

Whereas authorities are satisfied with their risk allocation in PFI schemes,

this view is only shared by two thirds of the contractors (National Audit

Office, 2001, p. 4). The transfer of design, construction and operation risks

to the private sector is seen as one of the benefits of PPP and on most of the

PFI projects in the UK, this is the case (Akintoye et al., 1999; in Akintoye et

al., 2003, p. 8).

Summary for Component A comparisons

A summarised combination of the above comparisons is presented in Figure

13. The most apparent differences are further analysed thereafter.


38

‘Level 3’ Subject

CEE UK Difference (CEE perspective)

A01: Whole life costing

- PSC used frequent only in Slovakia, Latvia and Poland.

- Maintenance budget not ring-fenced: 17.5% of risks

- PSC generally used - Maintenance budget

ring-fenced

- PSC used frequent in minority of countries

- Maintenance budget not ring-fenced: 17.5% of risks

A02: Delivery on time

- PPP take longer - Some delaying legis-

lative procedures

- PPP take longer - Some delaying legislative procedures

A03: Catalyst for reforming public services

- Applicable but is not the main reason why PPP is embraced

- Applicable - Applicable but is not the main reason why PPP is embraced

A04: PPP allows for innovation

- Stimulates innovation - Stimulates innovation - No difference apparent

A05: PPP provides value for money

- Not ensured in general

- Good or excellent value for money

- Value for money is only achieved in general

A06:Risk is allocated to those who can handle it best

- only in slight majority - in most cases - less favourable allocation of risks in CEE

Figure 13: Component A differences.

In the following the major differences, as identified above, are discussed in

more detail, with the focus being on CEE, and finally summarised in a brief

overview that forms a basis for conclusions and recommendations in Chapter

6.

Difference I: Whole life costing and value for money is worse in CEE

than in the UK

From all the identified benefits of PPP particularly value for money is not

equally available to projects in CEE. The survey further reveals that on those

projects, where a PSC has been used, there was no other procurement

alternative available. Given the original idea of using a PSC to decide whether

to go for PPP or a conventional procurement, this result seems surprising

and an explanation might be that PSC have been used as a necessary tool to


39

calculate a benchmark cost which is subsequently used to negotiate the

concession price with preferred bidders.

Difference II: Delaying legislative procedures

In addition to PPP taking longer to prepare, procure and implement, there

are delays due to the legal framework being not yet in place or in the process

of being implemented. Examples underlining this issue are the appeal of state

prosecutors in Bulgaria to block the signed concession for the Trakia

Motorway due to lack of transparency and unfavourable terms (The

Economist Intelligence Unit, 2005, p. 9) or the injunction of the Czech anti-

monopoly office banning the transport ministry from introducing an

automatic tolling system (The Economist Intelligence Unit, 2006, p. 12).

According to the survey PPP is considered to be faster in those countries,

where there is guidance on PPP in the form of law, which apparently helps in

speeding up the process.

Difference III: Risk allocation is less favourable

An unfair risk allocation can be found on those Reference Projects, where

there were no PPP guidelines for ‘best practice’ available by an expert panel

or professional body in contrast to projects in countries where such

information is available.


40

Findings and observations in brief

Difference (CEE perspective)

Finding Finding Code

Whole life costing and value for money is worse

→ If no alternative to PPP is available, the use of a PSC is common.

F1

Delaying legislative procedures

→ PPP is slower on projects in countries with no specific PPP legislation.

F2

Risk allocation is less favourable

→ If PPP guidance is unavailable, an unfavourable risk allocation is common.

F3

Figure 14: Component A findings in brief.

5.1.2 Component B – PPP Project Differences

In the following, those survey results that relate to PPP projects, partly

supported with additional secondary data, are compared with secondary

literature on the equivalent issues for PPP in the UK and summarised in an

overview table before the key differences are further analysed.

B01: Project types

CEE:

In contrast to the UK with the most diversified PPP project spectrum in

Europe (Thomson, et al., 2005 p. 3) the PPP projects in CEE are mainly

roads (41.4%), schools (17.2%) and water and sewage projects (10.3%). In

addition there are special transport concessions e.g. for ports

(Wirtschaftsblatt, 2007, p. P. 10). The survey also reveals that there are

slight predominance of road projects in the Czech Republic and Hungary and

water and sewage projects in the Ukraine.


41

UK:

In the UK the palette of project types is much wider and comprises, in

addition to transport which accounts for 37% of the cumulative value of PFI

spending, buildings for health (12%), defence (12%), education (6%),

prisons (2%), environment (2%) and others (17%) (IFSL, 2003, p. 9).

B02: BOT-models used

CEE:

The Build, Operate, Transfer (BOT) boom of the 1990s has influenced

initiatives but today the Design, Build, Finance, Operate (DBFO) form is used

more often (34.5%) than BOT contracts (27.6%) as the survey shows.

BOOT is only used (6.9%) with the remainder being other forms. For water

and sewage projects mainly BOT contracts are used, whereas for road

projects either BOT or DBFO contracts are common. According to IFSL

(2003, p. 8) this form is closer to privatisation as compared to the other PPP

models.

UK:

According to Yescombe (2007, pp. 7-8, 11), the difference between BOT

and DBFO is more a historical with DBFO being a subsequent enhancement

of BOT models, whereby PFI can take any of the contract models. This shift

from BOT to DBFO is similar to the findings for CEE.


42

B03: Public sector comparator as benchmark

CEE:

In the survey only 28.0% state that a PSC has been used, as opposed to

44.0% denying the use of such benchmark with the remainder being unable

to give that information. If a PSC was used, it was mainly on school projects

and a minority of road projects.

To enable a meaningful use of such a benchmark tool whole life costing

needs to be used.

UK:

According to Yescombe (2007, p. 66-67), PSC are used only in early stages

when it can possibly affect the decision to use PPP and the only reasons not

to use it are if PPP is the only alternative which is the opposite to the survey

findings in Finding F1 (Figure 14). Low et al. (2005, p. 2) find that 84% of

projects a PSC was used.

B04: Length of procurement time

CEE:

As presented for Subject A02 (delivery on time), only a slight majority of

participants agree that conventional procurement would have been faster.

Due to the lengthy implementation process and staff turnover, or change in

political agendas, the newly implemented guidelines and PPP units in


43

transition countries are subject to change which all increases the initiation

time (Snelson, 2007, p.36.).

UK:

Due to stable political conditions in the UK, such increases in set-up time for

projects are not an issue. However, due to PPP being more complex projects

procurement periods are longer for PPP (Yescombe, 2007, p. 26),

irrespective of the location.

B05: Provisions for changes in preferred bidder stage

CEE:

The survey indicates that in the majority of cases (27.3%) the concession

rate would change if changes are made during the preferred bidder stage, as

compared to only few cases (13.6%) where this would not affect the

concession rate, with a majority (59.1%) being unable to give an answer.

Mainly changes on road and rail projects would change the concession rate

whereas changes on water and sewage projects would not affect it.

UK:

Low et al. (2005, p. 2) find that this would be the case in more than half the

PPP projects. According to Yescombe (2007, p. 257) price changes in

preferred bidder stage would arise if delays in this stage occur since

contractors cannot be expected to keep their prices indefinitely.


44

B06: Quality of aesthetics

CEE:

A slight majority of the respondents agree that PPP delivered better

aesthetics on the Reference Project as compared to a conventional

procurement, whereas the majority (56.5%) thinks there would have been

no difference. Professional / interest groups strongly agree that PPP

delivered better aesthetics, whereas some government bodies disagree.

Better aesthetics have been achieved mainly on school projects.

UK:

This is in line with the survey by Low et al. (2005 p. 2) where PPP delivered

only slightly better aesthetics.

B07: Functionality:

CEE:

The respondents nearly all agree that PPP delivered better functionality on

the Reference Project as compared to conventional procurement with 9.1%

even strongly agreeing. Similarly to the results for aesthetics, the

participating professional and interest groups strongly agree that PPP

delivered better functionality.


45

UK:

The above clear cut result is better as compared to the equivalent

undertaken by Low et al. (2005 p. 2) where PPP delivered only slightly better

functionality.

B08: Design supervision by independent ‘watchdog’

CEE:

A clear majority of respondents (66.7%) state that there was no such

independent design watchdog involved and only a minority (9.5%) affirms

that such an organisation was involved with the remainder of participants

being unable to answer.

UK:

In the UK such supervision is done by the CABE, as government advisor,

regarding the design for both PFI and other projects, however only on a

voluntarily basis.

B09: Design involvement by stakeholders

CEE:

The majority of the participants (54.2%) agrees or strongly agrees that their

organisation has been involved in the design process of the Reference

Project. Mainly authorities and consultants had such an involvement in

contrast to funders and some government bodies which had only little

involvement or none at all.


46

UK:

Low et al. (2005) could also confirm that mainly authorities had involvement

in the design, as compared to other project participants.

B10: Design involvement by users and community

CEE:

The survey found that the end-user had, on average, only little involvement

in the design of the project, e.g. through consultations. Most participants

(54.5%) either ‘disagree’ or ‘strongly disagree’ than the fewer participants

(40.1%) that ‘agree’ or ‘strongly agree’ that the end-user had such

involvement. Only on road and school projects did there seem to have been

involvement, in contrast to water and sewage projects.

UK:

The design involvement by the end-user and the community would be part of

the planning process with a planning enquiry for large projects. Some

anecdotal evidence suggests that for some PFI schemes political agendas and

pressures are often of a higher priority than following normal planning

procedures which is limiting the optimal involvement by the community.

B11: Innovation by contractor

CEE:

A large majority of participants (63.6%) agrees that PPP did stimulate

innovation or different approaches to achieve the specified design which is in


47

contrast to Snelson’s (2007, p. 33) findings that innovation is often not

possible in transition countries as the legislation has not been created to

allow such flexibility. Only a quarter of participants (27.3%) reflects

Snelson’s findings with the remainder being unable to give an answer.

Innovation was mainly stimulated on rail, school and water and sewage

projects. The organisations least optimistic about the stimulation of

innovation were authorities and funders.

UK:

Low et al. (2005, p. 2) found that PPP stimulated innovation, although this

opinion was mainly shared by contractors and not so much by authorities.

B12: Service standard of the facilities

CEE:

Of all respondents 56.5% state that PPP delivers a better service standard

than a conventional procurement would have delivered. Only 21.8%

disagrees with that and the remainder is unable to give an answer. The

better service standards are mainly achieved on rail and water and sewage

projects.

UK:

The above findings are slightly more in favour for PPP than the survey

findings that Low et al. (2005, p. 2) have undertaken where PPP operators


48

neither delivered a better nor a worse service standard than the public

sector.

B13: Quality control of built facility and service offered

CEE:

According to the survey most participants (45.0%) affirm that there has been

an evaluation of the Reference Project by an independent party regarding the

built quality and the service offered. Fewer respondents (30.0%) disagree

with that and the remainder was unable to give an answer.

UK:

Independent audits would be carried out by the National Audit Office which

investigated performance levels of PFI and recommends that the partnership

framework need be made to work in practice (National Audit Office, 2001,

p. 5). At least half of all operational PFI projects have provisions in their

contracts that require the value of certain services, such as catering and

cleaning, to be tested at intervals (National Audit Office, 2007, p. 4).

B14: Contractual agreements / procedures for change

CEE:

The survey reveals that on a large majority (61.9%) of the Reference

Projects there are contractual provisions in place that would allow the

authority to demand changes such as a change in scope or in specification.


49

This is mainly the case for rail and water and sewage projects, but not for

school projects, where changes might also occur.

UK:

In the UK such mechanisms are there but are often less flexible than

conventional contracts and contractual change procedures are complex and

as a result authorities seek to wrap up multiple changes into a single

negotiation to make one-off payments rather than changing the financial

model (Low et al., 2005 p. 2-3).

B15: Risk types of the projects

CEE:

The survey shows that political risk is seen as the single largest source of risk

(32.5%) of all risk sources which is also shared by Snelson (2007, pp. 35-36)

who defines the political risk as the main of three risks in transition countries

with the other two being commercial risk and macroeconomic risk. The

second most applicable risk on the Reference Projects is capacity forecast

(22.5%), which is particularly the main risk on those projects, where risks

are not allocated fairly, according to the respondents. On projects where the

EIB is involved, risk transfer is usually evaluated on a case-by-case basis with

the use of a PSC since optimal risk allocation is the single most important

factor in structuring PPP (European Investment Bank, 2004 pp. 4-5). Snelson

(2007 p. 36) defines demand risk and revenue risk as main commercial risks


50

which is particularly an issue in transition countries where economies trying

to grow to levels that have never been achieved before.

UK:

The main risks in debate are on long-term contract flexibility whereas the

political commitment seems stable towards supporting PFI (Yescombe, 2007,

p. 39).

Summary of Component B comparisons



‘Level 3’ Subject

CEE UK Difference (CEE perspective)

B01: Project types

- roads - schools - water and sewage

- health - schools - water and sewage

- more roads

B02: BOT-models

- DBFO - BOT in 90ies

- DBFO - BOT previously

- no significant difference

B03: PSC as benchmark

- in 26.7% of cases used

- in 84% of cases used - PSC used less often

B04: length of procurement time

- conventional pro-curement faster

- change in political agendas

- conventional procurement faster

- change in political agendas add to procurement time

B05: changes during bidder stage

- in about 2/3 of cases it would change concession rate

- in >50% of cases it would change the concession rate

- no significant differences

B06: quality of aesthetics

- slightly better with PPP

- slightly better with PPP


B07: functionality

- better with PPP - slightly better with PPP

- slightly more function-ality gain with PPP

B08: design con-trol/supervision by independent institute.

- no control in majority of cases

- by CABE as government advisor (on voluntary basis)

- less design control or supervision

B09: design involvement by stakeholders

- in majority of cases - mainly authorities

- in majority of cases - mainly authorities

- no difference


51

B10: design involvement by user and/or community

- some yes, but most had no involvement

- generally yes - exceptions in some

cases

- less end-user involvement

B11: innovation by contractor

- in most cases - except from per-

spective of authorities and funders

- in most cases - except from

perspective of authorities

- no significant difference

B12: service standard of facility

- generally better with PPP

- neither better nor worse

- service standard better with PPP

B13: quality control of facility and service

- in most cases - most projects have testing provision in place


B14: contractual procedures for changes

- on majority of projects

- on majority of projects

- no differences

B15: Project risks

- mainly political risk - capacity forecast

- long-term contract flexibility

- more political risks - more capacity

forecast risks

Figure 15: Component B differences.

The above analysis reveals that about half the identified subjects are not

much different from those in the UK. The main differences are the whole-life

costing issues, projects risks and types of projects, as discussed below.

Difference I: More road projects

The need for motorways is in line with the infrastructure needs identified by

Howcroft (2004, p. 23). According to the survey especially in Hungary,

Poland and Russia there are a substantial amount of road projects with

mainly mixed or international contractors (88.9%) involved.

Difference II: Change in political agendas add to procurement time

Secondary data identified that instability in political agendas slows the

implementation of PPP. The survey reveals that substantial track records are

to find in those countries that have government commitment to PPP, which


52

is likely to have been available for the past years as track records take long to

build up. In countries with no track record, a conventional procurement was

perceived to be faster than in those with such a track record.

Difference III: Less design control

The survey reveals that even on those projects, where no such supervision

took place, more than half the participants agree that the design quality is

better than it would have been under a conventional procurement, so that

the absence of such control seems not to hinder this.

Difference IV: Less end-user involvement

On those projects where end-users had some involvement in the design,

both design and functionality are not perceived to be better or worse. Either

such involvement seems not essential for PPP or the involvement has not

been carried out in a way that would improve the service and appearance of

these projects.

Difference V: Service Standard better with PPP

The service standard seems far higher on those projects, where an evaluation

by an independent party of the built quality and the service offered took

place. It seems that the anticipation of such a control puts pressure on the

private party to deliver service of higher quality.

Difference VI: More political risks and capacity forecast risks

Political risk is stated as the main risk on those projects, where international

contractors are appointed. Local contractors seem to be more confident in


53

their governments. In those countries, where political risk is stated as the

main risk, there has not yet been built up a substantial track record.

Capacity forecast risks are stated as main risk, along with political and

maintenance risks, on those projects where there had been an end-user

involvement. This end-user involvement has probably been undertaken in

order to find out expected future demands of end-users, however with

limited success.


Difference Finding Finding Code

More road projects → Road projects, mainly by mixed or international contractors

F4

Political changes in agenda

→ Political changes in agenda increase procurement time. F5

Less design control → Design control has no effect on design quality. F6Less end user involvement

→ User involvement has no effect on design or functionality.

F7

Service standard better with PPP

→ If evaluation by independent body is given, service and built quality are strongly improved.

F8

More political risks and capacity forecast risks

→ International contractors perceive potential political problems as more risky than local contractors. If political risks are present, track records are weaker.

F9

F10More capacity forecast risks

→ End-user involvement is carried out mainly on projects where capacity forecast risks occur, but this does not eliminate them.

F11

Figure 16: Component B findings in brief.

5.1.3 Component C – Market Environment

In the following, those survey results that relate to the market environments

in the CEE countries, partly supported with additional secondary data, are

compared with secondary literature on the equivalent issues for PPP in the


54

UK and summarised in an overview table before the key differences are

further analysed.

C01: Law and regulation for PPP

CEE:

The majority of participants (58.6%) state that there is guidance on PPP in

the form of Law in the country of the Reference Project. With 34.5% saying

there is no such legal guidance, only few participants have not been able to

answer this question. In line with this, only 20.0% of participants see lack of

legal framework as a project risk. According to Zverev et al. (2007, pp. 7-8)

in CEE only Lithuania and Bulgaria have a high quality concession as well as

the Czech Republic and Slovenia in respect to other relevant law in the

absence of concession law. The Czech Republic and Poland both have a PPP

unit ‘in progress or existing with limited consultative capacity’ and a

‘comprehensive legislation being drafted (European Investment Bank, 2004,

p. 15).

UK:

In the UK there is no specific law for PPP or PFI. The legislation of main

relevance is the procurement law as discussed in “C05-Stage of competition

law implementation”. For governing the partnerships and concession there

are standard terms and conditions for PFI/PPP projects by HM Treasury.


55

C02: Availability of professional organisations

CEE:

In 54.0% of the countries of the Reference projects there are professional

organisations available that issue guidelines on PPP. However, the expert

panels or organisations that issue guidance on PPP will not have the skills

required and practical experience if track records are only starting to be built

up (Howcroft, 2004 p. 22).

UK:

There are a number of organisations in the UK that gathered experience

from the history of PPP and PFI since its introduction in 1992. Such

organisations include ‘Partnerships UK’ as joint venture between HM

Treasury and private sector participants, and the ‘4Ps’ unit which supports

local authorities in the procurement of PFI/PPP projects.

C03: Best-practice guidelines

In 2003 the European Commission published guidelines for successful PPP

(European Investment Bank, 2007, p. 13).

CEE:

The survey reveals that in less than half the countries (36.7%) PPP guidelines

have been used. However these are likely to be different for each country as

there is neither a single approach to PPP at either the national or local level


56

nor a single best-practice recipe for all countries or situations (Snelson, 2007

p. 32).

UK:

Due to the experience that the government and the private firms have

gathered in the history, there are less general guidelines on how to

implement PPP in the UK, but more specific guidelines, for example the

Department of Health guidelines for PFI.

C04: Government support for PPP

The European Commission Green Paper on PPPs and Community Law on

Public Contracts and Concessions have neither a PPP definition nor a policy

(Howcroft, 2004 p. 22) but its publication is clearly a sign that the EU might

change from being a dormant stakeholder to become a dominant one

(Mitchell et al., 1997, p. 860).

CEE:

With a majority (70.0%) confirming that there is significant government

support for PPP this leaves a fifth (20.0%) of respondents disagreeing and a

small remainder being unable to give an answer. However, even if one

government might support PPP projects, a new government might cancel

these and therefore construction companies try to fit the procurement

within the election cycle (Snelson, 2007 p. 36). An ideal support would

comprise (i) clear and long term political will, (ii) a good understanding of


57

PPP at political and policy level, (iii) a good understanding of how PPP should

be structured, (iv) institutional capability and capacity to undertake complex

projects and procurements and (v) an enabling environment covering

legislative, commercial and financial requirements (Howcroft, 2004 p. 22).

After some unsuccessful initiatives of CEE countries during the 1990s these

are now re-examined in the light of that experience (European Investment

Bank, 2004 p. 5).

UK:

As the country having introduced PPP in the form of PFI in 1992 with about

20% of public procurement carried out as PPP there is undoubted

government support. This is in line with the public sector reform movement,

known as ‘New Public Management’ (NPM), which encourages

decentralisation of government and contracting-out of public services to the

private sector and separating responsibility for the purchase of public

services from that of the provision (Yescombe, 2007, p. 16).

C05: Stage of competition law implementation

For all EU member states the new Directives, as adopted in 2004, have been

designed to meet particularly complex contracts, such as certain forms of

PPPs (European Investment Bank, 2004 p. 12).


58

CEE:

In the majority of countries (67.7%) competition law for tendering PPP

contracts seems to be in place at the time of the survey. However, according

to Snelson (2007 p. 33), to date many contracts have failed and been subject

of compensation payments because of lack of transparency of legislation and

fair competition for the contracting of PPP.

UK:

The Public Services Contracts Regulations 1993 strongly recommends the

negotiated procedure for all PFI projects (Akintoye, et al., 2003, p. 174) and

the Competitive Dialogue, introduced by the EU in 2006, better

accommodates some strict national procedures for PPP bidding (Yescombe,

2007, p. 78).

C06: Track record of PPP projects

CEE:

Only a minority of participants (26.7%) agrees that their country of the

Reference Project has a substantial track record of PPP projects. All other

participants are equally split between disagreeing or being neutral about this

issue. A summary by the European Investment Bank (2004, p. 4) shows that

Romania and Hungary have ‘many procured projects and some projects

closed’.


59

UK:

Since 1987 (the PFI introduction as backdated by the government

(Yescombe, 2007, p. 35), all government bodies have commissioned 747 PFI

projects with a total capital value of £47.6bn (Yescombe, 2007, p. 37) in all

sectors as discussed in ‘B01 Project types’.

C07: Construction skills available

CEE:

The availability of contractor capacity, besides the investor capacity, is an

essential requirement for successful PPP (European Investment Bank, 2004

p. 4) and the fact that these are applied across borders is evidenced in the

survey with 30.8% of contractors being international and 42.3% being mixed

international and local. The remaining 26.9% are local firms, some of which

might be smaller companies which make use of the opportunity to

participate on PPP through joint-ventures (European Investment Bank, 2004

p. 4).

The need to commission international construction companies is evidenced

by the example of the Ukrainian government which intends to appoint

construction firm Bouygues and construction and operator firm Vinci as long

term strategic partners to upgrade the motorway network (Ixpos, 2007a).


60

UK:

The amount of projects in construction and in operation suggests the

presence of relevant skills available. The companies with such skills are both

British, e.g. Amec, and of foreign origin with a British entity, e.g. Skanska,

Bouygues Construction and Vinci.

C08: Access to funds

CEE:

The survey reveals that funds involved include mainly other sources (56.3%)

than the suggested sources of development banks (21.9%) or foreign direct

investment (FDI) (21.9%). Such other sources are mainly the European

Investment Bank (EIB) and commercial banks. The EIB found that its loan

funding can be successfully combined with either public or private sector

funding and in 2003 the European Commission published guidelines for

successful PPP that addressed how EU grants could be integrated into PPP

(European Investment Bank, 2004 p. 13) e.g. for the PPP projects related to

the EM 2012 in Poland and Ukraine (Ixpos, 2007).

UK:

PPP does not necessarily require capital financing and in the UK there are

outsourcing contracts in place (Snelson, 2007 p. 31).


61

C09: Competition amongst contractors

CEE:

The survey responses suggest there is a high level of competition as 56.5%

of the respondents ‘agree’ or ‘strongly agree’ that there was significant

competition from contractors and operators on the Reference Project. As

construction companies and concessionaires are looking for certainty in the

market and in the product, transition countries need to offer good policies as

compared to more established economies such as Western Europe or the

United States.

UK:

Competition in the UK seems to be strong as contractors accept

inappropriate allocation of risks in order to win the contract (National Audit

Office, 2001, p. 9).

C10: Competition amongst design firms

CEE:

The survey shows that there is slightly less competition for design and

engineering firms than there is for contractors with 52.4% ‘agreeing’ or

‘strongly agreeing’ that there was significant competition. As Snelson (2007,

pp. 35-36) points out, inflation, interest rates and currency exchange rates,

together with a possible low credit rating of countries, are more of a

concern to private firms when bidding in CEE countries than in the UK.


62

UK:

There seems to be hardly any difference to the ‘healthy’ level of competition

as found by Low, et al. (2005, p. 2).

C11: Availability of alternatives to PPP

CEE:

In the survey a majority of respondents (69.6%) say there was no alternative

to PPP on the Reference Project because the required capital would not have

been available. The remainder is about equally split between either

disagreeing or being unable to answer. A further reason why PPP is the only

option is the Maastricht requirements on public spending. For example Latvia

has the largest current-account deficit, 21% of its GDP in 2006, of all CEE

countries and almost everywhere public spending is higher than it should be

for middle-income developing economies (The Economist, 2007, p. 37).

The lack of options available seems to force authorities to create special

forms of PPP as some of the projects in CEE are not in line with the original

PPP ‘philosophy’ by being restructured, partially owned by the government

or contracts not being a true form of PPP (Snelson, 2007, p. 35).

UK:

The absence of alternatives to PPP is equally stated by many authorities in

the survey that Low et al. (2005, p. 3) undertook.


63

C12: Main drivers and forces to use PPP

CEE:

The main drivers for PPP seem to be initiatives by the government (58.3%)

underlining the fact of their needs for this form of procurement. Far smaller

driving forces are initiatives by private operators (13.9%) and private

investors (8.3%). The fact that EU funds can be used or that specialist

knowledge on parts of the authority side is not available is not seen as a

driving force to use PPP.

UK:

In the UK it is also the government that is the main driver for PPP, as

initiated in 1992 with the PFI programme. Contractors that aim to obtain

further long term concessions to secure revenue can also be seen as drivers

that support PFI schemes.

C13: Government needs for infrastructure

CEE:

The particular needs of CEE countries that demand for PPP are to

strengthen the infrastructure, to achieve an influx of private finance and the

need to introduce institutional reform (Snelson, 2007 p. 32) which is

evidenced by the survey where 58.3% of respondents see the government as

the main driver to use PPP. The survey shows that in CEE the government

needs for projects procured as PPP are concentrated on the transport sector


64

with mainly road, rail and airport projects (together 48.3%) and some water

and sewage and other projects (10.34%). Other sectors such as waste,

environment, ports, energy and social housing are undergoing an extensive

development but have not reached a level of critical mass to create a

competitive market (European Investment Bank, 2004 p. 5). Within the

environment of fast growing economies of CEE countries the government

needs for infrastructure are growing as well but there are more difficult to

predict over the length of a concession period as compared to a more stable

growth in the UK. One example is the increase by 54% of passengers at the

Varna airport, a new PPP project (Wirtschaftsblatt, 2007a, p. 40).

Whereas Bulgaria has signed 300 state concessions and 500 municipal

concessions since 1997 (Zverev, et al., 2007 p. 11), other countries such as

Croatia, Lithuania and Latvia lack such substantial track record, according to

the survey.

UK:

Government needs are mainly for hospitals, schools and less urgent for

infrastructure projects. The ‘schools for the future’ programme is one

example for large scale needs in service provision.

Summary of Component C comparisons




65

‘Level 3’ Component

EEC UK Difference

C01: Law and regulation for PPP

- in majority of cases - lack of legal frame-

work only small risk

- no specific legislation - standard terms for

HM Treasury

- lack of legal framework is risk in some cases

C02: Availability of professional organisations

- in more than half the countries

- limited track record to refer to

- available - also for different

sectors

- not in all countries

C03: Best practice guidelines

- only in less than half the countries

- sector specific - general guidelines, and only in minority of countries

C04: Govern-ment support for PPP

- large support in majority of countries

- long term support unclear

- large support since 1992

- long term support not obvious

C05: Stage of competition law implementation

- law in place in majority of countries

- previously contracts failed due to lack of law

- law in place, improved by ‘Competitive Dialogue’

- some countries still need to implement competition law

C06: Track record of PPP projects

- only in minority of countries

- large track record available

- far smaller track records, except few countries

C07: Construction skills available

- mainly international or joint international / local contractors

- mainly local but also international contractors

- not many local contractors

C08: Access to funds

- funds from development and commercial banks

- no capital financing required

- more funds from development banks

C09: Compe-tition amongst contractors / operators

- in majority of cases - in majority of cases - no significant difference

C10: Competition amongst design firms / engineers

- in majority of cases - in majority of cases - no difference

C11: Availability of alternatives to PPP

- no alternative available in most cases

- no alternatives available in most cases

- no difference

C12: Main drivers / forces to use PPP

- initiative by governments

- initiative by government

- no difference

C13: Govern-ment needs for infrastructure

- infrastructure - schools - water and sewage

- hospitals - schools

- more infrastructure needs and water and sewage project needs

Figure 17: Component C differences.


66

The above combination reveals that there are differences in the market

environment for about two thirds of the subjects identified. The main

differences are discussed in the following.

Difference I: Lack of legal framework in some countries

The lack of legislation has a positive correlation with the lack of PPP

guidelines. The uncertainty of political long term support and lack of legal

framework and sector specific guidelines make such countries not ‘PPP

ready’ as defined by Cheatham and Oblin (2007 p. 3) regarding (i)

government commitment, (ii) the project pipeline’s robustness and

transparency and (iii) track record in execution.

Difference II: Only general PPP organisations & guidelines

A strong correlation between the availability of PPP guidelines by

professional organisations with the presence of government support suggests

that such support leads to the creation of such organisations, either by the

government or private stakeholders in PPP. This general nature needs to be

transformed to sector specific know-how as in the UK.

Difference III: No obvious long term support and legislation

In those countries where there is significant government support for PPP,

there is also guidance in the form of law on PPP available. This would give

better long-term assurance for projects as compared to those countries that

lack strong support and legislation. This goes generally in hand with the


67

presence of competition law for tendering PPP contracts in the same

countries.

Difference IV: Track records are largely not yet available

There is a slight tendency for track records being present in those countries

where PPP on Reference Projects was the only option available. It seems that

a strong need for PPP ‘forced’ the public authority in these countries to

implement PPP sooner than governments in countries where conventional

procurement is an alternative.

Difference V: Not many local contractors appointed

On projects where international contractors are involved, the main driver to

use PPP was private investors and operators. It seems these operators

‘trigger’ their own prospect contracts, supported by private investment.

Difference VI: More funds from development banks

On all projects where investment comes from development banks the

government has been the main driver to use PPP and the types of these

projects are largely roads. It seems that the essential infrastructure needs are

supported by government with the aid of development banks, whereas FDI is

invested on a wider range of project types, possibly because they are more

attractive to private investors.


68

Difference VII: More infrastructure and water and sewage project

needs

Roads, railways and water and sewage projects are mainly driven by

governments to be procured as PPP. In most countries of such projects,

there is also significant support for PPP.


Difference Finding FindingCode

Lack of legal framework in some countries

→ Countries with no PPP legislation have also no ‘best practice’ guidelines.

F12

Only general PPP organisations/ guidelines

→ Government support leads to creation of PPP organisations.

F13

No obvious long term support and no legislation

→ Government support goes along with availability of PPP legislation and competition law.

F14

Track records are largely not yet available

→ In countries where there are no alternatives to PPP, track records are available.

F15

Not many local contractors appointed

→ Many projects are triggered by international contractors together with private investors.

F16

More funds from development banks

→ Such development bank funds are used on basic infrastructure projects. Private funds are used on wider range.

F17

More infrastructure and water and sewage needs

→ Roads, railways and water and sewage are driven by governments.

F18

Figure 18: Component C findings in brief.

Chapter 6 – Conclusions and Recommendations

69

6 Conclusions and

Recommendations

The review of existing literature revealed that PPP is still predominantly

driven by the underlying ideology (Spackman, 2002) but that it is welcome by

CEE countries which need to fill their ‘infrastructure gap’ without exceeding

EU budget deficit requirements (Howcroft, 2004). The consensus is that a

policy framework is needed to ensure successful implementation, especially

in developing markets (Pongisiri, 2002). The purpose of this research is to

find out if the PPP benefits in the UK are also applicable to CEE countries.

6.1 Conclusions

For all three research components there are differences regarding more than

half of the subjects identified, which are interpreted in the following and

subsequently used to give a research answer.


70

6.1.1 Findings

PPP Benefits

We discovered that the benefit of whole-life costing is not equally applicable

to CEE countries since PSCs are mainly used in those projects, where no

alternative to PPP was available, thereby contrasting with the original idea of

a ‘comparator’, but possibly acting as benchmark price for tender evaluation.

The benefit of a delivery on time is hindered in those countries that have not,

or not yet, implemented legislation and guidance on PPP, as further

interpreted later.

Risk allocation is generally less favourable to the public partner, especially on

projects in those countries where PPP guidance is not available.

PPP Projects

Most of the road projects, the most frequent project type in CEE, are carried

out by international contractors which are, probably being used to

undertaking business in their home markets, more anxious about political risk

than their local counterparts. If such risks are perceived, this has a negative

impact on the country’s overall PPP track record. Such fears of political risks

are mainly based on possible changes in political agendas over the long term.


71

The risk of capacity forecast is apparently responded to with end-user

involvements but these seem not to eliminate this risk.

Neither design control is evidenced to improve the build quality, nor has

user involvement any effect on design or functionality. However independent

quality controls of the final service are putting pressure on the private

partners with a positive result.

PPP markets

The majority of the subjects regarding market environment, surrounding

PPP, reveal differences between CEE and the UK.

A significant amount of these subjects, e.g. the existence of PPP organisations

and PPP guidelines, are directly linked to government support, which triggers

PPP legislation and relevant competition law.

Track records of PPP seem to be driven by two forces, firstly the absence of

procurement alternatives and secondly by international contractors,

supported by commercial funders. Development banks, in contrast, are

funding more basic infrastructure that seems less attractive to private

investors, such as roads and water and sewage projects which are mainly

driven by governments.


72

6.1.2 Research Answer

The above findings suggest that PPP benefits are only equally available to

CEE countries, if there is the same amount of government support as in the

UK, which creates a supportive market environment that encourages the

creation of ‘follow-on’ factors such as legislation and PPP-organisations. The

PPP benefits can be increased if independent quality control is carried out on

these projects, whereas design control and user-involvement seem not

carried out in an effective manner.

6.2 Recommendations

As this research has not a consultancy character, the recommendations are

solely reflecting potential implementations of the derived findings and

suggestions and further continuous research is advisable.

6.2.1 EU level

We only touched briefly on the increasing role of the EU as stakeholder, but

due to its dominance it is suggested that the planned PPP whitepaper should

also be accompanied by a PPP unit on EU level that can cross-transfer

knowledge rather than every country having their individual PPP unit and


73

particularly add value providing expertise to those countries not having such

a unit.

6.2.2 Country level

A PSC should be used on those projects where alternative forms of

procurement are available to ensure the whole-life costing and value for

money is achieved in a similar way as in the UK.

The large number of projects needs a fiscal policy that forms guidance to

how much PPP are a ‘healthy’ level of long-term monthly expenditures,

thereby ensuring long-term value for the overall PPP track record.

The poor level of efficiencies of user-involvement or design control should

be increased by possibly getting experience form organisations with relevant

experience from the UK or other countries with long term PPP experience.

6.2.3 Further research

Several topics that emerged from the research can further explore ‘how’

specific PPP benefits are achieved after having analysed ‘when’ and why’ PPP

benefits exist.


74

Governmental strategies

After having discovered that (i) government support is essential in triggering

basis elements which enable PPP benefits, and (ii) that political risk is seen as

the main risk, a further research could look at how to implement and ensure

long term support. As Berry and Wechsler (1995, in Haberberg and Rieple,

2001, p. 489) find that most public sector agencies think only in short term

time frames of less than five years, often only in one year periods, ensuring

benefits of 30 year’ concession periods seems impossible.

Whole life costing

Such long term planning can be analysed in a research on an evaluation of

how PPP projects and their assets will be evaluated, in regard to their value

to the authority, at the end of the concession period. Such long term

planning should be evaluated against other options such as privatisation,

conventional procurement or possibly other models.

Based on the review of existing literature and the questionnaires, the above

recommendations and suggestions for further research can be an aid in

making PPP even more attractive in CEE countries.

References

75

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Briggs A., 2005. The PPP push. The Lawyer. 19 (28), p. 24. Broadbent, J. and Laughlin, R., 2003. Public private partnerships: an introduction.

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Appendices

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8 Appendices

8.1 Appendix 1 – Subject Codes and Survey

Questions

Q. No

Question Question Type

Item Code

1 What is the type of organisation you work for? Open single answer choice

-

2 How many PPP projects in Central and Eastern Europe has your organisation been involved in its lifetime?

Open ended text

-

3 In which Central and Eastern European countries have these PPP projects been? (Hold Ctrl-key for multiple answers.)

Open multiple answer choice

-

4 In which country and city is the Reference Project based? (e.g. Poland, Warsaw)

Open ended text

-

5 Of which type is the Reference Project? Open single answer choice

B01, C13

6 Which BOT-model has been used for the Reference Project?

Open single answer choice

B02

7 In the country of the Reference Project, is there guidance on PPP in the form of Law?

Single answer choice

C01

8 Are there any PPP guidelines for "best practice" by an expert panel or a professional body?


C02, C03

9 Do you think there is significant government support for PPP?


C04

10 Is there a competition law in place for tendering PPP contracts?


C05

11 The country where the Reference Project is located has a substantial track record.

Liekert scale C06

12 Which funding was involved in the Reference Project? Open multiple answer choice

C08

13 On the Reference Project, what is the origin of the contractor?


C07

14 Was there a Public Sector Comparator (a publicly financed benchmark) used to evaluate if PPP is better value than a conventional procurement?


A01, A05, B03

15 For the Reference Project, there was significant competition from contractors / operators.

Liekert scale C09

Appendices

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16 For the Reference Project, there was significant competition from design firms and engineering firms.

Liekert scale C10

17 Some projects are procured as PPP because the required capital would not be available. On the Reference Project, was this the case?


C11

18 A conventional procurement would have been faster. Liekert scale A02, B04

19 What have been the main drivers to use PPP on the Reference Project?

Open multiple answer choice

A03, C13, C12

20 Would the concession rate change if there would be a change in design or specification at Preferred Bidder stage?


B05

21 PPP delivered better aesthetics on the Reference Project as compared to a conventional procurement.

Liekert scale B06

22 PPP delivered better functionality on the Reference Project as compared to conventional procurement.

Liekert scale B07

23 Was there an independent design 'watchdog' involved (e.g. such as the CABE in the U.K.)?


B08

24 Your organisation had involvement in the design process of the project.

Liekert scale B09

25 The end-user of the PPP object had an involvement in the desgin process (e.g. consultation).

Liekert scale B10

26 Did the use of PPP on the Reference Project stimulate innovation / different approaches to achieve the specified design?


A04, B11

27 Do you think the Reference Project does deliver a better service standard than a conventional project would have delivered?


B12

28 Has there been an evaluation by an independent party of the built quality and the service offered?


B13

29 On the Reference Project, are any contractual provisions in place that would allow the authority to demand changes (e.g. change in scope or specification)?


B14

30 Is the regular concession payment 100% for the use of the service or is it mixed (constant base rate plus payment dependent on use)?

Open single answer choice

A05

31 What are the main risks on the Reference Project? Open multiple answer choice

B15

32 Are risks adequately allocated to avoid project failure? Single answer choice

A06

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8.2 Appendix 2 – Survey Questionnaire

Web page 1:

Appendices

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Web page 2:

Appendices

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Web page 3:

Appendices

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Web page 4:

Appendices

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Web page 5:

Appendices

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Web page 6:

Confirmation page:

Appendices

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8.3 Appendix 3 – Survey Results

Appendices

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Appendices

88

Appendices

89

Appendices

90

Appendices

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Appendices

92

Appendices

93

Appendices

94

Appendices

95

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Appendices

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