EBRD approach to PPPs continues to perplex

After a long gestation period the EBRD's new draft Municipal and Environmental Infrastructure (MEI) policy finally appeared in April, bringing some good news such as the bank's commitment to start monitoring some on the ground project impacts and sustainability rather than just market-related transition impacts.

This article is from Issue 52 of our quarterly newsletter Bankwatch Mail

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One of the document's more puzzling features, though, is its attitude towards public-private partnerships or PPPs. On the one hand, it takes a noticeably more cautious - and realistic - attitude towards PPPs than past EBRD documents, yet on the other, it is saturated with the bank's intentions to finance more of them.

The section on south east Europe is typical: “There remains an appetite for PPPs, despite the limited success in this region and the difficult market conditions. This approach will remain the mainstay of engaging the private sector. The Bank will continue to support municipalities wishing to tender viable PPPs, even though the process is resource-intensive and there is no guarantee EBRD finance will be chosen by the preferred tenderer. Activity is expected to cover a broad range of sub-sectors including parking, transport terminals, water and solid waste.”

Another section, on Promoting Adequate Private Sector Participation, takes a similar line: “projects involving private sector participation will remain challenging and resource-intensive because: Intense policy dialogue is generally required … Compliance with the best practice requirements ... can be problematic in the MEI sector … Lead times are long because of tendering requirements and the need to achieve fair and balanced contracts between the public and private partners … The costs of financial, legal and technical advisers are considerable; and … the preferred bidder may ultimately not choose EBRD financing. Despite these constraints, the development of PPPs will remain an aim in all EBRD countries of operations.”

It is refreshing to hear that the EBRD has finally understood that many PPPs are not running smoothly, either in the transition countries, or anywhere else, but why then does the bank insist on pursuing the model?

One of the issues here is what counts as a PPP. The EBRD has tended to use a rather broad concept, one that can include commercially profitable activities and may include relatively small concessions lasting only a few years, for example for the construction and operation of a car park (although quite why such projects should be financed by a public bank is another question). In this case, there is indeed no need to throw the baby out with the bathwater and exclude all private participation in sectors where it actually does work. But too often larger, longer-term PPPs in public services such as water supply concessions and motorway construction and operation are proving problematic.

Evidence of failure mounts

Most of the examples so far are not in the EBRD region. The UK is the world 'leader' in this field, with over 700 projects financed so far, mostly for schools and hospitals. However the PPP model (or Public Finance Initiative - PFI - as the type used in the UK is known) has faced a barrage of criticism. Just the latest high profile broadside against this investment model was delivered by a new report last month from a UK parliamentary committee whose Chair, the MP Margaret Hodge, said:

“When a public authority chooses to fund a project using private finance it must be able to demonstrate that this was the best way to deliver real value for money for the taxpayer, not just a way to keep the project off the balance sheet ... The current model of PFI is unsustainable. Time and again my Committee has reported on problems with PFI, including the costly contracting process and the prospect of little risk being transferred but high returns being enjoyed by investors. 30 year contracts are inflexible and don’t allow managers to alter priorities or change services that have become outdated. We have even seen evidence of excess profits being priced into projects from the start.”

In the MEI sector, a 2008 overview of studies comparing public and private operation of water supply globally (carried out by Germà Bela and Mildred Warner of Barcelona University and Cornell University) also found that private sector participation has not reduced costs, although this has been one of the main advantages cited in favour of private sector participation.

Another report, by the World Bank’s Public-Private Infrastructure Advisory Facility in 2009, has found that in the water and electricity sectors, private sector participation has resulted in increased efficiency, but that this has not necessarily translated into increased investments or lower tariffs - meaning that either the starting tariffs were so low that increased efficiency still has not led companies to a sustainable position, or that the additional income has simply ended up as company profits that have not been re-invested.

Back in the EBRD region, only Hungary has undertaken a significant number of PPPs - around 100 - but then decided to review this policy when it noticed how much off-balance-sheet debt it had been running up. At the time of writing the National Development Ministry http://www.realdeal.hu/20120502/gov%E2%80%99t-set-to-bin-huf-3-billion-w... said that it will propose to the government cancelling HUF 3 billion (over EUR 10 million) of PPP contracts signed under previous governments.

But doesn't the EBRD's involvement in projects stop problems like this from happening? Well, no, not necessarily. The bank contributed to Hungary's EUR 1 billion M6-M60 motorway with a EUR 75 million loan in 2008, seemingly without noticing the country's looming debt problems and the additional budget burdens that payments for this project would bring.

In the MEI sector, the EBRD was unable to ensure good value for the public budget in the Zagreb wastewater treatment plant, where the price tag rose from EUR 176 million in 2001 to EUR 326.7 million in 2007 and 75.5 percent of the capital investment costs were paid off by the end of 2006, raising the question of why the city could not have simply used normal public procurement for the project. Nor did the bank manage to ensure satisfactory performance in the Sofia water concession in Bulgaria that was awarded in 2000, yet in 2009, the most recent year for which figures could be found, water losses were still at 58 percent.

In this overall context, would it not be more logical for the EBRD to concentrate on assisting its countries of operation to get the basics of public procurement right before moving on to more complicated and highly rigid structures?

A new form of 'PPP', Public-public partnerships, are being put forward by groups such as Food and Water Europe. These may represent an alternative model for improving public sector service provision, one as yet not utilised by the EBRD.

Read more

'Public-Public Partnerships: An alternative model to leverage the capacity of municipal water utilities' by Food & Water Europe

Look out for the forthcoming Bankwatch website dedicated to showing how PPPs work, or don't work in reality.