Combining PPPs with EU funds

Horizontal Tasks

Present state

Projects that combine the PPP model with EU Funds are subject to both PPP rules as well as guidelines for European Funds. This is still a new formula which arouses numerous questions and doubts. Specific risks are connected with such projects (e.g. a risk of the need to return European Union Funds or a risk of substantial changes made to the project in which case approval of the European Commission will be required).

At present procedures connected with obtaining financing for PPP projects are being discussed with the European Commission.

Main problems include:

• lack of procedures agreed with EC for obtaining EU financing that would not discriminate against PPP projects,
• lack of clear rules relating to project durability (e.g. disposal of shares in a company),
• lack of guidelines relating to the settlement of EU subsidies and including EU Funds in PPP project cash-flows also in the context of tax settlements.
   

Objectives and products

• Agreeing with EC procedures for obtaining EU financing that do not discriminate against PPP projects,
  Resolving unexplained problematic issues.
• Guidelines for blended projects together with necessary document templates (e.g. conditional financing contracts) will be also worked out under the auspices of the Platform.
   

Activities performed so far

The Ministry of Development Funds and Regional Policy actively participates the working group of European PPP Expertise Centre (EPEC) aimed at combing European Funds with the PPP formula.

A sample method of applying for co-financing for investments planned to be implemented under public-private partnership, including concessions for services and construction works (see: documents) has been developed on the basis of domestic experience.

A discussion has been initiated with the European Community concerning issuance of decisions relating to PPP projects.

Information on the status of negotiations over provisions concerning PPP projects in General Regulation of Cohesion Policy for the years 2014-2020

At the meeting of the Council of the European Union (General Affairs) held on 26th June 2012 under partial general approach ppp related provisions were adopted as a separate chapter in the future General Regulation.

Since the beginning Poland has actively promoted the use of specific approach to ppp under regulations relating to the cohesion policy and the fact that these provisions were adopted by the Council of the European Union constitutes a huge success of Polish negotiators, because no provisions concerning specific character of ppp projects had been included in the original version of the draft regulation.

The above provisions were adopted within a block relating to revenue generating projects and have the following elements:

• recognising the specific character of ppp through ensuring priority of provisions for this formula over general provisions,
• introducing to the general regulation a definition of ppp,
• ensuring that a public or private entity may become a project beneficiary,
• ensuring a possibility of changing the beneficiary in the course of project implementation, without prejudice to the provisions relating to durability,
• recognising expenditure as eligible when EU reimbursement is paid to an escrow account if a contract provides that a public entity will be charged with availability payments, spread during the project operation phase, i.e. following the end of expenditure eligibility period.

It is worthwhile to recall one of basic principles of union negotiations, which says that nothing has been agreed until everything has been agreed. In practice it means that ppp related provisions similarly as other closed topics can be regarded as finally agreed only when the entire legislative package is adopted, i.e. most probably in the second half of 2013.

The adopted compromise text is available on the website of the Council of the European Union.

More information concerning the status of negotiations over the legislative package for cohesion policy 2014-2020 can be found on the Ministry of Development Funds and Regional Policy portal.

Questions and answers:

1. What benefits does public-private partnership offer?

Public-private partnership is a form of long-lasting cooperation between the public and private sector in service delivery aimed at achieving mutual benefits. Of key importance is here the orientation towards achieving both commercial objectives of such ventures as well as public objectives, which are equally important. The PPP model is conducive to better prepared projects, timeliness and economy, makes better use of competences through tasks and risks distributed between the public and private sector, takes into account full life-cycle of a project, combines responsibility for an investment project with infrastructure operation, takes into consideration full account of the costs and benefits of infrastructure construction and operation and also encourages to seek other sources of funding.

2. What are blended projects?

This name relates to projects implemented in the public-private partnership formula, which are funded from European Funds resources along with private funding. A grant from European Funds in PPP projects enables implementation of public projects that would otherwise be unprofitable. The subsidy limits financial costs of a private partner and in consequence its needs for investment project loans decrease. It is an encouragement for private investors to invest in projects whose expected revenue could not otherwise cover the costs of construction and operation of a given venture. What is more, due to EU participation the project becomes more credible for other partners (financial entities included). The Union also ensures that costs of preliminary project studies are covered and provides institutional support. On the other hand, presence of a private partner improves efficiency and benefit ratio.

3. Which investment projects are now being implemented in Poland as blended projects?

In Poland blended projects are still in the preliminary stage, however we do have several years of experience in their implementation. It has been planned that in the financial perspective 2007-2013 at least three blended projects will be implemented. A key pilot project is an investment project implemented in the waste management sector entitled "Waste Management System for the City of Poznań". The second important project implemented in the Information and Communication Technologies (ICT) sector is "Construction of Wielkopolska Broadband Network and Infrastructure Management". The third project is an investment project implemented in the sport and recreation sector called "Mineral Swimming Pools Complex in Solec-Zdrój". At present the investment is the only blended project in Poland to have obtained so called financial close - it is implemented under Silesian Voivodship Regional Program for years 2007-2013, Priority II Activity 2.3 Promotion of economic development and tourism in the region.

These projects are pioneer in nature and experience gathered in the course of their implementation will be invaluable for subsequent blended investment projects.

4. How does the Ministry of Development Funds and Regional Policy support blended projects on the basis of WtE projects?

• substantive support for public entities that implement incineration projects under the public-private partnership formula, including preparation of the necessary documents, analyses and private partner selection processes,
• sgreeing with the European Commission procedures necessary for blended projects and ensuring compliance with all requirements of the EU,
• ensuring competent and experienced consultants for the public party during negotiations,
• reduced costs of project preparation due to economies of scale, exchange of experiences between beneficiaries, ensuring that all beneficiaries have access to opinions, expert opinions, analyses, audit reports, contract templates, project documentation and other documents prepared by the public party,
• promotion of incineration projects implemented in the public-private partnership formula.
   

5. What role and responsibilities does EPEC have?

The European PPP Expertise Centre - EPEC was launched by European Investment Bank (EIB) in cooperation with the European Commission to enable public authorities in Member States of the European Union and Candidate States more effective participation in PPP transactions.

The main responsibility of EPEC is assistance for the public sector as regards specialised knowledge relating to PPP. EPEC shares with member states its experience and knowledge of project preparation as well as problematic issues connected with the PPP market.

Membership in EPEC is limited to public authorities, whose role consists in political liability for PPP projects and programs. At present EPEC has 37 members, including the Commission and EIB.

EPEC publishes a number of reports and expert opinions, among others Guide on Information Materials available in an electronic version.

6. Public debt

I. Do all investment projects with the PPP formula affect public debt of local self government?

Only some investment projects implemented using the Act on public-private partnership, in compliance with Ordinance of the Minister of Finance of 23 December 2010 on the detailed classification of debts, which are part of the public debt, including the debt of the State Treasury (Journal of Laws No. 252, item 1692) can affect the  public debt, as local self-government liabilities. These liabilities are analysed and classified as public debt on the basis of EUROSTAT Decision of 11 February 2004 that appendix 41 to Ordinance of Minister of Finance of 3 February 2010 on budgetary reporting relates to (Journal of Laws No. 20, item 103).

II. Are Ordinances of Minister of Finance of 23 December 2010 and of 28 December 2011 on the detailed classification of debts, which are part of the public debt, including the debt of the State Treasury to be understood as a change in approach to public-private partnership?

The concept of recognition of liabilities arising from PPP contracts has not changed since 2006. On 21st June 2006 Minister of Economy issued ordinance to the previous Act on Public-Private Partnerships that came into force on 28 July 2005 on risks connected with the implementation of ventures under private-public partnership, which enumerates and presents distribution of risks that occur in the course of PPPs contracts execution. Pursuant to § 4 when a public entity incurs majority of construction risks or incurs majority of availability risks and majority of demand risks, these liabilities will affect the level of public debt and deficit of the sector of public finance. These solutions referred to the concept of the European System of National and Regional Accounts - ESA95 proposed by EUROSTAT in 2004. However Ordinance of Minister of Economy of 21 June 2006 ceased to have binding force when a new act on public-private partnership (Journal of Laws of 2009, No. 19, item 100) came into force on 19 December 2008.

Reference to the Decision of EUROSTAT as regards the preparation of reports was then made by Minister of Finance in ordinance of 3 February 2010 on budgetary reporting (Journal of Laws No. 20, item 103) who on 4 March the same year issued an ordinance on reports on financial operations by units from the sector of public finance (Journal of Laws No. 43, item 247), which reads that if a contract on public-private partnership affects the level of public debt then liabilities arising from such a contract should be treated as a loan (§ 2 section 1 of chapter 1 of attachment no. 9 to the ordinance "Instructions for Preparation of Reports").

III. How to classify contracts in the form of public-private partnership in terms of their impact on the public debt?

Long-term contracts concluded by units from the sector of public finance implemented in the PPP formula are classified as loans in compliance with the ESA95 rules. The most important issue is to determine the effect of liabilities connected with the implemented partnership on an account of the sector of public finance, which mostly depends on the scale of risk incurred by a private partner.

Three basic types of risks have been identified:

• construction risk - which among other things includes the risk of extra costs or delays in project implementation or failure to meet technical requirements,
• availability risk - connected with quality and quantity of delivered services,
• demand risk - relating to changeable level of demand (a typical economic market risk).
   

PPP liabilities can be off balance sheet of the sector of public finance when a private partner incurs the construction risk or at least one of such risks as availability or demand. Then the project is treated in accordance with ESA95 rules as a purchase in the sector of public finance. If risk distribution is unfavourable for a public entity the project is on the balance sheet of the sector of public finance. Specific information relating to this issue, from the point of view of rules applicable in the national accounts statistics, is included in the „Manual on Government Deficit and Debt” updated in 2010 by EUROSTAT and available on its websites.