The PPP push

The introduction of PPPs into Central and Eastern Europe has been a hard slog, but some projects are promising a light at the end of the tunnel. Andrew Briggs investigates

There have been PPPs in Central and Eastern Europe (CEE) – just not that many. The Czech Republic was using structures recognisable as PPPs as early as 1992 to introduce private sector investment into its water and waste water sector. Since then, the Czech Republic has tried, and failed, to use PPPs in a number of sectors – notably for roads. The Czech government’s failure to competitively tender its largest road scheme caused that deal to collapse on the eve of close. Politically, it was the PPP concept, rather than the flawed procurement approach, that shouldered the blame, and the fallout has resulted in no one political party being prepared to give PPPs the clear support they need to succeed.

Across the border in Poland, things are no clearer. Three PPP highway schemes have reached close. However, the most recent scheme took almost nine years from start to finish and lost a number of its original participants along the way. The current government has trumpeted its new PPP law, which is currently before the Polish Senate, and it will undoubtedly make a difference when it comes into force. Sadly, it now looks likely that the new act will not become law before the parliamentary elections this autumn.

Of the three largest CEE countries, it is Hungary that has best delivered, both for itself and for international law firms. One successful highway scheme (the M5) in 2003 was followed last year by another (the M6). The M6 deal was based largely on UK precedent. This, coupled with the fact that it was financed in the international markets, provided a number of City law firms with the opportunity to showcase their expertise. With the Hungarian government’s stated ambition to ensure that no Hungarian lives more than 15 minutes from a motorway by 2015, the Hungarian roads sector is reason for cautious optimism.

Further east, there has been significant activity in the infrastructure sector. However, on the whole this has been structured using EU grant funding or through government-funded construction financing, supported by one of the European institutions. Roads funded in this way are being built in Romania, Bulgaria and Croatia, but these schemes do not adopt the PFI/PPP model in the way that the term is recognised here in the UK.

What is the problem?

Frequently, lawyers, bankers and contractors will blame a lack of progress on the perceived underdeveloped legal systems of the CEE countries. This simplistic view is missing the point.

There are three main criteria that a country’s legal system must demonstrate to facilitate the PPP model:

A strong private law framework that respects and enforces a bargain struck between the public and private sectors. PPPs are heavily contract-reliant and the private sector needs to know that it can rely on its negotiated deal standing up in court.

A clear and transparent procurement regime. The private sector will not compete unless it is sure that it is doing so on a level playing field – and strong competition is the key to ensure best value for money for the public sector.

Robust securities laws that allow the revenue stream at the heart of the PPP to be secured for the benefit of the project lenders.

For most of the CEE countries, these criteria are largely met, particularly now that EU-compliant procurement procedures are standard. The use of PPPs as a model for public procurement requires a step change in the way the public sector is required to think. Experience has shown that this change can be achieved only with clear, high-level political support. The key is to find clear political will to support, and even require, the use of the PPP model. As happened in the UK, legal flaws can readily be solved if the will is there to do so. The real issue in the CEE region is that, to date, this clear political support has not been forthcoming.

There is one other related problem. Joining the EU offers the prospect of significant financial subsidies for public infrastructure development. For the period 2004-06, more than €8bn (£5.5bn) has been available to the new accession countries. Faced with the prospect of free money, the willingness to develop the use of PPPs (which effectively require governments to fund long term out of their own resources) has been undermined.

The prospects

The City’s project finance lawyers are subject to the same financial constraints as the markets they serve. Today’s business development can be justified only for so long by the promise of deal flow tomorrow. Resources will naturally flow to more active markets with more sustainable deal flows. Is now the right time to look elsewhere?

Fundamentally, the business case to support the development of PPPs in CEE remains sound. The need for significant expenditure on infrastructure remains and will increase as transitional arrangements on EU transport and environmental targets come to an end. Financial constraints are unlikely to ease in the short to medium term. And while deals may not resemble precisely the UK PFI, they will build on UK experience while taking on a local slant.

Across the region, expect the road sector to dominate the early deals, with a good prospect of more projects in Hungary, the Czech Republic, Slovakia and Austria. A number of schemes have been given pilot status in the accommodation sector, with healthcare projects in the Czech Republic and prisons and government accommodation in Hungary prominent.

Parallel experience in an entirely different part of the world provides some comfort. For two years, working in the Canadian PPP market was a rollercoaster ride of optimism and frustration. Deals were announced, only to be postponed or cancelled. Then things changed. Since the beginning of this year, two major highway schemes have reached financial close and there is prospect of further deal flow.

The second of these was the Sea-to-Sky (S2S) Highway project, which was a scheme to develop the main transport corridor between Vancouver and Whistler ski resort for the 2010 Winter Olympic Games. With clear public and private sector commitment, the S2S deal reached financial close within three months of the preferred bidder being announced, despite requiring the blend of UK design, build, finance and operate precedents with Canadian legal and political considerations.

With the right level of political support, the same results can be achieved in CEE. In my experience, governments in the region increasingly recognise that they are competing globally for the resources of the PPP industry and that continued delay will see those resources go elsewhere. I believe they recognise that now is the time to demonstrate to the market that they are serious about the use of PPPs and intend to be around to see it happen.

Andrew Briggs is apartner in Lovells’ project finance practice.