What can we learn from public-private partnerships in the transport sector in Europe and Central Asia?

Private sector investment in Europe and Central Asia (ECA) is quite small, even accounting for the size of the individual countries’ economies. Despite integration within the European Union (EU), ECA countries have not attracted much private sector investment in the transport sector compared to other regions, such as Latin America or South Asia (four times more during 2009-13).
 

While public-private partnership (PPP) transport investment has been initially driven by countries (such as Poland, Croatia and Hungary) that implemented reforms to join the EU, most of them have not been able to close on transport PPP transactions in the past five years. Now Russia and Turkey are the leaders in the region, as explained below.

What can explain this situation?
A focus on off-balance sheet accounting of PPP projects has dominated transport PPP in EU-member ECA countries in recent years. Off-balance sheet accounting means PPP projects are structured in a way that only annual government payments are accounted for, instead of the total commitment (the assets and liabilities associated with the project). This means that PPP projects end up being large and greenfield (multi-billion dollar investment, typically in new highways), and tend to follow a separate path than for budget-financed projects, based on the assumption that the associated liabilities won’t be accounted for.

Risk allocation between the public and private sectors is driven by accounting treatment. This also results in limited support from governments and very rigid negotiations. It also means that projects are often not able to close or, as a former Minister of Transport said, “We do PPP to build off-balance sheet assets but, in order to reach financial close, assets has to be on our books.”

Russia and Turkey have more port and airport projects, and are also pursuing more rehabilitation and expansion of existing assets. However, Russia had virtually no experience in transport PPP in 2007. The first Russian transport PPP closed in 2010 (St. Petersburg Pulkovo Airport expansion) and the World Bank supported the City on its PPP program over several years. St. Petersburg started with a focused program of five transport transactions, with dedicated resources (human and financial) and a champion (Vice-Governor) following closely these projects. The World Bank a committed team during a three-year period with the sector that possessed the financial and legal expertise needed for the job. In parallel to project preparation, a new PPP legislation was introduced (with World Bank support) and a PPP unit was created to support the scaling up of the program.

Lessons for ECA and other countries
The World Bank did a review of PPP experience in the transport sector in ECA between 1992 and 2011. The findings are still valid, particularly in relation to allocating sufficient human, financial and time resources to project preparation and transaction. A more recent review of the ECA experience in the context of the recent euro crisis identified issues such as off-balance sheet accounting and the need for financing solutions to help good projects reach financial close.

There are at least five lessons from the ECA experience and World Bank engagement in the region that can be applied to other countries:

• First, the fiscal implication of large transport programs cannot be ignored. PPP is a public-finance topic, given its potential impact on future public spending. Some of the very large highway PPP projects require such a level of public support over the life of the concession that it may affect governments’ future capacity to proceed with important public expenditure in key sectors. We cannot simply ignore the private side and focus only on “public investment.”
• Second, the institutional capacity remains a major constraint, but issues are now more complex. It’s not just about a new PPP law and PPP unit. The issues are now more about governance and how to apply good principles (i.e. value-for-money, balanced risk allocation, affordability) in the decision-making process. A clear strategy for private sector participation is often missing. We should focus on going beyond addressing fiscal constraint, and ensuring a process that justifies the underlying investment on the same economic and social principles as projects funded from budget.
• Third, in many countries, PPP may offer more short-term opportunities and benefits in brownfield projects. There is tremendous opportunity for improving efficiency and reducing public contribution to transport State-Owned Enterprises through reforms and private sector participation. Transport modes such as ports, railways or airport terminals may have more chances of securing large private investment, especially when reforms are implemented prior to seeking private participation. Expansion of existing services/infrastructure carries less risk and is often more attractive to the private sector than greenfield projects.
• Fourth, engagement in transaction support for transport PPP projects should include fiscal risk and sector sustainability reviews. This is really where the collaboration between the World Bank and IFC could achieve wonders. IFC has a clear edge on PPP transaction and financing, while the Bank has sector expertise, can advise on feasibility studies and address broader fiscal issues. We should move to joint engagements where an IFC advisory mandate could rely on World Bank staff to address sector policy (including decision making process for identifying and preparation), justification of underlying investment and managing fiscal risk. Bank staff can also rely more on IFC expertise to advice on transport PPP policy and project feasibility.
• And fifth, capacity building is needed to help governments identify, prepare and bid viable and sustainable transport programs. Government decision makers are now familiar with the PPP concept and its potential fiscal benefits. World Bank Group support is needed to understand associated risks, where PPP makes more sense from a sector perspective and how to link legal, policy and fiscal issues with a program that will be attractive to the private sector. There is also a need for technical assistance on strategic issues beyond a project or on providing an independent opinion on project feasibility before the transaction phase. Walking governments through the process from identification until supervision of the PPP agreement is a role the World Bank could and should play jointly with IFC and other development partners.

What are your lessons in PPP? Please feel free to let us know by commenting.