When public turns to private

With EU funds designated for Poland likely to become scarcer, could Public Private Partnerships help bridge the investment gap? By Alex Hayes and Beata Socha The public authorities in Poland would like to build yet more new roads, yet more new hospitals and still more new railways and metro lines, but now the EU is becoming distinctly less generous in its funding of such projects in Poland. Taking on further debt is no longer an option for the authorities as they are nearing the limits of their borrowing capacity. But help is at hand. With Public Private Partnerships (PPP), the burden of financing a new project is placed on the private partner and so officially can be kept off government books. Indeed, since the project is a “partnership,” it is not always necessary to contribute to the initial costs of the investment at all, deferring payment until the facility is built. Is this the ultimate buy-now-pay-later scheme? Pay nothing till September One recent example of such a project is the renovation of the student dormitories at the Jagiellonian University Medical College (UJCM) in Kraków, for which Bank Pekao granted PLN 80 million as a long-term loan. The project is funded by Polish Investments (PIR) as the majority stakeholder, Cofely and BYPolska Property Development. “In addition to raising equity, BYPolska also secured the debt side of the transaction by bringing lender Pekao, a subsidiary of Unicredit Group, on board. So the University did not have to finance the project or increase its debt,” stated Gilles Leonard, the chairman of BYPolska Property Development (a subsidiary of Bouygues Construction). “The development risks were 100 percent borne by BYPolska which structured the project based on a PPP agreement originally established by the UJCM and discussed during a competitive dialogue process,” he added. According to Kamil Jankielewicz of the Allen & Overy law firm, there is nothing unusual about the private partner bearing most of the responsibility for financing a project. “Generally with PPP the majority of the risk and the majority of the financial burden is on the private partner,” he stated. [negative]Despite bearing the bulk of the risks involved in the projects, private companies have long been interested in the PPP formula, because it is easier to obtain the remaining financing if you are backed by a large public institution[/negative] Why so few? Despite bearing the bulk of the risks involved in the projects, private companies have long been interested in the PPP formula, not only because they can count on an injection of public money but also because it is easier to obtain the remaining financing if you are backed by a large public institution. “Private companies are not Santa Claus,” said Tomasz Sawicki, a transaction manager at the state-owned Bank Gospodarstwa Krajowego (BGK). “Their involvement in PPP projects is strictly business-oriented and one cannot accuse them of not wanting to make money. PPP projects widen portfolios of both building companies and operators as well as give good alternatives for capital investments, especially if the project is availability payment-based.” However, despite the financial attractiveness of PPP, only a limited number of such projects has been implemented in Poland so far, mainly due to opposition from public authorities. The Ministry of the Economy runs a database that lists 77 such projects currently in progress throughout the country, with another 125 proposed. One of the main reasons for that is the ready availability of EU funds for infrastructural projects within the previous and the current EU budget. Tapping EU funds is far easier than partnering up with a private business, as it requires less preparation on the part of public authorities, including hiring experienced advisers and negotiating with banks. As Jankielewicz put it, PPP “is not a simple way of doing business and I guess the Polish public authorities lacked that knowledge.” BGK’s Sawicki concurs: “In previous years, there have been large amounts of ‘free’ EU money relatively easily available for top-priority public projects. Nevertheless, one can observe a growing number of increasingly well prepared PPP projects, which shows that the parties involved are moving up the learning curve.” Rafał Petsch, director at Bank Pekao also seems cautiously optimistic about PPP. “The fact that a mere 20 percent of all PPP proceedings get to the stage of selecting a contractor clearly points to a number of legislative shortcomings. However, we are seeing a gradual improvement in this area which has already sparked an uptick in the number of new PPP contracts.” [caption id="attachment_86301" align="alignleft" width="300"] Image: Skanska[/caption] Despite Keeping hands clean Another reason why public authorities in Poland have been wary of direct links with the private sector is because they have wished to remain beyond any suspicion of corruption. “Such has been the public perception of any deals between the private and public sector. I guess what has changed this is the fact that PPP is known in all other markets in Western Europe, especially in the UK, so it’s not something that Poland would have to invent itself,” Jankielewicz explained. Still, public bodies have long been accustomed to doing only what the law told them to do and seemed intimidated by the range of possibilities that Public Private Partnership offered. “For years there was a discussion about whether you actually could do any PPP, because nothing like that was provided for in the law,” Jankielewicz said. “In private law, there is a rule that whatever is not forbidden is permitted, while the overriding principle of public law is that public authorities only act on the basis of what is permissible to them under the law. It’s not easy for public authorities to understand that when they are doing deals they are not within the confines of public law,” he explained. Then there came a period of over-regulation which bound the hands of public authorities so tightly that no actual PPP project was implemented under that legislation. Now, after years of going from one extreme to the other, a better balance has been struck (although further changes to the law have already been proposed). The current regulations mainly define PPP schemes as projects implemented through a competitive dialog as defined by EU rules or as a concession for services or construction work, which Jankielewicz describes as very flexible mechanisms. Long-term planning However, Marta Piotrowska of Interhealth Canada disagrees that the current legislation facilitates public-private projects. “The current legal system is not always compatible with the nature of PPP projects,” she said. Interhealth Canada has signed a PPP contract to build and run a large regional hospital in Żywiec, the first such PPP investment in the health care industry in Poland. In her opinion, additional regulations are necessary to facilitate long-term projects. “PPP agreements assume, more often than not, a 30-year contract period. It’s a curious exercise to have to forecast all the possible areas of change at the time of the tender process so as to adhere to the limitations of the current Polish procurement law.” The government seems to understand that the current legal provisions are inadequate and are working to remedy the situation. The Polish Agency for Enterprise and Development (PARP) has stated that, “Currently, the Ministry of the Economy as well as the Ministry of Regional Development have undertaken an effort to strengthen Public Private Partnerships in the Polish economy. New amendments to the Act governing PPP and the Act governing public finances with regard to the implementation of PPP projects have been prepared.” Still, even if all the kinks in the law are fixed, there are other obstacles that PPP projects, particularly those long-term ones, will need to overcome. Sawicki claims that there are only three banks in Poland (including Bank Gospodarstwa Krajowego) capable of providing the kind of long-term financing that such projects require.Also, the scale of PPP projects may be an issue. “Given the number of parties and institutions involved, the minimum viable size of such an endeavor is some PLN 40 million in most cases,” said Igor Bilski, CEO of BIPRO, a Łódź-based architectural and engineering firm specializing in public utility schemes. “First, there are specialist legal, accounting and advisory services, then there is the design stage and investment execution,” he enumerated. Go hybrid Are we going to be seeing many more of these types of projects then? The probable answer is yes, [caption id="attachment_86303" align="alignright" width="300"] Image: Skanska[/caption] especially when EU funds can be combined with PPP projects. “We already have the first few examples of such hybrid projects, such as the waste incinerator in Poznań and the railway station in Sopot, which have already paved the way for more investments. We can also see increasingly strong signals from the European Commission that such undertakings need to become more common,” said Pekao’s Petsch. He added that although no major breakthrough is expected, “the number of hybrid projects should increase as the entire PPP market develops.” The range of PPP investments will be larger too, going beyond road, energy and environmental infrastructure. “Local governments are putting a lot of weight on medical investments, refurbishing hospitals and equipping them,” said Bilski. Major cities are also taking on projects involving revitalization of their downtown areas. “The city of Łódź received some PLN 2 billion for city revitalization in the new EU perspective, and a part of that sum will likely be spent on PPP projects,” he explained. Even though PPP is still something of a novelty on the Polish market, we can expect that with each new successful public-private investment more institutions and private firms will be inclined to team up and use the formula to their advantage, and for the public benefit.