European Commission
The Contributions of the Private Sector to
Successful Public Private Partnerships
Wael Elkhouly – Director, Citigroup
November 24th 2005, Brussels
Introduction

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Citigroup is pleased to have this opportunity to participate in today’s conference hosted by the
European Commission
This presentation focuses on the Contributions of the Private Sector to Successful Public Private
Partnerships
Key Features of PPP/PFI
 Public Private Partnership (“PPP”) is an umbrella term covering a variety of procurement initiatives, all
of which benefit from a close and normally long term relationship with a private sector partner

One form of PPP is, as the UK terminology, the Project Finance Initiative (PFI). Under the PFI -The
private sector is required to invest in, manage and operate any capital asset(s) necessary to deliver
the specified service

Payment to the private sector may take different forms, determining how much demand risk is being
transferred, e.g.:
 Based on availability: Payment if service available at the standard defined (e.g. hospitals)
 Based on demand: Payment proportional to usage (e.g. roads with real tolls)

PPPs are in essence a method of procurement of services that:
 Is more efficient than traditional procurement, i.e. that delivers “value for money”
 Allows matching of timing of payment and services delivered
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Benefits for Government
Budgetary
Management
Generation of
Third Party
Revenues
Exposure to
Private Sector
Skills
Better Risk
Allocation
Public Private
Partnership
Smoothing of
CapEx Spend
Profile
Certainty &
Quality of
Service
Timeliness of
Delivery
Optimise WholeLife Design &
Costing
Typical conditions for a project to have PPP potential:
Final decision against
 Requirement for capital investment, either now or in the future
key evaluation criteria:
 Substantial service content within the requirement
PPP offers
 Scope for innovation in services delivery
better Value for
 Competitive market, interested in the public sector’s business,
Money than the
 Private sector is better able to manage risks currently taken by the public sector
Public Sector
 Long term contracts are feasible
Comparator
 Boundaries of activity are clearly defined
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Risk Allocation and Value for Money
PUBLIC SECTOR
PRIVATE SECTOR
Right to Build
Construction Risks
Title to Land
Operations Risk
Maintenance Risk
Other Approvals
Service Pattern
Tariffs Policy
Availability
Demand Risk
Tax & Inflation
Operating Interfaces
Discriminatory Law
Force Majeure
Risks allocated to Public Sector by:
Concession Agreement
Residual Risk:
Allocate in Competition
Finance Risks
Change in Law
Risks allocated to Private Sector by:
Construction Contracts
O&M Contracts

As a general rule, the public sector body would normally seek to transfer to the private sector those
risks where the latter can influence the outcome

Precedent from signed projects suggests some risks will normally be borne by the private sector and
others by the public sector

The remaining risks constitute the negotiable part of the risk allocation, on which the private sector is
asked to compete

Value for money is a key consideration in deciding whether or not to transfer individual risks
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UK PFI/PPP Experience:
Efficiency - Results to date
Evidence suggests the traditional procurement (costed via the Public Sector Comparator) is generally more
expensive than PFI / PPP procurement
17% average estimated cost savings against Public Sector Comparators
National Audit Office
81% of public bodies involved in PFI projects believe they are achieving satisfactory or
better value for money’- National Audit Office
78% of projects have been delivered to price agreed
at contract - HM Treasury
88% of projects have been delivered on time or
earlier - HM Treasury
Only 8% of projects were delayed by more than 2
months - National Audit Office
Cost Overruns
Timeliness of Delivery:
80%
100%
73%
88%
90%
70%
80%
60%
70%
50%
60%
40%
50%
40%
30%
22%
20%
30%
30%
20%
10%
10%
0%
0%
Pre PFI Experience
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Source: HM Treasury / NAO
PFI Experience
Pre PFI Experience
PFI Experience
PPP in Europe
PPP Map

The first wave of PPP schemes
were implemented in the UK
and then began to expand
through Europe

A number of new EU member
countries are showing interest in
development of PPP. Poland,
Hungary and the Czech
Republic as most advanced

Historically, the road sector has
tended to be the initial
application of PPP

The pace of development is
linked to the regulatory
framework and the
establishment of a PPP
programme
Established PPP
programme
Long history of private
concessions in
infrastructure (toll
roads), emergence of
PPPs programmes
Recent emergence of
PPP programmes
Interest in PPPs,
isolated experience in
private infrastructure
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PPP in New EU Member States

Sovereign debt constraints may mean that new EU members and candidates will need to fund
infrastructure involving the private sector

Governments are progressing regulatory reform to allow PPPs in infrastructure sectors dominated by
the state, but there are mixed experiences

Road and rail projects likely to be focus of initial attention

Projects for education and military accommodation considered in Czech Republic and other countries.

A number of countries considering “separate fund-type” solutions for the funding of their road
infrastructure (e.g. Poland)
EU Funding

On accession, the New EU Member States became eligible for increased levels of EU grant funding.

While availability of EU funding is a great benefit, co-financing requirements (for instance with
Cohesion and Structural funding) translates to significant financing commitment for New Member
States that aim to fully absorb EU funding.

While the EU Commission has stated that private co-financing is acceptable and should be
encouraged, New EU Member States have rarely combined EU funding with private finance

For the right projects, governments could benefit from combining EU funding with private finance

Citigroup has been advisors on two of the largest infrastructure transactions which combined EU
grants and private finance: Second Tagus Bridge (Portugal) and Athens International Airport (Greece)
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Case Studies: Co-financing Using
Private Funds
►
Project to build, own and
operate the c.€900m
Second Tagus Crossing
near Lisbon, Portugal
1995
Advisor to the
Lusoponte Consortium
►
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►
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Financing of the Athens
Spata International
Airport
1995
Advisor to the Greek
Government
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►
►
Citigroup advised an international consortium on its successful bid to build and
operate a new bridge across the river Tagus in Lisbon and also to operate the
existing 25th April bridge.
The financing package totaled c.180m Contos (c.€900m) and included:
 82.5m Contos (€413m) of EU and Portuguese government grants,
 16.5m Contos (€83m) of shareholder funding
 60m Contos (€300m) of DM and Escudo EIB loans guaranteed by a
syndicate of banks
Agreement by the EIB, for the first time, to fix the interest rate on a large part of
their loans at signature. 23-year final maturities on loans
Citigroup was advisor to the Greek government in the structuring and
implementation of the tender to the private sector for the construction of the new
Athens Spata International Airport.
Private financing was completed via a syndicate of mostly German banks
EIB loans were made available for c. 50% of total construction costs with a total
maturity of 25 years
Greek government agreed to seek to secure two EC grants (€150m & €250m),
and agreed to make those grants itself if EC funds were not made forthcoming
Greek government agreed to levy an additional passenger departure fee from
November 1994 until at least 2014 (the “Spata Airport Development Fund”).
Government retains “sovereignty” in respect of its ability to levy, vary or not levy
taxes. Government committed to make these amounts, or an alternative
guaranteed minimum of €45m p.a., available to fund the construction
Represents the first successfully completed PPP structure for a European airport
Case Study: PPP in Poland A1
►
Citigroup advised the GTC consortium, led by Skanska on the development and
limited recourse financing of the €700m A1 motorway (Gdansk-Torun) under a 35
year concession.
► The project is PPP with availability payments and shadow tolls paid by the
Government to the concessionaire, with real tolls paid by the users contributing
to the Government obligations.
►
The project was financed by long term debt from EIB and NIB; EIB and NIB do
not rely on a commercial guarantee but on the strength of the project and the
contractual structure
►
The concession agreement and contractual framework were designed to provide
protection to debt financiers, which allowed the concessionaire to attract very
competitive financing terms from EIB and NIB without a Government or
commercial guarantee of the debt.
POLAND A1
Advisor to GTC
consortium
2005
Construction and
operation of a motorway
from Gdansk to Torun
under a 30yr concession
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Case Studies: Summary
Poland A1
Government Contribution
EU Grant Contribution
EIB Loans
Development of Infrastructure
Quicker implementation
Pre-Operational Risk Transfer
Usage Risk Transfer
Alignment of interests
(Focus on whole-life costs)
Innovation and Best Practice
Upfront
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Demand
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Upfront
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Ongoing
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Demand
Availability
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In conclusion:
 As evident, introduction of the private sector through PPPs brings significant benefits
 As previous beneficiaries of EU grant funding, New EU members will benefit from deploying private
finance as a source of co-financing (for the right project) in order to make full use of the increased EU
funds now available
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