How PPP will be integral to tackling the economic crisis in 2010 - Mazars - Ireland

Roger Alexander, Head of Mazars Project Finance team, comments on how the EU Commission’s recent paper will assist create momentum and confidence for member countries to embrace PPP moving into 2010.

19th of November 2009 saw the publication of ‘Mobilising private and public investment for recovery and long term structural change: developing Public Private Partnerships’ by the Commission to the European Parliament. Despite the long winded title, for many PPP investors this clearly signaled reinforcement of how PPP will be integral to tackling the financial and economic crisis in 2010 and beyond. The EU and member states have embraced the fact that investment in infrastructure projects is an important means to ‘maintain economic activity during the crisis and support a rapid return to sustained economic growth.’

Over the past two decades PPP’s have proven to be effective ways to deliver infrastructure projects, reform and transform public service outputs and to innovate as a change agent. By forging both public and private sector, PPPs are intrinsic vehicles for the long-term delivery of infrastructures and services. This merging of the minds to meet objectives also creating efficiency in public services through risk sharing and embracing private sector expertise.

The Commission have acknowledged through this publication that, ‘PPPs can offer extra leverage to key projects to deliver shared policy objectives such as combating climate change; promoting alternative energy sources as well as energy and resource efficiency; supporting sustainable transport; ensuring high level, affordable health care; and delivering major research projects such as the Joint Technology Initiatives, which are designed to establish European leadership in strategic technologies. They can also boost Europe’s innovation capacity and drive the competitiveness of European industry in sectors with significant growth and employment potential.’

Across Europe there are some signs of recovery from the ‘big bang’ although the activity rates are significantly less that before and to be honest will likely to be next year. It is estimated that up to October 09 this was 30% less than the previous 2008. This would estimate that by the end of the year well over 100 transactions will still have been completed in an extremely tempestuous environment. In Europe this has been dominated by infrastructure and healthcare followed closely by education and waste projects.

A co-ordinated approach is now being adopted for the benefits of PPP to be embraced across Europe. The European PPP Expertise Centre (EPEC) was launched by the European Investment Bank (EIB) and European Commission in 2008 which is collaboration between the EIB, European Union Member and Candidate States and the European Commission. This was conceived in order to strengthen the organisational capacity of the public sector to engage in PPP procurement.

This reflects that parts of Europe’s public sector have considerable PPP experience but this knowledge and experience has not been systematically shared. It has been anticipated that public authorities will be more effective participants in PPP transactions, and EPEC’s work will create more efficient PPP procurement and increase deal flow. In addition, we continue to see EIB’s contribution to PPP’s in Europe with almost €30bil being committed to projects since PPP initiation. This also facilitates investor confidence and increased ability to attract finance.

EPEC have already been at forefront of moving ahead and their publication in August this year ‘Financial Crisis and the PPP Market – Potential Remedial Action,’ attempts to regroup and co-ordinate stakeholders identifying that solutions can and are being adopted. The negativity of adopting ‘it’s too difficult’ can only serve stagnation and adversely affect momentum across Europe.

The Commission is taking a proactive approach to propelling PPP as a catalyst for growth by not only the work being carried out by EIB and EPEC but by setting out an action plan for 2010. This will be observed as a year for stabilization, refocus and co-ordinate approaches in the market. This must only reflect that the investors are migratory and settle where market confidence is apparent and that PPP will continue in the programmes.

Today across Europe Mazars Project Finance team are still observing active participation and appetite. UK still remains the dominant and resilient player in the PPP market, over 160 deals in various stages of procurement, and is well documented in terms of growth and sectors. The political risk of elections in the UK, early in 2010, will have an impact on dealflow with the activity slowing slightly. Given 30 transactions were closed in the first half of 2009 recognized, despite the liquidity issues, a strong market; VFM continues to be clearly demonstrated. This will be enforced by developments in Scotland promoted by Scottish Futures Trust in the health, community, education and waste sectors. Wales is also re-emerging with a potential pipeline of transactions in 2010. Northern Ireland still remains committed to PPP as a procurement tool but has seen its investment plans dampened by the current climate and reduction in public spending.

The recent general elections in Germany and Portugal have provided investor confidence. One of Mazars Partners involved in PPP in Portugal, Jose Silva Jorge, observes that,
‘The Portuguese PPP market has been developing mainly on infrastructure programs centered around road systems, hospital construction and management, railway systems construction and management, ports and airports and energy systems, by means of long term concessions.

The country's motorway programme has been generally viewed as a success and there is the prospect of a further pipeline in 2010. Similarly, the majority of hospital projects have reached financial close, and a further review of where this can continue from these pilot transactions. Coming 2nd in the first quarter of 2009 league table of transactions closed indicates that Portugal has embraced PPP in delivery of infrastructure but has been frustrated by universal issues in the funding market.

Although the value of transactions slowed considerably in Greece in the first half of 2009, the market still remains strong with its pipeline of transactions totaling over 60 moving forward.
Traditionally one of Europe’s strongest markets, activity in Spain has reduced significantly over the past year with projects of just over US€1b being closed in the first half of 2009. This is dominantly health projects at present but likely to see reemergence of transport infrastructure in its pipeline for 2010 and justice emerge as a strong sector.

Belgium continues to see education dominate its market with the three US€3 projects still in procurement and a further pipeline of 6 projects totaling around US€7bil.
In Ireland, there continues to be a strong pipeline in the accommodation sector with many projects already in the market and healthcare about to emerge. There continues to be investment opportunities in the transport sector, with the Dublin Metro and several roads concessions already in various stages of procurement. Major Spanish, German and UK investors continue to see the island as a place to partner with the local supply chain. The co-ordination of PPP’s through specialized organizations such as National Development Finance Agency, Rail Procurement Agency and National Roads Authority has greatly increased efficiency of procurement process on the island. A recent Mazars project, RoI Motorway Service Stations, took only 8 weeks from Preferred Bidder to Financial Close which is a record on the island, ironically achieved in the current climate.

Mazars also are experience that their home market in France has another healthy pipeline and the promise of more projects to follow. With the country's bid to host the Euro 2016 football tournament a number of stadium projects have emerged with Marseille and Nice stadium redevelopments have already well advanced. There have been nearly 40 projects identified in its pipeline with a value of almost US€17b with roads and education spending dominant. The diversity of sectors makes France attractive to investors where there are various expertise being introduced creating added value and differentiation.

How EU countries adapt to the challenge set by the commission will vary widely, but ultimately they will require the support and participation of the private sector. Mazars are already working with EPEC to assist in this process and inject our knowledge and experience of delivering projects across Europe. As European economies strive towards recovery in 2010, there should be continued release of tenders for forging strategic partnerships between the public and private sector in a number of infrastructure and social sectors.