The Polish public sector must reduce its debt or at least try not to add any more. Local government is being disciplined through, among other things, a new, more rigorous debt ratio imposed on them as of 2014. On the other hand, the very same local government will receive more investment funds from the EU under Regional Operational Programmes (ROPs) than they do today. But to spend the money, they will have to their provide their own contribution. How can they find the means?
Running at least some of the projects under the public-private partnership (PPP) framework seems to be one of the best solutions. In the EU, the liabilities of the public partner – under certain conditions – are not added to its debt. The key conditions are that the private partner takes upon itself the risk related to construction and one of two other risks, which are: the risk of demand or risk of availability.
Pre-election investment activity
It seems that, under the circumstances, the Polish public sector should firmly opt for PPP. Yet, this is not the case, even though some data may point otherwise. In 2012, the number of PPP public investment tenders in Poland rose significantly. Also, in 2013, the total value of projects for which those tenders were called increased to PLN 4.6bn. Furthermore, it looks like this upward trend will continue over 2013 and 2014, if only for the fact that next year will be the year of elections for the Polish local government, which always means a spate of new investment projects – on paper at least, if not always in reality.
The problem is that if the statistics are compared against benchmark data and facts, the picture is no longer that bright. Firstly: unlike the West, which employs PPP on a larger scale, Poland delivers mostly small projects under this arrangement. Most often, these are worth a few million zloty, up to several dozen million zloty at best (against the EU average of EUR 160m). The reason why this happens is that in recent years, almost all of our PPP projects have been local government ones.
In the West, the central government and its agencies are in charge of most of such projects. In Poland, in contrast, the government can boast only one successful PPP project, which is the new District Court building in Nowy Sącz. Secondly: in Poland, most tenders for PPP projects have ended up in a flop – they were either cancelled or, despite the tender being resolved, or even or the contract being awarded, the project never came to pass.
The year 2009 saw 33 PPP investment tenders, but only two contracts with private partners were signed. In 2010, there were 51 tenders, rendering only 11 contracts. In 2011 – 36 versus 11, and in 2012, out of 57 tenders, only 9 contracts were executed. Between 2009 and 2010, as many as 45 per cent of tenders for projects to be delivered using PPP were cancelled.
The result is that projects delivered under PPP account for less than 1 per cent of all public investment in Poland. In this respect, we are at the bottom of the OECD list. By way of comparison, in the UK, which is the global leader in this model, the ratio stands at 23 per cent. In PPP advancement, we lag behind not only the West but also poorer countries such as India, which until 2009 could boast 450 completed or in-delivery projects in this model.
This year’s “Report on Public-Private Partnership in Poland” produced by Centrum PPP (collective work edited by professor Jerzy Hausner) distinguishes three stages of the public-private partnership market development. Poland has only entered the first, initial phase. Countries at the third, most advanced stage, include the UK and Australia, at the second – Germany, Spain, Ireland, Italy, France, the Netherlands, Japan, Canada, Greece, Portugal, US and New Zealand. Besides us, India, Brazil, Mexico, Russia, South Africa, Romania and Bulgaria, among others, are still at the first stage; however, the report shows that even those countries have overtaken us in terms of PPP development.
They do not know enough
Why are we doing so badly? Why are so many tenders for PPP projects failing? There are several reasons for this. One of the main ones is that the public sector in Poland still has little knowledge of the matter. In consequence, public institutions either give PPP a wide berth or tackle it improperly, e.g. call tenders for projects which do not qualify for PPP. The public player would rather do it traditionally than under PPP.
It often happens that the local government officials, not quite understanding the model, wish to shift too many risks to the private partner. The partner cannot accept it and the project collapses. The waste separation facility in Przemyśl is a case in point. A very interesting example is the pioneering project for a new county hospital in Żywiec. It is to be built by a Canadian investor, InterHealth Canada, with its own money. But even though the investor signed a contract with the Żywiec-based county office more than two year ago, the project has not yet begun. For one reason: the Canadian investor cannot get the funding of the project together. This is because they have taken on as many as three main risks: that of construction, availability and demand.
It is the last one which poses a problem, since demand relies on contracts negotiated by the hospital with the National Health Fund (NFZ). The National Health Fund signs contracts only for one year, and the future remains uncertain. For this reason, the investor has difficulty obtaining a construction loan.
“The three “Ps” should receive a “B” as “bank” for company”, explains – Tomasz Korczyński from Dentons law firm, expert in public-private partnership. “The bank should be involved in such a project from its very inception, but in Poland it seems to be the last one to contact when the contract between the private and public partners has already been signed. Hence we have situations where the bank’s representative says: there is no way we could fund a project like this on the terms you have negotiated”.
Adam Szejnfeld, MP and economic expert of the Civic Platform (PO), claims that the key impediment to PPP development in Poland is the mentality of the public administration and politicians, their fear of joint projects with private partners.
“An (untrue) conviction was conceived and publicized that the three “Ps” often have to be complemented with a fourth one, a “P” for Public Prosecutor”, he says. “Every single thing a public officer does in around business, even a mere meeting of an MP or a mayor with a business person is treated as a minor crime. How should PPP flourish then? Another factor is the attitude towards investment that often seen in civil servants: if I have money, I do it, if not, then I simply don’t – even though, having no funds in the budget, they could still deliver it under a PPP arrangement. There is, however, no common awareness of PPP as a way to deliver public investment”.
The report on PPP in Poland, and the statements made by the best Polish experts in this area (such as Irena Herbst, the head and founder of Centrum PPP) demonstrate that it is the government that is largely responsible for insufficient knowledge and competence of the public sector officials who fear public-private partnership and continue to brush PPP off.
The Polish government (and its agencies) are now running only one – and small – PPP project, something that provides little incentive for local governments. Yet this is only one element of the puzzle. According to the Report on Public-Private Partnership in Poland, not only the number of delivered projects or the speed of new ones coming up decide about the advancement of the market in this regard, but also the institutional and legal solutions determining the transparency of the projects launched, and the competitiveness and real profitability and efficiency of PPP projects. The authors of the report argue that such solutions are still lacking in Poland.
What specific solutions are they then? Firstly, public government agencies which would deal with, among other things, disseminating the knowledge about PPP and promoting this model. In several European and non-European countries contemplated by the authors where PPP is growing, only Switzerland, Spain and Poland have no government institution in charge of public-private partnership (Centrum PPP is a private foundation).
In most countries in which the formula is used efficiently and on a large scale, the procedures for preparing PPP projects are formally approved and officially supported by the government. They include special regulations showing how to draft them. Those governments also highlight and foster relevant good practices. These countries also have public agencies which, before the preparation for a certain project begins, analyse whether it is more advantageous for the public partner to deliver the project in PPP or traditionally. There are still no such solutions in Poland.
There is no specific strategy or state policy that would more generally show in which areas, when and how public investment projects should be launched under PPP or how to develop this investment model in Poland. To compare, even India has such a policy and strategy in place, trying to employ PPP to accelerate its development and improve the infrastructure.
The consequences of disregarding such opportunities in Poland are greater than it seems at first glance. In the West, and also in India, areas in which most PPP projects are completed reflect the most urgent social needs. Most PPP projects relate to roads and transport (more than a half), hospitals, schools and the country’s defence. In Poland, the structure is completely different at this point. From 2009 to 2011, as many as 37 per cent of projects to be delivered in PPP were sports and leisure projects, i.e. the much-questioned aqua parks or stadiums.
In 2012, they took the best positions in the ranking, although their percentage has shrunk significantly(down to 19 per cent). The second position in 2012 was taken by power (18 per cent), the third – by culture (11 per cent), and the fourth by parking lots, water and sewage management and education (7 per cent each). Such structure, according to the writers of the “Report on Public-Private Partnership in Poland”, proves lack of skills to use the tool and lack of activity of national public authorities.
The law hampers development
Central administration is still reluctant to remove legal impediments to PPP development. For three years, Centrum PPP has been striving (to no avail) to convince the government to make a minor amendment to the Public Finance Act – i.e. to specify Article 124 and Article 236.4. The present wording may be interpreted so that all the financial liabilities of the public side due to the private partner under a PPP contract shall be current expenses. If the contractual object is a specific project, in the opinion of Irena Herbst, the liabilities should be largely qualified as capital expenditure.
Why is this important? Because current expenses, and more specifically the surplus of current income over expenses, will largely determine whether the local governments in Poland fit into a new debt ratio, which comes into force in 2014. Classifying all expenses as financial liabilities of the local government to a private partner will discourage civil servants from getting involved in PPP projects.
“We have managed to convince all ministries except the Ministry of Finance about this amendment”, says Irena Herbst. The Ministry of Finance explained that this solution would introduce inequality between public entities, i.e. local governments could use it while other public institutions could not. Yet, there is no impediment for all public entities to adopt the same solution.
It is a pity that nothing is changing, as, after all, more and more local governments in Poland would wish to deliver some of their investment plans using PPP. It is a pity, because despite the barriers, the knowledge of Polish local government officials in this area is growing and there are more and more very interesting, innovative local government projects in PPP. For example, in Kraków, a private investor (an Italian-Polish syndicate) is to build a community cemetery and a crematorium under PPP. Even more spectacular examples abound.
One of them is the construction of a waste incinerating plant worth more than PLN 700m in Poznań, the restoration of land at the railway station in Sopot for PLN 100m or 2,000 new bus stops in Warsaw. Those projects are impressive, encourage others; they provide a springboard. But for a real breakthrough, the Polish government must become less half-hearted about PPP.