EIB finances large projects (greater than £100 million) in the education, health, waste and transport sectors. Other sectors in which a large number of projects have been procured using PPPs, such as defence, prisons and general accommodation are not eligible for EIB funding. EIB has also not participated in sectors where the average size of the projects tends to be small (eg the NHS Lift Programme). Our comments below therefore reflect our experience of performance of the first group of projects.
In 2005, the EIB's Operations Evaluation Department, an independent function of the EIB reporting directly to the Bank's Board of Directors, reviewed the performance of the then operational portfolio of PPP projects financed by the Bank. Amongst the key results from this Evaluation12 were:
- the PPP projects were largely completed on time, on budget and to specification. In contrast, an analysis of conventionally procured infrastructure projects financed by the Bank revealed delays of at least one year in more than half the cases;
- the PPP projects were completed to a standard at least as high as conventionally procured alternatives and on some projects, the standard of works was better than would have been found in public procurement;
- in terms of the Bank's standard evaluation criteria, 80% of operational projects were "good" or "satisfactory". Some 20% were unsatisfactory in terms of their economic efficiency-these were non-UK road projects suffering from lower than expected traffic demand; and
- in most cases, PPP enabled the public sector to accelerate the construction of key infrastructure.
These conclusions are consistent with an increasing amount of international evidence on the strong performance of well structured and managed PPP projects.
The Operations Evaluation Department report further concluded that PPP projects funded by the EIB and operational by 2005 demonstrated genuine sharing of risks between the public and private sectors. It is sometimes argued that risk transfer is only fully tested when projects run into difficulties. Whilst this argument has some merit, the superior on-time and on-budget performance of PPP vis-á-vis conventional procurement is prima facie evidence of appropriate incentivisation (and as a corollary, risk sharing) in the construction phase of PPP projects. This does not necessarily imply, however, that the risk transfer was cost effective from the public sector's point of view. There is less evidence on operational performance (as relatively fewer projects are in the operational phase) but, as noted above, that which exists is also generally positive in respect of PPP performance.
Funders play a key role in securing the generally superior performance of PPP projects. They scrutinise a borrower's obligations under PPP contracts to ensure that these can be fully met; and negotiate clauses and other protections with the borrower and sub-contractors (eg penalties for delay) which are intended to incentivise the on-time completion and good operation of projects. They will also monitor a project's performance during the construction and operational periods with the help of external technical advisors to enable problems to be identified at an early stage and remedial action taken. Loan contracts also contain provisions which enable banks to take pre-emptive action to deal with performance shortfalls which threaten the ability of projects to meet financial obligations (and therefore put lenders' debt at risk). This third party scrutiny of projects, and the incentivisation of funders to ensure successful project implementation and performance, represents arguably the single most important advantage of PPP structures.
Equivalent levels of monitoring should, in principle, apply in the case of conventionally procured projects. In practice, similar disciplines and incentives do not apply where a project is conventionally funded or where the debt is not exposed to project risks (for example where it is fully guaranteed by the public sector). In other words, a key advantage of privately financed projects can be the additional incentivisation and monitoring capacity required by lenders and that comes with the need to repay third-party debt.
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12 The full report is available at http://www.eib.org/attachments/ev/ev_ppp_en.pdf