PPP in NIB’s member countries

By Joe Wright, Senior Director, Head of NIB’s Transaction & Portfolio Management

Generally a public-private-partnership (PPP) involves the private sector being contracted to deliver a public sector project or service. In NIB’s member countries PPP projects involve mostly road infrastructure and social infrastructure such as school buildings and hospitals. NIB is a long-term debt financier of many of the larger projects in its member country region.

The key contrast between PPPs and conventional public procurement is that with PPP’s private sector, returns are linked to service outcomes and performance of the asset over the contract life. The private sector service provider is not only responsible for financing and building the infrastructure, but also for the quality and efficiency of its operation for several years thereafter.

PPP projects in the infrastructure sector usually fit well with NIB’s mandate of enhancing competitiveness. NIB’s strengths in providing long-term finance is well suited to the PPP model as infrastructure assets have long lifetimes and the private sector service provider has a long period of responsibility for their operation and maintenance.

An in-house study at NIB, covering the period 1994–2012, identified 60 PPPs within its member country region. During the same period, NIB has lent EUR 590 million to eight of these. The total cost of these projects is EUR 4.2 billion, equalling 70% of the entire PPP market value in the Nordic-Baltic region. NIB’s financing thus constitutes 15% of the total project costs.

While NIB’s involvement in PPP financed projects is substantial in the context of its member countries, elsewhere in Europe the number of PPP projects is low compared to the Nordic and Baltic region. In Europe in 2011, for example, 84 PPP transactions were carried out with a total value of EUR 17.9 billion. While in NIB’s member countries the total value of PPP projects in the period 1994–2012 is just EUR 5.9 billion.

High quality infrastructure and services

NIB’s experience of the PPP projects it has financed is that they have been built ahead of schedule, and delivered high quality infrastructure and services. The projects have also achieved significant risk transfer to the private sector, and given public authorities certainty with regard to life-cycle costs.

NIB hosted a round-table meeting for public authorities involved in PPP procurement in May 2012. The key question for public authorities when choosing between PPP and conventional public procurement is value for money over the life-cycle of an infrastructure asset, taking into account the transfer of construction, operation and maintenance risk to the private sector. The main challenge for public authorities is to maximise the benefits of PPP projects by promoting competitive tender procedures, lowering transaction costs, and retaining expertise in the public sector to procure PPP projects efficiently.

Since the financial crisis the number and value of PPP projects in Europe has decreased, as it has become more costly for banks to provide the long-term financing needed for PPP infrastructure. This trend may be expected to continue as banks adjust to the requirements of Basel III regulation. However, there is potential for this gap to be filled by long-term debt from institutional investors seeking new long term assets and diversification of the risk in their investment portfolios. There are several interesting developments in this regard, including initiatives for PPP projects to be financed in bond markets, the emergence of specialist infrastructure debt funds, and direct investment by pension funds in the debt of infrastructure assets.