Public-private partnerships in the EU at lowest level for ten years, but more blood transfusions from project bonds coming soon

The EIB has recently published a market update for public-private partnerships (PPPs) in Europe for the first half of 2012 showing that during this period, the European PPP market recorded its lowest volume for 10 years. Only seven EU states closed PPP deals during the first six months of this year, with the UK signing most contracts (16) but France, with 11 projects worth a total of EUR 2.9 billion, remaining the largest PPP market in terms of value.

Not being great fans of PPP models of infrastructure financing here at Bankwatch, we weren’t too sorry to hear that more and more EU governments are deciding not to ‘build now and pay heavily later’, but it does raise the question of what is going on and why there are fewer PPP projects being signed at the moment?

Is it just because of the crisis? Or have governments finally started to take heed of the warnings that have been issued by PPP critics for well over a decade now? Unfortunately the EIB’s update itself does not offer any answers whatsoever.

However, another recently published EIB document does comment that:

“Since the onset of the financial crisis, commercial bank debt has become more difficult to secure and lending terms (e.g. pricing, tenors, loan volumes) have deteriorated significantly, affecting the bankability and value for money of PPP projects.”

It is true that the crisis did heavily affect PPPs, as the example of the M25 motorway widening in the UK showed. The UK National Audit Office found that the price of the contract increased by around EUR 826 million to around EUR 4.25 billion between the time when Connect Plus became preferred bidder and the contract letting in May 2009. Financing terms were much more expensive than before the credit crisis and accounted for 67 percent of this price increase. While this project did – controversially – go ahead, many other PPP projects caught by the crisis did not.

One of the answers, according to the European Commission, is the Project Bonds Initiative, in which the EIB will play a role by guaranteeing bonds issued for PPPs in EU member states. Today, Commissioner Olli Rehn and EIB President Werner Hoyer will be presenting project bonds at an event marking the signing of the cooperation agreement between the EIB and the Commission establishing the Pilot Phase of the Initiative.

But project bonds are the answer to the wrong question. Instead of asking how to finance more PPPs and helping private companies to transfer even more of their risks onto the public sector, the EU institutions should be focusing on asking whether to finance more PPPs at all, and if so, under what conditions.

The Commission and EIB have not shown any inclination to undertake this kind of in-depth and critical evaluation of PPPs so far, although around the EU the evidence is getting stronger and stronger that PPPs are a risky model for governments to follow and can result in huge, long-term budget burdens. Just look at Hungary, Portugal and the UK as examples. Instead of properly diagnosing the problem, though, the Commission and EIB prefer to keep administering more and more blood infusions, this time in the form of project bonds.

The hidden costs of public-private partnerships
Read more on our website ‘Overpriced and underwritten’