European public banks and PPPs
The involvement of public banks in public-private partnerships has not proved to ensure that the public sector obtains good value for money from PPPs.
International financial institutions promote PPPs not only by making direct equity and loan investments into PPP projects, but also by making private sector participation part of otherwise public projects and by using their advisory capacity to promote private sector participation.
It is crucial that public authorities undertake an assessment of whether PPP really offers value for money compared to traditional public procurement, and if so, which kind of PPP would be most appropriate.
Why European public banks?
As an organisation which monitors the activities of the European public banks – the European Investment Bank (EIB) and the European Bank for Reconstruction and Development – Bankwatch has taken a particular interest in the role of these institutions in promoting PPPs.
Also the World Bank is very active in promoting PPPs, through its investment projects as well as through its Public-Private Infrastructure Advisory Facility (PPIAF).
The European Bank for Reconstruction and Development
The EBRD has an explicit mandate to encourage economic and political transition in the former Soviet Union countries and the Eastern Bloc satellites through the development of market economies. Since the beginning of operations in 1991, the EBRD has been involved in creating the legal environment for private investment in its countries of operation, including concession laws.
The European Investment Bank
Between 2005 and 2010 the EIB – the EU’s bank, which is supposed to follow EU policy – financed 85 PPP projects (pdf) with a total of EUR 15.2 billion, mostly in the transport sector but also with a significant number of projects in the health and education sectors. Most of these projects were in the UK, Spain and Portugal, with very few in central and eastern Europe.
The responsibilities of European public banks
As well as contributing to their specific mandates, the investments of the European Investment Bank and the European Bank for Reconstruction and Development must protect the public interest and promote sustainable development, in both the environmental and economic sense.
PPP projects financed by the European public banks should bring public benefits and deliver goods and services for affordable prices or tariffs. In general, they enter PPP projects with the aim of improving infrastructure and raising the quality of public services in sectors such as transport, waste and water management, education or administration.
At the same time, their lending is ruled by the operating principles of economic and financial soundness, and they have not always found a balance between the financial soundness of PPPs and providing good value for money and services for the public.
In order to exercise influence over the project design, in theory the banks should enter the projects at an early stage in order to ensure a thoughtful and open project development process. However with such overt enthusiasm for PPPs displayed by the banks, it is doubtful whether they really do encourage level-headed consideration of non-PPP options during discussions with project promoters.
The case studies on this website show that the choice of project and the decision to use a PPP has not always been based on clear or balanced evidence, and the international financial institutions should use their experience to ensure that the public sector will get good value for money.
The methodology and calculations need to be publicly available in order to ensure that the calculation is being carried out using realistic assumptions, and the banks need to ensure that this is done.
However, as we can see, the EIB stated in its evaluation of PPP projects that it does not normally review the Public Sector Comparator calculation, a serious omission for a bank that should work in the public interest.
Neither does the EBRD regard itself as having a duty to ensure value for money for the public sector:
“While host governments might seek a more pro-active stance from [the] EBRD, in particular with respect to confirming the fairness of a transaction, if [the] EBRD were to undertake such work, then we could expect to be drawn into controversy, particularly as time passes and perceptions and expectations change. By issuing such opinions, the Bank may even undermine its ability to act as honest broker in any future disputes, in case an aggrieved party takes exception to a fairness opinion and then perceives the Bank as partisan”.
This is unacceptable.
Contracts already contain arrangements for dispute settlement, and the EBRD and EIB should concentrate on ensuring that the public authority will get good value for money and a quality project. Of course public authorities should be able to do this themselves, but experience has shown that this often does not happen, due to inexperience, and individual and political interests.