The Spanish Public-private Partnership Model: Alfredo Fernández Rancaño Washington, September 22, 2009

THE SPANISH PUBLIC-PRIVATE PARTNERSHIP MODEL

Alfredo Fernández Rancaño Washington, September 22, 2009

Introduction (I)

Public authorities can currently choose to go down two routes to execute major infrastructure projects: The budgetary route, i.e., using revenues raised from collecting taxes paid by citizens. The nonbudgetary route, which entails using existing capital in the financial sector coming from private sector investment.

The latter route, used by public authorities to take advantage of the experience and knowhow of private sector firms specializing in the construction and operation of public infrastructure projects, and to try to comply with the legal constraints on public debt, requires there to be sufficient private sector confidence: only a model that is safe and reliable is a “bankable” model. The ability to give the necessary reassurance to the private sector depends, in my opinion, on a set of factors: The existence of a stable political framework that inspires confidence in the actions of the public authorities. 2

Introduction (II)

The existence of a developed legal framework that guarantees that the actions of the public authorities are legally accountable and that the rights of the private sector are effective. The existence of model contracts, the terms of which are all technically, legally and financially well-defined. Flexibility to limit the contractor’s risk in two ways: First, the possibility of devising means of maintaining the economic and financial balance of the contract in situations such as the following: Where the decisions of the contracting authority impact the contract directly. Where the decisions of the contracting authority or of other public authorities do not relate directly to the contract, but affect it nonetheless. Cases of force majeure.

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Introduction (III)

Second, the possibility of predicting with certainty the potential consequences of the contracting authority’s decisions for the private contractor, such as early termination of the contract, the elimination of contractor-managed services, etc. Together with the relevant provisions in the contract to regulate the consequences of such situations, in practice public contributions to the private contractor can be established in Spain to ensure the economic and financial balance of the contract, such as: Subsidies: for investment (for instance for job creation), or for operations (subsidy for part of the price of the rates to be charged to future users of the infrastructure). Returnable advance payments, guarantees, performance bonds, exchange rate hedges, or capital contributions. Structurally subordinated loans, the repayment of which can be deferred until a certain amount of the commercial debt has been repaid. Secondary guarantees to ensure a certain level of revenues for the private partner. Termination clauses, which enable the private operator to transfer the project to the public authority and recoup its investment plus a specific return if infrastructure use does not reach projected levels. Contribution of land, buildings, facilities, etc.

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Introduction (IV)

The simultaneous coexistence of this factors gives the private sector in Spain an attractive incentive to work together with the public sector in the execution of major projects. In Europe, the challenge is to achieve sufficient transfer of risk in order to avoid legal constraints on public debt without reducing the attractiveness of the transaction in the market. Having reached this point, the flexibility in operation of a public-private partnership will basically depend on how developed each country’s public infrastructure and procurement legislation is. Unlike the model in English-speaking countries, the extensive regulation of public procurement in Spain has meant that most of the elements of a contract (as much as 80%) are predetermined legislatively. This avoids the need to have to negotiate all the elements of each contract and significantly cuts down on any delay caused by such negotiations in practice. 5

Introduction (V)

Public Sector Contracts Law (2007) Special legislation about each kind of infrastructure (airports, railways, etc.)

Partial implementation of the Public Sector Contracts Law (2009)

General Administrative Tender Terms

Special Administrative Tender Terms Special Technical Tender Specifications governing each contract

Contract The level of negotiation in Spanish public procurement depends on the award procedure chosen by the contracting authority: •

In open and restricted procedures, negotiation is not permitted.

•

Negotiated and competitive dialog procedures do allow some room for negotiation between the public and private sectors. 6

Types of PPPs used in Spain

In general, two different types of PPPs are used in Spain: “Institutional” PPPs, which entail the creation of a specific entity, via: Joint participation of public and private sector. The taking up of stake by the private sector in a pre-existing public enterprise. “Purely contractual” PPPs, which entail the conclusion of a contract between the parties. In turn, a distinction can be made between the different systems available: Concession system: existence of a direct link between the private partner and the end user. The private partner delivers the service to citizens. Characterized by the operation of the infrastructure. Other contracts in which the partner executes and manages the infrastructure for the public authority owner, with no direct link to the user.

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Reasons why PPPs are used in Spain

The following factors have led to the use of PPPs in Spain: They enable the adequate infrastructure to be put in place, which has a positive impact on productivity and economic growth, and improves the quality of life of citizens. They help overcome budgetary control and public debt-related issues, driving the pace of investment and encouraging effective and efficient public spending, ensuring the best price/quality ratio while maintaining public interest objectives. They ensure the successful outcome of complex, sophisticated and lengthy legal transactions and operations. They entail a whole new definition of activities: the private partner tends to take a leading role in the different stages of the project, while the public authority assumes, essentially, control functions. The distribution of activities between the partners ensures an adequate distribution of risk between the private sector and the project developer (public authority).

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Contribution by PPPs to meeting budgetary stability objectives The Treaty on European Union introduced the principle of budgetary balance as a basic criterion of economic policy. This principle means that the ability of the public sector in the Member States to borrow money is limited. To ensure compliance with this constraint, at EU level the “European System of National and Regional Accounts in the Community” (ESA 95) has been developed as an instrument for calculating the level of domestic debt in the Member States. Under the ESA 95, not all transactions entailing public debt affect the budgetary stability of the Member States [i.e. the investments made by institutional public market entities (AENA, ADIF, Puerto del Estado)], but rather only those carried out by certain public sector entities. Where the indebtedness of a public sector entity affects the deficit of the Member State in question, an infrastructure project can only be executed if the risks are transferred appropriately to the private sector. If there is no transfer of risk, it might even become impossible to execute the infrastructure project, since budgetary stability requirements and the legal limits on public debt would not be met. (As I have told before, the challenge is to achieve sufficient transfer of risk in order to avoid legal constrains on public debt without reducing the attractiveness of the transactions in the market.)

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Transfer of risk to the private sector (I)

The limit on public borrowing has been precisely one of the main drivers for the expansion of PPPs in Europe, albeit not the only one. PPPs allow risks to be transferred to the private sector and, therefore, the limits on indebtedness, to which certain public sector entities are subject, to be complied with. At EU level, a distinction is drawn between three general categories of risk: Construction risk (delays in handover of infrastructure, nonfulfillment of contractually stipulated criteria, additional costs possibly incurred, technical defects, and adverse external effects). Demand risk (variation in demand, regardless of the conduct of the private partner, as a consequence of the economic cycle, new market trends, competition, etc.). Availability risk (failure to deliver volume agreed on in the contract and noncompliance with predetermined quality standards).

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Transfer of risk to the private sector (II) The Statistical Office of the European Communities (EUROSTAT) takes the view that assets linked to a public-private initiative should not be considered when calculating public debt if two conditions are met: The private partner must bear the construction risk. The private partner must also bear the availability risk or the demand risk.

The construction risk may be transferred to the private partner by attributing the consequences of the following factors: Delays in completion and subsequent handover of the project where they are for reasons attributable to the private partner. Noncompliance with the project technical specifications. Increase in costs during construction of the infrastructure. Damage to third parties during the execution of the project. Any technical defect or adverse external effect that may arise during the contract term. 11

Transfer of risk to the private sector (III)

To transfer either of the other two risks (demand and availability) to the private partner, the methods used in Spain are based on private partner remuneration mechanisms: (i) demand risk transferbased mechanisms, and (ii) availability risk transfer-based mechanisms. The demand risk transfer-based mechanisms are as follows: Conventional toll: The private user of the infrastructure pays the private enterprise directly according to the rates set by the developer (public authority). To ensure the viability of the project, it is advisable to insert into the contract maximum and minimum performance thresholds based on which enterprises must submit their economic bids to perform the contract. Shadow toll: the public authority pays the private partner according to the volume of use by citizens of the infrastructure and pursuant to certain predetermined rates. Operation of commercial or ancillary areas by the private partner.

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Transfer of risk to the private sector (IV) Availability risk transfer-based mechanisms are characterized by making the private partner’s remuneration dependent on the degree of compliance with the quality standards predetermined by the authority developing the infrastructure: Deductions applicable for noncompliance, according to the seriousness and duration of the noncompliance in question. Examples of noncompliance as regards availability: TYPES OF NONCOMPLIANCE

DEDUCTION

Noncompliance that renders inoperative and prevents the use of an entire functional area of the project

100 %

Noncompliance that renders inoperative and prevents the use of part of a functional area of the project

70 %

Noncompliance that seriously affects operability but does not prevent the use of all or part of a functional area of the project

50 %

Noncompliance that moderately affects operability but does not prevent the use of all or part of a functional area of the project

30 %

Noncompliance that slightly affects operability but does not prevent the use of all or part of a functional area of the project

10 %

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Transfer of risk to the private sector (V)

Deductions for defects in the quality of the services can be set in proportion to the degree of compliance with the quality indicators established by the authority, as in the following example: % COMPLIANCE WITH EACH INDICATOR

DEDUCTION

100 % - 90 %

0%

90 % - 80 %

5%

80 % - 70 %

10 %

70 % - 60 %

15 %

60 % - 50 %

20 %

50 % - 40 %

30 %

40 % - 30 %

55 %

30 % - 20 %

70 %

20 % - 10 %

85 %

10 % - 0 %

100 %

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PPPs in Spain: some data of interest (I) In recent two decades, Spain has enjoyed a significant boom in investment and, through this, Spanish companies have developed a high profile expertise in the construction, renewal, maintenance and operation of public infrastructure (airports, ports, motorways, high-speed rail, subway, hospitals, etc.). Public infrastructure investment (US$ million) in concessions in the last five years in Spain, according to SEOPAN (Spain’s construction industry observatory): TYPE OF INFRASTRUCTURE

2003

PORTS

146,1

2004

2005

2006

426,90

10,9

378,1

2.382,7

609,2

2.208,9

1.017,6

2007

2008

3.975

702,2

ROADS NEW INFRASTRUCTURE

3.388

MAINTENANCE RAIL

2.106,7

AIRPORTS

164,9

270,1

WATER-RELATED DESALINATION

PARKING FACILITIES

306,6

17,5

52,4

1.382,6

221,9

151,8

616,9

1.378,2

530,4

3.635,9

114,1

281,7

414,6

125,4

296,3

629,2

2.076,5

70,8

99,4

290,5

URBAN MOBILITY 48,1

HEALTHCARE

8.305,9

SOCIAL SERVICES

1.156,4

38,8

387,6

13,2

88,4

31,3

OTHER

1.007,6

536,8

2.841,1

2.230,5

795,7

2.572,5

TOTAL

8.308,3

4.057,7

10.083,4

6.615,9

14.131

7.737,4 15

PPPs in Spain: some data of interest (II)

The 2005-2020 Strategic Plan for Infrastructure and Transportation in Spain envisages that at least 40.5 % of new project funding will come from PPPs:

FINANCING TYPE OF INVESTMENT

% TOTAL INVESTMENT

BUDGET

PPP

ROADS

75 %

25 %

26,81 %

RAIL

81,4 %

18,6 %

48,00 %

AIRPORTS

2,2 %

97,8 %

6,60 %

PORTS

9,7 %

90,3 %

9,72 %

OTHER PROJECTS

27,7 %

72,3 %

8,87 %

TOTAL

59,5 %

40,5 %

100 %

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Examples of projects in Spain RAIL INFRAESTRUCTURE 1980s

Arrival of high-speed rail, 1992

17

Examples of projects in Spain High-speed train (AVE), 2009

18

Examples of projects in Spain Santa Justa AVE Station, Sevilla, 1991

19

Examples of projects in Spain Zaragoza AVE Station, 2003

20

Examples of projects in Spain Antequera AVE Station, 2006

Málaga AVE Station, 2006

21

Examples of projects in Spain Characteristics of the Spanish AVE network:

Spanish high-speed rail (AVE) network, 2009

In service Under construction In development Under study

•

The aim of the Ministry of Development is for Spain to have an AVE network spanning 2.230 km in 2010.

•

This would make Spain the leading country worldwide in terms of kilometers of high-speed rail line, ahead of France or Japan, whose networks are very developed.

•

The 2005-2020 Strategic Plan for Infrastructure and Transportation in Spain contemplates an investment of $ 182.500 million (48 % of the total) for expansion of the AVE network.

•

By 2020, 90 % of Spanish citizens will live within 50 km of an AVE station, and will be able to use a network of 10.000 km of high-speed lines.

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Examples of projects in Spain SUBWAY AND LIGHT TRAIN Madrid Subway, 1970s

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Examples of projects in Spain Madrid Subway, 2009

24

Examples of projects in Spain Alameda de Osuna Station, Madrid, 2006

Chamartín Interchanger, Madrid, 2007

25

Examples of projects in Spain San Francisco Station, Madrid, 2006

Olympic Stadium Station, Madrid, 2007

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Examples of projects in Spain Madrid Ligth Railway

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Examples of projects in Spain Madrid railway evolution (kilometres)

Some data of interest: 2008: 321,2 Km.

•

Between 1999 and 2008, the Community of Madrid, through the managing agency MINTRA infrastructure, has invested $ 12.244,5 mill. in transport infrastructures (that are operated by the company METRO DE MADRID).

•

The planned investment for the period 2007-2011 is $ 8.120,84 mill.

•

Approximately 15,7 % of this investment will be financed through the budget, and 84,3 % from nonbudgetary sources.

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Examples of projects in Spain Sarriko Subway Station, Bilbao, 1995

29

Examples of projects in Spain Moyua Subway Station, Bilbao, 1995

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Examples of projects in Spain ROAD INFRAESTRUCTURE New Madrid radial highways (2004) R2 Motorway

31

Examples of projects in Spain R3 Motorway

R4 Motorway

32

Examples of projects in Spain R5 Motorway

Radial 2

Radial 3

Radial 4

Radial 5

Total

Length (Km)

61

33,9

87,99

27,5

210,39

Investment (US Million $)

730

430,7

868,7

351,8

2.381,2

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Examples of projects in Spain First Generation Main Road Conditioning Madrid-La Coruña Road, 1980s

Madrid-La Coruña Motorway, 2008

34

Examples of projects in Spain Madrid-Andalucía Road, 1980s

Madrid-Andalucía Motorway, 2008

35

Examples of projects in Spain Los Viñedos Motorway, 2005

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Examples of projects in Spain Evolution of the Spanish road network (km) State roads

Regional roads

Underregional roads

Years

Total

High capacity roads

Other roads

High capacity roads

Other roads

High capacity roads

Other roads

1992

158.324

5.443

15.862

1.316

70.245

229

65.229

1993

159.630

5.714

15.862

1.456

70.626

234

65.738

1994

162.196

6.002

15.534

1.489

71.076

257

66.838

1995

162.617

6.274

15.652

1.572

70.981

287

66.851

1996

162.100

6.534

16.597

1.667

70.499

299

66.504

1997

162.795

6.919

16.478

1.821

70.623

323

66.631

1998

163.273

7.423

16.419

1.664

68.910

562

68.295

1999

163.769

7.657

16.467

2.032

69.048

617

67.948

2000

163.557

7.656

16.449

2.088

68.749

699

67.916

2001

166.799

8.082

16.376

2.362

68.492

708

67.779

2002

164.139

8.368

16.273

2.245

67.214

793

69.246

2003

164.584

8.794

16.063

2.361

67.909

854

68.603

2004

164.152

9.164

15.991

2.407

68.094

873

68.623

2005

165.646

9.465

15.950

2.746

68.009

945

68.531

2006

166.339

10.081

15.723

2.812

68.183

979

68.561

37

Examples of projects in Spain AIRPORT INFRAESTRUCTURE Madrid-Barajas Airport, 1980s

New Madrid-Barajas Terminal 4, 2006

Budget: $ 9.030 mill. 38

Examples of projects in Spain New Madrid-Barajas Terminal 4, 2006

39

Examples of projects in Spain Sondika Airport, Bilbao, 2001

40

Examples of projects in Spain Tenerife Norte Airport, 2008

In 2006, the Ministry of Development decided to invest $ 26.280 mill. for the expansion and improvement of the 48 Spanish airports network. 41

Examples of projects in Spain PORT INFRAESTRUCTURE

2009

Expansion project of the Port of Gijón 2005

The expansion project: •

Construction of a new breakwater that, starting from Cape Torres and running for a total length of 3.834 meters along three differently structured alignments, was to form a wharf containing 140 Ha of sheltered waters.

•

Construction of a quay located to the north of the wharf that measured 1.250 meters in length with draughts ranging between 23 and 27 meters and a width of over 400 m to allow for the simultaneous berthing of three bulk carriers of 230.000 DWT and 20 meters of draught.

•

Backfill protection, with a length of 1.732 meters to give a total surface area of 145 Ha with land entirely reclaimed from the sea.

•

The new dry bulk terminal to be established in these facilities will have an unload capacity of over 25 million tons and a 60 Ha storage area to allow for the storing of up to 2 million tons of iron ore and coal.

•

Budget: 845.691.860 $

42

Examples of projects in Spain Expansion project of the Port of A Coruña (Punta Langosteira) The expansion project: •

Building of a floating dock of 3.360 meters long, a dock of 900 lineal meters (with a draught of 16-22 meters), and the building of an open area and its land accesses by connecting the road to the industrial area of Sabon nearby.

•

Seawall of prefabricated concrete drawers, located to 230 meters since the beginning of the jetty head and parallel to it, 390,90 meters long.

•

The final dock will have a surface of 230 hectares of sheltered water and 143 hectares de port yard (91 of them will be land that has been reclaimed from the sea).

•

Budget: 626.632.573 $

43

Examples of projects in Spain PUBLIC HEALTHCARE INFRAESTRUCTURE New Puerta de Hierro-Majadahonda Hospital, 2009 Puerta de Hierro Hospital, 1990s

44

Examples of projects in Spain Infanta Sofía Hospital, Madrid, 2008

Henares Hospital, 2008

45

Examples of projects in Spain Infanta Elena Hospital, Madrid, 2008

Sureste Hospital, Madrid, 2008

46

Examples of projects in Spain Infanta Cristina Hospital, Madrid, 2008

Tajo Hospital, Madrid, 2008

47

Examples of projects in Spain Infanta Leonor Hospital, Madrid, 2008

In the Community of Madrid, between 2004 and 2007, have been built 8 new hospitals in Madrid: • • •

2.000 new places for patients. 75 new operating rooms. 749 new doctor’s offices. 48

Examples of projects in Spain Torrevieja Hospital, Alicante, 2006

Investment: $ 189,8 mill.

49

Examples of projects in Spain WASTE TREATMENT INFRASTRUCTURE Valdemingómez Biomethanation Plant, Madrid, 2009

Valdemingómez Biomethanation Plant: •

Can generate each year 34 million cubic meters of biogas that, once processed, will be sufficient to move 405 buses on natural gas, supply electricity to 20.500 houses or 4% of the entire industry capital.

•

Can remove up to 369.000 tons of organic matter (60 % of this waste generated in the city of Madrid) and produce 390.000 megawatts of renewable energy.

•

Investment: $ 116 mill.

50

Examples of projects in Spain Zabalgarbi Plant, Bilbao, 2004

Zabalgarbi Plant: •

Can incinerate 242.000 tonnes of waste per year.

•

Can generate 586.6 million kWh per year, equivalent to domestic and commercial consumption of about 300.000 people. Is expected to further increase power production to 760 million KWh.

•

Investment: $ 224 mill.

51

Examples of projects in Spain JUSTICE INFRAESTRUCTURE Justice City, Valencia, 2003

Justice City, Málaga, 2007

52

Examples of projects in Spain SPORT INFRAESTRUCTURE The Magic Box, Madrid, 2009

New Marina, Valencia, 2007

53

Examples of projects in Spain CULTURAL INFRAESTRUCTURE Alfredo Kraus Auditorium, 1997

Canal Theater, Madrid, 2008

54

Examples of projects in Spain Fair of Madrid, 2002

55

Examples of projects in Spain City of Arts and Sciences, Valencia, 2002

Guggenheim Museum, Bilbao, 1997

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