Value for money – today’s mantra

Newly elected governments across Europe are making good on all those value for money promises they made on the campaign trail – and public-private partnerships (PPPs) have not proven immune to the cost cutting.
 
The first big blow for European PPPs came in July, when the UK’s new coalition government cancelled the £55 billion (€66 billion, $83 billion) Building Schools for the Future programme, a significant part of which was being procured through PPPs.
 
This week, Slovakia’s recently elected centre-right government landed the second major blow, letting the axe fall on the €3.3 billion first stretch of the D1 highway by choosing not to extend the financial close deadline for the road beyond August 30.
 
For the sponsors and roughly 20 banks that were said to have been on standby to close the deal, the government’s refusal to continue negotiations must have been a disappointment.  But the decision can hardly be considered unexpected. After all, the parties that are now part of Slovakia’s centre-right coalition government had made their opposition to the road PPP loud and clear during the election campaign. Their main complaint – as you might have guessed – had to do with value for money.
 
According to their estimates, the PPP model had inflated the cost of the first stretch of the D1 by €546 million, with several suggesting it would be cheaper to fund the highway from the public balance sheet. The D1 PPP, like all availability based projects, would still be funded from the taxpayer’s pocket, although the expense would be amortised over a period of 30 years.
 
In fact, opposition to the D1 PPP grew so vociferous during the campaign that one of the parties threatened the previous government with legal action if it rushed the road project to financial close before the elections took place.
 
Ironically, the D1’s cancelation comes exactly one year after another Slovakian road PPP – the €1.8 billion R1 – reached financial close in what would turn out to be one of 2009’s biggest deals. But it was precisely the way in which the R1 closed that sowed the seeds for the demise of the D1 project.
 
To close the R1, the previous government caved in to commercial bank pressure for an increase in its availability payments and allowed the winning consortium to raise the R1’s net present value from €1.5 billion to €1.8 billion – a 25 percent increase – after it had already signed the concession contract.
 
That deterioration of conditions for the state struck a chord with Slovakia’s centre-right opposition, now in government, with transport minister Jan Figel saying that he is not against PPPs, but wants to make sure they bring “cheaper investment in infrastructure development and acceptable conditions for the state”.
 
Of course, Slovakia was not the only European country to have made extraordinary concessions in 2009 to make sure its PPPs kept reaching financial close. 
 
The UK’s National Audit Office recently concluded that PFI (the UK’s standardised PPP procurement process) deals struck in 2009 had been useful to stimulate the economy at the time, even though they had been costly to the public sector and involved less risk transference to the banks. However, the audit body pointed out that such deals would not necessarily represent value for money today.
 
And that, in a nutshell, is where the European PPP market now stands. Value for money is today’s mantra, with many governments no longer willing to go the extra mile to make sure their PPP projects reach financial close.
 
The tricky question going forward is how to find the right balance between value for money and bankability.