In the first projects the initial investment of the private partner is reimbursed via the fees that the end-users pay directly to the SPV for the use of the infrastructure or service provided. Under such schemes, the private partner constructs the project and following its completion has the right to collect fees from the end-users for the services provided. The amount of these fees, the conditions and their collection mechanism are clearly defined in the contractual agreement between the Contracting Authority and the selected private partner. At the end of the contractual period, the infrastructure is transferred to the public entity.
In case the fees paid by the end-users are not sufficient enough to cover the whole cost of the project, the public sector may support this venture, either through lump sum contributions during the construction phase or through availability payment during the operational period. In the projects where the public sector reimburses the private sector, the initial investment of the private partner is reimbursed by the Contracting Authority through regular availability payments, linked with pre-determined output specifications criteria for the provision of quality infrastructure and services. Under such schemes, the private partner constructs the infrastructure of the project and upon its completion receives availability payments from the public partner, based on the provision of pre-agreed quality services. In order for the availability payments to be made in full (without any penalty or even full probation) the private partner should cater for the efficient operation and maintenance of the infrastructure or the services that it provides. The private partner undertakes the management and operation of the project throughout the contractual period and upon its termination, the infrastructure is transferred to the public entity.
The form of PPP that will be implemented depends on the allocation of the risks between the two contracting parties and on the extent of the involvement of the private sector, which is a decision to be made by the Contracting Authorities, depending directly on the optimum allocation of risk. Key for their success is that risk is undertaken by the party that can better deal with it.
PPP schemes are complementary not only to the traditional public works but also to other forms of partnerships between the public and the private sector, such as concession agreements or other forms of collaboration of Public Authorities with private partners.
PPPs, besides being a reliable alternative for the financing of public works, are also used for:
- the efficient maintenance of the construction projects (as Private Entities cater for the operation or performance of the project and their repayment depends on its good maintenance)
- ensuring the quality of services provided during the contractual period (via availability payments depending on the quality specifications set out in the contractual agreement). PPPs ensure that the public budget will not be burdened by overruns and delays that have increased the cost of projects in the past.
The time required for a PPP project to be tendered depends on its maturity and the actions already taken by the Public Authority to ensure the successful implementation of the project. A main element of this procedure, according to the international practice and due to lack of PPP specialists, is the recruitment of external advisors, financial, technical and legal advisors. These advisors assist the authorities to carry out the projects faster and in a more effective way, since the invitations to tender differ from those of traditional Public Procurements
The establishment of a legal framework constitutes the basic condition for the wider implementation of PPPs, but the way they will be implemented is the basic element for their success. The implementation of PPPs requires particular know-how and staff in a broad range of disciplines, as well as extensive experience and expertise in their respective specialisation fields.
As the contracting authorities of the PPPs are the public institutions themselves, the PPP Unit assists them so that they can cope with the new projects that they will implement via PPPs. For this reason the State, like other countries already implementing PPPs, via setting up a PPP Unit, has created a central mechanism with experienced staff, ensuring in this way that everyone will have access to that knowledge. On a technical level, the Inter Ministerial PPP Committee approves PPPs and integrates the annual payments in the Public Budget, according to Law 3389/2005. Therefore, it needs to ensure that the services provided by the private sector are viable and that the financial data are realistic and for the benefit of the State, in relation to the results they produce. The PPP Unit, when approving PPPs or launching tenders, evaluates a lot of parameters that prove the necessity for implementing such projects. The implementation of PPP projects where the Public sector reimburses directly the private sector creates future obligations for the State. The PPP Unit monitors all financial obligations undertaken by Public Entities, so that the State knows precisely the future burden on the Public Investments Programme, resulting from the implementation of PPPs and the payments to be made.
It is difficult to determine in advance the time required between the invitation to tender and the finalisation of the contract award procedure, because of the complexity of each project. However, it has been observed in other European countries that the usual time required ranges between 9 to 12 months. This is determined by the fact that the invitation to tender is in line with the European Law, which determines specific periods of invitation to tender, submission of tenders, judicial appeals etc.
According to article 17 of Law 3389/2005, the Partnership Contracts have clear and detailed descriptions of the rights and obligations of both Parties (Public - Private Entities) for the Partnership object. The method of monitoring the performance and operation of the project is agreed in the contract and can be done either by independent companies recruited for this purpose by the Public and Private Entities acting in common, or by the competent State authorities, alongside the supervisory role of the PPP Unit.
Law 3389/2005 does not define a minimum limit for the implementation of PPP projects, therefore, the proposals for low budget PPP projects are not excluded a priori, but are examined in terms of their viability.
However, based on the international experience, it has been proven that the State benefits from PPP projects with a significant budget, since the cost of the invitation to tender is considerable because of the involvement of external advisors and of the inelasticity of their total budget. For this reason, it is to the State's interest to group similar projects and launch a single Invitation to Tender.
In cases of projects where the end user pays a fee directly to the private partner, the Special Purpose Vehicle (Private Entity) has undertaken both the responsibility for constructing the project infrastructure and the demand risk. In case that the fees paid by the end users are not sufficient enough to cover the cost of the project, the SPV cannot sustain the forecasted contractual revenues. This issue also concerns the banks that provide big long-term loans to the SPV and expect to be paid off from the project's revenues. In case the Private Entity cannot deal with this problem, it might be substituted by another Private Entity indicated by the banks. In cases of projects with a social character, the Public Sector is always safeguarded for their smooth operation.
The State pays availability payments (payments to the private partners for the availability of infrastructure, so that the State can provide its services to the citizens) to the private partners that undertake projects reimbursed directly by the Public Sector. Services, such as education, health and a number of others, are still provided to citizens for free, although the private partner constructs the infrastructure and caters for the efficient operation and proper maintenance of the project.
As in the case of traditional procurements, the profit of the Private Entities is included in the availability payments paid by the State.
The Private Entities that undertake the implementation of a PPP project also bear the construction, availability and / or demand risks. In this way, the State avoids possible budget overruns that could result from problems and delays during the construction phase and which could lead to budget overruns. On signing the Partnership Contract, the annual payments of the Private Entity for the implementation of the project are arranged.
The repayment of PPP projects by the State or by the end users begins once the project is operational. This means that the Private Entities are motivated to deliver the project to the public sector in time and with no delays, so as to start receiving the availability payments.
The role of banks in the implementation of PPPs is important. The obligation of Private Entities to secure the financing of the projects, in whole or in part, leads them inevitably to bank loans, as proven internationally. Indicatively, the usual ratio of equity and bank loans for financing PPP projects ranges from 10-20 to 90-80. The involvement of banks in PPP projects contributes to their prompt implementation, as banks will monitor Private Entities which have undertaken their implementation. This monitoring keeps the cost of the project low and helps to meet the deadlines set in the Contract. Moreover, the monitoring continues throughout the Contract. In this way the quality of the offered services according to pre-determined output specifications is ensured. Private Entities have to be consistent with their contractual obligations in order to get repaid by the Public Authorities and pay off their bank loans.
PPPs do not cover additional needs of the Public Authorities. Via PPPs, the existing needs for additional infrastructure and services, already included in the strategic planning of each Authority, can be implemented.
Greece is one of the few countries that has a cap limit on future availability payments of Authority-pay PPP projects, upon which each new project is tested during its approval.
Normally, Private Entities are responsible for the delivering and finalizing the required design studies. Of course, the determination and the settlement of the technical specifications (or the functional requirements) or the elaboration of the preliminary designs (when this is required) is made by the Public Entity that acts as the Contracting Authority.
The payments of the Public Sector to Private Entities are linked with the pre-determined output specifications for the provision of infrastructure and services of high quality. In each PPP contract, there is a number of parameters that determine the quality and performance of the project, so as to quantify whether the contractual obligations of the Private Sector are fulfilled. Low quality services result in reduced payments by the Public Authorities. This way, the quality of a project throughout the contractual period is ensured.
Public Authorities can monitor the quality and the safety of construction projects through the terms and regulations that are obligatorily set in the contractual agreements. The monitoring of the Private Entities by the financial institutions (banks) is an additional guarantee for the Public Authorities and the end users. Banks want to ensure that the Private Entity delivers the PPP project according to the quality specifications set out in the contractual agreement. In this way the payment mechanism, which is linked to the agreed quality specifications, is activated and with these payments, the Private Entity repays its loans. It is emphasised, however, that the monitoring by the banks (for example via technical advisors) offers an additional safety feature that cannot substitute the monitoring by the Public Authorities.