PPP Review by the European Court of Auditors finds a mare’s nest
Published on 11 November 2018
This year the ECA published a report criticising the use of PPP. A report often referred to by politicians who favour a more conservative approach to delivering public services. However, upon a closer look of the report the plausibility of the analysis presented and its conclusions may be questioned.
The report is entitled “Public Private Partnerships in the EU: Widespread shortcomings and limited benefits”. A somewhat tendentious statement in particular given that it is based on a review of a meagre 12 projects (of which 3 not even have started construction) whereas the total number of PPPs in the EU amounts up to 1,749 as also stated in the report. How can this be even remotely representative and validate the conclusion of ‘widespread’ shortcomings? Auditors should know better.
It would be too far-fetched to counter every observation in the report, although there are definitely grounds to do so. The focus will therefore be on the main conclusions in terms of shortcomings and limited benefits.
The first apparent shortcoming is that PPPs attract limited competition because of the scale of the project putting governments in a weaker negotiating position. This conclusion is primarily evidenced from a single project in Greece. It is questionable whether this single observation should be generalised in view of the presence of a well-established European PPP market with numerous reputable developers operating across borders. A simple review of a PPP project database indicating the bids received for a representative sample of the 1,749 PPPs implemented could have led to a more substantiated conclusion. A missed opportunity (as a side note, it is intriguing that a perceived issue of limited competition is raised by a profession which is dominated globally by the Big Four…)
Secondly the conclusion is made that PPP procurements are occasionally subject to considerable delays. Yes, it is recognised that PPP procurements take longer than traditional procurement because of the complexity of the arrangements and -when used- the competitive dialogue process. Extra time that is typically offset by a more effective project delivery, a more robust risk assessment and more innovative technical solutions. Obviously, there are cases where there are exceptional delays, and some may even be specifically related to PPP such as the financial crisis at the time or the need for parliamentary approval. Then again, are there not also numerous examples of exceptional delays in traditional procurement proceedings?
The most controversial conclusion is ECA’s observation that “most of the audited projects were affected by significant construction delays and cost overruns”. This is a flagrant neglect of the broad range of studies available demonstrating that on average PPP delivers projects more on time and within budget than traditionally procured projects. Widely acknowledged as one of the main motivators for using PPP. And ECA dares to counter these studies based on some anecdotical evidence? OK, PPP is no guarantee for success and there will always be exceptions to the rule in terms of cost overruns and delays though to qualify them as ‘widespread’ shortcomings (based on a review of 9 out of 1,749 projects) rather than empirically proven benefits is beyond comprehension.
Although the report suggests limited benefits arise from PPP it also concludes that “audited projects have shown good levels of service and maintenance and have the potential to keep these levels for the remaining project duration”. From a user perspective this may well be perceived as somewhat more than ‘limited’ benefits. In the end of the day the user requires a decent level of service and -again as confirmed by research- PPPs tends to deliver on average a higher service level when compared with conventional delivery schemes.
Finally, the report refers to the lagging traffic volumes. Indeed, a critical issue in many PPP projects around the world. However, the question is whether this specifically relates to PPP? Tolling is a cost recovery mechanism and not a delivery scheme. Governments can also opt for public toll roads as there are many around the world. The question is whether traffic estimates are more accurate for toll roads under a PPP regime than for public toll roads. One would tend to say yes because of the additional layer of due diligence from the lenders as to some extent indicated by the 2002 S&P Toll Roads review though further research is needed to confirm this hypothesis.
Overall the often-cited report tends to provide nothing more than some case studies of failed PPPs where some failures are not even closely related to the use of PPP though more to an inadequate preparation or the absent considerations of the risk profile of the respective projects. The recommendation to strengthen the capacity and the frameworks for implementing PPPs makes sense and is already being addressed and facilitated through among others the APMG’s Certified PPP Professional program. However, the report title is totally misleading and sends the wrong message to our already disturbed decision makers
The fact that we don’t do it right doesn’t mean that it isn’t right.