EIB Papers Volume 13. n°1/2008 - European Investment Bank

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Strong legal and institutional frameworks are needed to curb excessive renegotiation. 140 Volume13 N°1 2008 EIB PAPERS In this context, public investment frameworks need to be strengthened to be conducive to successful PPPs. In most NMS, public investment planning is still not embedded in a medium- to long-term budget framework; a full-fledged framework would help investment planning and prioritization and facilitate the development of good PPPs. In addition, NMS also need to improve technical aspects of investment planning and evaluation: The experience indicates that tools for evaluating costs and benefits are often not applied appropriately. In some cases, cost benefit analysis and value for money assessments are carried out only after the decision to go ahead with the PPP project has been taken. Second, successful PPPs should be supported by a strong legal and institutional framework. Such a framework can help minimize political and regulatory risks for the private sector and thus increase the value for money the government can obtain. In particular, the legal framework should cover all major aspects of the PPP process and be conducive to private participation. Moreover, competitive bidding should be used to find the most efficient PPP concessionaire and minimize corruption. Furthermore, governments should develop the appropriate structures to manage PPPs. The institutional setup for PPPs may vary by country, but experience suggests that a central PPP unit, preferably at the Ministry of Finance, can serve as a useful vehicle to facilitate PPPs. The Ministry of Finance should act as a “gate keeper” to ensure that PPPs are consistent with broader macro-fiscal objectives, while a unit elsewhere in the government can handle PPP promotion functions. The institutional framework affects the quality and outcome of PPP projects. Given the complexities of large PPP projects, contracts are often incomplete, and therefore, many PPPs are subject to renegotiations. Guasch (2004) finds that most renegotiations are initiated by private firms and grant them more favourable outcomes (Table 11). For example, more than 60 percent of the renegotiations results in delay or reduction of the private firms’ obligations or cost pass-through. However, the institutional framework, such as the legal and regulatory setups, significantly affects the incidence of renegotiations. For example, 61 percent of renegotiations occur in the absence of a regulatory body, while only 17 percent occur when there is one in place. Therefore, a solid institutional framework provides an ex-ante incentive for better PPP contracts to deliver the expected results. The NMS have made progress in developing appropriate legal and institutional frameworks but still face considerable challenges. A PPP policy framework has been established in a number of NMS through government resolution (e.g., Czech Republic and Latvia) or publication of strategy papers (e.g., Bulgaria). In others, however, a general PPP policy framework is lacking. Even in countries with an appropriate PPP policy framework, the existence of such a framework does not necessarily imply an appropriate legal framework. Similarly, the progresses in developing a legal framework for PPPs vary in NMS. Some countries reached international standards by regulating PPPs through contract, public procurement, and other civil legislations with no specific PPP/concession Law (e.g., Czech Republic, Estonia, and Slovenia). In contrast, a few countries that have enacted a specific PPP law still lack sufficient details in core areas to meet international standards (e.g., Hungary and Croatia). 15 Furthermore, the legal and institutional framework in many NMS is not conducive to the competitive selection of the concessionaire and does not regulate the gate-keeping role of the Ministry of Finance to address fiscal risks in the PPPs. 15 Core areas, as defined in the EBRD (2005), include (i) general policy framework, (ii) general concession legal framework, (iii) definitions and scope of the concession law, (iv) selection of the concessionaire, (v) project agreement, (vi) security and support issues, and (vii) settlement of disputes and applicable law.
Table 11. Institutional framework and concession renegotiations In percent in all renegotiations Selected renegotiation outcome In percent in all renegotiations Selected institutional factors Regulation criteria Investment requirements (regulate by means) 70 Delays on investment obligation targets 69 Performance indicators (regulate by objectives) 18 Reduction in investment obligations 62 Regulatory framework Extension of concession period 38 Price cap 42 Tariff increases 62 59 Rate of return 13 Increase of cost components with automatic pass-through to tariffs Existence of regulatory body In existence 17 Adjustment of fee payment to government Not in existence 61 favorable to operator 31 Impact of legal framework unfavorable to operator 17 Embedded in law 17 Changes in asset-capital base Embedded in decree 28 favorable to operator 46 Embedded in contract 40 unfavorable to operator 22 Source: Guasch (2004) EIB PAPERS Volume13 N°1 2008 141
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EIB Papers • Volume 13 • No1
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Preface This year the European Inve
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Infrastructure investment, growth a
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Government investment is not the sa
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A common feature for the new member
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