Analysing Public Private Partnership - Master Thesis Msc In Finance And International Business

DEF I N I T I ON Public private partnership PPP, in simple terms, is a form of private-sector involvement PSI2 in which a private partner brings its skills, capital, commercial innovatio

D EPAR T MENT O F BU SIN ESS AD MIN ISTR AT IO N

BU SIN ESS AN D SO C IAL SC IEN C ES

AAR H U S U N IVER SIT Y

Analysing Public-Private Partnership

Master thesis MSc in Finance and International Business

Author: Jurgita Jakutyte Student ID: JJ91185 Academic supervisor: Jingkun Li

September, 2012

TABL E OF CONT E NT S

Introduction 5

Problem statement 6

Structure 7

Delimitations 9

1 Literature review 11

1.1 Definition 11

1.2 Types of PPPs 16

1.3 Reasons for implementing PPPs 19

1.4 value for money 21

1.5 Advantages and disadvantages of PPP 26

1.6 Criticism of PPPs 29

2 Analysis 32

2.1 The project 32

2.2 Alternatives for project implementation 32

2.3 Identifying an appropriate PPP scheme 34

2.3.1 Overview of Lithuania’s legal PPP environment 34

2.3.2 Choosing a PPP scheme 38

2.4 Cost and benefit analysis 39

2.4.1 Assumptions overview 40

2.4.2 Data overview 46

2.4.3 Financial analysis 48

2.4.4 Socio-economic analysis 49

2.4.5 Sensitivity analysis 52

2.4.6 Overview and the discussion of the CBA results 56

2.5 Factors not covered by CBA 58

3 Conclusions 63

4 Bibliography 66

5 Appendices 73

CONT E NT OF FIGURES

Figure 1 European PPP trend, 1990-2009 6

Figure 2 Cash flows in PPP and traditional procurement mode 16

Figure 3 Structure of Public Sector Comparator 22

Figure 4 Optimal risk allocation point 23

Figure 5 Model for risk allocation 24

Figure 6 Identifying Value for Money 26

Figure 7 PPP scheme under economic activity 37

Figure 8 PPP scheme under social activities 38

Figure 9 Sensitivity analysis – FNPV on investment 53

Figure 10 Sensitivity analysis – FNPV on capital 54

Figure 11 Sensitivity analysis - Socio-economic results 55

CONT E NT OF TABL E S Table 1 Distribution of investment costs, % 46

Table 2 Financial return on the investment costs –PPP and traditional procurement approach 48

Table 3 The structure of financing in PPP and traditional procurement approach 48 Table 4 Financial return on capital – PPP and traditional procurement approach 49 Table 5 Assumptions for the socio-economic analysis 51

Table 6 Net benefits of non-market impact 51

Table 7 Socio-economic analysis results 52

Table 8 Sensitivity analysis – change in demand 55

LIST OF ABBRE V IAT IONS

EPEC European Public-Private Partnership Expertise Centre

EIB European Investment Bank

ENPV Economic net present value of investment

EU15 European Union of 15 member states

FNPV/C Financial Net Present Value of the Investment

FNPV/K Financial Net Present Value of Capital

FRR/C Financial Rate of Return of the Investment

FRR/K Financial Rate of Return of Capital

IMF International Monetary Fund

SPV Special Purpose Vehicle

STPR Social Time Preference Rate

tkm tonne-kilometre

VAT Value Added Tax

VFM Value for Money

WACC Weighted Average Cost of Capital

INT RODUCT ION

PPP (3P) – public-private partnership – a concept used widely in the public procurement that lacks both clarity and united definition (Meidute & Paliulis, 2011) The concept has no clear boundaries for distinguishing what kind of private and public partnership is assumed to be a form of PPP or a form of a traditional procurement This results in some confusion, both in the academic literature, as well as within the international experiences Nevertheless, PPP, in general terms, could be defined as a long term contractual relationship between a public and private sectors, which is usually characterised by having features such as bundling

of functions, exchange of resources, shared responsibility, risks and rewards, and

is arranged with the aim to provide a public service/asset

PPP is not a new phenomenon even though it is perceived as such due to its recent popularity Growing interest is a result of changing attitudes as well as expectations of the society towards the government and public services (Grimsey

& Lewis, 2004) Today society expects to see the government more as a governor and regulator rather than the direct provider of public services In addition, it requires infrastructure of better quality, more efficient provision of public services,

as well as better use of public money Considering all this, PPPs are seen as a procurement mode that may satisfy these changing needs Nevertheless, PPPs are not a ‘miracle’ solution (European Commission, 2003; Harris, 2004; Meidute & Paliulis, 2011) to the problems of the conventional procurement; they are complex and expensive and, as a result, only certain projects qualify for the use of public-private partnerships

The figure below shows the trend of growing interest in the use of PPP within Europe for the period of 1990 – 2009 It is important to note that between 1990 and

2004 from all PPP projects more than half were arranged in the United Kingdom Only recently the trend has changed and other European countries have experienced increased use of PPPs (EIB, 2010)

Figure 1 European PPP trend, 1990-2009

Source: Adopted from EIB (2010, p 7)

Even though, the numbers are increasing, the portion of PPP projects in the overall public procurement is still not that significant (Appendix 1) For example, in the United Kingdom, the biggest producer of PPP projects, public private partnerships represent only 10-13% of all public infrastructure projects (Deloitte Research, 2006)

Having this in mind, the question rises, why PPPs represent such a small fraction

of all public projects if they deliver benefits such as greater efficiency, timely delivery of public projects, better quality of service provision, etc.? In order to try to answer this, the paper examines the concept of public-private partnership and reviews the advantages, disadvantages, and the reasons why PPPs are implemented In addition, the case study is perf ormed where the conventional procurement approach is compared to public-private partnership The paper investigates what PPPs are, what they deliver and when they prevail over the conventional procurement approach

PROBL E M ST AT E ME NT

The aim of the paper is to analyse the concept of public private partnership and its suitability for a procurement of a public project The objectives of the thesis are achieved by reviewing the relevant literature and performing an analysis on the

case study by examining the different procurement approaches available for the project: PPP and conventional procurement The analysis will answer which procurement approach should be the appropriate one for the case study concerned

ST RUCT URE

The paper is divided into two main parts The thesis is structured in the way that from the very beginning an understanding of the concept of PPP could be developed, which is used for the second part of the thesis, where the analysis is performed

The first part of the thesis provides an extensive discussion on the theoretical foundations of public private partnerships It focuses on the discussion of the relevant concepts, characteristics, types, advantages and disadvantages of the PPP The first part of the paper answers questions, such as: what PPPs are, why such a procurement mode is practiced and how it differs from other procurement approaches, such as conventional procurement and privatisation

The second part of the thesis is the analysis of the case study It is divided into two main sections The first section includes an overview of the project’s background and its adequacy for a PPP It further includes a review of the Lithuanian environment regarding PPP law and provides a discussion on the suitable PPP form for the infrastructure project concerned The second section of part two consists of the cost and benefit analysis, which involves the following steps:

 Data overview (identification of costs and benefits, assumptions);

In addition, the second part of the thesis is expanded with a discussion on other factors that are not covered by CBA, however, factors that are relevant when a PPP approach is considered

The last part of the paper concludes the discussion on public-private partnerships and the analysis performed

The paper is written by following the deductive, in other words, a “top-down” approach The paper begins with the general overview of the theory and then narrows down to the analysis of a specific case study In addition, the paper is based on the secondary sources

The first part of the paper emphasises on the literature review The literature review is based on the European Commission, EPEC, Hong Kong Efficient unit, Victoria Partnership guidance on PPPs, reports of OECD, IMF, PwC, Deloitte, and views provided by a variety of PPP researchers – such as Grimsey and Lewis, Akintoye, Hodge, etc The articles, books and reports used in the paper were accessed through a variety of research databases, such as OECD iLibrary, Science Direct, Business Source Complete, etc

The second part of the paper emphasises on analysing a particular public-private partnership project The analysis is carried out by performing a cost-benefits analysis (CBA) while employing guidance of the European Commission: “Guide to Cost Benefit Analysis of Investment projects: Structural Funds, Cohesion Fund and Instrument for Pre-Accession” (2008) and “Guide to cost benefit analysis of investment projects” (2002) Some additional insights for the application of CBA have been adopted from OECD (2006), Boardman, Greenberg, and Vining (2011) and Campbell and Brown (2003)

Cost and benefit analysis is a technique used to identify, measure and compare benefits and costs of an investment project and it is used to assist the decision maker in choosing the most beneficial project from the alternatives available

(Campbell & Brown, 2003) In this paper cost and benefit analysis is used as a tool

to determine the main differences between procuring a project through a traditional procurement mode and a PPP It should be noted that the CBA used in this paper does not try to compare different project implementation alternatives1 The idea of the analysis is to compare the same project financed by public and private funds Therefore, it could be said that the aim the cost and benefit analysis performed in this paper is to understand whether the inclusion of the private partner in the public procurement influences the investment decision rule – whether to proceed with the project or abandon it instead

The addition to CBA is an overview of other factors that are not incorporated in the aforementioned analysis, which, however, are influential when the choice of procurement approach is considered The discussion on these factors is performed

in accordance to the theory overview of the first part of the thesis

DEL IMIT AT IONS

The concept of public-private partnership encompasses a variety of different partnerships and relationships, which are not covered fully in the thesis The paper focuses on one particular PPP infrastructure approach, within which the topic is analysed

What concerns the second part of the paper, due to time constraints and size limitations, the CBA is performed only to the level that is enough to identify the most important points regarding the differences between procuring a project through PPP and conventional procurement approach In addition, due to the complexity and extent of the project, the analysis has been simplified and only most important impacts taken into account As a result, there is possibility for some divergence between results presented in the paper and the reality Further development on the CBA could be made if more specific studies were conducted: for example, a detailed market demand analysis or more specific environmental

1

The paper does not intend to compare the usual cost and benefit analysis’ alternatives: “Business as usual”,

“Do minimum”, “Do something”, “Do something else” (European Commission, 2008)

studies examining the CO2 emission, air pollution, etc Moreover, due to the lack of relevant information, which is a consequence of the absence of the analogues projects in Lithuania, most of the assumptions are based on the foreign countries’ experience, especially of the more developed Western economies, which might be highly inaccurate when situation in Lithuania is considered With addition to this, it

is a nature of CBA to use a variety of assumptions, which might sometimes appear

to be imprecise, in particularly, when a long term project is analysed

1 LIT E RAT URE REV IE W

1.1 DEF I N I T I ON

Public private partnership (PPP), in simple terms, is a form of private-sector involvement (PSI)2 in which a private partner brings its skills, capital, commercial innovation into the provision of the services the government is responsible for It should be noted, however, that such an explanation covers only a part of this broad concept It is widely acknowledged within the relevant literature that there is no clear definition for PPP which would cover all aspects of different relationships that these partnerships encompass (Daube, Vollrath, & Alfen, 2007; Hodge & Greve, 2007; OECD, 2008) and at the same time restricting it to a more narrow description As Weihe (2006) argues, the concept of PPP is nebulous – it “allows for great variance across parameters such as time, closeness of cooperation, types

of products/services, costs, complexity, level of institutionalization as well as number of actors involved”, as a result, nearly any type of the relationships that include both the private and the public sector (whether it is a service contract or a joint venture) may be called a public-private partnership (PwC, 2005) In order to make some distinction between the variety of definitions present, Weihe (2006) attempted to classify them into 5 categories: local regeneration, policy, infrastructure3, development and governance approaches The local regeneration and the policy approaches are similar due to perceiving PPP concept as a very wide definition that covers changes in policies of environment, economic renewal, development, and institutional set up The difference between the two is that the local regeneration approach focuses on the local level while policy approach – on the national The third approach – the infrastructure approach – covers the cooperation of private and public sector in order to create and maintain

In order to define infrastructure, we use the definition provided by Grimsey and Lewis (2004, p 20):

“investment in infrastructure on some definitions is said to provide ’basic services to industry and households ’,

‘key inputs into the economy and ‘a crucial input to economic activity and growth’” Infrastructure approach in PPP does not cover such infrastructure as “coal or steel or motor vehicles”, it concerns infrastructure like roads, motorways, ports, airports, telecommunication, prisons, schools, etc

infrastructure, as well as deal with the financial and legal aspects of such projects The fourth approach – the development approach – concentrates on the development of infrastructure in developing countries where corruption, social deprivation, global disasters are present This approach includes many forms of cooperation between the public and private sectors such as strategic or entrepreneurial partnerships The last approach is the governance approach which does not specify any context or policy as it emphasizes on organizational and management side, as well as new ways of cooperation and governing For the purpose of this thesis, the concept of PPP will be limited to the infrastructure approach

Even thought the concept has been narrowed down, there are still many definitions explaining what a PPP is under the approach chosen For example, the European Commission (2004, p 3) defines PPPs as “forms of cooperation between public authorities and the world of business which aim to ensure the funding, construction, renovation, management or maintenance of an infrastructure or the provision of a service”; whereas OECD (2008, p 12) defines it as “an arrangement between the government and one or more private partners (which may include the operators and the financers) according to which the private partners deliver the service in such a manner that the service delivery objectives of the government are aligned with the profit objectives of the private partners and where the effectiveness of the alignment depends on a sufficient transfer of risk to the private partners” Further examples of definition include the one proposed by IMF (2006, p 1) that explains the concept as the “arrangements where the private sector supplies infrastructure assets and infrastructure-based services that traditionally have been provided by the government”, and EIB (2004, p 2) that views PPP as a relationship of the two sectors which has an aim “of introducing private sector resources and/or expertise in order to help provide and deliver public sector assets and services…<it is> used to describe a wide variety of working arrangements from loose, informal and strategic partnerships, to design build finance and operate (DBFO) type service contracts and formal joint venture companies” An overview of the PPP definitions under the variety of international organizations draws some

conclusions on the basic set of features that characterise PPP under the infrastructure approach:

 long term contractual arrangement between the public and private sector;

 functions are bundled;

 responsibility for the provision of the services is shared;

 resources are shared:

o the private sector brings in capital, skills, experience, commercial innovation, etc.;

o the public sector delivers skills, political authority, access to publicly run services, assets, etc.;

 risks and rewards are shared

In order to understand the PPP concept fully, it is also useful to distinguish it from the traditional procurement mode The reason for this is that the boundaries between the two modes are ambiguous In order to remove this ambiguity the main differences between the two modes are identified and explained

First of all, the main differentiating point between PPP and traditional procurement

is that in PPPs risks are shared between the private and public partners whereas in

a conventional procurement most of the risks are retained by the government4(European Commission, 2005; OECD, 2008) This is in line with the functions included in the contracts In a PPP different tasks are bundled together and, as a result, private partner takes responsibility for the whole package of the associated risks In the conventional procurement, on the other hand, the government usually purchases a single function from a private partner and, as a result, the private partner is responsible only for the risks associated with this function Consequently,

in the traditional procurement the private partner has no incentives to incorporate decisions that may favour future operations as after completion of the task, the private partner is no longer involved in the operations of the asset/service For

4

Because there is no single clear definition for PPP, the most important factor that distinguishes the procurement mode and the type of PPP used is the amount of risk and responsibility transferred to the private partner (European Commission, 2005, p 1)

instance, if the government proposed a tender to deliver a package of services, such as design, build and maintain a facility, the private partner involved would be incentivized from the very beginning to make decision that could minimize the future risks associated with cost overruns Such an example has been identified in the international experience by Grimsey and Lewis (2004, p 135), where an innovative decision to construct 45-degrees windowsills in UK hospital was proposed with an intention to save future cleaning costs It is hardly likely that such

a decision would have been made in the conventional procurement case A government would propose a tender to design a facility with input requirements already specified The specific requirements can be seen as a frame from the private partner’s point of view as these requirements restrict private partner to innovate and come up with more efficient solutions The aim of the private partner responsible for a design function is to design a facility while incorporating all the details required and within the budget stated The review of function bundling and risk allocation in both procurement cases help to determine what defines a PPP and a traditional procurement approach

Secondly, the two modes differ between each other when the function specification

is considered What this means is that, in a PPP, government states what it expects from the private partner in output terms, whereas in the conventional procurement it does that through input specification Considering the aforementioned example, in a PPP case, government might require a hospital to

be big enough to accommodate 300 people and to be kept in a good condition by clarifying what good condition means, whereas in the conventional procurement option, a government would request a certain size, with a certain number of rooms, with specific materials used, etc In the PPP case, private partner is free to use its skills and innovation in order to provide the outputs required in a most efficient way, whereas the latter case does not allow such a freedom as a private sector is restricted to the requirements specified

Thirdly, in a PPP approach, returns to the private partner are linked to the performance of their functions, i.e the provision of outputs specified by the

government, whereas in a conventional procurement approach, private partner is remunerated for the completion of a specific function This contributes to the level

of incentives attached to the private partner: in a PPP case, if a private partner does not operate as expected, it might incur some sort of penalties (Harris, 2004),

if it operates better than expected, it may be awarded by, for example, receiving higher portion of additional profits In a traditional procurement case, on the other hand, private partner is not awarded for an extra value added to the task it was responsible for, however, it might be penalized f or the uncompleted function Considering all this, the private partner in a traditional procurement is not encouraged to provide more than the government requested for, which means some possible gains might be overlooked

Fourthly, the relationships involved in both of the procurement modes differ (OECD, 2008) In the traditional procurement, in order to deliver the services and infrastructure required, the government acts as an intermediary – on the one side it deals with direct users of the services, taxpayers, and financial markets, and on the other side – with other private companies The idea behind such a relationship structure is that the government gathers financing directly from the users of the service, taxpayers and financial markets, and uses it to remunerate the other side – the private companies for the capital goods provided to deliver the public service and develope the infrastructure If the project is handled through a public-private partnership, the intermediary role of the government is decreased – public authority deals with the taxpayers and the single private operator only The role of the private operator, on the other hand, is enhanced: private operator becomes responsible for the intermediary role – it collects financing from the direct users of the service and financial markets and remunerates the other side – other private companies for the capital goods provided If the private operator acts in accordance to the performance standard specified, in some of the cases5, it receives additional payment from the government (Maski & Tirole, 2008) The relationship structures of the two schemes are represented in the Appendix 2

5

The private operator may be remunerated through: the collection of direct user charges only, through the government payment only, or through a combination of both (Grimsey & Lewis, 2004)

Finally, a crucial advantage of PPP from a government’s point of view is the financing In a PPP case capital is provided by the private partner This means that the government does not incur immediate cash outflow due to the project, which might be an impossible task when restricted public funds are considered In a traditional procurement mode, on the other hand, the government finances the project from its own funds, that is it incurs large investment costs instantly Figure 2 represents the comparison between the two financing options in the public procurement

Figure 2 Cash flows in PPP and traditional procurement mode

Source: Akbiyikli, Eaton, and Turner (2006, p 71)

All in all, the two modes differ between each other when the following factors are considered: amount of risks transferred and tasks bundled, the way requirements for the service delivery are specified, characteristics of private partners returns, relationship between the parties involved and the financing flows Nevertheless, it

is clear that sometimes these differences may be too ambiguous or too subjecitve

to state clearly which procurement approach is adopted

common characteristics, such as: being long term, involving risk transfer, shared responsibility, resources and rewards

In general, private partner involvement arrangements in PPPs differ between each other depending on the level of responsibilities and risks transferred to the private partner (Amekudzi & Morallos, 2008) The responsibilities concerned include activities such as: designing, building, financing, maintaining, operating, and owning the facilities The allocation of risks will be discussed in more detail later in the paper; however, what matters at this point is the amount of risks transferred and retained by the government

Most common forms in the infrastructure approaches are:

 Turnkey procurement, which includes: BOT (build-operate-transfer), BBO (buy-build-operate), etc (European Commission, 2003, 2005);

 DBFO (Design-Build-Finance-Operate), which includes: DBOM build-operate-maintain), BOOT (build-own-operate-transfer), concessions, etc (Deloitte Research, 2006; European Commission, 2005; IMF, 2004) Turnkey procurement6 is described as the scheme where the private partner takes

(design-on the resp(design-onsibility to design, c(design-onstruct and operate the asset, whereas the public sector retains the responsibility for the financial risks involved Using this procurement mode, public sector sets the quality outputs required and by doing so

it ensures that the private sector brings the necessary efficiency gains as well as the asset is maintained to the standards expected This mode of procurement is used in water and waste projects as it ensures incentivized management and maintenance of the asset through the bundling of functions passed on to the private partner (European Commission, 2005)

DBFO scheme7 is characterized by involving a private partner with responsibilities (financing, designing, building, constructing, and operating the asset/service) attached to it Public sector’s role is to set the specific output requirements for the

private partner, whereas private partner’s role is to fulfil those requirements The DBFO schemes are usually long term and involve bundling of functions in order to provide private partners with the necessary incentives for it to operate in the most efficient and innovative way These schemes involve performance linked payment mechanisms with an aim to ensure the presence of motivation for the private partner to operate on its full capacity The idea behind such schemes is that the private partner designs, builds, operates and maintains the asset for the agreed term At the end of this term, the asset is either transferred back to the government

or is left under the ownership of the private partner – depending on the specific structure of the scheme chosen For example, one of the most common schemes under DBFO is concession Concession is described as a PPP scheme, where exclusive rights to operate an asset or provide certain services are granted to a private company (usually a SPV8), which in return has to design, build, finance and operate the asset/service for the time agreed upon These exclusive rights usually permit the private partners to collect the revenues from the direct users of the asset/service Concessionaires typically own the rights to the asset/service during the time of concession, however, at the end of this period the ownership of the asset/service is usually transferred back to the public sector (Deloitte Research, 2006; European Commission, 2005; IMF, 2006) Literature overview shows that concession is usually assumed to be a form of PPP (Deloitte Research, 2006; European Commission, 2004; IMF, 2006; Ng, Xie, Cheung, & Jefferies, 2007; PwC, 2005), however, OECD (2008) argues the opposite First of all, it states, that the amount of risk transferred differs in PPPs and concessions: concessions involve higher level of risks allocated to the private partner, compared to other forms of PPPs Secondly, it is usual for concessionaires to collect revenues from the direct users of the asset/service and, according to OECD, this feature differentiates concession from other PPP forms As a result, OECD concludes that concessions should not be treated as a PPP Nevertheless, in this paper concession is considered as a form of PPP

The international experience shows that most of the time DBFO schemes are used

in transport sector for building highways, bridges, railways, whereas concessions are chosen for mobile phone services, toll roads or provision of municipal water The similarities between the turnkey procurement and DBFO schemes are that the activities involved are same in both of the schemes, differing only in the amount of functions involved in the arrangements What differentiates the two schemes is that

in the first one the majority of risks remains within the public sector, whereas in the latter – risks are shared between the partners, allowing for the possibility to transfer the optimal amount of risks to the private partner

1.3 RE AS ON S F OR I M PL EM EN T I NG PPPS

The main objective of procuring a public project through a PPP mechanism is to achieve value for money (VFM) (Grimsey & Lewis, 2004; Harris, 2004; New South Wales Government; Quiggin, 2004; Shaoul, 2005) which as Grimsey and Lewis (2005, p 347) argue is “the optimum combination of whole life cycle costs, risks, completion time and quality in order to meet public requirements” This definition assents to the one implied by the European Commission (2003, p 55) which identifies a set of factors that determine value for money: life cycle costs, allocation

of risks, time required to implement a project, quality of a service, and ability to generate additional revenues Following this, a general principal used to determine whether a project should be implemented through a PPP or a traditional procurement is to evaluate which procurement mode ensures lower life cycle costs, better allocation of risks, quicker implementation, higher quality and additional profits In other words, additional value for money represents additional efficiency gains – delivering or maintaining the same service or asset in a more cost efficient

or a more qualitative way than it would have been if the government retained the full responsibility for delivering/maintaining service/asset concerned (EIB, 2004, p 4; Meidute & Paliulis, 2011; Nisar, 2006) EIB (2004) argues that the critical aspect

in order to reach value for money is the ability to share risks and rewards appropriately OECD (2008) confirms this view recognizing that main reasons for

PPP establishment are the appropriate risk allocation and value for money gains9 Grimsey and Lewis (2005, p 347), however, imply that the value for money gains can only be achieved if the following conditions are present: a competitive environment, optimal risk allocation and if the comparison between the financing options is handled in a “fair, realistic and comprehensive” way Furthermore, when questioning PPP’s ability to deliver additional gains, one should consider the qualitative benefits of PPPs – whether they are achievable and whether they really provide the benefits expected It is essential therefore to check whether the private partner is capable of bringing in skills that the government lacks and whether it has the expertise and know-how necessary to operate more efficiently compared to the government (PwC, 2005)

According to the literature review, further reasons that lie behind the use of PPP as

a procurement mode differ between countries depending on the environment present For example, the main aim of a PPP at the early stage of its development

in the United Kingdom was to finance the public infrastructure projects (Grimsey & Lewis, 2004; IMF, 2006; Meidute & Paliulis, 2011) The issue at that time consisted

of a growing need for public infrastructure development (as it also is the case in Hong Kong (Cheung, Chan, & Kajewski, 2009)) and a lack of available public funds

to finance this need As a result, a new initiative took place – Private Finance Initiative (PFI) – with the purpose to provide additional funds for public infrastructure projects On the other hand, countries like Australia do not have such an issue They are capable of financing projects by themselves, however, they still choose to involve the private sector for the possibility of achieving additional value (Cheung et al., 2009) Moreover, Hong Kong and Australia involve

a private partner into the procurement of public services with the aim to ensure a better quality of services This, on the other hand, does not seem to be the prioritized reason for the PPP development in the United Kingdom, which

9

The gains associated with the inclusion of the private partner are based on the assumptio n that the private partner has more to offer than the public entity could realize by itself - it is assumed that the private partner will bring more innovative and cost efficient solutions in addition to a better management Nevertheless, caution should be taken here that the mere inclusion of the private partner will not be sufficient to generate value for money required (OECD, 2008, p 18)

emphasizes the point that reasons to implement PPP depend on the circumstances surrounding countries’ economic and political environment

In many of the countries the choice for PPPs, however, is due to financial reasons (such as lack of public funds and restricted public investment) This reason is amplified when “a tight fiscal environment following the development of European Monetary Union” (EIB, 2004, p 4) is considered as due to this European countries experience difficulties in organizing large investment sums to finance public infrastructure projects from the public funds only

All in all, in theory, the main reason to develop PPPs lies behind the concept of value for money, creating additional benefits due to private partner’s expertise, know-how, ability to operate efficiently and generate additional revenues Despite the theoretical foundations, it is evident that PPPs are also often used in cases when there is a lack of public funds for the growing need for public infrastructure

1.4 V AL U E F OR M ON EY

The concept of value for money is ambiguous and in order to understand it better,

it is worth analysing the estimation procedure for it When estimating the value for money that a partnership creates, governments have to choose between four methodologies: CBA of public and private partner proposals, PSC-PPP comparison before the tender, PSC-PPP comparison after the bidding process, and identification of value for money through the competitive bidding process (Grimsey

& Lewis, 2005; Sarmento, 2010) The literature review shows that the calculation of PSC (public sector comparator) and comparison of it with the PPP option before the tender is the most commonly used method The purpose of public sector comparator is to verify that value for money is generated (Harris, 2004; Quiggin, 2004) and in order to do this “the hypothetical risk-adjusted cost if a project were to

be financed, owned and implemented by the government” (Partnerships Victoria,

2001, p 6) should be calculated The calculation of such costs is done by estimating four elements: raw PSC, competitive neutrality, transferable and retained risks, all of which are represented in the figure below:

Figure 3 Structure of Public Sector Comparator

Source: Partnerships Victoria (2001, p 6)

To begin with, the first component – raw PSC – includes the calculation of project’s base costs as if the government would procure the project through the conventional method It includes identifying and calculating project’s direct (capital, maintenance, operating costs) and indirect costs (overheads, administrative costs)

as well as any revenues incurred (Amekudzi & Morallos, 2008) The next component – competitive neutrality – involves adjusting the cash flows in order to remove any competitive advantages or disadvantages that the government may have over the private sector (Amekudzi & Morallos, 2008; Partnerships Victoria, 2001) The advantages and disadvantages concerned may be due to differ ent aspects of the taxing system applicable to the public and private sectors For example, land and income tax rates may differ as government authority may receive exemption whereas bidder may not In addition, competitive neutrality adjustments may rise due to differing regulatory requirements for the partners concerned The third and fourth elements of PSC calculation concern the estimation of transferrable and retainable risks, where risks are identified, allocated and priced The price of risks transferred to the private partner should be included

in PSC value Transferrable risk element together with retained risk element ideally should ensure the optimal allocation of risks between the partners involved in the project

The allocation and valuation of project’s risks is inherent in the value for money concept (European Commission, 2003; Grimsey & Lewis, 2004; Nisar, 2006;

Sarmento, 2010) The aim of the risk transfer is to transfer only those risks that the private partner could offset in a most efficient and least costly way(Grimsey & Lewis, 2004; Harris, 2004; Nisar, 2006) Risk allocation produces highest value for money once the optimal risk transfer point is identified (Figure 4): transferring too much or too little risks results in either procuring an inefficient project or procuring a project with excess costs incurred by the government (for example, if risks are transferred to the private partner that it does not have control over or cannot control it at least-cost, then the private partner will require higher premium for these additional risks assumed (Hodge, 2004)), consequently, producing lower value for money (Amekudzi & Morallos, 2008)

Figure 4 Optimal risk allocation point

Source: Partnerships Victoria (2001, p 52)

Unfortunately, there is no universal solution regarding risks allocation for every single project, however, there is a general agreement on how different risks should

be allocated To begin with, risks in general are allocated to different categories, such as, for example, proposed by OECD (2008): legal and political risks in addition to the commercial ones Categories are differentiated on the basis of who takes the responsibility for the risks concerned – private partner or the government authority For example, construction, supply and demand side risks lie under the commercial risk category (market risk, project risk and internal risk) as they are handled better by the private partner, whereas legal and political risks are assumed

to be handled better by the government Other categorization is proposed by Li, Akintoye, and Hardcastle (2001), who distribute risks into three levels: macro, meso and micro Macro level covers risks outside the project – environmental, political, legal risks that are concerned with national or industry level Meso level

risks emerge within the project’s implementation phase – design, construction, operation Finally, the micro level risks concern risks that appear between the partners involved, they rest on the idea that both of the parties have different incentives and objectives, and therefore, risks due to power struggle, differences in working methods and environment between the partners may emerge Furthermore, Grimsey and Lewis (2004) argue for more detailed risk categorisation – they divide risks into nine categories that are suitable for the infrastructure approach: technical, construction, operating, revenue, financial, force majeure, regulatory/political, environmental and project default risks This distribution is similar to the one proposed by Gray (2004), IMF (2004) and the European Commission (2005)

Finding the most optimal risk allocation point requires identifying what risk is handled best by which party As mentioned above, there is no one optimal risk allocation solution that fits every specific project, however, some general guidance

is present in the literature on PPPs (Bing, Akintoye, Edwards, & Hardcastle, 2005; European Commission, 2003; Grimsey & Lewis, 2004; OECD, 2008; Quiggin, 2004) For example, if Harris (2004) risk allocation model was considered, the risks would be assigned accordingly:

Figure 5 Model for risk allocation

assigned to the private partner The reason for that is that the private partner receives most of these risks implicitly with the responsibilities passed on to the private partner (Harris, 2004) When, for example, DBFO is concerned, the responsibilities of the private partner include designing, building, financing and operating the asset, all of these tasks include associated risks, and by contractually agreeing to handle these tasks, the private partner, consequently, agrees to handle the risks concerned (Akintoye, Beck, & Hardcastle, 2003) The risks that are retained by the government authority are risks that the private partner has no influence over while the government does (Nisar, 2006) For example, the discriminatory regulatory risk – government might decide to change certain regulations that may influence the success of the private partner In order to keep private partner safe from such possible modifications, the government has to take responsibility for the consequences of such certain change Risks under the shared risk group are those that cannot be controlled at least cost or in the best way by neither of the party, for example, inflation, exchange and interest rate risks (Akintoye et al., 2003) An example of a more detailed risk allocation matrix, proposed by Chan, Yeung, Yu, Wang, and Ke (2011), is presented in the Appendix

4

After identifying and allocating the risks, the next step is to place a value on them There are three factors determining the price of the risk – probability of the risk occurring, consequence of the risk and the contingent factor10 The value of the transferable risk equals the contingent amount that the government would pay to the private partner if a risk occurred under the conventional procurement approach (Amekudzi & Morallos, 2008; Hodge, 2004)

Four elements: raw PSC, competitive neutrality, transferable risks as well as retained risks, produces the value of PSC, which is then compared to the value proposed by the private partner – estimate of PPP value The value for money is represented in net present value terms as a difference between the expected costs

of PSC and PPP (Amekudzi & Morallos, 2008), as shown in the figure below:

10

Value of risk = consequence * probability of occurrence + contingency factor (Partnerships Victoria, 2001)

Figure 6 Identifying Value for Money

Source: Amekudzi and Morallos (2008, p 121)

1.5 AD V AN T AG ES AN D D I S AD V AN T AG ES OF PPP

As it has already been reviewed, the appropriately constructed PPPs entail the advantage of delivering better value for money compared to the traditional procurement approach Delivering projects on time and on budget set (Meidute & Paliulis, 2011) are two of the most important advantages that are hidden under the concept of value for money As study conducted by UK’s National Audit Office (2003) showed, from all conventionally procured projects, 70% were delivered late and 73% with costs exceeding the initial budget (data of 1999), whereas only 22%

of PFI projects were late and only 24% delivered project in excess of the budget (data of 2002) The reason for such a difference lies behind the risks transferred in line with additional responsibility and accountability attached to the private partner

in the case of PPP, what incentivizes the private partner to operate in the most efficient way In addition, due to the long term characteristics of the partnerships, partners involved tend to act in a more cooperative way to each other in this case creating additional synergy benefits Private partner manages complex financial arrangements as well as highly technical tasks more efficiently by using its innovative skills, on the other hand – the public sector preferably controls the legal system, regulation and policies As a result, a combination of the leading features

of both of the partners produces a higher value (Harris, 2004)

The other advantage of PPPs lies behind the construction of the proposal to procure a public project Government constructs PPP proposals that focus more on outputs rather than inputs As a result, such mindset encourages government to perform a thorough discussion on which services should be provided, what standards should be expected, and what is the aim of the service provided/asset developed Such a detailed discussion on service provision or asset development requires a detailed analysis of the project which in some of the cases may hinder the government from moving ahead if the project becomes inadequate In addition, such kind of initial discussions encourage the government to think about the project with long term strategic goals in mind rather than focus on short term objectives Furthermore, PPP’s ability to spread the costs of large investments over the lifetime of the asset is seen as an attractive advantage for the public sector This eases the current debt of the government sector as it does not have to incur large cash outflows immediately It follows, that the government can get projects financed even though in reality there are no public funds available This advantage could be considered from two points of view: first – large investment costs are spread out, and second – private funds are considered as the new financing opportunities for the government (Meidute & Paliulis, 2011) On the other hand, this advantage should be considered with caution as sometimes the government might

be incentivized to prove better value for money for a PPP project than it actually is just to guarantee the financing of the project

Finally, from the private partner’s point of view, PPPs deliver opportunity for the private sector to get involved in the new markets (telecommunication, municipal water systems, energy, etc.) that otherwise would be closed for the private sector’s participation In addition to this, the private partner involved in the new markets has

a support of the government, which may facilitate gathering the funds required

On the other hand, one of the main disadvantages of PPPs is large bidding and contractual costs, which refer both to the government and the private partner Large bidding costs of the PPP projects act as a rejecting force for the private parties as they are unwilling to invest heavily in the bidding process just to be

rejected later What concerns government, large preparation costs consist of feasibility studies, lawyers, etc Moreover, PPP projects are highly complicated Usually, they involve more than two parties: public, private and banking sectors, and all of these parties have their own contradicting aims In order to construct a unified agreement, a lot of time and capital needs to be invested on complex negotiations

Furthermore, PPPs are said to deliver benefits because they transfer a significant amount of risks to the private partner Nevertheless, it should be kept in mind that even though most of the risks are transferred to the private partner, the final entity that is responsible for providing services to the public is the government As a matter of fact, if the private partner goes bankrupt, solely the government has to deal with the consequences and try to find other expedients how to keep delivering the service to the public This implies that even though the risks are contractually transferred to the private partner, in practice, government retains a large portion of them in case of the private partner’s failure

Moreover, in a PPP agreement, government bounds itself to a single private partner for a long term period and it agrees today for services/assets that will be in use in further future There is a certain amount of risk concerning the future consumers’ need for the specific service The idea behind the risks concerned is that the partnership may end up delivering services that are no longer required by the public As a result, the partnership will appear to be less valuable than initially expected

Finally, PPPs work well only for specific projects, which are complex and require specific private partner’s know-how, skills, and experience Therefore, advantages that are attached to PPPs are attained only if certain project characteristics are met, whereas if the project is simple, executing it trough a PPP implies higher preparation costs, and as a result, lower value for money

Considering all of the above, the main idea behind the PPP option is to have a project intricate enough that its complexity could justify additional preparation and

negotiation costs Developing a project through a PPP usually ensures additional benefits such as implementing the project on time and on budget Nevertheless, these benefits should be considered while keeping in mind the risks involved in having the long term agreement between private and public sector s for a certain service provision: who can reassure that there will still be a need for some kind of service in, for example, 30 years?

1.6 CR I T I C I SM OF PPPS

Even though the majority of the international institutions seem to favour the PPP option (EC, UK Treasury, OECD, IMF), some of the researchers see PPPs as a language game in the politics – PPP is regarded as another way of privatizing a service/asset (Hodge & Greve, 2007) This point of view has been neglected by many other researchers who represent arguments proving that PPPs differ from the privatization (Grimsey & Lewis, 2004; Harris, 2004; Hong Kong Efficiency Unit, 2008; OECD, 2008) One of the first differences identified is the sale/transfer concerned PPP involves government granting a right to the private party to develop and provide certain services/assets for a period of time, whereas privatization, in general terms, involves the sale of the asset This assents to the amount of risks transferred In PPP case, the amount transferred differs on the type of PPP chosen Concession is the mode of PPP that involves the largest amount of risks transferred to the private partner; however, it still does not encompass the transfer of all risks On the other hand, privatization includes the sale of the full package, which means the transfer of all associated risks In this case, government is left with no direct responsibility for the service provided/asset developed, whereas in a PPP case, government is the one that retains the initial control and responsibility for the service/asset (Harris, 2004) If the private partner goes bankrupt, the service/asset is transferred back to the government If the private partner does not operate to the standard required, the government has a right to intervene and punish the private partner All in all, it is true that privatization and PPP share some similarities, but the idea of PPP is that it shares some superior features of the privatization as well as of the conventional procurement

mode – as Grimsey and Lewis (2004) argue: PPP fills in the missing gap between privatization and the traditional procurement approach

Other critiques concentrate on the idea that the government should be fully responsible for the services provided as this is the role of the government and not the private sector However, as Harris (2004, p 3) argues, the provision of public services (such as free education, transportation or health) by the government is

“comparatively recent development” So the question rises whether it is the actual provision of the services or is it the regulation and control of the service provision (what kind of services to deliver, what kind of standard should be kept, what policy

to follow, etc.) that is the role of the government? As Harris (2004) concludes the role of the government is to ensure that a policy is being adopted If delivering the policy through the parties that are able to do that in the best possible way while additionally creating value for money to the public means that the private partner should be involved, then the advantages of private partner’s efficiency and innovative skills should be utilized

Further critique concerns the view that PPPs are a ‘trendy’ politics This means that countries might favour PPPs over the conventional procurement due to the lack of public funds available Owing to this, the government is left with a choice not between a PPP and a conventional procurement project but with a choice between

a project and no project at all as a government is unable to finance the project from its own funds (Robinson, 2000; Shaoul, 2005) The problem of such a preference for PPPs is that there is a high degree of possibility for approval of projects that do not generate better value for money but are accepted for the financial resources only – getting a project procured while having debt off government’s balance sheet (Maski & Tirole, 2008) In addition to this, as value of PPPs are most of the times assessed by using PSC, problems appear when hypothetical risk-adjusted nature

of the model is considered The PSC depends highly on the assumptions employed (Amekudzi & Morallos, 2008), one of the most important one being the rate used to discount the cash flows of the PSC Furthermore, when risks allocation is performed, it is criticized that not all of the risks may be identified and

valued (Amekudzi & Morallos, 2008; OECD, 2008; Shaoul, 2005), thus leading to inaccurate PSC estimate As OECD (2008) argues some of the risks may be left out and neither of the party initially agrees to take responsibility for it, however, once the risk evolves, it is the government and the public that have to bear the consequences and not the private partner, leaving some element of value for money out of the initial estimate Considering all this, the value for money estimate may be easily adjusted in order to make the PPP proposal more attractive, which is seen as a problem when the only reason for PPP project implementation is the lack

of public funds

Moreover, it has been noted that an advantage of PPP is its ability to spread out the huge initial investment costs throughout the years of the lifetime of the asset This means that the government avoids large investments today and is able to incur them later on in smaller amounts However, who may guarantee that the government with increasing number of PPPs will be capable of financing these payments in later years? Will it pass this contingent liability to the future taxpayers (Harris, 2004)? In addition, who can be reassured that the same service/infrastructure will be necessary in, for example, 30 years? In addition, will the taxpayers be happy for paying taxes for the services that are unnecessary anymore? These questions are especially relevant to the cases of PPPs where the government contracts to pay availability payments for the services provided by the private partner

Overall, PPPs attract some significant critiques, however, it should be noted that PPPs are not a magic solution for the conventional procurement issues The true experiences of PPPs have not been observed yet as it takes time to acknowledge the full impact of each PPP, however, the initial stages of the PPP and the theoretical foundations allow PPPs to be considered as a possible way to bring on additional efficiency gains to the public sector

2 AN AL YS IS

2.1 TH E PR OJ EC T

In the last decades the advantages of having a developed inland waterway in Lithuania were forgotten The politicians focused more on developing the road and rail rather than the inland waterway network This is understandable as the potential for Lithuanian biggest river (Nemunas) to become domestically or an internationally important part of the transport network is far more complicated compared to the road or rail network On the other hand, due to Lithuania’s geographic position and increasing global emphasis on the environmentally friendly modes of transportation, inland waterways are becoming a solution to many of the European environment targets set11 As a result, the interest to encourage the development of Lithuanian waterway is growing and one of the first steps is to develop a wharf in the centre of Lithuania (Appendix 5) The aim of the wharf is to stimulate the freight transportation in Lithuanian inland waterway network by creating opportunity to accommodate barges transporting containers

2.2 AL T ER N AT I VES F OR PR OJ EC T I M PL EM ENT AT I ON

The traditional procurement approach for the delivery of public services and facilities has been practised in Lithuania for decades already The new rising trend, however, is the use of public-private partnerships Despite the fact that PPPs may bring additional value for money, the PPP option is not always the best solution to the provision of the public service or good In order to assess whether PPP option should be considered for the wharf’s project, the following circumstances, identified

by the Ministry of Municipal Affairs (1999) and adopted to this particular project, should be reviewed:

11 For example, European Commission’s White Paper has noted that the GHGs emission should be decreased

by 80-95% below 1990 levels, from which at least 60% decrease should be achieved in the transport sector by 2050; by 2030 the transport sector’s GHGs emission should be lowered to 20% below the 2008 level In addition, freight transportation shift to other modes is advocated: the target has been set to transfer the road freight to other transportation modes – rail or waterborne – when the transportation distance exceeds 300km

by at least 30% by the year of 2030, and by 50% by the year of 2050 (European Commission, 2011, pp 3, 9)

1 Does the government have enough know-how or financial resources to consider the project on its own?

2 Is there a potential for the private partner to provide the public service faster and in a better quality than the government would do on its own?

3 Is there a competitive environment for potential tender of a project?

4 Can the output of the project be identified easily? Can the performance of the private partner be measured easily?

5 Does the project require innovative skills?

The wharf’s project is very specific and the government authority lacks the skills and know-how required to operate the wharf effectively As a result, due to the expertise and experience of the private sector in the field concerned, the inclusion

of the private partner may bring additional value Furthermore, additional value can

be enhanced by delivering the project faster than in the case of the government The experience of PPP projects around the world prove that PPPs most of the times deliver the projects on time, whereas in the conventional procurement mode, the delivery is often delayed12 Moreover, the output of the wharf can be identified and measured easily, and as a result, monitoring private partner’s performance should not be too problematic The idea behind PPP is that only the outputs of the project are specified, and the private partner has all the freedom it needs for innovative decision making that could make the project more efficient Following this, it should be concluded that the PPP option is worth considering and, as a result, the paper analyses the following procurement options:

1 Traditional procurement approach, where government takes a full responsibility for the project and finances, designs, builds, operates and owns it;

12

Study performed by Flyvbjerg, Holm, and Buhl (2002) proved that costs in the conventional procurement approach in 90% of transportation infrastructure projects were underestimated – actual costs exceeded the planned budget on average by 28% Another study conducted by UK’s National Audit Office (2003) found that from all conventional procurement approach projects arranged, 70% were delivered late and 73% with costs exceeding the initial budget (1999 data), whereas only 22% of PFI projects were late and only 24% delivered project in excess of the budget

2 PPP approach, where the responsibility of the project delivery is shared between the private partner and the government, and where it is the private partner that finances, designs, builds and operates the wharf

Which of the two options delivers better value requires a detailed analysis, which is presented in the following sections

2.3 ID EN T I F Y I NG AN APPR OP R I AT E PPP SC H EM E

In order to determine which PPP scheme should be the appropriate one for the project concerned, first of all, the overview of possible PPP forms in Lithuania is reviewed

2.3.1 OVER VI EW OF LI T H U AN I A’S L EG AL PPP EN VI R ON M EN T

Currently Lithuania has no one single legal act determining all existing forms of public-private partnerships, their characteristics, etc (Meidute & Paliulis, 2011) Nevertheless, some forms of PPPs are covered by Lithuanian laws, such as the Law on Management, Use and Disposal of State and Municipal Authorities’ Property, the Law on Concessions, the Law on Investment The problem with these laws, however, is that some of them do not fully cover the regulations necessary and therefore, are insufficient (Meidute & Paliulis, 2011)

In Lithuania PPP environment is not yet developed Some of the interest has been identified, however, it is far away from what, for example, United Kingdom or Australia has already achieved As Meidute and Paliulis (2011, p 262) note "there are virtually no PPP projects implemented at a national level that would cover some sector of importance for the society and where the public sector would be represented by central authorities” Nevertheless, Lithuania is improving its PPP environment and as of today Lithuanian law provides two classifications of public-private partnerships: institutional and contractual partnerships

IN S T IT U T IO N A L P A R T N E R S H IP

Institutional partnership is a PPP mode when functions of a state or municipal authority are granted to a joint stock company or a limited liability company, which ownership is shared between the state or municipal authority and the private partner The characteristics describing the nature of this PPP form are determined

in the Law on management, use and disposal of state and municipal authorities’ property(Seimas of the Republic of Lithuania, 2012c, article 2, paragraph 12)

The main requirement for establishing an institutional partnership is the exchange

of resources between each of the party involved, i.e the state or municipal government invests its property in exchange for acquiring the authorized capital in either the newly established joint stock or a limited liability company or in a company which is increasing its share capital The acquired authorized capital should provide the state or municipal government (or both of them together) with more than 50 percent of the vote

CO N T R A C T U A L P A R T N E R S H I P

In general terms, it could be defined as cooperation between the public and private parties on the basis of the contractual agreement The contractual partnership can assume the form of a concession or public and private parties’ partnership

To begin with the concession, the characteristics describing the nature of this PPP form are determined in the Law on Concessions (Seimas of the Republic of

Lithuania, 2012a) Concession is an engagement of a concessionaire (private party

involved in the concession agreement), in accordance to the concession agreement and the conditions laid down by the awarding authority, in economic-commercial activities related to infrastructure design, construction, extension, renewal, modification, repair, management, use and (or) maintenance, as well as the provision of public service, management and (or) use of state, municipal property (including the operation of natural resources), when the concessionaire assumes all or most of the risks in addition to the rights and obligations associated

with an activity awarded under the specific concession agreement Concessionaire‘s remuneration for handling the activity granted consists of:

1 The right to engage in this particular activity in addition to the income generated from such an activity; or

2 The right to engage in this particular activity in addition to the income generated from such an activity together with the payment made by the awarding authority, which is subject to the risks assumed

According to the concession agreement, the concessionaire is allowed to operate certain economic-commercial activity, which is related to infrastructure development or the provision of public service in the following areas: water management, waste management, railway lines and networks, road transport infrastructure, health care system, port and wharf’s infrastructure, etc for a period

of time no longer than 25 years The property that could be transferred to the concessionaire for the use or management purposes is the property belonging to the state or municipal government in addition to the property which exclusively belongs to the state under the Constitution

The main point differentiating concessions from other contractual partnerships is that revenue can be collected from the direct users of the public service or infrastructure managed under the concession agreement

According to the recommendations For PPP feasibility study preparation provided

by the Central Project Management Agency (CPVA), concession mode is classified under the economic activity, which includes services of general economic interest (CPVA, p 20) The aim of the economic activity is to create an open and competitive internal market Public-private partnership for the economic activity can

be arranged when the activity concerned is of economic nature, irrespective whether it is under the responsibility of the government or the private party Under such activities, users pay for the services directly to the service provider – in this case, private party PPP scheme under economic activity is presented in the Figure

7

Figure 7 PPP scheme under economic activity

Source: CPVA (p 21)

The other mode of the contractual partnership is the public and private parties’ partnership The characteristics describing the nature of these particular

partnerships are determined in the Law on Investment (Seimas of the Republic of

Lithuania, 2012b) Partnership is a mode of PPP in which a private party invests in the activity that the government is responsible for and the corresponding infrastructure (which is owned by the government) and operates within it according

to the rules defined in the Law on Investment The government is responsible for remunerating the private party for the operations handled

According to the public and private parties’ partnership, the right to operate a certain activity can be granted to the private partner, which is related to the design, construction, reconstruction, repair, renovation, management, operation and maintenance of infrastructure and other property that government transfers to the private party, in addition to the provision of public services in the following areas: transport, education, health and social care, culture and other areas determined by the state authorities During the time of the partnership the property can be transferred to the private partner for the operations defined in the partnership agreement, however, after the duration of the partnership, the whole property has

to be returned to the government: the one transferred to the private partner at the start of the partnership period in addition to all the new property created during the time of the partnership

The partnership is arranged only when it provides an effective implementation of the state functions, public interest and public needs and it cannot be shorter than 3 years and no longer than 25 years

According to CPVA, the public and private parties’ partnership is classified under

the social activity, which covers all non-economic activities Some examples of social activities under PPPs include schools, prisons, health security, and various social services In this PPP mode, users do not pay directly for the services It is the responsibility of the government to allocate public funds in order to receive the services concerned PPP scheme under social activities is illustrated in Figure 8

Figure 8 PPP scheme under social activities

in the most efficient way, whereas the private business has it all In the institutional partnership, the day-to-day operation management is in the hands of both parties involved as the government has at least half of the votes As this is not the aim of the government authority in this particular case, the institutional partnership mode

as an adequate PPP form for the project has been rejected

The other PPP mode is the contractual partnership, which consists of concession (economic activity) and partnership (social activity) Partnership under the social activity has been rejected due to its differing goals and circumstances regarding the payment mechanism First of all, these partnerships are developed in order to implement projects of non-economic nature Secondly, under the scheme agreed

on, the users of the wharf will have to pay for the services directly, whereas in the partnership the government remunerates the private party for the services delivered

Finally, the last PPP form – concession, has been considered as the most suitable PPP form due to the following reasons:

1 The wharf’s business is an economic activity, irrespective whether the wharf operates in the hands of the government or of the private partner;

2 Economic-commercial activity of the project is identified in the Law on Concessions as an activity related to infrastructure development – building port and wharf’s infrastructure;

3 The payment to the private partner consist of the right granted to engage in wharf’s business, the income generated from direct user payments as well

as the payment made by the government authority in exchange for the risks assumed

2.4 COST AN D BEN EF I T AN AL Y SI S

The next section of the paper represents the cost and benefit analysis carried out

on the project In this paper the project is analysed by c omparing the two alternatives, i.e implementing a project through a traditional procurement and a PPP approach The CBA will begin from the assumptions and data overview, followed by the financial, socio-economic and sensitivity analysis Finally, the results of the analysis will be reviewed and the main question – which procurement mode generates higher welfare – will be discussed

2.4.1 ASSU M PT I ON S OVER VI E W

TIME H O R IZ O N

The project is assumed to take a time horizon of 25 years The decision regarding the length of the project is made in line with the recommendations provided by the European Commission (2008) for the port development projects as well as according to Lithuanian Law on Concessions where the maximum period of time is set to 25 years

ST A N D IN G

In order to assess and allocate the costs and benefits generated by the project, it is important to understand whose costs and benefits count, in other words, CBA requires the identification of who has standing (Boardman et al., 2011) With respect to the project analysed, the chosen point of view is the national perspective The reason for this is that the wharf is of a national importance and it has effect not only on a certain region within the country, but it has influence on the whole economy of Lithuania and its development

PR IC E L E V E L

Identification and monetization of costs and benefits relevant to the project concerned, first of all, require some assumptions regarding inflation and relative price changes The costs and benefits should be valued in the same comparable way throughout the years of the project, therefore, it is important to define the relevant components The choice for projecting the costs and benefits is between using nominal and real values (Boardman et al., 2011) From one point of view, the inflation could be incorporated into the calculations of costs and benefits This would require the estimation of expected future inflation rates for the next 25 years However, as the Belli, Anderson, Barnum, Dixon, and Tan (2001, p 42) note, predicting the rate of inflation is “a difficult, if not impossible task” As a result, the inflation is usually netted out, i.e the costs and benefits are valued in real terms OECD (2006, p 44) proposes using the real terms and valuing all costs and