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Comparative analysis of ppp investments in wholesale markets in Poland and Ukraine1

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Fifth progress report Page 170

ANNEX 32

DELEGATION OF THE EUROPEAN UNION TO UKRAINE

MINISTRY OF AGRICULTURAL POLICY OF UKRAINE

“Implementation of Ukrainian’s Commitments under WTO and ENP Frameworks

in the Rural sector”

- Ukraine -

Comparative analysis of PPP investments in wholesale markets in Poland and Ukraine1

Wholesale Market, Gdansk, Poland

Comparative analysis of PPP investments in wholesale markets in Poland and Ukraine2

Renk Wholesale Market, Gdansk, Poland

Geographical location

Renk Wholesale Market is located between Gdansk and Gdynia cities in Poland, near to the Northern Sea, and the important haven of Gdansk. It is located right next to the E28 Motorway, Germany, the Capital Warsaw are easily accessible.

The location of the wholesale market meets all the general requirements of an over-regional market:

• central location of the Gdansk, Gdynia, Sopot agglomeration and to Northern Poland,

• location at the East- West and North- South transit communication route,

• convenient road and rail network in terms of national and foreign connections,

• direct connections with the basic road and sea transport routes via Gdynia and Gdańsk ports

• direct connections with airport in national and international routes.

Description

The idea was born in 1995, and the official launch of the project was March 1996, by the founder: Pomeranian Wholesale Agricultural Centre. (PWAC, key person was for 12 years, Mr Jacek Austen).

The market became operational in 1999; today trade goes on 23 hectares, including 28.000 square meters dedicated to trade indoor. There are three halls: one for flowers, one for fruit, vegetables and also flowers and one rented for warehouses.

Wholesale market in Gdansk was established within the state department program of the wholesale market construction. The program had two development phases.

First phase of construction

In the first stage it was scheduled to develop approx. 20 hectares and build complete road infrastructure providing access to the market though a network of public roads. It was agreed that the infrastructure and the related premises will make it possible to move all the entities which were operating on the market place in Gdansk and Gdynia before, in order to provide modern wholesale for the region, and above.

The newly-built food wholesale market was comparable in terms of standards and logistic solutions to the modern wholesale markets in western countries. Within the implemented program flower market hall of 5.000 square meters was built and equipped with all the technical devices that provide optimal conditions for the trade in those goods. Two halls were built, each of 10.000m sqm for vegetables, fruit and other food products. The halls were designed in order to adjust the premises to the changing conditions in a flexible way as per the development and concentration of wholesale trade. Some of the area was destined for the off-truck sale, which enables to retain the traditional form of trade existing in Poland and in other countries where there is a small consolidation of agricultural organization and substantial seasonal fragmentation of the sale of vegetables and fruit and flowers in bulk.

Through the construction of an office building, the wholesale market guarantees sufficient space for institutions that provide services and monitor the agricultural market and distribution of its produce. It was agreed that following the example of similar premises of other countries, the premises will include offices of the representatives of customs office, sanitary and epidemiological services, central standardization inspectorate, customs agencies, food trade agencies, bank, etc.

The company was registered in 1995. It was offered consultancy services from Know How Fund and the World Bank. It received a loan from the World Bank in amount of approx. 14 million Euro (approx. USD 19.9 M) guaranteed by the State Treasury. In 1998, after a long time of preparing the investment, the investment process began. This first phase of investment was fulfilled in 100% in a record time of 9 months as per the financial provisions. The facility was recognized by many experts closely connected to this sector, as one of the most advanced facility in Europe in any aspect.

Second phase

In the second phase of the market development the construction of the next premises were scheduled including the specialized hall for meat and fish trade, packing and sorting premises and warehouse for big distributors. The third stage comprises the equipment of the wholesale market infrastructure. Such big concentration of wholesale trade resulted in greater interest in this location on the part of

petrol stations, truck wash, air-conditioning service, shop and warehouse equipment, warehouse transport equipment servicing, etc. Despite the fact that the market met all the statutory standards, that the costs of lease were competitive compared to the prices of the illegal wholesale market places and the area of the market was 100% leased at the market opening, the market did not operate as per the scheduled provisions. The reason behind it was the lack of decisions of the political authorities and bodies responsible for observing the law on closing down the illegal market places or banning the wholesale trade and night work in this area. As a result, till today, ten years after opening of the facility, the market does not operate as per its destination. Only the flower market operates well but there is no trading place for new entities.

A decision was taken to close down the competitive market place offering the same goods through paying compensation to the entity that runs this illegal facility. However, such action was not possible in the case of two wholesale market places operating in this area. Therefore, the company has too little profit to pay the principal instalments to the World Bank. As a result the government pays the loan back to WB instead of the company.

Partners

Company name:

Pomeranian Wholesale Agricultural Centre (PWAC)

Present Shareholders:

  • Millennium Bank (approx. 38%)

  • Governmental Agencies (app. 49%) (ARP, ARMA)

  • Municipality of Gdansk (app. 3%)

  • Pomeranian Development Agency Company (app. 2.3%)

  • Company itself and private individuals (app. 7.7%)

Further partners contributing ever during implementation:

  • UK-based Know How Fund

  • World Bank (loan of 19.9 USD M, with state guarantee, loan is paid back by state today…)

  • Agricultural Property Agency (ARP) (this organization is providing the land of ~ 50 ha, nominal value, USD 5 M)

  • Agency for the Modernization and Restructuring of Agriculture (ARMA)

  • Polish government

  • Polish-English consortium for technical assistance in engineering and finance

  • Polish Company carrying out environmental impact assessment

Market infrastructure3

In total 33 hectares, of which - 23 hectares are operational. In May 2009, Poland’s largest heated flower wholesale hall opened.

Sales of flowers, decorative artifacts, horticultural products from inland and export, fruit, vegetables and further food products take place on about 28000 sqm indoor area.

Halls are heated, and equipped my mechanical air ventilation, with automatic air conditioner. Sales area has also running water, catering facilities, toilets, showers and social room for the workers. Professional routes and ramps are created to ease logistics.

The market works full season, 24/7

Wholesale market fees

Following prices apply at the Market: (1 EUR: 3.98 polish zloty(PLN), 1 PLN: 0.25 EUR)

Car entry: 3 PLN, monthly pass 60 PLN,

Truck until 0.8 carrying capacity: 3 PLN,

Trucks up to 2.5 t carrying capacity: 5 PLN, monthly pass 80 PLN

Over 2.5 t: 10 PLN monthly pass 160 PLN

Buses: 10 PLN

Tractors: 10 PLN

Agricultural tractors: 5 PLN

Outdoor place for sales, one day: 25 PLN

Indoor place for sales, one day: 60 PLN

One week indoor: 400 PLN

Outdoor one month: 350 PLN

Parking: approx 15-20 PLN/day

Problems

The main obstacle to the further development of the market is 2 competitive markets located in the Gdańsk-Gdynia region. For the moment the market is not able to repay the construction loans, which are repaid by the state that was the guarantor.

Coordination mechanisms and contractual arrangements

Public-private ownership (~55% public, ~45% private)

50 ha land owned formerly by State Agency ARP, apported to the present company, PWAC

The wholesale operates full year.

.

Build-operate-own (BOO) concession (ownership of built assets, and land property. The land donor state agency has to possess at least shares equivalent of nominal value of land, brought in by it.).

Nezhdanno Wholesale Market, Velyki Kopani, Ukraine4

Geographical location

Fruit and vegetable wholesale market “Nezhdanno” is located in the south-east of Kherson oblast in the village Velyki Kopani. The distance to Kherson is 25 km., to the border of Crimea oblast – 85 km. A railway goes through the village; there is a railway station and a railway junction. The village is located on the motor highway of international importance: E97 – Kherson-Dzhankoi-Novorossijsk-Sochi-Sukhumi-Batumi.

Description

Since 1980 on the territory of Velyki Kopani village there was a transfer base for vegetables and fruit that ensured the supply to recreation centres, boarding houses and camps along the Black sea coast in Kherson and Crimea regions. From 1990 a spontaneous fruit and vegetable market appeared in Velyki Kopani, so the location was not chosen by accident.

On June 6, 1996 a Limited liability company “Nezhdanno” was established to organize a wholesale market; the director was Negoy Fedor Fedorovich; legal address was: Kherson oblast, Tsyuryupinskiy rayon, village Vel.Kopany, 95 Lenin street, “Nezhdanno” Ltd. The market was officially registered as “Wholesale agricultural market”.

At the moment the “Kherson Vegetable Company” is in place of the old one, with the same director, ant it is now a privately owned LTD, with the address:75131, Kherson region, Tsurupynskyi rayon, Velyki Kopani, Okhremenka Str., 19. The profile of the company is export of fruit and vegetable production.

The wholesale market has a current capacity of 700– 1 000 trucks per day, bringing 500–3 000 tonnes of fruit and vegetables for trading. The Kopani market is located in an area of high growth potential, well known by regional producers and accessible to international traders from the Russian Federation, Belarus and the Baltic States.

The purpose of the market is to provide outlets for farmers to market their produce.

Improve price transmission and quality information from export and urban markets, leading to increase in domestic competitiveness and wider range of domestic produce. Concession arrangements offer incentives to the private sector to invest in agricultural infrastructure in the long term.

Although small in size, Velyky Kopani holds significant influence in the southern region of Ukraine. Despite the fact that relatively moderate volumes of fruits and vegetables pass through its market, Velyky Kopani market prices for fruits and vegetables are used as indicators for oblast prices as a whole.

Sources of income are as follows: US$2 to US$10 per truck (at average of 700 trucks per day, and six months per year, revenues equate to US$250 000 o US$1.2 million p.a.). Other sources were not mentioned by the owner, but are supposed that informal sources exist.

The market is loaded 20-25%.

Main products:

early cabbage (Kherson, Nikolaev, Odessa oblasts);

early cucumbers (Kherson, Nikolaev oblasts);

early tomatoes (Crimea, Kherson, Nikolaev oblasts);

planting material;

potatoes (Sumy, Rovno, Chernigov, Poltava oblasts).

Buyers of early fresh products are from Lugans, Kharkov, Donetsk, Kiev, Poltava oblasts.

Partners

The Wholesale Market, referred as PPP investment in international sources, today in practice operates as private enterprise. The land of the market is leased from the State of Ukraine, for 49 years.

Kherson Vegetable Company (100% private ownership)

State of Ukraine (owner of the rented land)

Market infrastructure and organization5

The total territory is 8,5 ha, trade area for automobiles – 6 ha, parking for trucks – 0,6 ha, covered trade area for meat and fish – 575 m2, administration buildings – 300 m2, package storage – 780 m2, administrative territory – 0,3 ha.

On the territory there are:

  • package storage;

  • garage for service and construction machinery (16 units);

  • laboratory to perform quality control of vegetables, fruit, meat and fish;

  • Privatbank branch;

  • weigh house – up to 30 tons;

  • cold storage – 640 tons;

  • analytical department (to track prices for all types of products three times a day).

  • administrative building, accounting office;

  • café, grocery stores.

There is a gas station and a service station across from the market.

The market works on the twenty-four hour basis twelve months a year. The highest sales volume is observed from May 15 till November 1.

Sellers:

owners of personal households (residents of 18 nearby villages);

farm enterprises from Kherson, Crimea, Nikolaev, Odessa, Zaporozhye oblasts;

large agricultural enterprises from Kherson, Crimea, Nikolaev, Odessa, Zaporozhye oblasts;

Buyers:

recreation centres, boarding houses and camps for children; processing enterprises; trading companies; traders.

Geography of clients:

Ukraine – 60% (all oblasts); Russia – 20%; Baltic states – 10%; Belarus – 10%.

Information on prices for fruit and vegetables at the wholesale market is collected daily by the staff member of Agrarian Marketing Project .

Maintenance staff at the market amounts to around 50 people: manager; controllers; accountants; drivers; loaders; security.

All input materials for fruit and vegetable production are sold on the territory of the market: seeds, fertilizers, plant protection means, plastic, working tools, boxes, packaging materials, etc.

Starting from March planting material is sold at the market: cabbage, tomatoes, peppers, cucumbers and also fruit tree saplings.

Prospects and problems6

Active construction is going on the territory of the market to improve the trade conditions.

Works are being completed on the territory of the parking lot for trucks (photo).

The market administration is planning in the future (no concrete arrangements are made however):

  • construction and purchase of a line to produce wooden packing boxes;

  • construction of cold storage for 2000 tons;

  • construction and purchase of a line to wash and pre-pack vegetables;

  • construction of a hotel for 50-70 people.

We would state here that all these investments are only “imagined”, if there would be donors for funding. The enterprise itself will not effect new investments.

It is very difficult to calculate daily turnover and the amount of cash assets, since payments are mostly done in cash and seldom upon official contracts with cashless settlement.

There is a need to establish an information centre to collect and accumulate information on demand and supply of produce in order to increase the efficiency of trade operations and track agreements.

Absence of financial support and lack of funds to implement planned construction of the line to produce packing boxes and the line to wash and pre-pack vegetables.

Reasons of PPP failure

Regulatory Framework

PPP law was rejected by the Ukraine in May 2009, which creates a major obstacle for PPP investments in the country which for the moment are impossible.

UPDATE:

On 1 July 2010 the Parliament of Ukraine has approved the Law of Ukraine "On Basic Principles of Relationships between the State and Private Partners" (the "Law"). The Law will enter into force after the signing thereof by the President and subsequent publishing.

The first draft of the Law was passed by the Parliament of Ukraine and annulled by a resolution of the Parliament of Ukraine on 9 October 2009. It had been intended that the law would guide public-private partnership in Ukraine and, amongst other things, allow state guarantees to be granted to private partners. However, this draft did not regulate specifics of such partnership and contradicted some norms and provisions of the Land Code.

Soon afterwards, however, the initially registered and subsequently annulled draft of the Law was considerably amended, tabled and registered as a new draft with the Parliament of Ukraine (on 16 October 2009).

The Law purports to regulate relations between the state and private partners. It identifies the main principles of contractually based public-private partnership along with a more effective use of state and municipal property. The Law also sets out mechanisms for attracting investments to contribute to the modernisation of industrial and social infrastructure of Ukraine.

The Law seems to be of a declarative nature and does not really regulate the issues connected with the relations between the public and private sectors. Thus, the Law provides for the main forms of implementation of the Public Private Partnership in Ukraine, among them are: the concession, the joint activity, the product sharing, i.e. the forms of agreements that are well regulated by another legislative acts. However, the Law provides for the possibility and establishes the procedure of the public procurement within the Public Private Partnership as well as the special regime of allocation and use of the land plots designated for PPP projects in Ukraine.

The Law also introduces the amendments to the Land Code of Ukraine, some effective laws and legislative act.

Personal ambition of owner

Mr Fedorovich does not want the wholesale to grow further, nor are significant investments seriously planned.

If the market income can benefit the persons in charge with the income which they find appropriate, than it depends on their professional ambitions to further develop. If there is no ambition to upgrade, then we cannot hope for changing situation.

Corruption

Corruption is one main reason against PPP investments; however I only received informal statements on this. There is a famous saying though: “It is not important what you know, all what county is who you know.

Coordination mechanisms and contractual arrangements

100 percent private ownership (owner-operator).

Land rented from state – 49-year lease with seasonal operation.

Imports sharing market space by the Russian Federation, Belarus and the Baltic States.

Build-operate-own (BOO) concession (ownership of built assets only).

49 years of land lease.

Lessons learnt from the examples of the Gdansk (PL) and Kopani (UKR) wholesale markets

As the main lesson, we consider the so called human factor, meaning that behind both cases we see a person, whose commitment is deciding early on the success of the investment. Without this commitment, even if other elements of the environment are enabling (like they were not in the case of Kopani), the investment will not remain a sustainable PPP. As we saw, however, the interest of high level and local politics, the local population, wholesalers, traders and investors all are essential for the long lasting and profitable partnership.

Still, a committed individual can balance other weaknesses, like in the Gdansk case, where for more then 10 years of the development we can find the same few persons responsible for the wholesale.

Below we mention some further lessons, as issues to consider in future PPP wholesale investments in the Eastern European and Central Asian region.

Improved marketing

Covered markets and trading centres, especially those that bring imported produce in proximity to domestic production, carry significant opportunity to improve competitiveness for both export and domestic urban markets. Farmers and traders can experience precisely which products, and what level of quality and packaging, is required to compete. For example, a notable effect in the Kopani wholesale market in the Ukraine has been the improvement in client-oriented production and packaging by domestic producers in response to exposure to foreign competition. Data on this impact for the Kopani project is not forthcoming, and the market does not operate any more in PPP structure but in Gdansk domestic traders reported a 25–30 percent premium on the price of domestic vegetable if washed and packaged in accordance with the same standards achieved by Dutch importers active in another wholesale facility in Poznan.

Price transmission

Wholesale markets and other trading centres bring the forces of comparative pricing to bear on agricultural inputs and sales, enhancing the prospect of farmers securing fairer deals than might be achieved by purchasing or selling through single traders. Further, more accurate pricing information and knowledge of the wider trends on the cost of agricultural inputs – fertilizers, seed, herbicides, etc. – provide farmers with greater confidence to make investments and improve productivity. There is currently a debate as to whether farmers need wholesale markets at all, given the expansion of vertically integrated distribution arrangements promoted by supermarkets and chain stores. This is however nothing but a work hypothesis. In many developing countries and Central and Eastern Europe, and in probably all least developed countries, the fragmented and cooperative nature of farmer groupings means that wholesale markets provide a valuable source of information on price and quality standards that improve competition. In particular, it has been noted that the high rates of urban growth in Asian developing countries, will continue and will create a need for both expanded and new wholesale markets, especially in the rapidly expanding ‘secondary’ cities in many countries.

Additional income from land development

A key constraint on development of the Gdansk Wholesale Market has been the reluctance of traders to move from the existing bazaars, because of the vested interests of individuals in the municipality (the flower market is functioning at only 30–35 percent capacity). As the Gdansk case illustrates, the demand risks associated with wholesale markets, and the opportunities for indirect revenues from land development, suggest a need for close attention to this aspect. If land ownership remains with the state or municipality, then the regulatory framework might be adapted to allow the on-leasing of land under the concession to other private parties, for example, through appropriate land-use rezoning. Care will need to be taken with the pricing of these lease arrangements so as not to contribute to criticism that private ownership or concessional development of government land used for wholesale markets is exploitative of the state. With high demand risks and not insignificant capital costs, the advantage of enabling land development and on-leasing or sale provides an important alternative source of revenue, which in turn may be used to reduce financing costs, rendering the project more attractive to private investors.

The lessons from PPPs for water, education and health infrastructure regard: more transparent procurement and competitive bidding processes; mechanisms for infrastructure beneficiaries and the wider public to have an input into the policy, technology and PPP options; and the private parties or operators building strong relationships with current and potential customers who may then be a source of support disputes with political leaders. Because infrastructure for agricultural development can be in part exclusionary (more so for irrigation, trading centres and agro processing facilities than roads or telecommunications), the politics of PPP can also be reversed. Instead of objecting to private companies benefiting from the financing of public services, the controversy is around whether the public sector should be subsidizing what are essentially private sector ventures, targeted at a minority of the public.

Considerations of PPP investments in agricultural market infrastructure development

In short, a PPP merges private sector entrepreneurial opportunism with development challenges on governments’ agendas. Engaging the private sector in agricultural infrastructure partnerships enables governments to expand the impact of programmes beyond their own limited financial resources and capacity constraints. Experience shows that when correctly designed and implemented, PPPs can reduce life-cycle costs, can be implemented faster, improve service quality, yield additional revenue streams, and benefit from better risk allocation. Thus, all partners have much to gain from a partnership approach.

To make good use of PPPs, public authorities must have the capacity to plan, specify, negotiate, manage and supervise effectively partnership contracts. This might require some skills upgrading to institutionalize the PPP process within the public sector and requires strong political will. Also, the establishment of a sound investment code and a basis in law for property rights, and contract dispute and settlement mechanisms is a pre-requisite. Recognizing the complementary roles that public and private sectors play opens up huge opportunities for improved joint agricultural infrastructure development.

Agriculture-oriented infrastructure provided under a PPP arrangement is essentially a form of targeted public good, in that it is non-exclusionary. However, by focusing on one or more aspects of agricultural development, it is invariably targeted at a discrete subsection of the population. Introducing private sector finance into this infrastructure provision may further restrict the range of the beneficiaries, with the service accessible only to a portion – possibly the more wealthy section – of the agricultural value chain. That is, those who can pay a user fee or tariff at a level sufficient to service the debt of the private party and its investors. To counter these exclusionary pressures, it is essential for PPPs to operate within a suitable regulatory framework, so that the wider public benefit is maximized, for example, performance-based contracts carrying a universal, or near universal, service obligation. Important regulatory considerations for infrastructure PPPs relevant to agricultural growth include:

  • transparency and accountability in regulatory decisions, to ensure public support an independence from vested interests;

  • open bidding and evaluation procedures for private service provision;

  • incentives for the provider to become increasingly efficient over time;

  • protecting customers against monopolistic abuse while ensuring the viability of investments and profits sufficient to support further network expansion, if this is policy;

  • whether there is need for an independent regulator, for example, if state-owned companies are effectively in competition with private operators;

  • a capability to undertake comparisons of private sector performance data over time.

One controversial area of regulation is whether or not to regulate informal, small-scale infrastructure providers, such as providers of subsidized irrigation equipment, or “last-mile” mobile telecommunications providers. If such providers are not monopolistic, then it may be that they do not need regulation, although their role in serving the poor could still be stimulated under some sort of licensing arrangement. However, small-scale vendors, if enjoying monopolies, can lead to inefficient and high-priced patterns of service provision. Drawing on experience with small-scale vendors in the water and sanitation sector, “light” regulatory options for formalizing small-scale infrastructure providers include:

  • voluntary frameworks and operating principles to improve quality, reliability and accountability that providers sign up to and use to aid their marketing;

  • performance requirements within the concession agreements or purchase agreements of local government authorities that require the main infrastructure providers to allow access to smaller-scale providers at reasonable cost, and to provide help in improving the quality and reliability of their services;

  • microfinance as an incentive for reaching quality and reliability standards; to smaller-scale providers at reasonable cost, and to provide help in improving the quality and reliability of their services;

  • development of associations of small-scale providers to spread good practices and strengthen negotiation and lobbying capabilities with local government authorities, utilities and regulators;

  • formal contractual agreements with small-scale providers to manage and operate mininetworks on conditions that both give formal recognition to informal vendors.

The transaction costs in developing the design of a PPP arrangement for infrastructure can be high. The longer the term of the arrangement, the higher the commercial risks, and the more likely it is that negotiations will be protracted owing to the need to, amongst others: put together a consortium of lenders (to spread risks); arrange third-party risk guarantors (to take on long-term credit risk and manage political risk); and calculate the level of state and donor subsidy (to offset low rural user fees). Because of this complexity, private project sponsors frequently elect to undertake more detailed feasibility studies and wider-ranging risk analysis to inform their decision-making, thus adding to the transaction costs.

These development costs are multiplied in the case of competitive bidding. If significant concessions or subsidies are involved, there will be pressure to put the project out to tender, with the costs of the private party foregone unless they win the bid. The alternative, where the private sector approaches a government body and unilaterally attempts to negotiate a PPP deal, carries its own risks and costs, not least with respect to the competition principle that companies or consultants involved in early conceptual design should not take part in subsequent tenders. The costs and risks of PPP project development are further elevated where the public entities lack the political autonomy or quality of advice to reach rapid decisions on the choice of private sector partner or joint venture.

There remains a general lack of capacity within ministries, utilities and local authorities to assess different PPP scenarios, and to determine which are best suited to a given situation and how to structure the financing and procurement. This is particularly the case in countries with strong decentralization programmes, where provision of infrastructure services is being transferred from central to sub-national levels. Sub-national authorities (local governments, public utilities) frequently lack capacity to fulfil this new role, because of weak policy frameworks, inadequate institutional capacity, evolving regulatory environments, thin local capital markets and weak credit worthiness.

Private financiers and developers have pointed out that transaction advisors provided by donors to assist public parties do not have the requisite practical experience in the sector. Where development finance institutions and multilateral or bilateral donors are involved directly (either on the subsidy side or as a financiers), this again can lead to protracted project development. These institutions invariably have long and complicated financial planning and due diligence procedures. In recognition of the wide range of challenges to project development in higher-risk PPP infrastructure projects, and the concern that this is discouraging the private sector from considering participation, governments and international donors offer various forms of project technical assistance to support these early stages, both for the private and public sector parties

Additional recommendations

Public institutions have to use their experience pro-actively to ensure that taxpayers and service users will not be excessively burdened by PPPs and to ensure greater transparency of the deals. It cannot be assumed that the higher cost of private financing, the long and expensive PPP preparation, and the need for the private sector to earn a profit will be offset by efficiency savings during the design, construction and operation of the facility. This is because the mechanism for ensuring that the private sector minimises its costs is the competitive tender, which in practice is not always very competitive, due to the frequency of only one or two consortia making bids and the risk of ‘deal creep’ bringing the costs up during the ‘preferred bidder’ stage. Many PPPs have not been sufficiently competitive in the tender stage and during the preferred bidder stage there has been no real threat that the preferred bidder will be excluded.

One of the most frequently made claims for PPPs is that they deliver on-time and on-budget compared to publicly procured projects. This claim is based on hidden or biased evidence. However, even if it turns out to be true it cannot alone justify the use of PPPs – a project can still be poor value for money or unaffordable even if it is built on time. Risk transfer has shown itself to be a particularly problematic area in CEE. Poor risk allocation has on the one hand led to contracts guaranteeing profits at the cost of taxpayers, and on the other hand it has sometimes led to disappointment for the concessionaire and subsequent attempts to extract income guarantees from the public sector. As it is not in the interest of public authorities for the PPP project to fail – both for financial and reputational reasons – the public sector is in a very weak position during any renegotiations and this may result in it taking on undue risks. Finally, the unfair accrual of refinancing gains to private sector investors in PPPs, often amounting to tens of millions of euros, has caused several scandals in Europe and needs to be seriously addressed in those CEE countries that are considering undertaking PPPs.

Given all the disadvantages of PPPs as defined, the number and type of projects for which they may bring real advantages is likely to be limited. CEE governments, financial institutions, think tanks and consultants need to take a step back and consider whether their promotion of PPPs in the region may be encouraging unaffordable spending, placing a large long-term burden on taxpayers, and crowding out alternative financing arrangements. The following recommendations aim to ensure that PPPs take place only where they are affordable and bring real benefits.

Considering the real danger of undertaking PPP projects which will impose a severe burden on public budgets in years to come, ceilings should be set on the total amount of future taxpayers’ money each ministry or local authority is permitted to commit for PPP projects per annum. These would need to be based on a thorough analysis of what is likely to be affordable, which should take into account all planned budget burdens as well as allowing for unforeseen events.

When a decision is due to be taken on whether to undertake a PPP, this must be done on a level playing field, with other options open. Governments, finance institutions and consultancy organizations must not imply or dictate that PPP is the only possibility for a certain project. Where public funding for the project would not be an option, it is not likely that PPP would be affordable either, and authorities should prioritise the most important projects, or scale down projects to a more affordable size.

On the institutional level, this means that procurement should be approached as an integrated topic including a range of public and private possibilities, i.e. public authorities need to set up not centres of PPP expertise but centres of procurement expertise in order to avoid a short-sighted focus on promoting PPPs where they may not be the best option. An affordability assessment for each project needs to be carried out and to be publicly available. This must include a full assessment of the risks for users, taxpayers, workers and the government, including if the project fails.

Draft PPP contracts must be published in order to allow suggestions for changes to limit fiscal risks before the contract is signed. In order to limit opportunities for corruption and inflation of projects, all tender documents, bids and contracts, including financial details, must be published. So far these have usually been regarded as commercially confidential, but if the public is to get good value for money then this practice must end.

Besides this, tender procedures must not only be carried out according to EU procurement rules but if there is only one bidder the procedure should be stopped, as there is an extremely low chance of obtaining value for money. If there is no evidence that a new tender would bring different results, the project should be redesigned.

Ceilings need to be set for the maximum cost changes allowed during the preferred bidder stage, whether the changes are a result of new specifications or not. No substantial changes should be made to the contract, and ‘substantial’ needs to be clearly defined either on the EU or national level. The public sector also needs to have a clear strategy and clear triggers for walking away from the negotiations if the private sector becomes too demanding in other areas such as risk transfer or the penalty system.

PPP contracts should always ensure that the public sector gains a minimum of 50 percent of any refinancing benefits, preferably with a ceiling for maximum gains by the private sector. The contract must include a clause allowing contract termination in the public interest in case of unforeseen circumstances.

Contracts must require compliance with environmental standards and labour standards.

Public authorities proposing a PPP must show how they will ensure that they have adequate capacity and funds to enforce compliance with performance standards.

If termination is to be taken seriously, the public partner needs to be aware of when it would be entitled to terminate the contract and must be prepared to use such powers. As part of its contract management procedures, the public sector should draw up and maintain contingency plans for contractor default, even when this is perceived to be unlikely.

Public authorities must carry out evaluations for all PPP projects, and these must be publicly available. This should happen twice: once when the initial investment has been completed and the service has begun to operate, and secondly, 4-6 years after operation has begun, in order to ensure that any problems can be minimised.

Finally we can conclude, that the PPPs in western Europe have some bad reputation, in Eastern Europe success of their greater part in doubtful and in Central Asia the mechanism is emerging. These, combined with the risk factors and vulnerable nature of agricultural investment projects should lead us to pay extra attention in the preparation of agro-infrastructure PPPs, meaning that serious financial and social feasibility studies should take place before every single investment, which examines the local circumstances. In those countries where no PPP law exists, these kind of structures are not recommended. Based on high level political commitment, qualified and experienced consultancy, which is flexible enough to make recommendations against PPPs if necessary, and high transparency of the investment projects, PPP is certainly a viable solution, and can fill financing gaps, which would be bottleneck of the greater agricultural infrastructure development programs. FAO, committed for the success of PPPs in EECA, will continue its work to pool experiences and know-how of agricultural PPPs, and keeps contributing to the development of market oriented agricultural infrastructure in the region.

Sources

  1. Lenihan, M. & Kray H. 2009. A Review of Public Service Delivery and Productive Partnerships in Central/South Europe (ECCU5) Agriculture. World Bank Document

  2. Gramzow, A. & Petrick, M. 2007.Stimulating cooperation among farmers in a post-socialist economy. Lessons from a public-private marketing partnership. IAMO

  3. FAO-AGS. 2006. Public-private Partnership for Rural Infrastructure (PowerPoint presentation)

  4. Press service of the Vice Prime Minister of Ukraine, Viktor Slauta. 2010. Government systematically works on growth prospects of agricultural sector. Press release

  5. Warner, M., Kahan D. & Lehel, Sz. 2008. Market-oriented agricultural infrastructure: appraisal of public-private partnerships. FAO-occasional paper

  6. Tanic, S., FAO. 2006. Enabling Environments for Agribusiness and Agro-industry Development in Easter Europe and Central Asia. Proceedings of FAO workshop

  7. Rolls, M., FAO. 2001. Review of Farm Management in Extension Programmes in Central and Easter European Countries. Working paper

  8. Marocchino, C., FAO-AGSF 2009. A guide to upgrading rural agricultural retail markets. working document

  9. Tracey-White J., FAO. 2003. Planning and Designing Rural Markets. FAO Marketing Extension Guide

  10. Tracey-White J., FAO. 2005. Rural–urban marketing linkages FAO Agricultural Services Bulletin

1 J. Przyk, H. Czapiewska, A. Michalik, personal communication 2009

2 J. Przyk, H. Czapiewska, A. Michalik, personal communication 2009

3 Personal communication with local wholesalers and retailers in Gdansk, 2009

4 R. Rozwadowski, I. Kravchenko, N. Domanska, personal communication 2009

5 Discussions with local wholesalers and retailers in Odessa, 2009

6 PPP workshop in Odessa, with representatives of the EU, Odessa county administration, and Ukrainian agricultural wholesalers, 2009

EuropeAid/126205/C/SER/UA (E1229C) April 2011

Implementation of Ukraine’s commitments under WTO and ENP WYG International Ltd

frameworks in the rural sector (Sector Wide Approach), Ukraine



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