Managing Complex PPP Infrastructure Projects in Belgium and the Netherlands

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Managing Complex PPP
Infrastructure Projects in
Belgium and the
Netherlands
Ciska Servais & Dieter Veestraeten
Benelux Infrastructure Forum 2016, Amsterdam

27/03/2017 1
Introduction
Session 1: How to Deal with Governments in a
PPP?
Session 2: The Impact of Local Stakeholder
Resistance on Infrastructure Projects
Session 3: Cultural Differences – a Comparison
between Belgium and the Netherlands
Session 4: Guidelines for a Successful PPP

Introduction
 Infrastructure gap in Europe
 Necessity to improve public infrastructure
 Condition for economic growth
 EU Governments have limited financial resources and face
European restrictions on raising additional debt (ESA 2010)
 Increasing gap between the cost of infrastructure works and
resources available
 Key question: how to deliver cost-efficient investment?
=> Public Private Partnerships (PPPs) are growing element of
public sector procurement across Europe
27/03/2017 2

Introduction
 Features of a typical PPP
 Long term partnership between government and private
partner(s)
 Arrangements where the private sector supplies infrastructure
assets and services that traditionally have been provided by the
government (IMF, 2004)
 Use of a special purpose vehicle (SPV)
 Clear task and risk allocation
 Various assets and types:
− building and operating hospitals, schools, prisons, roads, bridges and
tunnels, light rail networks, air traffic control systems, and water and
sanitation plants
− DB(F), DBM, DBFM or DBFO
27/03/2017 3

Introduction
 Beware of ESA 2010
 Excessive deficit procedure of Maastricht Treaty: public debt
ratio of max. 60% of GDP and deficit of max. 3% of GDP
 European system of accounts (ESA) aims to gather reliable
and comparable statistics on the debt and deficit position of
Member States
 ESA 2010 is reference framework as of September 2014
(legally binding)
 Contains rules for statistical treatment of PPP
 Recent guide of Eurostat on statistical treatment of PPP
(September 2016)
27/03/2017 4

Introduction
 Advantages
 PPP makes infrastructure projects cost efficient and affordable
 PPP maximises the use of private sector skills
 Injection of private capital
 Off balance sheet (ESA 2010 neutral)
− Case: Oosterweel connection Antwerp
 For the private sector, PPPs present business opportunities in
areas from which it was in many cases previously excluded
27/03/2017 5

Introduction
 Disadvantages
 Loss of management control by public sector
 PPP procurement can be lengthy and costly
 Private sector has higher cost of finance compared to public
sector
 PPPs are long-term relatively inflexible structures
27/03/2017 6

Introduction
 Typical PPP structure
27/03/2017 7

Session 1: How to Deal with
Governments in a PPP
27/03/2017 8

1. Government as Stakeholder or Regulator
2. Government as a Risk Factor
3. Guidelines for Risk Management
27/03/2017 9

1. Government as a Stakeholder vs Government as a
Regulator
 Conflict of interest?
 Local government vs regional or federal government
− Members of same political party on different levels may take
different positions!
− Institutional due diligence: coordination of views by public
stakeholders
 Government as regulator:
− Granting permits
− Assessing complaints / environmental reports
− Courts: legal procedures
27/03/2017 10

2. Government as a Risk Factor
 PPP
− more risk for the private party (traditional public procurement:
more risk for the public party)
− ESA2010
 Recurring risks:
− Financial risk
− Legal risk
− Political risk
− Organisational risk
− Technical risk
 Often a combination
27/03/2017 11

2.1 Financial Risk
 Insufficient financial means of the public party, often caused
by wrong persuasive information re costs, income and risks
 Higher/lower use of the infrastructure than initially estimated
 Case: Liefkenshoektunnel (Belgium)
− toll tunnel between Antwerp and Beveren under the River Schelde
− continuation of Highway R2, the ring motorway surrounding the
city and harbour of Antwerp ; the second of three sequential road
tunnels running under the river and port installations
− constructed between 1987 and 1991, and opened on 10 July 1991
− 1993 : legal proceedings
− 1995: settlement + buy out = Government now owns SPV
Liefkenshoektunnel
27/03/2017 12

27/03/2017 13
2.1 Financial Risk
 Case: Diabolo railway connection (Belgium)

 The Diabolo project created a new railway line serving Brussels
National Airport.
 DBFM structure
 SPV Diabolo will maintain and rent the infrastructure to Infrabel
for 35 years
 Successful PPP but…
 Overestimation of revenues
 Revenues: (increased) surcharge to be paid by travellers
27/03/2017 14

2.2 Legal Risk
 Administrative and legal procedures
− Contestation of permits by third parties
 Suspension or annulation of permits by courts
− Contestation of selection of PPP partner by competitors
 Lack of an adequate legal framework
− E.g. Belgian law restricts the creation or transfer of security over assets
used in the provision of public services
− Most governments have adopted specific PPP legalisation now
 Case: prison of Dendermonde (Belgium)
− The Belgium Buildings Agency awarded BAM PPP the contracts for the
construction of two prisons in Beveren and Dendermonde, which will
house 312 and 444 inmates respectively
− Legal proceedings by local action committees
− Annulment of spatial implementation plan of government
− Substantial delay
27/03/2017 15

2.3 Political Risk
 Changes in national and international legislation after contract
closure
 Changes in the decision making process
 Appointment of new governments following elections, with
new political agenda
− After closing: pacta sunt servanda?
− Before closing: delay or abortion of project
 Organisation of referenda by government
 Case: Oosterweel (Belgium)
− construction project intended to complete the Antwerp Ring Road
− modification of construction plan following referendum: first a
bridge, now a tunnel?
− substantial delay
27/03/2017 16

27/03/2017 17
2.3 Political Risk

1.4 Organisational Risk
 Insufficient follow-up and project management by the public
party after contract closure
− E.g. Insufficient project methodology (project team, project plan,
budget, quality and safety plan,…)
 Lack of or poor communication
− E.g. high media profile
− Case: Oosterweelverbinding Antwerp
 Lack of or poor risk management
 …
27/03/2017 18

27/03/2017 19
2.4 Organisational Risk
 Case: Betuweroute (the Netherlands)

2.5 Technical Risk
 Constant evolution of methods and techniques
 Changed initial principles after closure caused by:
− Wrong initial principles
− Time pressure
− Need for additional research
 Soil/water pollution, archaeological sites,…
 Case: HSL-Zuid (the Netherlands)
− New train protection systems
− Lack of test trains and test trail
− Substantial delay
27/03/2017 20

3. Guidelines for risk management
 Preventive Measures
− Project Management
− Communication Management
− Contract Management
− Financial Management
 Risk Allocation
27/03/2017 21

3.1 Preventive Measures
3.1.1 Project Management
− Multidisciplinary team and flexible project structure
− Standard project methods and tools
− Reporting structure
− Legal expertise
27/03/2017 22

3.1.2 Communication Management
− Communication strategy
− Representative but operational consultation network
27/03/2017 23

3.1.3 Contract Management
− Integration of contract management into the organisation of the
project
− Avoid hasty decision-making
− Standardization (template risk allocation matrices, model
contracts,…)
− Long-term contract vs innovation?
− Periodic review of the contracts
27/03/2017 24

3.1.4 Financial Management
− Clear but all-encompassing budgetary framework
 Prepare detailed financial model, including integrated estimated cost,
including tax formulas, expected price evolutions
 Provide for financial margins for unexpected costs
− Regular monitoring of financial assumptions
27/03/2017 25

3.2 Risk Allocation
 Identification, analysis, evaluation and management of risks,
including stakeholder responsibilities
 Risk analysis by potential contractors as a selection criterion
 Allocation of risks to the party best able to manage or absorb
each particular risk
 Transfer of certain risks as a requirement for budget neutrality
imposed by the ESA2010 rules (e.g. construction risk)
 Changes in the PPP project should not impact the risk
allocation
27/03/2017 26

Risk allocation matrix
27/03/2017 27
Cause Consequences Public
Partner
Private
Partner
Shared
No building
permit
- Loss of time
- Financial
consequences
X
Changes in
national
leglisation
Possibly financial
consequences
X
Nuisance to
nearby
residents
- Financial
consequences
- Additional
measures
X (with cap?)

3.3 Conclusion
 Definition of a successful PPP?
 “The government should know its direction”
 Importance of stakeholder inclusion – see Session 2
27/03/2017 28

Session 2: The Impact of
Local Stakeholder Resistance
on Infrastructure Projects
27/03/2017 29

1. Importance/Relevance of Stakeholder Inclusion
2. How to Involve Different Stakeholders?
3. Risks
4. More Responsibility for Local Governments in the
Future
5. The Impact of Stakeholders on Determining the
Success of a PPP
27/03/2017 30

 “The use of tools and processes, both formal and informal, to
increase stakeholder engagement within the planning,
evaluation and implementation of large-scale infrastructure
projects”
 Why?
− External factor: information gap between government and market
− Internal factor: principle of diligence requires government to
prepare its decisions carefully
− More equitable distribution of costs and benefits
− Increased (perception of) legitimacy
27/03/2017 31

27/03/2017 32

 Points of attention:
− Consider impact of stakeholders
 Stakeholders ≠ influencers
− Focus on co-production so stakeholders evolve from individual
players to co-authors (cf. Oosterweel)
27/03/2017 33

2. How to Involve Different Stakeholders?
 Stakeholder Identification and Composition
 Interaction with Stakeholders
 Guidelines
27/03/2017 34

2.1 Stakeholder Identification and Composition
 First step: define stakeholders with large potential influence
on the project’s success
 “What?” / “How?” / “Why?”
 Potential stakeholders:
− Consumers
− NGOs and community based organisations
− Workers
− Private firms and financiers
− Alternative providers
− Politicians and officials (other than those involved in the PPP)
− Media
27/03/2017 35

2.1 Stakeholder Identification and Composition
 Second step: categorize stakeholders through different
phases of the PPP (Initiation - Definition and planning –
Adjudication – Execution)
 Categories:
− Primary stakeholders: realisation of project = realisation of their
goal
− Secondary stakeholders: project is not their goal, but their
participation is essential
− Tertiary stakeholders: participation is not essential, but useful
27/03/2017 36

2.2 Interaction with Stakeholders
 5 main types of interaction:
− Collecting information
− Providing information
− Consulting
− Deciding together
− Acting together
 By means of:
− Printed materials
− Opinion polls and surveys
− Focus groups
− Open forum
27/03/2017 37

2.2 Interaction with Stakeholders
 Case: Stakeholder inclusion in the execution phase:
Noorderlijn project (Belgium)
27/03/2017 38

2.3 Guidelines
 Step 1: determining the aim and the method of market
consultation
− Set out the aims and trust each other
− Determine how/in which phase(s) the market will be consulted
− Try to keep a balance between the requirement of transparency
and the confidential nature of the information obtained
− Respect the other party
− Create a reasonable timeframe
− Decide who will lead the market consultation and who will do the
follow-up
27/03/2017 39

2.3 Guidelines (ctd)
 Step 2: Market Consultation
− Draft a consultation document
− Exclude liability
− Respect confidential and protected information
− Make the market consultation public
− Treat all parties the same way
− Avoid conflicts of interest
− Be aware of wrong or manipulated information
27/03/2017 40

2.3 Guidelines (ctd)
 Step 3: Analysis and Further Action
− Analyse the results in light of the chosen method
− List the stakeholders’ objectives
− Communicate with the consulted parties
− Maintain equality between the parties and provide them with a
report
− Avoid “cherry picking” and “tunnelling” when using the information
obtained (see further)
− Follow the planning as foreseen in the consultation document
27/03/2017 41

3. Risks
 Limited regulation might lead to abuse
 Lack of compensation might lead to limited response
 Risk of “cherry picking” or “tunnelling”
 Different stakeholder conflict profile  4 types of PPPs (see
next slide)
− Internal dimension: interplay between the public and the private
party and inside the focal stakeholder groups
− External dimension: potential causes of conflict outside the project
environment
27/03/2017 42

PPP
type
Characteristics Example in
Belgium
Responsibility
over SH
management
1 High risk of SH conflicts or opportunity for
action, large-scale, transcending multiple
governmental levels
E.g. prisons, malls, transport
infrastructures,…
Oosterweel
connection
Public body
2 Societal support, high-risk profile ,
transcending different public institutions
E.g. swimming pools, hospitals, tunnels,…
Liefkenshoek
rail connection
Private partner
3 Large opportunity for external actions
E.g. energy plants, windmills, prisons,
homeless shelters,…
BRABO1 Mixed
4 High societal support, very few conflicts
E.g. urban development projects
City garden
Ronse
Mixed
27/03/2017 43

Future
 Increase of local PPP projects
 Case: Flemish Sports Infrastructure Plan (Belgium):
27/03/2017 44

Future
 Need for legal framework by Eurostat
 Local support by PPP units
− Belgium:
 Flanders: Flemish PPP Knowledge Center (Vlaams Kenniscentrum PPS)
 Wallonia: Wallonian PPP Unit (Cellule d’Informations Financières)
− The Netherlands:
 The PPP Knowledge Centre
 Ministry of Infrastructure and Environment
 Code of conduct (duty to request advice)
27/03/2017 45

5. The Impact of Stakeholders on Determining the
Success of a PPP
 Success is multidimensional
 In Flanders, no fully finished PPP
 Stakeholder management is one of the main success factors
27/03/2017 46

Session 3: Cultural
Differences – a Comparison
between Belgium and the
Netherlands
27/03/2017 47

 Politics in Belgium and the Netherlands
 Different procedures have impact on timing of
decision making
 Communication with governments, other
stakeholders and their advisors
 Understanding differences avoids frustration
27/03/2017 48

Introduction: case study Fyra (HSL-Zuid)
27/03/2017 49
 Objective: European
railway network with
limited travelling time
 Project failed -> Dutch
Parliamentary Committee:
 “One of the main causes of
the failure was a lack of
communication between
the Belgians and the
Dutch”

Cultural differences Belgium - Netherlands
 Belgium
 Governmental structure
− Federal state
− Decentralisation
− Cultural and economic differences between Flanders and Wallonia
 PPP-concept is relatively new
− Flemish PPP Act of 18 July 2003
− Flemish Knowledge Centre for PPP
 Advises Flemish government on and evaluates PPP projects
 Final assessment of PPP Projects
− Mostly DBFM
 Public authority as shareholder
− Case: R4
27/03/2017 50

 Netherlands
 Governmental structure
− Unitary (central government)
 Governmental agencies such as Rijkswaterstaat or Rijksvastgoedbedrijf
 PPP as a full-fledged policy instrument is also relatively new
 More market driven than in Belgium?
− When applied? => added value test
− Public Private Comparator (PPC) and PSC (Public Sector Comparator (PSC)
− PPC: compares advantages and disadvantages of different methods
− PSC: clarifies the total costs and risks over project’s life cycle, if government
were to carry it out itself
 Case A59 (PSC) and New National Military Museum of the Netherlands (PPC)
− But: privatisation is no guarantee for success e.g. “HSL-Zuid (Fyra)”
27/03/2017 51

 Netherlands (ctd)
 Tendering:
− Usually tendered on the basis of EU procurement legislation
− Competitive dialogue procedure with most economically
advantageous offer
− Criteria:
 Price (net present value)
 Risk management plan
 Value of certain risks accepted by private party
− Standardized DBFM(O) contracts
27/03/2017 52

 Communication in Belgium
 Reserved and modest
 Formal
 Preference to do business in person – trust is essential
 Try to compromise!
 Belgians like to do business over lunch or dinner
 Slow decision making process
 Respect the use of languages of Governments:
 Wallonia: French
 Flanders: Dutch
27/03/2017 53

27/03/2017 54
 Communication in the Netherlands
 Direct, openhearted
 Informal
 No nonsense
 Time is money
 Try to be efficient
 Languages: Dutch or English

 Conclusion
 Do not underestimate the importance of culture
− Public-public
− Private-public
27/03/2017 55

Session 4: Guidelines for a
Succesful PPP
27/03/2017 56

1. Project identification
2. Structuring of the PPP
3. Managing the tendering process
4. Execution phase and management
27/03/2017 57

 Steps to project identification
 Project idea
 PPP feasibility: does PPP offer added value?
− ESA 2010 neutrality: Beware of excessive focus of off balance
projects (may push government to PPP when not appropriate) and
affordability illusion (by deferring and spreading public sector
payments trough time)
− Case: Oosterweel connection Antwerp
− Allocation of building risks and timing
− Finance sources
27/03/2017 58

 Steps to project identification (ctd)
 Project definition
− Defining project, background, initial business case, organisation,
risks
 Pre-business case
− Financial model showing costs and revenues of project
 Market consultation
 Formal added value test
− Financial and non financial (social) added value
− Key consideration for choosing between traditional public
procurement and PPP
27/03/2017 59

 Case: A11
27/03/2017 60

 A 11
 High added (social) value
 Respect for environment
 Integral quality of offers as selection criteria rather than
mathematical approach
 Intensive dialogue with stakeholders and authorities, resulting
in one common view prior to market consultation
 Efficient market consultation
27/03/2017 61

2. Structuring of the PPP
 Organisation
 Project team
− Team leader, steering committee, project team, advisors
 Project plan
− Documentation, market consultation, procurement procedure, selection
 Timing & communication
 Institutional due diligence: public-public coordination
 Risk analysis and risk management
 Business case
 Defining procurement strategy
 Preparing project documents
 Standardization of contracts
 Netherlands vs. Belgium
27/03/2017 62

2. Structuring of the PPP: example of Brabo
I
27/03/2017 63

 Procurement procedure
 Publication
 Investigation of offers
 Selection
 Financial close
 Standardization vs. high transaction costs
 E.g. Oosterweel
 Innovation vs. compensation for tendering procedure
 Which project criteria?
 Lowest price vs. sustainability
27/03/2017 64

 Case: Kromhout Kazerne Netherlands
27/03/2017 65

 Kromhout Kazerne Netherlands
 Attention to sustainability (quality of material, low energy
costs)
 Variable and flexible output specifications
27/03/2017 66

 Contract management vs project management
 Contract management:
 Monitoring of key performance indicators
 Quality control
 Daily contact with project team
 Reporting to shareholders and principals
 Risk management
 Changes to project documentation: procurement laws
 Project evaluation
 Continuous process
27/03/2017 67

 Case: Renovation Dutch Ministry of Finance
27/03/2017 68

Conclusions and discussion
 Budget constraints vs. value for money
 Need for quality improvement and more efficiency
 Need to overcome practical difficulties in legal framework,
tendering procedure, training of civil servants, …
 Need for mentality shift?
 Evaluation of projects and knowledge sharing
27/03/2017 69

THANK YOU FOR YOUR ATTENTION
ANTWERP
RODERVELDLAAN 3
B-2600 ANTWERP
T +32 3 287 11 11
F +32 3 287 11 12
BRUSSELS
LOUIZALAAN 235/
AVENUE LOUISE 235
B-1050 BRUSSEL/BRUXELLES
T +32 2 215 97 58
F +32 2 216 50 91
Ciska Servais & Dieter Veestraeten
cs@astrealaw.be
dve@astrealaw.be
7027/03/2017

Managing Complex PPP Infrastructure Projects in Belgium and the Netherlands

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