ricardo ferreira reis [observatório ppp] 2012_the impact of ppp(s) contracting on portugal's fiscal...

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The impact of PPPs contracting onPortugals fiscal position andwhat can be done about it

Presentation at the 4th Annual OECD Symposium onPPP Working Party of Senior Budget Officials (SBO)

Professor Ricardo Ferreira Reis


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Introduction

Portugals current Public Finances situation.

The Portuguese experience with PPPs.

PPPs in the Memorandum of Understanding withthe EU/ECB/IMF (The Troika)

The future of PPPs in Portugal: What solutions?

The OPPP at the University: Our mission, organization and

work.


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Public Financesin Portugal


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Public Finances in Portugal:current situation

Significant increase in public spending not followed byeconomic growth

Permanent deficits around 5% before 2008 financial

crisis

After 2008, fast fiscal deterioration

High levels of public debt with an increase in the interest

rates Unsustainable fiscal situation


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Public Finances in Portugal

That have produce significant public deficits

Sources: adapted from the Parliaments National Budget Technical Unit (UTAO) report,INE data, the 2012 National Budget, and Ministry of Finance reports and OPPP estimates

-4.5%

-

3.4% -3.5%

-2.7%-2.9%

-4.3%

-2.9% -3.0%

-3.4%

-5.9%

-4.1%

-3.1%

-3.6%

-10.2%

-9.0%

-4.0%

-4.5%

-7.3%

-9.8%

-5.9%

-4.5%

-11.0%

-10.0%

-9.0%

-8.0%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

%o

ftheGDP

Maastricht benchmark

official deficit

deficit with no one offopstroika objectives


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59.2 58.3

54.4 50.4 49.6 48.751.0 53.7

55.1 56.5

61.763.9 62.7

65.3

83.0

93.3

101.9

110.5106.8 105.0

101.8

40.0

50.0

60.0

70.0

80.0

90.0

100.0

110.0

120.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

That lead to a substantial increase in the public debt

Source: INE (Portuguese Statistics Bureau), forecasts from 2012 onwards takenfrom the Portuguese Government official forecasts


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Pro-cyclical deficits, with significant decrease inrevenues and increase in automatic stabilizers

No particular concern with public debt, focus hasbeen mainly on deficit

Election cycle does not help either, but hasconsistently enhanced transparency

Precarious fiscal consolidation recurrentlylead to off budget public spending solutions


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The PPP Experience inPortugal


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The PPP Experience in Portugal

Intensive use of PPP to close the infrastructuregap

Portugal lead PPP projects when measure by the sizeof the GDP

Off-budget temptation, and not Value for Money, wasthe main reason to choose PPP instead of traditionalprocurement

Affordability issued due to the high level of futurepayments.


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Number of Projects (PPP and Concessions)

1995 1996 19971998 1999 2000

20012002

20032004

20052006

20072008

20092010

13

62

1 512 17

3 4 6

0

8

4

19

11 9

1319 21 22 27

39

56 5963 69 69

77 81

100

111

120

New Projects Accumulated

Source: Adapted from Ministry of Finance PPP reports


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0

5,000

10,000

15,000

20,000

25,000

30,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Acumulated Capex Year Capex

Total Investment

Source: Adapted from Ministry of Finance PPP reports

Transports45%

Energy31%

Environment19%

Ports4%

Health1%


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N1 worldwide in PPP investment (measure as % of GDP)

Source: Andreas Kappeler and Mathieu Nemoz, public-private partnerships in europe before and during the recentfinancial crisis, Economic and Financial Report 2010/04 July 2010, EIB.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%


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Annual Payments in Million

0

500

1,000

1,500

2,000

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

2038

2039

2040

in M

Net Charges Total Charges

Source: Adapted from National Budget 2012


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2011 GDP: 171 billion

NPV in % of GDP

Sector Data

NPV

R= 6%

YTM 2008 -

4%

YTM 2011 -

13%

Roads Gross payments 10.0 12.1 5.8

Net payments 5.2 6.0 3.4

Trains Gross payments 0.5 0.6 0.2

Health Gross payments 1.6 1.8 1.1

Security Gross payments 0.2 0.2 0.1

TOTALGross payments 12.2 14.7 7.3

Net payments 7.4 8.6 4.9


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The PPP Experience in Portugal:7 main reasons for concern

1. High levels of investment in a shortperiod of time.

2. Deficit on structure and managementskills.

3. Poor public management during thebidder process: PSC only after 2006


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The PPP Experience in Portugal:7 main reasons for concern

4. PPP focus only as off-budget operation.

5. Poor budget control of financial

assumptions.

6. Incorrect risk valuation and allocation.

7. PPP renegotiations have systematicallyincreased the payments for public


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PPPs in the Memorandum of

Understanding with The Troika


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PPPs in the MoU with The Troika

15 references in 8 paragraphs

3 lines of actions:

RE-BUDGETING (3.3 e 3.13.i)

MONITORING (3.11, 3.18, 3.19, 3.20 e 3.21)

RE-ASSESSING (3.17 e 3.19)


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PPPs in the MoU with The Troika

TroikaPPP Guidelines

1. Avoid engaging in new PPPs before theassessment of the current ones are reviewedand the legal and institutional framework iscreated

2. Consider the possibility ofrenegotiation of theexisting PPPs with the purpose of reducingState payments.


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The future of PPP in

Portugal:

What solutions?


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The future of PPP in Portugal: What solutions?

Buying Back existing contracts

(2nd wave: 7 former shadow toll roads already in service)

Assumptions:

Future payments until 2031 net of O&M expenses

Present value of net future payments at 15% discount rate (averagecurrent CAPM): M 3 500.

Government funds this amount (about 2% of GDP) at 6% interest fromthe Troikaand uses it to acquire total asset (debt + equity)


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The future of PPP in Portugal: What solutions?

Buying Back existing contracts(2nd wave: 7 former shadow toll roads already in service)

Consequences:

Liquidity injection into the banks (debt payment) and into constructioncompanies (equity purchase)

Eliminating renegotiation risk

Arbitrage opportunity between current 15% CAPM and 6% interest rate onpublic debt (Troikaassistance terms) allows for a yearly saving of up to M400

Increasing Eurostat official public debt by 2 p.p., while decreasing off balancedebt by 5.2 p.p.


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The future of PPP in Portugal: Whatsolutions?

0

100

200

300

400

500

600

700

800

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

in M

Annuity Savings


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The future of PPP in Portugal: What solutions?Other projects

Railways: 3 existing contracts:

Fertagus is performing well

MST under renegotiation

High speed rail suspended

Health:

Clinical services in 3 hospitals:

Recent experiences (opened in2009, to soon to evaluate)

Risk sharing seems to be betterdone

Construction of several units:

Performing well

Energy: Natural Gas Supply:

No public payments

Hidrical Powerplants

Payments forwarded toconsumerselectricity bill

Other roads:

1st wave:

Tolled roads

3rd wave: Under construction

Solution could be equitypurchase


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The OPPP: Our mission,organization and work.


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TRIP

LECROWN CATLICA-

LISBON was thefirst PortugueseSchool to beamongst the selectgroup of BusinessSchools accreditedwith the TripleCrown.

Only 1% ofBusiness Schoolsworldwide have thisaccreditation.

FINAN

CIALTIME

SThese prestigious rankingsrepresent the internationalrecognition of our programsacademic excellenceaccredited ensuring that theymeet the most demandinginternational standards.

CATLICA-LISBON is theLeading Portuguese School tobe ranked amongst the TopEuropean Business Schoolsaccording to the FinancialTimes.

CATLICA-LISBON Masterprogram entered FT rankingsfor Master programs. Occupiesthe 4th position worldwide forthe variable that evaluatesemployability success .

CF

APARTNER CATLICA-

LISBON has beennamed the onlyProgram Partner inPortugal by theCFA Institute, theglobal associationfor investmentprofessionals thatawards theprestigious CFAdesignation.

Catolica Lisbon School of Business andEconomics (CLSBE)

9


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Center for Applied Studies (CEA)

Applied research and consulting unit of CLSBE.

Mission: to provide a continuous link betweenthe academic world and companies, offering

consulting services in the areas of economicsand management to private, public and socialinstitutions.

These services are mainly driven by theaplication, to real world situations, of severalresearch topics conducted by CLSBE faculty.

10


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The OPPP

Created in 2009, the Public-Private PartnershipsObservatory (OPPP) is an independent, not forprofit, research driven organization, based inCLSBE

The Observatory develops a systematic approachto PPPs in Portugal, providing rigorous analyticalinformation to its members, and keeping them

also informed about relevant marketdevelopments.

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The OPPP

Currently (October 2011) the OPPP has 30paying members, among public entities andregulators, private contractors andconcessionaries, banking and finance institutions,consulting companies and law firms.

The independence of the OPPP is promoted bythe balance in the composition of its membership

base: every category of players in the PPPscontract is always well represented.

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The OPPP

This balanced diversity of members also adds tothe expertise, knowledge base, and networking ofthe OPPP, turning it into the perfect forum foropen, frank and insightful discussion on PPPs inthe country.

Each member pays a yearly fee and gets firsthand access to all the research produced

internally and participates in the discussions andevents organized by the OPPP. The fees areused exclusively to cover the research activities ofthe Observatory.

13


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Research Projects at OPPP

PPP risk assessment methodology(2008-2009)

Portuguese PPP risk assessment andRegressions analysis (since 2009)

Public Sector Comparator (2010)

Renegotiation and Refinancing (2011-2012)

Corporate Governance (2012-2013)

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