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Public Private Partnerships in Central and Eastern Europe:
Are the same benefits available as in the U.K.?
A project submitted in partial fulfilment of the
requirements for the degree of
Masters of Business Administration
At the University of Westminster
Marylebone Campus
By Albrecht Meyer
Date of submission: 23rd August 2007
3
Table of Contents
1 Introduction ............................................................................................ 8 1.1 Research Area.....................................................................................................8
1.1.1 History of PPP.............................................................................................. 8 1.1.2 Current Needs of PPP in Emerging Markets ................................................. 9
1.2 Objectives ........................................................................................................10 1.2.1 Focus Area ................................................................................................. 10
2 Literature Review.................................................................................. 12 2.1 PPP in General ..................................................................................................12
2.1.1 PFI ............................................................................................................. 13 2.1.2 PPP Benefits and Disadvantages.................................................................. 13
2.2 Focus on CEE Countries ...................................................................................14 2.2.1 Construction market .................................................................................. 15 2.2.2 Legal framework ........................................................................................ 16 2.2.3 Funding ...................................................................................................... 16 2.2.4 Governance................................................................................................ 16
3 Research Methodology and Data Collection .......................................... 17 3.1 Questionnaire and Survey Methodology ............................................................17
3.1.1 Component A - Benefits of PPP.................................................................. 20 3.1.2 Component B - Differences between PPP in CEE and the UK..................... 20 3.1.3 Component C - Differences between PPP markets in the UK and Eastern Europe 21
3.2 Methodology.....................................................................................................22 3.2.1 Approach ................................................................................................... 22 3.2.2 Structure.................................................................................................... 22 3.2.3 Scope ......................................................................................................... 23 3.2.4 Questionnaire Structure ............................................................................. 25
4 Evaluation of Survey Data...................................................................... 27 4.1 Generic Results .................................................................................................28
4.1.1 Projects...................................................................................................... 28 4.2 Results by Categories........................................................................................30
5 Comparison of PPP Benefits in CEE and the UK ................................... 31 5.1 Combining the data...........................................................................................31
5.1.1 Component A - Benefits of PPP.................................................................. 32
4
5.1.2 Component B – PPP Project Differences .................................................... 40 5.1.3 Component C – Market Environment......................................................... 53
6 Conclusions and Recommendations ...................................................... 69 6.1 Conclusions ......................................................................................................69
6.1.1 Findings...................................................................................................... 70 6.1.2 Research Answer........................................................................................ 72
6.2 Recommendations.............................................................................................72 6.2.1 EU level ..................................................................................................... 72 6.2.2 Country level ............................................................................................. 73 6.2.3 Further research ........................................................................................ 73
7 References ............................................................................................ 75
8 Appendices ........................................................................................... 78 8.1 Appendix 1 – Subject Codes and Survey Questions ...........................................78 8.2 Appendix 2 – Survey Questionnaire ..................................................................80 8.3 Appendix 3 – Survey Results .............................................................................86
5
Table of Figures
Figure 1: Research question – ‘Level 1’. ............................................................................. 8 Figure 2: Possible alternatives for governments to deliver public services......................... 11 Figure 3: Methodology structure...................................................................................... 18 Figure 4: Research component questions – ‘Level 2’. ....................................................... 19 Figure 5: Subjects regarding benefits of PPP – ‘Level 3’. ................................................... 20 Figure 6: Subjects regarding differences in PPP projects – ‘Level 3’. ................................. 21 Figure 7: Subjects regarding differences in PPP markets – ‘Level 3’. ................................. 21 Figure 8: CEE countries included in the survey. ............................................................... 23 Figure 9: Overview of organisation types included in the survey....................................... 25 Figure 10: Number of Reference Projects by involved organisation type and country of
project location. ....................................................................................................... 28 Figure 11: Number of Reference projects by type and location. ....................................... 29 Figure 12: Directions of comparisons and component scopes of the analysis. ................... 32 Figure 13: Component A differences................................................................................ 38 Figure 14: Component A findings in brief. ........................................................................ 40 Figure 15: Component B differences. ............................................................................... 51 Figure 16: Component B findings in brief. ........................................................................ 53 Figure 17: Component C differences. .............................................................................. 65 Figure 18: Component C findings in brief. ........................................................................ 68
6
Abstract
Typical advantages of PPP constructs, e.g. pre-agreed monthly payments
without the need to spend money on the construction itself, are very
attractive to governments facing the need of heavy infrastructure
investments. This is especially visible in the UK since the 90s, where PPP has
proven to be a success story. Now the model is also increasingly attractive
to governments of emerging markets with the challenge to improve
infrastructures fast enough in line with the growing economies.
The goal of this study is to explore if the same benefits of the PPP model that
have been witnessed in the UK are available in Central and Eastern Europe.
The methodology used as a basis for this study is an online questionnaire on
characteristics of PPP projects in CEE targeted towards PPP experts from
various organisation types.
The findings suggest that PPP benefits are equally available to CEE countries,
if there is the same amount of government support as in the UK.
The recommendations are to provide similar support on EU level to enable
cross transfer of expertise and to ensure that benefits can be applied to all
CEE countries. On national level Public Sector Comparators and quality
checks should be used more frequently and design consultations carried out
more effectively to achieve a higher degree of availability of PPP benefits.
7
List of abbreviations
Acronym Term BOT Build, Operate, Transfer CEE Central and Eastern Europe DBFO Design, Build, Finance, Operate EBRD European Bank for Reconstruction and Development RIBA Royal Institute of British Architects CABE Commission for Architecture and the Built Environment EIB European Investment Bank PPP Public Private Partnership(s) PFI Private Finance Initiative PSC Public Sector Comparator
Chapter 1 – Introduction
8
1 Introduction
1.1 Research Area
This research explores the benefits and disadvantages of public private
partnerships (PPP) in infrastructure and building procurement in Central and
Eastern Europe (CEE) and tries to answer if the often stated benefits of such
partnerships are equally available to these markets as in the UK, where this
form of procurement has a much longer history. Thereby the research
question, as shown in Figure 1, is at the highest of three ‘Levels’ of analysis
that will enable a component based approach, as presented in chapter 3
‘Research Methodology and Data Collection’.
“Are the same benefits of PPP available in Central and Eastern Europe as in the U.K.?”
Figure 1: Research question – ‘Level 1’.
1.1.1 History of PPP
The philosophy of private organisations being appointed to deliver public
services has its history in the 17th century in Europe with concessions, water
supplies and turnpike trusts (Morledge et al., 2006, p. 196).
Chapter 1 – Introduction
9
Whereas in the UK PPP is a common form of procurement of public
buildings such as schools and hospitals as well as infrastructure such as public
transport and motorways, this form of procurement is new to the countries
in CEE and is welcomed by governments allowing them to outsource the
financing and technical aspects of running public services.
In the UK this procurement has been used since the introduction of the
Private Finance Initiative (PFI) in 1992 and considerable experience has been
gathered since. In CEE such procurement was looked at only after the
communist area had ceased and new legislation was introduced. In many
cases this was carried out in a rushed manner due to urgent needs to
upgrade infrastructure and public budgets not holding sufficient funds.
1.1.2 Current Needs of PPP in Emerging Markets
The advantage of a pre-agreed monthly payment, without the need to spend
money on the construction itself, is very attractive to governments of
emerging markets that need to improve their infrastructures fast in line with
their growing economies. In CEE countries, the need for PPP exists in
parallel with the economic restructuring from centrally-led markets to a free
market economy with privatisation and deregulation steps. In order to allow
the governments to use PPP in their countries, new procurement systems,
legislation and guidelines have been introduced or are about to be issued.
Chapter 1 – Introduction
10
1.2 Objectives
The objectives of this research are to investigate the suitability of PPP as a
procurement vehicle to meet the infrastructure needs in CEE and to explore
whether the typical benefits of PPP available in the UK are equally applicable.
In the construction sector it is known and debated that PPP can lead to
solutions that lack design quality. Whereas in the UK initiatives from
professional bodies such as the Royal Institute of British Architects (RIBA)
and the Commission for Architecture and the Built Environment (CABE)
have resulted in a generally high level of quality of projects, these influential
groups may not be equally predominant in CEE.
1.2.1 Focus Area
The goal of the research is to find or suggest starting points as to where,
how and which measures could be implemented in order to ensure that PPP
benefits, to public authorities and the public at large, are available for
projects in Central and Eastern Europe.
For the purpose of this research we focus on the comparison of PPP and
conventional procurement as two of a range of alternatives, as shown in
Figure 2, which serve to enable public authorities in providing their service
duties.
Chapter 1 – Introduction
11
Comparison used in this
research
conventional procurement
forms
privatisation types
outsourcingPPP
Government service / function(e.g. hospital, motorway, prison, rail track)
Theoretical range of alternatives available
Figure 2: Possible alternatives for governments to deliver public services.
The research question focuses on the benefits for the public in both forms,
the public authorities as the client as well as the public as end users. We are
not investigating the benefits for the private partners as private firms have
the choice whether to participate in a particular PPP or not, whereas the
public authority very often has got no choice other than using a PPP, due to
limited budgets and expertise, in order to continue delivering its service
duties for the increased demand.
The further goal of this study is to find or suggest starting points concerning
where, how and which measures could be implemented in order to ensure
that PPP benefits are available for projects in Central and Eastern Europe.
Chapter 2 – Literature Review
12
2 Literature Review
2.1 PPP in General
PPP is one of many forms of building procurement and the PFI development
in the UK has influenced risk-distribution and value for money for alternative
procurement forms (Morledge, et al., 2006). There is an extensive literature
on PPP, with particular reference to the UK; see Broadbent and Laughlin
(2003) for an overview. The policy and financing aspects of PPP are
intertwined and PPP benefits would be undermined if both were not fully
understood (Yescombe, 2007). The complexity of PPP requires that
stakeholders be managed alongside risks and opportunities (Akintoye et al.,
2003), while the blurred division between private interest and public
responsibilities necessitates a clear and well defined regulatory framework,
especially in developing markets (Pongisiri, 2002; Jamali, 2004).
A significant amount of literature stems from individual experts within
organisations involved in PPP, especially in the CEE markets where there is a
large interest of organisations to promote PPP and transfer skills and
knowledge to prospective project participants.
Chapter 2 – Literature Review
13
2.1.1 PFI
PFI is now firmly embedded in UK procurement whereby bidding costs are
much higher as compared to conventional procurement and value for money
and refinancing issues can be rewarding for both parties on successful
implications, which are not always the case (Morledge, et al., 2006).
2.1.2 PPP Benefits and Disadvantages
There is a large consensus amongst scholars that ideology and accounting are
still the main drivers for PPP, so that in practice the value added often fails to
match the ideal (Spackman, 2002; Klijn and Teisman, 2003) especially if the
intended cooperation is weak (Bult-Spiering and Dewulf, 2006). The degrees
of ‘PPP readiness’ of countries globally is defined by the risks of lack of
political commitment and regulatory framework (Cheatham and Oblin,
2007).
For any project, a careful assessment of positive and negative factors
influencing the attractiveness of PFI procurement should precede any
acceptance of such procurement (Li, et al., 2005). The attractiveness can be
further evaluated by focusing on the actual requirements that governments
have to fulfil which are categorised in the three dimensions of rights,
obligations and liabilities (Abdel-Aziz and Russell, 2001). Such obligations
might be in conflict with short term interests of private parties and such
Chapter 2 – Literature Review
14
conflicts need to be addressed or checked against alternative strategies, such
as decentralisation, before expanding PFI (Ghobadian et al., 2004), especially
in healthcare (Barr, 2007). A further crucial point in achieving mutual benefits
with PPP, risk allocation to those parties that can carry it best, is presented
by the same authors in a further article (2005a) and Ng and Loosemore
(2007) find that risks are often not allocated carefully to the most
appropriate parties which result in cost increases and delays, therefore not
allowing the key benefit of value for money. If risks are allocated
appropriately and if strong competition is available, then value for money is
achieved, especially on large projects due to scale economies of transition
costs (Low, Hulls and Rennison, 2005).
2.2 Focus on CEE Countries
The literature in the area of PPP with specific focus on CEE is currently fast
evolving in line with the development of these new markets and the first
projects implemented. A brief overview of the PPP market in Europe,
including the CEE countries, is presented by DLA Piper (2007) where an
interesting view emerges that not only experience from the UK can be
transferred to the CEE but in return the UK can learn from the successes of
long-term concessionaire operator groups (DLA Piper, 2007). AMA Research
Ltd (2002) has previously covered the area of PPP in CEE on a country by
country analysis in a report containing checklist data such as legislation, key
Chapter 2 – Literature Review
15
contacts and case projects, which has, due to costs and the fast changing
nature of these markets, not been consulted.
The consensus amongst scholars is that transition countries are highly
interested in PPP due to the possibility to fill the infrastructure gap of lack of
quality and quantity of service provisions within the fast growing economies
without capital expenditure which is limited by EU and Maastricht
requirements (Howcroft, 2004; Snelson, 2007), whereby the role of the EU
should be to manage successful implementation (Howcroft, 2004) by
promoting PPP without over-legislating (European Information Service,
2005).
2.2.1 Construction market
The much needed large scale projects, such as the construction of 717km of
motorways by 2015 in Bulgaria (Chiltern Magazine Services, 2006, p. 4) will
require foreign private companies to take a greater role in the provision and
management of public services (Economist Intelligence Unit, 2007). Sleight
(2003) finds that PPP with a typical concession of 30 years is not suitable for
railways as procurement. Despite the benefits at first sight for satisfying the
infrastructure needs as presented by Sleight (2005 p. 27) and Kovac (2003).
Briggs (2005) reports on lessons from a failure in the Czech motorway
project and the resulting difficulty to find new support from any political
party.
Chapter 2 – Literature Review
16
2.2.2 Legal framework
Weak legislation in CEE is slowing down the implementation of PPP but the
World bank and the European Bank for Reconstruction and Development
(EBRD) are key stakeholders in consulting on new law (Public Private
Finance, 2005) and there is a new EU initiative to clarify rules on PPP in the
EU (Public Private Finance, 2006). Zverev and Zatezalo (2007) find that only
few countries have high quality concession law.
2.2.3 Funding
Large funds are available from the EBRD, some of which is invested in PPP
projects (Velikov, 2007). Up to 2003 inclusive, the EIB (2004) had signed
14.7bn Euro in loans to special purpose vehicles that undertake PPP projects.
2.2.4 Governance
Bult-Spiering and Dewulf (2006) argue that most individuals involved have
short term political and financial interest and therefore a strategic approach
to PPP needs to be taken.
Chapter 3 – Research Methodology and Data Collection
17
3 Research Methodology and
Data Collection
3.1 Questionnaire and Survey Methodology
Due to the complex nature of PPP the research question has been broken
down into components and subcomponents which are then used to
formulate questions for the survey. The results of these sub-components are
then combined into the components and then into the conclusions for the
research question. The structure of this methodology is presented
diagrammatically in Figure 3.
Chapter 3 – Research Methodology and Data Collection
18
Research Question
Conclusions and Recommendationsfor Research Question
Survey Questionnaire
A: PPP BenefitsB: PPP Project characteristics
C: Market environment
A1 A2 A6… B1 B2 B15 C1 C2 C13… …
A1 A2 A6… B1 B2 B15 C1 C2 C13… …
Conclusions for A:PPP Benefits
Conclusions for B:PPP Project
characteristics
Conclusions for C:Market
environment
‘Level 3’:IndividualSubjects
[Chapter 3,Chapter 5]
‘Level 2’:Components[Chapter 5]
‘Level 1’:Research Question
[Chapter 6]
‘Level 2’:Components[Chapter 3]
‘Level 1’:Research Question
[Chapter 1]
Figure 3: Methodology structure.
For the purpose of enabling a precise research approach to the research
question, the same has been broken down into three component questions
(‘Level 2’) as shown in Figure 4.
Chapter 3 – Research Methodology and Data Collection
19
Component Question Component Code
What are the benefits of PPP in the UK? A
What are the differences between PPP in Western Europe and those in Central and Eastern Europe?
B
What are the differences of the markets surrounding PPP between Western Europe and Eastern Europe?
C
Figure 4: Research component questions – ‘Level 2’.
The above questions are further split into subject elements (‘Level 3’), as
presented in the following three sections. These subjects have been used to
formulate the survey questions. A copy of the web-based questionnaire can
be found in Appendix 2 – Survey Questionnaire.
It is worth noting that many participants have a vested interest in PPP and
the results are therefore analysed in the light of existing literature, which, in
some cases, is also written by some of the participants.
The fact that PPP as a procurement form has a far shorter history in CEE will
make like-for-like comparisons in the research difficult, especially as most
organisations in CEE, as Snelson (2007, p. 31) points out, have their own
interpretations of PPP, apart from the classic definition of ‘risk being shared
by those best able to manage it’.
Chapter 3 – Research Methodology and Data Collection
20
3.1.1 Component A - Benefits of PPP
As stated in the introduction, the focus of this research is on the benefits for
the public authority as client as well as the end-user. The main benefits for
this public realm can be broken down in separate items as shown in Figure 5.
‘Level 3’ Subject of Component A - Benefits of PPP Item Code
Whole life costing encourages contractors to think 25 years ahead, hence encouraging long term overall cost efficiency.
A01
PPP encourages delivery on time as private consortium is only receiving payment once the object is ready to use.
A02
PPP is a catalyst for reforming public services. A03PPP allows for innovation due to the nature of output specification (i.e. contract not being prescriptive).
A04
PPP provides value for money (payment for service delivery, not the building / infrastructure itself).
A05
the risk is allocated to those parties that can handle it best. A06
Figure 5: Subjects regarding benefits of PPP – ‘Level 3’.
3.1.2 Component B - Differences between PPP in CEE and the UK
PPP projects may differ in various aspects with the most obvious
characteristics presented in Figure 6. The scope of these subjects is the
project, whereas the aspects of their environment are part of Component C.
‘Level 3’ Subject of Component B - Project Characteristics Item Code
types of project used (hospitals, transport, water/sewage) B01BOT-models used B02Public sector comparator as benchmark B03length of procurement time B04contractual provision for changes during preferred bidder stage B05quality of aesthetics B06functionality B07design control or supervision by an independent design institute (e.g. CABE in U.K.) B08
Chapter 3 – Research Methodology and Data Collection
21
design involvement by project participants B09design involvement by user and/or community B10Incorporation of innovation by contractor B11service standard of facility B12quality control of built facility and service offered B13contractual agreements/procedures for changes B14Risk types on the project B15
Figure 6: Subjects regarding differences in PPP projects – ‘Level 3’.
3.1.3 Component C - Differences between PPP markets in the UK and Eastern Europe
The differences between markets in Western Europe and countries in CEE
are mainly characterised by the transition from planned economies to free
market economies and recent EU accessions. Differences that can affect PPP
are presented in Figure 7.
‘Level 3’ Subject of Component C - Market Environment ItemCode
law/regulation for PPP C01availability of professional organisations to share local market knowledge C02best practice guidelines C03government support for PPP C04stage of competition law implementation C05track record of PPP projects in the country C06construction skills available C07access to EU funds and other development funds C08competition amongst contractors / operators C09competition amongst design firms / engineers C10availability of alternatives to PPP C11main drivers / forces to use PPP C12government needs for PPP projects C13
Figure 7: Subjects regarding differences in PPP markets – ‘Level 3’.
Chapter 3 – Research Methodology and Data Collection
22
3.2 Methodology
3.2.1 Approach
Despite the fact that PPPs are slowly initiated and of a long duration with
only a few projects per country, the questionnaire method has been
adopted, as opposed to a case study approach in order to achieve a sample
size that allows for statistical calculations. In the variety of countries a case
study in one country might not represent the general situation in all CEE
countries, which is asked for by the research question.
3.2.2 Structure
The subjects will be used to formulate the survey questions. Their results
will be first evaluated at ‘Level 3’ and later re-combined with a combined
evaluation at the ‘Level 2’ questions, before their results will finally be
analysed with regard to the research question on ‘Level 1’.
The key which links the individual questions to their original subject on ‘Level
3’ can be found in ‘8.1 Appendix 1 – Subject Codes and Survey Questions’.
However, in some cases, e.g. market risks and project risks, survey questions
refer to more than one of the subjects.
For the purpose of achieving an easy to answer questionnaire, the structure
of the three component questions, as derived from the research question,
Chapter 3 – Research Methodology and Data Collection
23
has been transformed into a structure more appropriate to typical PPP
elements and project phases, covered on individual web-pages within the
survey.
In order to strengthen or validate the questionnaire results, these are
combined with secondary data, if available, to achieve triangulation (Gill and
Johnson, 2002, p. 201) mainly on the ‘Level 3’.
3.2.3 Scope
Countries
The questionnaire has been designed for individuals involved in PPP projects
in CEE countries as shown in Figure 8, even if these individuals are based in
organisations outside these countries.
EU Member EU Candidate Other Bulgaria Czech Republic Estonia Hungary Latvia Lithuania Poland Romania Slovakia Slovenia
Croatia Former Yugoslav Republic of
Macedonia
Albania Montenegro Russia Serbia Ukraine
Figure 8: CEE countries included in the survey.
Chapter 3 – Research Methodology and Data Collection
24
PPP Types
The scope of PPP for the purpose of this research only includes projects of
physical structures such as infrastructure and buildings including their
maintenance. Therefore it does not include special forms of service PPP such
as education partnerships, IT projects or pure financial partnerships such as
microfinance initiatives. We will only look at PPP as an alternative to
conventional procurement and not at further alternatives such as
privatisation, even if in some cases this might be a viable alternative, e.g. for
airports. Similarly we will not try to assess which rights, obligations and
liabilities as defined by Abdel-Aziz and Russell (2001 p. 891) the public
authorities have and if PPP, as compared to conventional procurement, will
provide a better or worse solution to meeting these requirements.
Participants of Questionnaire
Due to the nature of PPP projects being large, complex and long term, there
are a variety of stakeholders involved, ranging from the policy making
government to the end-user of the facility. The questionnaire was sent to
specific individuals that have been identified from literature and on the
internet, rather than posting the questionnaire on portals where a large
amount of visitors would dilute the few expert answers based on relevant
experience of managing PPP in CEE. The different types of stakeholders
approached are presented in Figure 9.
Chapter 3 – Research Methodology and Data Collection
25
Organisation group Organisation types Authority (as PPP client) • municipalities
• local government • port and airport authorities
Consultant • lawyers • quantity surveyors • accounting firms
Contractor • general contractors • specialist contractors
Design firm, engineering firm • architects and planners • engineers
Funder/Investor • development banks • investors
Government • government bodies • EU Commission
Operator • operators Professional/Interest Group • associations
• professional bodies • other NGOs
Research Institute • universities • research institutes
Figure 9: Overview of organisation types included in the survey.
3.2.4 Questionnaire Structure
The questionnaire asked the respondents 3 questions about their
organisation and 29 questions about the most recent PPP project in CEE
they have been involved in, which was referred to as Reference Project. The
structure is designed to allow for the four purposes of a questionnaire
(Hague, 2002, p. 106) of (i) drawing accurate information from respondents,
(ii) providing a structure that applies to all types of respondents (see Figure
9), (iii) providing a standard form in which the facts are written down, and
(iv) facilitating data processing.
Chapter 3 – Research Methodology and Data Collection
26
In total 223 individuals from 133 organisations have been approached by
email and invited to complete the survey online and to pass the email on to
further experts if they so wish .
By using the techniques for self-completion questionnaires recommended by
Hague (1993, p. 101-110) the incentive has been offered to send the findings
of the survey, in order to improve the response rate, and individuals have
therefore also been allowed to only partially complete the questionnaire as it
was expected that many individuals might not be in a position to answer all
questions. The underlying rationale was that for the aggregate several
partially completed questionnaires will provide a better result than too few
completed questionnaires at all.
Chapter 4 – Evaluation of Survey Data
27
4 Evaluation of Survey Data
Following the approach of the identified individuals and organisations the
survey has been filled out by 74 individuals, but has been entirely completed
by 31. Although the questionnaire has been answered by experts for PPP the
results should be treated with caution as for some countries the results are
based on a small number of datasets. The individuals relate their experience
to one particular project, as asked by the questionnaire, and not to the
average of all projects. This approach has been chosen in order to allow
cross-tabulation in order to find patterns which would not be able to
discover if the participants had been asked for general experience across the
whole range of projects.
From all respondents 27.3% were from public organisations (21.8%
government and 5.5% authorities as clients) and 5.5% from research
institutes and the remainder from private organisations (56.3%) and NGOs
(10.9%). Figure 10 gives a graphical representation of the number of
projects by the type of organisation involved in these projects and the
location of the project. The summary of all respondents’ answers can be
found in ‘8.3 Appendix 3 – Survey Results’.
Chapter 4 – Evaluation of Survey Data
28
Figure 10: Number of Reference Projects by involved organisation type and country of
project location.
4.1 Generic Results
4.1.1 Projects
The majority of Reference Projects have been in Hungary (11.7%), Poland
(10.4%) and the Czech Republic (9.2%) with the most common type of
projects being roads (41.4%), schools (17.2%) and water and sewage
Chapter 4 – Evaluation of Survey Data
29
projects (10.3%). The complete range of projects and their location is
graphically presented in Figure 11.
Figure 11: Number of Reference projects by type and location.
It should be noted that some projects are in their early stages, either
procurement or construction, so that not all answers could be answered.
Chapter 4 – Evaluation of Survey Data
30
4.2 Results by Categories
We employ the most widely used statistical measure of association, cross-
tabulation analysis (Baker, 2003 p. 310), in order to find apparent patterns of
association. This will be carried out in the following chapter in order to
analyse the results of each subject to enable better comparison with PPP in
the UK e.g. regarding certain project types.
Chapter 5 – Comparison of PPP Benefits in CEE and UK
31
5 Comparison of PPP Benefits
in CEE and the UK
In the following we compare the results of the survey with equivalent
secondary data on PPP in the UK. The survey data is partly supported by
secondary data. This comparison is carried out for each individual subject of
all three research components.
5.1 Combining the data
In order to investigate the differences between PPP in the UK and in CEE
(the main level of comparison) it is necessary to look at differences between
PPP and conventional procurement forms (secondary level of comparison) in
order to achieve a better understanding of these main differences, as
illustrated in Figure 12. Such conventional procurement forms vary by
country an can include standard forms of building contracts, design-and-build
contracts and partnering contracts, all of which exist in some countries but
not in all, and therefore do not allow for complete like-for-like comparisons.
Chapter 5 – Comparisons of PPP Benefits in CEE and UK
32
conventional procurement
forms
conventional procurement
forms
conventional procurement
forms
conventional procurement
forms
UK Market CEE Markets
PPP procurement
conventional procurement
forms
PPP procurement
conventional procurement
forms
Secondary direction of comparison
(comparison not part of this survey)
Component B
Component C
Component A
Main direction of comparison
Secondary direction of comparison
Figure 12: Directions of comparisons and component scopes of the analysis.
5.1.1 Component A - Benefits of PPP
In the following, those survey results that relate to PPP benefits, partly
supported with additional secondary data, are compared with secondary
literature on the equivalent issues for PPP in the UK and summarised in an
overview table before the key differences are further analysed.
Chapter 5 – Comparison of PPP Benefits in CEE and UK
33
A01: Whole life costing encourages cost efficiency
Applicable to both, CEE and the UK, the costs for PPP are higher as
compared to conventional projects due to the risks carried by the private
sector, the costs of the loan structuring and the private sector’s higher
financing costs (Thomson, et al., 2005 p. 3).
CEE:
In the minority of cases (28.9%) a Public Sector Comparators (PSC) was
used on the Reference Projects. Many countries have no project with a PSC
used, which is seen as an essential tool for whole-life costing and to get a
comparison with a conventionally procured equivalent project. Only in
Slovakia, Latvia and Poland has there been relatively frequent use of PSC.
The survey also reveals that maintenance budgets not being ring-fenced
count for 17.5% of all risks on PPP in CEE. As such budgets are essential to
keep the project running in the desired scope, the achievement of cost
efficiency seems limited in most CEE countries.
UK:
Whole-life costing is seen as a benefit of PPP as the investors will be
responsible for construction, operation and service delivery (Yescombe,
2007, p.21). PSC are used in 84% of the cases analysed by Low et al. (2005,
p. 2) and budgets are effectively ring-fenced for maintenance of these assets.
Chapter 5 – Comparisons of PPP Benefits in CEE and UK
34
A02: Delivery on time
CEE:
A slight majority of the participants (37.5%) states that conventional
procurement would have been faster on the Reference Project, as compared
to those who disagree with that (29.2%). Whereas in Slovenia and the three
Baltic States the participants on average think that conventional procurement
would have been slower, the opposite can be said for participants with
Reference Projects in Albania, Slovakia and the Ukraine. Snelson (2007, p.
33) points out that some legislation in place in transition countries requires
permissions for certain activities in PPP projects that can be lengthy to obtain
and thereby making this form of procurement much longer. This can be seen
in the example of the Bulgarian airport of Gorna Oriachovista where
concerns of necessary investments before PPP implementation are causing
debate and delay (Wirtschaftsblatt, 2007, p. 10).
UK:
The key principle of concession contracts of ‘no service / no pay’ is not only
ensuring value for money but is also an incentive for the private firm to
deliver the project on time however PPP take longer to prepare due to their
complexity (European Investment Bank, 2004 p. 4-5). According to Pitt
(2006, p. 364) with PFI, only 24% of projects are late, as compared with
70% under conventional procurement.
Chapter 5 – Comparison of PPP Benefits in CEE and UK
35
A03: Catalyst for reforming public services
CEE:
According to the survey the governments have been the main drivers, far
ahead of all other forces, to use PPP on the Reference Project despite the
fact that this form of procurement is in such an early stage of implementation
in CEE, whereas private operators are also seen as main initiators in Bulgaria,
Estonia and Slovakia.
UK:
In the UK PPP is seen to act as catalyst for reforming public services
(Cheatham, et al., 2007 p. 2) which can happen in various ways such as
creating transparency in costing, introducing procurement skills and
management skills (Yescombe, 2007, p. 25-26).
A04: PPP allows for innovation
CEE:
With 63.6% agreeing that the use of PPP on the Reference Project
stimulated innovation or different approaches to achieve the specified design
this benefit seems to be available in most of the projects, except some road
schemes.
UK:
This is similar to PPP in the UK, where it is seen as one of the benefits of
PPP by allowing the contractor to compete in offering unique and creative
Chapter 5 – Comparisons of PPP Benefits in CEE and UK
36
approaches to the delivery of the required project (Birnie, 1999; NS, 2000;
in Akintoye et al., 2003, p. 7).
A05: PPP provides value for money
CEE:
The survey reveals that the payment models on most projects (47.6%) are a
mixture of payment for use and a fixed payment for availability (e.g. shadow
tolls and availability for toll roads). Roads are of all types of payment models,
whereas water and sewage are all of a mixed model, consisting of a fixed and
a use dependent part. Therefore in not all of the projects is value for money
achieved, especially with the rare use of PSC.
Due to long set-up times and transaction costs value for money is particularly
effective if the concession runs over a long time, which seems to be valid in
CEE with examples being the Varna and Bourgas Airports, which show that
concession periods can be as long as 35 years (Sofia News Agency, 2006).
UK:
In the UK a majority of authorities considered PPP to be good or excellent
value for money (Low et al., 2005 p. 3). The associated benefit of an off-
balance sheet asset requires that the risks, for both project completion and
either project use or project availability, are transferred to the private sector
in accordance with the guidelines published by Eurostat (Thomson et al.,
2005 p. 3).
Chapter 5 – Comparison of PPP Benefits in CEE and UK
37
A06: Risk is allocated to those who can handle it best
CEE:
Even if more participants (44.4%) agree that risks are allocated fairly, as
compared to those that disagree (33.3%), this is not a clear cut result. In
CEE risk allocation it is often interpreted as simply passing risk to the private
sector and with this concept such countries frequently find problems
(Snelson, 2007 p. 31).
UK:
Whereas authorities are satisfied with their risk allocation in PFI schemes,
this view is only shared by two thirds of the contractors (National Audit
Office, 2001, p. 4). The transfer of design, construction and operation risks
to the private sector is seen as one of the benefits of PPP and on most of the
PFI projects in the UK, this is the case (Akintoye et al., 1999; in Akintoye et
al., 2003, p. 8).
Summary for Component A comparisons
A summarised combination of the above comparisons is presented in Figure
13. The most apparent differences are further analysed thereafter.
Chapter 5 – Comparisons of PPP Benefits in CEE and UK
38
‘Level 3’ Subject
CEE UK Difference (CEE perspective)
A01: Whole life costing
- PSC used frequent only in Slovakia, Latvia and Poland.
- Maintenance budget not ring-fenced: 17.5% of risks
- PSC generally used - Maintenance budget
ring-fenced
- PSC used frequent in minority of countries
- Maintenance budget not ring-fenced: 17.5% of risks
A02: Delivery on time
- PPP take longer - Some delaying legis-
lative procedures
- PPP take longer - Some delaying legislative procedures
A03: Catalyst for reforming public services
- Applicable but is not the main reason why PPP is embraced
- Applicable - Applicable but is not the main reason why PPP is embraced
A04: PPP allows for innovation
- Stimulates innovation - Stimulates innovation - No difference apparent
A05: PPP provides value for money
- Not ensured in general
- Good or excellent value for money
- Value for money is only achieved in general
A06:Risk is allocated to those who can handle it best
- only in slight majority - in most cases - less favourable allocation of risks in CEE
Figure 13: Component A differences.
In the following the major differences, as identified above, are discussed in
more detail, with the focus being on CEE, and finally summarised in a brief
overview that forms a basis for conclusions and recommendations in Chapter
6.
Difference I: Whole life costing and value for money is worse in CEE
than in the UK
From all the identified benefits of PPP particularly value for money is not
equally available to projects in CEE. The survey further reveals that on those
projects, where a PSC has been used, there was no other procurement
alternative available. Given the original idea of using a PSC to decide whether
to go for PPP or a conventional procurement, this result seems surprising
and an explanation might be that PSC have been used as a necessary tool to
Chapter 5 – Comparison of PPP Benefits in CEE and UK
39
calculate a benchmark cost which is subsequently used to negotiate the
concession price with preferred bidders.
Difference II: Delaying legislative procedures
In addition to PPP taking longer to prepare, procure and implement, there
are delays due to the legal framework being not yet in place or in the process
of being implemented. Examples underlining this issue are the appeal of state
prosecutors in Bulgaria to block the signed concession for the Trakia
Motorway due to lack of transparency and unfavourable terms (The
Economist Intelligence Unit, 2005, p. 9) or the injunction of the Czech anti-
monopoly office banning the transport ministry from introducing an
automatic tolling system (The Economist Intelligence Unit, 2006, p. 12).
According to the survey PPP is considered to be faster in those countries,
where there is guidance on PPP in the form of law, which apparently helps in
speeding up the process.
Difference III: Risk allocation is less favourable
An unfair risk allocation can be found on those Reference Projects, where
there were no PPP guidelines for ‘best practice’ available by an expert panel
or professional body in contrast to projects in countries where such
information is available.
Chapter 5 – Comparisons of PPP Benefits in CEE and UK
40
Findings and observations in brief
Difference (CEE perspective)
Finding Finding Code
Whole life costing and value for money is worse
→ If no alternative to PPP is available, the use of a PSC is common.
F1
Delaying legislative procedures
→ PPP is slower on projects in countries with no specific PPP legislation.
F2
Risk allocation is less favourable
→ If PPP guidance is unavailable, an unfavourable risk allocation is common.
F3
Figure 14: Component A findings in brief.
5.1.2 Component B – PPP Project Differences
In the following, those survey results that relate to PPP projects, partly
supported with additional secondary data, are compared with secondary
literature on the equivalent issues for PPP in the UK and summarised in an
overview table before the key differences are further analysed.
B01: Project types
CEE:
In contrast to the UK with the most diversified PPP project spectrum in
Europe (Thomson, et al., 2005 p. 3) the PPP projects in CEE are mainly
roads (41.4%), schools (17.2%) and water and sewage projects (10.3%). In
addition there are special transport concessions e.g. for ports
(Wirtschaftsblatt, 2007, p. P. 10). The survey also reveals that there are
slight predominance of road projects in the Czech Republic and Hungary and
water and sewage projects in the Ukraine.
Chapter 5 – Comparison of PPP Benefits in CEE and UK
41
UK:
In the UK the palette of project types is much wider and comprises, in
addition to transport which accounts for 37% of the cumulative value of PFI
spending, buildings for health (12%), defence (12%), education (6%),
prisons (2%), environment (2%) and others (17%) (IFSL, 2003, p. 9).
B02: BOT-models used
CEE:
The Build, Operate, Transfer (BOT) boom of the 1990s has influenced
initiatives but today the Design, Build, Finance, Operate (DBFO) form is used
more often (34.5%) than BOT contracts (27.6%) as the survey shows.
BOOT is only used (6.9%) with the remainder being other forms. For water
and sewage projects mainly BOT contracts are used, whereas for road
projects either BOT or DBFO contracts are common. According to IFSL
(2003, p. 8) this form is closer to privatisation as compared to the other PPP
models.
UK:
According to Yescombe (2007, pp. 7-8, 11), the difference between BOT
and DBFO is more a historical with DBFO being a subsequent enhancement
of BOT models, whereby PFI can take any of the contract models. This shift
from BOT to DBFO is similar to the findings for CEE.
Chapter 5 – Comparisons of PPP Benefits in CEE and UK
42
B03: Public sector comparator as benchmark
CEE:
In the survey only 28.0% state that a PSC has been used, as opposed to
44.0% denying the use of such benchmark with the remainder being unable
to give that information. If a PSC was used, it was mainly on school projects
and a minority of road projects.
To enable a meaningful use of such a benchmark tool whole life costing
needs to be used.
UK:
According to Yescombe (2007, p. 66-67), PSC are used only in early stages
when it can possibly affect the decision to use PPP and the only reasons not
to use it are if PPP is the only alternative which is the opposite to the survey
findings in Finding F1 (Figure 14). Low et al. (2005, p. 2) find that 84% of
projects a PSC was used.
B04: Length of procurement time
CEE:
As presented for Subject A02 (delivery on time), only a slight majority of
participants agree that conventional procurement would have been faster.
Due to the lengthy implementation process and staff turnover, or change in
political agendas, the newly implemented guidelines and PPP units in
Chapter 5 – Comparison of PPP Benefits in CEE and UK
43
transition countries are subject to change which all increases the initiation
time (Snelson, 2007, p.36.).
UK:
Due to stable political conditions in the UK, such increases in set-up time for
projects are not an issue. However, due to PPP being more complex projects
procurement periods are longer for PPP (Yescombe, 2007, p. 26),
irrespective of the location.
B05: Provisions for changes in preferred bidder stage
CEE:
The survey indicates that in the majority of cases (27.3%) the concession
rate would change if changes are made during the preferred bidder stage, as
compared to only few cases (13.6%) where this would not affect the
concession rate, with a majority (59.1%) being unable to give an answer.
Mainly changes on road and rail projects would change the concession rate
whereas changes on water and sewage projects would not affect it.
UK:
Low et al. (2005, p. 2) find that this would be the case in more than half the
PPP projects. According to Yescombe (2007, p. 257) price changes in
preferred bidder stage would arise if delays in this stage occur since
contractors cannot be expected to keep their prices indefinitely.
Chapter 5 – Comparisons of PPP Benefits in CEE and UK
44
B06: Quality of aesthetics
CEE:
A slight majority of the respondents agree that PPP delivered better
aesthetics on the Reference Project as compared to a conventional
procurement, whereas the majority (56.5%) thinks there would have been
no difference. Professional / interest groups strongly agree that PPP
delivered better aesthetics, whereas some government bodies disagree.
Better aesthetics have been achieved mainly on school projects.
UK:
This is in line with the survey by Low et al. (2005 p. 2) where PPP delivered
only slightly better aesthetics.
B07: Functionality:
CEE:
The respondents nearly all agree that PPP delivered better functionality on
the Reference Project as compared to conventional procurement with 9.1%
even strongly agreeing. Similarly to the results for aesthetics, the
participating professional and interest groups strongly agree that PPP
delivered better functionality.
Chapter 5 – Comparison of PPP Benefits in CEE and UK
45
UK:
The above clear cut result is better as compared to the equivalent
undertaken by Low et al. (2005 p. 2) where PPP delivered only slightly better
functionality.
B08: Design supervision by independent ‘watchdog’
CEE:
A clear majority of respondents (66.7%) state that there was no such
independent design watchdog involved and only a minority (9.5%) affirms
that such an organisation was involved with the remainder of participants
being unable to answer.
UK:
In the UK such supervision is done by the CABE, as government advisor,
regarding the design for both PFI and other projects, however only on a
voluntarily basis.
B09: Design involvement by stakeholders
CEE:
The majority of the participants (54.2%) agrees or strongly agrees that their
organisation has been involved in the design process of the Reference
Project. Mainly authorities and consultants had such an involvement in
contrast to funders and some government bodies which had only little
involvement or none at all.
Chapter 5 – Comparisons of PPP Benefits in CEE and UK
46
UK:
Low et al. (2005) could also confirm that mainly authorities had involvement
in the design, as compared to other project participants.
B10: Design involvement by users and community
CEE:
The survey found that the end-user had, on average, only little involvement
in the design of the project, e.g. through consultations. Most participants
(54.5%) either ‘disagree’ or ‘strongly disagree’ than the fewer participants
(40.1%) that ‘agree’ or ‘strongly agree’ that the end-user had such
involvement. Only on road and school projects did there seem to have been
involvement, in contrast to water and sewage projects.
UK:
The design involvement by the end-user and the community would be part of
the planning process with a planning enquiry for large projects. Some
anecdotal evidence suggests that for some PFI schemes political agendas and
pressures are often of a higher priority than following normal planning
procedures which is limiting the optimal involvement by the community.
B11: Innovation by contractor
CEE:
A large majority of participants (63.6%) agrees that PPP did stimulate
innovation or different approaches to achieve the specified design which is in
Chapter 5 – Comparison of PPP Benefits in CEE and UK
47
contrast to Snelson’s (2007, p. 33) findings that innovation is often not
possible in transition countries as the legislation has not been created to
allow such flexibility. Only a quarter of participants (27.3%) reflects
Snelson’s findings with the remainder being unable to give an answer.
Innovation was mainly stimulated on rail, school and water and sewage
projects. The organisations least optimistic about the stimulation of
innovation were authorities and funders.
UK:
Low et al. (2005, p. 2) found that PPP stimulated innovation, although this
opinion was mainly shared by contractors and not so much by authorities.
B12: Service standard of the facilities
CEE:
Of all respondents 56.5% state that PPP delivers a better service standard
than a conventional procurement would have delivered. Only 21.8%
disagrees with that and the remainder is unable to give an answer. The
better service standards are mainly achieved on rail and water and sewage
projects.
UK:
The above findings are slightly more in favour for PPP than the survey
findings that Low et al. (2005, p. 2) have undertaken where PPP operators
Chapter 5 – Comparisons of PPP Benefits in CEE and UK
48
neither delivered a better nor a worse service standard than the public
sector.
B13: Quality control of built facility and service offered
CEE:
According to the survey most participants (45.0%) affirm that there has been
an evaluation of the Reference Project by an independent party regarding the
built quality and the service offered. Fewer respondents (30.0%) disagree
with that and the remainder was unable to give an answer.
UK:
Independent audits would be carried out by the National Audit Office which
investigated performance levels of PFI and recommends that the partnership
framework need be made to work in practice (National Audit Office, 2001,
p. 5). At least half of all operational PFI projects have provisions in their
contracts that require the value of certain services, such as catering and
cleaning, to be tested at intervals (National Audit Office, 2007, p. 4).
B14: Contractual agreements / procedures for change
CEE:
The survey reveals that on a large majority (61.9%) of the Reference
Projects there are contractual provisions in place that would allow the
authority to demand changes such as a change in scope or in specification.
Chapter 5 – Comparison of PPP Benefits in CEE and UK
49
This is mainly the case for rail and water and sewage projects, but not for
school projects, where changes might also occur.
UK:
In the UK such mechanisms are there but are often less flexible than
conventional contracts and contractual change procedures are complex and
as a result authorities seek to wrap up multiple changes into a single
negotiation to make one-off payments rather than changing the financial
model (Low et al., 2005 p. 2-3).
B15: Risk types of the projects
CEE:
The survey shows that political risk is seen as the single largest source of risk
(32.5%) of all risk sources which is also shared by Snelson (2007, pp. 35-36)
who defines the political risk as the main of three risks in transition countries
with the other two being commercial risk and macroeconomic risk. The
second most applicable risk on the Reference Projects is capacity forecast
(22.5%), which is particularly the main risk on those projects, where risks
are not allocated fairly, according to the respondents. On projects where the
EIB is involved, risk transfer is usually evaluated on a case-by-case basis with
the use of a PSC since optimal risk allocation is the single most important
factor in structuring PPP (European Investment Bank, 2004 pp. 4-5). Snelson
(2007 p. 36) defines demand risk and revenue risk as main commercial risks
Chapter 5 – Comparisons of PPP Benefits in CEE and UK
50
which is particularly an issue in transition countries where economies trying
to grow to levels that have never been achieved before.
UK:
The main risks in debate are on long-term contract flexibility whereas the
political commitment seems stable towards supporting PFI (Yescombe, 2007,
p. 39).
Summary of Component B comparisons
A summarised combination of the above comparisons is presented in Figure
15. The most apparent differences are further analysed thereafter.
‘Level 3’ Subject
CEE UK Difference (CEE perspective)
B01: Project types
- roads - schools - water and sewage
- health - schools - water and sewage
- more roads
B02: BOT-models
- DBFO - BOT in 90ies
- DBFO - BOT previously
- no significant difference
B03: PSC as benchmark
- in 26.7% of cases used
- in 84% of cases used - PSC used less often
B04: length of procurement time
- conventional pro-curement faster
- change in political agendas
- conventional procurement faster
- change in political agendas add to procurement time
B05: changes during bidder stage
- in about 2/3 of cases it would change concession rate
- in >50% of cases it would change the concession rate
- no significant differences
B06: quality of aesthetics
- slightly better with PPP
- slightly better with PPP
- no significant differences
B07: functionality
- better with PPP - slightly better with PPP
- slightly more function-ality gain with PPP
B08: design con-trol/supervision by independent institute.
- no control in majority of cases
- by CABE as government advisor (on voluntary basis)
- less design control or supervision
B09: design involvement by stakeholders
- in majority of cases - mainly authorities
- in majority of cases - mainly authorities
- no difference
Chapter 5 – Comparison of PPP Benefits in CEE and UK
51
B10: design involvement by user and/or community
- some yes, but most had no involvement
- generally yes - exceptions in some
cases
- less end-user involvement
B11: innovation by contractor
- in most cases - except from per-
spective of authorities and funders
- in most cases - except from
perspective of authorities
- no significant difference
B12: service standard of facility
- generally better with PPP
- neither better nor worse
- service standard better with PPP
B13: quality control of facility and service
- in most cases - most projects have testing provision in place
- no significant differences
B14: contractual procedures for changes
- on majority of projects
- on majority of projects
- no differences
B15: Project risks
- mainly political risk - capacity forecast
- long-term contract flexibility
- more political risks - more capacity
forecast risks
Figure 15: Component B differences.
The above analysis reveals that about half the identified subjects are not
much different from those in the UK. The main differences are the whole-life
costing issues, projects risks and types of projects, as discussed below.
Difference I: More road projects
The need for motorways is in line with the infrastructure needs identified by
Howcroft (2004, p. 23). According to the survey especially in Hungary,
Poland and Russia there are a substantial amount of road projects with
mainly mixed or international contractors (88.9%) involved.
Difference II: Change in political agendas add to procurement time
Secondary data identified that instability in political agendas slows the
implementation of PPP. The survey reveals that substantial track records are
to find in those countries that have government commitment to PPP, which
Chapter 5 – Comparisons of PPP Benefits in CEE and UK
52
is likely to have been available for the past years as track records take long to
build up. In countries with no track record, a conventional procurement was
perceived to be faster than in those with such a track record.
Difference III: Less design control
The survey reveals that even on those projects, where no such supervision
took place, more than half the participants agree that the design quality is
better than it would have been under a conventional procurement, so that
the absence of such control seems not to hinder this.
Difference IV: Less end-user involvement
On those projects where end-users had some involvement in the design,
both design and functionality are not perceived to be better or worse. Either
such involvement seems not essential for PPP or the involvement has not
been carried out in a way that would improve the service and appearance of
these projects.
Difference V: Service Standard better with PPP
The service standard seems far higher on those projects, where an evaluation
by an independent party of the built quality and the service offered took
place. It seems that the anticipation of such a control puts pressure on the
private party to deliver service of higher quality.
Difference VI: More political risks and capacity forecast risks
Political risk is stated as the main risk on those projects, where international
contractors are appointed. Local contractors seem to be more confident in
Chapter 5 – Comparison of PPP Benefits in CEE and UK
53
their governments. In those countries, where political risk is stated as the
main risk, there has not yet been built up a substantial track record.
Capacity forecast risks are stated as main risk, along with political and
maintenance risks, on those projects where there had been an end-user
involvement. This end-user involvement has probably been undertaken in
order to find out expected future demands of end-users, however with
limited success.
Findings and observations in brief
Difference Finding Finding Code
More road projects → Road projects, mainly by mixed or international contractors
F4
Political changes in agenda
→ Political changes in agenda increase procurement time. F5
Less design control → Design control has no effect on design quality. F6Less end user involvement
→ User involvement has no effect on design or functionality.
F7
Service standard better with PPP
→ If evaluation by independent body is given, service and built quality are strongly improved.
F8
More political risks and capacity forecast risks
→ International contractors perceive potential political problems as more risky than local contractors. If political risks are present, track records are weaker.
F9
F10More capacity forecast risks
→ End-user involvement is carried out mainly on projects where capacity forecast risks occur, but this does not eliminate them.
F11
Figure 16: Component B findings in brief.
5.1.3 Component C – Market Environment
In the following, those survey results that relate to the market environments
in the CEE countries, partly supported with additional secondary data, are
compared with secondary literature on the equivalent issues for PPP in the
Chapter 5 – Comparisons of PPP Benefits in CEE and UK
54
UK and summarised in an overview table before the key differences are
further analysed.
C01: Law and regulation for PPP
CEE:
The majority of participants (58.6%) state that there is guidance on PPP in
the form of Law in the country of the Reference Project. With 34.5% saying
there is no such legal guidance, only few participants have not been able to
answer this question. In line with this, only 20.0% of participants see lack of
legal framework as a project risk. According to Zverev et al. (2007, pp. 7-8)
in CEE only Lithuania and Bulgaria have a high quality concession as well as
the Czech Republic and Slovenia in respect to other relevant law in the
absence of concession law. The Czech Republic and Poland both have a PPP
unit ‘in progress or existing with limited consultative capacity’ and a
‘comprehensive legislation being drafted (European Investment Bank, 2004,
p. 15).
UK:
In the UK there is no specific law for PPP or PFI. The legislation of main
relevance is the procurement law as discussed in “C05-Stage of competition
law implementation”. For governing the partnerships and concession there
are standard terms and conditions for PFI/PPP projects by HM Treasury.
Chapter 5 – Comparison of PPP Benefits in CEE and UK
55
C02: Availability of professional organisations
CEE:
In 54.0% of the countries of the Reference projects there are professional
organisations available that issue guidelines on PPP. However, the expert
panels or organisations that issue guidance on PPP will not have the skills
required and practical experience if track records are only starting to be built
up (Howcroft, 2004 p. 22).
UK:
There are a number of organisations in the UK that gathered experience
from the history of PPP and PFI since its introduction in 1992. Such
organisations include ‘Partnerships UK’ as joint venture between HM
Treasury and private sector participants, and the ‘4Ps’ unit which supports
local authorities in the procurement of PFI/PPP projects.
C03: Best-practice guidelines
In 2003 the European Commission published guidelines for successful PPP
(European Investment Bank, 2007, p. 13).
CEE:
The survey reveals that in less than half the countries (36.7%) PPP guidelines
have been used. However these are likely to be different for each country as
there is neither a single approach to PPP at either the national or local level
Chapter 5 – Comparisons of PPP Benefits in CEE and UK
56
nor a single best-practice recipe for all countries or situations (Snelson, 2007
p. 32).
UK:
Due to the experience that the government and the private firms have
gathered in the history, there are less general guidelines on how to
implement PPP in the UK, but more specific guidelines, for example the
Department of Health guidelines for PFI.
C04: Government support for PPP
The European Commission Green Paper on PPPs and Community Law on
Public Contracts and Concessions have neither a PPP definition nor a policy
(Howcroft, 2004 p. 22) but its publication is clearly a sign that the EU might
change from being a dormant stakeholder to become a dominant one
(Mitchell et al., 1997, p. 860).
CEE:
With a majority (70.0%) confirming that there is significant government
support for PPP this leaves a fifth (20.0%) of respondents disagreeing and a
small remainder being unable to give an answer. However, even if one
government might support PPP projects, a new government might cancel
these and therefore construction companies try to fit the procurement
within the election cycle (Snelson, 2007 p. 36). An ideal support would
comprise (i) clear and long term political will, (ii) a good understanding of
Chapter 5 – Comparison of PPP Benefits in CEE and UK
57
PPP at political and policy level, (iii) a good understanding of how PPP should
be structured, (iv) institutional capability and capacity to undertake complex
projects and procurements and (v) an enabling environment covering
legislative, commercial and financial requirements (Howcroft, 2004 p. 22).
After some unsuccessful initiatives of CEE countries during the 1990s these
are now re-examined in the light of that experience (European Investment
Bank, 2004 p. 5).
UK:
As the country having introduced PPP in the form of PFI in 1992 with about
20% of public procurement carried out as PPP there is undoubted
government support. This is in line with the public sector reform movement,
known as ‘New Public Management’ (NPM), which encourages
decentralisation of government and contracting-out of public services to the
private sector and separating responsibility for the purchase of public
services from that of the provision (Yescombe, 2007, p. 16).
C05: Stage of competition law implementation
For all EU member states the new Directives, as adopted in 2004, have been
designed to meet particularly complex contracts, such as certain forms of
PPPs (European Investment Bank, 2004 p. 12).
Chapter 5 – Comparisons of PPP Benefits in CEE and UK
58
CEE:
In the majority of countries (67.7%) competition law for tendering PPP
contracts seems to be in place at the time of the survey. However, according
to Snelson (2007 p. 33), to date many contracts have failed and been subject
of compensation payments because of lack of transparency of legislation and
fair competition for the contracting of PPP.
UK:
The Public Services Contracts Regulations 1993 strongly recommends the
negotiated procedure for all PFI projects (Akintoye, et al., 2003, p. 174) and
the Competitive Dialogue, introduced by the EU in 2006, better
accommodates some strict national procedures for PPP bidding (Yescombe,
2007, p. 78).
C06: Track record of PPP projects
CEE:
Only a minority of participants (26.7%) agrees that their country of the
Reference Project has a substantial track record of PPP projects. All other
participants are equally split between disagreeing or being neutral about this
issue. A summary by the European Investment Bank (2004, p. 4) shows that
Romania and Hungary have ‘many procured projects and some projects
closed’.
Chapter 5 – Comparison of PPP Benefits in CEE and UK
59
UK:
Since 1987 (the PFI introduction as backdated by the government
(Yescombe, 2007, p. 35), all government bodies have commissioned 747 PFI
projects with a total capital value of £47.6bn (Yescombe, 2007, p. 37) in all
sectors as discussed in ‘B01 Project types’.
C07: Construction skills available
CEE:
The availability of contractor capacity, besides the investor capacity, is an
essential requirement for successful PPP (European Investment Bank, 2004
p. 4) and the fact that these are applied across borders is evidenced in the
survey with 30.8% of contractors being international and 42.3% being mixed
international and local. The remaining 26.9% are local firms, some of which
might be smaller companies which make use of the opportunity to
participate on PPP through joint-ventures (European Investment Bank, 2004
p. 4).
The need to commission international construction companies is evidenced
by the example of the Ukrainian government which intends to appoint
construction firm Bouygues and construction and operator firm Vinci as long
term strategic partners to upgrade the motorway network (Ixpos, 2007a).
Chapter 5 – Comparisons of PPP Benefits in CEE and UK
60
UK:
The amount of projects in construction and in operation suggests the
presence of relevant skills available. The companies with such skills are both
British, e.g. Amec, and of foreign origin with a British entity, e.g. Skanska,
Bouygues Construction and Vinci.
C08: Access to funds
CEE:
The survey reveals that funds involved include mainly other sources (56.3%)
than the suggested sources of development banks (21.9%) or foreign direct
investment (FDI) (21.9%). Such other sources are mainly the European
Investment Bank (EIB) and commercial banks. The EIB found that its loan
funding can be successfully combined with either public or private sector
funding and in 2003 the European Commission published guidelines for
successful PPP that addressed how EU grants could be integrated into PPP
(European Investment Bank, 2004 p. 13) e.g. for the PPP projects related to
the EM 2012 in Poland and Ukraine (Ixpos, 2007).
UK:
PPP does not necessarily require capital financing and in the UK there are
outsourcing contracts in place (Snelson, 2007 p. 31).
Chapter 5 – Comparison of PPP Benefits in CEE and UK
61
C09: Competition amongst contractors
CEE:
The survey responses suggest there is a high level of competition as 56.5%
of the respondents ‘agree’ or ‘strongly agree’ that there was significant
competition from contractors and operators on the Reference Project. As
construction companies and concessionaires are looking for certainty in the
market and in the product, transition countries need to offer good policies as
compared to more established economies such as Western Europe or the
United States.
UK:
Competition in the UK seems to be strong as contractors accept
inappropriate allocation of risks in order to win the contract (National Audit
Office, 2001, p. 9).
C10: Competition amongst design firms
CEE:
The survey shows that there is slightly less competition for design and
engineering firms than there is for contractors with 52.4% ‘agreeing’ or
‘strongly agreeing’ that there was significant competition. As Snelson (2007,
pp. 35-36) points out, inflation, interest rates and currency exchange rates,
together with a possible low credit rating of countries, are more of a
concern to private firms when bidding in CEE countries than in the UK.
Chapter 5 – Comparisons of PPP Benefits in CEE and UK
62
UK:
There seems to be hardly any difference to the ‘healthy’ level of competition
as found by Low, et al. (2005, p. 2).
C11: Availability of alternatives to PPP
CEE:
In the survey a majority of respondents (69.6%) say there was no alternative
to PPP on the Reference Project because the required capital would not have
been available. The remainder is about equally split between either
disagreeing or being unable to answer. A further reason why PPP is the only
option is the Maastricht requirements on public spending. For example Latvia
has the largest current-account deficit, 21% of its GDP in 2006, of all CEE
countries and almost everywhere public spending is higher than it should be
for middle-income developing economies (The Economist, 2007, p. 37).
The lack of options available seems to force authorities to create special
forms of PPP as some of the projects in CEE are not in line with the original
PPP ‘philosophy’ by being restructured, partially owned by the government
or contracts not being a true form of PPP (Snelson, 2007, p. 35).
UK:
The absence of alternatives to PPP is equally stated by many authorities in
the survey that Low et al. (2005, p. 3) undertook.
Chapter 5 – Comparison of PPP Benefits in CEE and UK
63
C12: Main drivers and forces to use PPP
CEE:
The main drivers for PPP seem to be initiatives by the government (58.3%)
underlining the fact of their needs for this form of procurement. Far smaller
driving forces are initiatives by private operators (13.9%) and private
investors (8.3%). The fact that EU funds can be used or that specialist
knowledge on parts of the authority side is not available is not seen as a
driving force to use PPP.
UK:
In the UK it is also the government that is the main driver for PPP, as
initiated in 1992 with the PFI programme. Contractors that aim to obtain
further long term concessions to secure revenue can also be seen as drivers
that support PFI schemes.
C13: Government needs for infrastructure
CEE:
The particular needs of CEE countries that demand for PPP are to
strengthen the infrastructure, to achieve an influx of private finance and the
need to introduce institutional reform (Snelson, 2007 p. 32) which is
evidenced by the survey where 58.3% of respondents see the government as
the main driver to use PPP. The survey shows that in CEE the government
needs for projects procured as PPP are concentrated on the transport sector
Chapter 5 – Comparisons of PPP Benefits in CEE and UK
64
with mainly road, rail and airport projects (together 48.3%) and some water
and sewage and other projects (10.34%). Other sectors such as waste,
environment, ports, energy and social housing are undergoing an extensive
development but have not reached a level of critical mass to create a
competitive market (European Investment Bank, 2004 p. 5). Within the
environment of fast growing economies of CEE countries the government
needs for infrastructure are growing as well but there are more difficult to
predict over the length of a concession period as compared to a more stable
growth in the UK. One example is the increase by 54% of passengers at the
Varna airport, a new PPP project (Wirtschaftsblatt, 2007a, p. 40).
Whereas Bulgaria has signed 300 state concessions and 500 municipal
concessions since 1997 (Zverev, et al., 2007 p. 11), other countries such as
Croatia, Lithuania and Latvia lack such substantial track record, according to
the survey.
UK:
Government needs are mainly for hospitals, schools and less urgent for
infrastructure projects. The ‘schools for the future’ programme is one
example for large scale needs in service provision.
Summary of Component C comparisons
A summarised combination of the above comparisons is presented in Figure
17. The most apparent differences are further analysed thereafter.
Chapter 5 – Comparison of PPP Benefits in CEE and UK
65
‘Level 3’ Component
EEC UK Difference
C01: Law and regulation for PPP
- in majority of cases - lack of legal frame-
work only small risk
- no specific legislation - standard terms for
HM Treasury
- lack of legal framework is risk in some cases
C02: Availability of professional organisations
- in more than half the countries
- limited track record to refer to
- available - also for different
sectors
- not in all countries
C03: Best practice guidelines
- only in less than half the countries
- sector specific - general guidelines, and only in minority of countries
C04: Govern-ment support for PPP
- large support in majority of countries
- long term support unclear
- large support since 1992
- long term support not obvious
C05: Stage of competition law implementation
- law in place in majority of countries
- previously contracts failed due to lack of law
- law in place, improved by ‘Competitive Dialogue’
- some countries still need to implement competition law
C06: Track record of PPP projects
- only in minority of countries
- large track record available
- far smaller track records, except few countries
C07: Construction skills available
- mainly international or joint international / local contractors
- mainly local but also international contractors
- not many local contractors
C08: Access to funds
- funds from development and commercial banks
- no capital financing required
- more funds from development banks
C09: Compe-tition amongst contractors / operators
- in majority of cases - in majority of cases - no significant difference
C10: Competition amongst design firms / engineers
- in majority of cases - in majority of cases - no difference
C11: Availability of alternatives to PPP
- no alternative available in most cases
- no alternatives available in most cases
- no difference
C12: Main drivers / forces to use PPP
- initiative by governments
- initiative by government
- no difference
C13: Govern-ment needs for infrastructure
- infrastructure - schools - water and sewage
- hospitals - schools
- more infrastructure needs and water and sewage project needs
Figure 17: Component C differences.
Chapter 5 – Comparisons of PPP Benefits in CEE and UK
66
The above combination reveals that there are differences in the market
environment for about two thirds of the subjects identified. The main
differences are discussed in the following.
Difference I: Lack of legal framework in some countries
The lack of legislation has a positive correlation with the lack of PPP
guidelines. The uncertainty of political long term support and lack of legal
framework and sector specific guidelines make such countries not ‘PPP
ready’ as defined by Cheatham and Oblin (2007 p. 3) regarding (i)
government commitment, (ii) the project pipeline’s robustness and
transparency and (iii) track record in execution.
Difference II: Only general PPP organisations & guidelines
A strong correlation between the availability of PPP guidelines by
professional organisations with the presence of government support suggests
that such support leads to the creation of such organisations, either by the
government or private stakeholders in PPP. This general nature needs to be
transformed to sector specific know-how as in the UK.
Difference III: No obvious long term support and legislation
In those countries where there is significant government support for PPP,
there is also guidance in the form of law on PPP available. This would give
better long-term assurance for projects as compared to those countries that
lack strong support and legislation. This goes generally in hand with the
Chapter 5 – Comparison of PPP Benefits in CEE and UK
67
presence of competition law for tendering PPP contracts in the same
countries.
Difference IV: Track records are largely not yet available
There is a slight tendency for track records being present in those countries
where PPP on Reference Projects was the only option available. It seems that
a strong need for PPP ‘forced’ the public authority in these countries to
implement PPP sooner than governments in countries where conventional
procurement is an alternative.
Difference V: Not many local contractors appointed
On projects where international contractors are involved, the main driver to
use PPP was private investors and operators. It seems these operators
‘trigger’ their own prospect contracts, supported by private investment.
Difference VI: More funds from development banks
On all projects where investment comes from development banks the
government has been the main driver to use PPP and the types of these
projects are largely roads. It seems that the essential infrastructure needs are
supported by government with the aid of development banks, whereas FDI is
invested on a wider range of project types, possibly because they are more
attractive to private investors.
Chapter 5 – Comparisons of PPP Benefits in CEE and UK
68
Difference VII: More infrastructure and water and sewage project
needs
Roads, railways and water and sewage projects are mainly driven by
governments to be procured as PPP. In most countries of such projects,
there is also significant support for PPP.
Findings and observations in brief
Difference Finding FindingCode
Lack of legal framework in some countries
→ Countries with no PPP legislation have also no ‘best practice’ guidelines.
F12
Only general PPP organisations/ guidelines
→ Government support leads to creation of PPP organisations.
F13
No obvious long term support and no legislation
→ Government support goes along with availability of PPP legislation and competition law.
F14
Track records are largely not yet available
→ In countries where there are no alternatives to PPP, track records are available.
F15
Not many local contractors appointed
→ Many projects are triggered by international contractors together with private investors.
F16
More funds from development banks
→ Such development bank funds are used on basic infrastructure projects. Private funds are used on wider range.
F17
More infrastructure and water and sewage needs
→ Roads, railways and water and sewage are driven by governments.
F18
Figure 18: Component C findings in brief.
Chapter 6 – Conclusions and Recommendations
69
6 Conclusions and
Recommendations
The review of existing literature revealed that PPP is still predominantly
driven by the underlying ideology (Spackman, 2002) but that it is welcome by
CEE countries which need to fill their ‘infrastructure gap’ without exceeding
EU budget deficit requirements (Howcroft, 2004). The consensus is that a
policy framework is needed to ensure successful implementation, especially
in developing markets (Pongisiri, 2002). The purpose of this research is to
find out if the PPP benefits in the UK are also applicable to CEE countries.
6.1 Conclusions
For all three research components there are differences regarding more than
half of the subjects identified, which are interpreted in the following and
subsequently used to give a research answer.
Chapter 6 – Conclusions and Recommendations
70
6.1.1 Findings
PPP Benefits
We discovered that the benefit of whole-life costing is not equally applicable
to CEE countries since PSCs are mainly used in those projects, where no
alternative to PPP was available, thereby contrasting with the original idea of
a ‘comparator’, but possibly acting as benchmark price for tender evaluation.
The benefit of a delivery on time is hindered in those countries that have not,
or not yet, implemented legislation and guidance on PPP, as further
interpreted later.
Risk allocation is generally less favourable to the public partner, especially on
projects in those countries where PPP guidance is not available.
PPP Projects
Most of the road projects, the most frequent project type in CEE, are carried
out by international contractors which are, probably being used to
undertaking business in their home markets, more anxious about political risk
than their local counterparts. If such risks are perceived, this has a negative
impact on the country’s overall PPP track record. Such fears of political risks
are mainly based on possible changes in political agendas over the long term.
Chapter 6 – Conclusions and Recommendations
71
The risk of capacity forecast is apparently responded to with end-user
involvements but these seem not to eliminate this risk.
Neither design control is evidenced to improve the build quality, nor has
user involvement any effect on design or functionality. However independent
quality controls of the final service are putting pressure on the private
partners with a positive result.
PPP markets
The majority of the subjects regarding market environment, surrounding
PPP, reveal differences between CEE and the UK.
A significant amount of these subjects, e.g. the existence of PPP organisations
and PPP guidelines, are directly linked to government support, which triggers
PPP legislation and relevant competition law.
Track records of PPP seem to be driven by two forces, firstly the absence of
procurement alternatives and secondly by international contractors,
supported by commercial funders. Development banks, in contrast, are
funding more basic infrastructure that seems less attractive to private
investors, such as roads and water and sewage projects which are mainly
driven by governments.
Chapter 6 – Conclusions and Recommendations
72
6.1.2 Research Answer
The above findings suggest that PPP benefits are only equally available to
CEE countries, if there is the same amount of government support as in the
UK, which creates a supportive market environment that encourages the
creation of ‘follow-on’ factors such as legislation and PPP-organisations. The
PPP benefits can be increased if independent quality control is carried out on
these projects, whereas design control and user-involvement seem not
carried out in an effective manner.
6.2 Recommendations
As this research has not a consultancy character, the recommendations are
solely reflecting potential implementations of the derived findings and
suggestions and further continuous research is advisable.
6.2.1 EU level
We only touched briefly on the increasing role of the EU as stakeholder, but
due to its dominance it is suggested that the planned PPP whitepaper should
also be accompanied by a PPP unit on EU level that can cross-transfer
knowledge rather than every country having their individual PPP unit and
Chapter 6 – Conclusions and Recommendations
73
particularly add value providing expertise to those countries not having such
a unit.
6.2.2 Country level
A PSC should be used on those projects where alternative forms of
procurement are available to ensure the whole-life costing and value for
money is achieved in a similar way as in the UK.
The large number of projects needs a fiscal policy that forms guidance to
how much PPP are a ‘healthy’ level of long-term monthly expenditures,
thereby ensuring long-term value for the overall PPP track record.
The poor level of efficiencies of user-involvement or design control should
be increased by possibly getting experience form organisations with relevant
experience from the UK or other countries with long term PPP experience.
6.2.3 Further research
Several topics that emerged from the research can further explore ‘how’
specific PPP benefits are achieved after having analysed ‘when’ and why’ PPP
benefits exist.
Chapter 6 – Conclusions and Recommendations
74
Governmental strategies
After having discovered that (i) government support is essential in triggering
basis elements which enable PPP benefits, and (ii) that political risk is seen as
the main risk, a further research could look at how to implement and ensure
long term support. As Berry and Wechsler (1995, in Haberberg and Rieple,
2001, p. 489) find that most public sector agencies think only in short term
time frames of less than five years, often only in one year periods, ensuring
benefits of 30 year’ concession periods seems impossible.
Whole life costing
Such long term planning can be analysed in a research on an evaluation of
how PPP projects and their assets will be evaluated, in regard to their value
to the authority, at the end of the concession period. Such long term
planning should be evaluated against other options such as privatisation,
conventional procurement or possibly other models.
Based on the review of existing literature and the questionnaires, the above
recommendations and suggestions for further research can be an aid in
making PPP even more attractive in CEE countries.
References
75
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Appendices
78
8 Appendices
8.1 Appendix 1 – Subject Codes and Survey
Questions
Q. No
Question Question Type
Item Code
1 What is the type of organisation you work for? Open single answer choice
-
2 How many PPP projects in Central and Eastern Europe has your organisation been involved in its lifetime?
Open ended text
-
3 In which Central and Eastern European countries have these PPP projects been? (Hold Ctrl-key for multiple answers.)
Open multiple answer choice
-
4 In which country and city is the Reference Project based? (e.g. Poland, Warsaw)
Open ended text
-
5 Of which type is the Reference Project? Open single answer choice
B01, C13
6 Which BOT-model has been used for the Reference Project?
Open single answer choice
B02
7 In the country of the Reference Project, is there guidance on PPP in the form of Law?
Single answer choice
C01
8 Are there any PPP guidelines for "best practice" by an expert panel or a professional body?
Single answer choice
C02, C03
9 Do you think there is significant government support for PPP?
Single answer choice
C04
10 Is there a competition law in place for tendering PPP contracts?
Single answer choice
C05
11 The country where the Reference Project is located has a substantial track record.
Liekert scale C06
12 Which funding was involved in the Reference Project? Open multiple answer choice
C08
13 On the Reference Project, what is the origin of the contractor?
Single answer choice
C07
14 Was there a Public Sector Comparator (a publicly financed benchmark) used to evaluate if PPP is better value than a conventional procurement?
Single answer choice
A01, A05, B03
15 For the Reference Project, there was significant competition from contractors / operators.
Liekert scale C09
Appendices
79
16 For the Reference Project, there was significant competition from design firms and engineering firms.
Liekert scale C10
17 Some projects are procured as PPP because the required capital would not be available. On the Reference Project, was this the case?
Single answer choice
C11
18 A conventional procurement would have been faster. Liekert scale A02, B04
19 What have been the main drivers to use PPP on the Reference Project?
Open multiple answer choice
A03, C13, C12
20 Would the concession rate change if there would be a change in design or specification at Preferred Bidder stage?
Single answer choice
B05
21 PPP delivered better aesthetics on the Reference Project as compared to a conventional procurement.
Liekert scale B06
22 PPP delivered better functionality on the Reference Project as compared to conventional procurement.
Liekert scale B07
23 Was there an independent design 'watchdog' involved (e.g. such as the CABE in the U.K.)?
Single answer choice
B08
24 Your organisation had involvement in the design process of the project.
Liekert scale B09
25 The end-user of the PPP object had an involvement in the desgin process (e.g. consultation).
Liekert scale B10
26 Did the use of PPP on the Reference Project stimulate innovation / different approaches to achieve the specified design?
Single answer choice
A04, B11
27 Do you think the Reference Project does deliver a better service standard than a conventional project would have delivered?
Single answer choice
B12
28 Has there been an evaluation by an independent party of the built quality and the service offered?
Single answer choice
B13
29 On the Reference Project, are any contractual provisions in place that would allow the authority to demand changes (e.g. change in scope or specification)?
Single answer choice
B14
30 Is the regular concession payment 100% for the use of the service or is it mixed (constant base rate plus payment dependent on use)?
Open single answer choice
A05
31 What are the main risks on the Reference Project? Open multiple answer choice
B15
32 Are risks adequately allocated to avoid project failure? Single answer choice
A06
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