SELECTION OF QUANTITATIVE AND QUALITATIVE METHODS FOR COMPREHENSIVE EVALUATION OF PPP PROJECTS FOCUSING ON THE CZECH REPUBLIC.

• Author: Jilek, Petr

1. Introduction

   The possibility of benefiting from co-operation between private and public sectors opens new dimensions for investment opportunities of the public sector and enables the implementation of projects which would not be, under normal circumstances, possible to realize, either from financial, technological or knowledge reasons. Cooperation based on a partnership brings, in case of realistic expectations, a mutually beneficial situation which could replace in the future the realization of projects using standard public contracts (Nijkamp, van der Burch and Vindigni, 2002).

   The general awareness of PPPs is still quite low among both researchers and practitioners, at least within the Czech Republic. At the same time, it is possible to argue that, in case of a correct application, it brings the intended results (Bovaird, 2004). This type of cooperation is most commonly used in the execution of projects such as road constructions, building bridges, hospitals, sport centers, prisons, etc. (Zaato and Hudon, 2015; Zou, Wang and Fang, 2008).

   The first country where PPP projects started to be implemented was the United Kingdom, with more than 200 projects currently providing high quality public services. Other countries where PPP projects are successfully implemented are France, Spain, Portugal (see Figure 1) and e.g. Canada. No project has been implemented yet in the Czech Republic. The method used to evaluate them can be one of the reasons for this.

   The expected outcome is to ensure minimization of expenditures on public services and infrastructure from public budgets. This should be enabled by the already mentioned cooperation with the public sector (Boardman and Vining, 2007).

   One of the main attributes of the transparency resulting from market mechanisms is the financing of such projects. Provided that there is a presence of financial exposition of both the public and private sectors in a project, also financial institutions (banks, financial cooperatives, insurance companies, etc.), which in almost 100% of projects interact with a private partner in PPPs, are becoming a part of the game. The reason for that is the well-known economic principle of financial leverage that improves the profitability of the own project capital. Therefore, it is very sad that, in spite of all the advantages of PPPs and all the successful projects realized in Europe, only a negligible number of such projects have been implemented in the Czech Republic (Ehrenberger, 2014). The answer needs to be sought in the early stages of pre-development and project preparation. According to statistics, a majority of projects have not been finished not because of unsuitability of the PPP processes but due to inability of public and private subjects to find a common action and mainly a goal which should be fulfilled. More precisely, they have not been able to make a qualitative and quantitative evaluation that would be comprehensible and could satisfy both parties.

   Nowadays, a method called Value for Money (based on the Public Sector Comparator) for evaluation of suitability of the PPP projects is being used. Unfortunately, only a few projects at the municipal level (but not a single project on the national level) have been proceeded since the existence of this methodology. The output of this methodology is, however, only the Net Present Value, which is a static simple indicator that does not reflect the complexity of a PPP project. Private sector needs other important information such as profitability of own capital. To improve this aspect, the authors, when studying a value assessment of property, have developed methods of value assessment of work facilities where the outputs of assessment are precisely defined and most importantly, the parameters, with which the aim can be reached, are precisely given. This article assumes that a PPP project can be considered as an enterprise unit. This assumption is supported by the fact that PPP projects are in 99% of cases SPV (special purpose vehicle), i.e. special project companies with a standard status of a trade corporation (most commonly stock companies or limited liability companies). In this case, the authors of this article were able to apply and examine the methods of valuation of such business units which will be modified for cases of providing public goods and which will be complemented with modified versions of PPP evaluations based on VFM.

   The main aim of this article is to create a new methodology of evaluation of PPP projects which would better reflect both partners' requirements for a decision on whether a particular project brings appropriate money value for both parties, which is proportional to the risk involved. The baseline is an assumption that the current methodology, serving a contracting entity, does not bring results which would be effective when deciding whether a project is suitable for a PPP or for a normal public procurement procedure.

   This methodology is expected to replace the current methodology created by Ministry of Finance in cooperation with Ernst & Young and issued as a recommended procedure for the realization of PPP projects. Qualitative and quantitative methods that were used are a combination of standard methods used for business valuation and were modified in order to be used in PPP projects. The methodology should therefore help the public contractor, who will know if a commissioning of a project at a given time is favorable, under which conditions is a project economically favorable, which risks are contained in a project and how are they quantified, who is the ideal partner after the final evaluation of costs, benefits and discount rate. If the public contractor, on the basis of this information, decides to realize such a project, he will know an exact value of his investment at any time. He will also be able to know, for instance (also thanks to an assets sharing in business premises) an amount of life-cycle-cost at a given time. He can also know if it is possible to sell a part of his assets which are no longer needed because it is obsolete or superfluous and get additional incomes of the project. For the private partner this methodology brings a clear view on the SPV as on a standard business unit with a business plan which is based on particular economic indicators and on a preliminary estimation of the value using value generators.

   The article consists of three main parts, introduction and conclusions. The first part explains basic consequences concerning PPP definition and is primarily focused on the introduction of evaluation methods, technics and indicators currently used in the Czech Republic (but also in most of the other countries using PPP). The key second part is devoted to the new methodology of PPP evaluation, where the process is presented step by step. In the following part several crucial findings, resulting from the methodological process, are summarized.

   This article has primarily a methodological character. This fact results from the main goal. At this stage, the new evaluation method is explained in detail and its advantages, compared to the currently used one, are discussed. The aim is not to apply this new process on a selected PPP project within this article. There are reasons for this decision--mostly caused by time and extent constraints. As this methodology has just been developed and the discussion about its future application has just started, it is highly desirable to pay close attention to the methodology itself first. The next logical step would be to apply the process to a certain PPP project. This will happen in the future, but a separate article will be needed for this demonstration as the process includes many steps and it needs large coverage.

   The methodology of the article is based particularly on collection and exploration of existing methods used in the discipline of business evaluation. These methods have been combined and applied to the area of PPP evaluation in order to create a new original methodology. This approach has been applied for the first time within these issues.

2. PPP projects and the methods for their evaluation

   There is no unified definition of PPP. For instance, OECD (2012) defines PPPs as a type of contracts where a private investor provides services and infrastructure which are usually ensured and provided by the public sector. According to Ostrizek et al. (2007), the PPP is a contracted partnership of public and private sectors which leads to ensuring of public infrastructure and services and using of abilities of the both partners by the most suitable allocation of resources, responsibilities, risks and related incomes.

   Therefore, it may be considered that the PPP is essentially a type of long term contract of provision of goods and services (Zaato and Hudon, 2015). This type of partnership is in most cases concluded between representatives of both the public and the private sectors. The private sector most commonly is comprised of a consortium of a number of companies such as banks, suppliers, technical experts, etc. Then, the PPP contract covers a proposal, realization and ownership of the subject-matter of the contract (Koppenjan, 2005).

   One of the characteristics of PPP projects is a concept of risk-sharing where the general principle is that the largest degree of risk is being borne by the project participant that at the same time has the largest share on the project's management (Bovaird, 2004). Therefore, PPP projects enable risk-sharing in a way in which each partner takes on such part of the risk that he...