PPP goes to ER

From January 1st 2017 all Polish hospitals have been mandated to operate on the basis of European Union standards. Does this mean that they will resemble those in the House, MD series? Not necessarily, but they should operate on a decent European level. This will be a revolution. It will be a revolution which will cost many billions of złoty. And who will pay for all this when the budgets of a large number of Polish local authorities are hardly healthy or are in the red already? The private sector could offer some help here and it is very keen to start such projects. “PPP offers a possibility of transferring some of the costs onto the private sector. Particularly considering the fact that there are a lot of parties interested in each PPP project. Nearly all large construction companies are interested in such projects provided that the enterprises are of a suitable value – usually at least PLN 50 mln,” says Inez Handzlik of the Baker & McKenzie Krzyżowski i Wspólnicy law firm.

Growing pains

The business interest is there but larger projects carried out under the PPP formula are still a rarity. “We have quite good PPP legislation but the potential of this form of project implementation is not being fully utilised. You can come across data showing that there are as many as 200 PPP projects under construction in Poland, but the larger projects carried out under this formula can be counted on the fingers of one hand. These include a waste incinerator plant in Poznań, the PKP railway station in Sopot and the halls of residence scheme in Kraków,” remarks Agnieszka Ferek, a legal counsel from the same law firm. The list should also include the construction of a hospital in Żywiec, even though this is not the best example of smooth functioning under this system. The Żywiec administrative district was the first in Poland to decide to build a hospital under the PPP formula. In 2011 they chose Canadian company InterHealth to be the private partner in the construction of a facility with an area of over 20,000 sqm, including a landing pad for helicopters. The problem was that the launch of the construction work on the PLN 140 mln project has been put off several times. The last missed launch date was back in April, but there is still nothing going on at Pola Lisickie in Żywiec. This is because obtaining the financing for such a large project has proven to be problematic. The private investor has not lost faith and assures us that the project could be launched any minute now. “Five banks have given InterHealth Canada positive loan decisions for financing the construction of the new hospital in Żywiec,” insists Marta Piotrowska, the business development director of InterHealth. “Due to the delayed financial closure of the project, InterHealth Canada has decided to prepare the general contractor over the next few weeks and start preparation work on the building site itself to guarantee that a considerable amount of work has already been completed before the onset of the winter period. The design and preparation work on the construction site will require InterHealth Canada to invest another USD 2 mln, which is clear evidence of its commitment to the project and its faith that the financial side of it will be successfully completed,” adds Marta Piotrowska.

What about the EU?

The Żywiec deadlock illustrates just how complex PPP projects can be. Perhaps this is why to date public institutions have not been very fond of this formula and so have opted for public procurement contracts, which are easier to implement – particularly taking into consideration the fact that so far they have been able to count on the EU money available for public bodies to carry out projects independently. But even the generous hand of the EU does not give anything for free, you need to provide an own contribution – and this is a burden on their budgets. Some can no longer bear the weight of these new investments. And PPP is certainly alternative here, as it will be possible to combine it with EU funding. “EU regulations provide for the possibility of supporting PPP enterprises with additional EU funds. The list of eligible projects is not final; therefore, if they are economically and legally sound hybrids, projects can be carried out in a variety of public schemes,” explains Rafał Cieślak, a legal counsel and managing partner of the Cieślak & Kordasiewicz economic consulting law firm. “The health care sector is supported by both nationwide programmes (the Operational Programme Infrastructure and Environment, the Operational Programme Knowledge Education and Development and the Operational Programme Intelligent Development) and 16 regional operational programmes. The allocation of the funds to health care services between 2014 and 2020 will exceed EUR 2 bln according to my calculations, and some of the projects will certainly be implemented with the involvement of private partners,” he adds. The Wielkopolska provincial government is among those intending to use EU funds to build a new mother and child hospital in Poznań. “We are looking for a formula that will allow us to implement this costly project effectively. Thus we opted for the PPP formula, but with a small modification because we entered it as a large project in the Wielkopolska Operational Programme for 2014–2020. If the European Commission accepts our arguments, there is a chance that some of the money for the project could be obtained from the European Union. In this way we can decrease the burden on the province’s budget,” explains Marek Woźniak, the Marshal of the Wielkopolska province, during a presentation of the concept for the project. “We have the opportunity to receive a special contribution from the Ministry of Agriculture and Regional Development in the form of consultancy support worth app. PLN 1.5 mln,” adds the Marshal. The project will not be starting in the near future, though. To prepare for the construction, they have so far carried out pre-construction analyses, an initial medical programme, a programme and spatial study, and they have obtained the necessary opinions of network operators, an environmental decision and a decision for the location of a public project. The technical dialogue procedure has also been completed, which was attended by seven businesses interested in involvement in the scheme. “The consultancy stage should be carried out by the end of 2015,” reveals Marek Woźniak.

Can you count? Count on...

However, EU money cannot be relied on alone, as it will only partly cover the investment needs. “The market is young in Poland, since the act on PPP was passed in 2008. The awareness of limited funds being available from the EU has slowly been growing, as it will make it possible to cover 20–30 pct of our needs related to improving the quality of life and reducing differences in standards with Western Europe. So we need to look for new ways of financing necessary projects and PPP could be just the alternative needed,” suggests Waldemar Olbryk, Skanska Infrastructure Development’s senior vice-president responsible for business development. A public institution can, for example, contribute real estate to an enterprise, while the execution and financing could be left to the private partner. “Pilot programmes supported by the Ministry of Infrastructure and Development are also a chance for PPP projects in new business lines, as they are designed to finance the expenditure related to consultancy, making it possible to prepare a project better. Financing consultancy services are a good approach because in a lot of cases local authorities avoid spending additional funds, which results in the inferior preparation of projects and limiting their chances of being successful,” claims Agnieszka Ferek. Waldemar Olbryk also points out that the right personnel are needed. For PPP to work on a larger scale it is necessary to prepare projects professionally, and this needs a lot of time and perseverance. “You need highly qualified staff who will devote themselves to the task. Even for a company like Skanska, which has some experience in this field on several markets, the introduction of structures to enable us to carry out PPP projects in Poland has taken a long time because, like everyone in our country, we are only learning how to do this now and adapting our knowledge from other countries, such as the UK, translating their formulas and methods for Polish conditions,” adds Waldemar Olbryk. He knows what he is talking about. His company is carrying out probably the largest project of this kind in Europe – the New Karolinska Solna University Hospital in Stockholm. The construction of the ultra-modern health and research complex with a combined area of 320,000 sqm is to cost SEK 14.5 bln (app. EUR 1.6 bln). There are unlikely to be any such large projects in Poland, but thorough project preparation is the key, particularly if they are being financed through bank loans. One problem with many PPP projects is that the private partner’s financial contribution is often supported by loans. “It is very important to involve the financing entity at the earliest possible stage of the project, rather than after the contract is signed,” emphasises Inez Handzlik. “When carrying out the due diligence, banks try to identify the risks connected with the development and subsequent operation of the project. If they find that the project will not pay for itself, they will not participate in such an enterprise. The risk undertaken by the private entity is also very important – if it is too large, it is difficult to secure the financing,” she argues.

Business starts to roll

A well-tailored project should make it possible to generate healthy profits, while the public entities can fulfil their obligations with the minimum cost. So experts are convinced that an actual PPP boom is just round the corner. According to our estimates, the value of hospital projects earmarked for execution under the PPP formula comes to app. PLN 1.5 bln. “The development of PPP in Poland is gaining momentum, the public sector is preparing PPP processes better and better, and what private partners have to offer is now being adjusted to the needs and expectations of the public sector,” concludes Rafał Cieślak. He is not alone in this opinion. Experts surveyed by the Polish Agency for Enterprise Development expect the PPP market to grow to around 30–40 new contracts a year over the next five years.