Guidance 1

A user-pay PPP can be self-supporting if investment costs are funded entirely by private financing and project revenues derive solely from user charges. In many cases, however, full cost recovery through user charges may not be feasible (e.g. because of limited willingness to pay or affordability constraints). In cases where the public sector has to provide financial support to make the PPP financially feasible either at the start or on a recurrent basis, EU grants may be available for PPP projects to cover part of the funding gap.

Public authorities pursuing PPPs should be aware of the terms and conditions of EU grant funding to be able to benefit from them to the fullest extent. The European Commission has issued guidance on the legal and methodological issues involved in combining EU grants with PPPs, in particular in the framework of the JASPERS initiative, in order to facilitate and increase the uptake of PPPs in Structural Funds projects Guidance 2. The main issues addressed in this guidance include the following:

A) Understanding EU grant eligibility requirements relating to PPPs and how to determine the maximum permitted amount of EU grant funding for a specific PPP: Guidance 3

• The EU grant can cover up to 85% of eligible expenditures. Co-financing by the government (at least 15%) is always required.

• If the PPP will generate some revenue from user charges, the “eligible expenditure” for purposes of determining the amount of the EU grant is reduced by the net contribution (i.e. after covering operating and maintenance costs) that such user-charge revenue makes to funding capital expenditures (determined on a discounted basis). This is known as the “funding gap” approach.

• The direct beneficiary of the grant must be the public authority responsible for the PPP, generally the Authority. This approach makes the procedures somewhat more complicated than if the PPP Company could receive the grant funds directly, but this can be resolved.

B) Understanding the procedures (including timing) for the submission of documents and the approval of the grant:

• Approval of the grant occurs before bidding for the PPP takes place. In many ways, this is the preferred solution. The grant arrangements can be thoroughly vetted, planned and specified in advance, and bidders will be asked to bid on that basis. This requires detailed structuring of the PPP project before going to the market, but this is the best approach regardless of the presence of any grant funding.

• Approval of the grant occurs after the preferred bidder has been selected. In this approach, although it is well understood at an earlier stage how an EU grant can be incorporated into the PPP and the contract and bidding are well structured to take this into consideration, the approval of the grant is not obtained until after the preferred bidder has been selected. This approach is advantageous where the results of the PPP bidding process need to be clarified in order to enable key elements of the grant application to be filled in (e.g. if there would be significant uncertainty about the size of grant required).

C) Structuring a PPP that includes EU grants in a way that does not weaken incentives and reduce value for money:

• For example, EU grants should not incentivise the private partner to allocate too much of the costs to capital expenditures rather than operation and maintenance expenditures – thus removing one of the benefits of PPPs, namely optimal whole-life costing. Good practice can be maintained by careful structuring of the PPP contract and the bidding process. This should not be difficult if competent advisers are engaged. It will also be less of a problem where the grant is modest and there remains a significant amount of private finance.

D) Determining the way (or ways) that EU grants can be applied to PPPs: Guidance 4, 5, 6, 7, 8, 9

• Parallel co-financing of capital expenditure (capital grant). With this method, a distinct component of capital expenditure is financed by the private sector and another by the EU grant and government funds.

• Blended co-financing of capital expenditure (capital expenditure subsidy, capital grant). This is the most common model. The EU grant and government funds are used jointly with the financing mobilised by the private partner to make payments during the construction period under a single prime construction contract.

• Design-build-operate (DBO) contract. This is an extreme form of the above approach in which private financing has been entirely replaced with EU grant and government funds, but there is just one prime contract covering both the construction and operating phases.

• Partial grant funding of service fee (payment subsidy). Grant funds could be used during the operating period as full or partial payment of availability payments, that is, time-based payments which would otherwise be made solely by the Authority, as opposed to user charges (N.B. the feasibility of this model, in particular the application of EU funds to cover availability payments which would be incurred after the December 2015 deadline for EU funds expenditure in the current financial perspective, is not yet clear).

In all cases, it is essential for the user of this Guide to seek proper advice and discuss the project with the relevant EU authority (e.g. national management authority, DG REGIO), maintaining a dialogue during project development and procurement, to ensure that the PPP is being designed and procured in a way that will give the greatest assurances that the applicable EU grant will be forthcoming and to avoid later procedural complications.

Finally, there are other considerations to be taken into account when incorporating EU grants into a PPP, such as: the choice of the appropriate tender evaluation criteria, ensuring that the grant will not be considered illegal State aid, minimising the risk that a significant modification of the project might require repayment of the EU grant or the extent to which a failure to complete the project would result in an obligation to repay the grant.

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