The risks of PPPs in higher education projects - Hungarian case study Joint CELE conference on Public-Private Partnerships, May 2011, Athens, Greece

Content general overview lessons learnt conclusion, recommendation convergence program, Szél Kálmán plan

PPP in Hungary is the cooperation of the public and the private sector where the parties share responsibility and risk in order to provide public services. In Hungary, under PPPs generally we understand those Availability Fee – based, DFBO type projects, recorded Off-Balance-Sheet. DBFO: The private partner is responsible for Designing, Building, Financing and Operating the given infrastructure. The concept of Public Private Partnership (PPP)

Advantages + Risk sharing + Off-Balance-Sheet Accounting Possibility of involving resources outside central budget (As of January 2010 Act on Public Finance does not support PPP scheme due to high number PPP projects launched.) + Specific expertise from the private partner + life cycle efficiency by the private side Disadvantages - Difficulties in estimating risks - It burdens the budget in long- term - It requires extremely complex capacity and knowledge - Different interests and motivations - Calculation of PSC is hypothetical

PPP projects in Hungary

Budget earmarked in higher education PPPs (bn HUF, mio EUR, gross) Budget estimates Billion HUFMillion EUR Billion HUF Million EUR Contribution to the rental of education-research infrastructure 5,614 HUF 20,050 EUR 5,615 HUF 20,054 EUR Contribution to the rental of existing dormitory reconstructions 3,262 HUF 11,650 EUR 3,262 HUF 11,650 EUR Contribution to the rental of new student hostels 0,415 HUF 1,482 EUR 0,415 HUF 1,482 EUR Higher education infrastructure in total 9,291 HUF 33,182 EUR 9,292 HUF 33,186 EUR 280 HUF/EUR

Subsidy of the State (for educational institutions) can be disbursed (max) up to 50% of the AF AF (Availability Fee) covers: Debt, cost of financing, returns, exchange rate & O & M Max. 50% AF AF Service Service Provider Central Government Educational Institution 50%+50% = AF

At present: Reviewing the existing projects from financial, legal and technological view In 2011 all higher education projects will be reviewed in priority order Reviewing higher education projects as of 2010 with involvement of the National Audit Office, the Government Control Office, the Public Procurement Council and the Hungarian Competition Office Aim of the review: - More efficient management of the national wealth and the budget resources, - Enforcing a more risk sharing of the contracts (stricter monitoring system) - Optimization of risk sharing from governmental point of view  Renegotiation, or  Termination of contracts

EXPERIENCES FROM THE REVIEW OF HIGHER EDUCATION PPP PROJECTS I. 1.Shortage of equivalent strategical and financial plans 2.Difference of budgetary, departmental and institutional interests 3.Institutional financial problems for the year 2011 are foreseen: a.Demographic problems – decreasing number of students, b.The degree of service fees exceeds the financial capacity of educational institutions

EXPERIENCES FROM THE REVIEW OF HIGHER EDUCATION PPP PROJECTS II. 4.Generally higher risk taken by the State compared to the Private side ( e.g. financing - interest and exchange rate risk) 6.Lack of competition - in some cases breaking the Public Procurement Law 7.Overpriced constructions 8.Inappropriate or missing performance-monitoring during the operational phase

9.Partner companies with off-shore background 10.Lack of operational experience of the building companies for long-term contracts 11.Too many PPP projects launched at the same time consequently the private side could better get its own way 12.In many cases there are huge investment volume vs. decreasing demand for institutions’ service EXPERIENCES FROM THE REVIEW OF HIGHER EDUCATION PPP PROJECTS III.

Final conclusion for educational projects These type of PPP projects are rather disadvantageous than advantageous for the state concerning financial, technical and legal point of view in contrast with previous forecasts. Necessary actions are going to be done. Recommendation Take your time before launching a new investment and only start if you make sure (along appropriate preparation) that real need for the project(s) exists.

Convergence Program & SZÉLL KÁLMÁN Plan Former Minister of Finance ( ) and Prime Minister ( ) of Hungary Intention of the government is to decrease national debt in general including implicit debt As of 2010, the Hungarian government’s aim is to review and rethink the PPPs’ role and (e.g.)to terminate disadvantageous PPP projects – In case of higher education projects approx. HUF 425 billion (1,52 bn €) total determination appears in the budget for 20 years duration in nominal value

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