Public Investment in Bulgaria

6. Value for money for public and private investment in infrastructure

Abstract

This chapter focuses on how traditional and non-traditional forms of procurement, including public-private partnerships and concession contracts, can help deliver investments more efficiently, economically and equitably. While making sure that investments are procured efficiently, procurement can also ensure that investments are delivered, operated and maintained in a way that delivers maximum value and efficiency over the full duration of an investment’s life. This chapter focuses on how traditional and non-traditional procurement perform in Bulgaria.

As noted in Section 5: Project Selection, Prioritisation and Appraisal, the OECD Recommendation on the Governance of Infrastructure states that to guard fiscal sustainability, affordability and value for money, countries must:

“… select delivery modes (i.e. the way in which the infrastructure asset will be provided and financed) that are grounded in value for money and optimal allocation of risk between the parties, with no institutional, procedural, fiscal or accounting biases for any particular delivery mode.

Ensure a transparent and appropriate allocation of risks in the structuring of the project, along with a comprehensive and agreed plan for managing, monitoring and mitigating risks during the asset lifecycle ….” (OECD, 2020[1])

The 2012 OECD Recommendation of the Council on Principles for Public Governance of Public Private Partnerships (PPPs) sets out the following requirements for a thriving PPP market that achieves value for money:

• “Establish a clear, predictable and legitimate institutional framework supported by competent and well-resourced authorities:

  • The political leadership should ensure public awareness of the relative costs, benefits and risks of PPPs and conventional procurement as well as involving end-users in defining the project and subsequently in monitoring service quality.

  • Procuring authorities, PPP Units, the Central Budget Authority, the Supreme Audit Institution and sector regulators are entrusted with clear mandates and sufficient resources to ensure a prudent procurement process and clear lines of accountability.

  • Ensure that all significant regulation affecting the operation of PPPs is clear, transparent and enforced.

• Ground the selection of PPPs in Value for Money:

  • The decision to invest should be based on genuine needs. There should be no institutional, procedural or accounting bias either in favour of or against PPPs.

  • Carefully investigate which investment method is likely to yield most value for money and identify the key risk factors.

  • Transfer the risks to the parties for whom it costs the least to prevent the risk from realising or for whom realised risk costs the least.

  • The procuring authorities should safeguard value for money by preparing for the operational phase with the same intensity as during the pre-operational phase.

  • Value for money should be maintained when renegotiating. Only if conditions change due to discretionary public policy actions should the government consider compensating the private sector, with re-negotiations happening transparently and subject to clear, predictable and transparent rules for dispute resolution.

  • Government should ensure there is sufficient competition in the market by a competitive tender process and by possibly structuring the PPP programme so that there is an ongoing functional market. Where market operators are few, governments should ensure a level playing field in the tendering process so that non-incumbent operators can enter the market.

  • Use the budgetary process transparently to minimise fiscal risks and ensure the integrity of the procurement process.

  • In line with the government’s fiscal policy, the Central Budget Authority should ensure that the project is affordable and the overall investment envelope is sustainable.

  • The project should be treated transparently in the budget process, with all costs and contingent liabilities disclosed.

  • Government should guard against waste and corruption by ensuring the integrity of the procurement process. The necessary procurement skills and powers should be made available to the relevant authorities.” (OECD, 2012[2])

6.1. Why is achieving value for money for public and private investment in infrastructure important?

Value for money is important because it helps decision-makers strike the best balance between economy, efficiency, effectiveness and equity. Value for money is not just about reducing the cost of inputs or achieving efficiency; it is also about ensuring an investment is effective at delivering the intended outcomes. For example, if the effectiveness of an activity is notably reduced because of a small cost saving, value for money is reduced. Similarly, while an activity may be very cheap and run efficiently, if it does not achieve results, it is not value for money. The quality of the outcomes is fundamental to understanding whether something is providing value.

While value for money is primarily established at the project selection stage, procurement also plays an important role in delivering value for money. Two common methods for governments to achieve value for money through procurement is by involving private investment and transferring risk to private parties, which require agreement with private investors in the form of concession contracts and public private partnerships (PPP). Concession contracts are where a government asks a corporation, after a competitive procedure, to manage the construction, as well as finance and operate an asset throughout the life of the contract. The private party will charge the final users for the use of services linked with the asset, from which most of the private party's income arises. Under these conditions the assets will be posted in the balance of the private party, without effect on the government deficit. PPPs are where a government is the main purchaser of the services, through regular payments once the assets are supplied by the private party. Whether the demand originates directly from government itself or from third party users, the government must be the main purchaser of services.

The PPP model has been used around the world with the intention to improve the delivery of service outcomes from major public infrastructure assets by integrating asset and service design; incentivising whole of life design and asset management; allocating risks to the parties who are best able to manage them; and only paying for services that meet pre-agreed performance standards. For PPPs, it is important that roles and responsibilities are clearly stated and that risks are centrally managed. For example, Portugal established a department in the MOF, the Project-Steering Technical Department, to lead the evaluation and procurement of PPPs and large infrastructure projects. The central role of the MOF can ensure that proposed projects are adequately appraised before they are approved. A centralised approach with key steps that must be adhered to will result in better informed decision-making as well as a clearer understanding of the fiscal risks involved. At the planning stage, it can help to minimise risks posed by poor identification of needs, poor strategic planning, poor coordination with other public bodies and poor project appraisal. At the allocation stage, it can minimise risks associated with failing to carry out lifecycle costing, failure to take a multi-year approach, failure to assess affordability as well as poor project selection. Then at the implementation stage, it can guard against the wrong procurement option being selected, unforeseen risks associated with the construction including objections from affected parties, as well as the risks associated with operational problems such as demand issues and regulation of user fees.

PPPs have been used to keep government debts off their core balance sheets, thereby appearing to minimise a government's overall debt profile. However, as the 2012 OECD Recommendation of the Council on Principles for Public Governance of Public Private Partnerships notes, this is not an appropriate use of the PPP model.

Box 6.1 outlines important findings from the International Transport Forum on the circumstances under which PPPs can be best deployed to achieve value for money.

Box 6.1. International Transport Forum analysis on when PPPs are most effective

In 2018, the International Transport Forum (ITF), housed within the OECD, undertook an in-depth study of the role and the economics behind private investment in infrastructure, involving more than 30 experts, academics and practitioners from 13 countries. ITF found that well-defined and less complex structures in terms of time and space can often be organised into PPP-like structures where risks can be defined, predicted and allocated between the contracting partners without too high complexity or cost. More complex structures with a longer life span and involving many actors and constituencies (space) might lead to a contractual situation that is highly demanding and therefore less efficient for a PPP.

The first reason for this is because construction and maintenance contracts in PPPs must rely on fixed date and fix price delivery requirements. This can increase the uncertainty contractors face in the bidding process and lead to excessive contingencies, driving up project costs. Second, fixed long-term contracts do not leave room for uncertainty and future changes, potentially leading to renegotiations, which can be costly and time-consuming for all parties, including the public purchaser.

ITF also found that PPPs can best yield superior value for money in circumstances where continuous pressure for efficiency is present and where demand is highly responsive to service quality. Examples include sea and airports serving the same catchment area and who thereby compete for demand.

In cases where continuous pressure for efficiency cannot be assured and where long duration periods occur, such as social infrastructure and road PPPs, the ITF recommended the regulatory asset based (RAB) model. RAB models are commonly used in the regulation of privatized utilities. In the case of RAB, a specialised regulator continuously benchmarks and measures the performance of the infrastructure operator. Periodic price reviews are built in the contract between the public sector and the operator.

Source: (International Transport Forum, 2020[3])

6.2. How well does Bulgaria promote value for money for public and private investment in infrastructure?

Bulgaria has a legal framework in place for public procurement, concession contracts and PPPs, but there are few concessions or PPPs. Concession contracts and PPPs are looked upon unfavourably by politicians, the public and the construction market. However, there is evidence that some concession contracts are providing the basis for good public sector outcomes, reducing costs for users and generating returns to invest back into networks.

The following section evaluates how PPPs, concession contracts and conventional public procurement are applied in Bulgaria.

6.2.1. Public Private Partnerships and Concession Contracts

Since 1995, the national government has awarded concession contracts for a small number of airports, seaports and water infrastructure projects and some municipalities have awarded concessions contracts for public facilities, such as sports grounds. For natural resources, concession contracts are an obligatory means of contracting. As of April 2022, the Ministry of Transport and Communications had 19 concession contracts in operation.

The Concessions Act 2018 specifies that concession and PPP contract arrangements are granted on the condition that the operational risk is borne by the concessionaire. The Act defines the following types of risks:

Operational risk - arises from factors beyond the control of the parties to the concession agreement and represents the risk of exposure to market fluctuations in the demand for and/or supply of the concession object and/or services. Risks related to mismanagement, non-performance of contractual obligations by the economic operator and force majeure are not considered as operational risk. Supply and demand risk are subsequently defined as follows:

• Demand risk - facts or circumstances that may adversely affect market demand for the object of the concession, the services provided or other business activities carried out. 

• Supply risk - the services offered or other business activities carried out will not meet the requirements of the market, including the risk of availability of the services provided. Availability risk is the likelihood of an event, fact or circumstance occurring that may affect the provision of the service in a form, volume, quality and time of performance that is consistent with that specified in the concession contract (Republic of Bulgaria, 2018[4]). 

In the case of concession contracts for construction projects, the contractor bears the construction and operational risk. All other risks are allocated between either the responsible minister or municipal mayor and the contractor depending on the capacity of each party to best assess, control and manage the respective risk. Risk allocation happens as part of the preliminary financial and economic analysis. Risks are monitored on an ongoing basis and, if a concession contract is amended, the allocation of risk must stay the same.

The mayor and the minister are accountable to the municipal council and the Council of Ministers respectively for the overall performance of all concession contracts. The responsible mayors and ministers publish information annually on the implementation of concession contracts, which is published in the National Concession Register. To ensure the responsible ministers and mayors are meeting their obligations, the Public Enterprises and Control Agency (PECA) carries out inspections according to a schedule that is approved by the Council of Ministers. Over the last three years, the PECA has carried out five inspections per year. The Concessions Coordination Council (CCC) may commission extraordinary inspections on a wide range of matters at their discretion. However, to date the CCC have not used this power.

Often, line ministries and municipalities lack the capacity to appoint and manage concessions. To help address this, the Administration of Council of Ministers recently launched an information campaign and training for officials in ministries and municipalities managing concession contracts.

All contracts concluded by the State have penalty clauses for failing to implement the investment programme or meet payment obligations. According to the Concessions Act 2018, the assets subject to a concession contract can be owned by the contract authority (i.e. state or municipality) or the contractor. At present, there is no concession contract where the assets are owned by the contractor.

Overall, the payment of availability fees and other charges associated with concessions and traditional PPPs are not well-perceived by decision makers, the construction market and the public. There is a view among some officials that it is easier to award EU funds through conventional public procurement because private funding and finance crowds out European funds. In Bulgaria, authorities still lack an understanding of how EU funds can be allocated through a concession-based delivery model. The construction industry does not look positively upon concession contracts due to concerns with taking on operational risk. As a result, the construction sector typically prefers public procurement.

As a result, there are no concession activities proposed in the Resilience and Recovery Plan. This is despite the National Strategy for the Development of Concessions recommending construction of all infrastructure projects valued above EUR 50 million be considered for the concession contract model. Frequent changes to legislation related to concessions have also made implementing concession contracts challenging due to the disruption this causes to contracts with duration periods of 35 years and longer.

Given the low number of infrastructure concession contracts, it is difficult to compare the outcomes against conventional public procurement. Where concessions have been possible, there is some evidence they have provided a basis for better service outcomes and reinvestment back into infrastructure networks. In Sofia, leakages in the water services network have reduced from 60% to 20% under a concession contract. The concessionaire has also invested to modernize Sofia’s water network’s drinking water treatment plants. The charges that consumers pay for water, which are regulated, are lower than other municipalities where concession contracts are not in place, although this could also be because as a larger municipality, they can be more efficient by delivering infrastructure and services at greater scale. There are other examples of where the public is getting better outcomes under concession contracts than conventional public procurement, such as several port terminals where the level of investment from the concessionaire back into the asset is greater than compared to those owned by the State and managed by State-owned companies.

There is some information available for ministries and municipalities to learn about best-practice, the benefits of using concession contracts and lessons from previous experience. All guidelines and instructions are published in the National Concessions Register and guidelines can be issued upon request by contracting authorities. Grantors of concessions are required to publish a notice in the National Concession Register for an awarded concession, which includes information on the value of the concession. Grantors are also required to publish concession contracts, amendment agreements and annual information on the execution of concession contracts. 

Work is underway to review and refresh Bulgaria’s approach to concession contracts. An interim assessment of the National Concessions Strategy was being carried out at the time of the mission. The Administration of Council of Ministers asked all ministries and municipalities to confirm whether they assessed projects for suitability with the concession contracts model – 21 responses were received, of which only one municipality indicated that it had carried out such an assessment. To encourage wider adoption of concession contracts, change needs to be driven at the political level.

6.2.2. Conventional Public Procurement

The Public Procurement Act states that public contracts must be awarded in accordance with the Principles of the Treaty on the Functioning of the European Union. The internal rules under the Act sets out the following rules for public contracting authorities:

• The forecasting of procurement needs, including establishing the dates by which contracts must be in place, taking in to account time needed for contract preparation, conducting procedures and concluding contracts.

• Assignment of staff to necessary procurement procedures.

• The recording of tenders and other formal documentation.

• Monitoring of contracts.

• Actions in the event of court proceedings.

• Induction and refresher training.

• Documenting each stage of the procurement cycle (Republic of Bulgaria, 2019[5]).

The Act also requires that for procurement valued above BGN 5 million (EUR 2.5 million), public contracting authorities must develop and adopt rules for the management of the procurement cycle. However, the Act does not require public contracting authorities to undertake a risk assessment.

Bulgaria has two central purchasing bodies, the Ministries of Finance and Health, and many public contracting authorities. Overall, there is considerable fragmentation across public procurement in Bulgaria, such as a lack of standardized documentation, contracts and methodological guidance. Greater centralization of procurement would help make procurement more efficient and reduce mistakes. However, bespoke contracts may in some instances be necessary because standard contracts cannot anticipate every scenario or outcome. Frequent changes to the Public Procurement Act also make it difficult for officials to keep up with the latest rules, which can slow procurement processes and result in errors. To help address these issues, The Public Procurement Agency facilitates the sharing of information, provides support and advice on applying the law and other procedural matters. The Institute of Public Administration also organizes training sessions for officials on the latest procurement rules.

When procuring major public investments, such as new roads, they are typically divided into sections given the sizeable financial cost and to minimize risks. The Public Procurement Act encourages openness and transparency through the use of open competitive tenders, as well as other forms of tenders.

References

[3] International Transport Forum (2020), Risk Allocation in Public-private Partnerships and the Regulatory Asset Base Model, https://www.itf-oecd.org/sites/default/files/docs/risk-allocation-ppps-rabs_0.pdf.

[1] OECD (2020), Recommendation of the Council on the Governance of Infrastructure, https://legalinstruments.oecd.org/en/instruments/OECD-LEGAL-0460.

[2] OECD (2012), Recommendation of the Council on Principles for Public Governance of Public-Private Partnerships, https://legalinstruments.oecd.org/en/instruments/OECD-LEGAL-0392.

[5] Republic of Bulgaria (2019), Article 244, Public Procurement Act (Internal Rules of Public Contracting for the Management of the Public Procurement Cycle (amended, SG on 17/2019).

[4] Republic of Bulgaria (2018), Article 31, sections (2) – (4), Concessions Act 2018 (amendment SG 17/2021).