It is already a well known fact that public-private partnerships (PPPs) are considered to be a solution for world wide governments facing insufficient public budgets. In the context of the current economic crisis, many voices promote public-private partpublic-private partnership (PPP), infrastructure investments, economic recovery, economic crisis, budgetary deficit

MINA Laura

PLUMB Ion

ZAMFIR Andreea

English

Research Papers in Economics

426 
PUBLIC-PRIVATE PARTNERSHIPS - SOLUTION OR VICTIM OF THE CURRENT ECONOMIC 
CRISIS? 
 
Plumb Ion  
Academy  of  Economic  Studies  Bucharest  Faculty  of  Management  6th  Piata  Romana  RO  010374  Bucharest 
Romania ionplumb@yahoo.com +4021.319.19.00/287 
Zamfir Andreea  
Academy  of  Economic  Studies  Bucharest  Faculty  of  Management  6th  Piata  Romana  RO  010374  Bucharest 
Romania zamfir_andreea_ileana@yahoo.com +4021.319.19.00/250 
Mina Laura  
Academy  of  Economic  Studies  Bucharest  Faculty  of  Management  6th  Piata  Romana  RO  010374  Bucharest 
Romania lauramina.ase@gmail.com +4021.319.19.00/250 
 
It  is  already  a  well  known  fact  that  public-private  partnerships  (PPPs)  are  considered  to  be  a  solution  for  world  wide 
governments facing insufficient public budgets.  
In the context of the current economic crisis, many voices promote public-private partnerships also as a solution for fighting 
the crisis, as PPPs help creating jobs, offer good value for money, do not have a negative impact on the public deficit, favour 
economic recovery. 
On the other side, however, the current economic crisis affects projects which are aimed at making the public and the private 
sectors work together. Thus, the crisis determines a decrease of the number of private competitors and the number of financial 
institutions willing to get involved and finance such projects. This means lower competition and in the end higher total costs. 
 
Keywords:  public-private  partnership  (PPP),  infrastructure  investments,  economic  recovery,  economic  crisis,  budgetary 
deficit. 
 
JEL Classification: H44, L88 
 
1. Introduction 
Over the past decade we have witnessed a world wide growing interest for public-private partnerships (PPPs). PPPs 
popularity is due to the fact that governments are more and more eager to increase the quality and efficiency of 
public services, but in the same time they face insufficient budgetary resources to cover investment needs, coupled 
with public spending restrictions [1].   
Public-private partnerships are not anymore a brand new concept in Romania. Several progresses have been made 
recently. Thus, a Central Unit for Public-Private Partnership was set up within the Ministry of Public Finance in 
2005, and in 2006 and 2007 a new enabling legislation was introduced. However, there is a slow PPP deal activity 
to date if we look at the number of implemented projects. The reasons for the slow pace of activity include: the 
complexity of the PPP process in terms of preparation and awarding, not very strong, clear and long term political 
support, a very restrictive legislative framework (the Romanian legislation limits PPPs to service concessions and 
works concessions), little public sector expertise in relation to PPPs, etc. 
When taking a close look into the current context for PPPs in Romania we cannot not consider the economic crisis 
and its` impact on the cooperation between the public and the private sectors. In this paper we focused very much 
on the infrastructure sector (especially the roads sector) and most of all on the PPPs opportunities which exist in 
this  area.  This  particular  interest  is  due  to  the  fact  that  infrastructure  development  is  a  key  determinant  for 
economic progress and prosperity. In Romania, the infrastructure modernizing process is one of the drivers for 
foreign investments and also a tense item on the public agenda. Moreover, PPPs are considered to be a mechanism 
to fill the infrastructure “gap” which exists in many CEE countries [7] in general and in Romania in particular. 
When talking about public-private partnerships in relation with the current economic crisis, two main types of 
attitudes emerge. On one side we have “the optimists” and on the other side we have “the pessimists”. 
Optimists see PPP projects as instruments for fighting the economic crisis and for economic recovery. Pessimists 
instead see the current economic crisis as an important obstacle in the PPPs` evolution in Romania. Therefore, the 
next two sections of this study are emphasizing the main arguments and counter-arguments related to PPPs as a 
solution for the current economic crisis. Furthermore, after presenting both arguments and counter-arguments, 
some objective conclusions are drawn. 
 
2. Public-Private Partnerships, Solution for the Current Economic Crisis 
PPPs may be important instruments for fighting the economic crisis and for economic recovery, and this is, as 
already mentioned, the optimists’ approach. The arguments that support this approach are related to the advantages 
of PPPs: (1) PPPs may help redefining the State’s direct role in the economy; (2) PPPs have positive impact on 
public finance; (3) PPPs may contribute to job creation; (4) there is a special fiscal treatment for PPPs (the “off 
balance sheet” treatment); and (5) PPPs may lead to a better absorption of EU funds. 
Redefine de State’s direct role in the economy 427 
Public-private partnerships help the State to better focus on its’ original functions: representing the people and 
managing those services that cannot be transferred to the private sector [8]. During recession periods this aspect is 
critical for a country’s economic recovery pace. Moreover, PPPs are intended to be the recognition of the private 
sector’s efficiency and know-how. 
Multiple positive impacts on public finance 
Public-private partnerships can have a significant impact on public finance by [8]: (a) generating new sources of 
income, new infrastructures and new services; (b) allowing new development for existing sources of revenue 
(public transportation, sanitation); (c) promoting industrial development and as a consequence, increasing fiscal 
income; and (d) better directing public budgets. 
There are a lot of competing demands on the public purse which makes it difficult for governments to choose 
which project to finance or not. PPPs make this choice easier and help governments finance more projects than they 
would usually do by using traditional methods. 
Public-private partnerships also contribute to reducing taxation, which is one of the primary measures governments 
should  adopt  during  critical  periods.  Thus,  the  redirected  resources  stimulate  demand  and  contribute  to  the 
country’s wealth.  
 
Job creation  
Public-private partnerships are source of jobs on the medium and long-term and the key of the anti-crisis programs. 
For example, the 900 billion dollars plan for revigorating the American economy adopted in 2009 is aimed at 
saving 2,5 million jobs in the next two years through public-private partnership infrastructure projects: roads , 
bridges, schools, ecological technologies, etc. [9]. 
The Eurostat treatment for PPPs/ the “off balance sheet” treatment 
The fiscal treatment of public-private partnerships is one of the main drivers for such projects in the new European 
Union member states. Thus, accordingly to the EU state budget and public finance rules, PPPs can benefit of the 
“off balance sheet” treatment if: the construction risk and either the demand risk or availability risk is accepted by 
the private company. 
In other words, the Eurostat treatment for PPPs establishes the minimum level of risk the private sector has to 
assume in order to degrevate the public budget of that project (the assets involved in a PPP project will not be 
registered in the government’s balance sheet). 
The private company assumes the construction risk if the public sector pays only when the results obtained match 
the agreed parameters. 
The private partner assumes the demand risk if he is totally responsible for the demands’ variability compared to 
the moment when the contract was signed. 
The private company bears the availability risk if the public authority applies penalties when the concessionaire’s 
performance is poor, meaning that he was not able to reach the stated quality standards. 
In the context of the current economic crisis, it is in the state’s interest to keep investment in public infrastructure 
off the balance sheet so that it does not add to the national budgetary deficit. 
Absorption of EU funds 
Public-private  partnerships  assure  a  better  absorption  of  the  EU  grants.  PPPs  which  blend public and private 
finance with EU funds are called hybrid PPP. Optimists think that EU money will protect PPPs from the negative 
effects of the financial crisis. 
Grant financing has three principal impacts on public-private partnerships [2]: (a) an immediate impact on the 
project’ financial viability by reducing costs (or increasing revenues); (b) an impact on local authorities budgets by 
reducing demand on funds and allowing budget transfer to other requirements; and (c) an impact on the private 
sector contractor’s perception of the project viability. 
Figure 1 shows a series of infrastructure development opportunities in Central and Eastern European countries that 
are expected to be developed on a PPP basis during 2007-2013. Romania ranks second in this top.  
 
   428 
Figure 1 Major infrastructure development opportunities by country 
 
(Source: PricewaterhouseCoopers, 2008) 
 
However, the allocations of EU funds for CEE countries for 2007-2013, as shown in Figure 2, ranks Romania on 
the fourth position. This indicates two important aspects. First it highlights that there is a real interest for PPPs and 
that things are starting to move forward. Second, this situation is the consequence of the historic underinvestment 
in infrastructure in Romania, which caused an infrastructure “gap” by comparison with other CEE countries. 
 
Figure 2 Allocations of EU funds in CEE countries in 2007-2013 (€m) 
 
 
 
(Source: PricewaterhouseCoopers, 2008) 
 
 
3. Public-Private Partnerships, Victim of the Current Economic Crisis 
The current economic crisis may be an important obstacle in the PPPs` evolution in Romania, and this is the 
pessimists’ approach. Most of them fear that big infrastructure projects, like Comarnic-Brasov highway or the 
Bucharest ring road will be affected by the current macroeconomic context (Table 1). The arguments that support 
this approach are: (1) tighter lending conditions; (2) decrease in the investor’s confidence; (3) weaker external 
demand; and (4) difficulties in blending PPPs with EU grants. 
Tighter lending conditions 
Given the actual financial crisis it is likely that a single bank will not be capable to finance a one billion euros PPP 
infrastructure project, like Comarnic-Brasov. Such an investment will require the participation of at least ten banks. 
Also, more time will be needed in order to obtain the necessary loans and the negotiation conditions will be for sure 
tougher. At the moment banks do not have enough financial resources and as a consequence they will tend to be 
very selective when it comes to getting involved in a major infrastructure project [4]. 
Decrease in the investors’ confidence 
The  tough  lending  conditions  will  force  investors  to  be  very  careful  with  their  money.  Moreover,  the  banks 
restrictive attitude will force private partners to increase their equity contribution. This means investors will get 
involved in a PPP deal only if the project proves to be very feasible. In other words, the bankability and viability of 
projects will be very much affected. Bankability refers to the private sector’s interest in participating in a public-
private partnership, while viability measures the project’s capacity to generate positive cash-flows. 
1
4
9
9
11
15
19
0 5 10 15 20
Hungary
Romania
Poland
Slovakia
Czech Republic
Bulgaria
Latvia
Number of projects429 
Weaker external demand 
The fragile economic situation will generate a decrease in the number of tenders interested in participating at PPPs 
bidding processes. This comes as a natural consequence if we think about the costs private partners have to bear in 
order to make a proposal: pre-feasibility and feasibility study expenses, consultancy, negotiation costs, etc. Less 
tenders mean less competitive price for PPPs and higher prices are translated into lower efficiency, which in the 
end means less value for money. 
Difficulties in blending PPPs with EU grants 
During 2007-2013 the European Union allocated for Romania 13.1 billion euros from the Structural Fund and also 
6.6 billion euros were allocated from the Cohesion Fund. Although the absorption of EU grants is extremely 
appealing  for  PPPs  as  it  offers  the  cheapest  financing,  there  are  several  financial,  legal  and  organisational 
incompatibilities  that  make  it  difficult  to  insert  EU  grants  within  public-private  agreements.  Thus  there  is  a 
difference in the timing of payments: EU funds are available for a much shorter period of time (7 years) than 
public-private agreements, which are long-term contracts (20-25 years), based on constant availability payments. 
Pessimists consider that PPPs are not going to attract as much EU funds as predicted due to this inconveniences.  
 
Table 1 Ongoing and upcoming infrastructure PPP projects (road sector) 
 
Project   Status  Procurer  Project details  Project 
size (€m) 
Likely 
timetable 
Comarnic- 
Brasov 
highway  
Ongoing 
project 
Romanian 
National 
Company 
of 
Motorways 
and National 
Roads 
(CNADNR) 
Twelve tenders have been 
already submitted for the 
competitive dialogue 
procedure relating to the 
concession contract. 
995  2008-2011 
Sibiu-
Pitesti 
highway 
Upcoming 
project 
CNADNR  The  length  of  the 
concession highway will be 
around  120km.  The 
feasibility  study  is  under 
development. 
1,260  2009-2012 
Brasov- 
Ploiesti 
highway 
Upcoming 
project 
CNADNR  The  length  of  the 
concession highway will be 
around 111km. 
2,051  2009-2013 
Focsani-
Brasov 
highway 
Upcoming 
project 
CNADNR  No further details about the 
project  have  been 
announced yet. 
n/a  n/a 
Targu 
Mures-Iasi 
highway 
Upcoming 
project 
CNADNR  The  length  of  the 
concession highway will be 
around 300km. 
1,050  2009-2013 
Bucharest 
ring road 
Upcoming 
project 
CNADNR  The  length  of  the 
concession highway will be 
around 164km. 
1,000  2009-2013 
(Source: PricewaterhouseCoopers, 2008) 
 
If for instance we take a look at the Comarnic-Brasov highway which today has a six years delay compared to its 
initial deadline (2003) we will notice that it would have been more advantageous for the Romanian state to close 
the  negotiations  in  2003,  when  the  prices  were  lower  compared  to  2009.  If  instead  we  analyse  Hungary’s 
experience we can clearly see that although its M1-M15 motorway PPP contract was considered to be unsuccessful 
at that time (2003) (due to unrealistic traffic forecasts which led to several renegotiations of the contract and in the 
end to the re-nationalisation of the project), today is thought to be a major achievement, which attracts foreign 
investors and boosts economic development, compensating the high price paid from the public purse in order to 
build it. 
 
4. Conclusions 
Romania is starting to implement major infrastructure projects with a PPP component in an extremely delicate 
macroeconomic context, when financial institutions are becoming very selective because of their low financing 
capabilities. This gives us two main alternatives: either to continue, or temporary give up our infrastructure plans, 
until the economic situation will improve. 
Optimists’ opinion is to continue PPPs plans because PPPs bring along a series of advantages that can compensate 
the negative impact of the economic crisis and can help achieve economic recovery faster. 430 
On the other side, pessimists suggest to postpone infrastructure PPPs as they tend to be more expensive today than 
they will be once the recession ends. However such a rationale does not take into consideration our past experience 
or the PPP lessons learned by other Central-Eastern European countries.  
We may conclude that it is better to finance infrastructure PPP projects today than tomorrow. Although today it 
may be more expensive due to the “credit crunch” generated by the financial crisis, tomorrow it will not be cheaper 
because prices always tend to grow up and because the renegotiation process is very expensive too.  
 
References 
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Private Partnerships”, Brussels. 
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PUBLIC-PRIVATE PARTNERSHIPS - SOLUTION OR VICTIM OF THE CURRENT ECONOMIC CRISIS?

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PUBLIC-PRIVATE PARTNERSHIPS - SOLUTION OR VICTIM OF THE CURRENT ECONOMIC CRISIS?

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