Connecting the region through public-private partnerships

Earlier this summer, an agreement to construct the Ķekava bypass in Latvia gave the start to the first major industrial public-private partnership project in the Baltics. This bypass will improve the connectivity between the Baltic countries and the rest of Europe while diverting transit traffic away from densely populated areas. According to the Chairman of the Latvian State Roads (LSR) Mārtiņš Lazdovskis, the project is a breakthrough not only for the road network, but also for boosting other large infrastructure developments in the region.

A public-private partnership (PPP) involves the public sector contracting private partners to deliver a public sector project or service. The key contrast between PPPs and public procurement is that in the former returns are linked to service outcomes and performance of the asset over the lifespan of the contract. The private service provider is not only responsible for financing and building the infrastructure, but also for the quality and efficiency of the operation for several years thereafter.

In the case of the Ķekava bypass, the construction and maintenance will be implemented by an international consortium, AS “Ķekava ABT”. The project is co-financed by a long-term EUR 61.1 million loan from NIB, and an equivalent amount from the European Investment Bank.

Mārtiņš Lazdovskis, who has been managing the project on the public side, says that attracting institutional financing was crucial to achieving the landmark agreement. According to him, the project has already provided some spill-over effects as general interest for PPPs is increasing.
NIB newsletter set out to discuss the initial and wider impacts of the project in an interview with Mr. Lazdovskis.

Why was there a need to build a bypass around the town of Ķekava? How will the project affect connectivity and what are its estimated benefits?

“In Latvia, the traffic flow is quite centralised: 70% of it occurs on around 10% of the existing public roads, and the most intensive traffic is in the vicinity of Riga. The road in question, the A7, is the only state main road entering Riga with merely two lanes; all other roads have four or six lanes. At the same time, the A7 is part of the Via Baltica highway and the main transit artery of Latvia. The section of the A7 from Riga to Ķekava is used by some 30,000 drivers daily, and it is one of the most congested sections in the country with a huge share of heavy traffic. Therefore, for a long time the LSR has planned to improve the road by creating a four-lane entry and exit from/into Riga with the construction of the Ķekava bypass.”

“The beneficiaries of the project are all Via Baltica road users: Latvian drivers, Lithuanian drivers, or Finnish and Estonian road users travelling to the rest of Europe.”

“The average waiting time on the road, for instance, if you want to get to Riga from Vilnius, is currently 30 to 40 minutes. On completion of the project, this is estimated to be reduced by 20 or 30 minutes. If we multiply this by the number of total road users, we see how many motor-hours and man-hours, and in turn also how much fuel we save. By reducing traffic jams and fuel usage, the project will also reduce the impact on the environment immensely.”

“Moreover, the bypass will improve road safety – not only by minimizing the risk of traffic jam accidents, but simply because divided, four-lane roads are much safer than two-lane roads.”

The Ķekava bypass road project is the first major PPP project in Latvia. Why was there a decision to seek a public-private partnership and how did the project come to life?

“Traditionally, there are two sources of financing for infrastructure: the state budget or European Union funds. It is evident that direct funding for a road infrastructure from European Union funds is decreasing because of changing priorities.”

“As for the national budget, there are several restrictions. First and foremost, as a Eurozone country, we must stick to general rules regarding budgetary deficit. This means that to build the infrastructure, we also need to compete with other state needs in Latvia, such as healthcare, education, or police funding. That is the main reason why, already in 2014, our government decided to seek opportunities to carry out the project by attracting other sources of funding. Considering the available, well-adjusted financing in the market, PPP was chosen as a reasonable solution.”

“The loan for the bypass project is taken by a private partner, so the fiscal space of the state budget is not affected, enabling the funding of other urgent development priorities. Additionally, during the implementation of the project, the partner undertakes most of the project risks as well as guarantees a quality result to provide citizens with the maximum benefit and to avoid any additional unexpected costs for the state budget. The main advantages of the PPP model are that it minimizes risks, and the payment of the loan is distributed in the long term. It allows us to construct a new section of the road without having to halt other projects in other fields of the national economy.”

André Küüsvek, President & CEO of NIB, speaking at the PPP signing event. Photo: Latvian State Roads

What is the value of having NIB as a long-term financier in the project?

“Undeniably, when taking financial loans for construction, additional costs are incurred. Yet, if the owner, in this case the state, does not have the necessary amount of money ‘in its coffers’, a loan is the only way to construct anything at all. For this I have a simple comparison: ‘Why do people buy a house using financing mechanisms instead of simply saving the money over time? Because we get results much earlier, for which we can pay in a long-term perspective’.”

“However, in this case, I cannot even say that such a financing model is more expensive. What makes this PPP alternative not as costly as one would have imagined is attracting international financial institutions (IFIs) such as NIB and EIB. That gives us the possibility to finance this project almost at the same level as we are financing general debt in our budget. Without the involvement of IFIs, the bypass would be much more expensive, maybe even so expensive that other alternatives could have been considered more appropriate.”

“In fact, attracting institutional financing was a precondition set by our ministers; it was part of our road map for the whole project. Moreover, involving IFIs gives more transparency for the project, as due diligence requirements set by NIB and EIB are high and well-respected.”

Given the success of this project, do you think this could lead to further PPP financing for infrastructure projects in the future? Are there any other similar projects planned in Latvia?

“Looking from today’s perspective, I can say that the next PPP project has already started. As of a few weeks ago, our government decided and requested the LSR to make financial economical calculations for building the Iecava and Bauska bypasses as our next PPP project.”

“Geographically, the Iecava and Bauska bypasses start where the Ķekava bypass ends. Once completed, they will make the journey to Lithuania and the rest of Europe by another half an hour shorter, further adding to the time savings derived from the Ķekava bypass.”

“The Latvian government has confirmed the development vision of Latvian state roads up until 2040, which entails radically improving the infrastructure by reconstructing the roads and providing several traffic lanes in each direction. This strategy supports high infrastructure traffic safety standards as well as better mobility, and this is what we build our future projects on.”

“The strategy lays out a plan to make it possible to reach the Riga bypass (A4/A5) from any region of the country within 2 to 2.5 hours. Due to an insufficient road capacity and a low level of safety, the Riga bypass already cannot fully serve its function of bypassing the capital quickly, comfortably, and without burdening the streets of the city. Therefore, the Riga bypass will be reconstructed with EU Cohesion Fund funding, and the Iecava and Bauska bypasses will be implemented as a supplementary PPP project, as only the synergy of these projects can unlock their full potential.”

“As for the future of PPP projects in general, I feel that interest in this area is increasing, and not only within the road sector. However, there is still a feeling of hesitation, as the model is still quite unknown until it has been used. We have completed the initial stage of our PPP project, and the biggest challenges of building and maintaining the road still lie ahead of us. I am sure that if the implementation goes smoothly and we can demonstrate the positive effects, the Ķekava bypass project will boost the presence of PPP not only in Latvia, but also in the Baltics.”