Public-Private Partnership in Creating a Knowledge Economy: the

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Public-Private Partnership in Creating a
Knowledge Economythe Sunrise Valley case
J.R. Lazutka Vilnius University
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Sunrise Valley Short History
09/01/2002, Vilnius A Memorandum of Understanding
was signed by leading Lithuanian businesses,
universities and public institutions
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Sunrise Valley Short History

• Sunrise Valley was formally incorporated as a
  public enterprise in May 2003.
• Founding stakeholders in Sunrise Valley included
  Vilnius University, Vilnius Gediminas Technical
  University and leading companies in key target
  sectors such as Alna (IT), Bite (TC), Ekspla
  (HiTech).
• In February 2004 Vilnius City Municipality became
  a stakeholder.

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Sunrise Valley Mission

• To put Lithuania on the map as a location for
  world-class businesses engaged in knowledge
  intensive activities

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Sunrise Valley Mission

• To achieve its mission, Sunrise Valley will
• Provide high quality sites and premises suitable
  for technology-driven businesses
• Combine physical infrastructure with the
  provision of a range of specialist support
  services
• Promote networking between the universities and
  businesses located at Sunrise Valley, between
  the businesses themselves, and with partners
  elsewhere in Lithuania and worldwide.

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Sunrise Valley Main Objectives

• Helping transform Vilnius into a Knowledge City
  
• Capitalising on the research strengths of
  Lithuanian universities
• Improving industry-higher education linkages
• Encouraging technology transfer and the
  commercialisation of publicly funded research
• Fostering a culture of entrepreneurship
• Creating new employment and wealth creation
  opportunities for university graduates,
  scientists and researchers
• Attracting new foreign direct investment (FDI) in
  high value added activity areas.

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Sunrise Valley Former Projects

• SINO (Support to the Innovation Structure)
  2003-2004
• PHARE PPF (Sunrise Valley Breaking Grounds)
  2004-2005
• BRIDGE (part of EU EUROPRACTICE initiative)
  2004-2005

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Sunrise Valley Current Projects

• Sunrise Enterpreneurship School (funded by ESF
  1.1 MLt) 2006-2008
• Technology Transfer Center (funded by ERDF 1.3
  MLt) 2006-2008
• Sunrise Science and Technology Park (funded by
  ERDF 10.5 MLt Vilnius City Municipality 6
  MLt bank loan 12 MLt)

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Sunrise Science and Technology Park

• Territory of 0.6 ha owned by Sunrise Valley on
  gratuitous lease basis
• Up to 14.000 sq m for STP and incubator (2
  buildings) in period of 2006-2008

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Sunrise Valley Expansion Territory

• Territory of 1,8 ha
• Up to 40.000 sq m of building space
• Second development phase 2008-2015

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Some Important Questions to be Answered

• Which procurement mechanism should be adopted to
  raise the financing for infrastructure
  development public-private partnership or
  conventional financing? What are the implications
  in terms of financing structure, revenue
  generation etc.?
• What are the most appropriate sources of
  financing in respect of
• a) capital infrastructure development and
• b) operating costs?
• What role will subsidies play in relation to (a)
  and (b)

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Financing Infrastructure Two Options

• Publicly financed route - a public works contract
  would be put out for public tendering. Following
  an evaluation of tenders from construction
  companies, appoint a private sector contractor to
  design and build the infrastructure. The public
  sector would finance and operate the
  infrastructure.
• Public-private partnership route - following a
  public procurement process, a public-private
  partnership agreement would be signed and a
  private concessionaire would be appointed to
  design, build, finance and operate the
  infrastructure. A revenue-sharing agreement would
  need to be agreed between the parties setting out
  the proportion of rental income that would be
  given to public enterprise Sunrise Valley versus
  the concessionaire.

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Public Works Contract - Advantages

• Speed in absence of a framework for the use of
  PPP in Structural Funds in Lithuania, launching a
  public works tender and appointing a contractor
  may prove quicker than more innovative
  procurement mechanisms
• Keeping things simple / avoiding risk the
  legislative framework for PPP is only just
  evolving in Lithuania. Given delays encountered
  in operationalising Sunrise Valley,
  advantageous to keep procurement mechanism
  simple. Given lack of experience in LT in
  implementing PPP, there may be additional
  unforeseen risks
• Lack of need for PPP - there is likely to be
  sufficient funding to finance of Sunrise Valleys
  development with public money alone i.e. VCM, the
  Ministry of Economy and ERDF. Sunrise Valley does
  not therefore need to attract additional private
  finance.
• Control Sunrise Valley may have more control
  over the implementation process than under PPP

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Public Works Contract - Disadvantages

• Absence of leverage on public funds unlike PPP,
  public works contracts will not leverage in
  additional financing from the private sector.
  Arguably, this could be interpreted as a
  sub-optimal use of public funds and
• Human resource implications under a public
  works contract, once the construction work has
  been finished, managing / operating the buildings
  will become the responsibility of the public
  sector organization which commissioned the
  contract. Sunrise Valley will therefore have to
  invest time resources in managing and operating
  the infrastructure could be a distraction from
  its core business.

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Public Private Partnership - Advantages

• Public sector defines the outputs, not the
  inputs
• Transfer of risk to private sector (assuming
  managed effectively)
• Leverages additional finance from private sector
  so state budget is less encumbered
• Greater certainty over future operational costs
• Framework in place to ensure that quality
  standards are adhered to e.g. penalties when
  standards fall
• Can accelerate project implementation
• Assets are returned to public sector after fixed
  period i.e. are handed back at the end of the
  contract.

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Public Private Partnership - Disadvantages

• Higher cost of private sector capital
• Contracts more detailed to eliminate all possible
  risks. This takes comparably more time than
  public works contracts/ has HR implications
• Long-term contracts e.g. 30 years or so may
  reduce the flexibility of the public sector
• Danger of PPP being used for the wrong reasons
  i.e. because it is fashionable
• In some instances, traditional public procurement
  may have advantages over PPP
• Obstacles in absorbing EU Structural Funds.

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Obstacles in Absorbing Structural Funds

• The absence of a framework for using PPP in
  combination with SFs
• Inconsistency between the Law on Concession and
  the Law on Public Procurement
• The short duration of the SFs programming period
  
• The comparatively long duration (12-18 months) of
  the process involved in appointing a
  concessionaire under the Lithuanian Law on
  Concession
• The N2 rules which set out rules with regard to
  the commitment and disbursement of SFs. Under the
  de-commitment rule funding may be lost given the
  time period it can take under the Law on
  Concession to appoint a concessionaire
• Operational costs may not be eligible under SFs
  rules for the current programming period
  (although rental income may be collected, other
  costs for operating the infrastructure on behalf
  of public enterprise Sunrise Valley may be
  ineligible).

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Development of Sunrise Valley Joint Venture
(capital and services provider)/1

• Sunrise Valley is the builder and owner of the
  park buildings
• Private partner is the financier and operator of
  the park directly or through establishment of a
  separate legal person
• Additional funds from the banks to be attracted
  for the project
• Private partner is the lessee of the premises
  having the right to sublease
• Public tender for selection of the private
  partner to be launched
• According to the Lithuanian legislation other
  entity may develop infrastructure on the land
  plots held on gratuitous lease basis by Sunrise
  Valley, only in case Sunrise Valley is the
  co-developer and resulting co-owner of such
  infrastructure (at least formally)

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Development of Sunrise Valley Joint Venture
(co-owner of infrastructure)/2

• Contributions of the parties to the joint
  venture
• In kind contribution of Sunrise Valley (works,
  gratuitous lease of land, other obligations)
• Financing arranged by the private partner
• The building to be developed joint ownership of
  Sunrise Valley and private partner according to
  pre-agreed proportions
• Private partner is the operator of the park
• Pubic tender for selection of the private partner
  to be launched
• In case if private business intends to become a
  stakeholder of Sunrise Valley there is no
  possibility to get return on investment (profit
  must be reinvested into Sunrise Valleys further
  development)

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Development of Sunrise Valley EU SFs

• According to EU structural funds private business
  may participate in the project financed from the
  funds only as providers of goods, services and
  works (e.g. operator of the park)
• Public procurement rules to be applied
• Prohibition to change type of activity and
  ownership of property created using EU structural
  funds (5 years after the end of the project)