Over the past two decades, the Greek State has increasingly relied on self-financing techniques for large-scale infrastructure projects, namely concession agreements and public-private partnership (PPP) agreements which differ from the traditional public works contracts first of all in terms of private financing (either through equity or bank financing) provided by the contractor against consideration. At the same time, the contractor assumes significant part of the associated economic and business risks.
Concessions and PPP agreements share many similarities, with differences primarily found in the tender process (concessions are governed by Law 4413/2016, whereas PPPs are regulated by Law 3389/2005, with a key distinction being the legislative ratification requirement for concession agreements). From a substantive perspective, concession agreements typically provide for the repayment of the concessionaire by the users of the infrastructure, whereas PPPs provide for consideration in the form of payments from the public entity (e.g., availability payments) or a combination of both repayment methods.
The Greek State employs self-financing techniques not only because they offer financial relief by deferring payments in the future, but also because they relieve the public sector of most risks inherent in the implementation and long-term operation of technically complex infrastructure projects of significant economic scope. In traditional public contracts, the public entity bears the risks related to financing and operation of the infrastructure, while the private entity bears only the construction risks. In concession and PPP agreements, these risks are shifted to the private sector.
Emerging trends
Recently, there has been a surge in self-financed projects tenders, partly because, under Regulation 549/2013 and EUROSTAT’s methodology, respective expenditure is not registered in the general government’s balance sheet nor counts towards public deficit and debt, provided that the business risk is substantially borne by the private sector.
Currently, many infrastructure projects are implemented or tendered through PPPs, such as the ultra-high broadband infrastructure, numerous road projects (e.g., Thessaloniki Flyover, Thessaloniki-Edessa Highway, the Crete Northern Highway – Hersonissos to Neapoli section, Kalamata-Pylos-Methoni road axis etc.), the operation of Thessaloniki’s subway, the construction and management of school facilities, student housing and other educational and research facilities. Other notable projects include the relocation/construction of prisons and courts, as well as numerous irrigation and water supply projects. Infrastructure projects that have been tendered through concessions comprise motorways (such as Egnatia Odos, Attiki Odos etc.), marinas and regional airports. Moreover, the concession scheme is also used in port privatization programs, which combine the sale of majority stakes in port authorities with the renegotiation and modification of existing concession agreements.
Risk allocation
In addition to the aforementioned fiscal benefits for the Greek State, the proper identification of risks arising during the contractual period and the contractual allocation of such risks between the public and private sectors is crucial for a project’s success. This allocation should be primarily based on each party’s capacity to manage the relevant risk more effectively and at the lowest cost. Excessive risk transfer to the private sector can produce adverse results, potentially:
- threatening the project’s viability if it endangers the cash flows required to pay operational costs, the repayment of the loans and the agreed or reasonable investor’s internal rate of return (IRR);
- affecting the project’s bankability;
- increasing the price offered by the investors in the relevant tenders and consequently the project’s cost for the contracting authority and taxpayers/users.
Therefore, an unreasonable risk allocation acts as a disincentive to investments, jeopardizing the success of the tender and the project itself.
Contractual provisions in Greek PPP and Concession Agreements
In the tender and contractual PPP and concession documents, an effort is made for a fair and reasonable allocation of risks, adapting international standards and practice to the peculiarities of Greek public administration and infrastructure. Indicatively:
(a) Environmental and expropriation risk: Typically assumed by the public sector and addressed before contract award.
(b) Licensing risk: Usually borne by the private sector, with contractual presumption for obtaining the required permits if administrative authorities fail to issue such permits without reason within a specified period (60 days for PPP projects under article 20 of Law 3389/2005). However, these provisions are criticized as incomplete, as they do not provide for contractor’s compensation in case of delays or unlawful rejection of contractor’s application. Additionally, presumed issuance often excludes technically complex permits.
(c) Archaeological risk: Usually shared between the parties. If the archaeological authority fails to act within a pre-defined timeframe (60 days for PPP projects under article 21 of Law 3389/2005), the private sector is entitled to an equivalent extension of time and compensation. Nevertheless, the private sector bears the cost of delays caused by the initial timeframe set for the archaeological authority’s actions.
(d) Demand risk: Typically borne by private entities. However, exceptions are usually included in the relevant contracts, allowing private entities to claim compensation from the public sector in cases of force majeure or state liability events, i.e. events for which the private entity is not responsible but are due to specific measures taken by the state that adversely affect demand (e.g., measures taken to curb the spread of the COVID-19 pandemic), depending on whether the specific event has or should have been insured.
Given that concession and PPP agreements will continue to serve as a tool for implementing major infrastructure projects in the coming years, it is essential to ensure proper risk allocation between the public and private sectors, tailored to the peculiarities of each project and avoid unreasonable risk transfer to private entities, thus ensuring maximum investment interest, projects’ bankability and a smooth, swift and proper execution of the contracts, to the benefit of all stakeholders, and ultimately the end-users of the projects.
By Prokopis Linardos and Katerina Politopoulou, Partner, Your Legal Partners