Category: Uncategorized

The absence of a stable and predictable regulatory framework in Albania undoubtedly accounts for the country’s financial instability and stagnant development. The possibility of an upcoming tumble in the national economy calls for reforming one of the most vital national legislative sectors: concessions and PPPs. The law on concessions and PPPs has been amended several times, in an attempt to harmonize it with respective EU legislation and the needs and trends of the Albanian market. As a result, it has inevitably evolved into a hybrid system that has often created legal deadlocks between investors and the state authorities.

Over the last decade, the Albanian government has opted to allocate the largest part of the state budget to the development of a national infrastructure, leaving niche market sectors without adequate financial support. However, the poor quality of work performed by local and international companies on these projects has created a vicious circle in which large expenditure was required to complete unfinished projects and provide maintenance for existing ones. In order to reverse this unsustainable tradition, the Albanian government started considering the assignment of the country’s main highways in concession/PPP to specialized companies that would also undertake subsequent maintenance. 

The implementation of a new concession/PPP scheme sets the focus on the Milot-Morine highway connecting Albania to Kosovo. According to a feasibility study conducted almost five years ago, the operation of the highway would incur toll charges of 5 Euro for passenger vehicles and 10 Euro for transport vehicles. However, the accuracy of the study was strongly contested by the competent authorities and several experts, on the grounds that it disregarded a series of major technical and financial elements, including, inter alia, the previously unsuccessful concession venture of the Tirana international airport, the impact on the personal financial situation of Albanian and Kosovar citizens, the business relationship between the two countries and the comparatively low toll tariffs of 1.5 to 2 Euro currently imposed in the same region. On the technical level, the highway remains under construction, with several issues outstanding, discouraging investors from participating and supporting a partially delivered and under-performing project. 

In light of the above, the current concession/PPP contract is intended to effect the construction, upgrade, operation, and maintenance of the highway for a period of 30 years. Although the tender process was initiated in 2014, there have been several delays and postponements from the competent authorities and participating investors, who still seem reluctant to facilitate the procedure. The Ministry of Transport and Infrastructure has provided limited information on investors’ rates of return and the special framework that will be implemented for the highway’s ordinary users, such as local farmers, small businesses, students, and public clerks, and to date there has been no provision for a toll-free alternative to the highway, as international practice mandates.

Upon the elimination of all socio-technical barriers on the performance and operation of the project, the Milot-Morine highway will be the first large-scale concession/PPP and investment project to be implemented in Albania. With the application deadline for the tender not yet expired, it is not clear whether the scheme will take the form of a concession or PPP. Investors are clearly in favor of a concession arrangement that will secure for them full control of the SPV subsidiary that will own the project; equally, the Albanian government hopes to have the investor make the initial investment and carry out the full management of the project. Moreover, due to the expanding scale of the project and its subsequent public economic impact, the tender procedure will inevitably generate a public debate on the efficiency and sustainability of the possible investment scheme. As a result, the Albanian government will be forced to make a tough decision over the choice between concession and PPP with respect to the project management and maintenance, and a more complicated decision calling for better management of public money and the creation of a fund for the maintenance of the highway.

By Besnik Duraj, Partner, Drakopoulos Law Firm

This Article was originally published in Issue 2.5. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

A Stable Market With Few Changes

The Estonian public procurement market has been fairly stable and uniform in the last couple of years. While experiencing steady growth, the major trends in the market have remained unchanged. We expect that the consolidation of contracts and a wider spread of joint procurement proceedings, along with the implementation of new EU procurement directives, however, is about to break the ice and bring about some significant changes.

A relatively large number of very small contracting authorities is what sets the Estonian market apart from the bigger economies of the European Union. Despite the country’s small size, there are over 200 municipalities with their own local governments, all of which are contracting authorities. Likewise, there are also a large number of small and medium-sized enterprises (SMEs) that according to global standards might even be considered micro-enterprises. It comes as no surprise then that over 50% of procurements have been conducted as “simplified proceedings”, falling below EU and national monetary thresholds.

In terms of monetary value, such simplified proceedings only amount to just over 10%. Throughout the years the state itself and the large state-owned enterprises have played an influential role on the market, and their orders have accounted for about two-thirds of the market’s value. This is particularly the case with construction and road works, where the state and its enterprises are the most important clients on the market.

What Will the Future Hold?

From a legal point of view, the largest change in upcoming years will definitely be the implementation of the three new EU public procurement directives (i.e., 2014/23/EU, 2014/24/EU, and 2014/25/EU) in March 2016. As opposed to amending the current Public Procurement Act, to incorporate these directives, the Estonian legislature has opted to enact a brand new one. This is the first major revision of public procurement law since 2007.

For the most part, the revision will carry on the current legislation and solidify the interpretations and principles already expressed in the case law of both the domestic courts and the Court of Justice of the European Union. Nonetheless, the legislative revision will also bring about some significant changes which in our opinion may have a profound effect on the Estonian market.

For some years now, there has been a trend towards the consolidation of contracts and joint procurement. For instance, although previously every ministry procured all of its IT-equipment separately, the Centre of Registers and Information Systems now jointly procures all of such equipment for the state and its ministries, departments, and agencies. We have also seen an increase in joint procurement by the smaller local governments.

This trend is favored by the new EU public procurement directives and, consequently, also by the new national legislation, and we expect the trend to continue and become more widespread. As a consequence, the aggregate value of contracts will rise, and a fall in the percentage of low-value simplified proceedings is expected.

While joint procurement will no doubt bring savings and more efficiency to the public sector, it might also upset the market. It might limit access to the public procurement market for smaller tenderers, of which there are many. There will be a need to address this problem in the upcoming years if the legislature or the contracting authorities take no immediate steps to remedy this effect. Opening up the market to SMEs has been declared to be among the aims of the new directives. We suspect that the current Estonian trend might work against it.

As a new possibility the new Public Procurement Act is set to give contracting authorities the option of taking a tenderer’s fulfillment of previous contracts into account. In recent years, there has emerged a small group of companies who frequently breach procurement contracts and fail to fulfill them. While the high likelihood of future problems is known to the contracting authority, the current Act and its case law offer few if any chances to take this into consideration in subsequent procurement proceedings. 

We have high hopes for the new legislation, which would allow contracting authorities to disqualify such repeat offenders. It would have a broader social and economic scope, especially in the construction market. Such regulation will allow the state, the biggest client, to implement best business practices and influence the market to be more responsible and sustainable in the long run.

There has been a steady rise in fully electronic procurement proceedings. We expect this trend to continue. In 2014, such proceedings accounted for 68.5% of all the procurement proceedings, and most likely we will see this percentage rise towards 75-80% in the following years. Estonia is well placed to take advantage of e-procurement. The country has not only the necessary IT-infrastructure, including the widespread use of digital signatures, but also the willingness of the market to embrace digitalized solutions in everyday business. This allows the contracting authorities to expedite the move towards more efficient and fully fledged e-procurement.

By Erki Kergandberg, Partner, and Priit Lember, Associate, Tark Grunte Sutkiene

This Article was originally published in Issue 2.5. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Every country strives to achieve well-developed, efficient, sustainable, and safe road and transport infrastructure. The state of infrastructure indicates the level of a country’s development. At the same time, its development is a precondition for economic, commercial, administrative, and cultural growth and prosperity.

The largest and most significant transport infrastructure project in Bosnia and Herzegovina is the construction of the highway within the Corridor 5-C (branch “C“ of the fifth Pan-European corridor). 

Some explanation may be useful. At the second Pan-European transport conference, held on Crete in March 1994, the European Union specified its main goals in the area of infrastructure. Ten Pan-European transport corridors were defined at the third Pan-European transport conference, held in Helsinki in 1997. These corridors are therefore known as the “Helsinki corridors.” Branch “C” of Corridor 5 is 702 km long and runs from Budapest to Ploce, a Croatian port on the coast of the Adriatic Sea, via Osijek and Sarajevo. 

The longest part of Corridor 5-C runs through Bosnia and Herzegovina, starting from Svilaj, a town on the Sava River on the country’s northern border with Croatia, and running  to Bijaca, the southern border with Croatia near the town of Ljubuski. The total length of the Bosnia and Herzegovina section is 335 km and extends across and connects both state entities – the Federation of Bosnia and Herzegovina and the Republic of Srpska. 

Construction of the highway within the Corridor 5-C project is of vital importance for Bosnia and Herzegovina, as it not only aims but in fact is obliged to improve the state of the country’s infrastructure in accordance with the Agreement on Stabilization and Association which Bosnia and Herzegovina concluded with the European Union. The Law on the Highway on the Corridor 5-C adopted by the Parliament of the Federation of Bosnia and Herzegovina back in 2013 defines the highway as public property of interest for Bosnia and Herzegovina and its entities. The highway connects Bosnia and Herzegovina with the European highway network as well as with the ports on the Adriatic coast. Along its route there are several cities which represent administrative, economic, and cultural centers; namely, Zenica, Sarajevo, and Mostar. 

The conceptual design and the feasibility study were completed back in 2007, and by March 2015, 92 km of the highway had been completed. 

The key issue related to construction of the highway on Corridor 5-C, which led to numerous debates and deliberations, is financing of the construction. Realizing the project requires considerable financial means, and for a transitional country such as Bosnia and Herzegovina which does not have sufficient budgetary resources to fund the whole construction by itself, the financing model is a crucial element for successful implementation of the project. 

So far the construction has been financed mainly through credits by the EBRD, the Council of Europe Bank, and the European Investment Bank, with one section financed from the budget of the Federation of Bosnia and Herzegovina. On September 28th, 2015, Public Enterprise Motorways FB&H Ltd. Mostar (“Motorways FB&H”), the entity competent to construct the highway, announced that the EBRD had approved funding in the amount of 60 million EUR for the construction of a new 10 km segment, and that the initiative has been sent to the Government of the Federation of Bosnia and Herzegovina for approval. 

However, it has also been announced that certain sections of the highway will be financed through a PPP model. In April 2013, Motorways FB&H signed a contract with the International Financial Corporation to provide advisory services with the aim of successfully implementing a Private-Public Partnership as a construction model of several highway sections. The IFC would conduct its mandate in two phases. The first one would consist of carrying out technical, commercial, legal, and regulatory due diligence for the project and presenting the proposed transaction structure to the Government of the Federation of Bosnia and Herzegovina, while phase two would focus on obtaining the approval of the proposed transaction structure by the Government and the IFC’s assistance in implementing an open and transparent competitive bid process to select a private developer for the project.

This model is commonly used worldwide, and it has proved to have numerous positive effects, especially when for countries with limited budgetary investment capacities. However, there is a hindrance to implementation of this model due to the fact that the Federation of Bosnia and Herzegovina still has not adopted the Law on Private-Public Partnership – a necessary legal basis and framework. 

The Government of the Federation of Bosnia and Herzegovina adopted the Draft Law on Private-Public Partnership in October 2013, and it has been adopted by both the House of Representatives and the House of Peoples of the Parliament of the Federation of Bosnia and Herzegovina. However, due to the specifics of the country’s legislative process, more consideration and evaluation remains before its final enactment.

There is no official and concrete indication of the time frame in which the procedure related to adoption of the Law could continue, but we can hope it will happen soon, as Private-Public Partnerships could be the one model which would allow for Bosnia and Herzegovina to avoid further loans.

By Adis Gazibegovic, Managing Partner, and Saida Porovic, Associate, Saracevic & Gazibegovic Lawyers

This Article was originally published in Issue 2.5. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The topic of public and private partnerships (PPP) in Lithuania has always attracted a great deal of attention.

National public infrastructure, though tremendously improved over the last few decades, still requires considerable investment. In the past, EU Structural Funds enabled governmental and municipal institutions to make investments in the improvement of infrastructure by straightforward procurement of construction works or goods. The provision of public services or the maintenance of infrastructure was only rarely entrusted to the private sector. Reasons ranged from the lack of a reliable legal framework, to the fear that the profit motive would drive the prices for public services, to the fear of getting tied up in lengthy PPP procedures and complicated agreements. Nevertheless, to date about 40 PPP projects have been implemented, with 36 of them being concessions, and the rest private finance initiatives. Most of the projects have been implemented at the municipal level and in the area of service provision. 

Available EU Structural Funds as well as public finances do not cover existing needs for improvement in public infrastructure in various sectors. The public calls for more efficiency in managing public finances and improvement of the quality of public services. Private business is willing to assume more long-term obligations instead of short build-and-deliver type projects. Political support for PPPs has grown during recent years. All of these provide a stable basis for more PPP projects to be launched in the future. 

Regulatory Framework and Main Aspects

A study conducted by the EBRD in 2012 found that the PPP legal framework in Lithuania is highly compliant with the UNCITRAL Legislative Guide on Privately Financed Infrastructure Projects (2001) and best practices, as well as working with medium effectiveness in practice. The most important laws for PPP projects are the Law on Concessions, the Law on Investment, the Law on State and Municipal Property, and the Public Procurement Law, as well as the Government’s guidelines on PPPs. Recent amendments to the Law on Investment have provided for the right of the private partner to initiate a PPP project. Amendments to the Law on Concessions will ensure further compliance with EU legislation, providing more unified regulation. The preparation of PPP projects is strongly supported by a centralized structure consisting of two governmental agencies: Invest Lithuania and the Central Project Management Agency (CPMA). Invest Lithuania focuses mainly on the private sector and investors, helping them to understand the system and to communicate with public institutions, whereas the CPMA acts as a PPP competence center, providing training, consultations, and support for the public sector in preparation of investment projects, tender documentation, and selection of a private partner. 

Sectors eligible for PPPs are energy, railway network, transport infrastructure, waste management, health care, telecommunications, tourism and leisure, education, and other areas upon specific approval. 

The PPP process and its length depend on the type of the project, regardless of whether the PPP project is implemented with a governmental or municipal institution. 

Pipeline and Financial Support

PPP projects require considerable homework from both the implementing public institution and the private investor. A clearly established pipeline and plans communicated well in advance strengthen chances to attract solid and experienced private investors and partners. A successful project (such as a street lighting project) in one municipality may be multiplied in others, making the process less costly and more efficient. The value of current PPP project pipelines listed on the websites of Invest Lithuania and the CPMA is estimated at over EUR 250 million. The projects include the Vilnius-Utena Road Reconstruction, the Via Baltica Road Section Expansion, the Vilnius City Street Lighting Modernization, the Vilnius City Street Resurfacing, the Marijampole Social Housing, five police stations in Lithuanian Cities, prisons in Vilnius, Klaipeda, Panevezys, and Siauliai, and the Vilnius Multifunctional Complex. Recently, our firm has been consulted by the Lithuanian Road Administration on the “Implementation Project of the Palanga Bypass Construction and Maintenance” PPP project and is currently involved in a PPP project for the Development and Maintenance of the Infrastructure of Courts Operating in Vilnius.

The Government took another important step by addressing the risks associated with the financial reliability of the public sector, especially municipalities. UAB Viesuju Investiciju Pletros Agentura, a state-owned company, used the EU Structural Funds to set up the Energy Efficiency Fund, which aims to provide financial instruments for the renovation of central government buildings (in the form of preferential loans) and street lighting modernization projects (in the form of guarantees). Initially the fund will manage EUR 79 million, with up to EUR 65 million provided for the modernization of central government buildings and up to EUR 14 million for guarantees in street lighting modernization projects. In the future, available funds will be increased, leveraging both institutional investors and private funds. The recycling nature of the funds will allow for returned funds to be re-invested in the future. 

Given the consistent support for PPP projects at the governmental level and the increasing availability of EU funds to support PPP initiatives, it can be reasonably expected that public competence in preparing and conducting PPP projects will stabilize and grow, enabling more public infrastructure projects to be developed through PPPs.

By Dainius Stasiulis, Partner, and Neringa Grazinyte, Associate Partner, Tark Grunte Sutkiene

This Article was originally published in Issue 2.5. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Ukraine’s current deep political crisis combined with the armed conflict in the East, the occupation of Crimea, and years of extreme corruption have severely depleted the country’s reserves. Technically outdated and worn out infrastructure (roads, railways, sea ports, centralized heat and water supply systems, etc.) require significant capital, which obviously can be provided not only by state and local budgets but also by private investors.

The experience of developed jurisdictions shows that “public-private partnerships” (“PPPs”) succeed where well-defined and efficient legal regimes create a solid ground for combining significant investment, intellectual, and innovative resources. And indeed, the initial legislative basis for PPP regulation in Ukraine was enacted in the late 90s with the adoption of laws governing concessions, including in the area of toll road construction. The next step in PPP regulation was taken by the Parliament in 2010, when the separate PPP Law was adopted.

By and large, this PPP Law sets forth the basic “rules of play” for PPP projects in Ukraine. It defines a public-private partnership as a cooperation between state authorities, local governments (public partners), and private entities or individual entrepreneurs (private partners), performed under the procedure established by the PPP Law and other enactments. It requires that the duration of a PPP project may not be less than 5 years and may not exceed the threshold of 50 years. It says that PPPs should mainly be resorted to in roads and railways construction; gas, heat and energy supply; healthcare; tourism; and recreation. Finally, it says that joint activity agreements and concession agreements are deemed PPP agreements.

Although the framework has been in place for several years now, historically, the practical implementation of PPP projects in Ukraine has always been hindered by insufficient political will, as well as the lack of understanding of how PPP works from the state and local officials’ side. Among the legal obstacles to PPP development in Ukraine have been: (i) the prohibition against transferring a property used in a PPP project into a private partner’s ownership for the term of the PPP agreement; (ii) a lack of regulation of a step-in in case of a private partner’s non-performance; (iii) cumbersome and time-consuming procedures for obtaining permits, licenses, and other approvals; (iv) a lack of clarity as to participation in a PPP project of a company created by the tender winner; and (v) lack of a mechanism for granting state guarantees. This list of obstacles is hardly exclusive.

The current Ukrainian government seems more PPP-oriented, however, and clearly understands the necessity of attracting private investments. In September 2015 the Parliament of Ukraine sent a draft law on removal of regulatory barriers for PPP development (“Draft Law”) for a second reading.

If implemented in its current form, the Draft Law should positively influence PPP governance. First, it allows the transfer of real estate into a private partner’s ownership for the term of a PPP agreement. This, in turn, should bring about the opportunity to raise more project financing, since having a real property in ownership would allow a private partner to use it as security of its obligations under such financing.

Second, it partially regulates the step-in of a new private partner. The circle of entities allowed to step in, however, is limited to institutions which extend financing for the relevant PPP project. 

Third, the Draft Law entitles a public partner in a PPP to purchase goods and services from a private partner without conducting a mandatory public procurement procedure. This legal development is certainly positive considering how long and burdensome public procurement procedures can be in Ukraine.

To provide additional comfort to investors, the Draft Law also suggests wider guarantees against adverse changes of law, but at the same time exempts application of this stability clause in the tax, customs, and currency-control areas. Finally, PPP tender winners will be allowed to establish a separate legal entity solely for the purposes of PPP project implementation. This should solve the current problem of holding companies not having the right to participate in PPP tenders with the understanding that they will assign the PPP project – should they win the tender – to their Ukrainian subsidiary.

Introduction of an efficient and well-defined PPP legal regime is undoubtedly challenging and time-consuming, and it can only be tested in practice. But this should be done sooner rather than later. Ukraine will need extensive investment to rebuild its Eastern cities and to get its economy back on the right track. This is why all legal developments in the PPP area are aimed at creating a favorable investment climate and PPP marketplace and ensuring that foreign investors, despite the difficult political situation, invest in Ukraine.

By Serhiy Piontkovsky, Managing Partner, Baker & McKenzie Kyiv

This Article was originally published in Issue 2.5. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

As its key infrastructure project, the Slovenian government is keen to promote the expansion of the port of Koper as a competitive northern Adriatic container port and logistics hub, but further development of the port depends greatly on the development of improved transport links and freight rail systems between the inlands and the coast. The Divaca-Koper rail section forms a pivotal part of this plan.

The cost for a second 27.1-km Koper-Divaca railway line, which would facilitate a greater flow of goods from coastal to inland areas and abroad, has been estimated at around EUR 1.3 billion, and Slovenia expects to receive funding from available EU sources and other private and/or domestic public sources. To obtain this funding, the Government appointed an inter-ministerial working group to propose a set of possible forms of public-private partnership (PPP). The inter-ministerial group’s conclusions on plausible PPP models for the biggest rail project in Slovenia are expected to be published in October or November, 2015. In the meantime, the findings of the International Transport Forum at the Organization for Economic Cooperation and Development (ITF/OECD) – mandated by the Ministry for Infrastructure to prepare a risk assessment study of the Divaca-Koper rail project, including a study on possible models of PPP – have already been revealed to the public. 

The ITF study, which reviewed financial, technical, social, and economic aspects of the investment and related risks, concluded that the project for the construction of the second rail line carries a high level of risk, especially considering the financial constraints of the state. Against this background, the conclusions of the ITF study as to the most viable financing option were twofold. First, the most financially promising option for the realization of the rail project is a demand-based PPP, in which both the second track and the port would be concessioned with demand risk borne by the private party. In this model, the ITF noted, in order to achieve full financial cost recovery, the PPP would require important government support. Thus, as a more economically sensible solution in the short-term, the ITF suggested a completely new approach: the construction of an off-port/inland terminal – most likely in the town of Divaca. The off-port terminal concept would enable undisturbed and accelerated throughput growth (particularly of containers) and thus accelerate the growth of the port. This would allow the construction of the second rail line to be postponed until it becomes more economically viable, and in the short term would be more likely to attract private investors, given that the maximum expected cost for the construction of the off-port terminal would be in the range of EUR 50 million. 

Although this second option – the inland off-terminal concept – could be a good solution, it appears that the government is firm in its intention to construct a second rail line, while considering possible measures to address financial concerns related to the project. The Ministry mentions increasing the funding obtained from EU sources such as the CEF, for instance, which may be possible, and/or constructing a strictly freight rail system (i.e., not a passenger-based system), and thus minimizing expenses. The government’s decision to focus its efforts towards realizing Slovenia’s most vital rail project comes as no surprise, following more than a decade of government feasibility studies and the severe capacity problem with the existing rail infrastructure placing further development of Port Koper at risk.

In light of the announced intention of the government to continue the Divaca-Koper rail project, it is expected that the public procurement for the tendering of a detailed engineering review of project cost and design solutions as well as possible rationalization and optimization of the project will be announced this month. It will include verification of prices and the total value of the project in relation to the current market situation; verification of adequacy of technical solutions and possibilities for rationalization and optimization; and a catalogue of anticipated risks during construction. Second, with regard to the PPP models found as most appropriate by the inter-ministerial group, a tender is expected to be opened this month to preliminarily assess the interest of private investors for individual PPP forms, with the ultimate goal of finding the most suitable private investor by the end of 2016. 

By Robert Prelesnik, Senior Partner, Rojs, Peljhan, Prelesnik & Partners

This Article was originally published in Issue 2.5. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

As its key infrastructure project, the Slovenian government is keen to promote the expansion of the port of Koper as a competitive northern Adriatic container port and logistics hub, but further development of the port depends greatly on the development of improved transport links and freight rail systems between the inlands and the coast. The Divaca-Koper rail section forms a pivotal part of this plan.

The cost for a second 27.1-km Koper-Divaca railway line, which would facilitate a greater flow of goods from coastal to inland areas and abroad, has been estimated at around EUR 1.3 billion, and Slovenia expects to receive funding from available EU sources and other private and/or domestic public sources. To obtain this funding, the Government appointed an inter-ministerial working group to propose a set of possible forms of public-private partnership (PPP). The inter-ministerial group’s conclusions on plausible PPP models for the biggest rail project in Slovenia are expected to be published in October or November, 2015. In the meantime, the findings of the International Transport Forum at the Organization for Economic Cooperation and Development (ITF/OECD) – mandated by the Ministry for Infrastructure to prepare a risk assessment study of the Divaca-Koper rail project, including a study on possible models of PPP – have already been revealed to the public. 

The ITF study, which reviewed financial, technical, social, and economic aspects of the investment and related risks, concluded that the project for the construction of the second rail line carries a high level of risk, especially considering the financial constraints of the state. Against this background, the conclusions of the ITF study as to the most viable financing option were twofold. First, the most financially promising option for the realization of the rail project is a demand-based PPP, in which both the second track and the port would be concessioned with demand risk borne by the private party. In this model, the ITF noted, in order to achieve full financial cost recovery, the PPP would require important government support. Thus, as a more economically sensible solution in the short-term, the ITF suggested a completely new approach: the construction of an off-port/inland terminal – most likely in the town of Divaca. The off-port terminal concept would enable undisturbed and accelerated throughput growth (particularly of containers) and thus accelerate the growth of the port. This would allow the construction of the second rail line to be postponed until it becomes more economically viable, and in the short term would be more likely to attract private investors, given that the maximum expected cost for the construction of the off-port terminal would be in the range of EUR 50 million. 

Although this second option – the inland off-terminal concept – could be a good solution, it appears that the government is firm in its intention to construct a second rail line, while considering possible measures to address financial concerns related to the project. The Ministry mentions increasing the funding obtained from EU sources such as the CEF, for instance, which may be possible, and/or constructing a strictly freight rail system (i.e., not a passenger-based system), and thus minimizing expenses. The government’s decision to focus its efforts towards realizing Slovenia’s most vital rail project comes as no surprise, following more than a decade of government feasibility studies and the severe capacity problem with the existing rail infrastructure placing further development of Port Koper at risk.

In light of the announced intention of the government to continue the Divaca-Koper rail project, it is expected that the public procurement for the tendering of a detailed engineering review of project cost and design solutions as well as possible rationalization and optimization of the project will be announced this month. It will include verification of prices and the total value of the project in relation to the current market situation; verification of adequacy of technical solutions and possibilities for rationalization and optimization; and a catalogue of anticipated risks during construction. Second, with regard to the PPP models found as most appropriate by the inter-ministerial group, a tender is expected to be opened this month to preliminarily assess the interest of private investors for individual PPP forms, with the ultimate goal of finding the most suitable private investor by the end of 2016. 

By Robert Prelesnik, Senior Partner, Rojs, Peljhan, Prelesnik & Partners

This Article was originally published in Issue 2.5. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The PPP model in Slovakia has encountered problems since its introduction in 2007. The government at the time established a PPP-focussed department within the Ministry of Finance and a PPP Association. The law was intended to enable the construction of critical infrastructure, but arguably the only project to have reached successful financial close is the R1 expressway, with an investment in excess of EUR 1 billion. The PPP scheme included the design, build, finance, operation, and maintenance of the 51.6 km dual two-lane road connecting the towns of Nitra and Tekovske Nemce, to the east of the capital city Bratislava.

Other projects were launched by the Slovakian government in 2006-2010, but when the government’s term ended, the incoming government decided to cancel them, claiming that they were too expensive and overpriced. Between 2010-2012 the new government decided to continue with infrastructure investment, but further motorways were constructed using EU funds rather than PPP arrangements. Infrastructure spending has continued since 2012, with two further projects in initial phases, including the approximately 27-km D4 motorway around Bratislava and a hospital in the Patronka section of the city. The latter will represent the first PPP project in Slovakia’s public health system, and is expected to cost between EUR 200 and EUR 500 million. Uncertainty, however, continues to surround the future of these projects. The main reason for previous cancellations by the Slovakian government was that these projects, in their view, could be constructed for less. The projects at the time were under negotiation and final contracts had not been signed. In the context of the global economic downturn, public authorities in Slovakia – as elsewhere – had to deal with debt crisis, with the government continuing to demand value for money as price remains king.

By way of illustration, two large construction companies in the country, both heavily engaged in infrastructure development, became insolvent in 2015, with both claiming that the prices tendered by the government in 2010-2012 were too low and it became difficult to pay their sub-contractors as a result. There are many in the country that remain unconvinced by these arguments, suspecting fraudulent activity and pointing out that similar projects in Austria and elsewhere in Europe involved costs comparable to those tendered by the 2010-2012 government but did not lead to insolvencies.

The people of Slovakia view the current projects and infrastructure investment as necessary, but the negative publicity concerning previous projects leaves many suspicious of the current complex model. There is no questioning the public’s appetite for infrastructure improvements; however, for PPP to remain a viable solution, pricing inefficiencies will need to be addressed.

Given the scarcity of successful examples of PPP projects in Slovakia, there is no overwhelming public optimism and support for the PPP model in particular, compared to other financing models. That isn’t to say there is none at all, especially since PPP schemes although indisputably complex and costly – represent a flexible tool. There is not enough of a positive track record at the moment, but if pricing was to improve, PPPs have the potential to meet the growing demand for infrastructure improvements.

With respect to Slovakia’s infrastructure sector, there are great opportunities, since important investments are expected. Roads and hospitals remain a priority for Slovakia as these are the areas most in need of improvement. But if the PPP model does prove to be a success in the coming years, there are other areas that could benefit as well, including education facilities and energy projects – all of which lack adequate investment and struggle to keep up with public demand.

Given the complexities and obstacles in recent years, PPP remains an interesting area, although it can be challenging for lawyers to get involved and probably will not provide enough work to justify all firms making it the foundation of their practices. The challenge is to get on the moving train, get one’s foot in the door, and establish PPP capabilities and brand in a blooming market.

The future of PPP and infrastructure in Slovakia is far from certain, but the lessons are there to be learned and opportunities to be exploited. Attitudes about costs could change, and if economies across Europe improve in the coming years, we could see PPP’s potential realized, but it is too early to get excited.

By Peter Kubina, Partner, Dentons

This Article was originally published in Issue 2.5. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Despite many attempts to implement public-private partnerships at the state level in the Czech Republic, only a handful of PPP projects have been realized. The Czech Ministry of Transport seems determined to change this, starting this year with transport infrastructure projects. A private partner is to build and operate a section of the R4 expressway in South Bohemia, and other projects are expected to follow. This article concerns the status and possible future development of Czech PPP policy with a special focus on transport infrastructure.

PPPs in Czech Republic today 

Interest in PPPs has grown since 2006 when new laws on the awarding of PPP projects came into force. A number of large-scale infrastructure projects were planned on the state level, some reaching billions of euros in value. The vast majority of them, however, did not proceed to the construction phase for various reasons. 

In a turbulent political environment, plans for PPP projects prepared by one government were often not supported by successor governments. Some pilot projects were unsuitable for realization in the form of PPPs or lacked sufficient preparation. Moreover, the 2009 financial crisis created a difficult financing environment. Last but not least, the Czech Republic receives a substantial sum of money from EU funds that may not be used for PPPs. These circumstances led the government to recall significant PPP infrastructure projects, including the completion of the D3 freeway in South Bohemia and the AirCon railway connection from Prague’s city center to the airport. 

The implementation of PPPs has been more successful on the municipal level. Water and wastewater facilities in particular are run as PPPs. In a typical model, the municipality owns the infrastructure, whereas the service provider is a private investor who operates the infrastructure, pays a consideration for its lease, and collects fees from end customers. Another example of a successful municipal public-private partnership project is the repair facility for public transport vehicles opened last year in Pilsen. 

What to Expect in the Coming Years 

Despite previous failed efforts, the Ministry of Transportation is willing to partner with the private sector for significant infrastructure projects. Faster and better construction and, thereafter, more reliable administration of the projects are among its main motivations. That the main flow of money from EU funds will dry up by 2023 is also driving the efforts. 

Earlier this year, the Ministry hosted a conference dedicated to the kick-off of Czech PPPs in transportation infrastructure and presented a number of guiding principles for the future. To reduce the overall risk, thorough preparation should precede the tenders. This mainly includes timely acquisition of land and necessary zoning and building permits. To maximize financial effectiveness, PPPs should be implemented where the use of EU funds is limited, i.e., outside the Trans-European Transport Network of key roads across Europe designed to facilitate the mobility of goods and passengers within the EU (the “Ten-T network”). Finally, the so-called DBFOM approach (Design Build Finance Operate Maintain Concession) is expected to be adopted. 

In a typical DBFOM, the private partner is responsible for the design, construction, financing, operation and maintenance of the infrastructure. As opposed to a full concession, the state bears the risk of ridership and handles the collection of tolls. The private partner receives regular payments based on availability, which usually do not start until the road is operational. Distribution of the risk is based on the unpredictability of traffic, which may be significantly lower than expected. This was the case of the infamous Hungarian M1/M15 and M5 motorways, where the risk of demand was transferred to the private partners and the traffic did not reach anticipated levels. As a result, the motorways ended up being re-nationalized. 

R4 Expressway: A Promising Pioneer? 

The first major piece of Czech road infrastructure to be built and run as a PPP is expected to be a 32-km section of the R4 expressway connecting Prague with south-west Bohemia. The preconditions seem hopeful: all zoning permits have already been granted, land acquisition is ongoing, and the feasibility study showed positive results. Furthermore, R4 is not part of the TEN-T network. 

The Ministry of Transportation already launched a tender for related financial, legal and technical counselling. The government is expected to assess the project in the coming weeks and, if approved, construction could begin as early as 2017. 

By Tomas Rychly, Partner, and Lenka Krutakova, Of Counsel, Wolf Theiss

This Article was originally published in Issue 2.5. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Whereas Public Private Partnerships in Austrian infrastructure projects have been a rare species for many years, interest on the public side has risen significantly. At the same time, the new EU Concession Directive – due to be implemented into Austrian law by April 18, 2016 – also brings amendments to the legal framework. As a result, interesting times in the Austrian infrastructure market are guaranteed.

Different Public Demand for Infrastructure Models

Although several infrastructure projects in Austria involved PPP models in the past (and it is fair to say that these projects were successful), the vast majority of all projects have been implemented in the traditional (i.e. non-PPP) manner. The main reasons included the very good financing conditions offered to the public side because of the country’s AAA ranking, the sufficient manpower of awarding authorities to implement projects by themselves, and not enough pressure from budget restrictions. Large public awarding authorities in Austria also possess decades of experience, even in very complex projects.

The new driver for interest in privately financed projects, and PPPs in particular, is the increasing amount of public debt on both the provincial and municipal level. According to public accounting standards, the ESA 2010, a project in which the main risks are allocated to a private partner, however, require that the infrastructure investment and related debts be in the private partner’s books. As a result, the investment and debts do not become part of the public bookkeeping and thus are not elements of the public debt that is reviewed under the Maastricht criteria.

Accordingly, legal advisors on the public side need a thorough understanding of ESA 2010 requirements related to risk transfer. The allocation of the risks (and tasks) of an infrastructure project does not only influence aspects like price, bankability, securities, contract drafting, and the selection and award criteria, but also affects whether the ‘economic’ ownership in a certain infrastructure project belongs to the public or whether it is shifted to the private partner. In other words, it is not only the legal ownership in the respective building, road, etc., that determines who has ‘economic’ ownership – what counts even more are the typical risks and benefits of the project.

From the viewpoint of public accounting and budgeting the private partner carries the main risks and benefits if both the construction risk and either the so-called ‘availability risk’ (referring to the availability of a certain infrastructure) or the ‘demand risk’ (referring to the use of the infrastructure) are mainly shifted to it. To achieve this goal, lawyers drafting an infrastructure contract must make sure that the private contractor assumes the risk of finishing construction of the project in time, without additional costs and according to contractual requirements, before the contractor gets paid and before the infrastructure asset is taken over.

The demand risk is allocated to the contractor too if it is not guaranteed that it can earn back its investments, financing costs, and operation expenses because of not selling enough or because of customers not accepting sufficiently high prices. The availability risk is transferred if negative (contractual) consequences of either defective quality or a complete non-availability of the infrastructure are significant enough that the private partner cannot cover its costs. If in a contract both demand and availability risks are transferred but one of these two accounts for more than 60% of the contract price, the legal analysis can in a first step asses only this risk; only if the result remains unclear should all risks be assessed.

Currently, in Austria, the project pipeline for PPPs in particular contains roads, hospitals, schools, and administrative buildings.

New Procurement Law Framework

Under ESA 2010 rules slightly different requirements apply to PPPs than to concessions. This is where the new Concession Directive enters into play. The new Directive 2014/23 not only clarifies how concessions shall be awarded but also contains much more detailed definitions of concessions than the procurement regime from 2004. Unfortunately the definitions of ‘PPP’ and ‘concession’ under budgeting rules differ from the ‘concession’ definition of Directive 2014/23.

What make it even worse is that both the Concession Directive and the budgeting rules refer to the main project risks (i.e., construction, availability, and demand risks), but the Concession Directive – and thus public procurement law – does not clearly distinguish between these risks. It instead uses an overall perspective of all risks of a certain project. The reason for the difference is the slightly different goal which procurement law has to achieve: The award of a concession has to comply with a much more flexible and less strict legal regime than the award of a normal public contract because strong risks are transferred and thus distortion of competition is less likely. So it is only the overall degree of risk transfer that counts. For public budgeting, by contrast, it is important whether the main risks and benefits that constitute economic ownership are transferred.

Thus a project can be a concession under procurement law but not under public budgeting rules and vice versa. So don’t blame your lawyers for confusing terminology. But you can demand clear advice.

By Thomas Hamerl, Partner, CMS

This Article was originally published in Issue 2.5. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.