Legal Briefing

PUBLIC-PRIVATE PARTNERSHIPS IN THE CEE/SEE REGION

The In-House Lawyer Logo

Corporate & Commercial | 04 May 2011

In the context of budgetary restrictions on the one hand, and the need for major economy-driving projects in the public sector on the other, public-private partnerships (PPPs) provide states with an excellent option for achieving this goal with minimum financial participation. Many European countries have so far been successfully implementing PPP structures in various projects. However, when it comes to the ever-changing and often difficult markets of central and eastern Europe (CEE) and southeastern Europe (SEE), PPPs are still considered to be a unique challenge for the governments and are in need of further development.

OVERVIEW

A brief overview of the legal regimes in the region shows a considerable difference in the approach of each state in relation to PPPs. Political instability has led to unsustainable implementation of PPPs in certain states.

Some countries, such as Romania, Slovenia and Croatia, have adopted special legislation on the partnerships between the public and private sector. In Romania, which passed its first PPP law in early 2002, the implementation of a large PPP project is yet to be seen, as the law continues to be seriously criticised by experts. On the other hand, Croatia is considered one of the better examples of applying suitable PPP legislation. One of Wolf Theiss’ most recent cases relates to consultancy services rendered for the construction of the three largest sports complexes in Croatia. In this example, the public partner chose the PPP model due to the lack of any other objective possibility to complete the projects within the planned time frame. In practise, this proved to be not only the fastest, but also the most cost-effective model.

In Bulgaria no PPP legislation has been passed. Even the term ‘public-private partnership’ is not legally defined. On the other hand, it has been common practise for Bulgarian legislators over the past few years to envisage funding in the state budget for the realisation of ‘PPP incentives’. The government is reluctant to use PPP models for the financing of large infrastructure projects. Concessions and public procurement procedures are still preferred to PPPs, which are considered a rather complex model. Similar to the Czech Republic, the municipalities and regional authorities in Bulgaria are more active, and are trying to push the government to adopt appropriate PPP legislation. Some of the municipalities have even implemented local legal acts on PPPs or tried to complete PPP projects based on the existing legal framework.

RISK SHARING

One of the main characteristics of PPPs, with which the countries of the region are not very familiar, is the sharing of risks. Governments of CEE countries are often unwilling to have private partners be treated equally to them, mainly due to historical reasons. Through PPPs, states can transfer some of the risks to the private sector, instead of using the standard order-pay method. The lack of awareness of such positive aspects leads governments to either be passive or excessively careful by trying to transfer all risks to the private partner.

Risk-sharing should always be balanced; otherwise the private partner, being unable to bear a particular risk, will be reluctant to participate in the partnership. Incentives for private partners include the possibility to exercise control over expenditures, predictable public policy and regulatory environment, the possibility for a subsequent increase in the price of the rendered public services due to unexpected additional costs incurred by the private partner, the lack of restrictive public policies, and fair risk-sharing of both the commercial risks and the risks of force-majeureeffects.

Risk-sharing is extremely important for the successful financing of a project. In this context, it should be emphasised that the public partner’s flexibility, their desire to ensure some contractual safeguards for the implementation of the joint project (such as ensuring a specific price for the services or the fees to be paid by consumers of the public service, or a certain traffic level), as well as guarantees for the funding institutions, play a crucial role.

Experience in the region shows that it is usually the private partner that is the better prepared and more flexible party. The implementation of PPPs depends almost entirely on the government implementing the necessary legal framework and, even more importantly, becoming aware of the advantages of this phenomenon.

To assist potential investors in understanding both the benefits and challenges to make their PPP projects work, and in exploring untapped opportunities in CEE and SEE, Wolf Theiss has released its ‘Guide to PPPs, Concessions and Public Procurement’. The guide provides a practical overview of the principal features of PPPs, concessions and related public procurement issues in the 12 jurisdictions where Wolf Theiss has offices – Albania, Austria, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Romania, Serbia, Slovak Republic, Slovenia and Ukraine, as well as Poland, Turkey, Macedonia and Kosovo, where the firm also provides services.

(To access a pdf version of the guide, please use the following link:www.wolftheiss.com/tl_files/wolftheiss/Dokumente/projects_brochures/The_Wolf_Theiss_Guide_to_PPPs_Concessions_and_Public_Procurement.pdf.)