PPP Projects in Czech Republic Facing Legal and Other Obstacles Legal Aspects of PPP Transport Projects

The term PPP (Public Private Partnership) is generally used to describe co-operation of the public and private sectors, in particular in terms of using the resources and potential of the private sector in providing for public services. The PPP projects may be used where the construction of, for instance, essential highways and/or railway corridors need to be accelerated; where further hindrance to the enhancement and modernisation of the infrastructure in the less favourable economic climate is not desired, the PPP projects may additionally provide for an option to addressing the situation (instead of issuing special promissory notes). In the following text, the status of PPP projects in Czech legislation will be outlined, situation in the Czech Republic compared to the one abroad and shortcomings of the legislation and their redressing options discussed and drafted in the light of using the PPP projects in practice.

Within the PPP projects, the requirements for the provision of public service are determined by public authorities responsible for allocating public funds – i.e. the state, its organisational units, institutions receiving contributions from the state budget and/or regions and municipalities.

The public sector is usually represented by an entity established specifically for this purpose (the “Special Purpose Vehicle” – SPV) responsible for projecting, developing, financing and finally operating the object of the PPP project in question. Business shares in the SPV are often held by a group of well-established financial and construction companies. On the other hand, the PPP projects may well be implemented without SPV as such – the private partners may equally be represented directly by large and steady corporations.

PPP in Czech Legislation

Pursuant to Czech legislation, concession contracts (concessions) or so-called quasi-concessions apply.

Granting concessions, public authorities entitle concessionaries to implement a given project at their own costs and subsequently operate and maintain the project within the concession period plus retain revenues generated from third parties. Granted within the tendering procedure (upon concluding the concession contract), the concession as such cannot be transferred. Whereas material risks related to receiving the proceeds of the PPP projects is borne by the private partner (i.e. the concessionary), the remaining risks are spread across the public authority and the concessionary pursuant to the concessionary contract itself.

A specific and hybrid institute, quasi-concessions feature traditional characteristics of public contracts as defined in the Public Tender Act (No. 137/2006 Sb.) and those of concessions represented by the duty to follow certain binding rules set forth in the Concession Act (No. 139/2006 Sb.). Generally, the quasi-concessions can be defined as excess public tenders where the implementation contract is concluded for a definite period of time (min. 5 years; sustainability principle) and certain economic risks related to implementing the public contract – usually borne by the contractor – are borne by the public authority instead (principle of allocating private sector risks).

Specifically governed, strategic PPP transport projects are additionally regulated by the Roads Act (No. 13/1997 Sb.) allowing private partners to finance and provide for the construction, operation and maintenance of highways and 1st class motorways to a specific extent. Defining individual rules, the concession contracts, or rather the contracts on conferring certain rights and responsibilities of the state – the owner of the highway or 1st class motorway – on a legal entity may be concluded with a private partner selected in the tender pursuant to the Public Tender Act.

Characteristic to PPP, project financing models generally vary from availability payments to user payments and utilisation payments. Implied by projects ROWAN LEGAL has participated in, the PPP projects in the Czech Republic are commonly and most frequently financed by means of the availability payments (fees) – the demand risk is borne by the public authority paying the private partner for having the required infrastructure available within the given time and quality (with shortcomings penalised by deductions from the regular payments) regardless of the current utilisation rate. In the user payments, the demand risk is borne by the private partner receiving payments from the transport project end users (typically, “pure” tolls). In the utilisation payments, the demand risk is borne by the private partner and partially shared with the public authority; the payment amount is given by the number of users enjoying the infrastructure within a given period (e.g. shadow tolls) with maximum and minimum payments defined providing for limiting the risk of significant losses or inadequate profits where the demand is overestimated or underestimated grossly.

At present, the PPP concept is adopted and used within 10 public projects implemented in the Czech Republic (projects carried out at the regional self-governing level are not taken into account) with the transport projects being represented only marginally. Most discussed are the PPP transport projects on the construction, maintenance and operation of the D3 highway sections (or rather the R3 motorway) and the AirCon project – modernising the Prague-Kladno railway line and building a railway connection to the Prague airport, inclusive of its operation and maintenance. Compared to the situation abroad, certain unpopularity of the PPP institute in the transport projects and its unbalanced nature is thus quite evident.

PPP Abroad

Abroad, the PPP projects – especially the transport ones – are quite popular; this is further evidenced by the fact that the largest share on the PPP market worldwide is taken by the very transport infrastructure. For the first time, the PPP concept in providing for the transport infrastructure was adopted in Australia. At present, the most developed global market in this field (with a focus on the road transport) is considered to be the one of Great Britain, followed by the one in Spain, Ireland, Canada and USA that – together with many others – call for stabilising the unstable capital expenditures by means of more effective and high-quality facilities and services provided to the transport users. By involving the private sector more intensively and allocating and managing the risks and result-specific payments, this requirement can easily be met by the very PPP institute itself.

Insufficient application of the PPP concept in transport projects carried out in the Czech Republic is thus in contrast to the global and European trends as such.

PPP Shortcomings in Czech Republic

In the Czech Republic, the more intensive application of PPP projects is hindered by a number of factors in the form of legislative issues and other obstacles beyond the jurisdiction of law.

As noted by the legal team of ROWAN LEGAL, the PPP legislation faces a number of shortcomings. First and foremost, these are represented by a failure of the Concession Act both to provide for the legal definition of “concession” and clearly to determine the risks transferred to the concessionaries which – subsequently – results in frequent ambiguities and/or discrepancies in the interpretation. Easy orientation in laws is further complicated by the Road Act regulating the concession contracts in a specific way and its link to the Public Tender Act. Not regulated in the EU documents or common international legislations, the institute of quasi-concessions does not make the orientation easier, either. The same applies to the value of public contracts and concessions determined by different acts – the Concession Act, for instance, makes no significant difference between small (e.g. regional) and large (e.g. state) projects in terms of the selection criteria (i.e. selecting the contractual partner – the concessionary). Where the concessionary’s income is estimated not to exceed CZK 20 million excl. VAT, the concession contract may be awarded within a simplified procedure; where the income is expected to be higher, a complex and time-demanding concession procedure is to be carried out in full, discouraging potential public authorities from implementing smaller projects by means of adopting the PPP concept. Finally, the very preparation of the concession project and the related double approval process within significant PPP projects is quite problematic, too. In significant PPP projects, the concession project is to be approved before the concession is commenced and the concession contract approved at the end of the tender – the concession procedure is thus quite complex and financially and time demanding. Moreover, the duty to draft the concession project within the concession procedure may be considered discriminatory since in procedures conducted under the Public Tender Act no similar duty is required. Finally, it shall be noted that sufficient flexibility in negotiating the contracts with future contractors is guaranteed neither by concession nor analogous procedures. Since contracts on the PPP transport projects are often negotiated for dozens of years, a greater procedural freedom would definitely be to the benefit of the PPP projects.

The second group of problematic issues is represented, for instance, by complications in acquiring the land for the project implementation purposes – i.e. in terms of expropriation, especially where the lands are purchased and speculated with before the project is commenced. Further, the PPP projects as such are met with certain distrust resulting from the lack of public information on the principle of the institute itself. Last but not least, it shall be noted that the PPP projects – suffering from the potentially high costs of preparing the project with no positive result guaranteed and the reluctance of banks to finance these projects in the present economic situation by granting larger loans – face quite a low number of participants interested in this type of co-operation.

Recommendations

Recommended by the European Union, the transport infrastructure is to be funded by each member state by 2% GDP per year – equalling to CZK 100 billion per year in the Czech Republic. As already voiced at the “PPP – Yes or No?” conference on the PPP projects and development of the transport infrastructure in the Czech Republic held on 13 April 2010 within the Brno Building Fairs, this amount is expected to drop significantly as of the year 2012, or rather 2013 – at the same time, this difference can well be redressed at first by the very PPP projects themselves. Facing significant reduction in income due to the unfavourable state of the government funds and gradual reduction and subsequent termination of the EU subsidies, the State Fund for Transport Infrastructure (SFDI) may thus – in the future – adopt the PPP concept to finance its projects – as an extraordinary resource – and reverse the situation in question.

To redress the situation by levelling the status of the PPP projects to the one enjoyed abroad, the legislation is to be re-organised at first – the vague terms such as “concession”, “receiving the proceeds” and/or “material risks” are to be legally defined, cancellation of the quasi-concession institute considered (as proposed in the drafted amendment to the Public Tender Act) and differentiation in the concessions by the estimated financial limit (low-level concessions, under-limit concessions and above-limit concessions) introduced. The double approval process within the significant PPP projects could be eliminated by introducing a single approval procedure, preferably at the end of the concession procedure (i.e. before the concession contract is concluded); simplified, the duty to draft the concession project should be preserved.

Such legislative changes, however, can never be made unless more information on the PPP projects is spread and more support won with the public – for instance by pointing out to the international experience with the PPP projects.

Conclusion

Quite a popular method adopted for developing modern transport infrastructure abroad, the PPP projects – although undisputedly beneficial – are not that popular in the Czech Republic, yet. To catch up with the other developed countries, the Czech Republic needs to have her legislative regulations of the PPP projects changed. On the other hand, it shall be noted the implementation of the PPP transport projects is anticipated by the present legal situation; believed by the experts of ROWAN LEGAL with specialisation in the PPP projects, adoption of the PPP concept in the transport projects is thus worth considering even in the present legal situation.

Jan Strelička

ROWAN LEGAL