A viable solution?
Daniel Vlasceanu – Partener, Vlasceanu, Ene & Partners
Raluca Teodorescu – Senior Associate Lawyer, Vlasceanu, Ene & Partners
Since one year ago, there was an obvious intention to revive the concept of public private partnership (‘PPP’); as such, the Romanian Government adopted on 18 May 2018 the Emergency Ordinance no 39 on Public-Private Partnership (‘GEO 39/2018’).
Romania is acquainted with the PPP concept for more than 15 years: the first normative act expressly regulating PPPs was the Emergency Ordinance no 16/2002. Subsequently, within the context of Romania’s integration in the EU, PPPs were replaced by the public procurement and concession framework when the first normative act (i.e. GEO no 34/2006) setting the foundation of the Romanian legislation on public procurement was enacted. In 2010, an attempt to bring back PPPs was made when Law no 178/2010 was approved, but no PPP was developed under said law and, after several observations from the European Commission, it was repealed by Law no 100/2016 on concessions (which forms part of the larger package of normative acts currently governing the public procurement). Soon afterwards, Law no 233/2016 on PPP followed, but it was highly criticized and as such, repealed by the recent GEO 39/2018.
The Romanian Government intends to initiate public investment projects with a significant impact on the economy through PPPs: ambitious projects (e.g. three highways, several hospitals, a national blood bank etc.) have been included on the list of strategic investment projects to be developed as PPPs (and approved under Government Decision no 357 dated 24 May 2018). The initial list was supplemented on 27 August 2018 by adding several projects out of which we highlight the Tarnita – Lapustesti hydropower plant and the hydrotechnical complex Turnu Magurele – Nicopole along the Danube river (both being considered as key strategic investments under the draft 2018 – 2030 Energy Strategy released for public consultation on 20 September 2018).
PPPS UNDER THE NEW ENACTMENT
The concept of a PPP envisages projects of such a large magnitude that neither of the partners can achieve on their own or they could, but with disproportionate effort. Under a PPP, the partners aim to achieve or rehabilitate an asset belonging to the public partner and/or the operation of a public service. The PPPs are a form of a joint venture where always one of the partners is a public entity that seeks to attract one/more private entity/ies to invest its/ their resources (i.e. funds, know-how/expertise, human resources etc.) into a long-term project that will ultimately create a benefit to the large public.
Types of PPPs
A PPP involves three parties: the public entity, the private entity and a ‘project company’. Depending on how the control is exercised over said project company, there are two types of PPPs:
• contractual PPPs, where the project company is owned entirely by the private partner;
• institutional PPPs, where the project company is owned by both the private partner and the public partner.
Depending on who exercises the control over the project company, a number of implications arise on the decision making mechanism, the set-up and the overall functioning of the project company. As such, we salute the revival of the contractual PPP as we see it as one of the benefits brought by the new GEO 38/2018.
The ‘making’ and functioning of a PPP
PPP projects are initiated by the public partner: a feasibility study is prepared and approved by the Government or county/local councils. Then, a public tendering process (under the public procurement legal framework) is performed; at the end of such process, a contract is awarded to the selected private investor(s). As per Article 17 para 3 of GEO 39/2018, following execution, any subsequent amendment to the awarded contract must be performed only by approval of the Government or of the Local/County Council (i.e. ultimate beneficiary of the project). Given the long duration of the project, it is normal that the legislator referred to subsequent contractual changes; however, even if not expressly provided for, we believe that strict observance of the public procurement rules (applicable to contract changes) must be considered (in other words this provision is not to be considered as a unilateral right of amendment in favour of the public beneficiary).
A PPP is financed entirely/mostly by private funding; the public partner may participate with public funds, but only up to a maximum threshold of 25%. The private investor recovers its investment through a tariff (e.g. road usage tariff, in case of a highway) and/or payment obligations of the public partner.
A PPP’s duration is linked to the depreciation period of the investment. The minimum duration is of 5 years, but in any case, it must cover an amount of time allowing the private partner to recover its investments and register a reasonable profit [Article 3 letter a) under GEO 39/2018].
Given their very essence, the PPPs entail high risks and important resources. Only private companies of reasonably substantial size participate in PPPs, but even so the stronger contractual partner remains the public one. As such, the PPP interested investors will always seek stability under their contractual arrangements and predictable environments. A fundamental importance resides with the preliminary due diligence as several ‘sensitive’ questions must be clearly answered before going public with a PPP project:
- who is going to ultimately bear the cost and where will such cost be reflected (i.e. on final consumer/subsidies/additional tax etc)?
- is such cost affordable?
- what are the main risks and who will bear them?
- is the project economic; does it allow within a given time period for a reasonable return on investment? Etc.1
The Romanian economy witnessed in the last almost three decades a severe lack of infrastructure projects. As such, any type of concept allowing for private partners to come in and facilitate such infrastructure projects is welcomed. If Romania manages to create a climate of confidence (especially considering the geo-political environment in the region) and proper incentives are offered for each project, PPPs may be a feasible solution for implementing costly projects so long-awaited. From a different angle, it’s worth noting that the Romanian administrative and business environment is not (anymore) familiar with PPPs and, as such, it remains to be seen how effective the practical implementation will turn out.