Changes in public-private partnerships | In Principle

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Changes in public-private partnerships

Compulsory evaluation of the effectiveness of PPP projects, the possibility of obtaining an opinion on the legitimacy of a project carried out under this formula, a PPP test for projects valued at more than PLN 300 million, implementation of PPP projects via a special purpose vehicle owned by a private partner: these are just some of the changes introduced by an act recently signed by the President of Poland.

On 7 August 2018, the President of Poland signed the Act of 5 July 2018 Amending the Public-Private Partnership Act and Certain Other Acts. The amended regulations enter into force 14 days after publication, with the exception of amendments to the Public Roads Act, which enter into force 12 months after publication.

The new rules aim to improve the legal environment for public-private partnerships, in particular by introducing regulations enabling wider use of PPP projects and removing barriers that discourage these projects from being carried out. Effective preparation and conduct of PPP proceedings should increase the number of agreements concluded after these proceedings. It is particularly important to achieve this objective, as so far only one in four proceedings has ended with conclusion of an agreement under the PPP formula.

Evaluation of the effectiveness of PPP projects

The amending act introduces an obligation for the public entity to assess the effectiveness of a PPP project prior to commencement of the PPP procedure. The public entity will verify this way if the implementation of a project under any other formula, especially with the use of public funds only, would not be more effective.

While making this assessment, the public entity shall in particular take into account the expected division of tasks and risks between the public entity and the private partner, the estimated life cycle costs of the project and the time required for its implementation, the amount of user fees, if any, and the conditions for their change. The public entity will determine the detailed scope and subject of each assessment. The parliament has also left the manner of performing the analyses to the discretion of the public party.

Although in practice analyses of the legitimacy of the execution of a project under the PPP formula have already been carried out, the statutory definition of the mandatory obligation to perform such analysis is worthy of approval. We cannot overestimate a properly performed in-depth pre-execution analysis. This affects not only the decision to carry out a given project under the PPP formula, but also the course of proceedings and the content of the agreement on the PPP. Better preparation of PPP projects should increase the percentage of proceedings for selection of the private partner that lead to an agreement.

Certification of PPP projects

The amendment introduces the institution of optional assessment of projects planned under the PPP formula. After the evaluation of effectiveness, public entities will be able to additionally apply to the minister for regional development for a non-binding opinion on the validity of the planned investment under the PPP formula. The deadline for issuing such an opinion will be 60 days from receiving a complete application; the minister for regional development can ask the public entity to correct, clarify or supplement the application, setting an appropriate deadline.

The application submitted to the minister must be accompanied by the effectiveness assessment of the project prepared by the public entity. The minister will verify this assessment for correctness and completeness. The minister’s opinion will identify gaps and errors in preparatory works. Their removal by the public entity will result in improved quality of the planned PPP project. In the opinion, the minister will also analyse the adopted legal and organisational model, the mechanisms for the private partner’s remuneration, and the proposed division of risks.

The possibility of obtaining such an opinion may provide significant support in making the decision to carry out the project under the PPP formula. However, it should be remembered that the use of this institution is optional and is addressed to those public entities that have doubts as to whether the PPP formula is appropriate for a given project. Requesting an opinion as a precautionary measure when the public partner is already convinced that a PPP project is justified will unnecessarily prolong the procedure.

PPP test

For projects planned to be financed from the state budget in an amount exceeding PLN 300 million, there will be an obligatory verification whether implementation of the project would be more effective under the PPP formula (the so-called PPP test). This analysis will not be carried out for projects co-financed from EU funds. The PPP test will also not be obligatory for projects planned to be carried out under the PPP formula, as the public entities will assess the effectiveness of the project.

Pursuant to Art. 133b(1) introduced in the Public Finance Act, in case of projects exceeding the sum mentioned above, the institution responsible for the project will be obliged to obtain a non-binding opinion from the minister for regional development on the manner in which the project should be carried out. When issuing the opinion, the minister will be obliged to take into account the benefits for the public interest, in particular the assumed quality of performing tasks by the public entity and economical use of resources, as well as the possibility of financing the project from the state budget. The opinion will confirm the validity of the project in the traditional formula only if it brings more benefits than the use of the PPP formula. There is no mechanism for appealing against the opinion, as it is not binding.

The amendment aims to promote public-private partnerships as a method of financing projects. So far, the analysis of the possibility of using the public-private partnership formula for a given project has not been a common practice, resulting in projects that could have been successfully executed under the PPP formula being executed under a traditional formula.

Company-based PPP

Following the amendment, implementation of a PPP project will only be possible using a capital company, i.e. a joint-stock company (SA) or a limited-liability company (sp. z o.o.) Limited partnerships or joint-stock limited partnerships will no longer be able to implement PPP projects. This change is intended to reflect the reality, i.e. the existence, first of all, of capital companies in the public sector, and to better adjust the responsibility of shareholders for the obligations of capital companies to the relations existing in PPPs.

Additionally, the act has also introduced an important change allowing the possibility to create a public-private partnership by an existing company and a public entity. The amended regulations provide for the possibility for a private partner to join a public company by taking up shares in a capital increase. The previous regulations required the public entity and the private partner to establish a new company to implement a PPP project as a company.

In both cases, for implementation of a public-private partnership by a newly established company or by an existing company, the period of participation of the private partner in these companies is to be limited to the duration of the partnership. One year after the end of the public-private partnership contract at the latest, the private partner will be obliged to sell its shares in the company to the public partner. If that deadline is not met, the shares will be subject to compulsory redemption.

The establishment of a new company will be possible only for the definite period necessary for performance of the PPP agreement and completion of the company’s affairs. The duration of such company may be extended for an indefinite period only when the private partner has ceased to be a shareholder (by selling its shares in the partnership to the public partner or having its shares redeemed).

Implementation of a PPP project via special purpose vehicle owned by a private partner

The amendment introduces into the Polish legal system a solution already used in international practice, consisting of the possibility of implementing public-private partnerships via a special purpose vehicle company (SPV). The new regulations allow the private partner to entrust the performance of the PPP contract to a subsidiary established for this purpose by the private partner after its offer is selected. Upon conclusion of the PPP agreement, the regulations applying to the private partner will also apply to the subsidiary.

This solution will be available if the public partner specifies in the contract notice or the concession notice the conditions for its consent to conclusion and performance of the contract by the private partner’s subsidiary. The public partner will also be obliged to state in an announcement if such consent is not given.

So far, due to lack of appropriate regulations, undertakings intending to use an SPV for a project have established them before commencement of the procedure for selecting the private partner, incurring additional costs. Due to its flexibility, the new solution should encourage businesses to participate in PPP proceedings.

Basis for choosing the private partner

Under the amended regulations, the selection of a private partner will always be possible on the basis of the Public Procurement Law, even if the proceedings conclude with a concession agreement. The Public Procurement Law is stricter than the Act on Concessions for Construction Works and Services, so if a concession contract is concluded under the Public Procurement Law, compliance with EU law will be assured.

So far, if a public entity has conducted proceedings under the Act on Concessions for Construction Works and Services, it was only entitled to conclude a concession contract. On the other hand, proceedings conducted under the Public Procurement Law could only end with conclusion of a public procurement contract. This limitation was unjustified, as in practice, the assumptions concerning the project existing at the time of commencement of the procedure can change during the negotiations of the PPP agreement. However, the assumptions concerning the incurrence of investment risk or the rules for remuneration of the private partner determine whether the contract can be classified as a concession contract. Thanks to the changes, it will not be necessary to repeat the procedure when a public entity initiated the procedure under the Act on Concessions for Construction Works and Services, but ultimately the contract that is negotiated cannot be classified as a concession contract.

Tender evaluation criteria

The repeal of Art. 6(2) of the Public-Private Partnership Act on the mandatory criteria for evaluation of offers should ensure greater flexibility in selecting private partners. The criteria listed in the PPP Act, i.e. division of tasks and risks as well as payment dates and the amount of payments or other benefits provided by the public entity, will be transferred to Art. 6(3), listing the catalogue of optional criteria. The parliament has also specified that the optional criterion mentioned earlier—division of income from an enterprise between a public entity and a private partner—may consist of division of income in the form of a share in the profit of the company performing the contract under the PPP formula.

The cost of the project will be listed as a criterion for the process of evaluation of offers next to the remuneration of the private partner and the PPP company. This information will adjust the PPP regulations to the amended provisions of the Public Procurement Law by introducing the cost criterion.

Competent authority for PPPs

The parliament has appointed the minister for regional development as the body in charge of public-private partnerships governed by the PPP Act. The minister has been granted numerous powers and duties, including issuance of opinions on the legitimacy of PPP projects, dissemination and promotion of best practice in the field of PPP, preparation and dissemination of model agreements under the PPP formula, provision of substantive support to public entities implementing ventures, and carrying out analyses and evaluations of PPP in Poland. The parliament has correlated the obligation to monitor the PPP market by the minister for regional development with the information obligations of public entities on planned and implemented PPP projects and the obligation to update the data provided. This information is to be provided by public entities within 30 days from the date of the event to which it relates. The minister for regional development will also be able to request information from the public entity at any time concerning performance of the agreement under the PPP formula.

Other developments in PPPs

  • Under Art. 150 and 151 of the Public Procurement Law, the parliament has resigned from determining the amount of the end-use security and the rules for its release. These regulations did not suit the nature of long-term agreements executed under the PPP formula. After the changes, the public entity will determine the end-use security on a case-by-case basis.
  • The parliament has repealed Art. 13 of the PPP Act, which regulated changes in agreements under the PPP formula. Therefore, Art. 144 of the Public Procurement Law and Art. 46 of the Act on Concessions for Construction Works and Services will regulate changes in these agreements. These provisions provide for a wider possibility of amending agreements than the repealed Art. 13 of the PPP Act, and therefore their application will ensure more favourable conditions for performance of agreements under the PPP formula.
  • The parliament has introduced a possibility to exclude the liability of the public entity for remuneration due to the subcontractor of construction works borne by the investor under Art. 6471 §1 of the Civil Code, if such provision is included in the PPP agreement. If the public entity is excluded from such liability, it is the duty of the company implementing the partnership or the private party to pay the subcontractor’s remuneration if the private partner or a special purpose vehicle created by the private partner executes the project. The responsibility of the private partner to pay the subcontractor is consistent with the obligation to provide financing for the project, which usually rests with the private partner for projects implemented under the PPP formula.
  • Pursuant to Art. 221(1a) of the Public Finance Act, local government units shall be entitled to award specific subsidies to private partners for financing projects related to the implementation of local government tasks. Until now, local government units could only grant such subsidies to non-profit entities. Specific subsidies will be awarded on the basis of a PPP agreement, taking into account the provisions on state aid.

We should assess the amended provisions positively, as they provide an opportunity for greater involvement of the private sector in the implementation of public tasks and will allow the proceedings and the conclusion of agreements under the PPP formula to be conducted more flexibly.

Katarzyna Śliwak, legal adviser, Infrastructure, Transport, Public Procurement & PPP practice, Wardyński & Partners