Concessions and public-private partnership | In Principle

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Concessions and public-private partnership

Concession for construction work or services

The Construction Work or Services Concession Act of 9 January 2009 replaced the rules governing concessions for construction work previously included in the Public Procurement Law and introduced the concept of services concession. The concessions act created new possibilities for performance of public tasks through the engagement of private means and the potential of private entities, as an alternative to the public procurement regime which had previously been relied on. Concessions for construction work and services are an example of cooperation between public- and private-sector entities, and thus an example of public-private partnership. The ability to grant concessions to private entities does not deprive public entities of responsibility for performance of their tasks, however.

A general definition of concession was adopted in the Construction Work or Services Concession Act, based on the following features:

  • A concession holder, on the basis of a concession agreement concluded with a concession provider, undertakes to carry out the subject of the concession for consideration, which is as follows:
    • Construction work – the exclusive right to operate the constructed facility or such right together with payment to the concession provider
    • Services – the exclusive right to benefit from a service or such right together with payment to the concession provider.
  • The concession provider’s payment to the concession holder cannot cover all of the concession holder’s outlays relating to the concession.
  • The concession holder essentially bears the economic risk of the concession.

Typical mechanisms for establishing the consideration for the private partner are a fee based on actual utilisation of the facility, a fee based on the right to operate the facility (accessibility), and payments by end users.

When preparing and conducting proceedings to conclude a concession agreement, the concession provider must ensure equal and non-discriminatory treatment of interested entities, act in a transparent manner and observe fair competition principles. Concession proceedings consist of numerous stages, including publication of a concession announcement, submission by an interested party of an application to conclude a concession agreement (containing a request to participate in the proceedings and a statement on fulfilment of the conditions for participation described in the concession announcement), negotiations between the concession provider and candidates on all aspects of the concession, submission of offers, selection of the concession holder, and conclusion of an agreement with the bidder whose offer was deemed to be the most advantageous.

The parties to the concession agreement contractually define the risk surrounding the undertaking, in light of the skills, experience and financial capabilities of each partner. A concession agreement for construction work is usually concluded for a period not exceeding 30 years, and the maximum period for services is 15 years. The length of the concession depends on the time needed to gain the revenue necessary to cover the costs of the concession and its operation while repaying the costs of financing of the undertaking together with an appropriate return.

Not all types of activity can be carried out through a concession. This applies in instances when the recipient of a benefit may be a third party, e.g. actual users of the facility. If the recipient of the benefit is the entity ordering the benefit, then it involves public procurement.

Public-private partnership

Pursuant to the Public-Private Partnership Act of 19 December 2008, public-private partnership (PPP) constitutes a form of cooperation between a public entity and a private partner, which serves to carry out an undertaking and investment in the area of public services. The essence of PPP is joint performance of an undertaking based on a division of tasks and risks among the parties, whereby the given risk is assumed by the party more capable of effectively managing the risk. PPP allows public entities to achieve savings in the process of providing public services and gain access to knowledge necessary to raise or maintain the quality of public services or expand their scope. The basis for deciding which approach to use for a given project is to compare the costs of project implementation through PPP and traditional methods. Moreover, a PPP project must be tied to the maintenance or management of assets used to carry it out or related to the project.

The legal parameters of cooperation through PPP are specified in an agreement between the public entity and the private partner. The private partner undertakes to carry out the project for consideration primarily dependent on use or availability of the facility and full or partial coverage of implementation costs or expenses covered by a third party, e.g. a bank. The public entity, in turn, undertakes to cooperate in the project, particularly through its own contribution. The contribution on the part of the public entity or private partner typically involves coverage of project costs, including financing of additional services provided by the private partner, or contribution of an asset, most frequently in the form of real estate. A contribution by either partner to the project is a necessary element of PPP. The PPP agreement must also include provisions covering the consequences of breach, evaluation of performance going forward, allocation of assets, and rules under which the private partner must transfer assets to the public entity if they are used improperly. A PPP agreement may also provide for cooperation through a special-purpose company whose shareholders are the public entity and the private partner.

The selection of the private partner depends on how it will receive its consideration. If the consideration is the right to benefit from operation of the PPP facility, with or without additional payment by the public entity, the selection is made applying the Construction Work or Services Concession Act. In other cases, the private partner is selected applying the Public Procurement Law, most frequently through negotiations following publication of the contract notice or through competitive dialogue.