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How to deprive Polish roads of billions of euros

A lot has been published on the harmful effects on the construction industry of the legal solutions proposed in the draft Act on Prevention of Abuses in Road Projects. A disadvantage of the concept of protection of local subcontractors presented by the Ministry of Justice may be to severely limit the General Directorate for National Roads and Motorways’ external financing of projects.

One of the weak points of the draft act in particular is the unconstitutional nature of these provisions, which essentially entrust one person with resolving a dispute between the contractor and the investor, including the assessment of the compliance of works with the contract. The legal significance of a road certificate issued by a road project inspector (district construction supervision inspector) suggests that the inspector takes over the competence of the Polish judiciary. His decision is binding on common courts and excludes the possibility of litigation between the contractor and the investor or the contractor and the subcontractor as to the scope of works performed, their quality and their value.

Doubtful effectiveness of oversight by the Road Projects Commission (KID)

This problem is not eliminated by the possibility to appeal against the inspector’s decision to the Road Projects Commission (KID). KID is not a judicial authority within the meaning of the Polish Constitution. Although the draft act presents the proceedings before KID in a way that seems to give them the value of judicial proceedings, and to KID itself perhaps the value of a quasi-court (similar to the National Appeals Chamber—KIO), the act is enigmatic in determining who, apart from the appellant (i.e. the contractor or subcontractor), is the other party to such appeal proceedings. In principle, it also does not specify KID jurisdiction with regards to appeals.

Following the similarities of KID and KIO, we can imagine that KID will consider appeals examining whether an inspector violated the act in question. If this is not the intention of the drafters, even the determination of KID jurisdiction with regards to the settlement of civil matters—which again is constitutionally questionable—may have no significant practical meaning. KID will only have 14 days to decide the dispute regarding an agreement. Therefore, admission of evidence before KID using an expert’s opinion—the key evidence in any civil case concerning a construction contract to determine the performance of works in accordance with the contract—will be objectively impossible to carry out. Moreover, the act provides that the road certificate binds all participants of the development process even if they did not participate in the appeal proceedings.

Lack of judicial review

We would be wrong if we thought that judicial review of a decision issued as a road certificate is ultimately ensured by filing a complaint against the KID ruling to the administrative court. The administrative court’s jurisdiction excludes the possibility of resolving a dispute arising from performance of a civil agreement (Art. 58(1)(1) of the Administrative Court Procedure Law and Art. 1 of the Civil Procedure Code).

As many commentators have rightly pointed out, the argument referring to the inconsistency of the draft provisions with the Constitution may not be sufficient to review the draft regulation.

Additional risks for financing institutions

However, a financing institution deciding on granting financial support for a project may find these considerations relevant. This concerns both financing by international financial institutions, in particular the European Investment Bank, and financing by commercial financial institutions. This element may be the most important, as it is estimated that the mechanism of settling project payments via a fiduciary account introduced by law may require even greater external financing than now.

The decision to grant financial support by banks depends on the project’s analysis, its rules of implementation, and related risks. It may have several negative consequences for banks financing road projects under such rules.

First of all, there are additional new risks related to the transfer of a part of the contract engineer’s duties to the road project inspector. This results from the abandonment of the current market practice and uncertainty as to the possibility for the county construction supervision inspector to ensure the worthiness and professionalism of the procedure and decisions issued by the road project inspector as prescribed in the act.

As for shielding the bank from risks, financing such a contract may present a problem, as the performance of the contract will not be not subject to judicial review. The bank may require an assignment of rights under such a contract as part of the financing collateral. In particular, this may conflict with the guidelines of international institutions such as the European Investment Bank, for which judicial review, or even preferred arbitration, will be an absolute standard.

Additionally, such institutions as the EIB may have difficulties accepting the risk of corruption-generating effects of regulations that depend so much on the decision of the road project inspector. Currently, promoting practices and activities limiting corruption is high on the EIB’s list of priorities.

Hindered development of the Polish road network

Even if the changes do not block the possibility of obtaining external financing from a given bank, they may increase the costs, due to the higher risk and greater unpredictability for financing institutions.

The reduced financial stream from financial institutions will be difficult to replace with other sources. Limited judicial review of the implementation of road projects in Poland may also be an argument limiting the co-financing of road projects from European funds, due to the conflict with fundamental principles of the rule of law.

Bearing this in mind, we believe that the regulations currently being drafted may have a negative impact on the access to significant financial resources that have so far supported the development of the Polish road network. Thus, they may have a negative impact on the implementation of expansion and modernisation plans of the Polish road infrastructure in the coming years.

Finally, it is worth pointing out that the value of the financing that may be more difficult to obtain is enormous. For example, the EIB has so far financed around 420 projects and investment programmes in Poland for a total of EUR 65 billion.

Mirella Lechna, legal adviser, Infrastructure, Public Procurement & PPP practice, Wardyński & Partners

Łukasz Szegda, legal adviser, Banking & Project Finance practice, Wardyński & Partners