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There are many advantages to public-private partnerships: various solutions for private financing of public projects, costs reduction for central and local authorities, usage of private know-how and management in public projects, or the increased efficiency in project development.”
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September 15 2012

Public-private partnership: the paradox of a state that harms even when it wishes to do good (an interview with the magazine Avocatnet)

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Can you explain in a few words how the PPP mechanism works?

Law no. 178/2010, the legislative act establishing the public-private partnership in Romania resulted from the increasingly intense need of such a contractual formula. If the contractual PPP (e.g. concessions agreement) was regulated by G.E.O. no. 34/2006, the institutional PPP, that involves the participation of public and private partner in a joint venture entity (e.g. company), was almost entirely neglected by the Romanian legislature in 2006-2010. This happened in a context where, in Europe, about 40% of the PPPs take the form of institutional PPPs and economic crisis has promoted the public-private partnerships as a more and more interesting alternative to financing public projects.

According to Law no. 178/2010, PPP projects aim at designing, financing, construction, rehabilitation, modernization, operation, maintenance, development and transfer of a public good or service, as applicable. Rules for the Implementation of Law no. 178/2010 define the public-private partnership as “an economic mechanism of association of two partners, the public authority and the private investor to accomplish, through the public-private partnership project, a public good or a public service”.

Basically, after organizing a tendering procedure, the public partner and the private investor sign a PPP contract for a determined period of time. Under this contract, a project company is set up which is organized and operates as a company whose share capital is held by the public partner and the private investor. The project company manages all the stages of the PPP contract and at the completion of the contract, the good obtained under the PPP contract is transferred free of charge to the public partner.

The public-private partnership solution, namely the cooperation in various forms, between public authorities and businesses, in order to ensure the funding, construction, renovation, management, maintenance of an infrastructure or providing a service, is not a novelty. This is a solution embraced by most EU member states for infrastructure development, construction of schools, hospitals and prisons, but also for social services (especially in partnership with non-governmental organizations) or security services (in partnership with private firms for security and safety).

Although the legal framework exists for two years now, also being meanwhile amended , so far the history of PPP is consistent in ambitious plans, but discourages by a lack of result. Which, do you think, are the reasons for the non-functioning of the public-private partnership system so far in Romania?

On one hand, the law is still unclear and conflicting and on the other hand, the section dedicated to public-private partnership notices is missing from SEAP.

What deficiency shows the PPP legislation, even after being amended?

The PPP legislation still presents many inaccuracies. In addition, there is no clear delimitation between the scope of the PPP law and the scope of GEO no. 34/2006.

In your opinion, how “incentive” is the current legislation for attracting large investments?

The current legal provisions are definitely more incentive for public authorities than for investors. Through PPP projects, public authorities reduce their risks, transferring a significant part towards the private investor, and diminish costs without compromising quality.

Can you, however, appoint some positive elements of the PPP law?

Beyond the potential controversy regarding the content of the PPP law and some aspects of finesse that will surely be shaped by or as a result of the practice, besides the purpose of this law, salutary in itself, there are some elements that create the prerequisites of an effective enforcement of PPP. One of these aims the similarity with the procedures regulated by GEO no. 34/2006. Thus, the open procedure is similar to the open tender regulated by GEO no. 34/2006, and the competitive dialogue procedure is generally similar to the procedure bearing the same name under GEO no. 34/2006.

Thus, many of the steps and rules for organizing a procedure for the award of a public procurement contract may also be found in the procedure for awarding a public-private partnership contract, this fact being able to eliminate the eventual reluctance of the authorities to use PPP or, in other words, the proverbial fear of the unknown. Equally important, we can also make the same assertion about the procedure for remedies or about the submission of challenges against decisions of the National Council for Solving Complaints (NCSC). Thus, public partners will not start from scratch when they assign a PPP contract, their public procurement department already having an idea of ​​what such a procedure involves. The economic operators benefit from the same advantage.

Moreover, for the award of PPP contracts only the criterion “the most economically advantageous tender” is applicable, which can significantly contribute to the diminishing of discontent related to the questionable quality of services and works purchased at the lowest prices.

How do you think the law should be amended in order to attract more investors in PPP?

The legislative framework should be clearer, simpler and more concise.

What are the most common problems in practice that make the enforcement of PPP law faulty and ineffective?

At the moment, the most serious problem consists in the lack of a SEAP interface designated to publishing selection notices, making it impossible to start PPP projects.

Moreover, so far there is no centralized database of PPP projects which were developed in Romania and no portfolio of projects that could be undertaken through PPP. Attempts in this regard existed before, but they have not resulted in the publication of such information on the website of the Central Unit for the Coordination of Public Private Partnership – CUCPPP.

One of the problems that hindered the implementation of PPP was the lack from SEAP of the interface dedicated to public-private partnerships. To what extent has this problem been solved and how is the solution offered by the authorities operating at the moment?

According to UCCPPP, in principle, the model to be implemented online in the SEAP dedicated section for PPP has already been done. At the moment, technical tests are performed and by the end of September the SEAP dedicated public-private partnership interface should be implemented.

According to the Rules for the Implementation of Law no. 178/2010 any other means of publication outside SEAP of the selection notice and the attached document are not allowed.

What is at the moment the role of the PPP in Romania’s economic development?

Given that the selection notices cannot be published and the number of PPP projects in progress is not very large, certainly they do not presently play the role they could play in the economic development of Romania.

What role could they play?

Considering that, through PPP projects, private financial resources will complement public administration effort and the risks are divided between the public and the private partner, surely this kind of projects could play an important role for rapid and healthy economic development. However, it is not recommended to idealize such projects or to consider them a/the only lifeline of the Romanian economy. Because of the complexity and risks involved, PPP projects can be either great successes or great failures. The PPP projects undertaken in Europe over the past 10-15 years stand as proof.

On an ideal level, the PPP model implies that both parties share the risks and benefits. In light of current regulations, “how equal” are the risks/benefits divided between the public authority and the private investor?

According to Law no. 178/2010, the PPP project risk allocation is proportionate and fair between public and private partners. In practice, however, it is the contracting authority the who assesses the risks, calculating and proposing the risk transferable to the private investor and the risk retained by the public partner. Thus, the document published by the public partner must include, among others, the matrix of risks distribution.

In the case of a competitive dialogue procedure, the negotiation committee must establish with selected private investors inclusively the distribution and balancing of the risks between the public and the private partners. This negotiation is done but only within the limits of the mandate given by the head of the public partner. Therefore, within the competitive dialogue procedure, dividing risks and benefits is basically the result of negotiations between the parties.

What are the State’s advantages in developing PPPs? But the disadvantages?

The benefits of the public-private partnerships are various: manifold solutions for private financing of public projects, cost reduction for central or local authorities, know-how and private management usage in public projects, increased efficiency in project development, lower implementation period, technical innovation and higher quality level of provided services. The major interest is, however, that part of the project risks is allocated to the private partner: the private partner may assume, besides the design and construction risk, other risks such as: financing risk, risk of a situation of force majeure or risk of obsolescence. Last but not least, a major advantage for the public partner is that, according to Law. 178/2010, on completion of the contract, the good achieved by the PPP contract is transferred free of charge to the public partner in good condition, usable and free of any charge or obligation. Moreover, as pointed out repeatedly, Romania needs the PPP formula to hope for an integral absorption of EU allocated funds.

PPP’s main risk is that without careful regulation and monitoring of the selection procedure of the private partner and of the running of PPP projects, these projects can become a dangerous way of “swallowing” state resources. Moreover, the reduced experience of central and local authorities in this area is a serious impediment, since the preparation of a PPP project is complex and lengthy. For example, in the UK, one of the countries with vast expertise in this area, preparing a major PPP contract lasts approximately one year, in order to achieve the ultimate goal of the PPP: “Value for money” (value for the invested funds).

What is the situation from the same point of view (advantages/disadvantages) for the private investor?

The public-private partnership is most certainly an excellent business opportunity for multinational or even national companies. Furthermore, PPP law stipulates that the intellectual property resulting during the PPP project belongs to the private partner, if not otherwise stipulated in the contract.

The most important disadvantage is represented by the fact that the financing of the PPP project is entirely private, which means that the investor either brings his own financial resources or he has to attract them. This is happening on the background where the public partner only participates with contribution in kind.

Of course, in principle, PPP legislation primarily protects the interests of public partners in the implementation of PPP contracts. It remains, however, that each private investor to negotiate their benefits when competitive dialogue procedures are organized.

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