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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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January 30 2013

Green light for public-private partnerships in Romania

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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).
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.

ESPP launched the Public-Private Partnership section
[ here ]

Although PPPs have been regulated ever since 2010, unfortunately, there was a major drawback that blocked the start of such projects: the lack of IT support from ESPP. According to the rules for the implementation of Law no. 178/2010 no other means of publication of selection notices and of the attached document outside the ESPP are allowed. Only in January 2013 the ESPP added this functionality, making it possible to publish selection notices and awarding notices for PPP.

Initiated PPP projects
[ here ]

At the same time, a PPP Projects section appeared also on the website of the Central Unit for the Coordination of Public Private Partnership – CUCPPP, created to provide information on public-private partnership projects that are in the stage of intention (ideas, proposals), projects that were initiated, launched or contracted.
Of course, no PPP project was yet launched or contracted, but, according to the published information, three projects were initiated, the opportunity of their initiation being approved. Thus, Galati County Council started a PPP project aiming the construction, equipping and operation of a hospital to complete the offer of medical services in the Galati county and also in the surrounding counties. In addition, Maramures County Council started a PPP project for a road tunnel undercrossing the Gutai Mountains, with an estimated value of 92 million Euro, while Blaj Municipality approved the opportunity to start a PPP project to build a “Photovoltaic Park /Solar farm” in Blaj on an area of 9 hectares, with an estimated value of 3-4 million Euro.

PPP project ideas

Although the idea/proposal to set a PPP project can belong to both the public partner (local council/ county council/ ministry, etc.) and to private investors, on the CUCPPP website, for now, only public authorities’ projects are published.
The most interesting PPP projects, which are yet at the level of intent, envisage the health, construction, infrastructure, IT, transport and energy sectors.
Thus, in construction and infrastructure field, Maramures County Council plans to expand and modernize the Baia Mare airport (estimated value of 44 million Euro), but also to build a concrete bridge over the river Tisa and the road infrastructure with the connecting border point crossing the Sighetu Marmatiei – Slatina (Slotvino) Ukraine (estimated value of 11 million Euro). Also, Braila Municipality intends to build the bridge over the Danube, but also to achieve a Free Zone Industrial Park and to modernize the water supply and sewerage system . Nor the recreational and/or sports areas are neglected, Braila Municipality or Rosiorii de Vede Municipality are targeting several projects in this regard. Last but not least, the Ministry of Justice is considering the construction and management of prisons through PPP projects.

In the health domain, Braila Municipality wants to build a regional hospital and Dorohoi Municipality plans for a neuro-motory rehabilitation clinic, ambulatory care.
In the IT domain, the Ministry of Justice plans to set up the Integrated Information System of Electronic Access to Justice (IISEAJ), which will provide the justice seekers the possibility to submit documents to pending causes electronically and also to accomplish procedural acts, as much as possible in an electronic format (estimated value of 20 million Euro).
In the transport field, Tulcea Municipality plans to modernize the fleet of passenger transport in the city of Tulcea by purchasing environmentally friendly vehicles for public transport and the city of Braila wants to realize an ecologic public transportation system.
In the energy field, Tulcea Municipality is targeting a high-efficiency cogeneration plant in Tulcea and Braila Municipality aims at developing an eco-efficient public street lighting system.

How does the PPP mechanism work?

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 enter into a contract for a specific period. Under this contract, a project company which is organized and operates as a company whose share capital is held by the public partner and the private investor is established. The project company manages all stages of the contract of PPP and upon the completion of the contract, the good achieved by the PPP contract is transferred free of charge to the public partner.
Upon the public-private partnership contract, the project company is allowed to charge appropriate rates for third-party use of public property for a set period, thereby enabling investors to recover their investment and make a profit.

Sharing risks and benefits

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 one 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.
Procedures similar to public procurement
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.

Advantages and 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.

Advantages and disadvantages for the State

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).

Conclusions

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.
Av. Iulia Vass

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