Public-Private Partnerships, the key to anti-crisis programs

While in the U.S. and Western Europe the economic recovery plans target upgrading the infrastructure and bringing it into the 21^st Century, in Romania we are still struggling to lay down the foundation. Even though not an innovation in the field, the key to anti-crisis programs is:  the public-private partnership. U.S. economic recovery plan, $900 billion worth, proposed by the new U.S. president, Barack Obama, and approved by the House of Representatives in late January 2009, aims to save 2.5 million jobs over the next 2 years, through roads and bridges  building  projects and other infrastructure projects, by building and renovating schools and also by adopting Eco friendly technologies. According to the new U.S. president, the key to projects operation is the public-private partnership.

There is nothing new about the public-private partnership solution, seen as the cooperation under various forms between public authorities and the business field,  to ensure financing, construction, renovation, management, maintenance of infrastructure or to provide a service. It is solution embraced by most of the E.U. member states for infrastructure development, building schools, hospitals or prisons, but also for social services (particularly in partnership with non-governmental organizations), security services (in partnership with guardian and security companies). A lot has been said on this topic in our country too. In 2006, the Minister for Transport, Radu Berceanu, promised 2.000 km of highway to be built during the next 10 years, using contractual PPP arrangements. Also, the pilot project in infrastructure, the construction of the Ploiesti-Focsani highway, has been talked about since 2006, when the estimated time for initiating the project was 2008. Last year, the estimated time was lengthen already for 2010.

National legislation

The legal framework for PPP projects is found in the works concession contracts and services concession contracts legislation, G.E.O. 34/2006 and also in the Rules for the Implementation of works concession contracts and services concession contracts (G.D. no. 71/2007). Therefore, PPPs are assimilated to works concession contracts and services concession contracts. However, a distinction between institutional PPPs (PPPI) and contractual PPPs (PPPC) has to be made. PPPCs are created on basis of exclusive contractual relations (concession contracts, while PPPIs involve the participation of the public and private partner in a mixed-capital entity (joint venture or trading company). According to a Price Waterhouse Coopers research, nearly 60% of the PPP projects from Europe are shaped as concession contracts. While PPPCs are governed by the laws applicable to concessions, PPPIs have been almost entirely neglected by the Romanian lawmaker. The previous regulation in the matter, G.D. no. 16/2002 – concerning the public-private partnership contracts, with subsequent amendments, supplements and regulations, issued in implementation thereof, have been expressly repealed by G.E.O. no. 34/2006, as they were inconsistent with the Community aquis in the field.

Currently, the only applicable provisions are those referred to in Article no. 16, para. (1) and (2) of G.D. no. 71/2007. The project company is defined as “a trading company resident in Romania, founded by the concession provider, through subordinated units, and by the concessionaire, operating under the law and with the sole purpose of achieving the objectives of the public works or services concession”. The contracting authority must mention in the tender book the following: “the option of creating a project company”. The National Authority for Regulating and Monitoring Public Procurement promises to offer more information on the matter, as the Chamber of Commerce and Industry of Romania has announced on the website that a “Guide for the award of works concession contracts and services concession contracts” is currently being developed.

Community legislation

There is no specific legislation regarding the foundation of PPPIs in the European Union either. However, the European Commission published, on February 5^th 2008, an interpretative Communication on the applicability of the Community regulations on public procurement contracts and concessions for PPPIs. According to the interpretative Communication, PPPI is a mixed-capital entity, founded by partners from both public and private area, whose main activity is the performance of public procurement contracts and concession contracts. Besides equity or other assets, the contribution from the private sector consists in an active participation in performing the tasks assigned to the mixed-capital entities and/or the management of the mixed-capital entities.

The interpretative Communication reiterated that the EU public procurement rules apply to the private partner selection and to the award of public contracts by the mixed-capital entity. The European Commission explains that organizing a single public procurement procedure is enough for choosing the private partner or for awarding the public procurement contract or the concession to the mixed-capital entity. The interpretative Communication also stresses that a long term vision on the works or services assigned to a PPPI is necessary, so that the contractual arrangement to include a mechanism adaptable to legislative and economic changes.

By analogy, nationwide, selection procedure of the private partner in a PPPI is determined by the law applicable to the public procurement or concession contract awarding procedure. Moreover, the European Commission pointed out that if a public procurement or concession contract does not fall under the public procurement legislation, the contracting authority may select the private partner only by following the fundamental principles of the European Community Treaty, such as the principles of transparency, equal treatment, proportionality, mutual recognition and legal certainty.

To conclude, the deregulation of PPPI nationwide is not a way to circumvent national and Community legislation on public procurement or concessions. Following the interpretative Communication mentioned below, the European Commission has made another step towards facilitating PPP contractual arrangements: the launching of the European Centre of Expertise in Public-Private Partnerships (ECEP), in collaboration with the European Investment Bank. This centre will be a European information source for the public sector, a communication channel for sharing the best practices in PPP and a means to develop public sector’s ability to implement PPP projects.

Benefits and risks

There are many benefits of the public-private partnerships: 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 provided services. The major benefit is, however, that part of the project risks is allocated to the private partner: the private partner may assume, besides the construction risk, either the exploitation risk, or the availability risk. Moreover, as pointed out repeatedly, Romania needs the PPP formula to hope for an integral absorption of EU allocated funds.

Main risk of PPP is that without a careful regulation and monitoring of the private partner selection procedure and of the execution of PPP projects, the projects may result in a dangerous manner of “absorbing” the state’s resources. Furthermore, the lack of experience of central and local authorities in the area is a serious impediment, as the process of developing a PPP project is complex and long-lasting. For instance, in Great Britain, a country with a vast expertise in the field, the process of developing an important PPP contract lasts nearly one year, in order for implementation of the project to achieve the ultimate goal: value for money.

Moreover, Romania has neither a centralized database of the developed PPP projects, nor a portfolio of the projects that could be developed through PPP. The Chamber of Commerce and Industry of Romania attempted to create a Centre of Excellence for PPP, an interface between economic and social development programs and investment objectives completed through PPP, or through the Ministry of Public Finance, which created in 2005 the PPP Central Unit of the Ministry of Public Finance, that had the role of defining and coordinating government policy on public-private partnership.

De lege ferenda

Consequential, at least two measures should be adopted immediately:

1. Adopting a complete and comprehensive national law in the institutional public-private partnership field;
2. Founding a central organism having the following responsibilities, among others: promoting public-private partnership, identifying projects that can be implemented through PPP, assisting contracting authorities during the selection of the private partner or monitoring the implementation of PPP (ex. PPP Task Force in the UK, Italy, Germany or Greece);
3. Setting up an inter – ministerial committee for PPP (consisting of representatives of the Ministry of Public Finance, Ministry of Transport and Infrastructure, the Ministry of Regional Development and Housing, etc., depending on the particularities of the projects), just as the Greek model, to approve the implement of major national projects through a PPP and set the State’s participation in the PPPs. “WE NEED TO KEEP BUSINESS GOING”, said the European Commissioner Charlie McCreevy in December, and the public-private partnership solution has proved itself to be viable. It remains to be seen how much interest and enthusiasm the Romanian decision-makers will show on approaching the development version and the anti-crisis measure.

Published in “Curierul National” and “Cadran Politic”