Vol. 2 No.5  

Challenges to face in Public Private Partnerships

Financing schemes in Romania through public private partnerships may still find problems due to the latest legislation, find Sorin Mitel and Madalina Paisa of Vilau and Mitel

     An increasing number of public authorities, especially municipalities, have lately showed their interest in performing public investment projects in cooperation with private investors (Public-Private-Partnerships: PPPs). These projects, which typically involve complex legal and financial arrangements between private operators and public authorities, have been developed in several areas of the public sector and are commonly used within the European Union, in particular in transport, public health, public safety, waste management and water distribution.
     The PPPs also enjoy a large interest from private investors and financial institutions. If we consider the currently available European funds, as well as the huge structural funds that Romania will benefit from on its accession to the EU, a significant part of which has compatibility with such projects, we seem to have the premise for successful projects in the PPP field.

History of the law

     Several regulations for the performance of PPPs have been approved in Romania. One of the first enactments was a Government Ordinance (no. 30/1995) on concession regime for construction and exploitation of terrestrial communication way sections, such as highways and railroads. Special regulations for concession in different fields (including oil and mineral resources) then followed. In 1998, Law no. 219 on concession regime was passed, which acted as a general legal framework in this domain. However, Law no. 219/1998 had certain flaws, such as its inadequacy for the performance of Build, Operate, Transfer (BOT) projects, whereby the private investor builds a public asset, operates it for a certain period in order to recover its investment and to achieve the estimated profit margin, and upon termination of the agreement transfers the public asset to the contracting public authority.
     Thus, Law no. 219/1998 established the rule that the risk was fully taken on by the concessionaire, while the risks should in principle be shared between the public authority and the private investor. In addition, Law no. 219/1998 always implied the concessionaire’s payment of royalties in favour of the conceding authority while, for this kind of project, the private investor should be paid in time for its contribution.
     The issues mentioned above seemed to have been solved with the enactment of Government Ordinance no. 16/2002 on PPP agreements and the publication in the Official Gazette in late March this year of the new norms for the application thereof, while the public authorities as well as the private investors have even start working on the initiation of PPP projects.

Latest law change

     However the entire legislative framework in the field was drastically amended once again by the Government passing on April 19 of the Emergency Ordinance no. 34 on public procurement, public works concession and services concession agreements, which was published in the Official Gazette on May 15 (GEO no. 34/2006). Aiming at “honoring an European accession commitment and solving a situation marked with a red flag in the European Commission’s monitoring report in October last year”, as stated by the Government spokesperson, the new regulation entirely abrogates both Law no. 219/1998 and Government Ordinance no. 16/2002.
     The inspiration for the chapter regarding the concessions in GEO no. 34/2006 is Directive no. 2004/18/EC on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts. While it is of public knowledge that within the EU there is a major concern for the creation of a unitary legal framework with respect to PPPs, it is obvious that this Directive does not succeed in achieving such a framework. As a matter of fact, the Directive even fails to define the PPP concept, but only confines to giving a brief chapter to the public works concession. The Directive scarcely defines this notion, only by referring to the public works procurement.
     Thus, the Directive uses the private investor’s right to exploit the works as a distinctive and exclusive criterion between a public procurement and a public works concession, which fails to correspond to the actual reality of all concession contracts. Indeed, the works concession is different from a public procurement, not only through the right to exploit the works, but also through the duration of the contract, financing conditions (which compulsorily have a private component), operation manner, risks and liability allocation.
     In Romania, the Government has chosen to practically replace the entire PPP regulation with this equivocal definition of the works concession comprised in Directive no. 2004/18/CE. While the EU countries have developed comprehensive national legislations in this field, it is difficult to assess how Romania will succeed in achieving such a complex project based on this definition, highly criticised even in the EU. Even supposing that this is possible in principle, taking into account the previous experience, we believe that this change will seriously affect the PPP area. We wonder how long it will take until the public authorities not only accommodate the new legislative framework, but also make a clear difference between the different legal concepts and actually develop PPP projects in Romania. Last time it took years, too many years.