Mgr. Zuzana Meinecke Fábry, LL.M. Eur., Slovak attorney at law
photo: Courtesy of NÖRR STEIFENHOFER LUTZ s.r.o.
The current debate on the extension of parts of motorway D1 by public private partnership (PPP) has now finally directed public interest to this form of financing and implementing public sector projects by private companies. PPP is not only a topical issue for the Slovak public sector and indirectly for Slovakian citizens, but also for national and international construction and real estate companies, as well as the service and financial business. This article provides an overview of the experience of other states with PPP and the developments so far in this area in Slovakia.
PPP in Europe, Examples from England and Germany
A look at the English PPP market which has been the pioneer in PPP, illustrates the development and opportunities of PPP. The implementation of public projects by private business was promoted by the British government at the beginning of the 1990s as a private financing initiative with the objective of encouraging partnerships between public authorities and the private economy on an economic basis. This remains the foundation of PPP, although various PPP models have been developed. Up to the end of 2006, over 650 PPP agreements with an investment volume of over 63 billion EUR were concluded in Great Britain. A major proportion is attributed to transport, as is planned in Slovakia. The PPP spectrum is, however, considerably wider and is constantly being expanded. The areas of health - primarily hospital building - and defence - for example a privately operated harbour for British submarines - are other major beneficiaries of PPP projects. Recently, a private company has assumed the management of an entire administrative district. Central parts of the public administration of East Riding, a region with approx. 320,000 inhabitants, have recently been taken over in a PPP project, so that now a private company administers the region, including collecting taxes and paying social welfare benefits. The advantages of contractual structures between private and public partners can be readily seen in such areas of state control because the public partners can impose clear and enforceable requirements. For example, the private company has contractually undertaken in the East Riding project that at most 17% of visitors to the municipal offices will have to wait more than five minutes and that 90% of all telephone calls will be answered before the eighth ring. This with the existing personnel and a new private employer, which has also undertaken to ensure the maintenance of staffing levels and even to increase same in the future. The recipe for success being applied is that it is easier for a private company to operate efficiently, change structures more quickly, implement innovations and, by means of greater know-how and other financial possibilities, be economically more successful, applies.
The advance of PPP is also evident in recent years with the example of Germany. From the Slovakian point of view, it is interesting that in Germany PPP is sustainably established in a state organization system which, with its municipal administration system, i.e. the delegation of state functions to the community areas, is similar to the Slovak state organization. The initial fears that the state or public administration could lose its authority in this manner practically unnoticed, were intensively researched in a typically, for the German legal system, in-depth and theoretical discussion and were the subject of expert reports, court and economic investigation. No compelling ground against PPP emerged. A stable system of analyzing PPP projects in advance as to their economy and structuring them in a legally secure manner has thereby developed. While warnings with regard to PPP are still heard in Germany to some extent, PPP is today generally accepted in this form for the e.g. construction and operation of waste disposal facilities and power supplies, swimming pools, schools, prisons or the construction of new town halls and the assignment of technical and personnel operations to private companies without the sovereign character of the state being thereby lost or its decision-making authority being impaired.
Thomas Rosa, German attorney at law
photo: Courtesy of NÖRR STEIFENHOFER LUTZ s.r.o.
PPP projects in Germany also began with construction projects of motorways, roads, bridges and tunnels, as intended in Slovakia. The present focus of PPP is on, for example, Würzburg, a city of approx. 100,000 inhabitants which is undergoing a radical reconstruction of its administrative apparatus with the help of a private partner. With the partner chosen by public tender and the tasks of each side minutely specified contractually, the sovereign authority of the city is being maintained as in the English model while, to a considerable extent, the work necessary for its exercise is carried out by others. The objective prescribed by the city is clearly specified, namely budgetary savings and less complicated and more efficient services for the citizens. It is the task of the private partner to prevent excessive cost and thereby achieve profit for both PPP parties. Otherwise, it is almost self-evident that, in the case of such enormous projects, not everything must run in accordance with plan and that sometimes the economic effects aimed at are not achieved. In spite of this, all areas of risk are recognizable and negotiable in advance and apportioned in the contract and measures thereby taken to prevent adverse effects.
PPP in Slovakia, Experiences, Development?
Regarding the above mentioned possibilities in other states, a question about the PPP projects in Slovakia arises. It has to be stated, that no such project which could be classified as a typical PPP has so far been implemented in Slovakia. The government has, however, repeatedly declared its readiness to promote the development of PPP projects in Slovakia and has declared this to be a priority, whereas motorway and road extensions being the projects primarily considered. In addition, the construction of the multi-functional hall in Bratislava (volume approx. 3.5 billion SKK) for the Ice Hockey World Championship, the new national football stadium in Bratislava (investment volume over 3 billion SKK) or the reconstruction of railway stations to multi-functional service centres are discussed as possible PPP projects.
At the regional administrative level, more cautious interest has been expressed especially in road repairs, extension of educational facilities, technology parks and residential construction being the subject of PPP projects.
At the present time, an unmistakable tendency to facilitate or simplify rapid access by the public administration to the PPP structure is discernible. As early as November 2005, Slovakian government issued the document "Policy for the Implementation of Projects of Public Private Partnerships", in which its concept of the principles of PPP projects in the Slovakian environment have been specified in order to thereby facilitate the general framework for entering into PPP projects. According to this approach, the PPP policy of the government does not cover all forms of cooperation of the public and private sectors but only those which features especially long-term concession between the private and public sector (with a diversification of risks), whereas the private sector guarantees the construction and operation of the construction site, provides the services related to the construction site and receives consideration either from the users or from the government. Accordingly, long-term contracts between the public and private sectors which only, for example, concern long-term agreements on the procurement of services, turn-key construction, joint venture projects or leasing, are not classified as PPP. In July 2007, the Finance Ministry issued the "Draft for Implementing a Technical Introduction for PPP Projects in Slovakia", which defines the tasks of the new department for partner projects at the Ministry and specifies the individual preparatory steps in the implementation of PPP projects.
The newest development illustrates the priority of the Slovak government to implement the extension of certain motorways and express carriageways as rapidly as possible with the help of PPP, as declared finally by the government in the Regulation of 15 August 2007. For the commencement of the extension of approx. 121 km of motorway and approx. 43 km of express carriageway, the commencement of which is planned for 01 May 2008, the necessary Regulations or amendments thereof should be in force by 1 January 2008. A relatively short completion date of 2010 is intended.
The private sector has taken the correct step towards establishing PPP in Slovakia by forming the Slovakian PPP Association, intended to combine the interests of the private sector and advance the development and recognition of PPP as a whole in Slovakia. The transfer of knowledge is a central task in this area.
The legislative framework for PPP in Slovakia is not so far based on a complex act providing uniform and detailed conditions for the implementation of different types of PPP projects. PPP is covered in various pieces of legislation, e.g. the Public Procurement Act which defines concessions for construction. This definition of concession also covers PPP, although concession is to be understood as a special type of PPP projects. Among the other public law acts which must be considered in regard to PPP are e.g. the Budget Act, the legal provisions on the administration of state and regional property or, the Transport and Roads Act.
In order to provide a secure legislative legal foundation for PPP projects, the government sees the need for revision of the existing legal framework, whereas it is to be determined if an amendment to already existing acts or a completely new act should be passed.
Taxation aspects of each project have considerable significance for the implementation of PPP projects. This is especially the case if the taxation issues acquire multi-dimensional aspects because of the involvement of foreign investors. PPP projects are of up to 30 years duration and are typically associated with losses in the initial period. In addition, in the finance planning the carrying forward of losses must be calculated and this is more strictly dealt with than in some other EU states. Under Slovakian tax law, tax losses are carried forward over five years and no possibility loss carry back exists. The relatively short carry-forward for tax losses can possibly be made good by the interruption of the tax depreciation for which there is no time limit. As PPP projects are usually implemented through a local project company, general corporation tax structures are also to be considered. The choice of legal form is especially important because profits received from Slovak partnership and company can be taxed differently in other EU states. Another important tax aspect to be noted in the case of PPP projects arises in the VAT area. In spite of the general conformity of Slovakian VAT legislation with EU law, Slovakian special conditions are significant, for example, as to when the taxation obligation arises, the VAT co-liability mechanism for the purchaser/seller or the determination of the tax base. The involvement of state authorities that are typically not entitled to recover input VAT also creates enormous need for proper VAT structuring.
While the Slovakian government focuses at present on its intended PPP with the construction of motorways and expressways, comparison with other EU States in which PPP is already established shows clearly that PPP projects could have a future also in other areas, for example, in the expansion of airports, railways, waste disposal through purification plants, in culture and education by the construction of school buildings, in the justice system by the construction of prisons and court buildings and above all in the residential area (construction, extension and reconstruction of urban areas). If one now summarizes the general market attitude and the framework, it is clear that a major development in PPP projects in Slovakia is imminent. This is all the more so the case if one considers the opportunities of the many possible projects which can avail of EU funds. As shown, there is a broad and tested knowledge of effective and risk-free structuring of PPPs available in other states. Slovakia must only avail of this in suitable form both in the public and private sector. The opportunities are already available. Then, projects suitable for PPP, realizable for all parties with profit can already be identified.
Nörr Stiefenhofer Lutz is an international law firm with numerous representations in Germany and CEECS and was named the German Law Firm of the Year for Administrative Law/PPP in 2006.
This article reflects the actual legal provisions as of 31th August 2007
10. Sep 2007 at 0:00