The new Act on public-private partnership (PPP Act) and the Act on concessions for construction works or services (concessions Act) have been in force since the beginning of February 2009. Both are to replace the existing regulations, and in the opinion of many experts will lead to a breakthrough in infrastructure investments in Poland. The assumption of the new Acts was the introduction to the legal system of solutions that would correspond with the needs of the public and private sectors and enable effective execution of joint undertakings. The former PPP Act, dated July 28 2005, was generally criticised for imposing too many obligations connected to execution of investments within the PPP model and was inconsistent with public tender procedures.
The Acts
But when to apply the Act on PPP and when the concessions Act? The issue of applying the correct Act to the order and concession models will have significant meaning, as in one case the Act – the Public Procurement Law – will have application whereas in the other – the Act on concessions – will have another. These two models are definitely most frequently applied during execution of PPP undertakings in, for instance, Germany, where the legal system in many areas is similar to the Polish system. As a result, it can be expected that both models will also be frequently applied in Polish law.
The subject of PPP within the meaning of the new PPP Act is mutual execution of and undertaking based on division of tasks and risks between public entity and private partner. A discussion has been running for a long time regarding the relation of the new PPP Act to the new concession Act: so far, concessions for construction works were regulated in the Act (Public Procurement Law) as one of the methods for granting public orders. After completion of work on Sejm Commissions, it is clear that the concessions Act is to have a lex specialis character in relation to the PPP Act. This results from the content of the latter, in accordance with which: "remuneration of the private partner mainly consists of the right to obtain benefits from the subject of the partnership, then the choice of a private partner is conducted by applying concession Act regulations for construction works or services". Whereas, in every other case, the selection of a private partner is conducted by applying the regulations of the Public Procurement Act with a specific consideration of the manner of competition dialogue. Therefore the Act on concessions for construction works also becomes lex specialis in relation to the Act (Public Procurement Law). In accordance with the new Act, concessions for construction works will be granted after conducting negotiations in a new manner, similar to negotiations provided for in the Act (Public Procurement Law), which is also applied in relation to orders for construction works. The Act introduces a new method of bringing action against decisions of tender authorities, ordering for complaints to be submitted with the exclusion of participation of the National Appeal Chamber (Krajowa Izba Odwolawcza – KIO) directly to the provincial administrative court. It should therefore be assumed that if the share of remuneration deriving from the users is predominant, then we are dealing with concession, and in other cases with the order model and the Act (Public Procurement Law).
Forfaiting as a way of financing PPP off-budget
As the Polish legal system is in many areas similar to the German system, it is obvious to transfer the success story of financing PPP by forfaiting models to Poland. The main method of financing PPP undertakings in Germany is the forfaiting agreement connected with a waiver of claims and the right of offset by public partner. Pursuant to the aforementioned model of financing investments, the project company that executes the investment does not incur a loan but sells the liabilities due from the public partner, for instance on the account of executed construction works or provided services, within the scope of a forfaiting agreement, and assigns the right to such liabilities without recourse to the purchaser of liabilities, usually the bank. In exchange, the purchaser of liabilities pays the price corresponding to the value of remuneration due to the project company from the public entity. The above forfaiting agreement is connected with the statement of the public entity, under which the public entity waives the claims and the right of offset with liabilities, to which the public entity is entitled in relation to the project company, towards the purchaser of liabilities. The waiver of the public entity in relation to claims towards the project company resulting from the agreement on execution of the undertaking within the PPP is justified by the possibility of obtaining beneficial conditions of financing forfaiting of receivables, close to the conditions of municipal loans.
In accordance with the rules defined in Section 404 of the German civil code (BGB), in the event of assignment of liabilities the debtor may raise claims against the purchaser of liabilities that were justified towards the existing creditor at the moment of assigning the liabilities. Therefore, in the case of a lack of the public entity's waiver of claims and offsetting liabilities, the purchaser of liabilities would be exposed to a risk connected with the right of the public entity to raise claims connected with improper performance of the agreement, for example the right to withhold the completion of a consideration, limitation of actions, invalidity of the agreement, expiry of the liability due to its earlier performance, or an effective offset. In the absence of limiting the public entity's ability to raise claims, the costs of financing would have to take account of all risks connected therewith. The scope in which the public entity waives claims towards the purchaser of liabilities depends on the conditionings of the given project.
In the case of the aforementioned construction of financing PPP projects, remuneration paid by the public entity to the project company is usually divided into the part corresponding to the value of investment outlays and the part corresponding to remuneration for operation and regular services of the project company. The forfaiting agreement, including waiver of claims, provides for a sale and transfer of the part of remuneration due from the public entity and corresponding to the value of the investment outlays. Whereas, liabilities due to the project company on the account of maintenance and conservation of the facility are usually not subject to a transfer to a financing institution.
It should be underlined that waiver of claims by the public entity only takes place towards the purchaser of liabilities and not the project company. The construction of the waiver of claims and the right of offset in German law is based on the construction of an abstract or confirmative promise of performance based on Sections 780 and 781 of the BGB. The public entity confirms in writing the existence of the liability for the payment of remuneration (or its part in case of partial forfaiting – the so-called Teilforfaitierung) and undertakes to pay the amount on defined due dates. In addition, in such statement the public entity waives the claims, including claims due in case of terminating the agreement for the execution of an undertaking within the PPP. Due to the fact that the public entity is interested in maintaining the claims towards the project company, such statement should directly state that claims of the public entity towards the project company remain undisturbed. In practice, the waiver of claims towards the purchaser of receivables with simultaneous maintenance of claims towards the project company is regulated in a trilateral agreement between the public entity, project company and the purchaser of liabilities (the bank). Submission of the statement on waiver of claims towards the purchaser of liabilities by the public entity takes place after the public entity's acceptance of the investment or a part thereof if the agreement provides for division of remuneration, and after ensuring that the project company properly performed its obligations.
Forfaiting transferrable to Polish legal system
On the grounds of Polish law, the application of the above concept of financing PPP projects under a forfaiting agreement connected with waiver of claims and the right of offset by the public partner is usually possible. A forfaiting agreement is applied in Poland to finance commercial transactions, similarly to other countries. A forfaiting agreement, similar to a factoring or franchising agreement, is included under Polish law in the group of innominate contracts, not regulated in legal Acts.
A forfaiting agreement is subject to the provisions of the Polish civil code, in particular Article 3531 of the civil code, which states the rule of freedom of contracts and provisions on the transfer of liabilities included in Articles 509-517 of the civil code.
The liability due to the project company from the public entity relating to the payment of remuneration for the performed construction works can be transferred to the forfaiter (usually the bank) in accordance with the disposition of Article 509 of the civil code, unless the contract on PPP includes a prohibition of such assignment. The doctrine and judicial practice assumes that if mutual agreements – and a contract for PPP – should be deemed a mutual agreement, it is allowed to transfer the liability alone without assumption of debt. In the case of an assignment without simultaneous assumption of debt, a multilateral legal relation is formed, within the scope of which the public entity is obliged to pay remuneration due under the contract for PPP to the purchaser of liabilities, whereas the obligation to complete the consideration consisting of the execution of construction works and provision of services connected with maintenance of the finished facility in good state still lies with the project company.
In Polish law, the equivalent of the provision of Section 404 of the BGB is Article 513, Section 1 of the civil code, which states that the debtor is entitled to all claims towards the purchaser of liabilities, which he held towards the seller upon becoming aware of the assignment. Such claims include in particular the claim of non-existence of the liability claimed by the purchase of liabilities, the claim of invalidity of the legal transaction constituting the source of the liability, the non adimplenti contractus claim, connected with the debtor's right to withhold the consideration until its debtor (assignor) offers a consideration and claims regarding the scope of transferred liability (for example, partial remittance of debt). In addition, pursuant to Article 513, Section 2 of the civil code, the debtor can deduct from the transferred liability the amount of debtor's liability due from the seller, even if it became due only after receiving notice of the assignment from the debtor. However, the above does not relate to a case where the liability due from the seller becomes due after the liability constituting the subject of the assignment. Apart from debtor's claims due towards the seller, the debtor may also raise claims directly due towards the purchaser.
The doctrine and judicial practice assumes that the debtor may waive claims due under Article 513, Section 1 of the civil code, if the debtor was aware of such claim or if the debtor should have expected the occurrence of such claim. Similarly, in terms of the possibility of waiving the right of offset, it is assumed that parties can stipulate that the liability resulting from their legal relation cannot be unilaterally offset by the other party.
It should be underlined that assignment of liabilities in Polish law is a causal legal transaction, which means that in the case of cancellation of the forfaiting agreement the assignment of rights being the result of such agreement will also be cancelled. In such case, a prior waiver by the public entity of the possibility to raise claims towards the purchaser of liabilities would be ineffective. In addition, in Polish law under Article 117, Section 2 of the civil code, the waiver of the claim of limitation of actions before the expiry of the term is invalid.
Upon making the decision about executing the given undertaking within the PPP, is it vital to conduct an analysis of whether such project structure allows more effective use of public funds in comparison to the traditional model of executing investments directly by the public sector using its own funds and municipal loans. In the face of the constantly growing debt of the public sector, the influence of PPP projects on the level of public debt and the amount of budget deficit is also important. In accordance with the criteria of nominal convergence (Maastricht criteria), a state aspiring to membership in the EU Economic and Monetary Union (EMU), and thus the Eurozone, must meet the following fiscal criteria:
- budget deficit in the year preceding the assessment measured in market prices does not exceed 3% of GDP of the given state; and
- public debt in the year preceding the assessment does not exceed 60% of GDP of the given state – a rule even implemented to the Polish Constitution.
Pursuant to Eurostat decision dated February 11 2004, PPP projects are not accounted for in assessing the fulfilment of Maastricht criteria if the majority of economic risk connected with the execution of the undertaking is incurred by the private entity. Eurostat recommends that assets constituting the subject of the contract on PPP are not classified as assets of the public sector, and as a result are not included in the balance sheet of the public sector, if the following criteria were jointly fulfilled:
- the private partner incurs the construction risk; and
- the private partner incurs at least the bad-debt risk or the demand risk.
Otherwise, the loan obtained by the private partner will be attributed to the public entity and as a result investment outlays for fixed assets will be deemed public investment and will result in the increase of the budget deficit or the public debt.
The new PPP Act introduced in its Article 17 a provision providing that the budget Act defines the total amount, up to which government administration authorities can incur financial liabilities in the given year resulting from contracts on PPP. However, the Act does not introduce any regulations regarding accounting for expenditures resulting from contracts on PPPs in the budgets of local government entities.
Pursuant to Article 11 of the Act dated June 30 2005 on public finance, the state public debt includes, among other things, the liabilities of the public finance sector resulting from rights recognised as undisputed by the appropriate public finance entity. Therefore, there is a potential risk of recognising the waiver by the public entity of claims due to the purchaser of liabilities under a contract on PPP as a debt resulting in the increase of the public debt of the state.
In the light of the above comments, it should be stated that the application of the concept of financing PPP projects through forfaiting agreements connected with a waiver of claims and the right of offset by the public partner is admitted in Polish law. However, it requires a detailed analysis of risks so that division of liability between the public partner, the project company and the financing entity is acceptable to all project participants.
How to co-finance EU projects in accordance with EU state-aid rules
Poland, as the main beneficiary of funding within the EU, faces the enormous challenge of co-financing nearby €80 billion ($104 billion). In times when public budgets face the results of the financial crisis, the most obvious way for co-financing is PPP. The task gets more complicated when the co-financing has to be in accordance with the EU state aid regime. PPPs frequently involve measures that may be considered state aid and that are therefore subject to the European legal framework on state aid (Articles 87-89, EC Treaty).
As set out in Article 87(1) EC, any aid granted by a member state or through state resources in any form that distorts or threatens to distort competition by favouring certain undertakings, insofar as it affects trade between member states, is incompatible with the internal market. State aid, within the meaning of Article 87 EC, is given where a company is granted advantages directly or indirectly through state resources. However, Article 87 EC only applies to those measures that a private entity had not obtained under general market conditions. Where state aid within the meaning of Article 87 (1) is given, such aid can exceptionally be treated as lawful where it is in line with the common market pursuant to Article 87 (2) or (3) EC.
Based on the aforementioned rules of European law, the different forms of PPPs can generally involve state aid. With regard to PPPs and privatisation projects, the following issues are of particular practical relevance as they may comprise state aid:
- privatisations of state-owned companies;
- remunerations paid for services rendered under PPP contracts; and
- waivers of objection that are an integral part of the so-called PPP-forfaiting.
The European Commission developed a number of principles applying to the involvement of state aid in the privatisation of state-owned companies, which are basically set out in the 23rd Report on Competition Policy and Subsequent Practice (EU Commission, 23rd Report on Competition Policy 1993, Paragraphs 402 et seq). Thereby, if a company is privatised not by stock-exchange flotation but by a trade sale (by a sale of the company as a whole or in parts to other companies), the EU Commission assumes without further examination that no aid is involved if the company or the assets are sold within a competitive tender proceeding to the highest price (the private-vendor test). In particular:
- a competitive tender must be held that is open to all comers, transparent and not conditional on the performance of other acts such as the acquisition of assets other than those bid for or the continued operation of certain businesses;
- the company must be sold to the highest bidder; and
- bidders must be given enough time and information to carry out a proper evaluation of the assets as the basis for their bid.
In its subsequent Stardust Marine decision, the European Commission further emphasised the importance of the non-discriminatory character of the tender procedure.
In its decisional practice in privatisation cases, the European Commission has usually not requested additional valuations of the companies or the assets to be sold by accountants or independent experts where the aforementioned principles have been met. However, following its Centrale del Latte di Roma decision, the European Commission also accepts market compliance of privatisation measures to be proven by independent expert valuations if a competitive tender is not possible.
In some recent cases, members states have even conducted privatisations on the basis of both a competitive tender procedure and, additionally, independent expert evaluations. This will provide utmost certainty in terms of compliance with market prices. For example, the Hellenic Republic and the Italian Republic conducted the recent privatisations of their national air carriers on the basis of both competitive tender procedures and independent expert valuations.
As for the privatisation of state-owned companies, the European Commission and the European Court of Justice have developed certain principles applying to the involvement of state aid in remuneration for services rendered by private companies to public entities (the assignment or subcontracting of public tasks to private companies). According to the jurisdiction of the European Court of Justice, remuneration for services rendered in connection with the assignment or contracting of public tasks to private companies does not involve state aid where the following principles are met:
- the private company must be expressly and clearly charged with the rendering of the services concerned;
- the parameter applying to the calculation of the remuneration must be objective and transparent; and
- the remuneration does not exceed the costs for the services concerned plus the appropriate profit of the service provider.
Where the service provider is not selected by a public procurement procedure allowing the selection of the provider with the lowest price, the amount of the appropriate remuneration needs to be determined on the basis of the costs of an average, well-managed company. Therefore, within PPP projects cost calculation is of very high importance and should be documented carefully. Ideally (and often already required under public procurement law), the procurement of services should be conducted by way of a public (open, transparent and non-discriminatory) tender procedure.
State aid and forfaiting
As outlined above, waivers of objection are a typical element of forfaiting-PPP financing schemes. There are no specific principles applying to the involvement of state aid in forfaiting-financing models. However, as waivers of objection improve the legal enforceability of the relevant receivable, waivers of objection are comparable to guarantees or securities. According to the European Commission, guarantees or securities can be advantages within the meaning of European state-aid law as they provide better financial conditions for the creditor. Due to their similarity to classical securities, waivers of objection provided for under forfaiting-PPP financing projects can also therefore – in principle – involve state aid. In order to exclude such involvement of state aid, it needs to be ensured that the relevant forfaiting does not provide for conditions that are not at market rate. A forfaiting financing can be considered to be at market rate where the consideration to be paid is in line with the improved financing conditions provided by the forfaiting and the public entity involved also benefits from the improved financial conditions.
The participants of PPP projects are often uncertain as to whether there is a need to file a notification on measures possibly involving state aid to the European Commission or not. According to Article 88 (3) EC, the European Commission must be informed of any plans to grant or alter aid in sufficient time in order to enable the Commission to submit its comment. Until the European Commission has made a final decision, the member state concerned will not put the proposed measures into effect (Article 88 (3) EC). Within PPP projects, sometimes a notification is not required at all. According to the jurisdiction of the European Court of Justice, a notification is not required where a measure is already not considered as state aid within the meaning of Article 87 (1) EC (and therefore a further review on the lawfulness within the meaning of Article 87 (2)/(3) is not necessary). The best way to ensure the absence of state aid within PPP projects (the granting of advantages not being at market rate) is to procure the relevant services within an open, transparent and non-conditional (non- discriminatory) tender procedure. Furthermore, according to the European Commission's decision of November 28 2005, compensations to companies involved in the rendering of public services need not be notified where certain requiremennts are met – among other things, certain thresholds for the annual turnover (€100 million) and the compensation payment (€30 million) must not be exceeded.
However, if there are any doubts regarding whether or not a measure involves state aid, a notification is recommended. In light of the harsh consequences of unlawful state aid (among other things, the possible invalidity of the relevant contracts), only by way of a notification can public entities and private companies obtain legal certainty regarding the absence of unlawful state aid.
| Author biographies |
Christian Schnell
BSJP Legal and Tax Advi ce
Christian Schnell is a German attorney-at-law who has been working in Poland since 1999. He passed his first and second state legal examinations in Cologne, Germany, in 1994 and 1997 respectively. In 2000 he earned his doctor's degree in economic sciences.
Christian is a founding partner and the managing partner of BSJP Legal and Tax Advice, a law firm founded in 2002 as a spin-off of leading German law firms. BSJP is a market leader in Poland for advising German clients. He has been a member of the board of the Polish-German Chamber of Industry and Commerce since 2004, a delegate at the Entrepreneurship Council and at the Entrepreneurship Congress on behalf of the Polish-German Chamber of Industry and Commerce, a member of the employers' federation PKPP Lewiatan and a founding member of the Polish Public-Private Partnership Task Force Centrum PPP. Christian is also a member of the International Bar Association, the Dusseldorf, Germany Bar Association and the District Bar Association of Katowice, Poland.
Andreas Haak
Taylor Wessing
Andreas Haak is a partner at Taylor Wessing. He specialises in all aspects of EU, public procurement, state aid and international contract law. He has advised on numerous national and international PPP and Privatisation projects and dealt with cases relating to EU, public procurement and state-aid law on a regular basis.
Andreas studied law and business administration at the University of Osnabrück, passing his state legal exams in 1997 and 2000. His further legal training included working for an international law firm and European institutions in Brussels. Andreas has been a member of the European Committee of the German Federal Bar since 2004, a national expert to the European Commission on European contract law (CFR-Net), the editor of a law journal, and has published numerous articles in legal journals. He is a commentator on PPP, public procurement and state-aid issues in the press and a lecturer at the University of Cologne. |