In a previous article we covered the legal framework of PPPs in Poland and possible pitfalls a private partner may encounter when trying to arrange for financing concurrently with tendering for a PPP project. There are also other topics relevant for the financing of a PPP project.
As in other parts of the world, in Poland a material role among finance documentation is played by so-called direct agreements. In fact, direct agreements in a PPP transaction are not materially different from direct agreements typically found in a project finance transaction. They are executed between the lender(s) and the public partner with a view to limiting certain rights of the latter under a PPP contract, the exercise of which could have an adverse effect on the private partner's position and, consequently, on the lenders' ability to recover the funding.
The lenders often require the power to replace a non-performing (or improperly performing) private partner with an entity of their choice and continue the project as originally contemplated. For that purpose, direct agreements provide for a step-in rights mechanism for the benefit of the lenders. Unlike in project finance transactions, where the parties are in general free to structure their legal relationship as they see fit, in PPP projects the freedom of contracting may be significantly limited by provisions of law having application because of the public element of the projects or by construction of such provisions of law or doubts surrounding them.
As regards the step-in rights mechanism, it is unclear under the Polish public procurement law (which governs the tender process in the PPP projects) whether the private partner could be replaced by a third party by operation of such mechanism. Until suitable amendments are introduced into the law, public partners are ultimately agreeable to accepting the concept, but tend to set up additional requirements as preconditions to the exercise of the step-in provisions, some of which threaten to disrupt the mechanism.
Obviously, financing may rarely be granted without a proper security package. In a project finance transaction, all assets of the project usually serve as a collateral; this may not necessarily be the case in a PPP project. Namely, where the public partner contributes the site, it may be willing to retain its ownership, but unwilling to accept any security thereon. Given that under Polish law the ownership of a real property extends onto buildings and structures permanently attached to the land, depending on the nature of the project this could lead to a situation where the lenders would have no real assets to take as collateral. One may expect that in that case, the lenders would require the private partner (and its sponsors) to provide additional security for the financing, in the form of a corporate or bank guarantee for example.
As from the beginning of the financial crisis, lenders tend to insist that remuneration of the private partners in PPP projects is centred around availability payments. While in most instances this should be possible, lack of unanimous guidelines concerning classification of the availability payments from the perspective of public finances regulations by the public partners prompts the latter to consider whether to engage in the projects at all. This is because classification of the availability payments as public debt would increase the level of public debt of the given public partner and, at the same time, decrease the amount of other indebtedness the public partner could incur. Fortunately, amendments to the law, which would solve the issue in a manner favourable to the PPP market participants are expected to be introduced.
Borys D Sawicki
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