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PPP contracts

The Czech Republic has a new legal framework for joint projects of the public and private sector (PPP) as of July 2006. Concession contracts under the Czech Concession Act do not comprise all possible forms of PPP but rather concessions within the meaning of the European Directives. In practice, many PPPs fall within the definition of a public contract governed by the Public Procurement Act. This differentiation is important from the perspective of the tendering of contracts.

The remuneration of the private partner is the main issue in any PPP project. In a concession contract, a substantial portion of the economic risk relating to the project's profitability (that is, the risk of low demand) is shifted to the concessionaire, which might not be a feasible model in many cases. So it is expected that, in practice, the private partner will be mostly remunerated by direct payments from the public sector, subject to various modifications (for example, penalties for a lack of the relevant service).

Any PPP contract must contain a clear allocation of the risks between the public and the private sector. Although it might appear advantageous for the public sector to transfer as many risks as possible to the private sector, this attitude often turns out to be short-sighted. It is not appropriate to transfer a risk if the private partner cannot be reasonably expected to be able to manage that risk.

The law is silent as to who should own the property or infrastructure created or used in the project. In light of Czech insolvency law, public bodies can be expected to seek to retain ownership, in order to avoid the property being included in the bankruptcy estate of the insolvent private partner. The possibility of using the property or infrastructure as collateral for the financing of the project will be limited in practice, even if the private partner owns the collateral.

The financing institutions will be particularly interested in the early termination provisions of the contract. The contract must contain a mechanism of compensation of the parties in this case. In addition to compensating the contractual parties, the settlement will have to comprise the repayment of any financing facilities (these are not senior by operation of law) and other obligations connected with the project (for example, obligations to subcontractors).

As well as seeking a priority right to satisfaction of their claims, the financing institutions might also wish to have a step-in right if the private investor experiences financial problems due to failure to perform the contract. The financing institution (or its SPV) cannot step directly into the project because a replacement of the private partner would require a new tender. However, banks may require an undertaking from the public body that, before the public body exercises its right to early termination, they will be given the opportunity to take control over the non-performing SPV and rectify the breach.

Pavel Marc and Lenka Krutáková

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