What are PPPs?
EU Legislation on PPPs
Green Paper on PPPs
Recent years have seen a marked increase in cooperation between public authorities and private business for the development and operation of infrastructure and services such as waste management, water distribution and urban transport management. One form of cooperation aimed at ensuring the funding, construction, renovation, management or maintenance of such infrastructure or services is the public-private partnership (PPP). In the EU member states, PPPs operate in a complex legal environment characterized by the interaction of EU rules, as well as national, regional and municipal legislation and detailed project contractual documents. However, there is no specific EU legal system governing PPPs as such.
What are PPPs?
The term 'public-private partnership' is not defined at EU level. However, there is consensus on some characteristic aspects of PPPs, such as:
- the relatively long duration of the relationship between the public and private partners, involving cooperation on different aspects of a planned object;
- the method of funding the project in part from the private sector, sometimes by means of complex arrangements between various players;
- the important role of the economic operator, which participates at different stages in the project, such as design, completion, implementation or funding; and
- the distribution of risk between the public and the private partner, to whom some risks usually borne by the public sector are transferred.
The public partner concentrates primarily on defining the objectives to be attained in terms of public interest, quality of services provided and pricing policy, and also takes responsibility for monitoring compliance with these objectives. All other tasks can be transferred to the private side. However, this does not mean that the private partner assumes all the risk, or even the major share of the risk linked to the project. The precise distribution of risk is determined on a case-by-case basis, according to the respective ability of the parties concerned to assess, control and cope with the risk.
As far as the implementation of PPPs is concerned, there is extensive experience of private participation in transport infrastructure and the water sector, but there is also a growing acceptance that PPP arrangements can be used as complementary instruments to meet infrastructure and service needs in other sectors. In the EU member states, this is a direct result of: (i) efforts to increase the quality and efficiency of public services; and (ii) insufficient public sector funds to cover investment needs, coupled with spending restrictions. Another explanation of the burgeoning PPP phenomenon is the desire for the public sector to benefit more from the know-how and working methods of the private sector. Finally, the development of PPPs is also part of a more general change in the state's role in the economy, as it shifts from direct operator to organizer, regulator and controller.
The positive features of PPP arrangements in developing infrastructure appear particularly attractive to the new EU member states and the accession candidate countries, given the significant financing requirements, the equally large funding shortfall, the need for efficient public services, growing market stability and privatization trends which have created a favourable environment for private investment.
However, PPPs should not be seen as the only possible course of action. While the benefits of partnering with the private sector in PPPs are clear, such relationships are complex to design, implement and operate. Many alternative sources of financing are available, including 'public-public' institutional arrangements, which should not be discounted in the hope that PPPs will offer a miracle solution. Therefore, PPPs must be carefully assessed in the context of the project, the public benefit and the relative gains to be achieved under various approaches.
EU Legislation on PPPs
At EU level, the rules governing PPPs consist of EC Treaty provisions and other EU legislation, and have only been loosely coordinated.
With regards to the EC Treaty, any contract through which a public body awards work involving an economic activity to a third party must be carefully examined in light of the rules on the freedom of establishment and the freedom to supply services (Articles 43 to 49 of the EC Treaty). These principles include, in particular:
- equal treatment;
- proportionality; and
- mutual recognition.
Given the complex nature of PPP projects, there is potential tension between the need to maintain transparency and competition on the one hand, and the complex structures that arise in PPP and concession contracts on the other.
The most relevant provisions with a potential impact on PPPs are contained in the rules on public procurement. In this regard, the following four directives are of particular interest:
- the EU Public Supply Directive (93/36/EEC);
- the EU Public Works Directive (93/37/EEC);
- the EU Utilities Works Directive (93/38/EEC); and
- the EU Public Services Directive (92/50/EEC).
Under these directives, any contract for pecuniary interest concluded in writing between a contracting body and an operator, which has as its object the execution of work or provision of a service, is designated as a "public works or public services contract". A 'concession' is defined as a contract of the same type as a public contract, except that the consideration for the works to be carried out or the services to be provided consists either solely of the right to exploit the construction or service, or of this right together with payment. In the view of the European Court of Justice, assessment of these elements must be undertaken in such a way as to ensure that the directive is not deprived of practical effect.(1) In particular, the formalism attached to the concept of a contract under national law cannot be advanced to deprive the directives of their practical effect. Similarly, the pecuniary nature of the contract in question does not necessarily imply the direct payment of a price by the public partner, but may derive from any other form of economic consideration received by the private partner.
Annex IA of the Public Services Directive and Annex XVI A of the Utilities Works Directive define certain public works or service contracts as having 'priority'. These are subject to a detailed set of rules. In contrast, contracts and concessions dealing with so-called 'non-priority' works and public service contracts not listed in the annexes are subject to very few legal constraints. Services concessions and assignments awarded in the form of a unilateral act fall completely outside the scope of the directives.
EU public procurement legislation is being updated. On March 31 2004 the new Public Procurement Directives (2004/17/EC and 2004/18/EC) were adopted. However, the existing legislation will remain in force until the new directives are implemented by EU member states. This is required to happen by January 31 2006.
The so-called Compliance Directive (2004/18/EC) consolidates the existing Supply, Services and Works Directives into one single directive. The main objectives of this legislation are to simplify the existing rules and to make them more consistent with modern procurement methods and developments in best practice. In particular, it:
- allows the use of framework agreements and arrangements with central purchasing authorities;
- provides for increased transparency in relation to award criteria;
- gives the opportunity for environmental and social factors to be considered during the award procedure; and
- contains new electronic procurement provisions covering such issues as e-auctions and dynamic purchasing systems.
Moreover, the Compliance Directive creates a new procedure allowing for a competitive dialogue between contracting authorities and tenderers. This is because it is sometimes difficult at the outset of certain projects to identify precisely what kind of cooperation will be required. The competitive dialogue procedure allows public authorities to hold discussions with the applicant businesses to identify the solutions best suited to public sector needs. Once a preferred bidder has been chosen, the authority can ask the bidder to clarify or confirm aspects of its tender.
In the commission's view, the competitive dialogue procedure provides:
"interested parties with the procedure which is particularly well adapted to the award of contracts designated as public contracts while, at the same time, safeguarding the fundamental rights of the economic operators."
However, the competitive dialogue procedure does not fit every situation. On the one hand, the ability of the contracting authority to negotiate after bids have been submitted is very limited, since if that were not the case, competition could be distorted. On the other hand, lenders (banks, monocline guarantors and rating agencies) often may not complete due diligence until after bids have been submitted, even though lender support is usually required at bid submission. Often, adjustments are made to provide comfort to them.
Like the Compliance Directive, the Utilities Directive (2004/17/EC) incorporates provisions to reflect modern procurement practices, such as e-auctions and dynamic purchasing systems. It also includes a provision for any utility activity that is exposed to competition in markets for which access is not restricted to be excluded from its requirements.
Green Paper on PPPs
As a basis for further discussion on the EU framework for PPPs, the European Commission published in May 2004 its Green Paper on Public-Private Partnerships and Community Law on Public Contracts and Concessions. Given the importance of public procurement to the European Union (it accounts for about 16% of the gross domestic product generated in the European Union), this document was one of the priorities identified by the commission in its Internal Market Strategy for 2003 to 2006, and was intended to contribute to the measures planned as part of the initiative on growth in Europe. In the commission's view, PPPs could, for example, help to put in place the projected trans-European transport and energy networks that have fallen behind schedule, but which are seen as a key condition for the success of the internal market and to ensure sustainable mobility in an enlarged European Union.
The aim of the green paper was to launch a wide-ranging debate to ascertain whether the European Union needs to intervene to ensure that economic operators in the member states have better access to the various forms of PPPs within a framework of legal certainty and effective competition. To this end, the green paper asked a set of questions intended to find out more about how the existing rules and principles work in practice, so as to enable the commission to determine whether they are sufficiently clear and suitable for the requirements and characteristics of PPPs.
At the outset, the commission identified two types of PPPs. The first type is a PPP of a purely contractual nature, which the commission defined as a partnership between the public and private sectors based solely on contractual links. The second type is a PPP of an institutional nature, which the commission defined as cooperation between the public and private sectors within a distinct entity. Apart from these two types of PPP contracts, the green paper also dealt with concession contracts.
Based on this distinction, the green paper addressed various topics, such as:
- the procedural framework for certain PPPs (operations qualifying as public contracts, minimal framework for secondary legislation, no framework for works and service concessions);
- privately initiated PPPs;
- the contractual framework; and
- contractual amendments during the life of a PPP.
In the ongoing debate on the state of EU legislation on PPPs, initiated by the green paper, some issues are attracting particular interest. These include the lack of a detailed and homogeneous EU-wide set of rules, and the question of how to deal with subcontractors. As far as the considerable differences in the regulatory frameworks between member states are concerned, however, an EU version of standardized PPP contracts, which provides guidance on key issues arising in PPP projects, seems to be neither practical nor workable at this point. Also, concession agreements in many civil law jurisdictions differ in that the agreement rests on a codified corpus of civil law. The green paper also deals with proper competition taking place at subcontractor level and raises the possibility of implementing more detailed rules for private sector subcontracting. However, here too the existing rules seem to be sufficient. The desire to win subcontract work is one of the key drivers for an entity taking an equity position in a PPP project. Therefore, where a bid is submitted by a consortium, the consortium must be free to enter into subcontractual arrangements with its members.
The green paper on PPPs and concessions is comparable to the White Paper on Services of General Interest adopted in May 2004, which is part of the overall discussion on how the needs for both competition and reliable services of general interest subject to specific public service obligations can be met in times of restricted financial capacities. In order to provide guidance on this question, many observers expect that an EU Framework Directive on Services will be developed in the future. Together with the changes made by the Compliance and Utilities Directives, this directive could transform the EU framework for PPPs.
(1) European Court of Justice judgment of July 12 2001, Case C-399/98, Scala, ECR I-5409, see Paragraphs 53 to 55.