The New Public Private Partnership Act: New Opportunities for Construction Companies in Bulgaria

Forget vacation properties and malls – there is a new opportunity for construction companies in Bulgaria.

Effective from 1 January 2013 a new mode of a long-term public private partnership (PPP) can be applied to investments in construction and operation of social infrastructures, such as parking lots, sport centres and social housing. It is set out in the new Public Private Partnership Act, adopted in June 2012 after years of discussions, providing a much-needed complement to the regulatory framework that previously covered only public procurements and concessions.1

For the sake of better public services and infrastructure

Unlike the other PPP forms, the new mode has a very clear designation, aimed at public services and social infrastructure. It is intended for services of public interest that the administration is required to provide and the citizens are entitled to use free of charge. Such projects are not self-financing (unlike concessions) and often public authorities cannot ensure good quality if the infrastructure is built under the short-term public procurement mode.

Before: concessions, public procurements and local hybrids

For construction projects, the existing modes of PPP have set certain limits, rendering such cooperation unfeasible in certain fields of the social infrastructure. The public procurements, for example, have a relatively short term (five years), and the terms and conditions of the agreement cannot be amended in the course of implementation of the project. So they are not suitable for long-term cooperation. The concessions, assumed to be self-financing, do not allow for compensatory payments from the public partner to the private partner; that is, they are not applicable to projects not expected to generate enough income during their operation.

Still, given the need for a new mode of PPP appropriate for social services and infrastructure, proactive administrations have attempted to achieve the effect of such long-term partnership with the private sector by combining the existing rules on public procurements and concessions in local ordinances. This has resulted in hybrids, varying according to the interpretation of the local administration – a major discouragement for serious investors.

What is new about this PPP?

The new mode of PPP is intended for a long-term partnership (5-35 years) between a public partner and a private partner (a limited liability or a joint-stock company2) for a public service that the public partner is required to provide free of charge to the public. It should be used to ensure higher quality of the infrastructure through innovation and application of modern technologies, introduced by private investors.
The law enlists explicitly and exhaustively the options for the subjects of this PPP, aiming at clear and unequivocal regulation and preventing circumvention of the law. Projects that can be implemented as public procurement or concession are explicitly excluded from the scope of the new law.3

The public partner is allowed to make compensatory payments to the private partner to guarantee the rate of return stipulated in the PPP agreement (unlike the concessions). Also, the private partner can both build and operate the facility (unlike the public procurements). As alternative financing, the private party may be allowed to administer and benefit from another service on private municipal or state property to be able to reach the targeted rate of return under the PPP agreement.

Why is this new PPP a good idea?

The new mode of PPP allows for better allocation of the risks related to construction and operation of social infrastructure, assigning risks to the partner presumably better at managing them. The private party is expected to take the risks related to the construction and the availability of the service, while the public partner is responsible for the demand of the service. The result is cost saving for the public budget and better service for the public.

What is the procedure for new PPP?

The tender procedure under the new law follows the procedure under the Public Procurement Act, where the public administration has enough experience. But the choice is to be made based on the economic feasibility of the offer, and the contractual terms can be amended if necessary during the implementation of the agreement to allow a more flexible cooperation – a big advantage compared to the public procurement agreement.4

What are the restrictions to this new PPP?

The new PPP mode comes with restrictions guaranteeing transparency and accountability. For example, when the financial support is provided via limited property rights by the public partner, these rights cannot be transferred or granted on the PPP site.

In summary, the new mode of PPP cooperation is an excellent opportunity to expand the PPP in a more efficient and flexible way. The benefits to the public being obvious, both the administration and businesses look forward to its launch in 2013 to test its procedures and practical implications.

The new mode of PPP allows for better allocation of the risks related to construction and operation of social infrastructure, assigning risks to the partner presumably better at managing them.

The draft of the law has been developed since December 2010 in close cooperation between the Ministry of Finance and Ministry of Economy, Energy and Tourism – both experienced in application of the existing modes of PPP. The working group has built up on the previous drafts and the acknowledged needs of the public administration and finally on 1 June 2012 the new PPP Act (Закон за публично-частното партньорство) was approved by the Bulgarian Parliament. The supplementary ordinances and regulations to the new law are to be adopted before its entry into effect, and by 30 June 2013 the national PPP programme, along with the action plan to 2020, should also be approved and operational.
For accountability and transparency, if the private partner is a joint stock company, it cannot issue bearer shares (акции на приносител).
For transparency, every PPP under the new law will be subject to registration in a public register, maintained by the Ministry of Finance.
For better planning, the new law has introduced as the start of the procedure that the PPP project is included in the national PPP programme and the municipal PPP plans. The planning will allow coordination of the budget of the public partner. The procedure can be initiated by the private party, but this will not give a preference over other candidates for the respective PPP.