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.

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schoenherr attorneys at law /