Regulatory

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.

1
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.
2
For account­abil­i­ty and trans­paren­cy, if the pri­vate part­ner is a joint stock com­pa­ny, it can­not issue bear­er shares (акции на приносител).
3
For trans­paren­cy, every PPP under the new law will be sub­ject to reg­is­tra­tion in a pub­lic reg­is­ter, main­tained by the Min­istry of Finance.
4
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.