Corporate / M&A

Serbia: Public-Private Partnerships – Corporate Aspects

The public-private partnership (PPP) regulation in Serbia has been historically underdeveloped, with different laws containing the relevant provisions – which have sometimes even been contradictory. Also, key aspects of PPP project have been left unregulated. Largely because of this, PPP projects have been almost non-existent in Serbia.

The main goal of the new Pub­lic Pri­vate Part­ner­ship and Con­ces­sions Act (Offi­cial Gazette of Repub­lic of Ser­bia, no. 88/2011; PPP Act) is to increase access to pri­vate fund­ing through new PPP projects by uni­fy­ing the PPP rules into a sin­gle frame­work law.

Introduction of the institutional PPP

From a cor­po­rate per­spec­tive, one of the most sig­nif­i­cant aspects of the PPP Act is the clear dis­tinc­tion between two types of PPPs: con­trac­tu­al PPP and insti­tu­tion­al PPP. For the first time, the PPP Act intro­duces the insti­tu­tion­al PPP into Ser­bian law, defined as PPP based on a rela­tion­ship between pub­lic and pri­vate part­ners as share­hold­ers of the JV com­pa­ny imple­ment­ing the PPP project (SPV).

The insti­tu­tion­al PPP may be imple­ment­ed through a new­ly formed SPV or by invest­ing in the exist­ing com­pa­ny. The pro­ce­dure for select­ing the insti­tu­tion­al pri­vate part­ner is sim­i­lar to that for the con­trac­tu­al PPP or con­ces­sion projects; the major dif­fer­ence is that there is no need to con­clude the pub­lic con­tract to imple­ment the PPP project.

This means that the SPV’s arti­cles of asso­ci­a­tion, con­clud­ed between pri­vate and pub­lic part­ner, are the basis for the insti­tu­tion­al PPP. The PPP Act pro­vides that gen­er­al cor­po­rate and oblig­a­tions leg­is­la­tion will apply to such arti­cles of asso­ci­a­tion (the part­ners may freely agree on share­hold­ers’ and man­age­ment rights with­in the scope of Ser­bian cor­po­rate rules). In addi­tion, pri­va­ti­za­tion reg­u­la­tions will express­ly not apply to the share dis­pos­al in SPV (includ­ing legal­ly pre­scribed put and call options). Thus, the insti­tu­tion­al PPP pro­vides pri­vate part­ners with more options when struc­tur­ing its rela­tion­ship with pub­lic part­ner – as opposed to the con­trac­tu­al PPP, where the scope of the pub­lic con­tract is reg­u­lat­ed not only by the PPP Act but oth­er admin­is­tra­tive acts as well.

PPP term

The PPP Act pre­scribes 50 years as the max­i­mum term for pub­lic con­tracts. This is an improve­ment over the pre­vi­ous con­ces­sion reg­u­la­tions of 30 years. But any exist­ing time lim­i­ta­tion puts pres­sure on the pri­vate part­ner, whose incen­tive for fur­ther invest­ment and devel­op­ment of the ongo­ing PPP project dimin­ish­es over the years.

On the oth­er hand, the PPP Act does not con­tain term lim­i­ta­tions for insti­tu­tion­al PPPs, pro­vid­ing anoth­er poten­tial advan­tage for this type of PPP. How­ev­er, the PPP Act is ambigu­ous in this respect, and this remains untest­ed in prac­tice.

Multiple entities as private partner

Any for­eign or domes­tic enti­ty may be recog­nised as a pub­lic part­ner. The PPP Act also pro­vides that a group of unre­lat­ed enti­ties may par­tic­i­pate in the selec­tion pro­ce­dure for a PPP project with­out for­mal­is­ing their coop­er­a­tion, if the pub­lic part­ner does not require a par­tic­u­lar legal form. This solu­tion great­ly decreas­es logis­ti­cal issues when apply­ing for the PPP projects and allows for greater com­pe­ti­tion on the PPP mar­ket in Ser­bia.

For legal cer­tain­ty, the PPP Act requires that the group enti­ties select­ed for the project organ­ise their coop­er­a­tion in a cer­tain legal or cor­po­rate form.

PPP financing

The pri­vate part­ners’ pri­ma­ry respon­si­bil­i­ties are con­struc­tion, oper­a­tion and main­te­nance of PPP projects, and secur­ing the financ­ing of the project in full or in part. Under the PPP Act, PPPs may be financed by com­bin­ing dif­fer­ent meth­ods, such as equi­ty invest­ments or loans, includ­ing project finance.

To secure the financ­ing, the pri­vate part­ner may pledge or mort­gage the rights and prop­er­ty relat­ed to the PPP project, if the pub­lic part­ner grants its pri­or approval. The pub­lic part­ner may also pro­vide addi­tion­al secu­ri­ty and under­take addi­tion­al oblig­a­tions nec­es­sary for the financ­ing. This includes the pos­si­bil­i­ty of con­clud­ing direct agree­ments between financiers, pub­lic and pri­vate part­ners, where­by the financier is giv­en step-in rights and the part­ners under­take addi­tion­al oblig­a­tions.

The way forward

The PPP Act is still in its infan­cy and many con­cepts intro­duced are untest­ed in prac­tice. It is hoped, how­ev­er, that this mod­ern, EU-ready leg­is­la­tion will open the door for PPP invest­ments in Ser­bia, espe­cial­ly in the under­de­vel­oped infra­struc­ture. And the prac­tice will even­tu­al­ly pro­vide an answer to a very impor­tant ques­tion for the future PPP mar­ket: whether state and local insti­tu­tions will inter­pret and imple­ment this new PPP Act in a way that ben­e­fits the pri­vate as well as the pub­lic part­ner.

One of the most significant aspects of the PPP Act is the clear distinction between two types of PPPs: contractual PPP and institutional PPP.