Serbia: Public-Private Partnerships – Corporate Aspects
→ Miljan Mimić
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.
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.
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.