'Fewer, Better and Simpler'
GOVERNANCE CHALLENGE Legal processes in many jurisdictions are insufficient, overly complex and fail to provide sufficient security and incentives to investors in PPP arrangements. |
Principle 3 - Investors in PPPs need predictability and security in legal frameworks, which means fewer, simpler and better rules. In addition, the legal framework needs to take account of the beneficiaries and empower them to participate in legal processes, protecting their rights and guaranteeing them access in decision-making.
A clear framework of law and regulation…
Countries need a secure, predictable, stable, consistent and commercially-oriented framework of law and regulation, so that PPPs can flourish.
…Must be based on key principles and priorities:
(a) Protection of rights of investors to dispose of their property and assets;
(b) Promoting a better quality of legislation under the banner of fewer, better and simpler rules;
(c) Making enforcement more business sensitive;
(d) Improving the effectiveness of the judiciary in the enforcement of contracts; and
(e) Developing the legal framework for PPPs on the basis of thorough consultation in those areas which most directly affect the start up of the project and its operation, including concession, tax, competition, procurement and company laws.
Fewer laws…
PPP legislation should not be prescriptive, but permissive focussing on achieving outcomes, while setting broad parameters in which partners can design and implement projects that they agree on. Dense legislation that seeks to micromanage the PPP process will only deter prospective investors. The emphasis should be placed on flexibility. It also means:
(a) The removal of burdensome legal constraints on investors using public assets;
(b) The use of assets by private partners can sometimes be challenged by reference to provisions in the constitution. In these cases, such laws should be revised;
(c) The removal and streamlining of unnecessary approval procedures for construction and land use; and
(d) The lifting of legal restrictions on the investors' rights to use the benefits of their investment, such as on the ability to dispose of their equity investment in the Project Company at market prices and to repatriate the profits out of the country.
…Better laws…
Better laws are those that are knowable and secure, allowing investors to plan investment decisions and to adopt longer term as opposed to short-term perspectives when entering a market and this factor can attract a better quality of investment to a PPP. In PPPs better predictable rules have also some other more specific advantages, namely where the need to mitigate risk is such a central feature, predictability can allow lenders to better quantify the risk.
Lenders and investors will look for a predictable and reliable framework for PPPs for example, on investment laws, tax, security, corporate law, and contracts, and dispute resolution law in the project country. Bearing in mind the limited recourse nature of most concession based financing, funders look mainly to the legal and contractual framework for protection and need to be reassured as to its long-term stability and predictability. Here the predictable conditions for investments will include such things as no restrictions on foreign or private ownership, deductibility of construction and other expenses, double tax treaties with investors' countries, no withholding tax on interest or dividend payments and the offer of other suitable tax incentives.
Better also means better quality legislation that clarifies rights and obligations in PPP processes. One such case - the public sector's legal ability to grant concessions - is in many jurisdictions the most critical uncertainty faced by lenders and investors and it is best removed by a fully-fledged concession law.17 It is far more difficult to change a law than it is guidance, directives and other lesser rulings. It is also important to bear in mind that private investors prefer generic legislation as opposed to sector-specific rules, dealing with, say, transport or education, as the former involves numerous lenders and investors while specific legislation on sectors has a smaller constituency and is perceived as more vulnerable to change at the hand of the host government.
…And simpler laws will all lead to successful PPPs.
Many PPP processes are often very complex and this raises the cost and excludes all but the wealthier partners. Simpler procedures will improve competition, which will also increase the range of partners governments can choose from.
To improve efficiency in the legal processes surrounding PPPs, governments can standardize contracts. This approach promotes a common understanding of the main risks, allows consistency of approach and pricing across a range of similar projects and reduces the time and costs of negotiation by enabling all parties concerned to agree a standard approach without extended negotiations.18 Another practice is bundling projects, that is contracting with just one partner to provide several small-scale projects and incremental partnerships, which allow a partnership to grow by stages rather than in one 'big bang'. All these practices use economies of scale, lower costs to boost incentives for investors.19
Another practice that is becoming commonplace is the 'Competitive Dialogue'. In complex contracts where a contracting authority is not objectively able to define the technical means capable of satisfying its needs or objectives, or specify either the legal or financial make up of a project or both, a new form of arrangement - competitive dialogue - is often used by governments. It involves working with bidders to develop technical and commercial solutions. While this approach leads to solutions that overcome the inherent complexity of PPPs, the contracting authority must still work to ensure fairness in the tendering procedures and avoid discrimination.
Improving legal processes means better arbitration processes…
Lawsuits in PPP cases can be expensive and burdensome. Governments can improve the framework in which commercial disputes are solved. Overall, the investor needs to have confidence that the judiciary will enforce the laws and enforce contracts. In addition, the necessary administrative documents (such as authorizations and licences) to implement the PPP project must be obtainable.
Judicial enforcement is also a concern in arbitral judgements. Disagreements during the course of a PPP contract are common. Arbitration typically is performed on the basis of an agreement, explicit or tacit, prior to, or after, the dispute arose. Most countries have a law on commercial arbitration, some of which are based on the UNCITRAL Model Law on International Commercial Arbitration. Often, arbitration takes place with an institutional arbitration tribunal.
Recent trends in arbitration Use of foreign courts to deliver arbitration settlements Increasing interest in the use of ediation | The concern of the investor is that local courts favour the local public partner. This concerns firstly the obligation for arbitration to take place in local courts. If the judgement is held outside the country there is often the further concern that the local judiciary will not enforce the decision. Arbitration needs to be widely recognized and generally not obstructed. |
In order to improve countries' dealings with regard to arbitration, governments may wish to familiarize their judiciary with the various international bodies dealing with international commercial arbitration, like the ICC. In addition, governments should also consider, if they have not already done so, the ratification of the New York Convention on the enforcement of arbitral awards. In considering arbitration rules for PPPs, it might also be helpful to refer to dispute resolution procedures set out, for example, in the UK's SPOC4.20
…Together with fair and consistent enforcement…
The way regulations are applied and enforced is just as important as the content. Governments need to make enforcement and implementation more business-friendly by putting emphasis on helping business to comply with rules and become real partners.
…As well as fuller consultations.
In drafting rules on PPPs as well as on continuing improvements it should be considered that drafting and detailing content are likely to benefit from public consultation. Improvement can also be made in writing legislation that is clear and user friendly.
It is important to train lawyers and judges, particularly about lenders' rights to 'step in'…
Many legal issues in PPPs will be new. For example under concession contracts lenders ask to be given 'step in' rights. This allows the lender to take over the project, and if necessary bring in a substitute concessionaire, in order to forestall a termination of the concession agreement following the concessionaire's default. The main purpose of 'stepping in' is to avoid a collapse of the agreement of the concessionaire and the basis by which the lender is repaid. Given this threat to its repayment, the lender is likely to ensure that it or a substitute project company appointed by it, has an opportunity to cure the default. This in effect allows the private entity to halt the government exercising its right to terminate. This right, however, can prove controversial to government entities that have not encountered them before and can lead to a number of awkward questions related to when the lender can step in, duration of the cure period and so on.21
…While empowering citizens to use the legal processes is also essential to creating good governance.
Good governance also means the practice of extending the rule of law to groups who for various reasons do not have access to laws to protect their rights. Legal empowerment specifically refers to the socially and economically disadvantaged who need to improve their access to basic services. In many societies the perceptions of the legal and law-enforcement systems are not favourable among the economically marginalized communities. This has to be overcome if the benefits from PPPs are to reach a wider constituency.
One method of legal empowerment is to better inform people of their rights to access good services and to enable them to participate in decision-making, preferably while the project is still in the planning stage. Governments should create mechanisms for early public participation and build up the constituencies who will use them. Otherwise, this will become a right that is not used or implemented.
"Although regional in scope, the significance of the Aarhus Convention is global. It is by far the most impressive elaboration of Principle 10 of the Rio Declaration, which stresses the need for citizen participation in environmental issues and for access to information on the environment held by public authorities. As such it is the most ambitious venture in the area of environmental democracy so far undertaken under the auspices of the United Nations." Kofi A. Annan |
A good example of the legal empowerment of people that is relevant to PPPs is the UNECE Convention on Access to Information, Public Participation in Decision-making and Access to Justice in Environmental Matters (the Aarhus Convention). This Convention promotes the principles of good governance and the rule of law by recognizng that better access to information and increased public participation improve the quality of decision-making, while enabling public authorities to be more responsive to public demands and concerns. It also provides access to a review procedure before a court of law or another independent and impartial body established by law to members of the public whose rights of access to information and public participation have been impaired.
The Convention is therefore not only an environmental agreement, it is also a treaty about government accountability, transparency and responsiveness. The Convention's main contribution in promoting good governance is in setting standards for government performance that are applicable throughout the UNECE region and beyond.
ACTION POINT Governments and international organizations may wish to work together to complete a pan-European legal framework for PPP legislation that can serve as a model for governments in the region, taking into account existing recommendations, and providing for fewer, better and simpler approaches. |
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17 The requirements and extent of any PPP law will also depend on the nature of the legal system. Under common law systems, the need for an extensive PPP law is often not nearly as great as in civil code systems. In the UK and Australia for example, PPPs have been successfully implemented with very little PPP law. In civil code systems this is less likely.
18 In the UK, the Government decided to standardize PFI contracts: The Standardization of PFI Contracts was developed (SoPC 4 see UK Government, 2007). In the UK all PFI schemes must be SoPC4 compliant. To avoid uncontrolled sector-specific derogations from the model contract, at the time of writing all derogations from SoPC4 require specific prior approval from HM Treasury.
19 In Australia, bundling sometimes takes the form of grouping hospital construction with ancillary structures and commercial activities, thereby creating enough revenue generation to balance against building and procurement costs.
20 Released in March 2007, UK.
21 See Law in Transition, 2007 Public-Private Partnership, pp. 46-47.