CHAPTER 2 Legal Approaches to PPP Implementation

Note:

The Chapter follows the World Bank definition of PPPsi and applies that definition irrespective of the terminology used in the particular economy or jurisdiction. In economies where generally applicable and separate regimes exist for concessions (often defined as user-pays projects) and PPPs (often defined as government-pays projects), both regimes have been considered.

Facilitating PPPs through Legislation

While the vast majority of traditional public procurement practices are the same in substance, practices in PPP procurement vary across different countries. We, therefore, will further concentrate solely on the latter.

Various types of PPPs have been developed over the years and are commonly used in countries of G20. Specific PPP-related legal and regulatory framework may facilitate investments in long-term infrastructure projects by reducing transaction costs, ensuring appropriate regulatory controls and providing legal and economic mechanisms to enable the resolution of disputes.ii

The Survey has shown that many countries have introduced specific legislation and guidelines to encourage PPP implementation. The main idea behind enshrining PPP models in the legislation is to remove legal obstacles in project implementation and prevent law suits. Furthermore, the PPP model is essential for measuring domestic or international investors' risk as well as ensuring consistency.

Box 1. Pros and Cons of Unsolicited Proposals

An unsolicited proposal (USP) is a proposal made by a private party to undertake a PPP project, submitted at the initiative of the private firm, rather than in response to a request from the government. USPs need to be adequately regulated to prevent nontransparent behaviour.

By managing USPs appropriately, governments may benefit from this approach while reducing potential risks. However, unsolicited proposals may also pose risks of providing poor value for money, particularly if the government chooses to negotiate a PPP directly with the project proponent, as well as risks of diverting scarce financial resources to non-priority projects. Moreover, in case of USPs with a unique investor, a project may stall if the private side goes bankrupt. Hence, the mission to complete a project will fall upon the shoulders of the public funds. The lack of clarity and transparency in the treatment of USPs may lead to projects that yield low value for money.

Common Law and Civil Law jurisdictions

Legislation plays a central role in implementing PPPs. The law embodies a political commitment, provides specific legal rights and represents an essential guarantee of stability of the country legal regime.iii

However, not every country decides to incorporate PPP models in the national legislation. Administrative and legal traditions in the country establish distinctive features for PPP regulation. Common law and civil law jurisdictions have different approaches to many issues relevant to PPPs.iv

In civil law systems, the operations of government are codified through administrative law. This code, combined with other legislation, such as the civil code and the commercial and public contract codes, establishes legal rights and processes that apply to PPP contracts. Common law systems have fewer specific PPP provisions and govern such contracts in general.v

This section outlines approaches to PPP regulation in common law and civil law jurisdictions. It also elaborates on specific issues and distinctive aspects of PPPs that are intrinsic to civil law countries with specific PPP regulation, general PPP legislation and common law systems, which are formed based on historical, political and practical backgrounds.

Some Civil Law Countries have Specific PPP Laws

The differences also exist within a group of civil law countries, which tend to embody their PPP frameworks in specific laws. Depending on such criteria, civil law countries can be divided into two groups (see Table 2), taking into account the presence of specific laws on PPPs.

In Brazil, unsolicited proposals precede the request for proposals. It begins with a formal request by any interested party to the government seeking to assess the feasibility of a specific PPP project. The government reviews the request, and in case of approval, it publishes a notice or announce its intention via digital media. The public notice introducing the request for proposals must also indicate the scope of the project and specify the nature of the relationship between the public and private entities. The notice must establish the term during which interested parties will have to research the proposed project, as well as guidelines governing the use of this procedure by the government entity.

Unsolicited proposals for PPP projects are atypical in Canada. This may be due in part to the significant amount of planning that goes into all PPP projects before the procurement process gets underway, and in part to the highly structured approach taken in the procurement process.

In 2011 in Japan, the revised PFI Act introduced the unsolicited proposal system through which the private sector may propose a PFI project. Competitive bidding is still required even if the unsolicited proposal induces the relevant authority to start PFI procedures. In France, similar approach and process exist.

Source: Pubdocs.WorldBank.org, PPPKnowledgeLab.org, TheLawReviews.co.uk

PPP laws have been introduced in Argentina, Brazil, Japan, Mexico, Turkey and Russia. These particular laws on PPP form the central pillar for PPP regulation in these countries, integrated into the current system of legal regulation. Remarkably, most developing countries like Argentina, Indonesia and Russia adopted a special law on pPp over the past five years to reinforce the legal certainty and attract private investment. It is worth noting that many countries from this group also have separate law on concessions. The European Union adopted dedicated EU regulations (Directives) for (i) PPPs as part of public procurement, and (ii) concessions, with the key character of transferring to the private partner the operating risks (i.e. especially the demand risk or traffic risk). For example, as an EU member State, France has further developed its concession agreements legal framework, which serves to implement major infrastructure projects such as canals, motorways, water distribution systems and toll bridges with transfer of the operating risk and with a primarily end-user-pays structure. At the same time, in France, 'partnership contracts' exist for government-pays PPPs and the corresponding legal framework is outlined as specific elements under the general regulation on public procurement.

Other Civil Law Countries Follow General Regulation

PPP arrangements in many civil law countries are governed by a distinct framework of administrative law, which sets out fundamental principles that, in many cases, cannot be derogated from or overridden by agreement of the parties.vi More specific requirements can be derived from budgetary and public procurement laws and legal provisions concerning specific sectors. For example, Germany has no preferred types of PPP or special PPP-related regulation and applies general civil law framework and regulatory requirements to PPP projects.

Sectorial regulation is also widely spread in this group of countries. For example, in Germany and Italy, regulation in some industries involves certain PPP aspects.

Often in civil law countries, concession laws or procurement regulation are introduced to enable PPP projects to be carried out and to define the type of services that could be procured under PPPs. Such regulation has been introduced in Italy, Republic of Korea, China and Spain.

Common-Law Countries Prefer Guidelines

Common law jurisdictions have a less prescriptive approach to the structuring of PPPs than civil law jurisdictions. Such countries generally have no specific laws that establish PPP frameworks. In many common law countries, policy statements and administrative documents are widely used. Most countries in this group have legislation, aimed at facilitation of PPP projects 'implementation by centralising and streamlining planning approval and land use processes.

Australia and the UK exemplify approaches of common-law countries to dealing with PPPs.

The United Kingdom provides a notable example of the widespread and successful implementation of PPPs with no comprehensive PPP regulation.

UK introduced the Private finance initiative (PFI) in 1992 and standardized the pioneer model for government-pays PPPs through the implementation of numerous PFI-projects.

In Australia, the National PPP Policy and Guidelines have been developed to provide a consistent framework that enables public and private sectors to work together to improve service delivery through private sector provision of public infrastructure and related services. This framework has been endorsed and is applied by the Federal Government and all State and Territory governments for the delivery of PPP projects. Jurisdictions are also encouraged to seek guidance from Infrastructure Australia and the Infrastructure and Project Financing Agency when developing PPP business cases.

Civil Law Countries. Dedicated Legislation Exists, Including Specific Laws on PPPs

Civil Law Countries without Specific PPP Legislation. General Legislation and Regulation Vastly Cover the Notion of PPPs

Common-Law Countries. Specific Legislation is not Existant, PPP Guidelines may be in Place

Argentina

China

Australia

Brazil

Germany

Canada

Francea

Indonesia

India

Japanb

Italy

Singapore

Mexico

Rep. of Korea

South Africa

Russia

Netherlands

United Kingdom

Turkeyc

Saudi Arabiad

Spain

Switzerland

Argentina

Argentina was the first country in Latin America to adopt the PPP Law in 2000. Since Argentina is a federal country, with both federal and provincial levels of legal organisation, the federal government and each province have a dedicated law on public infrastructure.

In Argentina, all PPP contracts are to be designed according to the distinctive features of each project and its financial needs. Entities in charge of the execution and performance of the PPP contract may be organised as a special purpose vehicle (SPV), a trust fund, or any other vehicle or associative organisation.

The new law on PPP set forth two new bodies. First, the Undersecretariat of PPPs within the Secretariat of Budget Evaluation, Public Investment and PPP now assists various public procurement agencies in designing and structuring PPP projects and articulates the legal procedures with the different national agencies and ministries. Second, the Congress bicameral commission is in charge of monitoring the PPP projects' performance and compliance with the PPP legislation.

China

In China, most common types of PPP include operations and maintenance (O&M), management contract (MC), BOT, BOO, build-own-operate-transfer (BOOT), TOT, and rehabilitate-operate-transfer (ROT). The specific type of PPP is chosen due to the conditions of a project and the requirements of participating parties.

PPP projects are currently implemented by rules and guidelines regarding PPP and concessions, as well as laws, regulations and rules regarding fixed asset investments, construction and contracts. Neither the Guidelines of the Ministry of Finance of China nor other government guidelines prohibit the selection of specific types of PPP.

The Ministry of Finance (MOF) and National Development and Reforming Commission (NDRC) of China have separate PPP project libraries. The PPP project library of the MOF provides detailed project information, including the value for money analysis and assessment of fiscal feasibility. The PPP project library serves as an instrument for carrying out functions of the MOF associated with information disclosure for overall project life cycle, dynamic monitoring of fiscal expenditures and social supervision. The PPP project library of the NDRc serves as an online approval and supervision platform for investment projects, what means that government has already approved the fixed asset investments for the projects listed in the PPP project library.

Ideas for Policy-Making

• Preserve the distinctive character of PPP regulation to make allowance for project specifics, country tradition and political aims

• Choose parallel regulation of different PPP models, such as concessions and government-pays PPPs, as a recognised common practice in order to meet the demands of the market

The PPP project library is used as an essential basis to arrange government investment, determine and adjust prices, issue corporate bonds and determine entitlement to particular PPP policies. Projects listed in the PPP project library are implemented in batches under the coordination of the line bureaus or departments of the local government.

Canada

In Canada, several authorities regulate the PPP market, including the federal government, the provincial governments and dedicated specialised agencies.

From a constitutional perspective, the allocation of responsibilities between provinces and the federal government is such that the majority of large-scale infrastructure projects fall under provincial jurisdiction. At the federal level, three following institutions are involved: PPP Canada, a PPP group at Public Works Government Services Canada, and a PPP team at Treasury Board.viii

At the provincial level, Ontario and British Columbia have led the way by developing and adapting to the Canadian market the original PPP documentation from Australia and the UK at an early stage. As a result, their template documentation often serves as a model for the other provinces, and they play a crucial role in advising on the interpretation of the documentation and in continuous improvement of the templates.

In Canada, various types of PPP have been developed over the years as an alternative to the conventional delivery model of design-bid-build (DBB), in the hope of achieving better value for money. PPP models used in Canada most commonly include build-finance (BF), design-build-finance (DBF), DBFM and DBFOM. Other models, such as operation and maintenance (O&M) and the design-build-operate-maintain (DBOM) are used less frequently.

Japan

In Japan, several models of infrastructure and PPP projects' implementation exist, notably PFI model and concessions.

Under the PFI model, public entities give a call for proposals from private companies to carry out design, construction, and operation. Further, the private enterprise, which brings the best proposal, is granted the right to fulfil the proposed obligations.

In Japan, PFI projects are implemented, not only by the central government but also by the municipal government at the prefecture, city, town and village level. The Private Finance Initiative Promotion Office within the Cabinet Office plays a principal role in the PFI market in Japan, setting the general policy on PFI projects by issuing bills and guidelines and establishing action plans, among others, to support the promotion of the implementation of PPP/PFI projects.

As regards concessions, a public entity gives private enterprises the operating right of the existing public facility, enabling a private operator to collect service fees while the public entity keeps ownership of the facility.

Turkey

Turkey started to use the concept of PPP in infrastructure during the 1980s as an alternative to traditional public procurement. The first law in this area was the Law on Electricity put in force in 1984. It was a sector specific law for the participation of the private sector in energy supply infrastructure. In 1994 the BOT law which covers all sectors has been enacted.

Specific legislation regarding PPPs currently in force is in the form of laws and secondary legislation that are adopted according to specific PPP models including Build-Operate-Transfer (BOT), Build-Lease-Transfer (BLT), Build-Operate (BO), Transfer of Operating Rights (TOR) and concessions in various sectors such as transport, energy, mining, health and environment. Besides, a draft framework law on PPPs is under consideration, coordinated by the Presidency of Strategy and Budget.

With over 30 years of experience and an ambitious PPP pipeline, the PPP legislation in Turkey is evolving in accordance with the current needs of the projects to increase private sector involvement. There are specific provisions within the legislation on tender procedures and contracts.