Law in transition 2
007
European Bank for R
econstruction and Developm
ent
Law in transition 2007 • Public-private partnerships • Legal reform in Russia
The European Bank for
Reconstruction and Development
(EBRD) is an international
institution whose members
comprise 61 countries, the
European Community and the
European Investment Bank. The
EBRD aims to foster the transition
from centrally planned to market
economies in countries from
central Europe to central Asia.
The EBRD’s countries of operations
are: Albania, Armenia, Azerbaijan,
Belarus, Bosnia and Herzegovina,
Bulgaria, Croatia, Czech Republic,
Estonia, FYR Macedonia,
Georgia, Hungary, Kazakhstan,
Kyrgyz Republic, Latvia, Lithuania,
Moldova, Mongolia, Montenegro,
Poland, Romania, Russia,
Serbia, Slovak Republic, Slovenia,
Tajikistan, Turkmenistan, Ukraine
and Uzbekistan.
The EBRD works through the Legal
Transition Programme, which is
administered by the Office of the
General Counsel, to improve the
legal environment of the countries
in which the Bank operates.
The purpose of the Legal Transition
Programme is to foster interest
in, and help to define, legal reform
throughout the region. The EBRD
supports this goal by providing or
mobilising technical assistance for
specific legal assistance projects
which are requested or supported
by governments of the region.
Legal reform activities focus on
the development of the legal rules,
institutions and culture on which
a vibrant market-oriented
economy depends.
General Counsel of the EBRDEmmanuel Maurice
Co-Editors-in-Chief Gerard Sanders, Michel Nussbaumer
Focus EditorAlexei Zverev
SupportRichard Bate,
Veronica Bradautanu, Joanna Daniel, Matilda Kentridge, Anthony Martin,
Jon Page, Kareen Tolson, Helen Warren
Photographs Aleksandar Andjic (pages 60 and 76)
Richard Bate (pages 6, 22, 30 and 38)
Haris Memija (cover and page 2)
Yuri Nesterov (pages 60, 66 and 80)
Law in transition 2007
Law in transition is a publication of the Office of the General Counsel of the EBRD. It is available in English and Russian. The editors welcome ideas,contributions and letters, but assume no responsibility regarding them. Submissions should be sent to Michel Nussbaumer, Office of the General Counsel, EBRD, One Exchange Square, London EC2A 2JN, United Kingdom; or [email protected]
The contents of Law in transition are copyrighted and reflect the opinions of the individual authors and do not necessarily reflect the views of the authors’ employers, law firms, the editors, the EBRD’s Office of the General Counsel or the EBRD generally. Nothing in the articles should be taken as legal advice.
© European Bank for Reconstruction and Development, 2007
All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, without the written permission of the copyright holder. Such written permission must also be obtained before any part of this publication is stored in a retrieval system of any nature.
European Bank for Reconstruction and Development One Exchange Square London EC2A 2JN United Kingdom Tel: +44 20 7338 6000 Fax: +44 20 7338 6100 Web site: www.ebrd.com
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Ref: 6871 Law in transition 2007 (E).
ISSN 1683-9161
www.ebrd.com/law
Legal transition developments Information on legal developments in the EBRD’s countries of operations can be found on the EBRD web site at www.ebrd.com/law.
Law in transition online Law in transition online is published in the autumn of each year. It is available in English and Russian at www.ebrd.com/law.
EBRD Legal Transition and Knowledge Management Team
Michel Nussbaumer Chief Counsel, Team Leader
Frédérique Dahan Senior Counsel, secured transactions project
Paul Moffatt Senior Counsel, infrastructure regulation and competition
Alexei Zverev Senior Counsel, concessions/Russia legal reform
Jay Allen Counsel, insolvency legal reform
Gian Piero Cigna Counsel, financial markets and corporate governance
Paul Byfield Legal Information Specialist
Veronica Bradautanu Associate
www.ebrd.com/law
6Concessions laws in transition countries: the EBRD’s assessmentAlexei Zverev Senior Counsel, EBRD
Milica Zatezalo Senior Associate, Gide Loyrette Nouel
4Public-private partnerships
16Public-private partnerships: the EBRD’s investment activities in the municipal infrastructure sectorFrançois Gaudet Principal Banker, Municipal and Environmental Infrastructure team, EBRD
30Public-private partnerships in transition countriesPeter Snelson Director, Project Developments, Atkins Ltd
38Public-private partnerships in central and eastern Europe: structuring concession agreementsChristopher Clement-Davies Partner, Fulbright & Jaworski International L.L.P.
22Promoting PPPs for infrastructure development, innovation and competitiveness: the role of the UNECEGeoffrey Hamilton Chief of the Economic Cooperation and Integration Division, UNECE
60The Russian insolvency framework: building a credible system Jay Allen Counsel, EBRD
52Public-private partnerships in the transport sector: a Russian view Yulia Zvorykina Director, Investments Department, Russian Ministry of Transport
50Russia
66Securities market legislation in Russia: past, present and futureGian Piero Cigna, Counsel, EBRD
Elena Sulima Counsel, EBRD
76Russia’s social and economic development today: improving legislation to support economic growthMikhail Kopeikin Deputy Chief of Staff, Russian Government
80The institutional training of judges in RussiaVladimir Peysikov Provost, Russian Academy of Justice
2ForewordJernej Sekolec, Secretary, United Nations Commission on International Trade Law (UNCITRAL)
Contents
Contents 1
www.ebrd.com/law
Foreword
Throughouttheworld,theuseofpublic-privatepartnerships(PPPs)hasboomedinrecentyearsasstatesandmunicipalitiesworkwiththeprivatesectortomoderniseanddevelopmuch-neededinfrastructure.Despitethehugeinterestin,andincreasinguseof,suchpartnerships,however,manycountriesstillstrugglewithdifficultiesinplanning,negotiatingandimplementingPPPs.Itisveryencouragingtoseethatgovernmentsintransitioncountriesareinterestedinfindingwaystosurmountthosedifficulties,andthattheEBRDisattheforefrontofassistingtheminthis.
Akeyelementisthesharingofrisksandresponsibilitiesbetweenthestateormunicipalityandaprivateparty.Fromalegalstandpoint,thePPPexperiencetodateisbasedonconcessionsorothercontractualarrangementswherebytheprivatesectorundertakestoprovideservicesofapublicnature.Bestpracticecallsforeachelementofrisktobeallocatedtothepartywhichisbestequippedtomanageit,sothatriskcanbeminimisedaltogether.
Whenproperlystructured,PPPsofferanumberofbenefitstoboththeauthoritiesandprivatesector,and,ultimately,tothepublic.However,theyarenotapanaceaforrenderingpublicserviceseffectivelyandeachprojectshouldbeassessedcarefully.Indeed,PPPsarehighlysophisticatedstructureswhichrequirewell-functioninglegalframeworksandtheymaynotbesuitableforallprojects.Incontemplatingandimplementingprivatefinancingofpublicinfrastructure,governmentsfacemanychallenges,oneofthemostimportantbeingpolicyformulation,thatis,thebasisonwhichthelegalframeworkcanbedevelopedandtheinstitutionalinfrastructureimplemented.
UNCITRALhasalonghistoryofmodellawdevelopmentinvariousareas,includingPPPs.In2000itadopted
theUNCITRAL Legislative Guide on Privately Financed Infrastructure Projects.Thiswasfollowedin2003bythedevelopmentandapprovaloftheModel Legislative Provisions for Privately Financed Infrastructure Projects.TheGuidehasbecomeausefultoolprovidingstateactorswithessentialsummariesofbestpractices,aswellasvastexplanatorymaterialsandrecommendations.
ItisasourceofprideforUNCITRALthattheEBRDhaschosentheUNCITRALGuideastheprimarystandardforbenchmarkingthequalityoflawsintheregionwhereitoperates.Cooperationbetweenthetwoorganisationsislongstanding.Besidesmutualparticipationinconferencesandseminars,ithasincludedaninvaluablecontributionbytheEBRDanditslegaldepartmenttothepreparationofthetwopublicationsmentionedabove.Giventheboomthattheprivatefinancingofpublicinfrastructureiscurrentlyexperiencing,Iamoptimisticaboutopportunitiesforcooperationinthefuture.Indeed,thepotentialintransitioncountriesisimmense.Themajorityofthemhaveonlyrecentlystartedexperimentingwithnon-conventionalformsofprocuringpubliccontractsandthetrendistoconsiderasmanyoptionsofpublic-privatearrangementsaspossibletoachievehighqualityofservicesandbestvalueformoney.
Oneareawhereincreasedtechnicalassistancewillbeneededintheshorttermisthetrainingofpublicofficialsonnegotiatingwell-balancedPPPcontractswithexperiencedprivatesectorcounterparts.Obviously,bothpartiesneedgoodtransactionalskillstoreachafair,sustainableagreement.
FortheEBRD’scountriesofoperationsthatarestillattheinitialstageofpublic-privatecooperationimplementation,alltheexcitementliesahead.
InKazakhstan,Poland,RussiaandUkraine,whosevastterritoriesrepresentconstantchallengesforthedeliveryofpublicservices,privatesectorparticipationmaybecomethesolutionforthemodernisationthatissobadlyneeded.Themunicipalsector,transportation,healthandeducationaretraditionallyamongthefirstareaswherePPPsaretestedanditisintheseareasthattheycouldproveespeciallyvaluableforthesecountries.
ThecurrentissueofLaw in transitionprovidesanextremelyusefuloverviewofmanycurrentissuesregardingprivatefinancingofpublicinfrastructure.ReaderswillnodoubtappreciatethecontributionsofrecognisedspecialistsintherelativelysmallcommunityofinternationalPPPexpertise.ItishopedthatthisissueofLaw in transitionwillpromoteagreaterunderstandingofpublic-privatecooperationmechanismsand,perhaps,sparkideasfornewprojects.
BecausethisissueofLaw in transitionisbeingpublishedatthetimeoftheEBRD’sannualmeetinginKazan,Russia,articlesonconcessionsandPPPsarecombinedwithastreamofmaterialsonRussia:thecurrentstatusofitseconomicandlegaldevelopment,thechallengesaheadandthegovernment’splanstoupgradeitslegislativeframework.
EveryonewithaninterestinfosteringtransitionintheregionwheretheEBRDoperateswillfindexcellentfoodforthoughtinthisnewissueofLaw in
transition,whichcomesasajudiciousreminderoftheneedtopromotefurthertheruleoflawinthatpartoftheworld.
Jernej Sekolec
Foreword 3
Boostingprivatesectorparticipationininfrastructure
JernejSekolec,Secretary,UnitedNationsCommissiononInternationalTradeLaw(UNCITRAL)
Public-privatepartnerships
4 Lawintransition
For over a decade, various forms of private sector
involvement in public contracts, particularly in infrastructure,
have attracted increasing attention globally. The need
for flexibility in public service provision coupled with the
increased demand for modern infrastructure projects and
the implementation of national initiatives have led to a
wave of demand for public-private partnerships (PPPs)
as an instrument of providing public services while sharing
responsibilities between private businesses and authorities.
The establishment of PPP units in a number of countries
since the end of the 1990s as well as the introduction during
the same period of modern, or at least modernised, laws
governing concessions has facilitated the implementation
of various forms of Build-Operate-Transfer type of
arrangements both in Europe and globally. A good number
of the EBRD’s countries of operations have adopted a policy
towards PPPs, enacted new laws and used at least some
forms of PPPs in practice.
The articles in this section look at the legal framework and
the general environment for PPPs in transition countries,
providing views on what has worked well and what has gone
wrong. The articles also consider the prospects for PPP
development, while cautioning against overly optimistic
conclusions. Indeed, each PPP project should be assessed
on its own merits and implementation of foreign experience
is not a guarantee of domestic success. The section begins
with an article by Alexei Zverev, EBRD Senior Counsel,
and Milica Zatezalo, of the law firm Gide Loyrette Nouel.
They analyse the results of the 2006 EBRD Legal Indicator
Survey which focused on how concessions laws work
in practice. The article discusses the differences and
similarities of the various countries’ regimes based on
a case study and illustrates their findings with a rich
spectrum of charts and graphs. François Gaudet, EBRD
Principal Banker, looks at PPPs from a banker’s perspective
and presents the EBRD’s financing experience in the field.
Geoffrey Hamilton of the UNECE provides an outlook on
PPPs from the point of view of a global organisation, while
Peter Snelson of Atkins Ltd offers his experience of handling
projects in central and eastern Europe as a private sector
consultant. The focus section concludes with an article by
Christopher Clement-Davies of the law firm Fulbright &
Jaworski, examining how legal theory and project practice
can be combined to help identify the key issues in
implementing PPPs.
Public-privatepartnerships 5
Concessionslawsintransitioncountries:
theEBRD’sassessment
ConcessionslawplaysavitalpartintheimplementationofmanytypesofPPPs.Underaconcessionarrangement,apublicauthorityentruststoaprivatesectoroperatortotalorpartialmanagementofservicesforwhichthatauthoritywouldnormallyberesponsibleandforwhichtheprivatesectoroperatorassumesallorpartoftherisk.1Akeyfeatureofconcessionsistherightoftheprivateoperatortoexploittheconstructionorservicegrantedasaconsiderationforhavingerectedtheconstructionordeliveredtheservice.2Foranumberofyears,theEBRDhasbeenevaluatingboththequalityofnationallawsthatareessentialtotheinvestmentclimateandtheirworkabilitythroughoutitscountriesofoperations.Recentevaluationsweredevotedtoconcessionslegislationandpractices.
Therearenumerouswaysinwhichtheprivatesectormayinvestinpublicinfrastructure.Dependingonthelevelofassociatedrisk,thevarietyofpossiblecontractualarrangementsrangesfrompublicprocurement,whereacontractordoesnotassumeprojectrisks,toprivatisation,wherepublicassetsorsharesinapublicly
ownedcompanyaredisposedoftoaninvestortogetherwithallassociatedrisks.Arguably,themostinterestingandsophisticatedarrangementslieinthemedianbetweenprocurementandprivatisation.Suchoptionsarerecognisedtobemoreeffectivethanthoseattheextremesofthespectrum.
Sincetheearly1990s,thevolumeandnumberofPPPshaveincreasedsignificantlyworldwide.Whenregulatedeffectively,PPPsallowforflexiblerisksharingbetweenthepublicandprivatesectors,withtheaimofcarryingoutinfrastructureprojectsorprovidingservicesforthepublicinareasincludingtransport,wastemanagement,waterdistributionandpublichealthandsafety.
ThisarticlefocusesonaparticularcategoryofPPPs–concessiontypeandBuildOperateTransfer(BOT)/DesignBuildFinanceOperate(DBFO)typearrangements–anddoesnotaddressprivatisationorprocurementcontracts.Theselectedcategoryisregardedasthemostcomplexsinceitinvolvessophisticatedlegalandfinancialarrangementsaswellasrisksharing.
Quality of legislation
In2004-05,theEBRDundertookanassessmentofconcessionslaws(the2005Assessment)intransitioncountries.3
Thisinvolvedadetailedanalysisofconcessionslawsinselectedcoreareas:(a)thegeneralpolicyframework;(b)thegeneralconcessionlegalframework;(c)definitionsandscopeoftheconcessionslaw;(d)selectionoftheconcessionaire(theentitytowhichaconcessionhasbeenawarded);(e)theprojectagreement;(f)availabilityofsecurityinstrumentsandstatesupport;and(g)settlementofdisputesandapplicablelaw.4
Theselectionofcoreareas5andthequestionnaireusedinthe2005AssessmentwerebasedoninternationalstandardsdevelopedintheconcessionsfieldbytheUnitedNationsCommissiononInternationalTradeLaw(UNCITRAL)6andotherorganisationsandonEBRD’sexperienceinimplementingPPPprojects.
AlexeiZverevSeniorCounsel,EBRD
MilicaZatezaloSeniorAssociate,GideLoyretteNouel
Public-privatepartnerships
Concessionslawsintransitioncountries:theEBRD’sassessment 7
Intransitioncountries,thelegalenvironmentforconcessions,whichisvitaltotheimplementationofmanytypesofpublic-privatepartnerships(PPPs),hasmuchscopeforimprovement.MostcountriesneedtoimplementfurtherlegalandinstitutionalreformstoallowPPPstoworkeffectively.
Anumberofchallengesemergedduringthe2005Assessmentimplementationincluding:
■ Decidingwhichelementsshouldandwhichshouldnot,fromabestpracticeperspective,beincludedinaconcessionslaw.Thatis,thecreationofananalyticalinstrumentwhichassesseswhetherthelawisover-prescriptiveorwhetheritcontainsproblematicomissions.Forexample,itwasdecidedthattheexistenceofamodelprojectagreementormodelprovisionsshouldonlybeconsideredasapositivefeatureiftheuseofsuchmodelswasnotcompulsory.
■ Decidingontheratingmethodology.Forexample,shouldtherebeaweightingofquestionsand/orcoreareasandhowshouldcountriesthatdonothaveageneralconcessionlawbeassessed?In2004eightcountriesdidnothaveaconcessionslawandin2005sevencountriesdidnothaveone.
Regardingthefirstchallenge,itwasdecidedthatneitherthequestionsnorthecoreareasshouldbeweighted(thatis,eachquestionandcoreareaisassignedequalimportance).Infact,theevaluationoftheimportanceofaparticularquestion/coreareaisasubjectivetask,dependinginparticularonthepartyinvolved(forexample,alendertoaPPPprojectwouldprobablynotaccordthesameweighttoaquestionrelatedtostep-inrightsaswouldapublicentityrepresentative).However,giventhatanegativeanswertocertainquestionscouldbeconsideredadealbreaker(forexample,ifinternationalarbitrationisforbidden),theoverallevaluationofthelawtakessuchdifficultyintoaccount.
Regardingthesecondchallenge,severaloptionswereconsidered.Thefirstoptionwastoexcludecountrieswithoutageneralconcessionslawfromtheconcessionassessmentprocess,giventhat,strictlyspeaking,thebasisfortheassessmentwasmissing.Thesecondoptionwastobasetheevaluationsolelyontheanswerstothequestionsofthefirsttwocoreareas,asthesequestionsdidnotdirectlyconcernthegeneralconcessionslaw.Thethirdoptionwastocreatearevisedconcessionchecklist,forthepurposesofassessingthesecountries.
Thethirdoptionwasselectedasbeingthebestsuitedforthepurposesoftheassessment(thatis,identifyingthereformsneeded).Thusforcountrieswhererulesgoverningconcessionsarecontainedinvariouscontractlawsand/orsector-specificlegislation,aseparatechecklistofquestions
waselaborated.Rulesinthesecountrieswerebenchmarkedagainstinternationallyacceptedprinciplesonly.
Generalresults7
Usingtheanswersprovidedbylawyersinthetransitioncountries,therelevantlawswereassignedaratingoftheircompliancewithinternationallyacceptedstandardsandprinciples,rangingfromveryhightoverylow.
AscanbeseenfromTable1,onlyLithuaniaachievedaveryhighrating.Threecountrieswereratedverylow,whilethemajorityachievedmediumcompliance.Thisillustratestheneedforreformofconcessionslegislationinvirtuallyeverytransitioncountry.8
Resultsbycorearea
InmanytransitioncountriesageneralpolicyframeworkforPPPshasnotbeenidentified.Theexistenceofsuchaframeworkis,however,notnecessarily
Note: Countries in brown did not have a general law on concessions when the assessment was undertaken in 2005. For these countries, the assessment rated the level of conformity of other relevant laws – such as contract law or sector-specific legislation – with internationally accepted principles.
Source: EBRD Assessment of Concessions Law 2005
Table1Qualityofconcessionslawsintransitioncountries9
Compliance/conformity with international concessions standards and principles
Very high compliance/ Fully conforms
High compliance/ Largely conforms
Medium compliance/ Generally conforms
Low compliance/Partly conforms
Very low compliance/ Does not conform
Lithuania BulgariaCzech RepublicSlovenia
Bosnia and HerzegovinaFYR MacedoniaMoldovaMontenegroRomaniaRussiaSerbiaSlovak RepublicUkraineArmeniaAzerbaijan EstoniaKazakhstan
AlbaniaCroatiaHungaryKyrgyz RepublicLatviaTurkmenistanUzbekistanPoland
BelarusGeorgiaTajikistan
InmanytransitioncountriesageneralpolicyframeworkforPPPshasnotbeenidentified.Theexistenceofsuchaframeworkis,however,notnecessarilylinkedtoagoodqualitylaw.
8 Lawintransition
General policy framework
Settlement ofdisputes and
applicable law
Selection of the concessionnaire
0%20%40%60%80%
100%
De�nition and scope of the concessions law
Concession-speci�clegal framework
Projectagreement
Governmentsupport and
available�nancial
instruments
Estonia Latvia Lithuania International standards
linkedtoagoodqualitylaw.Forexample,Latviascoredstronglyforpolicyframework,butdidpoorlyintheoverallassessment.Conversely,Lithuaniadoesnothaveanextensivegeneralpolicyframework,butitsconcessionslawisveryclosetobestinternationalstandards(seeChart1).
Chart1alsopinpointsstrengthsandweaknessesintheconcessionslegalregimeofthethreeBalticstates.Forexample,whilerulesgoverningdisputessettlementinLatviaapproximatetointernationalstandards,projectagreementrulesarenotadequatelyregulated.Estonianlawsarereasonablystrongintermsoftheselectionofaconcessionaireanddisputeresolution,butratherweakinallothercoreareas.
Whereageneralpolicyexists,itisoftenbasedonpolicyframeworkdocuments.TheexistenceofaPPPtaskforceisrare.Inmostofthecountries,itisdifficulttoidentifythelegislationapplicabletotheawardofaconcessioninaparticularsectorowingto:(a)unclearboundariesbetweenthegeneralconcessionslawandsector-specificlaws;and(b)unclearboundariesbetweentheconcessionslawandthepublicprocurementlaw.10
Certainlawsdonotdefinethetermconcession(forexample,theHungarianlaw)andmostlawscontainunsatisfactorydefinitions(suchastheterm“therighttouse”).Contractingauthoritiesareoftenreferredtoinfairlyimpreciseterms.Themajorityoflawsdonotdiscriminateagainstdomesticorforeignpersonsbecomingconcession-aires,thoughsomedo(inTajikistanandGeorgiaforexample,domesticentitiesarediscriminatedagainst).Numerouslawscontainalistofsectorsinrespectofwhichconcessionsmaybegranted(forexample,theAlbanian,BulgarianandHungarianlaws),butcertainlawslimitthescopetoaverylimitednumberofsectors(forexample,inUzbekistanthelawislimitedtonaturalresources).
Mostcountriesscoredwellforsettlementofdisputesandapplicablelaw,dueinparttotheratificationbymanycountriesoftherelevant
internationaltreatiesonenforcementofarbitralawardsandprotectionofforeigninvestments.However,fewcountriesscoredwellontheavailabilityofreliablesecurityinstrumentsforlendersregardingtheassetsandcashflowoftheconcessionaire.Thisincludeslenders’rightstostepin,thatis,toselectanewconcessionairetoperformundertheexistingprojectagreement,incaseofabreachofcontractbytheinitialconcessionaire.
Thesurveyalsofoundthatstatefinancialsupportandguaranteesrulesweregenerallyentirelyomittedfromthelaworcontainedunnecessaryrestrictions.AmongthefewexceptionsweretheLithuanianandAlbanianlaws.
Althoughthemajorityoflawsincludeprovisionsoncompetitiveproceduresfortheselectionoftheconcessionaire,veryfewcontainsufficientguidanceinthisrespect.Provisionsrelatedtodirectnegotiationsandunsolicitedproposalsareoftennotregulatedwithsufficientprecisionandsotheyleaveroomforuncertainties(forexample,inTurkmenistan).
Legalprovisionsregardingthetermsoftheprojectagreementareoftenprescribedtoonarrowly,givingrisetoinflexibilityanduncertaintyastowhatcanbeincluded.
Resultsbyregion
Contrarytogeneralperceptionsregardingtherelativelygoodqualityoftheirinvestmentclimateandprivatesectordevelopmentlegislation,anumberofcountries(forexample,Croatia,Hungary,LatviaandPoland)wereratedashavingalowlevelofcompliance.However,withtheexceptionofHungary,inthosecountriestherehasbeenprogressinthereformofconcessionslegaland/orpolicyframeworkssincethecompletionofthe2005Assessment(seeBox1).
Public-privatepartnerships
Concessionslawsintransitioncountries:theEBRD’sassessment �
In central Europe and the Baltic states, the Czech Republic has adopted a concessions law that came into force on 1 July 2006. Latvia has drafted a new concessions law and responsibility for developing and implementing PPP projects has been given to the Ministry of Economy and the Latvian Investment and Development Agency. Poland’s new PPP law came into force at the end of 2005 and three ordinances to deal with PPPs have been issued since then. The Slovak Republic continued developing its policy framework for PPPs.
In south-eastern Europe, Albania is in the process of reforming its concessions legal framework. Bulgaria has adopted a new concessions law, which came into force on 1 July 2006. Croatia is in the process of adopting PPP guidelines. Romania has adopted the Ordinance on Granting of Public Procurement Concession of Public Works and Concession of Service Agreements, which came into force on 30 June 2006. A Slovenian draft law on PPPs is before the parliament.
In the Commonwealth of Independent States (CIS), Kazakhstan has adopted a concessions law, which came into force on 19 July 2006. Russia has recently adopted a model concessions agreement for the transport sector and communal infrastructure.
Box1Recentchangesinconcessionslaws
Chart1QualityofconcessionslawsintheBaltics
Note: The extremity of each axis represents an ideal score in line with international standards, such as the UNCITRAL Legislative Guide for Privately Financed Infrastructure Projects. The fuller the ‘web’, the more closely concessions laws of the country approximate these standards.
Source: EBRD Assessment of Concessions Law 2005.
10 Lawintransition
How the law works in practice
Tocomplementthe2005Assessment,theEBRD’s2006LegalIndicatorSurvey(2006LIS)measurestheeffectivenessofconcessionslawsinthetransitioncountries.The2006LISusedacasestudytoassesshowacountry’slegalandinstitutionalframeworkforconcessionsfunctionsinpractice.11
Lawyersineachcountrywerepresentedwithatypicalscenario(seeBox2)fortheawardandimplementationofaconcessionandwereaskedaseriesofquestionsabouthowthelegalandinstitutionalframeworkintheircountrywouldoperateinsuchasituation.Giventhenatureofconcessionsandrelatedagreementsinvolvinglong-termpartnershipsbetweenapublicandaprivateparty,thescenariowasdividedintotwoparts,thesecondtakingplacethreeyearsafterthefirst.Thecasestudywasprecededwith:(a)ashortsectioncontaininganexplanationoftheterminologyused(concession,concessionlaw,concessionaire,contractingauthority,financialcloseandprojectagreement)inanefforttokeepanswersconsistentandavoidambiguity;and(b)apreliminaryquestionnaire(seeBox2).12
Scoresforeffectivenesswerebasedonfourcoredimensionsoftheconcessionslegalandinstitutionalframework:
■ Presence –whetherconcessionshavebeenimplementedsuccessfullyand/orwhetherthereisapotentialforsuchimplementation;
■ Process–whetherthereisafairandtransparentselectionprocess,measuredbythepossibilityofchallengingaconcessionawardeffectively;
■ Implementation–whetherthereisafairandtransparentimplementationofconcessions,measuredbyhoweffectivelythecontractingauthorityadherestotheprojectagreementtermsandbytheefficiencyofremedialactionincasesofnoncompliance;
Preliminary questionnaire:
Have concessions ever been awarded in your country successfully?
If the answer is yes: (a) have such concessions been awarded on the basis of a concessions law? (b) have concessions been awarded following a transparent, competitive,
selection procedure? (c) was there a possibility to challenge the award? (d) have project agreements been fulfilled by the parties without serious claims? (e) if a project agreement has been terminated prior to the end of the contractual period by
the contracting authority, has fair compensation been proposed to the concessionaire? (f) how many terminations have there been to your knowledge?
If the answer is no: (a) is there a concession/project agreement in discussion? (b) are you of the opinion that there are no legal/social/political obstacles to implementing
concessions in your country?
Case study
Your client is an international operator involved in a municipal utility concessions project in your country (for example, water distribution, bus transportation or solid waste collection).
Part 1 Your client has been informed that the concession he is bidding for has been awarded to a local competitor who, to your client’s knowledge, did not meet the qualification criteria. Your client considers that his proposal should have won under a fair and transparent selection process and has incurred significant development costs.
Is there any action your client can take under the concessions law or any other applicable law to challenge the award? Would you advise your client to proceed with the challenge? If the chances of a successful challenge to the award are small, is there a chance to recover a substantial proportion of the client’s development costs?
Part 2 Your client has been awarded the concession. Three years later the project generates the expected cash flow and your client is making the anticipated profit. However, he faces difficulties obtaining the contracting authority’s acceptance of the tariff increase provided under the project agreement. This is due to political and social opposition to such an increase.
When faced with a complaint by your client, is the contracting authority most likely to: (a) refuse to implement the tariff increase without providing compensation to your client; (b) refuse to implement the tariff increase with adequate compensation; (c) abide by the terms of the project agreement despite the social and political opposition.
If the contracting authority refuses to implement the tariff increase, is there any action that your client can take to challenge the contracting authority’s decision and oblige the authority to comply with the tariff increase?
In the event that the tariff issue cannot be resolved and your client decides to terminate the project agreement and obtain an international arbitration award entitling him to recover the non-depreciated value of its investment, are there any efficient methods of enforcing the arbitral award? Can the contracting authority delay or otherwise obstruct the enforcement process?
Box2Thepreliminaryquestionnaireandcasestudyscenario(summary)
*Uzb
ekist
an*T
ajiki
stan
*Bela
rus
*Kyrg
yz R
epub
licAz
erba
ijan
Mol
dova
Mon
tene
gro
Russ
ia*M
ongo
liaAr
men
ia
Pola
ndBo
snia
and
Her
zego
vina
Ukra
ine
Esto
nia
Alba
nia
Latvi
aGe
orgia
Serb
ia*S
lovak
Rep
ublic
FYR
Mac
edon
iaCr
oatia
Kaza
khsta
nHu
ngar
yLit
huan
iaRo
man
iaSl
oven
iaBu
lgaria
*Cze
ch R
epub
lic
0
20
40
60
80
100High levelof effectiveness
Low levelof effectiveness
10 Lawintransition
Public-privatepartnerships
Concessionslawsintransitioncountries:theEBRD’sassessment 11
■ Termination–whetheraninvestmentcanberecoveredincasesofearlytermination,measuredbythecapacitytoenforcearbitralawardsandcounterobstructionbythecontractingauthority.
Eachofthefourareaswasratedoutof10andatotalof40pointsrepresentedascoreof100percent.Effectivenessforallareaswasgradedasfollows:verylow(lessthan30percentofthemaximumtotalscore),low(from30to49percent),satisfactory(from50to69percent),high(from70to89percent)andveryhigh(90percentandabove).
Similarchallengestothoseencounteredinthe2005Assessmentappearedduringthe2006LIS:thatis,shouldtherebeaweightingofquestionsand/orcoreareasandhowshouldcountrieswithlimitedornoconcessionexperiencebeassessed?
Forthesamereasonsasforthe2005Assessment,questionsandcoreareaswerenotweighted.ForcountriesthathadonlyimplementedoneconcessionprojectornoneatallbyJuly2006,thepotentialforaneffectiveregimeandanyrecentdevelopmentstowardsestablishingonewereassessed.ThecountriesinthiscategorycomprisedBelarus,theCzechRepublic,theKyrgyzRepublic,Mongolia,theSlovakRepublic,TajikistanandUzbekistan.
IntheCzechRepublicandSlovakRepublic,arelativelyquickmovetothesuccessfulimplementationofconcessionsinpracticecanbeexpectedgiventheimprovementsinthelegalandinstitutionalframeworkand/orpilotprojects.Forothercountriesinthiscategory,therouteseemsmuchlonger,withnumerouslegal,institutionaland/orpoliticalobstacles.
Generalresults
Chart2showsthatfourcountrieswithexperienceofconcessionswereratedashighlyeffective:Bulgaria,Lithuania,RomaniaandSlovenia.InBulgaria,accordingtotheNationalConcessionRegister,nearly300stateconcessionsandmorethan500municipalconcessionshavebeenawardedsince1997,generallyfollowingatransparentselectionprocessandwithoutmajordifficultiesinimplementation.However,transparencyoftheawardwassometimescriticisedandsomeawardswerechallenged(forexample,fortheTrakiahighway,VarnaandBourgasairportsaswellastheportsofSomovit,SvishtovandOryahovo).
InRomania,thesituationissimilartoBulgaria,withnumerousconcessionsimplementedinvarioussectorsinthelastdecade,mostofthemsuccessfullyandonthebasisofageneralconcession/PPPlaw.InSlovenia,concessionsareawardedonthebasisofvariousgeneralandsector-specific
InBulgaria,accordingtotheNationalConcessionRegister,nearly300stateconcessionsandmorethan500municipalconcessionshavebeenawardedsince1997,generallyfollowingatransparentselectionprocessandwithoutmajordifficultiesinimplementation.
Chart2HowconcessionslawsintransitioncountriesworkinpracticeEffectiveness by country
Notes: Effectiveness is measured on the following scale: very high (90 and above); high (70 to 89); satisfactory (50 to 69); low (30 to 49); very low (less than 30). Data on effectiveness for Turkmenistan were not available. Countries indicated with an asterisk had only implemented one concession project or none at all by July 2006.
Source: EBRD Legal Indicator Survey 2006.
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12 Lawintransition
Chart4HowconcessionslawsworkinFYRMacedoniaandUkraine
Note: The extremity of each axis represents an ideal score which indicates high effectiveness. The fuller the web the more effective the system.
Source: EBRD Legal Indicator Survey 2006.
laws,andgenerallyfollowatransparentcompetitiveprocedure.InLithuania,concessionsimplementationstartedrecentlyandnodifficultieshavebeenencounteredtodate.
TheCzechRepublicwasratedaspotentiallyhighlyeffectiveasitssurveywasbasedonahypotheticalimplementationratherthananyactualexperienceofconcessions.Inthiscountry,eventhoughmanypublicservicesarecarriedoutbyprivateentities,suchexercisesarenotbasedonconcessions,butonlicences.AfterthecreationofaPPPCentrumin2004,anewconcessionslawwasadoptedintheCzechRepublicin2006andseveralconcession-basedpilotprojectshavebeenlaunchedbyvariousministries,includingforprisons,hospitalsandmotorways.
ThehighpotentialforconcessionsintheCzechRepublicissupportedbythefollowing:concessionsindiscussioncurrentlybenefitfromstrongpolitical
support;concessionawardscanbechallengedbeforethecontractingauthority,theofficefortheprotectionofcompetition,aswellasbeforeadministrativecourts;publicauthoritiesgenerallyadheretotheagreementstowhichtheyareparty;andarbitrationiswidelyrecognisedandgenerallynotobstructed.
Fivecountriesreceivedaveryloweffectivenessrating:Azerbaijan,Belarus,KyrgyzRepublic,TajikistanandUzbekistan.InAzerbaijan,eventhoughseveralconcessionswereimplemented,inparticularintheelectricitysector,theimplementationthereofwasgenerallynotsuccessful(forinstance,therewereearlyterminationsanddisputes).Fourothercountrieshavelittleornoconcessionsexperienceandthegenerallegal,institutionaland/orpoliticalenvironmentsinthesecountrieswerenotsupportiveofconcession-typearrangements.Mostofthetransitioncountriesfellintoamiddlecategory.
Chart3HowconcessionslawsintransitioncountriesworkinpracticeEffectiveness by core area (40 = highest)
Note: Ratings for each core area range from 0 (worst) to 10 (best). The combined maximum score is 40, which represents a high level of effectiveness. Countries indicated with an asterisk had only implemented one concession project or none at all by July 2006.
Source: EBRD Legal Indicator Survey 2006.
Althoughthefindingsofthissurveygiveanindicationofhoweffectiveconcessionsregimesareinthetransitioncountries,theresultsmustbetreatedwithcaution.
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12 Lawintransition
Public-privatepartnerships
Concessionslawsintransitioncountries:theEBRD’sassessment 13
Althoughthefindingsofthissurveygiveanindicationofhoweffectiveconcessionsregimesareinthetransitioncountries,theresultsmustbetreatedwithcaution.First,theyarebasedontheanalysisofonlyonelawfirmineachcountry.Secondly,theyrelatetoaspecificsetofcircumstancesandmaynotapplytoalltypesofconcessions.Thirdly,eventhoughthefocusofthesurveywaslimitedtoconcessionarrangements,itinvolvedprojectsofdifferentsizesandscalesindifferentsectors.Lastly,asmentionedabove,notallcountrieshavehadexperiencewiththetypesofconcessionsdescribedinthechosenscenarioand,therefore,answersfromthesecountriesarespeculative.
Resultsbycorearea
Chart3showsthelevelsofeffectivenessbycorearea.Forallcountries,thecostsincurredinthepreparationofproposalsbythebiddersaregenerallynotrecoverable.Inthemajorityofcountries,aconcessionawardcanbechallenged,eitheronthebasisofaspecificprovisionintheconcessionlaw(forexample,inBulgaria
andtheFormerYugoslavRepublicofMacedoniaoronthebasisofgenerallaws(forexample,inSlovenia).However,locallawyerswouldnotalwaysadviseproceedingwithsuchachallenge,mainlybecauseofthepartialityofthecourtsystemorthelengthoftimeinvolved.Inthemajorityofcountries,thecontractingauthoritycannotbeforcedtocomplywiththetariffincreasemechanismintheprojectagreementifitrefusestoallowsuchanincrease.
Theresultsgiveasurprisinglypositivepictureoftheoveralllevelofadherencebycontractingauthoritiestocontractualterms.Respondentsin16outof26countrieshaveindicatedthatthecontractingauthoritywouldabidebythetermsoftheprojectagreementorprovideadequatecompensationdespitesocialandpoliticalpressures.EffectiveenforcementofarbitralawardsisregardedasespeciallydifficultintheKyrgyzRepublic,Moldova,Russia,Tajikistan,UkraineandUzbekistan.
Somecountriesscoredrelativelyuniformlyinallcoreareas(forexample,FYRMacedonia).Inothercountriesthevariationfromcoreareasissignificant(forexample,Ukrainescoredverywell
intheassessmentofexistenceofconcessionprojects,butperformedverybadlyintheassessmentofthepossibilityofeffectivelyenforcinganinternationalarbitralaward(seeChart4).
Resultsbyregion
Chart5showsthatthestrongestperformancewasincentralandeasternEuropeandtheBalticstates,followedbysouth-easternEurope(SEE).Montenegro,however,iswellbelowthenormfortheSEEregion.Thecountryhasaweaklegalframeworkforconcessionsandisinefficientinimplementingconcessionprojects.InBulgariaandRomania,ontheotherhand,numerousconcessionshavebeensuccessfullyimplementedsincethelate1990sonthebasisofconcessionslaw.Givenrecentreformsofthelegalframeworkinthesetwocountries,theyareexpectedtoprogressevenfurther.
IntheCISandMongolia,theresultsaregenerallyworsethanintherestofthetransitionregion.Thenumberofconcessionprojectsimplementedbyeachcountrydifferssignificantly.InKazakhstanseveralconcessions
Chart5HowconcessionslawsintransitioncountriesworkinpracticeEffectiveness by region
Notes: Effectiveness is measured on the following scale: very high (90 and above); high (70 to 89); satisfactory (50 to 69); low (30 to 49 per cent); very low (less than 30). Data on effectiveness for Turkmenistan were not available. Countries indicated with an asterisk had only implemented one concession project or none at all by July 2006.
Source: EBRD Legal Indicator Survey 2006.
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14 Lawintransition
havebeensuccessfullyimplemented,particularlyintheenergyandtransportsectors,buttransparencyoftheawardprocesshasnotalwaysbeenrespectedandseveralconcessionswereterminatedearly.
Belarus,theKyrgyzRepublic,TajikistanandUzbekistanhaveimplementedveryfewprojects(forexample,agolddepositconcessionintheKyrgyzRepublicandanenergyconcessioninTajikistan)ornoneatall.Theoverallframeworkfortheeffectiveimplementationoftheseprojectsispoorandthisisillustratedbyanon-competitiveawardpractice,alackofjudicialindependenceandtheimpossibilityofeffectiveenforcementofarbitralawards.
Conclusion
The2005Assessmentofthequalityofconcessionslegislationandthe2006LISonhowtheselawsworkinpracticehaveproducedgenerallycorrespondingpictures(seeChart6)inthatmostcountrieswithasoundlegalframeworkforconcessionshaveeffectivemechanismsinplaceforenforcingthelaw.Thereare,however,exceptions.
InAzerbaijan,MoldovaandRussiaforexample,concessionslegalframeworksgenerallyconformtorelevantinternationalstandards,butpolicy,institutionalandlegalreformsdonotpermitprojectstobeimplementedeffectively.Thisismainlyduetothepoorfunctioningofthecourtsystemandanegativeattitudetowardsinternationalarbitration.
InAzerbaijanandMoldova,problemsencounteredinconcessionsimplementedtodatemayhaveanegativeimpactonthedevelopmentoffutureprojects.InRussia,thesuccessorfailureofimportantprojectswhichareinthepipeline(forexample,awesternringroadinStPetersburg)willcertainlyinfluencetheefficiencyoftheconcession-relatedenvironmentinthiscountryingeneral.Conversely,insomecountrieswherethereareseriouslimitationsintheconcessionslegalframework,concessionprojectscanbeimplementedfairlysuccessfully.ThisisespeciallytrueforHungaryandCroatia.
Theexplanationforthisistheexistenceofseveralgoodprecedentsandagenerallyefficientinstitutionalframework,whichisessentialforday-to-dayimplementationandenforcement.However,boththosecountrieswereratedassatisfactorilyratherthanhighlyeffective,whichsuggeststhattherearesomerestrictionsinimplementingprojects.
Overall,theconcessionslegalenvironmentintransitioncountrieshasmuchscopeforimprovement.ThemajorityofcountriesstillneedtoimplementfurtherlegalandinstitutionalreformsiftheywishtoallowcomplexPPPstoworkeffectively.Nottheleastoftheseistheseriousneedfortrainingofficialsonnegotiatingappropriatearrangementswithprivatesectorparties.
Notes: The extensiveness score is based on an expert assessment of the concessions laws in each country. The effectiveness score refers to the findings of the Legal Indicator Survey. The extensiveness and effectiveness scores are measured on an ordinal scale from 0 to 100 with higher scores representing better performance. Data on extensiveness for Mongolia and on effectiveness for Turkmenistan were not available.
Source: EBRD 2005-2006.
Chart6Comparingextensivenessandeffectivenessofconcessionslawsintransitioncountries
Notes1 SeeEUCommissionInterpretative
CommunicationonConcessionsunderCommunityLawof29April2000,2000/C121/02.
2 SeeCommunicationfromtheEUCommissiontotheEuropeanParliament,theCouncil,theEuropeanEconomicandSocialCommitteeandtheCommitteeoftheRegionsonPublic-PrivatePartnershipsandCommunityLawonPublicProcurementandConcessionsof15November2005.
3 The2005AssessmentispartoftheEBRD’seffortstoimprovethelegalenvironmentinitscountriesofoperations.Throughsuchprojects,theEBRDcomparesthelegalenvironmentincertainareastointernationalstandardsand,indoingso,aimstoencourage,influenceandprovideguidancetopolicyandlawmakers,whiledevelopingthelegalreformintheregion.The2005AssessmentisthefifthassessmentofthistypeledbytheEBRD.Previousassessmentsexaminedsecuredtransactions,corporategovernance,bankruptcyandsecuritiesmarketslegalenvironment.TheseassessmentprojectsconcernlegalareasthattheEBRDconsidersessentialtotheinvestmentclimateandprivatesectordevelopment.Formoreinformation,see:http://www.ebrd.com/country/sector/law/index.htm.
4 TheEBRDworkedwithGideLoyretteNoueltofinalisetheEBRDconcessionchecklist,undertakeinitialassessmentsofeachnationallaw,developamethodologyforratingconcessionlaws,arrangeforverificationoftheassessmentsbyexpertsfromeachofthe27countriesofoperationsandensureconsistencyofinformationandscoring.TheprojectteamcomprisedAlexeiZverev(EBRD),BrunodeCazaletandMilicaZatezalo,(GideLoyretteNouel).
5 ForamoredetaileddescriptionofthesecoreareasandtheEBRDCorePrinciplesofaModernConcessionLaw,seetheBank’swebsitehttp://www.ebrd.com/country/sector/law/concess/index.htm.
6 SeeUNCITRALModelLegislativeProvisionsonPrivatelyFinancedInfrastructureProjects,2003.Otherinternationalstandardsusedare:CommissionInterpretativeCommunicationonConcessionsunderCommunityLaw,2000;UNIDOBOTGuidelines,1996,EuropeanCommissionGuidelinesforSuccessfulPublic-PrivatePartnerships,2003andOECDBasicElementsofaLawonConcessionAgreements,1999-2000.SeealsotheEuropeanParliamentResolutiononPublic-PrivatePartnershipsandCommunityLawonPublicProcurementandConcessionsof26October2006,CommunicationFromtheCommissiontotheEuropeanParliament,theCouncil,theEuropeanEconomicandSocialCommitteeandtheCommitteeoftheRegionsonPublic-PrivatePartnershipsandCommunityLawonPublicProcurementandConcessionsof15November2005,theGreenPaperonPublic-PrivatePartnershipsandCommunityLawonPublicContractsandConcessionsof30April2004andaReportanalysingallcontributionsof3May2005.
7 Thelastupdateofthe2005AssessmentwascompletedinJuly2005.ChangesintheconcessionlegalframeworkinsometransitioncountriessinceJuly2005(seeBox1)arenottakenintoaccountintheresultsandanalysispresentedhere.
8 Thecompleteresultsofthe2005AssessmentarepublishedontheEBRDwebsitetogetherwiththeCoverAnalysisReportandthefulltextoftheEBRDCorePrinciplesofaModernConcessionLaw.Seehttp://www.ebrd.com/country/sector/law/concess/assess/index.htmandhttp://www.ebrd.com/country/sector/law/concess/core/mcl.pdf.
9 Foramoredetailedexplanationofresultspleaseseehttp://www.ebrd.com/country/sector/law/concess/assess/report.pdf.
10 UndertheCommunityLaw,themaindifferencebetweenconcessionsandpublicprocurementistheriskinherenttoexploitationwhich,underaconcessionarrangement,theconcessionairehastobear.
11 TheEBRDworkedwithGideLoyretteNoueltofinalisethecasestudy,developthe2006LISmethodology,reviewtheinitialsurveybyexpertsfromtransitioncountriesandpresenttheresults.TheprojectteamcomprisedAlexeiZverev(EBRD),BrunodeCazalet,MilicaZatezalo,andAntoineFontaine,(GideLoyretteNouel).
12 Wheretheconsultantonthisproject,GideLoyretteNouel,didnothaveanoffice,theEBRDcontactedlocallawfirms.Theconsistencyofinformationwasensuredthroughareviewoftheindividualrepliesandafollowuponanyquestionsthatarose.TheEBRDisindebtedtoalllawfirms,whichparticipatedonaprobonobasis:AssociateKalo&Associates;AmeriaCJSC;Chadbourne&ParkeLLP;BrankoMaric;Djingov;Gouginski,Kyutchukov&Velichkov;ŠavoriciPartneri/Savoric&Partners;LuigaModyHäälBorenius;Mgaloblishvili,Kipiani,Dzidziguri;Assistance,LLCLawFirm;LawOfficesofKlavins&Slaidins;Lideika,Petrauskas,Valiunas&Partners;LawOfficePolenak;Turcan&Turcan;InternationalTradeCentre;VujacicLawOffice;Finance&Projects,LinklatersBratislava;Jadek&Pensa;Akhmedov,Azizov&Abdulhamidov,Attorneys;and,DentonWildeSapte,Tashkent.
AuthorsAlexeiZverevSeniorCounselEuropeanBankforReconstructionandDevelopmentTel:+442073386370Fax:+442073386150Email:[email protected]
EuropeanBankforReconstructionandDevelopmentOneExchangeSquareLondonEC2A2JNUnitedKingdom
MilicaZatezaloSeniorAssociateGideLoyretteNouelTel:+33140752942Fax:+33140756926Email:[email protected]
26,coursAlbert1er,75008ParisFrance
Public-privatepartnerships:theEBRD’sinvestmentactivitiesinthemunicipalinfrastructuresector
FrançoisGaudetPrincipalBanker,MunicipalandEnvironmentalInfrastructureteam,EBRD1
Public-privatepartnerships
Public-privatepartnerships:theEBRD’sinvestmentactivitiesinthemunicipalinfrastructuresector 17
Public-privatepartnerships(PPPs)intheinfrastructuresectorhavegreatpotentialforpositivetransitionimpactandtheEBRD’smunicipalandenvironmentalinfrastructureteamhaslongbeenactive,bothasanequityparticipantandalender,inPPPtransactionsinawidecross-sectionoftheBank’scountriesofoperations.
Theexpressionprivate-publicpartnership(PPP)canbeassociatedwithawiderangeofbusinessproposals.TheEBRD’sapproachtoPPPshasbeenbasedonpragmaticmarketfinancingneedsandnoformaldefinitionhasbeendeemednecessaryforprojectclassificationpurposes.PPPsaregenerallyunderstoodaslong-termcontractualagreementsbetweenapubliccontractingauthorityandaprivatesectorpartytosecurethefundingfor,andtheconstructionorrefurbishment,operationandmaintenanceof,aninfrastructureprojectandthedeliveryofaservicethattraditionallyhadbeenundertakenorprovidedbythepublicsector.ConcessionsareprobablyoneoftheoldestandmostdevelopedformsofPPPs.2
IntheEBRD’scountriesofoperations,publicauthoritiesoftenusePPPstocalluponprivatesectorknow-howandexpertise,tocapitaliseonthefinancingcapacityoftheprivatesectorpartnerand/ortocompensateforalackofhumanresourcesorshortageofexpertisewithintheauthority’stalentpool.
Risk transfer and value for money
WhatevertherationaleforstructuringaprojectasaPPPorconcession,therewillneedtobeabalancedtransferofriskbetweenthecontractingauthorityandtheprivatesectorpartner,inwhichtheproject’sindividualriskcomponentsshouldbeallocatedtothepartybestabletomanagethem.Althoughthetransferofriskisanessentialcomponentofthistypeofagreement,eachagreementdiffersinitsallocationofrisksandresponsibilities,theownershipoftheassetsandtheduration.
TheEBRDseesPPPsasaprocurementmethodforpublicinfrastructureandservicesthat,ifadequatelystructured,encouragesentrepreneurialinitiativeandpublicsectorefficiencies.Thebalanceinthisriskallocation,arrivedateitherbynegotiationorprojectdesign,isoftheutmostimportanceinassessingaproject’schancesofsuccessandthefinancingriskthattheEBRDwillultimatelybetaking.
Overall,thecontractingauthorityshouldbelookingforvalueformoneywhenusingPPPsasamethodofprocurement.Theconceptofvalueformoneyissometimesconfusedwiththecheapestsolution.However,financialandnon-financialaspectshavetobetakenintoaccountindeterminingwhethervalueformoneyhasbeenachieved.
Dependingonthecircumstances,valueformoneymaybeconsideredashavingbeenachievedwhenprocuringaserviceorinfrastructurethroughaPPPhasresultedin:reducedwholelifecyclecost;betterallocationofrisk;fasterimplementation;improvedservicequality;orthegenerationofadditionalrevenuescomparedwithwhatwouldhavebeenthecasehadtheprojectbeenundertakenpurelyinthepublicsector.Non-monetaryfactorsaretoooftenleftoutoftheprimaryconsiderationswhentheyshouldbeattheforefrontofthedebate.
IfonefocusesonthefinancialsideofPPPprojects,onerealisesthatthepotentialsourceofsavingsistheprivatesector’sneedandabilitytofocuson
18 Lawintransition
Publicsectormanagersmustoftenlimittheirfocustoshort-termgoalsowingtopoliticalagendas,theannualbudgetingprocessandthedrivetowinvotesforthenextelection.Thisshort-termattitudeisoftenincompatiblewiththelong-termdemandsofinfrastructuredevelopment.
efficientoperationsinordertomaximisereturns.Thepublicauthoritywillbenefitfromthesponsor’spursuitofprofitability,whichwillreduceoperatingcostsandincreaseefficientcapitalinvestment,aslongasoperatingcostsarenotreducedtothedetrimentoftheprojectcompany’squalityofserviceorlong-terminterests.Bycreatingincentivesand/orsharingbenefits,thecontractingauthorityshouldencouragefurtherincreasesinefficiency,suchastheimplementationofnewmanagementtechniques,technologyandknow-howandmethodsofoperationandmaintenance.
Inaddition,theprivatesectorisoftenconsideredtoprovidegreaterlevelsofefficiencywhenoperatingandmanaginglocalservicecompaniesthanthepublicsector.Thisincreasedefficiencyresultsfromvariousfactorsincludinggreatercosteffectiveness,loweroperatingcosts,novelcommercialapproachestoproblemsolving,insulationfrompoliticalconsiderations,anabilitytoplanforbest-valuesolutionsonawhole-lifecostingbasisandabetterallocationofriskbetweenthepublicandprivatesectors.
Publicsectormanagersmustoftenlimittheirfocustoshort-termgoalsowingtopoliticalagendas,theannualbudgetingprocessandthedrivetowinvotesforthenextelection.Thisshort-termattitudeisoftenincompatiblewiththelong-termdemandsofefficientinfrastructuredevelopment.
Asconcessionscanlastforperiodsof25yearsormore,concessionairesareforcedtoadoptalong-termcommercialapproachtoprojectdevelopmentandproblemsolvingwithindependentviewsfromthecontractingauthority.
Complexity and success factors
PPPsareacomplexprocurementstrategywithalongleadtime.Sincevalueformoneyoftencomesfromabalancedtransferofrisksbetweenthecontractingauthorityandtheprivateparty,carefulconception,structuring,tenderingandcontractingareofparamountimportanceforsuccessfulPPPs.
Thelong-termnatureofPPPsshouldcompensateinthelongrunforshort-termresourcesandinvestmentwhicharerequiredfortheuseofthisprocurementmethod.PPPsshouldnotbeconsideredasquickfixestolongertermproblemsinthedeliveryofpublicservices.Itshouldbenotedthat,giventhelong-termnatureofPPPtypecontracts,experiencehasshownthatareasonablelevelofflexibilityinthecontractualarrangementshasprovenbeneficialandthatalackofflexibilityisdetrimental.
TheEBRDrecognisesthechallengesassociatedwithstructuringasoundconcessionorPPP.Thekeytosuccessoftenrevolvesaroundandresultsfromacombinationofthefollowingfactors:
■ anadequatelegalframework
■ politicalacceptancethattheprivatesectorcouldundertaketheprovisionofpublicinfrastructureorservices
■ apoliticalchampiontomovetheprocessandprojectforward
■ acertainlevelofcoordinationbetweenthevariousministriesandgovernmentalbodiesconcernedwithanindividualPPPproject
■ theabilitytoallocateadequategovernmentresourcestoimplementation/monitoring
■ thedegreeofdevelopmentofthelocalcapitalmarketswhichinfluencestheleveloflong-termfinancingandtheamountofaccesstointernationalcapitalmarkets.
TheEBRDcontinuouslyengagesinopendialoguewithpublicauthoritiesthatareconsideringthistypeofprocurementrouteandprivatepartiesalikeinordertocreateaconvergenceoftheabovecontributingsuccessfactorsandtohelpclientswhoareseekingadviceonstructuringPPPs.
Public-privatepartnerships
Public-privatepartnerships:theEBRD’sinvestmentactivitiesinthemunicipalinfrastructuresector 1�
Procurement issues
TheEBRD’sinvolvementinfinancingconcessionscannotbedivorcedfromtheprocurementprocess.AlthoughtheEBRDmightbefinancingaprivatepartytoaconcession,itstillconcernsitselfwiththeprocurementstandardsthatwereappliedbythepublicsectorentityinawardingtheconcessionthatitisconsideringfinancing.Privatesectorprocurementpolicyrequiresthat,wheretheBankistofinanceaconcessionorsimilarundertaking,theawardprocessshouldhavefollowedcompetitivetenderingproceduresthatareacceptabletotheBank.
TheBank’sconcernarisesbecausetheinfrastructureandpublicservicesinvolvedoftenhaveanaturalmonopolycharacterandentailsignificantsocialdimensions.Thismakesconcessionagreementsfortheprovisionandfinancingofsuchservicespubliclyvisible,especiallywhentheyareforalongduration.Suchagreements,therefore,canbepoliticallysensitiveandvulnerabletore-negotiationandabrogationunlessthecontractingprocessisperceivedtohavebeenopen,fairandtransparent.TheBankmust,therefore,beparticularlyvigilantinrelationtothetransitionimpact,theeffectuponreputationandcreditrisks.
TheEBRDrecognisesthatitisnotalwaysinastrongpositiontoinfluencetheprocurementprocess–hencethepreferencefortheEBRDtoworkearlywiththecontractingauthorityontheprojectstructureanditsprocurement–andithasidentifiedcertaincorecriteria
thatmustbemetbeforetheBankcanconsiderfinancingaconcession.Insummary,thepolicyrequiresasaminimum:
■ formalcompetitivebiddingwithatenderprocessdesignedtoachievethepolicyobjectivesofeconomy,efficiency,transparencyandaccountabilityincaseswheretheBankisassistingoradvisingthestatesectorgrantoroftheconcession;or,wherethisdoesnotapply:
(a)theprocessforselectingtheconcessionaireshoulddemonstratesufficientfairness,transparencyandcompetition,(b)theprocessshouldbefreeofcorruptionandincompliancewithallapplicablelawsandregulations,and(c)theoutcomeintermsoftheconcessionagreementitselfshouldbefairandreasonableintermsofprice,qualityandrisksharinginrelationtomarketpractice.
TheBankneedsinallcasestobesatisfiedthattheconcessionagreementisfairandreasonableasamatternotonlyofsoundbankingandpublicpolicybutalsotoensurethatanyconflictsbetweenthesetwoobjectivesare,wherepractical,adequatelyaddressed.
PPPs as a source of transition
TheEBRDissensitivetothetransitionalimpactthatPPPsmayhaveandhasidentifiedthefollowingpotentialkeysourcesoftransitionimpactinEBRD-financedinfrastructureprojects:
■ commercialisation of infrastructure services,includingtariffreformandchangesincorporatestructure,managementandoperationstomaketheinfrastructurecompanycustomeroriented,
■ improved legal framework,includingchangestothelawsandregulationsthatprotectconsumersandinvestorsandsetbestpracticeenvironmentalstandards,
■ private sector participation,whichisexpectedtobringcostsavingsandimprovethequalityofservicedeliverycomparedwithpublicsectoralternatives.
PPPinfrastructureprojectssharealltheelementsoftheabovementionedsourcesoftransitionimpactand,ifproperlyimplemented,shouldbepositivefortransition.
The EBRD’s experience with PPPs in the infrastructure sector
GiventherecognisedpositivetransitionimpactpotentialofPPPprojects,itwasnaturalfortheEBRDfromtheearlyyearsofitscreationtobeinvolvedinthefinancingofPPPinfrastructureprojectsacrossawidecrosssectionofitsinfrastructureportfolioandinarelativelyhighnumberofcountriesofoperations.
TheEBRDrecognisesthatitisnotalwaysinastrongpositiontoinfluencetheprocurementprocessandithasidentifiedcertaincorecriteriathatmustbemetbeforetheBankcanconsiderfinancingaconcession.
20 Lawintransition
Table1MunicipalandenvironmentalinfrastructurePPP/concessionprojectsfinancedbytheEBRD
Country and year of investment
Project name Type Instrument Sponsor
Regional 19963 Multi-project Financing Facility
Service contracts/ concessions
Debt and equity Véolia Energy (Dalkia) (France)
Hungary 1999 Budapest waste water
Concession Equity Véolia Environnement (France)/Berlinwasser Holding (Germany)
Slovenia 2000 Maribor waste-water treatment plant
Build, operate, transfer (BOT)
Debt Suez Environnement (France)/RWE (Germany)
Croatia 2002 Zagreb waste-water treatment plant
BOT Debt RWE Thames Water, WTE (Germany)
Czech Republic 2002
Brno waste-water treatment plant
Operating contract
Debt Suez Environnement (France)
Estonia 2002 Tallinn Water Concession Debt United Utilities (UK)
Romania 2002 Apa Nova water treatment plant
Concession Debt Véolia Environnement (France)
Russia 2002 St. Petersburg south-west waste-water treatment plant
BOT Debt Skanska (Sweden), NCC YIT Corporation (Sweden/Finland)
Regional 20034 International Water United Utilities
Acquisition of participation in concessionaire5
Equity United Utilities (UK)
Regional 20056 Veolia Transport central Europe (Connex)
Service contracts Equity Véolia Transport (France)
Source: EBRD
ThisinvolvementwasbasedonthestateoftransitionatthetimecertainPPPdealswerestructuredand,arguably,thestateoflegalframeworksavailable.MostoftheprojectsinthissectoraretheresponsibilityoftheEBRD’smunicipalandenvironmentalinfrastructure(MEI)andtransportteams.
TheMEIteam’sstrengthsareinwaterandwastewater,urbantransport,districtheatingandsolidwaste–allofwhicharenaturalsectorsforconcessions.Therefore,itisnosurprisethatthisteam’sinvolvementinconcessionfinancingstartedintheearlyyearsoftheBank’sexistence.
TheMEIconcessionportfolioisdiverseandcoversarangeofproducts(seeTable1).Onbalance,PPPprojectsfinancedbytheEBRDinthemunicipalandenvironmentalinfrastructuresectorshavebeensuccessfulinmanyrespects.Inallcases,theunderlyinginvestments,whichwerematerialinmostinstances,werecompletedontimeandwithinbudget.
Onaverage,PPPprojectsinthemunicipalandenvironmentalinfrastructuresectorsdisbursedtwotothreetimesasfastastheirpublicpeergroupprojects,reflectingtheprofessionalexperienceoftheprivate
sectorpartnerdealingwithprojectmanagement.OneexceptioncontrastswiththerestoftheMEIPPPcohort:theconcessiongrantedtoInternationalUnitedUtilitiesbythecityofSofiawherealongstandingdifferenceofopinionhasyettobeworkedout.TheBankhassoughttoassistthepartiestoaddresstheseissues.
Inadditiontofinancing,theEBRD’sinvolvementisoftenseenasastabilisingfactorinprojectsthatarefrequentlypoliticisedinacontextwheretheregulatoryframeworkisofteninitsinfancyandwheretheindependenceoftheregulatingauthorityhasyettobeproven.TheBank’searlyinvolvementcanhelpneutraliseuncertaintyincertainrespectsandcontributetoensuringthattheallocatedrisksremainwiththepartybestplacedtobearthem.
Theseareallfactorsthat,ifperceivedasvolatile,willinevitablyincreasethecostsoftheproject.CautionshouldbetakeninoveremphasisingtheBank’smitigatingrolebut,throughitsongoingdialoguewithlocalauthorities,theBankiswellplacedtofosterthenecessarydialoguebetweenthecontractingauthorityandtheprivatesectorpartyinadministeringaconcessionorPPP.
Conclusion
OverallinthecountrieswheretheEBRDinvests,itisdifficulttoidentifyageneraltrend,butitisclearthatthewillingnesstoundertakepilotprojectsindicatesbotheagernesstoexperimentandareasonablelevelofscepticism.TheinstitutionalabilityforstatesasawholetolearnfromtheirinitialexperienceandtoreplicatefurthertransactionsindifferentsectorsisoftenlimitedbytheabsenceofPPPunitswiththeauthoritytoobligeindividualministriestocomplywithbestpractice.Thisisanareawhereimprovementisrequired.
InordertomaximisethechancesofPPPsachievingtheirfullpotentialandbenefitandtominimisethechancesofhavingunsuccessfulPPPs,anumberofissues,subjectmattersandpracticeshavebeenidentifiedandrecognisedby
Notes1 SpecialthankstoEBRDcolleaguesRobinEarle,
JoseCarbajoandAlexanderAuboeckfortheircontribution,commentsandediting.
2 Inthisarticlethetermconcessionisdefinedasanagreementoradministrativeactpursuanttowhichthecontractingauthoritygrantsexclusiverightsandundertakesobligationsinrelationtotheconstruction,refurbishment,provision,managementandmaintenanceofpublicinfrastructuresorservicestoaprivatesectorentitytoutilisegovernmentassetsinordertoprovidefacilitiesorservicestomembersofthepublic.
3 WithunderlyinginvestmentsinLithuania,Poland,RomaniaandSlovakRepublicasofOctober2006.
4 WithunderlyinginvestmentsinBulgariaandEstonia.
5 Thetransactionconsistedoftheacquisitionofwaterandwaste-waterfacilities,alongsideUnitedUtilities,namelyASTallinnaVesiandSofiyskaVoda.
6 WithinvestmentsinCzechRepublic,Hungary,PolandandSloveniaasofOctober2006.
AuthorFrançoisGaudetPrincipalBanker,MunicipalandEnvironmentalInfrastructureteam,EBRDTel:+442073386925Fax:+442073386964Email:[email protected]
EuropeanBankforReconstructionandDevelopmentOneExchangeSquareLondonEC2A2JNUnitedKingdom
interestedgroupsasrecommendedapproachestoPPPs.ThesebestpracticesshouldbecultivatedwithinaPPPunitandwithintheadministrationactingasacentralresourceforPPPsupport.Thiswouldhelpwiththestandardisation,costeffectiveness,preservationofinstitutionalmemoryandconsistencyinapproach.
TheEBRDhasbeenactivebothasanequityparticipantandalenderinPPPtransactionsinawidecrosssectionoftheBank’scountriesofoperations.TheBankwillcontinuetopursuethispromisinginfrastructureprocurementmethodasPPPshavegreatpotentialfortransitionandtheBankcancomplementprivatesectorfinancinginthestructuringoftheseprojects.Whilepursuingthis,theBankwillneedtostayawareoftheneedforprojectstorepresentvalueformoney.AchievingthisrequiresacarefulanalysisatthestructuringphaseandtheEBRDiswellplacedtohelpitsclientsonthispath.
PromotingPPPsforinfrastructuredevelopment,
innovationandcompetitiveness:theroleoftheUNECE
GeoffreyHamiltonChiefoftheEconomicCooperationandIntegrationDivision,UNECE1
Public-privatepartnerships
PromotingPPPsforinfrastructuredevelopment,innovationandcompetitiveness:theroleoftheUNECE 23
Partnershipsbetweengovernmentsandthebusinesscommunitycanboostinvestmentsininfrastructureandhelpcountriesfacethechallengesofglobalisation.TheUnitedNationsEconomicCommissionforEurope(UNECE)2hasbeenworkingtogetherwiththeEBRDandotherinternationalorganisationstohelpgovernmentsgetthemostoutofpublic-privatepartnerships(PPPs).
Manyofthetransitioneconomiesarecurrentlyenjoyingaperiodofstronggrowth,insomecasesfuelledbythehighpriceofnaturalresources,inmostcasesbyacompetitivelypriced,skilledworkforceand,inallcases,byastrongcommitmenttomarket-basedreform.However,asgrowthaccelerates,itputspressureontheinfrastructuretokeeppace.Infrastructureisalsoacriticalingredientofacountry’scompetitivenessandproductivity.
Inadequateinfrastructureacrossanumberofsectorsinhibitstheinvestmentofproductivecapitalandrestrictsoutput.Asinfrastructureservicesincludeeducationandhealth,thelackoftheseservicescanalsocontributetohighlevelsofpovertyandinequality.Consequently,inordertosustaineconomicgrowthandboostcompetitivenessandsocialdevelopment,manycountriesneedtomakelargeinvestmentsintheirinfrastructure.
Giventheofteninsufficientresourcesavailablefromnationalbudgets,governmentsareturningtotheprivatesectortomeetthesechallenges.
OneoftheinstrumentsusedtoupgradeexistingandbuildnewinfrastructurewiththehelpoftheprivatesectorisPPPs.3Inparticular,anewinterestinPPPsisemerginginthecountriesofeasternEurope,theCaucasusandCentralAsia(EECCA).
The challenge
TheUnitedNations(UN)viewspartnershipsbetweengovernmentandthebusinesscommunityasapotentiallypositivemechanismtoboostinvestmentsininfrastructureandmeetthechallengesofglobalisation.ManyofthecommitmentstoaddresstheglobalchallengesofpovertyandsustainabledevelopmenthavebeensetoutintheMillenniumDeclaration.4
Giventhescaleofthesechallengesbutthelackofgovernmentresources,theUNhas,notsurprisingly,identifiedthewiderangeofcorebusinesscapabilitieswhichtheprivatesectorprovides,namely,theirresourcesandrolesindevelopingnewtechnologies,providingessentialgoodsandservicesandmanaginglarge-scaleoperations,asessentialforachievingtheMillennium
DevelopmentGoals(MDGs).Insomecommitments,suchasinbridgingthedigitaldivide,thedeclarationexplicitlyencouragespartnershipswiththeprivatesector.Accordingly,theUnitedNationsanditsvariousagencies,suchasUnitedNationsDevelopmentProgramme(UNDP),theDepartmentofEconomicandSocialAffairs(DESA),theGlobalCompactandthefiveUNregionaleconomiccommissions,takePPPsseriously.
AgoodillustrationoftheimportancethattheUNattachestoPPPsisthefinaldeclarationoftheUNSummitonSustainableDevelopmentwhichtookplaceinJohannesburgin2002,whichmaderepeatedreferencestoPPPsandrecommendedthepromotionof“Partnershipswiththeprivatesector,taking[into]accounttheinterestsofandinconsultationwithallstake-holders,operatinginaframeworkoftransparencyandaccountability,toimprovetheaccessofeveryonetoessentialservices.”
InEuropetherearevarioustypesofPPPs,establishedfordifferentreasons,acrossawiderangeof
24 Lawintransition
OnerecentnotabletrendhasbeentheuseofPPPsinthedeliveryofsocialservicessuchashealthprojectsandeducation,aswellasurbanrenewalandinnewbusinessesrelatedtoinformationtechnologies.
marketsegments,reflectingthedifferentneedsofgovernmentsforinfrastructureservices.Althoughthetypesvary,twobroadcategoriesofPPPscanbeidentified:theinstitutionalisedkindthatreferstoallformsofjointventuresbetweenpublicandprivatestakeholders;andcontractualPPPs,whichhaveexperiencedastrongupsurgeinrecenttimesandcoverawiderangeoflegalarrangements.
PPPsarebeingusedinlargenationalandpan-Europeaninfrastructureprojects,inlocaldevelopmentprojectsandintheoutsourcingofdifferentkindsofpublicservices.OnerecentnotabletrendhasbeentheuseofPPPsinthedeliveryofsocialservices,suchashealthprojectsandeducation,aswellasurbanrenewalandinnewbusinessesrelatedtoinformationtechnologies.
Increasingly,fromthisvariedbackground,therearesignsthatthevalueofPPPs,intheirabilitytodrawonthebestofboththepublicsector(publicinterestconcern,enforcementandregulatorycapacity)andtheprivatesector,(resources,managementskillsandinnovation)forrealsocialgains,isbeingrealised.TheconceptofPPPsasapubliclyaccountable,sustainabledevelopmentaltoolthatmeetsrealneedsisgainingcurrency.5
PPPsprovidethefollowingbenefits:
■ helpforgovernmentstosecuremuch-neededinvestmentsinpublicserviceswithoutimmediatelyhavingtoraisetaxesorincreasedborrowing
■ trackrecordsfortimelydeliverywhichmeetsspecifications
■ transferofmanagementknow-howandskillsforinnovativesolutions.
Ontheotherhand,theverybenefitsofPPPsalsohaveadownside:
■ PPPsenableprojectstoproceedwithlittleorevennocapitalexpenditurebythehostgovernment(thecapitalcostofprojectsisusuallynotcountedagainstthegovernment’sbalancesheetorborrowinglimits).Thegovernment,nevertheless,sometimestakesoncertainliabilities–forexample,variousformsofguarantees,thatcanleaveitvulnerableiftheprojectgoeswrong.
■ Theyalsoofferthepossibilityoftransferringanumberofriskstotheprivatesector–forexample,therisksofcostoverruns,completiondelays,lowoperationalstandardsandfallindemand.PPPsofferthepossibilityofoptimalriskallocationwitheachsidetakingontherisksitisbestsuitedtomanage.However,typically,theprivatesectorseeksasfaraspossibletoshiftasmanyriskstothegovernmentsideleavingthelatterexcessivelyexposediftheprojectfails.
Inaddition,inthecaseofcontributingtoachievetheMDGs,PPPsalsohavecertainlimits.Theprivatesector,forexample,isoftennotmotivatedtomakeinvestmentsinremoteregionswheretheneedforsocialservicesisgreatest,butwherethecitizensarepooranddonothavethepurchasingpowertoofferthemsatisfactoryreturns.Governmentscan,however,employbetterprojectmanagementskillsinordertomaximisethesocialbenefitsfromPPPs.Forexample,inordertoimproveeducationalstandardsorservicedelivery,governmentscanaddclausestothecontractwiththeprivateentity,
whichplacefinancialpenaltiesonthelatterifthesesocialbenefitsarenotdelivered.
Itisimportant,therefore,inlightofboththebenefitsandcoststoadoptapragmaticapproachtopromotingPPPs,tomaximisetheirbenefitsandtominimisetheirriskswhile,atthesametime,buildingstrongmanagementcapacitywithingovernmentsinordertoachieveoptimalriskallocation.ThisisparticularlythecaseforEECCAcountries.ManyofthemarenowconsideringPPPoptions,butstillhaveverylowpercapitaincomes,publicsectorswithlimitedornoexperienceofPPPsandfew,ifany,publicsectorfinancingalternatives.
Whatismore,manyinhabitantsinthesecountriesendureinadequatehousing,poortransportationfacilitiesandroadsanddangerouslevelsofemissionsfromindustry,includingpowerplants.InsuchcountriesitisevenmoreimportanttothinkofPPPsnotjustasbricksandmortar,butalsoasimpactingonrealpeople,communitiesandvulnerablegroups.6
Thisapproachofharnessingtherespectiveskillsandresourcesofthegovernmentandtheprivatesectorforsocialgainisthewayahead,mindful,however,thattheprivatesectordoesnotundertakeitsworkoutofhumanitarianprinciplesbutasabusinesstomakeprofit.Moreover,thebenefitofthisapproachisnotjusttobringthebestoutofPPPs.
Bymakingitamorepopulartoolandinstigatingprojectsthatareacceptabletocitizensandotherstakeholdersthroughtransparencyandaccountability,farbroaderbenefitswillresult.
Public-privatepartnerships
PromotingPPPsforinfrastructuredevelopment,innovationandcompetitiveness:theroleoftheUNECE 25
OneofthemajorbarrierstothedevelopmentofPPPsisthelackofskillswithingovernmenttodesign,develop,financeandimplementsuchprojects.Theimplicationsfortheprivatesectorofweaknessinthepublicsectorincludeexcessivebidcosts,risksanddelays.
Mostimportantly,thiswillhelptoremovesuspicionsofPPPsinplaceswherepreviousprivatisationexperiencesmayhavereceivednegativepress.Inturn,broadsupportwillgeneratestrongerpoliticalwillinfavourofputtingappropriatefinancialandlegalframeworksinplacethatwillencouragewideruseofPPPsintheregion.
Recent UNECE actions in the field of PPPs
Incontrasttoadevelopmentbank,theUNECEdoesnotprovidefinancialadvice,loansorriskguarantees.Itdoes,however,haveanumberofassetsthathavemadeasignificantcontributiontothepromotionofPPPs.Theseincludeitsneutrality,intergovernmentalbodies,groupsofexperts,participationinregionalcooperationprogrammesandinvolvementinglobalUNwork.
High-levelpolicydialogues
SinceitsinceptionaftertheSecondWorldWar,UNECEhassupportedthedevelopmentofpublicinfrastructureinsectorssuchastrade,transport,energy,environment,housingandlandmanagement.Itcontributestosettingtheframeworkforinfrastructuredevelopmentsonapan-Europeanbasis.
IntergovernmentalbodiesundertheUNECE’sTransportCommitteehave,forexample,reachedagreementonthemultiplepan-Europeantransportcorridorsthatcriss-crossourterritory.Notsurprisingly,inthisworkthequestionhasarisenofhowtofinancetransportcorridorsandmemberstateshaverequestedthatUNECEexploretheuseofnewprojectfinancingtechniquessuchasPPPs.
Inresponsetothisinterest,UNECEbegananinitiativein1996andheldanumberoflarge-scale,high-levelpolicydialoguesonPPPs,involvingrepresent-ativesfromtheprivatesector,inter-nationalfinancialinstitutions,regionaldevelopmentbanksandexportcreditagencies.TheseeventsgatheredtogetherlargenumbersofpeopletodiscussprojectcasestudiesinvarioussectorsfromEuropeandaroundtheworld.
Agroupofpublicandprivatesectorexpertswasestablishedtoprepareguidelines.7Theseexpertsconsultedwidelywithseniorgovernmentofficialsinpreparingtheirfindings.ThesefindingsconfirmedthatPPPswereheretostayandthattheyhadastrongutility,althoughtheywerenotauniversalpanacea.Consequently,governmentswereadvisedtoadoptapragmaticapproachtousingPPPsaspartoftheirinfrastructurepolicy.8
Thesehigh-levelpolicydialoguesplacedthetopicofPPPsonthepoliticalagenda.TheyalsopromotedinterestinthePPPmodelincountrieswhichhadnopreviousexperience.9Thesedialogueshavealsoencouragedtheuseofthe
PPPmodelinanumberofgovernmentagenciesthatcooperateundertheUNECE’sauspices.Forexample,theUNECEWorkingPartyonLandAdministration,whichconsistsofmanyofEurope’slandregistryoffices,haselaboratedguidelinesontheuseofPPPsinthedeliveryoftheirservices.
Involvementoftheprivatesector
OurchallengeistoincorporatetheprivatesectorintoourworktocontributetotheUN’sgoals.Weworkforgovernmentsinthisprocess,helpingtocreateeffectivepartnershipsbetweenthemandtheprivatesector.WealsoworkwithexpertteamsthathavebeenestablishedtoidentifyandpromotetheconceptofPPPsandwhichincluderepresentativesfromdifferentprivatesectorprofessions,suchasfinance,lawandconstruction.Theseinnovativeanddedicatedteams,namelytheBOTGroupandthePPPAlliance,havemadegreatcommitmentstodialogue,consensusbuilding,breakingdownbarriers,increasinginformationflowsandparticipatingincloseandactivedialogue.10
Capacitybuilding
OneofthemajorbarrierstothedevelopmentofPPPsisthelackofskillswithingovernmenttodesign,develop,financeandimplementsuchprojects.Theimplicationsfortheprivatesectorofweaknessinthepublicsectorincludeexcessivebidcosts,risksanddelays.
Accordingly,thehighpriorityisfordomesticcapabilitybuildinginPPPsinnegotiatingskills,financingandprojectmanagement.
UNECE’sresponsetothischallengehasbeentoencouragetheestablishmentofnationalPPPunitswithingovernments.Suchbodies,whicharefullyempoweredtoactforthefinancingarmofthegovernment,canmanageandprioritise
26 Lawintransition
Principle 1: Transparency and openness Tendering procedures
1. Selective procedure a. General applicable law for all tender
processes b. Specific laws according to the sector c. Harmonised rules under regional
unification initiatives d. Corporate governance requirements e. Award procedure
2. Open participation and non-discrimination
a. Companies whose headquarters are not based in the country are successful in tender processes
b. Early publication of tender offers in local and international newspapers
c. Open competition rules d. Level playing field
3. Good negotiation platform a. Expertise and dedication
of negotiators b. Independence of judgement c. Defined goals and objectives
in the negotiation process
4. Coordination a. Special governmental agency in
charge of coordinating the project proposals and commencement of tender process
b. Web site information and online pre-registration
5. Organised data gathering a. Centralised database with possible
and actual contractors b. Due diligence on the bidders’ financial
and technical performances
6. Contractors’ registry a. Qualification of contractors
according to specific standards b. Contractors’ updated profile c. Regular advertisement of status
of contractors
Source: UNECE
Box1UNECEdraftguidelinesongovernanceinPPPs(extract)
theprojectpipeline.With10yearsofPPPexperienceinEurope,researchshowsthatastrongcorrelationexistsbetweenawellfunctioningPPPunitandsuccessfulPPPimplementationandthatthishasbeenachievedinbothcomplexanddifficultsettings.11InMay2000,theUNECEBOTGroupheldaninformalconsultationwiththegovernmentoftheCzechRepublic–followingthistheCzechgovernmentdecidedtoestablishadedicatedunitwithinthegovernmenttodealwithPPPs.
Governmentsalsoneedtoconsidertheprioritytasksandfunctionsoftheunits,thedifferentmodelsincludingadvisory,educationalandprojectorientedandwhethertoplacethematthelocal,regionalorcentrallevelofadministration.Whileeachcountrywilladoptitsownapproach,manycommonissuesariseacrossdifferentnationalprogrammesanditisimportantthatPPPexperiencesaresharedmoreeffectivelybetweenauthorities.NotsharingexperiencescanleadtomoreexpensivePPPtransactionsand/orthefailureofprogrammes.
UNECEtooktheleadundertheauspicesofitsPPPAlliance,toorganiseaseriesofmeetingsofPPPunitsinGeneva,BarcelonaandLondon,sothatmemberscouldshareexperiencesontopicsofmutualinterestandpromotebestpractices.12
BuildingnewinstitutionstocreatethecapacityfordealingwithPPPsisalsolinkedtotheneedtoimprovetheregulatorysettingforPPPs.Overall,theroleofgovernmentsistocreatepolicystabilityandthefinancialenvironmentneededtostimulatethegrowthoftheprivatesectorinordertoincreaseproficiencyandcompetitioninservicedelivery.
Tomanageprivatecontractors,governmentsshoulddeveloptheirownfinancialmanagementandadministrativeefficiencyandbewillingtoenforcecontracts.Governmentsmustalsohavean‘arm’slength’relationship
withtheprivatesector,clearrulesandopencompetitivetendering.Thiscanbechallengingforcountrieswithnopreviousexperienceofsuchmethods.
Accordingly,theUNECEPPPAlliancetooktheinitiativetoimprovethegovernanceofPPPs.Itidentified,throughanumberofcasestudies,keyprojectgovernanceissues.Itthenconsultedwidelywithmemberstates,holdingaforumonthetopicandthenconsultations(forexample,inCanada),toexplorethedifferentpracticesandprocedureswhichgovernmentsusedintheirmanagementofPPPsatvariouslevelsoftheiradministrations.13FromthisanalysistheUNECEguidelinessetoutfiveprinciplesofgoodgovernanceinPPPs:transparency;publicaccountability;socialsustainability;timelyandaccessibledisputeresolution;andenhancedsecurityandsafety.Theseguidelinesareinthefinalstagesofcompletion.14
Clearly,thechallengeinimprovinggovernanceisnotsimplytomakerecommendationsbuttocooperatepromptlyandeffectivelytoimplementthem.Thus,theUNECE’sproposedguidelinessetoutindetailthestepsforeachproceduretobeaccomplished.Governmentscanusetheseasachecklisttodeterminetheextenttowhichtheirproceduresareinlinewiththesegoodgovernancecriteria(seeBox1foranexampleofoneprocedure).
GoingforwardandasthePPPinstitutionsacrossEuropedevelop,itwillbeusefulalsotogiveaccreditationtoagenciesdealingwithPPPsthatoperateaccordingtosuchgoodgovernancecriteria.Thisprojectcouldalsosetstandardsfortraining.ImplementingcommonapproachestogoodgovernanceinPPPswouldalsobeagoodbasisforcooperationbetweenUNECEandourpartnersactiveinthisfieldsuchastheEBRD.
Public-privatepartnerships
PromotingPPPsforinfrastructuredevelopment,innovationandcompetitiveness:theroleoftheUNECE 27
UNECEhasprovidedaneutralforumandencourageddialoguebetweenthedifferentpartnerssothateachbetterunderstandsthecapacities,motivationsandconstraintsoftheother.
MaximisingthedevelopmentalimpactofPPPstomakerealcontributionstotheMDGsisalsocriticaltoimprovinggovernance.TheUNECEiscooperatingwithaSwissFoundation,theRéseauUniversitaireInternationaldeGenève(RUIG),onaprojectunderwhicharesearchteamispreparingcasestudies,toolsandinstrumentsthatwillfacilitatethecontributionofPPPstoUNgoalsandsustainabledevelopment.
Mitigatingtherisks
InsomePPPs,difficultiescanoccurwheretheexpectationsofthepartnersconflict.Typically,asmentionedabove,privatesectorsponsorsproposedealsthatwouldallowthemtoreaphighprofitsoverashortperiodbutleavemostoftheriskstothenationalorlocalgovernmentofthecountry.Governments,incontrast,oftenexpectprivatesponsorstoagreetolowerprofitsandtoacceptmostoftherisk.
UNECEhasprovidedaneutralforumandencourageddialoguebetweenthedifferentpartnerssothateachbetterunderstandsthecapacities,motivationsandconstraintsoftheother.TheforumhasalsofosteredabetterunderstandingamongotherstakeholdersinPPPssuchasbetweenemployersandemployees.Therehasbeenconcern,forexample,fromthetradeunionsideaboutthethreatsposedbyPPPstotheiremploymentconditions.Inresponse,UNECEhasoffereditsplatformtotheemployeestopresenttheircaseandhelptodevelopbetterunderstanding.
Aregionalfocus
Operatingataregionallevelisanimportantwaytoimplementprojectsandstandards.Therefore,UNECEcooperatesextensivelyinregionalactivitieswherethereareclosesimilaritiesbetweencountries,issuesandbasesforregionalcooperation.UNECEhasgoodframeworksinwhichtopromoteregionalapproachestoPPPimplementation.Forexample,incooperationwiththeWorldBankandundertheauspicesoftheSoutheastEuropeCooperativeInitiative(SECI)andtheStabilityPactforsouth-easternEurope,ithashelpedtocreatenationaltradefacilitationbodies.Thesebodies,alsoknownasPROCommittees,operateonaPPPbasisandhaveproveneffectiveinreducingbarrierstotradeinthatregion.
Globalreach
UNECEisoneoffiveUNregionaleconomiccommissions.ItsnetworkextendsbeyondEuropeanditsmembergovernmentsarebroughtintocontactwithothersthatfacesimilarchallenges.Thelackofcapacityinpublic-privatemanagementhasalsobeenaconcernofourcolleaguesincountriesoutsideofEurope.
HighlysophisticatedpromoterswithalotofinternationalexperienceoftensponsormanyofthesePPPprojectsandleadsomegovernmentstofeelatadisadvantageinnegotiations.UNECEincooperationwiththeUnitedNationsCommissionforAsiaandthePacific(UNESCAP),therefore,prepareda
‘Negotiationplatform’,whichisatrainingtoolforgovernmentofficials,toprotectthepublicinterestinnegotiationsoverPPPcontractclauses.15
Goingforward,UNECEwillalsocooperatewithUNESCAPandtheUnitedNationsEconomicCommissionforAfrica(UNECA)inajointprojecttoincreasethecapacityofcivilservantstoobtainthebestfromPPPsandtomaximisetheircontributiontosustainabledevelopment.EuropehasmuchtolearnfromtheexperienceofothercountrieswithPPPs,includingSouthAfricaandtheRepublicofKoreaand,inanincreasinglyglobalPPPindustry,suchglobalreachcanmaximiseourabilitytoobtainkeylearnings,insightsandbestpractices.
Conclusion
Inresponsetogrowinginterestfromcountriesinboostingcompetitivenessandinnovation,UNECEhasestablishedanewCommitteeonEconomicCooperationandIntegration.16Themaingoalofthiscommitteeistoenhancecompetitivenessthroughinnovationandprivatesectorparticipationandtodevelopstrongregulatoryframeworks,intellectualpropertyrightsandsuccessfulPPPsthatattractforeignanddomesticinvestment.Inthesethematicareas,teamsandnetworksofexpertswillidentifyandexchangegoodpracticeandexperiences.
TherearetwochallengesthatneedtobeaddressedinthepromotionofPPPsfordevelopment.Thefirstistoincreasethe
28 Lawintransition
availableinformationonPPPs,throughtheidentificationandpublicationofsuccessfulcasestudies,knowledgeoflegalframeworks,keysector-specificsuccessfactors,PPPmodelsandguidelinesandsoon,whicharebasedonasoundevaluationoftherecordofPPPsinbothtransitionandadvancedmarketeconomies.Accordingly,thefirsttaskofthenewcommitteewillbetoprepareanextensivecomparativereviewofPPPexperiencestodateintransitionandadvancedmarketeconomies.17InthisregarditwillbeimportanttoworkwithcolleaguesfromtheEBRDwiththeirpracticalexperiencesofPPPprojectsintheregion.
ThesecondchallengeistoexploretheappropriatemethodsofcapacitybuildinginordertofacilitatetheimplementationofPPPs.Fewtrainingprogrammesforpublicsectorofficialsareavailable:UNECE,theEBRD,theEuropeanInvestmentBank(EIB)andtheEUhaveallmadevariousproposalsforcapacitybuildingprogrammes.18Asthiseffortgoesforward,UNECEwillworkwithitsmemberstatesandpartnerstoexplorethebestapproachestocapacitybuildingandimplementation.
Russia,forexample,hasproposedthedevelopmentofaprojectaimedatraisingthequalificationsofcentralgovernmentandmunicipalcivilservantsrelatedtothe“Developmentofpublic-privatepartnershipinstitutions”.Suchaprojectcouldbeimplementedthroughaseriesofseminarsdealingwiththeintegrationofpublic-privatepartnershipprinciplesinthepracticeofpublicadministration,distancelearningprogrammesandtheestablishmentofregionaltrainingcentres.19
ThechallengeistopromotePPPstogetthebestoutofthemsothatwecanmeettheinfrastructurechallengesoftheregion.TheEBRDhasplayedacriticalroleinpioneeringthefinancingofPPPsintransitioneconomiesandhasofferedvaluablelegaladvice.OuractivitiesatUNECEhavecomplementedthisworkand,astheconceptspreads,thedemandonourrespectiveactivitiesislikelytogrow.Welookforwardtoclosecooperationinthefuture.
ThechallengeistopromotePPPstogetthebestoutofthemsothatwecanmeettheinfrastructurechallengesoftheregion.TheEBRDhasplayedacriticalroleinpioneeringthefinancingoftransitioneconomiesandhasofferedvaluablelegaladvice.
Notes1 Theviewsexpressedinthisarticlearethose
oftheauthoranddonotnecessarilyreflectthoseoftheUnitedNations.
2 TheUnitedNationsEconomicCommissionforEurope(UNECE)wasestablishedin1947bytheUnitedNationsEconomicandSocialCouncil(ECOSOC).ItisoneoffiveregionalcommissionsoftheUnitedNations(UN).UNECEstrivestofostersustainabledevelopmentamongits56membercountries.TothatendUNECEprovidesaforumforcommunicationamongstates;setsoutnorms,standardsandconventionstofacilitateinternationalcooperationwithinandoutsidetheregionaddressingtrade,transportandtheenvironment;suppliesstatistics;andpromoteseconomiccooperationandintegration.
3 Public-privatepartnershipsininfrastructure,includingenergy,transport,municipalservices,telecommunicationsandsocialservices,canbedefinedasconcessionsorothercontractualarrangementswherebytheprivatesectoroperates,builds,managesanddeliversaserviceforthegeneralpublictypicallyinreturnforapayment.SuccessfulPPPscombinethebestthepublicandprivatesectorsoffer,whilelimitingtheshortcomingsofeithertheprivatisationapproachortheexclusivepublicsectordeliveryofservices.
4 TheMillenniumDevelopmentGoalswerederivedfromtheUnitedNationsMillenniumDeclaration,whichwasadoptedby189nationsin2000.Mostofthegoalsandtargetsweresettobeachievedbytheyear2015,basedontheglobalsituationduringthe1990s.
5 Inrecenttimes,themainreasonsforconsideringPPPshavebeen:increasedpressureonbudgetarypolicies,resultinginareductioninpublicspendingforinfrastructure;theneedtoimprovemanagementpracticesandimprovetheefficiencyofthepublicsector;increasedemphasisonvalueformoneyapproachestopublicspending;andincreasedeagernessfortimelydeliveryofinfrastructureprojects.
6 Bytakingthisapproach,theprimetargetofPPPsisfundamentallywhatlocalcommunitiesandbeneficiariesactuallywantandneedratherthanlesserfinancialaccountingobjectives.Itis,therefore,importanttoconsultattheoutsetallstakeholders,includingemployees,onthevalueofprojectswheretheprivatesectorplaysasignificantrole.
7 ThisgroupwasknownastheBOTGroup.TheacronymreferstoatypeofconcessioncontractknownasBuild,OperateandTransfer.
8 PublicPrivatePartnershipsforInfrastructureDevelopment,UN,NewYork1999.
9 OnecountrywhichistakingPPPsforwardisRussia.TheadoptionofitsConcessionsLawandthecreationoftheRussianInvestmentFundhaveopenednewopportunitiesforthedevelopmentofPPPsinRussia.Themedium-termprogrammeforthesocialeconomicdevelopmentofRussia(2006-08)envisagestheactiveuseofPPPstorevamptransportinfrastructure,promotethedevelopmentofscienceandinnovationandimprovehousingandsocialservices,amongotherpriorities.
10 AsaresultofrecentUNECEreform,theactivitiesofthePPPAlliancewillbeintegratedintothenetworkofexpertsonPPPsunderthenewUNECECommitteeonEconomicCooperationandIntegration.
11 PapersubmittedbyMmeCorinneNamblard,ChairpersonofthePPPAlliancetotheUNECEForumonPromotingGoodGovernanceinPPPs,17November2003UNECE.
12 SeereportofmeetingofUNECEPPPAlliance‘TheroleofPPPsinrevitalisingcities’,heldundertheauspicesofthesecondUNHABITATWorldUrbanSummit,Barcelona14September2004,inUNECEDocumentTrade/2005/3,14March2005.
13 UNECEForumonGoodGovernanceinPublic-PrivatePartnershipsforInfrastructureDevelopment,17-19November2003,heldundertheauspicesofthefifty-firstsessionoftheUNECEWorkingPartyonInternationalLegalandCommercialPractice.
14 TheguidelineswerepreparedbyataskforceofgovernmentandprivatesectorexpertsestablishedundertheauspicesoftheUNECEWorkingPartyonInternationalLegalandCommercialPractice.TheWorkingPartydiscussedtheguidelinesatitsfifty-secondsessioninOctober2004.
15 NegotiationPlatformforPublic-PrivatePartnershipsinInfrastructureProjects.DocumentpreparedforUNECE–UNESCAPjointtrainingprogrammeonPPPs,DhakaBangladesh,15February2000.
16 UNECECommitteeonEconomicCooperationandIntegration:see:www.unece.org/ceci.
17 Thisworkwillinclude:identificationofthemajorsectorsandareasinwhichthistypeofcooperationisdesirable;analysisofthemodalitiesofoperationandmajorproblemsencounteredbyPPPs;assessmentoftheroleofPPPsinenterprisedevelopment;andassessmentofhowPPPsfacilitateprojectfinancing.
18 VariousEUbodiessuchastheVanMiertHigh-LevelGrouponTENsTransport(2004),andtheDGMarketReportonPPPGreenPaper(2005)haveechoedtheneedtoincreasepublicsectorskillsinPPPsintheEU.
19 ReportofthefirstsessionoftheUNECECommitteeonEconomicCooperationandIntegration,ECE/CECI/2006/6,21-22September2006:atwww.unece.org/ceci.
AuthorGeoffreyHamiltonChiefoftheEconomicCooperationandIntegrationDivision,UNECETel:+41229172838Fax:+412291737Email:[email protected]
PalaisdesNations,Room429-1,CH-1211Geneva10,Switzerland
Public-privatepartnershipsintransitioncountries
PeterSnelsonDirector,ProjectDevelopments,AtkinsLtd
Public-privatepartnerships
Public-privatepartnershipsintransitioncountries 31
Transitioncountriesthathaveonlyeverusedtraditionalpublicsectorprocurementprocessesfaceasteepandlong-termlearningcurvewhentheyembarkuponpublic-privatepartnerships(PPPs).TheadvantagesofPPPsincludemaximisingvalueformoney,reducingpublicdebtandstrengtheninginfrastructure.
ThepurposeofthisarticleistogiveaninsightintomyowninterpretationofthecurrentsituationregardingPPPsintransitioncountries.HavingbeeninvolvedinadvisinggovernmentsandmunicipalitiesinCroatia,theCzechRepublic,Georgia,Hungary,PolandandRomaniaonthedevelopmentofPPPs,Ihaveseenandlearntagreatdealabouthowtimeshavechangedsincethemid1990sand,insomecases,howtheyhavenot.
TheprocessofdevelopingPPPsasawayofprocurement,whenstartingfromasystemthathasonlyeverusedtraditionalpublicsectorprocurementprocesses,requiresaquantumleapinunderstanding,procedures,institutionalacceptance,marketunderstandingandrisktaking.Ittakesalongtimetointroducesuchasignificantchange.IntheUnitedKingdom,forinstance,thedevelopmentofthePPP,orPrivateFinanceInitiative(PFI)asitisknown,startedintheearly1980sandisstillbeingrefined.
What is a PPP?
WemustfirstacceptadefinitionofPPPsforuseinthispaper.Thisisimportantbecause,apartfromtheclassic“riskbeingsharedbythosebestabletomanageit”definition,mostpeopleandorganisationsinthePPPindustryincentral,easternandsouth-easternEuropeandtheCommonwealthofIndependentStates(CIS)havetheirownparticularinterpretations.
Apublic-privatepartnershipisapartnershipbetweenthepublicandprivatesectorsinwhichrisksandbenefitsareshared.ThisisasimpleconceptunlessyouareastatebodythathasneverbeeninvolvedinaPPPbefore.Theword“shared”,whenrelatedtorisk,tendstobeinterpretedmorealongthelinesofmeaning“passedtotheprivatesector”thansharedequally.Theconceptoftruesharingoftenonlycomesintotheequationiftherearebenefitstothestate.
Sharingrisksandbenefitsisaconceptwithwhichcountriesfrequentlyfindproblems.EvenintheUnitedKingdomandAustralia,twocountriesthathavebeenimplementingPPPsformanyyears,
thestateisstillreluctanttotakerisksitfeelsthattheprivatesectorshouldaccept,andviceversa.Itisaconstantlyshiftingprocess.
APPPisaformofprocurementandcontracting.ItmustberememberedthatthemostimportantelementofaPPPisthecontract.ThecontractualarrangementsofaPPPareverydifferenttothoseofatraditionalturnkeyconstructionoradesignandbuildarrangement.Thedefinitionswithinthecontractarecriticalanditisfareasierfortheretobemisunderstandings,errorsandconfusioninaPPPcontractthaninanyotherformofcontract.
APPPisnotnecessarilyaformoffinancing;itisaformofdelivery.Intheeyesofmanyinstitutions,especiallyinthebankingworld,aPPPisadealthatinvolvestheraisingoflargesumsofmoneythroughinvestments,equityorbonds.Thisisonlypartofthepicture.APPPisabouttheprivatesectordeliveringapublicserviceinpartnershipwiththepublicsector.Thisdoesnotnecessarilyrequirecapitalfinancing.IntheUnitedKingdom,forinstance,thereareoutsourcingcontractsinplace
32 Lawintransition
thathaveanannualservicevalueof€50millionwithnocapital,buttheyareallabouttheprivatesectordeliveringonbehalfof,andinpartnershipwith,thepublicsector.Publicandprivatepartnersoftenevensharethesameofficespaceandworkinjointteams.
Finally,itisimportanttounderstandthatthereisnosingleapproachtoPPPsateitherthenationalorlocallevelandnosinglebest-practicerecipeforallcountriesorsituations.WhiletheconceptofPPPsmustbethecoreofanyformittakesinanycountryormunicipality,theformatmaydifferforeach.ThemodelsinuseincountriesthathavePPPscanonlybeseenasthat–models.Modelsmustbeassessedandtheelementsofthosemodelsthatworkineachindividualsituationshouldbeadaptedandusedtosuit.
Chart1showswhatcanbeachievedbyusingaPPP.Thiscanbesummedupasthetransferofriskfromthepubicsectortotheprivatesectorwithoutshiftinganexcessiveburdenontothelatter.
Why introduce PPPs?
ThereareanumberofreasonsforintroducingPPPsforthedevelopmentanddeliveryofinfrastructureanditisimportantforthegovernment,eitheratthestateorthemunicipallevel,toestablishwhatitactuallywantstoachievewiththeintroductionofthisprocessbeforeembarkingupontheimplementationdetails.ThekeyreasonsforintroducingPPPsareshownbelow.
Maximisingvalueformoney
Thisreferstoprovidingaserviceoveralongtime-scaleinwhichthedeliverybytheprivatesectorisdesignedtomaximiseefficiencyandinnovationaswellasminimisecostandtimeoverrun.Itisimportantthattheprivatesectorisallowedtodeliverinnovationandbestpracticeinordertoensurevalueformoney.ThisisnotaconceptthatisputforwardintransitioncountriesasthekeyreasonforintroducingPPPs,butitisasupportingreasonforanyPPP.IntheScandinaviancountries,however,thisisthekeyreasonandtheapproachtoPPPsinthesecountriesis,therefore,differentthaninothercountries.
Reducingpublicdebtoroff-balance-sheetfinancing
ThisisseenbymostofthetransitioncountriesasthekeyreasonforintroducingPPPs.ThereductionofthepublicsectorborrowingrequirementtobringcountriesintolinewithEuropeanUnion(EU)andMaastrichtrequirementsisaveryimportantdriver.Italsoenablestheprocurementofservicesthatareconsistentwithpoliciestodriveeconomicdevelopment.
Theimplementationofmajortransportinfrastructureiswellknowntobeakeydriverinassistingregionaleconomicgrowth.ThishasbeenseenclearlyinHungary,forinstance,wherethegrowthingrossdomesticproduct(GDP)isprimarilyalongthecorridorsofthegrowingmotorwaynetwork,mostofwhichwasbuiltundernormalpublicprocurementprocedures.
Publicprocurementcanalsopayforserviceswhichachievetherequiredqualityanddonotonlydelivertoabudgetthatmaybeeasilyoverspent.However,incasesinwhichthereareinsufficientresources,qualitymaybereducedandincasesinwhichthedeliverytimeistoolongtheinfrastructuremaydeterioratebeforeitisevenopentothepublic.
Chart1HowPPPstransferrisk
PPPConcession • Joint ventures • Part-privatisation
DBFT • DBFO • DBFM
Public procurement
Private sector
More private, less public control (transfer of risk)
Note: DBFT stands for design, build, finance and transfer; DBFO stands for design, build, finance and operate and DBFM stands for design, build, finance and maintain.
Source: Atkins Ltd
Public-privatepartnerships
Public-privatepartnershipsintransitioncountries 33
Strengtheninginfrastructure
Strengtheninginfrastructurecanprovideservicesthatwouldnototherwisebeavailablewithinexistingbudgets.Thisdoesnotmeanthatthereisaneedforoff-balance-sheetfinancing.Rather,itmeansthatthereisnotenoughmoneybut,nonetheless,newfacilitiesneedtobedeliveredefficientlyandeffectively.Standardsneedtobemaintainedandtheremustbeflexibilityinthedeliveryofservices.
Aclassicexamplewouldbetheoperationandmaintenanceofahighwaysystemwherethereisnorequirementforcapitalinvestmentbutthereisaneedforperformance-basedoperationandmaintenance.ThisisaformofPPPthatisbeinginvestigatedinanumberofnewmemberstatesandtransitioncountries.
Otherreasons
ThereareanumberofotherreasonstointroducePPPs.Thekeyistoachieveaninfluxofprivatefinance.ThereareanumberofcountriesthatseetheintroductionofPPPsasawaytosimplyobtainprivatemoneytoprovideservicesthroughadirectpaymentsystem–atollonahighwayoratunnelforinstance.Inthesesituations,thegovernmentdoesnothaveanymoneytocontributetofundingeventhroughpaymenttotheconcession,soco-financingthroughinternationalfinancialinstitutionsiskey.
TheneedtointroduceinstitutionalreformisanotherreasontoestablishPPPs.Reducingthefinancialandinstitutionalburdenoflarge,overstaffedgovernmentsatboththenationalandmunicipallevelsandoutsourcingtheserviceelementtotheprivatesectoriskeytoinstitutionalreform.Thistypeofinstitutionalreform-basedPPPisbeingintroducedworldwide.
Key issues in developing PPPs
WhenacountryormunicipalitywantstoinvestigatetheintroductionofaPPPintoanypartofitsservicedelivery,itmustfirstreviewanumberofissues.Thepoliticalwillanddrivemustbepresentandarerequiredatalllevels.However,thataloneisnotenough.WhendevelopingPPPs,thefollowingissuesmustbeexplored.
Hastheneedandjustificationfortheprojectbeendefined?Oftenprojectsarepushedforwardpurelyonpoliticalgroundsandthenturnoutnottobefeasibleor,iftheyarefeasible,veryexpensive.Theprojectmustbejustifiedandallrealoptionsmustbeevaluated.Thereisnopointdemandingamotorwaybecauseitispoliticallyrequiredwhenitisnotpractical,justifiableorfeasible.Also,itmustbedecidedifaPPPisthebestwaytoundertaketheproject.Whentheinitialinvestigationsarecompleteand,especially,whenapublicsectorcomparatorhasbeencalculated,theresultsmayindicatethatitwouldnotbeinthepublicinteresttogodownthePPProutefordelivery.
Doesthestateormunicipalityhavethenecessaryandappropriatelegislationinplace?Thiscanbeadramaticstumblingblockifitisnotadequatelyinvestigated.AllthenecessarylawsandactsneedtobelinkedinordertoenabletheestablishmentofPPPs.Havingconcessions,procurementandPPPlawsisgoodbuttheymustbereferencedtoeachotherintheirdrafting.Otherwisetheymaynotcomplywithinternationalrulesonprocurement.
IfthekeyreasonforintroducingPPPsistoreducepublicdebtthenthelegislationshouldbereviewedbyEurostatinorder
toensurethatitisabletodeliverthecorrectformsforoff-balance-sheetfinancing.Thelegislationshouldbetransparent.Thispointiseasilymissedandnecessitatesmuchextraworkbehindthescenesinordertogetcontractsimplemented.FairandtruecompetitionforthecontractingofPPPsiscrucial.Manycontractshavefailedandbeenthesubjectofcompensationpaymentsbecauseofalackoftransparency.
Istheprojecttechnicallyfeasible?Aretherisksmanageable?Cantheprivatesectordelivertheprojectwithinexistingstandardsandnormsandisthereenoughflexibilitytoallowittobeinnovative?Itisoftenthecaseintransitioncountriesthatthereisarequirementintheprocurementlegislationforalldetaileddesign,costingsandsoontobeprovidedtothebidders.Thisisbecausethelegislationhasnotbeenreviewedproperlyfromthepointofviewofitspracticality.TheresultisaPPPwherevalueformoneyandinnovationcannotberealised.Permissionsrelevanttotheproject’sactivitiesmustbeinplaceand,iftheyarenot,atime-scaleforimplementationisnecessary.Againthisislinkedtolegislation,asinsomecountriesitcantakeyearstogetpermissions,thereforedelayingdeliverytosuchanextentthattheconcessioncompanyisnotinterested.
Istheprojectcapableofattractingbankfinancing?Isitcommerciallyattractivetotheprivatesectorandwillitgiveattractiveeconomicreturns?Thepublicsectormustrememberthatitsprivatesectorpartnermustbeaprofitableorganisationoritwillinevitablyfailandthedeliveryoftheserviceswithinthe
Havingconcessions,procurementandPPPlawsisgoodbuttheymustbereferencedtoeachotherintheirdrafting.Otherwisetheymaynotcomplywithinternationalrulesonprocurement.
34 Lawintransition
PPPwillalsofail.Istheprojectfinanciallyviableandwilltheinternationalbankingcommunitywanttofinanceit?Istheprojectbigenoughorisittoobig?
CanthestateormunicipalityaffordthePPP?EachPPP,especiallyifitinvolveslargesumsofcapitalinvestmentfromtheprivatesector,isalong-termmortgageandwillcostmoneyoveranextendedperiod,possiblyupto99years.Isthereenoughallocationinthelong-termbudgettobeabletopayforthis?ThecostofeachPPPaddstothecostsofthepreviousones.PPPsmustbeseenasapackageandnotasindividualentities.ThisisacriticalissueincountriesinwhichmunicipalitiescanenterintoPPPswithnorecoursetothecentralstategovernment.Thereisnotellingwhatthefuturewillholdifthereisnocontrol.
Current market developments
InternationallyPPPsarebecomingmoreimportantinthedeliveryofpublicserviceswhileatthesametime,theyarebeingdrivenbylimitsintheamountofpublicfundsavailabletocoverinvestmentneeds.Thisisthecaseintransitioncountriesbutitcanalsobeseenmoreandmoreinso-calledwealthycountries.Germany,FranceandeventheUnitedStatesarerapidlydevelopingPPPinitiativestodeliverpublicservices.
Becausethemarketisgrowinginthiswayitisimportantfortransitioncountriestorealisethatconstructioncompanies/concessionairesarelookingformorecertaintyinthemarketandintheproductand,therefore,requiremorecertaintyinthemarketinthesecountries.Thescenarioofthemid
1990swhenthebuild,operate,transfer(BOT)boomwasonandallmajorcompanieschasedeverymajorinitiativeisnolongerstilltruetoday.
TheabilitytoblendEUcohesionandstructuralfundingwithPPPsisbecomingclearerandthiswillassisttransitioncountriesincentralEuropeinestablishingPPPstrategies.Poland,inparticular,hasdabbledwithPPPsanumberoftimesnotknowinghowitsaccessionwouldaffectPPPprojects.Nowthatthisissueisbeingclarified,therewillbemorestabilityinthemarket.
Raisingprivatecapitaliseasierthanevergiventhesurplusoflenderssearchingfornewinvestmentopportunities.OnlyafewyearsagotherewasjustahandfulofinvestmentbanksthatwereinterestedinPPPs,nowbanksworldwideareinterestedinPPPinvestment.
PPPsareseenasastableformoflong-terminvestmentsolongasthecontractualarrangementsareputinplacecorrectly.ThisishelpedgreatlybyPPPprojectsinwhichthepublicpartneractsasaguarantor.Thesetypesofprojectsareincreasinglyraisinginterestwithinvestorsastheyarelessriskythanhavingonlyprivatefinanceinvolved.
Somecountriesare,atlast,puttingthenecessarylegislationinplacewitheitherspecificPPPlaws,asinPoland,RomaniaandSlovenia,ortheadaptationanduseofconcession,privatisationandprocurementlaws,asinHungary,LatviaandGeorgia.PPPcentresstaffedbypeoplewhoarebeingeducatedaboutPPPsarebeingputinplaceintheCzechRepublic,BulgariaandRomania.Theseunitsarebeinggiventheresponsibility
ofassistingministriestodevelopPPPsandprovidingadviceonhowPPPsshouldbedevelopedandprocured.IntheCzechRepublicandRomania,guidelinesandstandardsarebeingformulatedforPPPcentrestohelpthemprovideguidanceandadvicetotheministrieswhichareinchargeofimplementation.
Finally,inordertoaddtotheknowledgebaseofthePPPcentres,long-termadvisorycontractsarebeinggiventointernationaladvisers.Thus,thewayinwhichPPPsarebeingdevelopedisbeingaddressedbyanumberoftransitioncountriesandthiswillhelptoensurethatthedevelopmentofPPPsisundertakeninaconsistentandwellthoughtoutmanner.
AnumberofconsultancystudiesarecurrentlybeingconductedinordertodefinepilotPPPsinvarioussectors.InRomania,forinstance,studiesonthedevelopmentofperformance-basedhighwaymaintenanceandanewpilotPPPformotorwayconstructionaretobeconducted.InPolandthedevelopmentofperformance-basedhighwaymaintenanceisunderreview.
IntheCzechRepublic,wherePPPsarebeingembracedprobablymorethaninanyothercountry,therearestudiesbeingconductedwhichreviewthepossibilityofPPPsinmotorwayconstruction,prisons,courtsandhospitals.AnotherexampleisinLatviawhereconsultantsarebeingemployedtoreviewPPPsinmotorwayconstruction,districtheatingandcitylighting.However,onacautionarynote,pastinstancesofthisinAlbania,theCzechRepublic,Georgia,Poland,RomaniaandSloveniahavenotresultedinPPPsbeingundertaken.
TheabilitytoblendEUcohesionandstructuralfundingwithPPPsisbecomingclearerandthiswillassisttransitioncountriesincentralEuropeinestablishingPPPstrategies.
Public-privatepartnerships
Public-privatepartnershipsintransitioncountries 35
ThereareanumberofrecentdevelopmentsthathavebeeninstigatedbytheEuropeanInvestmentBank(EIB),EBRDandEU,thatareworthyofmentionhere.
First,theJointAssistancetoSupportProjectsintheEuropeanRegions(JASPERS),whichisajointpolicyinitiativeoftheEIB,EBRDandEuropeanCommission(DGREGIO).ItsaimistoassistEUcountries,principallynewmemberstatesandaccedingcountries,toabsorbstructuralandcohesionfundsfortheperiod2007-13.ThiswillbeachievedthroughexpertswithinJASPERSwhocanassistwithprojectpresentationandidentification.ThekeypriorityofJASPERSisthepreparationofPPPstohelpensurethattheyarecompliantandcompatiblewithnecessaryregulations.
ThesecondkeyinitiativeistheEuropeanPPPExpertiseCentre(EPEC).ThisisajointEIBandEUinitiativethataimstosharepolicyknowledgeandexperience.Itwillprovideinformationresourcesandoneofitsaimsistoactasanetworkfacilityformemberstates.ItwillpreparereviewpapersonEUexperienceswithPPPs.Itwillalsoundertakethepreparationofcasestudies,genericguidanceandtriedandtestedPPPstructures.ThesetupofEPEChasnotasyetbeenfinalisedbutitwillreceiveitscorefundingfromthesponsoringorganisations.
What progress has been made?
TherehavebeensomeveryvisiblePPPprojectsundertakenintransitioncountries,butthereareanumberofquestionsstillbeingaskedabouttheseprojectsintermsoftheirlong-termviabilityandalsointermsofhowmuchtheytrulyembracebasicPPPphilosophy.
Inthetransportsectortherearemotorwayprojectsin,forexample,HungarywiththeM5Budapest-Kecskemet-Roszke,whichwasoriginallyaBOTwithdirecttollsbutwasthenrestructuredwithgovernmentsupportandisnowunderanavailabilitypayment.TheM6Erd-DunuajvaroswasrecentlylettotheM6DUNAconcessioncompanyinwhichthestate,throughtheStateMotorwayManagementCompany,hasa40percentshare.
InPolandtheconstructionoftheA2Oder-Poznan-WarsawandtheA4Katowice-Krakowhasbeenunderwayformanyyearsand,recently,theconstructionoftheA1tothesouthofGdanskhasbeengrantedasaPPP.InCroatiatheA2Zagreb-MaceljandtheA8,A9BinaIstramotorwayshavebeenunderphasedconstructionforanumberofyears.
Inthefieldofairportdevelopmentanumberofcontractshavebeengranted,oraretobegrantedincountriesincludingtheCzechRepublic,Georgia,HungaryandPoland.However,itisclearfromanumberoftheseexamplesthatthetruedefinitionofaPPPdoesnotreallyfitwiththeformsofthecontracts.Insomecasesthecontractshaveevenresultedinlegalactionbeingtakenbythecontractedconcessioncompany.
WaterandwastewaterisanotherareainwhichtherehasbeenagreatdealofinvestmentandinterestincountriesincludingtheCzechRepublic,Hungary,Latvia,RomaniaandRussia.Theseseemtobesuccessfulprojectsandaredeliveringkeyenvironmentalservicestothemunicipalitiesthathaveembarkeduponthem.
Whethertheseprojectshavebeenoraregoingtobesuccesses,failuresorcompromiseswillonlybeseenintime.However,thekeypointtorememberisthattheyaredeliveringtheinfrastructureevenifitisnotinapuristPPPform.
The challenges of applying PPP structures in transition countries
InmyopinionthekeychallengestoapplyingPPPsintransitioncountriesarenodifferent,inmanyways,tointroducingtheminanyothercountry.Thewholechallengecanbesummedupintwowords,riskanduncertainty.
Riskappliesinanycountryandcanbedividedintothreekeycategories.First,therearecommercialrisks,alsoknownasprojectrisks.Commercialrisksarethosethatareinherentintheprojectitselforthemarketinwhichitoperates.Withinthisthereareconstruction,operationandmaintenanceriskswhich,iftheprojectisbeingimplementedforoff-balance-sheetfinancingreasons,arecritical.
Theprivatesectorunderstandstheserisksandcanmitigateagainstthemsolongastheyaregivensufficientflexibilitytoallowthemtousetheirownknowledgeandprocessingabilitiesinthedeliveryoftheinfrastructure.
Raisingprivatecapitaliseasierthanevergiventhesurplusoflenderssearchingfornewinvestmentopportunities.
36 Lawintransition
Themostdifficulttypeofcommercialriskisthedemandandrevenuerisk.Whendealingwithprojectssuchastollmotorwaysorrailprojectsthistypeofriskisverydifficulttocalculate.
Thedifficultyofcalculatingthelevelofriskdependsonthetypeofproject.TheriskassociatedwithnewlyconstructedgreenfieldprojectsisnotoriouslydifficulttoforecastandthiswasshownveryclearlyintheStandard&Poor’sstudyundertakenbyRobbyBain.1However,whendealingwithanexistingassetorbrownfieldsite,theuncertaintyismuchmoremanageableand,therefore,moreattractive.Thisisespeciallytrueintransitioncountriesinwhichtheeconomyistryingtogrowtolevelsthathaveneverbeenseenbeforeandforecastingdemandis,therefore,atrulydifficultexercise.
Secondly,therearethemacroeconomicrisks,alsoknownasfinancialrisks,whichrelatetoexternaleconomiceffectsthatarenotdirectlyassociatedwiththeproject.Again,thistypeofriskappliesinanycountryincludingthetransitioncountries.Knowledgeofthestabilityorinstabilityofinflation,interestratesandcurrencyexchangeratesarethingsthattheprivatesectorhastoconsiderseriously,especiallyincountriesinwhichthecreditratingislow–forinstance,belowaBBBrating,orevennonexistent.
Thirdly,andthemostimportanttypeofriskinmanycaseswhendealingwithtransitioncountries,ispoliticalrisk.Duetotherelativelylowmaturitylevelofthepoliticalsystemsinplaceintransitioncountries,morefrequentchangesinthegovernmentsofthesecountriescanoccurandthiscanleadtohighlevelsofuncertainty.
TheswingfromapositiveapproachtoPPPstoanegativeapproachandcancellationofPPPsafteranelectionis,unfortunately,commonplaceinsomecountries.ThishasoccurredinmanycountriesandhasbecomeawatchwordforconcessioncompanieswhichnowlookathowtheprocurementofaparticularPPPwillfitintotheelectioncycle.InsomecasesthePPPcansurvive.Forinstance,theA1projectinPolandsurvivedeightchangesofgovernmentduringitsnegotiationprocess.
Institutionalinstabilityoftenfollowspoliticalinstability:thelatteroftenresultsinthetransferofcompetenciesbetweeninstitutionsandthefoundationofnewinstitutions.Ithasoccurredinanumberofcountriesinwhichtheroadsadministrationbody,forinstance,startsasasingleorganismthatdeliversallstateroadsandmotorwaysunderoneadministration,thenisdividedintoseveralunitsrunningmotorwaysandstateroads,thendividedagainintounitscoveringthedeliveryofmotorwaysandthemaintenanceofmotorways.Thenafterafewyearstheseorganisationsmaybeamalgamated,possiblyduetoalackofoverallresources.
Staffturnoverwithinvariousinstitutionsisalsocommon.WiththeM5inHungary,forinstance,therewerefivedifferentMinistersofTransportinplaceduringthedevelopmentstage.Theresultofthistypeofpoliticaluncertaintyandchangeofdirectionmeansthatthecontractawardprocedurecanbedrawnout,whileseniorstaffinplaceatthebeginningoftheprocesschangeandnewstaffmembershavetostartfromscratch.Thisleadstohighertransactioncostsforboththepublicandprivatesectorswithnocertaintyofsuccess.
ThefinalchallengetoestablishingPPPsintransitioncountriesrelatestogovernmentappreciationofwhataPPPisandwhyitisbeingimplemented,fromboththegovernment’sandtheprivatesector’spointsofview.
ThisconceptofPPPallowsanewmethodofdeliverythatisquitedifferenttothetraditionalapproach.OnecannolongertakeforgrantedthataPPPislikeothercontracts.Itisnecessaryforthepublicsectorpartnertounderstandthebasicsofsharedandequitableriskallocationandnottotryandinsistonpassingonrisksthatcannotbedealtwith.Thisalsoappliestotheprivatesectorpartnerinthatitshouldnottrytomakethestateretainrisksthatitshouldacceptandprobablywouldinamorestableenvironment.
TheissueofaffordabilityisespeciallyimportantforthepublicsectorwhichmustrememberthateachPPPneedstobeaddedtothelastoneandthatallfutureonesalsoneedtobeincluded.Thepublicsectormustaskwhethertherewillbesufficientresourcesinfuturebudgetstopayforthelifespanofthecombinationofalloftheconcessions.Thepublicsectorpartnermustunderstandthatprivatefinanceisnotfreeandmustbewillingtopayforit.Thisisessentialinordertoensurevalueformoneyinthecontract.
Theprocurementprocessmustconformtotherulesandbetransparent.OpaqueprocurementprocessesthatdonotadheretotheruleshaveoftenbeenthedownfallofPPPcontractsintransitioncountries.Thisisaveryexpensiveanddamagingexercisetogetwrong.Toassistwiththisprocessinternationaladvisors,whoareabletoassessthebestwaytonegotiatewiththeconcessioncompany’sowninternationaladvisors,shouldbeusedduringtheprocurementprocess.
Itisnecessaryforthepublicsectorpartnertounderstandthebasicsofsharedandequitableriskallocationandnottotryandinsistonpassingonrisksthatcannotbedealtwith.
Dealshavebeenmadeand,inmanycases,havehadtobecancelledduetothelackofinternational-levelnegotiationability.Forthestate,itisimportanttoensurethatitgetstheproject,thattheprocessofevaluationandjustificationisundertakencorrectlyandthatitunderstandsthattheprivatesectorhastomakeaprofit.Otherwise,bothpartiesmaysuffer.
Finally,thepublicsectorneedstolearntobepatient.IttakesalongtimetointroducePPPs–boththeUnitedKingdomandAustralia,twoofthefirstcountriestointroducePPPs,thathavefewofthetransitionalproblemsofcountriesintheEBRD’sregionofoperations,arestillrefiningtheprocess.ItmaytakemanyyearsforPPPstobecomewidelyusedandproblemfreeintransitioncountries.
Notes1 R.BainandM.Wilkins(2002)Traffic in start-up
toll facilities, Standard & Poor’s; R. Bain and J.W. Plantagie (2003) Traffic forecasting risk: Study update 2003,Standard&Poor’s;R.BainandJ.W.Plantagie(2004)Traffic forecasting risk: Study update 2004,Standard&Poor’s;R.BainandLPolakovic(2005)Traffic forecasting risk study update 2005: Through ramp-up and beyond,Standard&Poor’s.
Author PeterSnelson
Director,ProjectDevelopments,AtkinsLtdTel:+441214836171Fax:+441214836161Email:[email protected]
TheAxis,10HollidayStreet,BirminghamB11TFUnitedKingdom
Public-privatepartnershipsincentralandeasternEurope:
structuringconcessionagreements
ChristopherClement-DaviesPartner,Fulbright&JaworskiInternationalL.L.P.1
Public-privatepartnerships
Public-privatepartnershipsincentralandeasternEurope:structuringconcessionagreements 3�
Public-privatepartnershipsareincreasinglybeingusedinemergingmarketeconomiestofinancemuch-neededinfrastructuredevelopmentprojects.Thisarticlediscussesthestructuringofconcessionagreements,whichoftenunderpinsuchventuresandcanbecrucialtothesuccessorfailureoftheproject.
Public-private partnerships and concession agreements
Recentyearshavewitnessedasharpriseinthefrequencyandsophisticationofattemptstoapplypublic-privatepartnership2structurestoinfrastructure3projectsintheso-calledemergingmarketcountries4ofcentralandeasternEurope(CEE)andtheCommonwealthofIndependentStates(CIS).
Thetrendappearstobeaccelerating.Atonelevel,thisisnotsurprising.Governmentsintheregionhaveturnedtothisapproachtoinfrastructuredevelopmentforfundamentallythesamereasonsasgovernmentsinnumerousotherjurisdictionsacrosstheglobe.Tightbudgetaryconstraints,agrowingfaithinthevirtuesofprivatisation,theextentandurgencyoftheneedfornewinfrastructure,thesearchforbettervalueformoneyinpublicservicesandtherapidevolutionofthetechniquesandskillsdeployedinstructuresofthiskindhaveallplayedtheirpart,astheyhaveinsomanyotherregionsandcountriesaroundtheworldastheprojectfinancemarketshaveexpanded.Thisisnowafamiliarstory.
Yet,thetruthisthattheattempttomakethesamestructuresworkintheseemergingmarketshasoftenmetwithmixedsuccess.Therehavebeensomehigh-profilesuccessstories,butalsosomenotable,andwidelypublicised,disappointments.
Many,ifnotmost,oftheseprojectsareconcessionbased,orinvolveconcessionorsimilaragreementsofonetypeoranother.Wheretheydoso,theconcessionagreementwill,fromalegalperspective,underpinthewholestructure,definingtherelationshipbetweenpublicandprivatesectors,allocatingrisksandresponsibilities,andrepresentingavitalpartofthelenders’securitypackage.
Whatfollowsisabriefintroductorydiscussion(designedprincipallyforthosenotparticularlyfamiliarwiththissubject)ofwhattheauthorseesassomeofthemainlegal,commercialandpracticalissuesthatconcessionagreementscangiverisetoinCEE/CIScountriesatanearlystageoftheevolutionoftheirPPPsystems.5Itishopedthatthiswillcontributetoanunderstandingofthebroaderchallengesinvolvedinimplementingpublic-privatepartnerships(PPPs).
Definingaconcessionagreement
Inconceptualterms,concessionagreementscanbedifficulttoclassify.Oneofthefirsttasksforalawyeradvisingonaconcession-relatedprojectisthereforetoestablishwhetherthelocaljurisdictionhasarecognisedjurisprudentialconceptofconcessions.Manycivil-lawbasedjurisdictionsplacetheminlegalcategoriesoftheirown,oftenwithintheareaofpublicadministrativelaw,withclearstatutorydefinitions.Commonlaw,bycontrast,doesnottreatthemasaseparatespeciesofcontract,distinctfromotherformsofcommercialagreement.
UnderEnglishlaw,aconcessionisessentiallyjustacontractuallicence.Itwillentitletheconcessionairetomakeuseofcertainfacilities(oftenincludingrealproperty)andtodevelopandimplementtheinfrastructureprojectduringthelifeoftheconcession.Itmayormaynotbeformallylinkedtoaseparateinterestinland(suchasasitelease).6
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Legislativebackground
Concessionagreementsinthecountriesoftheregionwilloftenhavetobedrawnupinthecontextofanexistinglegislativeframework.Concessionlegislation,whereitexists,canobviouslydomuchtosmooththeprocessofdevelopingandimplementingamajorproject.Itcancreateaclearframeworkforthepublic-privatepartnershipinquestion,providingready-madesolutionsforwhatcouldotherwiseproveverydifficultquestionsofscopeandstructure.Ontheotherhand,thelegislativeframeworkcansometimesseeminflexible,obscureorpoliticallyskewed.Provisionsmaybeimposedontheprojectsponsorswhicharenotnecessarilyidealfortheprojectinquestion,andcanrepresentanobstacle(andapotentiallyfatalone)totheraisingofproject-financefrominternationalfundinginstitutions.
TheconcessionslawsinplaceinthejurisdictionofcentralandeasternEuropeandtheCISareatdifferingstatesofevolution.TheEBRDhascarriedoutacomprehensivesurveyofthem(availableonitswebsiteandseepage6),revealinganinterestingrangeofstrengthsandqualities.Someofthem(suchasLithuania)areregardedalmostasmodelpiecesoflegislationofthiskind.Othersmayneedfurtherrefinementiftheyaretohavethehoped-foreffect.
Principal issues
Anynumberofissuescanariseasconcessionagreementsarenegotiated.Thatisperhapsnotsurprising,giventheextenttowhichanyoneinfrastructureprojectwilldifferfromanother.Therehavebeenrepeatedrequestsforstandardisedconcessionagreementstobeadoptedinternationally,buttherehavesofarbeenfewindicationsofrealprogressonthisfront.7Thenextsectionofthisarticleattemptstosummarisesomeofthemajorissuestypicallyencounteredinnegotiation.
Publicsectorcontrol
Oneareathatnearlyalwaysproveshighlycontentiousinnegotiationisthesubjectofthedegreeofcontrolexercisedbythepublicsectorovertheconcessionaireduringimplementationoftheproject,whetherbeforeorafterconstructioniscompleted.Obviously,theconcessionagreementwillcontainminimumstandards,approvalrightsandcontrolsdesignedtoensurethattheconcessionaireperformshissideofthebargain.
Yetthepublicsectorwillfrequentlydemandagreaterdegreeofcontrolthanthis,perhapsnotsurprisingly,givenitsresidualroleasguardianofthepublicinterest.Itmaytrytoinsistonarighttoapproveanychangeormodificationtotheconcessionaire’sequitystructure,forexample.Itwilloftenexpecttohavebroadrightsofparticipationandapprovaloverthedesigndocumentsastheyareproduced,theconstructionworksonsite,thenegotiationoftheprojectandfinancedocumentsandtheirfinalterms,andthecontents
oftheoperationalregime.Manyofthesedemandsmayinfactbeinappropriate,however,reflectingthetimeandexperienceitcantakeinsomecountriestomakethetransitionfromtraditionalprocurementtothemorehands-offapproachencounteredonasuccessfulPPPstructure.Thepoliticalsensitivitiesoftenassociatedwithhigh-profileprojectscanexacerbatethetemptationtomicro-manage.
Theconcessionairewillusuallytrytoresistorlimitthesedemands.Hewillarguethat,inordertodischargehisfundamentalundertakingsandmanagethevariousrisksimpingingonhisactivities,hewillneedahighdegreeoffreedomfrominterference.Excessivegovernmentcontrolmaypreventhimfromperformingaswellasheotherwisemight.Afterall,thegovernmentistransferringtheprojecttotheprivatesectorinordertobenefitfromitsmanagerialandcreativeskills.Flexibilityandtheabilitytoinnovatewillbeimportanttoitsabilitytoperformwell.Ifadditionalfinanceisneededbecausetheprojectisnotgoingaccordingtoplan,itwillbeuptotheconcessionairetofindit,andhisequityinvestmentsthatstandtolosemostupfrontasaresult.Theconcessionaire’slenderswillalsobeveryconcernedaboutthepossibilityofexcessivegovernmentinterference.Intheend,thepublicsectorwillbeprotectedbyitsterminationrightsiftheconcessionairefailstodeliver.
Theoutcomeisoftenaheavilynegotiatedcompromise.Therearelegitimateconcernsonbothsides.Theobjectiveshouldbetostrikeanappropriatebalancethatreconcilestheconcessionaire’sneedforautonomy
Theobjectiveshouldbetostrikeanappropriatebalancethatreconcilestheconcessionaire’sneedforautonomyandmanagerialfreedomwiththegovernment’sdesireforanadequatedegreeofsupervisionandinvolvement.
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Public-privatepartnershipsincentralandeasternEurope:structuringconcessionagreements 41
andmanagerialfreedomwiththegovernment’sdesireforanadequatedegreeofsupervisionandinvolvement,takingaccountoftheconcessionaire’savailableresourcesforthispurpose.
Someexamplesofthespecificareasonwhichthisdiscussiontendstocentreinclude:
■ Standards and objectives: Thegovernmententityshouldfocusontheresultstobeachievedandstandardstobemetbytheconcessionaire,ratherthanthemeansbywhichtheconcessionaireachievesthem(ontheoutputspecification,ratherthantheconcessionaire’sinputmethods,inthelanguageofPFI).8
■ Approval of design and construction: Itshouldusuallybesufficientfortheconcedingauthoritytoreceivecopiesofdesigndocumentsastheyareproduced,andtohavediscretionaryrightsofinspectionovertheworksastheyprogress,perhapstogetherwithapowertocounter-certifycertaincriticalstages,suchaspracticalcompletion.
■ Identity of shareholders: Restrictionsonchangestotheconcessionaire’sshareholdingstructurearelikelytohavemoresignificanceduringthecomparativelyhigh-risk,pre-completionphase,however,thanafterit.Onceastableoperationallevelhasbeenreached(perhapsayearortwoaftercompletion),itshouldnotparticularlymatterifashareholderwishestoselldownitsinterest.
■ Debt finance:Thegovernmententitywillwanttosatisfyitselfthattheconcessionairehasobtainedthenecessaryfinancetoperformitsobligationsbeforetheagreementisenteredinto,oratleastbecomesunconditional.Thetermsoftheseniordebtfinancearelikelytoberelevanttoitspotentialliabilityonatermination.Forthesereasons,atleastcertainrightsofapprovaloftheinitialfundingagreementsmaybeunavoidable.Themoredifficultquestionrelatestore-financing.Whatlimitsshouldbeplaceduponit?
■ Insurance:Theconcedingauthorityshouldnotusuallytrytoprescribetheconcessionaire’sentireinsuranceprogramme.Itwillmakesense,however,forittoseekassurancesastocertaincategoriesandperhapsminimumamountsofinsurancerelatingtoareaswhichimpingedirectlyonitsinterest(forexample,physicaldamage,thirdpartyclaims,andemployer’sliability).Otherareas(forexample,businessinterruption,latentdefects)shouldbeattheconcessionaire’sdiscretion.
Riskallocation
Toalargeextent,theunderlyingthemethroughoutthenegotiationoftheagreementwillbethequestionofriskallocation.Thestartingpointofmanyconcession-basedprojectsinemergingmarketswillbeawide-rangingassumptionofriskbytheprivatesector.Therealquestionconcernswhatriskswillbeshoulderedorretainedbytheconcedingauthority,andwhatprotectionsitwilloffertheconcessionaireagainstthem.
Theanswerswillvarywidelyfromprojecttoproject,anddependonmanyfactors.Governmentrisksmayinclude(atleastinpart)someorallofthefollowing:
■ legalcapacityandlegislativeauthoritytogranttheconcession
■ siteacquisition
■ certainessentiallicences,permitsandconsents
■ timelyprovisionofutilities(forexample,waterandelectricity)
■ certainfinancialsafeguards(forexample,investmentprotectionrights)
■ politicalevents
■ nationalisation/expropriation
■ protestorrisk
■ changeoflaw/fiscalregime(tosomeextent)
■ inflationandeconomicdisruption(possibly)
Thestartingpointofmanyconcession-basedprojectsinemergingmarketswillbeawide-rangingassumptionofriskbytheprivatesector.Therealquestionconcernswhatriskswillbeshoulderedorretainedbytheconcedingauthority,andwhatprotectionsitwilloffertheconcessionaireagainstthem.
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■ competitionfromotherfacilities
■ governmentvariationorders(costandeconomicconsequences)
■ force majeure(inpart).
Ineachcase,however,theremaybewaysofsharingtheriskbetweengovernmentandconcessionaire,sothatincentivestofindconstructivesolutionstounforeseencircumstancesaremaximised.Oneofthecentralobjectivesinstructuringaconcessionagreementshouldbetostrikeasuitablebalanceintermsofriskallocation.Itisnowatruismofprojectfinancethatrisksshouldbebornebythepartybestabletomanagethem.Asariskallocationtool,however,thisprincipledoeslittlemorethanprovidegeneralguidance.
Thereisoftenatemptationforeachpartytoattempttoinducetheothertoshoulderasmuchriskasitpossiblycan.Forexample,theconcedingauthoritywillsometimestrytobackawayfromtakingonobligationswhichnootherpartyshouldrationallyaccept(theauthorhasseenunsuccessfulattemptstodraftconcessionagreementswithoutanyclear-cutgovernmentobligationsatall),whilsttheconcessionairemayaskforprotectionagainstunforeseendevelopmentsofalmostanykind(forexample,anymaterialadverseeventbeyonditscontrol).
Onefactorthatwillplayaprominentpartindeterminingthepatternofriskallocationisthequestionoftheconcessionaire’scontroloveritschargesortariffs.Wheretheconcessionaireisfreetosetandreviseitstariffsatitsowndiscretion,chargingthepublicdirectlyforuseofthecompletedfacility,
itwilloftenbeinamuchbetterpositiontoabsorbandmanagetheimpactofeventsbeyonditscontrolthanwouldotherwisebethecase.Itspositionwillinsomerespectsresemblethatofanyotherentitydoingbusinessinaparticularcountry.
ThiscontrastswithmanyUKPFIprojectsusingashadowtollstructureorgovernmentrevenuestream,wheretariffswillbedeterminedfromtheoutsetbyagreementwiththepublicsector,andwillnotbecapableofrevisionexceptincloselydefinedcircumstances(subjecttoanymarkettestingmechanisms).
Emergingmarketprojects,includingincentralandeasternEuropeandtheCIS,tendtowardstheformermodel(partlybecausethereisoftenlessgovernmentinclination(orability)topaytheconcessionairedirectlyforitsservices).Thedifferencebetweenthetwocanleadtoverydifferentapproachestowardsriskallocationintheagreement.
Itis,inmanyways,inthiscontextthatthecontrastsbetweenPFIprojectsintheUKandemergingmarketdealsbecomesmoststriking.Sponsorsandtheirlenderswilloftenbeinapositiontoaskformuchbroaderprotectionsinthecaseofthelatter,giventheverydifferentriskprofilestowhichtheyarelikelytobesubject.Butitisimportanttoavoidthetemptationtoaskfortoomuchinemergingmarketdeals.Thedangeristhat,ifeithersidepushestoohardinnegotiation,theprojectstandstosufferasaresult,runningtheriskofprecipitatingacollapseofrelationsbetweentheparties,oratleastacontinuingpatternoftensionandconfrontation,andleadingtopoor
valueformoneyforthepublicsector(nottomentionoverlyprotractednegotiations).Ultimately,themostconstructiveapproachistoadoptaflexibleandrationalattitudetowardsriskallocation,leavingriskswheretheycanbemanagedandcontrolledmosteffectively.Iftheagreementisstructuredinawaywhichfostersaspiritofpartnershipandcooperation,of“win-win”solutionstoproblemsolving,theprojectstandsagreaterchanceofsucceeding.
Tariffstructure
Oneareawherethesubjectofpublicsectorcontrolovertheconcessionaire’sactivitiescanbecomeparticularlyacuteisinrelationtotheconcessionaire’stariffsorchargesfortheservicesitprovides.Theinitialchargesleviedbytheconcessionairecanbecontentiousenoughinthemselves;theymayinvolvechargestothepublicforserviceswhichhithertohavebeenprovidedfree-of-charge.Evenwherethisisnotthecase,theremayhavetobeasignificantincreaseinchargestoenablenewfacilitiestobefinancedandbuilt.
Themoredifficultarea,however,relatestoincreasesintariffsoverthelifeoftheconcession.Inwhatcircumstancescanthishappen,andwithinwhatparameters?Wheretherevenuestreamisprovidedbythepublicsector(whichtodatehasonlyrarelybeenthecasewithPPPsinemergingmarketsintheregion,incontrastwithPFIprojectsintheUK,whereitisthenorm),thegovernmententitywillbydefinitionhavealargedegreeofcontroloveranyincreases.
Oneofthecentralobjectivesinstructuringaconcessionagreementshouldbetostrikeasuitablebalanceintermsofriskallocation.Itisnowatruismofprojectfinancethatrisksshouldbebornebythepartybestabletomanagethem.Asariskallocationtool,however,thisprincipledoeslittlemorethanprovidegeneralguidance.
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Public-privatepartnershipsincentralandeasternEurope:structuringconcessionagreements 43
Themoreproblematicsituationiswherethird-partyusersofthefacility(thegeneralpublic)arechargedtariffsdirectlybytheconcessionaire(forexample,tollsonamotorwayorchargesforcleanwater).Here,theconcessionairewilloftenseekasmuchdiscretionasitcantomakeanyincreaseswhichitregardsasnecessary.Thegovernment,however,mayseeitascriticaltopreventunduetariffrises,especiallygiventheirpoliticalsensitivity.
Ifawell-developedregulatorysystemisinplace,thismaybethemechanismbywhichanyincreasesarecontrolled,makingitperhapsunnecessaryfortheconcessionagreementtoaddressthesubject.Therearemanyexamples,however,ofconcessionsbeingawardedintheregionincircumstanceswherearegulatoryregimeisunderdevelopedorevennon-existent.Inthatcase(asmentionedabove),theconcessionagreementmayitselfrepresentthegovernment’sregulatorytool.Thiscanleadthepartiestodrawupasetofregulatoryprinciplesapplicabletotariffsettingandanyrevisions.
Eitherway,theconcessionaireanditslenderswillseekadequatescopetopassthroughadditionalcoststocustomersinresponsetogivenevents–forexample,resultingfromeconomicdislocation,changesinlaw,requirementsforadditionalinvestmentandotherexceptionalevents.
Structuringamutuallyacceptabletariffwillobviouslyalsoraisemuchbroaderissuesthanonesofcontrol.Itwillbefundamentaltotheagreedpatternofriskallocation.Theremaybecomplexquestions,forexample,aboutthemostappropriatemechanismtouse(aunitarychargeoraseriesofdiscretecharges),aboutperformancemeasurementand
thestructureofapenaltyregime,aboutpass-throughcomponents,thetreatmentofdemandriskandavailabilityandsoon.
Theconcessionaire’sfinancingstructurewillplayaprominentpartinthesediscussions.Ontheotherhand,thesophisticatedbench-markingandmarket-testingtechniquesdevelopedinthePFIcontextintheUKdonotseemtohavebeenappliedyettoprojectsintheregion.
Qualityofserviceandperformancestandards
Thesubjectofthedefinitionandmeasurementofaconcessionaire’squalityandlevelofserviceduringtheoperationalphasecanalsorepresentacomplexarea.Questionsinclude:
■ Howisavailabilitydefined?
■ Howexactlyareanypenaltiesstructured(forexample,howaretheyweightedbetweentheconcessionaire’sdifferentresponsibilities)?Howexactlywillanydeductionsbeapplied?
■ Whatarethequantitativeandqualitativeservicelevelobjectives?
■ Whatisthedistinctionbetweenwhollyunavailableandmerelysub-standardlevelsofservice?
■ Whatarethemonitoringandmeasuringarrangements(forexample,objectivityorself-monitoringmechanisms)?
■ Whatarethetolerancelevelsandcureperiodsfordefectiveperformance?
Thisareaislikelytoneedsomewhatfullerdevelopmentinthecaseofaconcessioninvolvingagovernment-sourcedrevenuestreamthanonewherethefacilityusersarebeingchargeddirectly,andwheretheconcessionaire’srevenueswilltosomeextent,bydefinition,beself-policing.Inthelattercase,revenuesshouldtosomeextentriseandfallwithlevelsandqualityofservice.Aperformancepenaltyregimemaybeinappropriateorunworkable.Intheformer,thepublicsectorwillbepayingtheconcessionairefortheprovisionofaservice.
Thepaymentmechanismmaythereforebestructuredsoastobeconditionalontheconcessionaireattainingstipulatedperformancecriteria.Asalreadynoted,PFIprojectstendtoinvolvetheformermodel,9projectsintheregionunderdiscussionthelatter.
Financialbalanceprovisions
Aconcessionagreementwillusuallycontainanumberofdifferentclausesandprovisionsdesignedtoprotecttheconcessionaireagainsttheimpactofunforeseenrisk.Itcanbehelpful,however,todrawatleastsomeofthesethreadstogetherinthesameprovision,oftenreferredtoasafinancialbalance,changeofcircumstanceorexceptionaleventclause.Theytendtofeatureamongstthemostdifficultandcontentiousoftheagreement’sprovisionstostructureandnegotiate.Inbroadterms,theaimofaclauseofthiskindwillbetoputtheconcessionaire(typically)orperhapsboththeparties(moreunusually),asfaraspracticable,inthesame
Ultimately,themostconstructiveapproachistoadoptaflexibleandrationalattitudetowardsriskallocation,leavingriskswheretheycanbemanagedandcontrolledmosteffectively.Iftheagreementisstructuredinawaywhichfostersaspiritofpartnershipandcooperation,of“win-win”solutionstoproblemsolving,theprojectstandsagreaterchanceofsucceeding.
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netpositionasbeforetheeventtriggeringtheadjustmentoccurred.Putmorecrudely,itsmainobjectivewillusuallybetoprovideasuitabledegreeofprotectionagainstrisksthattheconcessionairecannotabsorb.Itwillachievethisbysettingoutabasisformodifyingoradjustingthetermsoftheagreementtoallowfortheimpactoftheseevents–forexample,byincreasingtariffsorextendingdeadlinesfortheperformanceofcertaintasks.Hencethecontentiousnessoftheseprovisionsinnegotiation.
Itcantaketimefortherationaleforaclauseofthiskindtobefullyappreciated.Theneedforitarisesfromtheverylong-termnatureofaconcessionagreement,coupledwiththefactthattariffsmaybefixedorregulatedunderthetermsoftheagreement.Thismayleavetheconcessionairewithmuchlessabilitythanpartiestomanyothertypesofcommercialcontracttomanagerisksbeyonditscontrol–forexample,bytransferringtheireconomicimpacttothirdparties.Conversely,wheretheconcessionairehasfullanddiscretionarycontroloveritstariffs,theneedforsuchaprovisiondiminishes.Thisquestionaboutcontrolovertariffsshouldthereforebethestartingpointofanydiscussionofprovisionsofthiskind.
Thereisobviouslyaconsiderabledegreeofoverlapbetweenafinancialbalanceclauseandaforce majeureprovision.Aforce majeureclausewillrelieveapartyofliabilityfor(certain)eventsbeyonditscontrol,butwillnotusuallyentitleittocompensation.Afinancialbalanceclausewillalsodothelatter.Therearereallythreedistinct,ifoverlapping,areasthatafinancialbalanceclausemustaddress,eachofwhichcanprovedifficulttofinaliseandagree:
■ Whicheventsshouldleadtoanadjustment?
■ Howshouldtheimpactoftheseeventsbemeasured?
■ Whatformshouldanyadjustmentorcompensationtake?
Thesubjectofwhicheventsshouldtriggertheprovision,potentiallygivingrisetoanadjustment,isclearlyaquestionofriskallocation.Certainevents,suchaspoliticalforce majeureandchangeoflaw,arevirtuallycertaintofeature(atleastinsomeform).Otherswillbemorecontentiousnon-politicaleventsofforce majeure,forexample,suchassevereeconomicdislocation,theeffectofcompetingfacilities,failuresofsuppliesofrawmaterials,interruptionsinothernecessarysuppliesandutilities,actionsofothergovernmentbodies,changesinthefiscalregime,andsoon.
Again,thescopeoffinancialbalanceclausestendstodifferradicallybetweenemergingmarketprojects,whererisksmaybemuchhardertopredict,quantifyandmanage,anddevelopedeconomies,withtheirmorestableandfamiliarbusinessenvironments.Inemergingmarketcountries,theconcessionairewillusuallypressforthebroadestpossibleprotectionagainstunforeseenrisks.Sometimes,itwillevenbeentitledtoseekanadjustmentforanymaterialadverseeventbeyonditscontrol(althoughamechanismexpressedinsuchgeneralisedtermswouldgenerallybeconsideredtoovaguetoday).
PFIprojectsintheUK,bycontrast,oftenallowtheconcessionaireonlyverylimitedprotectionofthisnature(limitinganychangeoflawtodiscriminatoryandspecificchanges,forexample).Intheend,thecriticalfactorwillbetheperceptionofriskintheparticularenvironment.
Thesecondquestionisaboutthebasisonwhichtheimpactoftheseeventsismeasuredandquantified.Whatcriteriashouldbeapplied–forexample,reductionincashflow,effectontheconcessionaire’snetfinancialposition(whichmayneedtobedefined),orsomeotherbasis?Thepublicsectorwilljustifiablybeconcernedaboutanybasisthatallowstheconcessionairetoclaimlossestooreadilyortoosubjectively.Inaddition,what,ifany,allowanceshouldbemadeforwindfallbenefitsderivedbytheconcessionairefromunforeseenevents?Howshouldthesebenettedoffagainstanyadverseconsequences?
Finally,thereisthequestionofhowtheconcessionaireshouldbecompensated.How,exactly,areanyremediestobeapplied?Commonly,theagreementshouldleaveconsiderableflexibilityastohowthisisdone,sinceanover-prescriptiveapproachmaybedifficulttoapply.Theconcessionairewilloftenbeentitledtoanincreaseintariffs,anextensionofthetermoftheconcessionagreement,analterationtocompletionmilestonesorcapitalexpenditurerequirements,acashpayment,oracombinationofallthese.Theagreementshouldideallylaydownanagreed,objectivebasisfordetermininghowanyadjustmentsaretobemade,withremedieslistedasaseriesofoptions,whichthedispute-resolutionprocedurescangiveeffectto,intheabsenceofagreement.
Changeoflaw
Thequestionsraisedbythestructureofachangeoflawclauseoftenfeatureprominentlyinanyconcessionnegotiation.Theyillustrateseveralofthepointsmadeinthepreceding
Inemergingmarketcountries,theconcessionairewillusuallypressforthebroadestpossibleprotectionagainstunforeseenrisks.Sometimes,itwillevenbeentitledtoseekanadjustmentforanymaterialadverseeventbeyonditscontrol.
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Public-privatepartnershipsincentralandeasternEurope:structuringconcessionagreements 45
paragraphs.Whichchangesoflaw,exactly,shouldentitletheconcessionairetoreliefand/orcompensation?IntheUKcontext,compensationistypicallyrestrictedtoanarrowrange(discriminatoryandspecificchangesoflaw,forexample).
Inarapidlychangingemergingmarket,however,thisisunlikelytobesufficientfortheconcessionaire.Thelegalsysteminquestionmaybesubjecttonumerousuncertainties.Itmaybeundergoingrapid,radicaltransformation(asithasalreadyinmostcountriesofcentralandeasternEurope),affectingmanyoftheareasoflawrelevanttoaPPP(suchassecurity,environmental,taxandregulatory).
Iftheconcessionaireisfreetosetitsowntariffs,perhapswithoutrestriction,whatsortofprotection,ifany,doesit
reallyneed?Willitbeinapositiontopassonitsadditionalcosts(inwholeorpart)toendusers?Ifnot,shouldtherebeathresholdamountwhichtheconcessionairehastoabsorbbeforeitcanseekredress?10Shouldchangesoflawrequiringcapitalexpenditurebetreateddifferentlyfromoperationalcosts?Whoshouldberesponsibleforobtaininganyadditionalfinanceneededfortheformer?Whatifitcannotbeobtained?What,ifany,changesoflawwillentitleeitherpartytoterminatetheagreement?Therearenoready-madeanswerstothesequestions.Mutuallyacceptablesolutionswillhavetobefoundthroughnegotiation.
Terminationandcompensation
Aconcessionagreementwilltypicallycontainaterminationclause,butitscontentscanprovehighlycontentious.Ifexercised,itwouldtriggertheunravellingofthematrixofagreementsunderpinningthewholeproject,andputtheprojectassets(onwhichtensorhundredsofmillionsofdollarsmighthavebeenspent)backintogovernmenthands.
Thegroundsonwhichterminationrightscanbeexercisedwillbeoneareaofdifficulty.Somewillbealmostunavoidable.Fromapublicsectorperspectivetheyarelikelytoincludetheinsolvencyoftheconcessionaire,abandonmentoftheproject,andprolongedmaterialbreachofcontract(whichmayhavetobedefined).
Equally,theconcessionairewillneedtheprotectionofrightsofterminationbasedoneffectiveannulmentoftheconcession(expropriationofessentialassets,forexample,orwithdrawalofcertainpermitsandconsents)or,again,unremediedbreachofcontract.Othergroundsoftermination–suchaselementsofcountryrisk,orchangeoflaworprolongedforce majeure–willbemoredebatable.
Thesubjectofgreatestcontentioninthisareatendstobethequestionoftheterminationpaymentspayableinthesecircumstances.Theconcessionaireanditslendersandinvestorswillexpectas
muchcompensationaspossiblewherethegovernmententityisindefault,orwhereaconvenienceorpublic-interestterminationisinvolved;theywouldexpectthistobesufficienttocovertheconcessionaire’sseniorandjuniordebt,andtoallowtheinvestorsanadequatereturn.Itisthereforelikelytoincludethefullvalueofassetstransferredbacktothegovernment,aswellasaproportionofrevenuesforegone,togetherwithunwindingcosts.Calculationsmaybebasedonpayingoutseniordebtandthird-partycreditors,followedbyequityatmarketvalue(asdefined),oronthenetpresentvalueofthefuturerevenuestream(minusoperationalcosts).Alternatively,theymaybetiedtothesponsor’sfinancialmodelanditsassumedratesofreturn.
Themorechallengingquestionrelatestoaterminationwheretheconcessionaireisatfault.Theconcedingauthoritywillusuallybeinclinedtowardstheopinionthattheconcessionaireshouldreceive
nocompensationwhatsoeverinthesecircumstances.Ifthegovernmenthasagreedtostep-inrights,andterminationhasproceededafteranunsuccessfulattempttoexercisethem,thisargumentmaybereinforced.Theprojectcompany’sshareholdersmaybepreparedtolivewiththisapproach,andtoforegoanyreturnonequity(orothercompensation)inthisevent.
Thelenderswillbemorereluctanttodoso,however.Theyarelikelytohaveprovidedmostoftheproject’sfinance(perhaps80percentormore).Theywillusuallyfinditunacceptablethatmostofthisfundingshouldsimplybewritten
Thegroundsonwhichterminationrightscanbeexercisedwillbeoneareaofdifficulty.Somewillbealmostunavoidable.Fromapublicsectorperspectivetheyarelikelytoincludetheinsolvencyoftheconcessionaire,abandonmentoftheproject,andprolongedmaterialbreachofcontract.
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Thepublicsectormaysimplyfindthenotionofcompensationondefaultdeeplyunacceptable.Attheveryleast,itwilltrytoensurethattheconcessionairehasappropriateincentivestoperform,andthatitstandstosuffersubstantiallossesifitfailsto.
off,andthepublicsectorreceivealargewindfallbenefit,asaresultofadefaultwhichtheymaynothavebeeninapositiontocure.
Theoutcomeofthesediscussionswillnotbeeasytopredict.Theissuetendstobehighlyemotive.Thepublicsectormaysimplyfindthenotionofcompensationondefaultdeeplyunacceptable.11Attheveryleast,itwilltrytoensurethattheconcessionairehasappropriateincentivestoperform,andthatitstandstosuffersubstantiallossesifitfailsto.
Acompromisesolutionthathasbeenappliedtoanumberofprojectsintheregionistoprovideforfullcompensationfortransferredassetstobepaidasastartingpointinthesecircumstances,buttoallowthepublicsectortodeductitsactuallosses(forexample,rectificationcosts)attributabletotheconcessionaire’sdefault.Alternatively,assetstakenbackintopublichandsmaybevaluedonadifferentbasisthanwherethegovernmentisatfault(forexample,aproportionofhistoriccost,asopposedtoadepreciatedreplacementvalue).ThecurrenttrendintheUKcontextistowardsanapproachbasedonthemarketvaluesoftheassetstransferred.Itisquestionablewhetherthisapproachwilloftenbereadilyavailableinthecountriesoftheregion.
Step-inrights
Whereaconcession-basedprojectisbeingprojectfinanced(involvingalimited-recourse,predominantlydebt-financedstructure,whererepaymentofthedebtdependsprincipallyonfuturerevenues),thelendersarelikelytoinsistonstep-inrightsbeinggrantedtotheminrelationtoit,setoutlargelyinan
ancillarydirectagreement.Thesewillallowthem,ineffect,totakeovertheproject,ifnecessarybringinginasubstituteconcessionaire,inordertoforestallaterminationoftheconcessionagreementfollowingtheconcessionaire’sdefault.Theywillsuspendtheoperationofanyterminationproceduresandultimatelyallowanovation(transfer)totakeplaceoftheprojectcontractstoathirdpartytotakeplace.
Projectfinancelenderswilltakethemostwide-rangingpackageofsecuritymeasuresthattheycanovertheprojectassets.Yetthiswillbevirtuallyworthlessiftheconcessionagreementisnolongerinplace.Iftheagreementisterminated,theabilityandrightofthesponsorsandtheconcessionairetogeneratethecashflowonwhichthelenderswilldependforrepaymentwillbelost;thecollapseoftheotherprojectcontractsislikelytobetriggeredaswell.Forthatreason,thelenderswillregarditasessentialtokeeptheconcessionalive,asitwere,andgivetheprojectcompany(orasubstituteentity)anopportunitytocurethedefault.Step-inrightsaredesignedtoachievethis.
Almostinvariably,however,theserightsprovecontroversial.Forgovernmentbodiesthathavenotencounteredthembefore,theunderlyingprinciplecanrequireagreatdealofexplainingandjustification.Themoreawkwardquestionsincludethefollowing:
■ Trigger events.Inwhatcircumstances,exactly,shouldtheserightsbeallowedtocomeintoplay?
■ Cure periods and procedures. Forhowlongwillthegovernment’sterminationrightsbeheldinsuspense,subjecttoidealprocedures,asthelendersattempttocureadefaultand/orfindasubstituteconcessionaire?
■ Project restructuring.Howextensiveshouldthelenders’rightsbetorestructuretheproject,replacetheshareholders,modifytheprojectcontractsandchangethepartiestothem?Whatapprovalrightsshouldthegovernmenthaveinrelationtoanynewparticipantsintheproject?
■ Limitation of liability. Whatresponsibilityshouldthelenders(ortheirstep-invehicle)havefortheexistingliabilitiesoftheconcessionaire–full,limitedornone?
■ Step-out.Inwhatcircumstancesshouldthelendersbeallowedorobligedtoabandontheirattempttostep-intotheproject?
■ Insurance proceeds.Whatobligationsshouldthelendershavetoapplyinsuranceproceedstorebuild,repairorreplacedefectiveworks?Inwhatcircumstancescantheysimplyapplythemtoreduceoutstandingdebt?
■ Interrelationship with termination payments.Ifthelendershavenegotiatedextensiveterminationpaymentsonaconcessionairedefault,dotheyalsoneedstep-inrights,andviceversa?
Public-privatepartnerships
Public-privatepartnershipsincentralandeasternEurope:structuringconcessionagreements 47
Governmentswilloftenpushstronglyfortheuseofindigenouslawsandcourtsystems.Theymayseeahigh-profileconcessionasanopportunitytofosterrecognitionofthesesystems,andmayfinditdifficultforpolicyreasonstoagreetoanythingelse.
Lawanddisputes
Thestructuringofdisputeresolutionmechanismsinconcessionagreementsneedscarefulthought;moreso,insomerespects,thaninmanyotherformsofcommercialagreement.Threedistinctformsofdisputeresolutionmechanismwillusuallybeneeded,relatingto:
■ Disputesabouttheinterpretationandapplicationoftheagreement’sprovisions,whereabreachofcontractisalleged.Shouldproceedingsbelitigatedorarbitrated?
■ Questionsaboutminoradjustmentstotheagreement(suchasreplacementofthecomponentofanindex)whereexpertdeterminationcanbeused.
■ Disputesaboutmodificationstotheagreement,inconnectionwiththeoperationofachangeofcircumstanceprovision(forexample,modifyingdeadlinesoradjustingtariffs).
Thereisfrequentlyfiercedisagreementbetweenthepartiestoemergingmarketprojectsaboutwhetherornotlocallaw,thelocalcourtsystemorlocalarbitrationshouldbeused.Governmentswilloftenpushstronglyfortheuseofindigenouslawandcourtsystems.Theymayseeahigh-profileconcessionasanopportunitytofosterrecognitionofthesesystems,andmayfinditdifficultforpolicyreasonstoagreetoanythingelse.
Lendersandinvestors,ontheotherhand,mayregardthisasunacceptable.Theymayhaveconcernsabouttheimpartialityoflocalsystemswhereamajorgovernmentbodyisconcerned.Internationalarbitration,inaneutrallocation,underoneofthemorefamiliarinternationalsystemsoftenbecomesthecompromisesolution,but,inasurprisingnumberofcases,thechoiceoflocallawtogoverntheagreementwilleventuallybeacceptedbysponsorsandlendersalike.Itisnotunusualthattherelevantlegislationwill,infact,requireit.Evenifitdoesnot,localenforcementconsiderations,publiclawissuesandsecurityconsiderationsmay,infact,makethisaperfectlyrationalendresult.
Disputesabouthowtomakefundamentalrevisionstotheconcessionagreement,ontheotherhand,togiveeffecttoexceptionaleventorfinancialbalanceprovisions,maybelesssusceptibletoresolutionbyarbitration.
ItisafundamentalprincipleofEnglishcontractandprocedurallawthatcourtswillnotre-writetheparties’agreementforthem.Anarbitrationforumwouldneedtobespecificallyempoweredtodoso,anditspowersmayanywaybelimited.Howexactlythepartieswillallowforalterationstobemadetotheconcessionagreementtogiveeffecttoclausesofthiskind,intheabsenceofagreementbetweenthem,islikelytovaryfromprojecttoproject.
Ingeneralterms,however,themechanismchosentendstoinvolveaformofrefinedexpertdetermination,withmoreextensivepowersthananexpertwouldusuallyhave,suchasapanelofthreeexperts,withappropriateexperienceandqualifications,tobeconstitutedatsignature,withpowertoapplythefinancialbalanceprovisionswhentheyarise.Apanelmayalsobeusedinthefirstinstanceasaformofalternativedisputeresolution,ormediation,beforeanyfinalactionisbroughtinthecourtsorarbitrationforum.
48 Lawintransition
ThelikelihoodisthatPPPswillcontinuetobeadoptedandrefinedonanincreasingscaleinCEEandtheCIS.Theneedforafirm,sophisticatedandbalancedunderstandingofthecontentsoftheconcessionagreementsthatunderpinthemisconsequentlyasgreatasever.
Conclusion
Asthisarticlehastriedtosuggest,therangeofissuesraisedbythestructuringandnegotiatingofconcessionagreementsforemergingmarketprojectscanbeasbroadanddiverseastheprojectsthemselves.Thereisremarkablylittleconsistency.Forlawyersworkingontheseagreements,thisreinforcestheneedtobeflexibleandcreative:innovativesolutionsfrequentlyhavetobefoundtotakeintoaccounttheidiosyncrasiesofeachprojectandthedifferingexpectationsofitsparticipants.Precedentsandguidancematerialscanbehelpfulbutshouldnotbeusedthoughtlessly.InthewordsofthePFImantra,theemphasisshouldbeon“deals,notrules”.
Asfamiliaritywiththistypeofagreementgrowswithintheinternationallegalandfinancialcommunityoperatingintheregion,however,greaterconsistencyandpredictabilityofapproachisboundtofollow.Itremainstobeseenwhetherfurtherattemptswillbemadetostandardiseconcessionagreements.Inthemeantime,muchcanbegainedbysimplydisseminatinginformationabouttheseagreementsandtheissuesthattypicallyaffectthem,astheauthorhassoughttodohere.ThelikelihoodisthatPPPswillcontinuetobeadoptedandrefinedonanincreasingscaleinCEEandtheCIS.Theneedforafirm,sophisticatedandbalancedunderstandingofthecontentsoftheconcessionagreementsthatunderpinthemisconsequentlyasgreatasever.
Notes1 PartnerofFulbright&Jaworksiandamemberof
itsInternational,StructuredandProjectFinance,andEnergyPracticeGroups.Hisexperienceofconcessionagreementsincludesdrafting,negotiatingorsimplyadvisingonconcessionsforthefollowingprojects:theBucharest(watersupply)Concession(Romania);TimisoaraWaterProject(Romania);theCrivina-OgrezeniBOTProject(Romania);theMariborWasteWaterProjectinSlovenia;theAlmatyWaterConcessioninKazakhstan;theLitoralCentroTollRoadProjectinPortugal;theHaziraPortConcession(India);theFortWilliamandInvernessProjectinScotland;theDaldowieProjectinScotland;SouthManchesterHospital(UK);theChannelTunnelRailLink(UK);thePegoPowerProject(Portugal);theA55AngleseyDBFOProject(Wales);theSecondSevernandSkyeProjects(UK);theKarachiHydrocrackerProject(Pakistan);thePortofAdenBOTscheme(MiddleEast);andtheBankokSecondStageExpressway(Thailand).HehasalsoadvisedthegovernmentsofRussia,Lithuania,theCzechRepublicandKazakhstanontheirconcessionslaws,andactedasaspecialadvisertotheUnitedNationsUNCITRALCommitteeonPrivately-FinancedInfrastructureProjects.
2 Thisarticleusestheexpressionpublic-privatepartnershipinthebroadestsense.Thereisnogenerallyaccepteddefinitionoftheterm.Increasinglyitisbeingusedtorefertothefullrangeofstructuresthatinvolvesharedrisksandresponsibilitiesbetweenpublicandprivatesectorsforthedevelopmentofinfrastructureprojects,fromBuild-Own-Operate(BOO),Build-Operate-Transfer(BOT),Build-Own-Operate-Transfer(BOOT),Design-Build-Finance-Operate(DBFO)andthemanyothervariationsonthisparticulartheme.Thatishowitisusedinthisarticle.ThetermhasbeenusedextensivelyinthecontextofthePrivateFinanceInitiative(PFI)intheUK.Itisnowbeingusedincreasinglycommonlyintheemergingmarketscontextaswell.ThenewmarketforthesestructuresintheUnitedStatesisreferredtowiththelucidtermP3!
3 Equally,theauthordoesnothaveanyspecialisedinterpretationofthewordinfrastructureinmind.Theissuesdiscussedareequallyapplicabletoconcessionagreementsinthewater,road,port,health,telecomsandenergysectors–indeed,toanyformofinfrastructure.
4 Thefocusofthisarticleisemergingmarketprojects.Itisbynomeanseasy,however,tomakehard-and-fastdistinctionsbetweenpracticeinthisareainemergingmarkets,ontheonehand,andtheso-calleddevelopednationeconomies,ontheother.Differencesofapproachwillobviouslybefound.Theywilldifferfromplacetoplaceandtimetotime,however.Itisnotoriouslydifficulttogeneraliseatanylevelaboutemergingmarketsasawhole,letalonetheprecisewaysinwhichtheydifferfromtheirOECDneighbours.Many,ifnotmost,oftheissuesdiscussedhereapplyequallytothelatterastheformer.Wheretheauthorbelievesthereisacleardifferenceinapproachbetweenthetwo,henotesthisinthetext.ThetextalsocontainsanumberofreferencestopracticeintheUKandotherpartsoftheworld,primarilybywayofcontrast.
5 Agreatdealofwrittenmaterialhasbecomeavailableonthissubjectinrecentyears.Inparticular,theTreasuryTaskForce(TTF)intheUK(nowformallydisbanded)publishedhundredsofpagesofguidanceinthepastfewyearsontheprovisionsofPFIcontracts,culminatingintherecentstandardisationofcontractdocuments.Theauthorhasthereforetriedtoconcentrateinthisarticleontheissuesthathaverecurredmostfrequentlyinthenegotiationofconcessionagreementswithwhichhehasbeeninvolved,withafocusonemergingmarkets.
6 Thisdisparityinlegalclassificationpartlyexplainswhytherearenowsomanydifferentlabelsforwhatisfundamentallythesameformofagreement;projectagreement,developmentagreement,implementationagreement(atleastincertainrespects),franchisearealllargelyinterchangeableterms.Theiruseissometimespreferredinordertoavoidtheconfusionthatconcessioncangiveriseto,givenitsdifferentmeaningsandcategorisationfromjurisdictiontojurisdiction.However,insubstance,theagreementtowhichtheselabelsreferareoftenverysimilar,intermsofthelegal,commercialandpracticalissuestowhichtheygiverise.Forthepurposesofthisarticle,theywillallbereferredtoasconcessionagreements.
7 IntheUKdomesticcontext,someveryimpressiveworkhasbeencarriedoutbytheTTFinstandardisingcertainprovisionsofPFIcontracts.SeeTreasuryTaskForce,2002,Standardisation of PFI Contracts,OfficeofGovernmentCommerce.Whereclausescannotbefullystandardised,thepublishedguidelineshaveanywayledtomuchgreaterconsistencyofapproachinagreements.NumerousPFIprojectsbasedontheTTF’srecommendedclauseshavenowbeensigned.AccesstoalargebodyofprecedentsinthePFIcontext–oftenavailabletotheprivatesectoraswellasgovernmentdepartments–hasalsoledtomuchgreaterconsistency.Certainsectorswitnessedtherapidemergenceofmodelformcontracts.
8 SeethelistofpapersavailableonthissubjectontheTreasurywebsite(www.hm-treasury.gov.uk).Inparticular,theGuidance Note on Public-Sector ComparatorsexplainsthemoretechnicalaspectsoftheUKgovernment’sapproachtorisktransferandvalueformoney.
9 “Thenegotiatedperformanceregimewillformakeyelementoftherisk-transfermechanism”.(TTFguidanceStandardisation of PFI Contracts).Thestructuringofperformancepenaltieshas,indeed,beenacentralpartofthenegotiationofmostPFIprojects,itseems.
10 ThepreferredapproachonPFIprojectsisforanyentitlementtocompensationtobesubjecttoasteppedorbandedseriesofthresholds,sothattherecourseavailabledependsonwhichbandtheadditionalcostfallsinto.Thisisagoodexampleofarisk-sharingmechanism.Theideaistomaximisetheconcessionaire’sincentivestomanagethisrisk.
11 TherehavebeenexamplesintheUKofprojectsbeingfinancedwithoutit,althoughtheyappeartoberare.Thereseemtobeveryfewexamplesinemergingmarketcountries.
Author ChristopherClement-Davies
Partner,Fulbright&JaworskiL.L.P.Tel:+442070108300Fax:+442070108383Email:[email protected]
Fulbright&JaworskiInternationalL.L.P.,90LongAcre,LondonWC2EUnitedKingdom
Russia
50 Lawintransition
This section is devoted to Russia, the country where the
2007 EBRD Annual Meeting of Governors is taking place.
This is also the vast country where the EBRD plans to have
41 per cent of its annual commitments by 2010. The section
offers a variety of views and topics authored by practising
lawyers, Russian government officials and academics.
In the first article, Yulia Zvorykina, Director of the Investment
Department at the Russian Ministry of Transport, presents
the Russian experience with PPPs, bridging harmoniously
the two focus areas of this issue of Law in transition.
Jay Allen of the EBRD examines the insolvency system
in Russia, while Gian Piero Cigna and Elena Sulima
of the EBRD dedicate their article to the quality of
Russian capital markets legislation.
The Deputy Chief of Staff of the Russian Government,
Mikhail Kopeikin, offers his comments on the status
of the economic and legal situation in Russia as viewed
from the ‘White House’. Finally, Vladimir Peysikov,
Provost of the Russian Academy of Justice, details the
experience his institution has had with the training
of judges, an area of critical importance for the
development of the rule of law in the country.
Russia 51
Public-privatepartnershipsinthetransportsector:
aRussianview
YuliaZvorykinaDirector,InvestmentsDepartment,RussianMinistryofTransport
Russia
Public-privatepartnershipsinthetransportsector:aRussianview 53
TheRussiantransportsectorhaschosentheconcessionmodelasthemainmodelofpublic-privatepartnerships(PPPs).Ifthepublicandprivatesectorsareabletochangetheirpatternsofthinkingandofdoingbusinesstogether,PPPscouldprovetobeakeyelementinthedevelopmentoftheRussiantransportsector.
Fundamentalchangestodifferentsectorsoftheeconomyarebeingmadeinmostcountriesandconcernsectorswhich,untilnow,haveinvariablybeenunderstateownershipandmanagement.
Enterprisesworkingintheseareas,mostlymonopolies,cannotbeprivatisedbecauseoftheirstrategic,public,socialandeconomicimportance.Ontheotherhand,statebudgetsdonotpossesssufficientresourcesforadequatelevelsoffunding.Insuchcases,thestatemay,onamedium-tolong-termbasis,granttoprivatelyownedcompaniestherighttooperategas,energy,transport,watersupplyandsewersystems,althoughitwouldretaintherighttoregulatethemandcontroltheiractivities.
Thesecontradictionscreatetheneedtoconsiderattractingprivateinvestmenttosectorsoftheeconomythathavealwaysbeenthoughtofastheprerogativeofthestate.SomecountrieshaveusedPPPsinordertoresolvesuchcontradictions.
NowadaysPPPsarebeingusedinmorethan100countriesworldwide.PPPshavebecomethemaintoolusedbystatestoaddresseconomicandsocialserviceresourceissuesandbudget
limitations.Thisisduetothefactthatprivatesectormanagementisconsideredtobemoreeffectivethanthatofthestatesector.
PPPshavebeenrediscoveredincontemporaryRussia.TheycouldnotbeusedintheformerSovietUnionforobviousreasons.However,inRussiaduringthe1920s–theNewEconomicPolicyperiod–PPPsintheformofconcessionswereaverypopularandeffectivetool.Nowadaysthepublicandprivatesectorsneedtorelearnhowtousethistool.
Duringthefinalstagesofitstransitiontoamarket-basedeconomy,RussiahasbeenabletousePPPsasaninstitutionalandorganisationalalliancebetweenthepublicandprivatesectors.Thistypeofpartnershipenablesthestatetoimplementsociallyimportantprojectsinawidespectrumofactivitiesrangingfromthedevelopmentofstrategicbranchesofindustrytotheadvancementofsocialservices.Asarule,eachPPPisestablishedforaspecifictime-scaleandaspecificproject.Partnershipsoralliancesareconsideredtobetemporary,becausetheyendaftertheprojectinquestionhasbeencompleted.
Thisarticlewillfocusoncurrentchallengesinthetransportsector.InRussia,theleveloffinancingandinfrastructureforthissectordoesnotmeetthecountry’smacroeconomicandsocialneeds.Thelevelofinvestmentintransportinfrastructureislessthan2percentofgrossdomesticproduct(GDP)eventhoughinmostcountriesitisatleast4percentofGDPorhigher.
PPPs in Russian transport
ExpertsestimatethatthepotentialvolumeofprivateinvestmentintransportinfrastructureinRussiais€12-15billionperyear.Privatesectorinvestorsareinterestedinfinancingtransportinfrastructurebuttheyarealsokeenforthegovernmenttosetoutcleargoalsinitslong-termstrategicplans.
InrecentyearsthestatehasestablishedseveralpreconditionsforincreasingtheuseofPPPs.Thesepreconditions,listedbelow,havelargelybeenmet:
■ increasedcooperationbetweenstateandprivatebusiness,aswellasconsultationsabouttheuseofPPPs
54 Lawintransition
Fromalegalpointofview,oneparticularityoftheRussianconcessionslawisthattheagreementisconstruedasaprivatelawcontract.
■ passingofthefederalLaw on Concession Agreements1
■ transitionfromonetothree-yearplansaspartofbudgetreform
■ adoptionoftheRegulation on Investment Funds
■ adoptionofstandardconcessionagreements
■ establishmentofspecialeconomiczonesandindustrialandtechnologicalparks.
ConcessionagreementsareregulatedbythefederalLaw on Concession Agreements.Thelawgovernstherelationshipsthatariseintheplanning,conclusion,performanceandcancellationofconcessionagreements.Italsoestablishestherightsandinterestsofthepartiestoanagreement.
Developing concession agreements in Russia
AdecisionwasmadetousetheconcessionmodelofPPPsinRussia.Concessionagreementsincludeelementsofdifferenttypesofagreementswhichhavebeenapprovedbyfederallaw.Theyfocusonimmovableproperty,thecreationand/orreconstructionofwhichisstatedintheagreement.Thefollowingtypesofprojectscanbethesubjectofconcessionagreements:
■ motorwaysandtransportinfrastructure
■ railwayandpipelinetransport
■ seaandriverports
■ seavessels,rivervesselsandmixed-usevessels
■ airportfacilities
■ unifiedairtrafficmanagementfacilities
■ undergroundandothertypesofpublictransport
■ medical,socialandwelfareprojects.
Landcannotbethesubjectofaconcessionagreement.Theperiodofanagreement’svalidityisestablishedbytheagreementitselfaccordingtothedateoftheconstructionand/orreconstructionofthesubjectmatteroftheconcessionagreement,theinvestmentvolumeandpay-backperiodandotherobligationsoftheconcessionaireundertheagreement.
Theconcessionpaymentshouldbespecifiedinthecontract.Itcanbesetintheformofdefinitepayments,productshare,incomefromtheactivitywhichisthesubjectoftheagreementoratransferofthepropertybelongingtotheconcessionaire.Thefunctionsofgovernmentauthoritiesduringthepreparation,conclusionandexecutionoftheagreementareestablished,asaretherightsanddutiesofthepartiesincludingtheconcessionaire’sdutiestowardthirdparties.Accordingtothelaw,theagreementisenteredintoonthebasisoftheresultsofanopencompetition.
Fromaneconomicpointofview,concessionsallowthepublicsectortoreducestateexpenditureandattractexternalinvestmentandmanagementresourcesintoareaswhichhavehighexpenditureandarenotveryprofitable.Theuseofconcessionsstimulatescompetitionandhelpstodeveloptheinvestmentmarket,whichneedsmoreprivateinvestment.Fromalegalpointofview,oneparticularityoftheRussianconcessionslawisthattheagreement
isconstruedasaprivatelawcontract,eventhoughinothercountriesothermodelsarealsoused.Thelegislatorsadoptedthisapproachasamatterofprinciple.
ThereareseveralreasonswhytheconcessionmodelofPPPswaschosen.Concessionsarethemosthighlydevelopedandcomplexformofpartnership.Unlikemostothertypesofcontracts,concessionsarelongtermandthisallowsbothpartiestocarryoutstrategicplanning.
Withconcessions,theprivatesectorpartnerisgivenadministrativeandmanagementflexibility.Thisdecision-makingfreedomdistinguishesthistypeofPPPfromothermodelssuchasjointventuresandworkcontracts.Inaddition,thestateretainstheabilitytoexertpressureontheconcessionaireifitbreachesthetermsofthecontractorifthepublicinteresthastobeprotected.Thestatetransfersownershipanduseoftheassetstotheconcessionaireforthetermofthecontract.However,thepublicpartnerisresponsibleformonitoringtheperformanceoftheprivatepartnerandattheendofthecontractownershipoftheassetsrevertstothepublicpartner.
TheLaw on Concession Agreementsforbidsthepledgingofassetsthatarethesubjectofaconcessionagreementandoftherightsoftheconcessionairesselectedbyopencompetition.Mostassetsthatarethesubjectofaconcessionagreementnaturallyremaininthepublicsectorbecausetheyareforthepublic’suse.Concessionagreementsmaynotbeusedtotransferassetsthatshouldremainstateproperty,suchasmotorways,intoprivateownership.
Russia
Public-privatepartnershipsinthetransportsector:aRussianview 55
Federalauthoritiesmustprovideconsultancysupportattheregionalandmunicipallevels.Consultantscouldhelpwithsupportingandmonitoringconcessionprojects,promotingbestpractices,retrainingstateandmunicipalemployeesandestablishingcentresofcompetence.
The challenges of establishing concessions in the transport sector
ThepassageoftheLaw on Concession Agreements clearedupmanyofthedifficultiesattractinginvestmentintotransportinfrastructure,butsomeissuesstillremain.Itisimportanttocreatespecial-purposefundsfordevelopinginfrastructureortodevelopasector-specificconcessionslawthatwillspecifywhichtransportprojectswillbethesubjectofPPPsandconcessions.
Limiteddevelopmentofandseriousrestrictionsindomesticfinancialmarkets,inparticularwherelong-termfinanceisconcerned,causeproblemswithraisinginvestmentfunds.Onepossiblesourceofinvestmentcouldbepensionfundsguaranteedbythestate.
Anotherseriousproblemisthatlandlegislationisnotveryadvanced.Inparticular,themostdifficultissuesinthefieldoftransportaretheabsenceofspecificrulesgoverningthereservationandseizureofland,andissuesrelatedtothetenureoflanduponwhichtransportandinfrastructurestands.
Legislationpertainingtostateobligations,includingtheBudgetCodeandtheCivilCode,shouldbeamended.Inorderforconcessionstobeeffectivethelegislationshouldbesimplified,especiallythesectionsthatdealwithpermits,licencesandsoforth.Legislationonbook-keepingandrealestateregistrationshouldbeharmonisedwithnewlaws.
Improvementstothelegislativesystemarebeingmadewithaviewtofacilitatingthegrantingofconcessionagreements.Federalauthoritiesmustprovideconsultancysupportattheregionalandmunicipallevels.Consultantscouldhelpwithsupportingandmonitoringconcessionprojects,promotingbestpractices,retrainingstateandmunicipalemployeesandestablishingcentresofcompetence.
Itisnecessarytoprovideconsultancysupporttoexecutiveauthoritiesatalllevelsduringthepreparationofconcessionagreements,co-financingforagreementimplementationandbudgetguarantees.ThisshouldbedonethroughtheRussianInvestmentFundandtargetedbudgetprogrammes.
TheMinistryofTransporthascreatedanadvisorycouncilonPPPdevelopmentinordertoassistwithenteringintoPPPs.TheministryhassignedanagreementwiththeRussianVneshekonombankwherebythebankactsasaninvestmentadviserwithrespecttolargeinfrastructure-basedPPPprojects.
Thetransportsectorneedsqualifiedemployeesandmanagerswhoarecapableofundertakinglargeinfrastructureprojects.AspecialeducationprogrammewasorganisedbytheTransportEngineeringInstituteofMoscowtoprovidetheMinistryofTransportwithspecialistsinthefieldoftransportconcessions.
RussianGovernmentResolution319of27May2006approvedstandardconcessionagreementsformotorways
andengineeringinfrastructure,includingbridges,overpasses,tunnels,parking,checkpointsandtollboothsfortrucks.
TheMinistryofTransporthasdevelopedandforwardedtotheMinistryofEconomicDevelopmentandTradedraftstandardconcessionagreementsbasedonResolution319inthefollowingareas:
■ airports,buildingsand/orfacilitiesintendedfortake-off,landing,taxiingandparkingofaircraftandindustrialandengineeringairportinfrastructure
■ seavessels,rivervessels,mixed-useriver/seavessels,ice-breakers,hydrographicandresearchvessels,ferriesandfloatinganddrydocks
■ seaandriverports,hydraulicengineeringconstructionsinports,industrialandengineeringinfrastructuresinports
■ railwaytransportfacilities
■ undergroundandpublictransport
■ waterengineeringfacilities.
AtthisstagethedraftstandardconcessionagreementsmentionedabovehavebeenreviewedandrevisedbytheMinistryofEconomicDevelopmentandTradeandhavebeensenttothefederalgovernment.
TheRussianInvestmentFund(Investfund)wascreatedin2005toprovidestateco-financingforlargeprojectsoffederalimportance.TheuseofInvestfundresourcesissettobecomethemostimportantinstrumentofbudgetsupportforprivatebusinessinvestmentprojects.2
InvestfundisaPPPinstrumentthataimstomakeiteasierforbusinesstofinancestrategicallyimportantlong-termprojectswhichhavelowlevelsofreturn.
56 Lawintransition
APPPisacompromisebetweenthepublicandprivatesectors.Takingintoaccountthefactthatthestatebudgetisonlyapprovedforoneyearatatime,thestatecannotguaranteethatpaymentswillbemadeinsecondorsubsequentyearsofaproject.
TheavailabilityofInvestfundresourceswillexpandtheopportunitiesforbusinessestoinvestinprojectswhichcostnolessthan5billionroublesthroughdirectco-financing.Upto75percentofthecostcanbeprovidedbythefederalbudgetandtherewillalsobestateguarantees.
Statesupportwillbeprovidedinthreeways:
■ directco-financingoftheprojects
■ equityparticipationinthecompanymanagingtheprojects
■ stateguarantees,whichwillbedifferentfromcurrentMinistryofFinanceguarantees.3
Investfundplanstoprovidetransitionalfinancing,intheformofalong-terminvestmentagreementbetweenstateandprivateinvestors.Thepossibilityofsharingcommercialrisksalsoexists.
Weshouldnotethat,duringthefirststageofPPPdevelopmentinacountry,thestatemusttakerisksinordertoreassureprivatepartners.Intimeandafteracertainlevelofexperiencehasbeenreached,risksmaybesharedmoreequitablybetweenpublicandprivatepartners.Ifthisdoesnothappen,thepartnershipmechanismwillloseitsmeaning.
APPPisacompromisebetweenthepublicandprivatesectors.Takingintoaccountthefactthatthestatebudgetisonlyapprovedforoneyear,thestatecannotguaranteethatpaymentswillbemadeinsecondorsubsequentyearsofaproject.Thatiswhytheshifttoathree-yearbudgetplanisanimportantstepinconcessionplanningandcreatesacertainlevelofstabilityinpublic-privaterelations.
WewillnowturnfromdiscussingwaystodevelopPPPsinRussiatoindividualinvestmentprojectsandtheirparticularfeatures.
PPP projects in the Russian transport sector
Theconstructionofatollroad,theWesternHigh-SpeedDiameter(WHD),inStPetersburgisaverygoodexampleofaconcession-styleproject.ThisprojecthasgonebeyondhavingmerelyaregionalpurposeandisofgreatimportanceforthedevelopmentandincreasedcompetitivenessoftheentireRussiantransportsystem.TheWHDconnectsthelargeseaportofStPetersburgtoanetworkoffederalmotorwaysandtheEuropeansystemofinternationalmotorways.
Inaddition,thesouthernsectionoftheWHDdirectlyadjoinsthelineoftheringroadaroundStPetersburgandconnectstheseaportwith13federalandterritorialroadsfromStPetersburginthedirectionofBelarus,Estonia,Finland,otherpartsofRussiaandUkraine.
OnthebasisofRussianGovernmentOrder1494-rof31October2006,draftdocumentationforcompetitivetendershasbeenprepared.IthasbeenreviewedbytheMinistryofTransportandforwardedtotheMinistriesofFinanceandEconomicDevelopmentandTrade.
ThefederalgovernmenthasapprovedtheguidelinesforcarryingoutcompetitivetendersfortheWHDconcession.Theguidelinesstipulatethatthefunctionsoftheconcedentonbehalfofthestatewithregardtoroad
concessionprojectsandbasicliabilityforRussia’scommitmentsunderroadconcessionprojectsliewithRosavtodor,thefederalroadagency.
However,onlythebasicrequirementsforsuchdocumentation,membershipofthetendercommissionandthetermsforconcludingtheconcessionagreementwereapproved.TheprocedureforthetransferoffederalgovernmentpowerslistedabovetoRosavtodorwasnotstipulated.
AcomprehensivelistofareasofRosavtodor’sauthorityhasnotyetbeendetermined.Itisimportant,however,thattheagencybegiventhefollowingareasofauthority:
■ todecidewhichlandtorequisitiontolettoconcessionaires
■ toregulateandapprovethetarifflevel
■ tograntminimumincomeguarantees.
Amarketstudyshowedthatpotentialparticipantswoulddefinitelyrefusetotakepartinconcessiontendersiftherewerenotminimumincomeguaranteesforpilotconcessionprojects.
Thetenderdocumentationforconcessionagreementstoconstructhigh-speedmotorwaysisnowreadyandhasbeencirculatedforreviewandrevision.Amotorwaywillbebuiltonkilometres15to58oftheMoscowtoStPetersburgroad.AnewexitfromthefederalM-1Moscow-Minskmotorway(theOdintsovobypass)isalsobeingplanned.
Russia
Public-privatepartnershipsinthetransportsector:aRussianview 57
Amarketstudyshowedthatpotentialparticipantswoulddefinitelyrefusetotakepartinconcessiontendersiftherewerenotminimumincomeguaranteesforpilotconcessionprojects.
ThetenderdocumentationwaspreparedwithinputfromthedraftconcessionagreementdevelopedbytheFreshfieldsBruckhausDeringerlegalteam,takingintoaccountrecommendationsfromtheEBRD,WorldBank,Ernst&Young,CitigroupandMacquarieBankaswellasinvestmentmarketrequirementsandexpectations.
ProjectstodesigndocumentationfortheinvestmentprojectfortheconstructionoftheKrasnodar-Abinsk-KabardinkatollmotorwayandfortheconstructionandsubsequentoperationonatollbasisoftheM-4DonmotorwayfromMoscow
toNovorossiskwereapprovedon21November2006bythegovernmentcommissionforinvestmentprojectsandaredescribedbelow.
ThecivilengineeringdesignoftheKrasnodar-Abinsk-Kabardinkatollmotorwayhasbeenapprovedbythecommissionforinvestmentprojects.Itprovidesfortheconstructionofa147kilometrefour-lanetollmotorwaywithseventunnelsand76bridges.Theprojectwilltakeplaceintwostages.
Thefirststagewillcomprisethedevelopmentofthetechnical,designandestimatedocumentationandthepreparationoftheconstructionsites.Thesecondstagewillbetheconstructionoftheroad.Itisestimatedthat50percentofthefundingwillcomefromthefederalgovernment,24percentfromtheKrasnodarterritoryand26percentfromtheprivatesectorpartner.Thecommissionhasallocated1.2billionroublesfromInvestfundforthepreparationofthedesignandbudgetdocumentationduringthefirststageoftheproject.
TheM-4DonfromMoscowthroughVoronezh,Rostov-on-DonandKrasnodartoNovorossiskprojectonkilometres21to117and330to464willcreatea233kilometrenetworkoftollmotorways.Theprojectwillentailtheconstructionorreconstructionof128kilometresofroad.Thefivepre-existingsectionsoftollmotorwaysonthispartoftheroadwillbesubsumedintothisproject.
Theprojectwillbecarriedoutintwostages.Duringthefirststagethedesignandestimatedocumentationwillbedeveloped,preparatoryworkwillstartonconstructionsitesandacompetition
willbeheldtoattractprivateinvestors.Thesecondstageoftheproject,whichwillbegininApril2008andwilllastforapproximatelytwoyears,willentailconstructionofnewsectionsandreconstructionoftheremainingsectionsoftheroad.
Investfundwillallocate167millionroublesforthefirst-stagedesignandestimatedocumentation.Duringthesecondstage,theconstructionoftheroad,itisestimatedthatnotlessthan50percentofthecostswillbecoveredbyaprivatesectorinvestor.
TheModernisationofRussia’sTransportSystem(2002-10)projectisforecasttoachievethefollowingresultsby2010:
■ transportservicesvolumewilldoubletoUS$13.1billion
■ thegrowthoftransittrafficwillbe25-30milliontonnes
■ numbersofairporttransitpassengerswillincreasebyfivetoseventimes,to3to4millionpassengersperyear
■ theshareofdomestictransportcompaniesintheRussianinternationaltransitservicesmarketwillincreaseto50percent
■ thetonnageofthemerchantmarinefleetinRussianwaterswhichisregisteredinthenationalregisterandcontrolledbyRussiawillincreaseto56percent.
ThedevelopmentandapprovaloftheDevelopmentofExportTransportServicesportionofthemodernisationprojecthasallowedustotakethefirststeptowardscreatingeffectivetoolstotackleexistingproblems.This,inturn,
hasallowedustodepartfromstandardschemestoincreasetheproportionaloutputofdifferenttypesoftransportinfrastructureandtostartusingcomplextoolstoenableinfrastructureprojects,includingPPPs.
ExamplesofprojectswithintheexporttransportportionoftheprojectincludetheconstructionofportcomplexesinMurmanskandNovorossisk.Theseinvestmentprojectshavebeenapprovedandprivatesectorcompanieshavecompetedinopentenders.
Projectsrelatedtothedevelopmentofcomplextransportinfrastructureincludetheconstructionofaversatilereloadingcomplex,intheUst-LugaseaportandthedevelopmentoftransportinfrastructureintheportofTaman,includingadrycargoarea.TheseprojectshavebeenpositivelyreceivedbytheMinistryofTransport’sAdvisoryCouncilonPPPsandhavebeenrecommendedforconsiderationbytheInvestmentCommissionoftheMinistryofEconomicDevelopmentandTrade.
58 Lawintransition
PPPprojectshavealsobeendevelopedforbuildingaccessroadstotheElginskoyeandElegestskoyecoaldepositsintheTyvaRepublicandthedevelopmentofportrailwaystations.
Conclusion
ItisestimatedthatthecompletionofthecomplextransportinfrastructuredevelopmentprojectsmentionedabovewillincreaseRussiangrossdomesticproductby0.2to0.3percent.TransportinfrastructureconcessionscouldreachanannualinvestmentvolumeofuptoUS$2-3billionby2010.
Insummary,IwouldonceagainnotethatinRussiatoday,theimplementationoflargeprojectsfortheconstructionofmotorways,railways,portsandairportsisonlypossiblethroughtheattractionofdomesticandinternationalcapitalonthebasisofPPPs.Givencurrentbudgetarylimitations,theadoptionofthewidespreadinternationalpracticeofusingPPPsistheonlywayforward.
Wemustnotallownarrow-mindedperceptions,thatprivatesectorcompaniesareefficientandthepublicsectorcompaniesarenot,topersist.Itisextremelyimportanttodispelillusionsabouteasyopportunitiesforprivatebusinessincertainsectorstoacquireanaturalmonopolybyusingloopholesinrelevantlegislation,andthentoestablishtheirownrulesofthegamediscriminatingagainstotherplayers.
Thefutureofpublic-privatepartnershipsinRussiadependsonthesuccessoflargeinfrastructureprojects.Boththepublicandprivatesectorsneedtoprovethattheyarereliablepartnersthatarecapableofmeaningfuldialogueandmutualcooperation.
InRussiatoday,theimplementationoflargeprojectsfortheconstructionofmotorways,railways,portsandairportsisonlypossiblethroughtheattractionofdomesticandinternationalcapitalonthebasisofPPPs.
Notes1 LawonConcessionAgreements,
Number115-FZ,21July2005.
2 PursuanttoRussianGovernmentResolution694of23November2005.
3 Theywillnothavetobeincludedintheannualbudgetandwillnotbeterminatedattheendofeachyear.
AuthorYuliaZvorykinaDirectoroftheInvestmentsDepartment,RussianMinistryofTransportTel:+74959261271Fax:+74959261384Email:[email protected]
1/1RozhdestvenkaStreet,Moscow109012Russia
TheRussianinsolvencyframework:
buildingacrediblesystem
JayAllenCounsel,EBRD
Russia
TheRussianinsolvencyframework:buildingacrediblesystem 61
TheRussianinsolvencysystemisneitheraseffectivenorasefficientasitshouldbeandthesystemofimplementationrequiresreform.TheEBRDandtheRussianMinistryofEconomicDevelopmentandTrade(MEDT)areworkingtogethertobuildthecapacityofinsolvencyregulatorsandproposelegislativereforms.
InrecentyearstherehasbeenagreatdealofreformintheRussianinsolvencysystem.Despitethis,thesystemcontinuestolagbehindinternationalstandards,havingproblemswitheffectivenesswhichcannegativelyimpacttheeconomy.Attheheartoftheproblemisthatthesystemreliesuponinsolvencyadministratorswhoareofteninsufficientlytrainedandqualifiedtocarryoutthefunctionsgiventothem.Furthermore,thesystemofmonitoringhasthepotentialtoopenthesystemtocorruption.TheEBRDandtheMEDTwillundertakeaprojecttoaddresssomeofthesystem’smajorshortcomings.
Sanity from madness
WhenSpanish-bornphilosopherGeorgeSantayanawrote“Sanityisamadnessputtogooduse”,hewasmostassuredlynotwritingabouttheworldofinsolvency,buthiswordscouldnotringtruerinthatcontext.
Insolvencyhasaterriblereputationamongthegeneralpopulation.Itisseenasanegative,evendisastroussituation.Peoplelosemoneyininsolvency,somelosejobsandothersseetheirdreamscrumblearoundthem.Astateof
insolvencycanproduceanger,fearanduncertainty.Initself,insolvencyismadnessandrightlyseenassomethingtobeavoided.
Withoutinsolvency,however,aneconomywouldsufferbecauseassetswouldbeusedinefficiently,thegroundrulesofcompetitionwouldbestrainedandeconomicgrowthcouldbedepressed.
Inourpursuitofasaneandrationalworld,howthenarewetoputthismadnesstogooduse?
Wemakethebestoutofabadsituationthroughthedevelopmentofdetailedprocessesandsetsofrulesandprocedurestogoverntheactionsofdebtorsandcreditorsinaninsolvencysituation.Insolvencylawsestablishtherulesandproceduresbywhichuncompetitiveandinefficiententitiesareeffectivelyremovedfromthemarketplaceandproductiveassetsaredivertedawayfromthem.Theycreatenewprospectsforwealthandgrowth.Fromdebtandstagnationcomeprosperityandadvancement.
Insolvencylaws,bytheirverynature,aredesignedtoallowtheefficientreallocationofassets,encourage
risktakingbyentrepreneursandallowproperriskassessment.Noneofthis,however,canhappeninavacuum.Thebestlawisonlyasgoodasthepeoplewhoimplementit.Agoodlawisnotenough;onemustworktobuildthesystemofimplementation.
TheEBRD,throughitsLegalTransitionProgramme,iscommittedtoprovidingassistancetoitscountriesofoperationstohelpthemestablishnotonlygoodlawsbutalsotheframeworksthatallowtheselawstobeproperlyimplemented.Onecurrentproject,forexample,isdesignedtoimprovethecapacityofRussianregulatorstotrain,overseeandbringdisciplinetothepracticeofinsolvencyadministrators.
ThisarticleoutlinesthedevelopmentoftheRussianinsolvencysystem,reviewthestateofthelawanditspracticalapplicationandprovideanoverviewofthejointEBRD-MEDTRussianinsolvencyregulatorcapacitybuildingproject.
History
Russia’sfirstmoderninsolvencylawwasadoptedin1992andprovedtobefarlessthanfunctional.Its1998successorbroughtmanyimportantchanges,
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butwasriddledwithloopholesandcreatedaprocessthatwaseasilymanipulatedinordertostripcompaniesofassets,defraudcreditorsandstiflecompetition.Itwasoftenusedforcompletelyulteriormotives.The1998lawprovedtobeavaluabletoolforhostiletakeoverswithrivalsbuyinguptheircompetitor’sdebtforthepurposeofbankruptingthecompetition.
Reformsin2002broughtaboutwhateffectivelyamountedtoanewlawoninsolvency,anamendedversionofwhichcontinuesineffecttoday.The2002Law on Insolvency (Bankruptcy)sawmajorchangestotheinsolvencyregimewiththeultimategoalbeingtofreethesystemfromcorruptelements.
Amongthenotablechangeswere:amendmentstothequalificationrequirementsforadministrators;1provisionfortheestablishmentofself-regulatoryagencieswhichwouldtrain,overseeandassigntheworkofinsolvencyadministrators;changestotheinitiationprocedureswhich,atleastonpaper,madeiteasierforcreditorstoinitiateproceedings;andtheadoptionofanewformofrestructuringcalledfinancialrehabilitationwhich,unlike
previouslyavailablemethodsofrestructuring,wouldallowtheincumbentmanagementtoremaininplaceunderthesupervisionofatemporaryadministrator.
Thereformalsosawtheenactmentofstiffnewpenalties.Topcorporatemanagerswhodiscloseafirm’sinsolvencyafteritistoolatefaceseverefines,deliberatebankruptciescanresultinprisontermsofuptosixyearsandoppositiontoarbitrarymanagersandwithholdingorfalsifyinginformationcanresultinprisontermsofuptothreeyears.
In2005therewasasignificantreformwithrespecttothemonitoringofinsolvencyadministrators.On13October2005theFederalRegistrationService(FSR)wascreatedbypresidentialdecreeinordertotakeresponsibilityfor,amongotherthings,exercisingcontrolovertheactivitiesofself-regulatingorganisations(SROs)whichareresponsiblefortheregistrationandoversightofinsolvencyadministrators.
ThedutiesoftheFSRinclude:ensuringthatSROscomplywithfederallaws;conductingauditsandchecksofSROs;pursuingapplicationsinthearbitrationcourtsfortheremovalofSROsfromthestateregister;pursuingcourtactionstobringadministratorsorSROstoadministrativeresponsibility;takingpartinthetrainingofadministrators;approvinganexaminationforadmissiontoSROs;andapprovingauniformprogrammeoftrainingforadministrators.
Evaluation of the law
In2003and2004,theEBRDconducteddetailedstudiesoftheextensiveness(thequalityofthelawonthebooks)andtheeffectiveness(thewaythelawisappliedinpractice)ofinsolvencylawregimesintheBank’scountriesofoperations.
Chart1showsthattheextensivenessoftheselawsinthesamplecountriesgenerallyexceedstheeffectivenessoftheirimplementation.Reasonsfortheimplementationgapcanincludepoorlytrainedadministrators,insufficientregulatoryoversightandinadequatejudicialcapacity.
Notes: The extensiveness score is based on an expert assessment of the insolvency laws in each country. The effectiveness score refers to the findings of the Legal Indicator Survey. Speed, efficiency and predictability scores for each country were combined to provide an overall effectiveness rating. The extensiveness and effectiveness scores are measured on an ordinal scale from 0 to 100 with higher scores representing better performance. Data for Montenegro, Tajikistan and Turkmenistan were not available.
Source: EBRD Insolvency Sector Assessment Survey, 2003-04 and EBRD Legal Indicator Survey, 2004.
Chart1InsolvencylegalregimesintransitioncountriesExtensiveness and effectiveness by country
Commencement and effects of proceedings
Terminal/liquidationprocesses
Treatment and involvement of creditors
0%20%40%60%80%
100%
Treatment ofestate assets
Reorganisationprocesses
Access and degreeof formality
Creditor-initiated insolvencies
Cost
Bankruptcyadministration
creditor involvement/trustee competence
Speed
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Court identi�cationand experience
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and competence
Access and degreeof formality
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and competence
Debtorprotection
Creditorinvolvement
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Russia
TheRussianinsolvencyframework:buildingacrediblesystem 63
WhileRussiaranksamongthetophalfofthegroupintermsoftheextensivenessofitslaw,itrestsinthebottomthirdintermsoftheeffectiveimplementationofthatlaw.
TheInsolvencySectorAssessment–theextensivenessstudy–measuredthelevelofcomplianceofeachcountry’sinsolvencylegislationwithinternationalstandards.Eachcountrywasmeasuredacross97differentindicesofextensivenessandwas,ultimately,givenafinalscorerangingfromverylowtoveryhighinreferencetoitslevelofcompliancewithinternationalstandards.
Clearly,therehasbeenprogressinthedevelopmentofRussianinsolvencylegislation.The2002Law on Insolvency (Bankruptcy)isaconsiderableimprovementonpreviousRussianinsolvencylegislation.Nevertheless,Russia’slawonlyscoredmediumintheInsolvencySectorAssessment.
Chart2displaysthedatacollectedintheassessmentandshowsthelevelofcomplianceoftheInsolvencyLawwithinternationalstandardsinfivecoreareas,withreorganisationandtreatmentofestateassetsbeinghighlightedasareasforparticularconcern.
Progressshouldbemeasurednotbyquantitybutbyquality
Undeniably,therehasbeenagreatdealofreforminRussianinsolvencylawsinrecentyears,butproblemscontinuetoexist,throwingintodoubtthequalityofthereform.Thedeficienciesnotedintheassessmentincludedthat:
■ thelegislationfailstoprovideabalance-sheettestforinsolvency;itfailstoprovidesufficientsafeguardswithrespecttoreorganisations,includingafailuretoprohibitcriticalsuppliersfromthreateningtocutoffsupplyunlesspastdebtsarepaidinfull
■ thecross-borderinsolvencyprovisionsareinsufficientinthattheyrelyoninternationaltreatiesandreciprocityratherthantheUnitedNationsCommissiononInternationalTradeLaw(UNCITRAL)ModelLaworsimilarEUregulations
■ thepowerofinsolvencyadministratorstoreviewpre-bankruptcytransactionsisweakandineffective,possiblypreventinginsolvencyadministratorsfromundoingimproperbehaviourbydebtorsand,thereby,maximisingtheestatevalue.
Mostcritically,however,thesystemwasseenas:
■ slow–forexample,theperiodofobservationbeforeanyeffectiveinsolvencyprocessbecomeseffectivemaylastforsevenmonthsormore
■ inefficient,inthatitisusuallynecessarytoobtainandthenendeavourtoexecuteajudgementdebtbeforetherewillbesufficientevidenceofcashflowinsolvency,aprocessthatcantake12monthsormore
■ presentingsignificantbarrierstocreditorparticipation,inthatordinarycreditorsaresometimessubjecttothedominationofstatecreditors.
WhiletheRussiangovernmentshouldbecommendedforundertakingreforms,theoverallqualityoftheimplementationofthelegislationremainsrelativelylowincomparisontoleadinginternationalstandards.
WhentheEBRDLegalIndicatorSurvey(LIS)whichstudiedtheeffectivenessofinsolvencylawregimeswasconducted,itwasdecidedtolookatthepracticalfunctioningofinsolvencylawregimesfromtheperspectiveofbothdebtorsandcreditors.Ineachofthesecases,manyaspectsofinsolvencylawregimesweremeasured.Specifically,withrespecttoinsolvencyadministratorsincreditor-initiatedinsolvencies,thecompetenceofthebankruptcyadministratorwasmeasured.Indebtor-initiatedinsolvencies,thequalityofthedebtor’smanagement,whichisconsideredbybankruptcyadministratorsinmanyoftheEBRD’scountriesofoperations,wasmeasured.2
AsCharts3aand3bdemonstrate,theRussiansystemdidnotfarewell.
Chart2QualityofRussianinsolvencylegislation(2004)
Chart3aand3bAssessingtheRussianinsolvencysysteminpractice
Notes: Survey respondents were asked a series of questions about the speed, efficiency and predictability/transparency of creditor – and initiated proceedings. Scores are calculated as a percentage of the maximum score for these criteria with higher values representing better performance. The fuller the web, the more effective the insolvency regime.
Source: EBRD Legal Indicator Survey, 2004
Notes: The outer boundary indicates significant compliance with international standards. The fuller the web, the more comprehensive the system.
Source: EBRD Legal Indicator Survey, 2004
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64 Lawintransition
TheLISdemonstratedsignificantproblemsinmostareas,withcomplexity,speed,costandjudicialpredictabilitybeingidentifiedasproblemsforbothcreditoranddebtor-initiatedproceedings.Especiallyproblematicweretheresultsrelatingtocreditor-initiatedinsolvencieswhichdemonstratedquiteseriousaccessproblemsandhighlightedthedifficultiesfacedbycreditorswhenenforcingtheirrights.Overall,thedataappeartoindicatethattheRussiansystemissomewhatslow,inefficientandunpredictable.
Chart4demonstratesthattheRussianinsolvencysystemlagsbehindmanyoftheinsolvencysystemsinotherEBRDcountriesofoperations.TheRussiansystem’sspeedratingwasamongst
theworst,whileefficiencyandpredictability/transparencywereratedasroughlyaverage.
WhatisclearfromtheEBRD’sanalysisisthatRussiaperformedpoorlyinpracticewithrespecttoinsolvencyadministrators.Thecountryhasanadequateinsolvencylawbutthereisalargeimplementationgapandalackofqualifiedadministratorscapableofeffectivelyimplementingthelaw.ThisissignificantbecauseRussia’sinsolvencylegislationplacesahighdegreeofresponsibilityoninsolvencyadministrators.Theadministratorischargedwiththedutiesofrunningatransparentliquidationprocess,investigatingsuspicioustransactionsand,incasesinwhichfinancial
rehabilitationandexternalmanagementareemployed,managingthedebtor’sbusiness.
Unfortunately,agoodlawthatisnotsupportedbywell-trainedandwell-regulatedinsolvencyadministratorsmay,insomespecificcases,beworsethanabadlawwhichdoesnotevencontemplatemanyoftheaboveduties.
Clearly,thereisthescopeandneedforreformwithintheRussiansystem.Itisnotenoughsimplytoreformthelaw;theremustbequalityreformofboththelegislationanditsimplementationfortheretoberealchange.
WhatisclearfromtheEBRD’sanalysisisthatRussiaperformedpoorlyinpracticewithrespecttoinsolvencyadministrators.Thecountryhasanadequateinsolvencylawbutthereisalargeimplementationgapandalackofqualifiedadministratorscapableofeffectivelyimplementingthelaw.
Notes: Survey respondents were asked a series of questions about the speed, efficiency and predictability/transparency of creditor- and debtor-initiated proceedings. Scores were combined and calculated as a percentage of the maximum score for these criteria. Data for Montenegro, Tajikistan and Turkmenistan were not available.
Source: EBRD Legal Indicator Survey 2004.
Chart4HowinsolvencylawsworkinpracticeEffectiveness by principal criteria
Russia
TheRussianinsolvencyframework:buildingacrediblesystem 65
Notes1 Article20.ARussiancitizenmeetingthe
followingqualificationsmaybeanarbitrationinsolvencypractitioner,ifshe/he:isregisteredasanindividualentrepreneur;hasahighereducationbackground;hasaworkrecordasanexecutiveofatleasttwoyearsintotal;haspassedatheoreticalexaminationunderthearbitrationinsolvencypractitionerstrainingcurriculum;hasundergoneprobationforatleastsixmonthsasanassistantarbitrationinsolvencypractitioner;hasnofinancialorotherseriouscriminalconviction;andisamemberofaself-regulatingorganisation.
2 EuropeanBankforReconstructionandDevelopment,Transition Report 2004,Annex1.1.
AuthorJayAllenCounsel,EuropeanBankforReconstructionandDevelopmentTel:+442073387632Fax:+442073386150Email:[email protected]
EuropeanBankforReconstructionandDevelopmentOneExchangeSquareLondonEC2A2JNUnitedKingdom
The Russian insolvency regulator capacity-building project
Therearenowover30insolvencyadministrator-relatedSROsinRussia.Thislevelofdecentralisationbringswithitasignificantriskthatthemonitoringofadministratorswillbeunequalbetweenorganisationsanditcreatesanenvironmentthatallowscorruptiontoexist.WithintheRussiansystem,creditorswhoinitiateproceedingshavetherighttoselectanSROfromwhichtheadministratorwillbeappointed.TheSROwillthennominateadministratorsforthecase.
ItispossiblethatthiscouldleadtoSROsbecomingbeholdentocertaincreditorsandworkingfortheirbenefittothedetrimentofothercreditors.AnotherconcernwiththesystemisthattheSROcontrolovertheaccesstoworkcouldmakeindividualadministratorssubjecttocorruptionfromwithintheSROitself,eitherintheformofdemandsforbribesorpressuretocarryouttheirdutiesinfavourofaparticularcreditor.
Insolvencyadministratorsaretheheartofmanyinsolvencysystems.Thestartingpointforrealreformistoimprovethequalityofadministratorsandthesystemfortheiroversightinacountry.Atpresent,manyadministratorsinRussiaarepoorlytrainedbytheirSRO,despitethebesteffortsoftheFSRandtheMEDT.Worsestill,thesystemisvulnerabletounethicalpracticesbyadministrators–forexample,preferringtheinterestsofasinglecreditortothedetrimentofothercreditors,orturningablindeyetotheillegalorunscrupulousactionsofthatcreditor.
Inordertoimprovethissituation,theEBRDandtheMEDT,withfundingfromtheSwissStateSecretariatforEconomicAffairs,aretoundertakeaprojectdesignedtobuildthecapacityofinsolvencyregulatorsinRussia.
TheprojectwillinvolveworkingcloselywiththeMEDTalongwiththeFSRandtheSROstoreviewexistingtrainingandmonitoringproceduresandsuggestimprovementsthatwillbuildtheoverallregulatorycapacitywithinthecountry.Tothatend,theEBRDwillmeetwithlocalpractitioners,lawyers,accountants,governmentofficialsandothersinordertounderstandbetterthepracticeofofficeholdersandtodesignandimplementasurveytoobtainanunderstandingoftheconductofinsolvencycasesinRussia.
ThisinformationwillbeusedinthepreparationofacomprehensiveimplementationmanualinrespectofthecorepracticeareasforadministratorsforusebytheFSRandtheMEDTinoverseeingandsettingstandardsforthem.Amongotherthings,theimplementationmanualwillincludestandardsandbestpracticesfortheadministrationofinsolventestates,includingreferencetoreviewingtransactions,reviewingclaimsandconductingsaleprocesses,methodsforreportingbyandmonitoringofinsolvencyadministratorsandmethodsforcarryingoutdisciplinaryfunctions.
Theprojectwillalsoresultinareviewofthelicensingexaminationandeducationalcurriculumtosuggestwaystoimprovetheextensivenessoftheeducationalmaterialaswellastheeffectivenessofitsimplementation.Thesesuggestionswillbuildonthealreadyestablishedsystemandwillworkwiththeexistingexaminationandcurriculum.Toassistwiththeimplementationofthis,theEBRDwill“trainthetrainers”tousetherevisedproducts.
Finally,theprojectwillincludesuggestionsforrelevantlegislativereformsand,asrequired,commentoninsolvencyrelatedlegislativeinitiativesbroughtforwardbytheMEDT.
SecuritiesmarketlegislationinRussia:
past,presentandfuture
TheEBRDrecentlycompletedanassessmentonthequalityofsecuritiesmarketlegislationinits29countriesofoperations.2Theinitiative–whichfocusedonthelawinforceon31May2005–isdevotedtogaugingthecomplianceofsecuritiesmarketlegislationwiththeObjectivesandPrinciplesofSecuritiesRegulationpublishedbytheInternationalOrganizationofSecuritiesCommissions(IOSCO).
ThisarticlefocusesonhowRussiafaredintheassessmentandprovidesaninsightintocurrentreformsthere.
Compliance with international standards
InordertocollectthedataonnationallegislationintheEBRD’scountriesofoperations,theBankdevisedaquestionnairewhichcoveredthemajoraspectsofsecuritieslegislationbasedlargelyontheIOSCOPrinciples.Withnearly300questions,thequestionnairecovered11subjectareas,rangingfromthepowersoftheregulatortomoneylaunderingissues.
Theresponseswereanalysedandeachanswerwasassignedascore.Scoreswerethenweightedaccordingtotheimportanceassignedtospecificsections.Finally,thesumoftheweightedsectionscoreswasaveragedinordertoderiveasinglenumericalvalueforeachcountry.Basedontheseresults,eachcountrywasplacedintoagroupingthatindicatesitslevelofadherencetointernationalstandardsforsecuritiesmarketslegislation.
The29countriesweredividedintofivecategoriesaccordingtotheirscore(seeTable1overleaf).Veryhighcompliancemeansthattheinternationalprinciplesarefullyreflectedinnationallegislation.Countrieswithhighcomplianceratingshaverelativelysoundexistinglawsinthemajorityofareashighlightedbytheprinciples.Thosecountrieswithmediumcomplianceratingshaveareasofconcernwhereimprovementisneeded.Aratingoflowcomplianceindicatesasituationwherethegeneralqualityofthelegislationshouldbeimprovedandaratingofverylowcomplianceisasymptomofalegalsystemwhichneedsurgentreform.
Itshouldbenotedthattheassessmentlooksexclusivelyatthequalityofthelawsonthebooks.AnanalysisoftheactualimplementationofsecuritiesmarketslegislationisplannedforpublicationbytheEBRDinthesecondhalfof2007.
Russia’ssecuritiesmarketlegislationwasfoundtobeinmediumcompliancewithinternationalstandards.Chart1overleafshowshowRussiafaredineachofthe11subjectareas.
AsillustratedinChart1,someofthesectionsanalysedbytheEBRDassessmentareinlinewithinternationalstandards.Theexistinglegislationwasfoundtobeofverygoodqualityespeciallywithrespecttoself-regulationandmoneylaunderingissues.Ontheotherhand,othersectionsshowedseveralweaknesseswheretheRussianauthoritiesshouldconcentratetheirprioritiesforreform.
GianPieroCignaCounsel,EBRD1
ElenaSulimaCounsel,EBRD
Russia
SecuritiesmarketlegislationinRussia:past,presentandfuture 67
ArecentEBRDassessmentfoundthatRussia’ssecuritiesmarketlegislationisinmediumcompliancewithinternationalstandards.ThisarticlediscusseshowRussiaperformedintheassessment,howitcouldimproveitslevelofcomplianceandprovidesaninsightintocurrentreforms.
Regulator
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68 Lawintransition
Table1QualityofsecuritiesmarketlegislationintheEBRD’scountriesofoperationsCompliance with international securities markets standards
Note: The assessment took into consideration the legislation in force on 31 May 2005.
Source: EBRD Securities Market Legislation Assessment 2005
Chart1QualityofsecuritiesmarketlegislationinRussia
Note: The extremity of each axis represents an ideal score, corresponding to the standards set forth in IOSCO’s Objectives and Principles for Securities Regulations. The fuller the web, the closer the relevant securities market legislation of the country approximates these principles.
Source: EBRD Securities Market Legislation Assessment 2005
Very high compliance/ (No countries)
High compliance/ (9 countries)
Medium compliance/ (11 countries)
Low compliance/ (4 countries)
Very low compliance/ (3 countries)
BulgariaCzech RepublicCroatiaEstoniaFYR MacedoniaLatviaLithuaniaSlovak RepublicSlovenia
ArmeniaBosnia and HerzegovinaGeorgiaKazakhstanMontenegroPolandRomaniaRussiaSerbiaUkraineUzbekistan
AlbaniaBelarusKyrgyz RepublicMoldova
AzerbaijanTajikistanTurkmenistan
Theregulator
Thescope,responsibilitiesandindependenceoftheregulator,includingitsenforcementandsupervisionpowers,aredetailedintheIOSCOPrinciplesontheRegulator3andonCooperationinRegulation.4SinceMarch2004,theRussiansecuritiesmarketregulatorhasbeentheFederalServiceforFinancialMarkets(FSFM).
TheFSFMwasestablishedbymergingthecompetenciesoftheformerFederalCommissionfortheSecuritiesMarketwiththosebelongingtotheMinistryofLabourandSocialDevelopmentandtheAnti-monopolyMinistryforsupervisionoftheexchangeandaddingthoseoftheMinistryofFinanceforthesupervisionofpensionfunds.TheFSFMoperatesdirectlyunderthejurisdictionofthegovernmentanditsfunctionsrangefromtheregulationofsecuritiesissuanceandtrading–includingthepowertoproposebillstothefederalgovernment–tothecontrolandsupervisionofissuers,marketparticipantsandselfregulatoryorganisations(SROs).5
TheFSFMhasaccesstothebooksandrecordsofmarketparticipantsandcandecidetoholdinspections.Incases
whereirregularitiesarefound,theFSFMcansuspendorrevokealicenceandcanrefermattersforcriminalprosecution.6
AllinformationreceivedbytheFSFMmustbetreatedasconfidential.Indeed,thelawprohibitstheuseofsuchinformationforusesotherthanmarketsupervision,butsanctionsincaseofabreacharegenerallytoolowtodiscourageillicitbehaviour.7Moreover,thelawprohibitinginsidertradinghasnotyetbeenputinplace(seepage71).
TheFSFMisanordinarymemberofIOSCObuthaslimitedagreementsinplaceforcollaborationandinformationsharingwithforeignregulators.
OneofthemajorflawsrevealedbytheassessmentistheFSFM’slackofindependence:itschairmanisappointedanddismissedbythegovernmentatitsdiscretionanditsresourcesdependentirelyonthefederalbudget.
Asaresult,thiscoreareaofnationallegislationwasfoundtobeinmediumcompliancewithinternationalstandards.
Self-regulation
IOSCOPrinciplessixandsevendealwithSROs,recommendingtheiruseforexercisingoversightresponsibilityinsomedefinedareasunderthesupervisionoftheregulator.SROsareorganisationswhichexercisesomedegreeofregulatoryauthorityoverthesecuritiesmarketandareabletoenforceregulationsontheirmembers,suchasminimumfinancialandreportingrequirements.TypicalexamplesofSROsarenationalsecuritiesexchanges,registeredsecuritiesassociations,orregisteredclearingagencieswhichareauthorisedtoregulatetheconductandactivitiesoftheirmembers,subjecttooversightbytheregulator.
UnderArticle50oftheLaw on the Securities Markets,SROsinRussiaareorganisedasnon-commercialorganisations,madeupofatleasttenprofessionalsecuritiesmarketparticipants.8SROsarerequired
Russia
SecuritiesmarketlegislationinRussia:past,presentandfuture 6�
Foreignissuers–otherthaninternationalfinancialinstitutions–arepermittedtoplaceandcirculatesecuritiesinRussiaonlyonthebasisofaninternationaltreatyoranagreementbetweentheFSFMandthesecuritiesregulatoroftheforeignissuer’scountry.
tosubmittotheFSFMtherulesdefiningtheirorganisationandmembershipasaconditionprecedentforobtainingthelicence.SROsarerequiredtocooperatewiththeFSFMandotherSROsfortheenforcementoflaws,regulationsandrules.9SROshavetheauthoritytoenforcetheirownregulations,imposeappropriatesanctionsfornon-complianceandensurefairrepresent-ationoftheirmembersontheboard.10
SROsarealsorequiredtofollowcertainprofessionalstandardsadoptedbytheFSFM.However,withtheexceptionofcertainrequirementssetforthinChapter13oftheSecuritiesLawandResolutionNumber24,suchstandardshavenotyetbeenimplemented.ThiswastheonlyweaknessregisteredbytheassessmentinthiscoreareawhichreceivedaratingofveryhighcomplianceofRussianlegislationwithrelevantinternationalstandards.
Issuersandtheirinformation-disclosureobligation
Publicofferingsofsecurities,prospectusrequirements,listingparticularsandmechanismstoprotectminorityshareholdersareotherimportantelementsofawell-functioningsecuritiesmarket.
AccordingtoRussianlaw,inpublicofferingsofsecurities,issuersarerequiredtoprepare,distributeandregisteraprospectuswiththeFSFM.Prospectusrequirementsapplyincasesofeitheropenorclosedsubscriptionsregardlessofthetotalvalueoftheissuance,providedthatthenumberofacquirersexceeds500.
Foreignissuers–otherthaninternationalfinancialinstitutions–arepermittedtoplaceandcirculatesecuritiesinRussiaonlyonthebasisofaninternational
treatyoranagreementbetweentheFSFMandthesecuritiesregulatoroftheforeignissuer’scountry.Todate,thispracticeisextremelylimitedastheonlytreatiesinplacearewithsomecountriesoftheCommonwealthofIndependentStates.Incaseofapublicofferingand/orpubliccirculationofaforeignissuers’securities,theymustberegisteredwithdepositoriesincorporatedunderRussianlawandmeetrequirementsyettobeestablishedbytheFSFM.
Theissuerisresponsibleforthecontentsoftheprospectusandquarterlyreports.Prospectusesmustbeco-signedbyanauditorand,insomeinstances,byindependentappraiserswhojointheissuerforliabilityincaseoffalse,incompleteand/ormisleadinginformation.
Thissection,whichwasbenchmarkedwiththeIOSCOPrinciplesforIssuers,showedanoveralllevelofmediumcompliance.SomeoftheflawshighlightedbytheEBRDassessmenthavebeensolvedwithrecentamendments.11InDecember2005andJuly2006,theLaw on the Securities Market, the Joint-stock Companies LawandsomeFSFMregulationswereamendedtosimplifytheprocessofinitialpublicofferings(IPOs)byRussiancompaniesandtoresolveissuesthatcomplicatedtheIPOprocess.
InDecember2005,theJoint-stock Companies Lawwasamendedtoallowashortened20-dayperiodfortheexerciseofpre-emptiverightsbyexistingshareholders.Inaddition,theamendmentallowsthepricefortheexerciseofsuchrightsupontheexpiryofthisperiodtobesetup.Thepurpose
ofthisamendmentwastoresolveoneofthemostnotoriousconcernsinrespectoftheRussianIPOprocess,namelywhenmarketparticipantshadtofixthesharepricelonginadvanceoftheplacement.
Duringthesameperiod,theSecuritiesLawwasamendedtoincludethenotionofaplacementnotice,tobefiledwiththeFSFMinsteadofregistrationoftheplacementreport.Thissimplifiedtheplacementregistration.12Disclosureruleswerealsoamendedsoastoprovidebetteraccessbylocalinvestorstoinformationaboutacompanyissuingsharesinanopensubscription.InformationrequiredtobepubliclydisclosedbyaRussiancompanyoutsideofRussiainconnectionwithasubscriptionnowhastobedisclosedinRussiaaswell.13
InJanuary2006theFSFMintroducedcertainrestrictionswithrespecttotheplacementandtradingofsharesofRussiancompaniesoutsideRussia,includingintheformofdepositoryreceipts.14Thenumberofsuchsharescannotexceed35percentofthetotalnumberofissuedsharesofthesametype.TheFSFMwouldgrantitspermissionfortheplacementortradingofsharesoutsideRussia,includingbywayofplacementofforeign-issuedsecurities,onlyiftheyaresimultaneouslyofferedinRussia.Inaddition,notmorethan70percentofthetotalnumberofeachissuecanbeplacedoutsideofRussia.
InJuly2006,newrulesfortheacquisitionofmorethan30,50or75percentofthevotingsharesinaRussianopenjoint-stockcompany
70 Lawintransition
AlongwiththedevelopmentofafavourableRussiansecuritiesmarketinfrastructure,theintroductionofRussiandepositaryreceiptscouldprovideanopportunityfordomesticinvestorstoinvestincompanieswithsubstantialRussianassetsthatarelistedoutsideRussia.
introducedintheJoint-stock CompaniesLawenteredintoforce.15Acquisitionsinexcessofthesethresholdstriggerbothvoluntaryandmandatorytenderofferrulesontheremainingshares.
Theamendmentsalsointroducednewso-calledsqueeze-outrules.Theholdingortheacquisitionthroughapublicofferingbyaperson–aloneortogetherwithaffiliatedparties–ofmorethan95percentofvotingsharesinanopenjoint-stockcompanyallowsthepurchasertocompeltheminorityshareholderstoselltheirshares.Theserulesdonotapplytothoseshareholdersthatheldmorethan95percentofsharesasof1July2006.Theywouldbeabletoexercisetheirsqueeze-outrightsonlyupontheenactmentofalawregulatingobligatorycivilliabilityinsuranceofindependentevaluatorssoastoeventuallyprotectevaluatorsfromshareholdersclaims.
Notwithstandingtheimprovementsmentionedabove,anumberofissuesstillneedtobeaddressed.OneoftheFSFM’sconcernsisthatasubstantialpartofRussianassetsisbeingtradedinforeignmarketsasdepositoryreceiptsissuedonsharesofRussiancompaniesandassharesofnon-RussianholdingcompanieswithsignificantRussiansubsidiaries.On30December2006anewlawintroducingchangestotheSecuritiesLaw16wasenacted,bringinginthenotionofaRussiandepositoryreceipt.TheintroductionofRussiandepositoryreceipts,whileincreasingtherangeoffinancialinstrumentsintheRussiansecuritiesmarket,providesdomesticinvestorswithaccesstoforeigncapitalmarketsandanopportunitytoinvestincompanieswithsubstantialRussianassetsthatarelistedoutsideRussia.
Collectiveinvestmentschemes
Theexistenceofcollectiveinvestmentschemesisagoodindicatorofthedevelopmentofthesecuritiesmarketinagivencountry.WhereasinseveralcountriesintheEBRDregiontherearenospecificstandardsorrequirementsestablishedinlawtomarketoroperatecollectiveinvestmentschemes,theassessment,inthecaseofRussia,revealedahighlevelofcompliancewiththerelevantstandards.17
ThebasicframeworkforcollectiveinvestmentschemesinRussiaiscomposedofthefederalLaw on Investment Fundsalongwithanumberofresolutionsissuedbytheregulator.18Investmentfundscanbeestablishedintheformofjoint-stockcompaniesornon-corporateentities,suchasunitinvestmentfunds.CollectiveinvestmentschemesmustbelicensedbytheFSFM.Licensingrequirementsincludeeducation,fitness,propriety,honesty,integrity,competence,experienceandfinancialcapacity.
Theoperatorsoftheseschemesarerequiredtodisclosetheirpriceonaregularbasisandaresubjecttoanongoingobligationtodisclosematerialinformationwhichmightinfluencethevalueofacollectiveinvestmentscheme.Paymentsofredemptionproceedsmustbemadenolaterthan15daysfromthedateofredemption.19
Theunlicensedoperationoffundscanresultinadministrativeliability,20criminalliability21andliquidation.22PursuanttothefederalLaw on Investment Funds,theFSFMcanorderspecificactions,forexample,thesuspensionandrevocationoflicences,thesuspensionofanissueandtheimpositionoffines,incaseofsuspected
oractualbreachesofthelaw.Operatorsaresubjecttosegregationofassetsrequirements.Collectiveinvestmentschemesassetsarerequiredtobeheldbyadepositor–licensedbytheFSFM–onbehalfoftheinvestors,buttherearenorequirementsconcerningthedepositor’sindependence,whichmightgiverisetoconcernandshouldbetackledasamatterofpriority.
Marketintermediaries
ThefifthsectionoftheEBRDquestionnaireaddressedthelicensingcriteriaformarketintermediaries,riskmanagementandinternalsupervisorysystems,minimumcapitalandcapitaladequacyrequirements.
InRussia,allprofessionalactivitiesonthesecuritiesmarketmustbecarriedoutonthebasisofalicenceissuedbytheFSFMorotheragenciesempoweredbytheFSFM.23Minimumstandardsforlicensinginclude:minimumcapital;properbooksandrecordkeeping;internalcontrolprocedures;riskmanagementrequirements;anddefinedskillsandexperienceofseniormanagement,directorsandcontrollingshareholders.24Intheeventthatamarketintermediaryfailstomeetongoingrequirements,theFSFMhasthepowertosuspend25orrevokeitslicence,imposeconditionsorrestrictionsonitsbusinessoperations,imposeadministrativesanctions26ordeferthemattertotheprosecutorforthestartofcriminalproceedings.27
LicensedmarketintermediariesarerequiredtoinformtheFSFMoftheirreorganisationorchangeofnameoraddressbuttheydonothavetoinformtheFSFMofeventualchangesinthefirm’sownership28orsenior
0
5
10
15
20
25
30Trillionsof roubles
1998 1999 2000 2001 2002 2003 2004 2005
Currency market
Stock market
“REPO” market
Deposit of the Bank of Russia
Derivative market
MICEX turnover
Russia
SecuritiesmarketlegislationinRussia:past,presentandfuture 71
Chart2aMICEXannualtradingvolumes1998-2005
Source: http://www.micex.com
management.29Thelawdoesnotrequireprofessionalparticipantstoinformclientsofpotentialconflictsofinterest,butitdoesrequirethemtoinformclientswhenaconflictactuallyoccurs.Asaresult,Russianlegislationonmarketintermediarieswasfoundtobeinmediumcompliancewithrelevantinternationalstandards.
Secondarymarket
Thelicensingofsecuritiesexchanges,trading,clearingandsettlementsystems,alongwithissuessuchaspricemanipulation,insidertrading,marketabuseandprudentrequirementsfortradingsystemsmemberswerebenchmarkedagainsttheIOSCOPrinciplesapplicabletosecondarymarkets,whichresultedinaratingofmediumcompliance.30
TheMoscowInterbankCurrencyExchange(MICEX)isthelargestfinancialexchangeinRussia.Tradinginnon-governmentsecuritieswaslaunchedinMarch1997.Laterthatyear,followingtheexampleoftheMICEX,regionalcurrencyandstockexchangesinSamara,Rostov-on-Don,StPetersburg,NizhniyNovgorodandYekaterinburgalsolaunchedtradinginbondsandstocks.
Chart2aclearlyshowstheincreaseoftradingactivitiesontheMICEXduringthepastfewyears.Theincreaseisparticularlyremarkableforthestockexchange(seedetailsinChart2c)andforcurrencymarketvolumes.Theincreaseintradingofderivativesisalsosignificant(seeChart2boverleaf)anditisinterestingtoseethedrasticcollapseofvolumeoftradingafterthe1998crises(seeCharts2band2coverleaf).
Allsecuritiesexchange,trading,clearingorsettlementsystemsinRussiaaresubjecttolicensingbytheFSFM.Amongotherrequirements,thelicensee’scapitalmustmeettherequirementssetbytheFSFM,31complywiththedescriptionsofriskmanagementsystemsandcontributetoinvestors’compensationfunds.32Onlybrokers,dealersandmanagers(professionalsecuritiesmarketparticipants)candirectlyparticipateintradingsecuritiesonthestockexchange.
InordertoallowtheFSFMtomonitortheongoingcomplianceofthesystemwiththeinitialauthorisationrequirement,tradingorganisersmustdiscloseinformationontheiractivitiesandoperationstotheFSFMonaregular
basis.TheFSFMisentitledtoexercisecontrolovertradingorganisersandcarryoutinspections.Intheeventthattradingorganisersarenotabletoenforcetheirinternalrulesandregulations,theymustreporttotheFSFMandthelatterhastherighttorevokethelicence.
Themajorshortcomingsregisteredinthissectionare,first,theinabilityoftheregulatortocompelmarketparticipantscarryinglargepositionstoreducetheirexposuresand,secondly,thelackofacomprehensiveinsidertradingregulation.
Asregardsinsidertradingissues,whiletheSecuritiesLawcontainsanotionoftheconceptofofficeinformationandprohibitstradingbasedonit,thisnotionislimitedandfinesforusingsuchinformationareinsufficient.Inordertoimprovemarketinfrastructureandattractawiderrangeofmarketparticipants,Russianeedstoadoptlawsprohibitinginsidertrading.
1996* 1997* 1998 1999 2000 2001 2002 20042003 2005
0
50
100
150
200Billionsof roubles
1994* 1995* 1996* 1997* 1998 1999 2000 2001 2002 20042003 2005
0
1,000
2,000
3,000
4,000
5,000
6,000Billionsof roubles
72 Lawintransition
Clearanceandsettlement
StandardsonthesurveillanceandauditingofclearingsystemsareessentiallyentrustedtotheRecommendationsforSecuritiesSettlementsSystemswhichispublishedintheJointReportfromtheTechnicalCommitteeofIOSCOandtheCommitteeonPaymentandSettlementSystemsoftheBankforInternationalSettlements(November2001).33
InRussia,theactivitiesofclearingorganisationsaresubjecttoFSFMsupervisionandcontrol.AccordingtotheSecuritiesLaw,stockexchangesandtradingorganiserscanalsoperformclearingactivities(thatis,matchtheaccountliabilitiesandclaimsoftradeparticipantsasaresultoftradesinsecurities),collect,verifyandcorrectinformationontradesinsecurities,definetheprocedureforthesettlementoftradeparticipants’obligations,determinethenetliabilitiesandnetclaimsoftradeparticipantsandprovidesettlementofnetliabilitiesandclaimsonadelivery-versus-paymentbasis.
ClearingsystemsmustbelicensedbytheFSFMandapplicantsarerequiredtocomplywithsecuritieslegislationrequirementsandwithspecificcapitalrequirements.Changestoaclearingorganisation’sinternalrulesandproceduresaresubjecttothepriorapprovaloftheFSFM.Themainrequirementforapprovalisthecomplianceofsubmitteddocumentswithapplicablelegislation.
OneofthelegislativeinitiativesthathasbeendiscussedinRussiaoverthelastfewyearsistheideaofcreatingacentraldepositary.Itisbelievedthat,
Chart2bMICEXderivativesvolumes1996-2005
Chart2cMICEXstockvolumes1994-2005
* Value expressed in 1998 denominated roubles (1000 non-denominated roubles = 1 denominated rouble)
Source: http://www.micex.com
Russia
SecuritiesmarketlegislationinRussia:past,presentandfuture 73
ThemainobstacletothedevelopmentoftheRussianderivativesmarketisthelegaluncertaintyastotheavailabilityofjudicialprotectionforclaimsarisinginconnectionwithcash-settledderivativestransactions.
onceestablished,itwillguaranteeahigherdegreeofprotectionofownershiprightstosecuritiesascomparedtothecurrentsystem,aswellasprovideforanefficientandsimplifiedsecuritiessettlementsystem.Asaresult,theestablishmentofthecentraldepositarywouldaddtotheimprovementofthemarketinfrastructureandstrengthenthecompetitivenessoftheRussianstockmarket.
Itisdifficulttopredict,however,whenacentraldepositarywouldbecreatedinRussia,althoughthenecessityofitsestablishmenthasbeenatopicofdiscussionformanyyears.
Anti-moneylaundering,financialinstrumentsandinvestmentserviceproviders
ThethreefinalsectionsoftheEBRD’sanalysiswerededicatedtolegislativeawarenessoftheneedtopreventanddiscouragemoneylaunderingoperations,toopenmarketstomoresophisticatedfinancialproductssuchasderivativesandtoaccommodateinvestmentserviceprovidersasaseparateclassofsecuritiesprofessional.Whilethelegislationonmoneylaunderingandinvestmentserviceprovidersappearedtobegenerallyinlinewithapplicableinternationalstandards,significantflawswereregisteredinthesectiondedicatedtofinancialinstruments(seeChart1).
AlthoughtheRussianderivativesmarkethasgrownconsiderablyoverthelastfewyears(seeChart2b),incomparisonwithworldmarketsitremainssmallandquitelimitedintermsofavailableinstruments.ThemainobstacletothedevelopmentoftheRussianderivativesmarketisthe
legaluncertaintyastotheavailabilityofjudicialprotectionforclaimsarisinginconnectionwithcash-settledderivativestransactions.
ThisuncertaintyresultsfromanumberofRussiancourtdecisionstakensince1998,includingfromcourtsofhighinstance34andtheRussianConstitutionalCourt.35ThebasisforthesedecisionsrefusingtograntjudicialprotectiontoclaimsarisingoutofderivativestransactionswastheapplicationofgamblingprovisionscontainedintheRussianCivilCode(thatdonotprovidelegalprotectiontogamblingcontracts)toderivativestransactions.
InordertoeliminatetheproblemofunenforceabilityofderivativescontractsunderRussianlaw,thelegislatureshouldexemptderivativestransactionsfromthegamblingprovisionsoftheRussianCivilCode.ThefederallawOn amendments
to article 1062 of Part II of the Civil Code
of the Russian Federationhasjustbeenenacted36anditisdifficulttopredicthowthelawwillbeimplemented.Atthismoment,thelawdoesnotseemtoprovidethecertaintythatmarketparticipantswerehopingfor.
ItrestrictsthescopeofeligiblecounterpartiestoderivativestransactionsbyprovidingthatthegamblingprovisionsoftheRussianCivilCodewouldnotapplyonlytothosederivativetransactionswhereatleastonecounterpartyisanentitylicensedtoengageinbankingortoactasaprofessionalsecuritiesmarketparticipant,thatisalicensedRussianentity.Inaddition,thenewlawdoesnotcoverthefullrangeofderivatives
transactionsand,asaresult,excludescertaintypesofderivativesfromthescopeoflegalprotection.
Thelackofjudicialprotectionofclaimsarisinginconnectionwithcash-settledderivativescontractshasbeenthemainimpedimenttothedevelopmentofaderivativesmarketinRussia.However,thereremainanumberofotherissuesthat,whileunresolved,arealsohamperingitsdevelopment.Theseincludetheuncertaintyofapplicationofclose-outnettingincaseofinsolvencyproceedingsunderRussianlawandthelackofcertaintypesofcollateralarrangementsthatarewidelyusedinworldmarkets.
AnotherareaofincreasinginterestamonginvestorsandothermarketparticipantsinRussiaisthedevelopmentofsecuritisationinstruments.Therehavealreadybeenseveralsuccessfulsecuritisationtransactionsoffutureflowstructuredwithanoffshoreissuer.Thereissignificantfurtheroriginatorinterestinsecuritisation,especiallyforexportreceivables-baseddealsandcreditcardandconsumerloansreceivables.
TheRussianmarketwouldbenefitconsiderablyfromdevelopingadomesticlegalframeworkforthesecuritisationofassets.AtthemomentRussiahasnospecificlegislationgoverningthesecuritisationofassets,exceptformortgages.37However,thecreationofanappropriatelegislativeframeworkforasset-backedsecuritiestransactionsinRussiawouldrequiresignificantamendmentstoalargenumberofexistinglaws.
74 Lawintransition
TheseshouldincludeamendmentstotheRussianCivilCodetoallowfortheassignmentoffutureclaims,theintroductionofanotionoftrustmanagement,amendmentstotaxlawstoprovideaneutraltaxregimeforsecuritisationdeals,amendmentstobankruptcylawstoprovideforspecificbankruptcyproceduresforsuchsecuritiesissuersandtocertainotherlaws.
Severallegislativeinitiativesaimedatthecreationofalegislativeframeworkforasset-backedtransactionsarealreadyunderway.DevelopingalocalsecuritisationmarketinRussiawouldultimatelyprovideRussianborrowerswithwideraccesstolong-termfinancing,reducedborrowingcostsandanexpandedrangeofcompaniesthathaveaccesstobondfinancing.
Conclusion
TherehavebeenseveralimprovementsmadetoRussia’slegislationonsecuritiesmarketsduringthepastfewyears.However,thereisstillmuchprogresstobemadeinmarketsupervision,clearanceandprudentialrequirementsforexchangesandintermediaries.Theregulatorshouldbesubjecttoacodeofconductand
itsactivitiesshouldbemorepublic,itshouldhaveinvestigatoryandrulemakingpowersanditshouldcooperatewithregulatorsfromotherjurisdictions.
Russiaalsoneedstoimplementthelistingofparticularrequirements,strengthenminorityshareholderprotections,imposereal-timetradeconfirmationsandcentralisesecuritiesdepositories.Currentlytherearenoregulatorypowerstoimposemargincalls,reduceexposurestolargesharepositions,orotherwiseempoweramarketauthoritytotakeactionagainstsystemicrisks.
Uncertaintyinrespectoflegalprotectionofderivativestransactionshastobeeliminatedandnettingandcollaterallegislationshouldbeadoptedsothatmoresophisticatedfinancialinstrumentscanbedeveloped.Introducinglegislativeamendmentsthatwouldallowthedevelopmentofdomesticasset-backedtransactionswouldalsobeanimportantstep.
TheeliminationoftheabovelegislativeimpedimentswouldprovidefinancialmarketparticipantswiththelegalcertaintyandconfidencethatisabsolutelynecessaryinordertobolsterthedevelopmentofRussia’sfinancialmarket.
Notes1 Thisarticleisbasedondocumentationfrom
theEBRD’sSecuritiesMarketsLegislationAssessment,2005,conductedbytheBankwithassistancefromthelawfirmSALANSbutexpressesonlythepersonalopinionsoftheauthorsanddoesnotnecessarilyrepresenttheviewsoftheEBRD.TheassessmentwasfinancedbytheFrenchgovernment.Opinionsexpressedarebasedoncurrentlegislationasof30January2007.
2 TheEBRD’scountriesofoperationsare:Albania,Armenia,Azerbaijan,Belarus,BosniaandHerzegovina,Bulgaria,Croatia,CzechRepublic,Estonia,FormerYugoslavRepublicofMacedonia,Georgia,Hungary,Kazakhstan,KyrgyzRepublic,Latvia,Lithuania,Moldova,Mongolia,Montenegro,Poland,Romania,Russia,Serbia,SlovakRepublic,Slovenia,Tajikistan,Turkmenistan,UkraineandUzbekistan.
3 Specifically,IOSCOPrinciples1,2,3,4and5(formoredetailsseewww.iosco.org).
4 Basically,IOSCOPrinciples11,12and13.
5 Themainfunctions,powersandorganisationoftheFSFM’sactivityaresetoutinRussianGovernmentDecreeNumber206“OntheFederalFinancialMarketsService”of9April2004,andinthestatuteontheFederalFinancialMarketsServiceof30June2004,approvedbyRussianGovernmentalDecreeNumber317of30June2004.
6 Article51oftheSecuritiesLaw;ResolutionoftheFSFM“OntheAdoptionofProcedureforLicensingofTypesofProfessionalActivitiesontheRFSecuritiesMarket”Number05-3/pz-nof16March2005.
7 Administrativesanctionsarelimitedto20-30timestheRussianminimummonthlywage(currently–100Roubles)whilecriminalliabilityisprovidedonlyforthedisclosureofcommerciallysensitiveinformation.
8 FederalLaw“OntheSecuritiesMarket”Number39-FZof22April1996(theSecuritiesLaw).
9 SROsarerequiredtocooperatewiththefederalauthorityresponsibleforthesecuritiesmarketpursuantto,amongothers,paragraphs2.2,7.3.8and7.3.11oftheFSFMResolutionon“ApprovaloftheRegulationonSelf-RegulatoryOrganisationsofProfessionalSecuritiesMarketParticipantsandRegulationontheLicensingofSelf-RegulatoryOrganisationsofProfessionalSecuritiesMarketParticipants”Number24of1July1997(ResolutionNumber24)andOrderoftheFSFM“OntheCo-operationoftheFederalCommissionfortheSecuritiesMarketwithSelf-RegulatoryOrganisationsuponConductingInspectionsofActivitiesofProfessionalSecuritiesMarketParticipants”Number982-rof17September1998.
10 Pursuanttoparagraph4.3ofResolutionNumber24atleastone-thirdofacollectivebodyofanSROshallconsistofpersonswhoarenot:(i)membersofthatSRO,(ii)employedbythatSRO,or(iii)professionalsecuritiesmarketparticipants.TheremainingmembersarerepresentativesofmembersofthatSROpursuanttoitscharter.ThereshouldbenomorethanonerepresentativefromonememberoftheSROontheboard.
11 TheIOSCOPrinciplesrelevantforthissectionarenumbers14and15.
12 Art.25oftheSecuritiesLaw.
13 Art.2.8.1oftheRegulation“OnDisclosureofInformationbyIssuersofSecurities”approvedbyFSFMOrderNumber05-5/pz-nof16March2005.
14 Art.9oftheFSFMOrder“OnApprovalofRegulationontheProcedureofIssuanceoftheFSFMPermitsforPlacementand/orTradingofSecuritiesofRussianIssuersoutsideoftheRussianFederation”Number06-5/pz-nof12January2006.
15 FederalLawN7-FZ“OnAmendmentstotheFederalLaw“OnJoint-StockCompanies”andtoCertainOtherLegislativeActsoftheRussianFederation”of5January2006.
16 FederalLawN282-FZ“OnAmendmentstotheFederalLaw‘Onthesecuritiesmarket’”of30December2006.
17 IOSCOPrinciples17,18,19and20.
18 LawNumber156-FZof29November2001.Essentially,FSFMResolutionNumber28/psof31July2002;FCSMResolutionon“AdditionalRequirementsfortheProcedureofEstablishmentofUnitInvestmentFundsoutoftheAssetsofJoint-StockCompanies”Number44/psof6November2002;FCSMResolutionon“ApprovaloftheRegulationsontheProcedureandTermsofEstablishingtheNetAssetsofJointStockInvestmentFunds”Number05-21/pz-nof15June2005;FCSMResolutionon“ApprovaloftheRegulationsontheRequirementstotheProcedureandTermsofDisclosureofInformationontheActivityofJointStockInvestmentFundsandManagementCompaniesofInvestmentFunds,andonthecontentoftheInformationSubjecttoDisclosure”Number05-23/pz-nof22June2005.
19 Art.25offederalLaw on investment fundsNumber156-FZof29November2001.
20 Art.14.1oftheRussianCodeonAdministrativeOffences.
21 Art.171oftheRussianCriminalCode.
22 Art.61oftheRussianCivilCode.
23 Art.39oftheSecuritiesLaw,asamended.
24 FSFMResolution“StandardsofAdequacyofEquityofProfessionalParticipantsoftheSecuritiesMarket”Number03-22/psof23April2003,establishescompulsorystandardsofadequacyofequityforprofessionalparticipantsofthesecuritiesmarketcarryingoutdifferenttypesofactivities.Thestandardsarethefollowing:fordealingactivity:500,000Roubles;forbrokerageactivity:5,000,000Roubles;forsecuritiesmanagementactivity:5,000,000Roubles;forclearingactivity:15,000,000Roubles;fordepositoryactivity:20,000,000Roubles;foractivityinvolvingmaintainingregistersofsecuritiesholders:30,000,000Roubles(from1January2005);foractivityinvolvingorganisingtradingonthesecuritiesmarket:30,000,000Roubles.
25 AccordingtoOrderoftheFSFM“OntheAdoptionofProcedureforLicensingofTypesofProfessionalActivitiesontheSecurityMarket”Number05-3/pz-nof16March2005,licensingauthoritiesareentitledtosuspendalicenseifprofessionalsecuritymarketparticipantsviolatetheRussianlegislationonsecuritiesrepeatedlyforoneyear.
26 Art.14.1oftheRussianCodeonAdministrativeOffencesprovidesthattheconductofentrepreneurialactivitiesinviolationofthelicenseconditionsshallresultintheimpositionofafinefor300-400timesstatutoryminimummonthlywages.
27 TheRussianCriminalCode(Art.169,171)providesforcriminalliabilityfortheconductofentrepreneurialactivitiesinviolationofthelicenseconditions/requirements,ifsuchoffencesresultinadversematerialconsequencesorinvolvetheacquisitionofincomeexceeding250timesstatutoryminimummonthlywages.Thecriminalpenaltyisafineofupto300,000Roublesorarrestandincarcerationforuptosixmonths.
28 However,accordingtoResolutionoftheFSFMandtheMinistryofFinanceonthe“AdoptionofRegulationsontheReportingofProfessionalSecuritiesMarketParticipants”Number33,109nof11December2001,professionalsecuritiesmarketparticipants(legalentities)shallsubmittotheFSFMtheirquarterlyreportscontaininginformationonpersonsholdingshares(participatoryinterests)insuchlegalentities.
29 Thereisnodirectobligationtogivesuchnotice.Atthesametime,ResolutionoftheFSFMandtheMinistryofFinance“OntheAdoptionofRegulationsontheReportingofProfessionalSecuritiesMarketParticipants”Number33,109nof11December2001,providesthatprofessionalparticipantsofthesecuritiesmarket(legalentities)shallsubmittotheFSFMtheirquarterlyreportscontaininginformationonthemanagementbodies(directors)ofsuchlegalentities.
30 Essentially,IOSCOPrinciples25,26,27,28and29.
31 ResolutionoftheFCSM“OnStandardsofAdequacyofEquityofProfessionalParticipantsoftheSecuritiesMarket”Number03-22/psof23April2003.
32 Art.17ofFederalLaw“OntheProtectionofRightsandLawfulInterestsofInvestorsontheSecuritiesMarket”Number46-FZof5March1999,asamended.
33 Availableathttp://www.bis.org/publ/cpss46.pdf
34 DecisionoftheRussianHighArbitrationCourtN5347/98of8June1999,andnumerousdecisionsoftheFederalArbitrationCourtoftheMoscowregion.
35 DecisionoftheRussianConstitutionalCourt“OnterminatingproceedingsinrespectofcompliancewiththeConstitutionofAtr.1062oftheCivilCodeoftheRussianFederation”N282-Oof16December2002.
36 FederalLawN5-FZof26January2007.
37 FederalLaw“OnMortgage-BackedSecurities”N152-FZof11November2003.
AuthorsGianPieroCignaCounselEuropeanBankforReconstructionandDevelopmentTel:+442073387087Fax:+442073386150Email:[email protected]
ElenaSulimaCounselEuropeanBankforReconstructionandDevelopmentTel:+442073387705Fax:+442073386150Email:[email protected]
EuropeanBankforReconstructionandDevelopmentOneExchangeSquareLondonEC2A2JNUnitedKingdom
Russia’ssocialandeconomicdevelopmenttoday:
improvinglegislationtosupporteconomicgrowth
MikhailKopeikinDeputyChiefofStaff,RussianGovernment
Russia
Russia’ssocialandeconomicdevelopmenttoday:improvinglegislationtosupporteconomicgrowth 77
OverthepastfiveyearstheRussianeconomyhasgrownrapidly,atanannualrateexceeding6percent.Consistentgovernmentpolicyhasresultedinmacroeconomicstability,asreflectedin,amongotherthings,thestrengthoftherouble,thefederalbudgetsurplusandthegrowthofRussia’sbudgetrevenues.Thegovernmenthasalsodevotedconsiderableefforttofocusingonlegalissues:regulatoryimprovementsandlegislativereformshaveprogressedsteadilyoverthepastcoupleofyears.
For2006,GDPgrowthinRussiaisforecastat6.9percent(comparedwith6.4percentin2005),capitalinvestmentat13.2percent(10.7percent),retailsalesat12.8percent(12.8percent),andrealdisposableincomeat11.5percent(11.1percent).Thecountry’sgoldandcurrencyreserves,whichstoodatUS$298.5billionon15December2006,arerising.
Akeyfactoristhediversificationofinvestmentacrosssectors.Asapercentageoftheoveralltotal,theshareofinvestmentinthemanufacturingindustriesincreasedfrom15.9to16.8percentbetween2002and2005,andtheshareofinvestmentintransportandcommunicationsfrom18.5to25.9percent.ThisistheresultoftheRussiangovernment’sselectionofpriorityareasinitseconomicpolicy,whichistargetingthedevelopmentofsectorsthathaveahighmanufacturingcontent.
Ifsteadyeconomicgrowthleadingtoasignificantincreaseinlivingstandardsistobeachieved,alowlevelofinflationisessential.Thegovernmentpaysspecialattentiontoensuringmacro
economicstability,andthesteadygrowthofthemainmacroeconomicindicatorsisevidenceofthesuccessachievedinrecenttimes.Inflationisregardedbythegovernmentasbeingamongthemostimportantproblemstobekeptunderconstantcontrol.
Particulareffortsweremadein2006toslowtheriseinconsumerprices.Aseriesofanti-inflationarymeasuresweretakenwiththeaimofachievinganinflationtargetof9percentfortheyear.Theintentioninthiscontextwastoreduceconsumerpriceinflationto4-5percentby2009.
Animportantaspectofstimulatingeconomicgrowthismakingtaxpolicymoreeffectivesothatitexploitsnotonlythefiscalbutalsotheregulatingfunctionsoftaxes.AnalysisofinternationalexperienceshowsthatRussialagswellbehindadvancedcountrieswithregardtotaxlevelsandthequalityoftaxadministration.Overanumberofyears,theoveralltaxburdenonbusinesshasdecreasedby1-1.5percentayear,butthishasprovedinsufficienttobringaboutasignificantchangeinthesituation.
Itisagainstthisbackdropthatthegovernmentapprovedthemainlinesofitstaxpolicyfor2007-09.Themeasuresputforwardtoimprovetaxlawprovideforareductionofmorethan220billionroublesinthetaxburdenontheeconomyduringthisperiod.
Attentioniscurrentlyfocusingondevelopingandimprovingeconomicmechanismsthatwillstimulateeconomicgrowth.Theseincluderefiningpublic-privatepartnershipapproachesandschemes,establishingastatedevelopmentcorporation,stimulatinghigh-techexportsandintroducingconcessionmechanismsinthehousing,utilities,roadsandportssectors.
Majorstepsarebeingtakentodevelopfurtheramodernbankinginfrastructuretoprovideconsumerswithaccesstoawholerangeofbankingservicesinlinewithinternationalpractice.
Giventhesizeofitsmarket,itsgeographicalposition,itspotentialforinnovationanditsnaturalresources,astrengtheningandexpansionofRussia’sroleonworldmarkets
78 Lawintransition
Judicialreformscontinuedtobeamongthegovernment’stopprioritiesandtherehavebeensignificantpositivestepstoincreasejudicialindependence,includingincreasesinjudges’salaries.
canbeexpectedwithintheforeseeablefuture.Ifinterestedcountriesworktogetherandexploittheirinherentadvantages,itshouldbepossibletoachieveimpressiveresultscapableofrespondingtotoday’schallenges.
Inordertokeepupwiththisnewexpandedrolethegovernmenthasalsodevotedconsiderableefforttofocusingonlegalissues:regulatoryimprovementsandlegislativereformshaveprogressedsteadilyoverthepastcoupleofyears.
AnumberoflawsaimedtoimprovetheinvestmentclimateinRussiafurther.Oneofthemostimportantfederallawsadoptedin2005wastheLaw on Concession Agreements.Thislawcreatesalegalframeworkenablingprivateparticipationintheprovisionofpublicservicesandcreatingalegalframeworkforpublic-privatepartnershipsinRussia.Consistentapplicationofthenewlawbythefederal,regionalandmunicipalauthorities,aswellasbythecourts,isnecessarytoensurethatitissuccessfullyimplemented.
TheLaw on Special Economic Zones,whichtookeffecton25August2005,isdesignedtostimulateinvestmentinRussia–itprovidesforaspecialregime(includingtaxandcustomdutiesexemptions)forentrepreneurialactivitiescarriedoutindesignatedspecialeconomiczones.
Inparticular,PartIVoftheCivilCodewascompletedin2006aswellasamendmentstoatax-governinglaw.PerhapsthesinglemostimportantdevelopmentintheareaofcorporatelawwastheapprovalofamendmentstotheLaw on Joint-stock Companies,enactedon1July2006.Anewfederallawdated3January2006helpedtoremovevariousdiscrepanciesbetweentheCivilCode,theLaw on Insolvency (Bankruptcy)andtheLaw on Insolvency (Bankruptcy) of Credit Organisations.
Toimprovemineralextractiontaxcomputationandcollectionprocedures,newlegislationaimstoresolvethehighest-priorityissuesofthedevelopmentoftheoilindustry.Inparticular,itaimstoaddresstheproblemofreducedoilproductionratesatdepletedoilfieldsandprovideincentivesforthedevelopmentofnewfields.
Judicialreformscontinuedtobeamongthegovernment’stopprioritiesandtherehavebeensignificantpositivestepstoincreasejudicialindependence,includingincreasesinjudges’salaries.
Successfulimplementationofthelegalreformshasbeenadverselyaffectedbytheinconsistentapplicationoflawsbythefederal,regionalandmunicipalauthoritiesandbythejudiciary.FurthereffortsareneededinthisareatoachieveachangeinthepublicperceptionregardingthestabilityofthebusinessclimateinRussia.
Notes1 FederalActNo.151-FZof27July2006,
AmendingSection26PartTwooftheRFTaxCodeandAbrogatingCertainProvisionsofRFLawsandRegulations.
AuthorMikhailKopeikinDeputyChiefofStaff,RussianGovernmentTel:+74952054092Fax:+74952055052Email:[email protected]
RussianGovernmentOffice, 2/2KrasnopresnenskayaNaberejnaya, Moscow,103274 Russia
TheinstitutionaltrainingofjudgesinRussia
VladimirPeysikovProvost,RussianAcademyofJustice
Russia
TheinstitutionaltrainingofjudgesinRussia 81
TheRussianAcademyofJustice,foundedin1999,provideshigherandcontinuingeducationfortheRussiancourtsystemandjudiciary.Tocarryoutitsroleproperly,theacademyneedsitsstatusandfunctionstobeenshrinedinlegislationandrequirestobeproperlyfundedbythestate.
InboththeformerSovietUnionandinRussiatheinstitutionaltrainingofjudgeshashadquitealonghistory.
TheAllUnionInstituteofContinuingProfessionalDevelopmentforEmployeesinJusticewasformedin1970.TheLawAcademyoftheMinistryofJusticeoftheUSSRopeneditsdoorsin1990andin1992theRussiangovernmentfoundedtheRussianLawAcademyoftheMinistryofJustice.
Theseinstitutionshavebeenrunningcontinuingprofessionaldevelopmentprogrammesforjudgesalongsidetheretrainingofothercategoriesofstudents.Thereforetheirtraininghasbeenunabletofullysatisfytheneedsofthecourtsystemforaschemeofjudiciarytrainingthatmeetsmodernrequirements.
Historically,theRussianSupremeCourtandSupremeArbitrazhCourthavenothadtheirowneducationaloracademicinstitutionstoprovidetraining,retrainingorcontinuingprofessionaldevelopmentforjudgesandadministrativeemployeesinthecourts.Neitherhavetheyengagedinfundamental,appliedoracademicresearchintothelaw-makingorimplementationactivitiesofthecourts.
In1998theRussianMinistryofJusticehandedoverfinancial,administrativeandpersonnelmanagementofthecourtstotheoveralljurisdictionoftheCourtsDepartmentoftheSupremeCourt.SubsequentlytheRussianAcademyofJusticewasestablishedasastate-ownededucationalinstitutionofferinghigherprofessionaleducation.1ThefunctionsofitsfoundingbodieswerehandedoverbythefederalgovernmenttotheSupremeCourtandtheSupremeArbitrazhCourt.
The role of the academy
Inaccordancewithitsstatutes,theRussianAcademyofJusticedealswiththefollowing:
■ continuingprofessionaldevelopmentandretrainingofjudgesandadministrativeemployeesingeneralcourtsandarbitrazhcourtsandforemployeesintheCourtsDepartmentoftheSupremeCourt
■ trainingofspecialistsforthecourtsystemunderprogrammesofhigherandsecondaryprofessionallegaltraining
■ trainingofpostgraduatesanddoctoralcandidatesforthecourtsystem,underprogrammesofpostgraduateprofessionaleducation
■ fundamentalandappliedacademicresearchintotheorganisationofthecourtsystemandacademicbackupforthelaw-makingandimplementationactivitiesofcourtauthorities
■ collaborationwithlegal,academicandeducationalinstitutionsinRussia,theCommonwealthofIndependentStates(CIS),otherstatesandinternationalorganisations,forthepurposeofstudyingandapplyingforeignexperienceofrule-making,lawimplementation,academicactivitiesandthetraining,retrainingandcontinuingprofessionaldevelopmentofspecialists
■ publicationofacademic,study,teachingmethodology,referenceandothermaterials.
82 Lawintransition
Theacademy,whichwasoriginallyestablishedtosatisfythepersonnelneedsofthecourtsysteminRussia,hasnowbecomeagenuinelyuniqueinstitutionoflegalhighereducationwithoutcomparisoninRussiaorabroad.
Astudyoftheunderlyingconceptsandconstitutivedocumentsoftheacademy,carriedoutin2000bytheCouncilofEurope,confirmedthatitsuniquemulti-functionmodelfullysatisfiestheneedsofthecourtsysteminRussia.
Priorto1998higherandintermediateeducationalinstitutionsinRussiadidnottakespecialistswhoalreadyhadahigherorintermediatelegaleducationandofferthemspecialisttrainingforfurtherworkinthecourtsystem.Theresultofthiswas,first,thatapproximately50percentof
candidatesforjobsasjudgesinRussiaobtainedunsatisfactorygrades.Secondly,individualswhohadpassedtheexaminationsandbeenappointedasjudgeswereobliged,eitherindependentlyorwiththeaidoftheirmoreexperiencedcolleagues,todevotelargeamountsoftheirowntimetogainingtheoreticalknowledgeinsubstantiveandprocedurallawandtostudyingthepracticalskillsneededtoconducttrialsincourts,prepareproceduraldocumentsandsoon.
Theacademy,whichwasoriginallyestablishedtosatisfythepersonnelneedsofthecourtsysteminRussia,hasnowbecomeagenuinelyuniqueinstitutionoflegalhighereducationwithoutcomparisoninRussiaorabroad.Itsspecialistsareindemandnotonlyinthecourts,butalsoinsuchareasasstateadministration,politics,economics,municipaladministrationandinternationalrelations,becausethetrainingofferedintheacademyiscloselylinkedwithrealcourtpractice.
Theunderlyingconceptoftheacademyiscontinuousspecialisedtrainingstartingatanearlyageandcontinuingthroughouttheprofessionallivesofjudges.Thatconcepthasdictatedtheacademy’sorganisationalstructure.Theacademyhasalawcollege,alawfacultythattrainsspecialistsforthecourtsystemandadditionalfacultiesforcontinuingprofessionaldevelopment.Italsohas21academicdepartmentsandsevenacademicsections.
Theacademyhas10branches,inChelyabinsk,Irkutsk,Kazan,Khabarovsk,Krasnodar,NizhniiNovgorod,Rostov-on-Don,StPetersburg,TomskandVoronezh.Inanygivenyeartheacademyanditsbranchesoffer
continuingprofessionaldevelopmentandretrainingtomorethan6,000judgesandadministrativeemployeesofthecourts.Morethan13,000studentsintheacademyarestudyinglawastheirmainsubject.
AsprojectedintheplanforcontinuingprofessionaldevelopmentforjudgesinfederalandmilitarycourtsandforcourtadministrativestaffandmanagersofpersonneldepartmentsinadministrationsorsectionsoftheRussianCourtDepartment,thenumberofprofessionalstafftrainedattheacademyisrapidlyincreasing(seeChart1).
Thesignificantincreaseinthenumberoftraineesin2005isduetotheTACISprogramme“TrainingforJudgesandAdministratorsinCourtsoftheRussianFederation”.2Inthenorth-west,central,RostovandnorthCaucasusbranchesoftheacademyaswellasinMoscow,therehavebeen43seminarsforjudgesand20seminarsforcourtadministrators.ThetotalnumberofpeoplewhohavebeentrainedunderthisTACISprojectis2,174.
Thetotalnumberoflawstudentsattheacademyhasincreasedrapidlyoverthelastfewyearstoreach9,390in2005(seeChart2).
Thetotalnumberofpeopleinpostgraduatestudyorattachedtotheacademyasdoctoralcandidatesiscurrently575.Theacademycurrentlyhasatotalof1,783employees.
Theestablishmentoftheacademyhashighlightedtheimportanceofinvestigating,fromtheacademicpointofview,thefollowingissues:improvingtheprofessionalismofjudges,variousaspectsoftheamendingoflegislationandimprovingacademic,procedural,informationtechnologyandpersonnelsupportfortheworkofthecourts.
Number of professional staff10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2000 2001 2002 2003 2004 2005
Number of law students10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2000 2001 2002 2003 2004 2005
Chart1NumberofprofessionalstafftrainedattheRussianAcademyofJustice
Source: Russian Academy of Justice 2006
Chart2NumberoflawstudentsattheRussianAcademyofJustice
Russia
TheinstitutionaltrainingofjudgesinRussia 83
Reforming the judicial training system
Thereisanacuteneedforfederallawstoincorporatelegalstandardsrequiringcandidatesforthejudiciarytoundergoacompulsoryyearofpreliminarytrainingintheacademy.Theacademyshouldemploythemostexperiencedemployeesthatthecourtsystemcanofferastutorsforthistraining.
Inordertoreformthejudicialtrainingsystemitwillalsobenecessarytodraftregulationslayingdownproceduresfortheselectionofcandidatesthatarebasedprimarilyonprofessionalcriteriarelatedtolegaltrainingbutalsotakeintoaccountthemoraloutlooksofthejudges.
Regular,mandatoryandhighlyprofessionaltrainingofsittingjudgeshasbecomeparticularlyimportantrecentlybecausecourtstendtorefertoalonglistofsourcesincluding:
■ theRussianConstitution
■ generallyrecognisedprinciplesofinternationallaw
■ decisionsoftheEuropeanCourtofHumanRights(followingRussia’srecognitionofthecourt’sjurisdiction)
■ constantlychangingfederallegislation
■ regulatoryactsadoptedbyconstituententitiesoftheRussianFederationinaccordancewiththeconstitutionandwithfederallegislation.
Atpresent,however,federaljudgesonlyhavetheopportunitytoupdatetheirskillsonceeverytenyears.
Theconceptunderlyingthelegislativeframeworkofthesystemforformingthejudiciaryshouldprovidefor:
■ transparencyatalllevels
■ detailedlegalregulationofallitscomponentrelations,bymeansoffederallegislation
■ obstaclestopenetrationorcorruptionofthejudiciarybyundesirablepersons
■ moreefficientorganisationofthecompetitiveselectionofjudges
■ moreefficientorganisationofjudicialtraining.
ThedraftingandimplementationofthisconceptassumedgreaterurgencyfollowingthedecisionbytheSixthAll-RussianCongressofJudgesto:“reinforcethecourtsystemwithhighlyqualifiedpersonnelbytrainingcandidatesforthejudiciaryinfederalcourtsandcourtadministratorsforonetotwoyearsintheRussianAcademyofJustice,throughmandatorycontinuingprofessionaldevelopmentforjudgesinfederalcourts(onceeverythreeyears),includingtrainingforjudgesinconstitutionalorstatutorycourtsandformagistrates,undercivillawcontractsbetweentheconstituententitiesoftheRussianFederationandtheRussianAcademyofJustice.”
Improvementstotheselectionprocedureforjudgesinaccordancewithgenerallyrecognisedprinciplesandstandardsofinternationallaw,theRussianConstitutionandfederallaws,could,itisthought,bebroughtaboutonthefollowingconditions:
■ byincludinginthestate-approvedcurriculumadifferentiationwithinthelegalstudiesspecialitysuchthattrainingcouldtakeplaceonthebasisofindividualstudyplans;inparticular,thiswouldmeantheintroductionofanadditionalqualificationentitled“court-trainedlawyer”
■ byinstitutingapositiontobeknownascandidatejudge,whichwouldinvolvetheapplicationofproperconditionsfortheselectionoffuturejudges,all-roundcharacterformationandcreatinganorganisationalframeworkforappropriatetraining
■ bydraftingadditionallegal,moralandpsychologicalcriteriawhichacandidatejudgewouldhavetosatisfy
■ bycarryingoutpreliminarytrainingofcandidatejudgesbeforetheirappointmentusingprocedureswhichfacilitatetheassessment
ofaperson’ssuitabilityforworkasajudge,forexample,businessgames,resolvingspecificlegal,psychologicalandmoralsituations,participationindiscussions,draftingthecorecontentofspeeches,otherformsoftrainingandaproperassessmentofhisorherindividualqualities.
Implementationoftheaboveconditionswouldonlybepossiblethroughlegislativeregulation,inparticularbyincludingthefollowingprovisionsintheLaw on the Status of Judges in the Russian Federation:
■ apersonwithcitizenshipofanotherstatecannotapplyforthepostofjudgeandexerciseajudge’spowers
■ informationprovidedbycandidatejudgesistobevettedbylawenforcement,customsandfiscalbodies
■ thecreationwithintheCourtsDepartmentoftheRussianSupremeCourtofapsychologicalassessmentservicewhosetaskwouldbe:first,toidentifybytestsandotherproceduresthepsychologicalqualitiesofcandidatejudgeswhichwouldenhancetheirworkasajudge,orqualitieswhichmightbeahindrancetosuchwork,forinstanceintellectualimmaturityorimpatience;secondly,tocarryoutregularpsychologicaltestingofjudgeswhoaredirectlyaffectedbytheimplementationofjusticeorwhodisplayimproperconductwhetherinserviceorinnon-workcircumstances;andlastlytoassistqualifiedcollegialbodiesofjudgeswhenconsideringmattersrelatedtotheappointmentofajudgeortheassessmentofimproperconductwhichmightbegroundsfordisciplinaryorotheraction
■ theprovisionoftangibleguaranteesinrelationtothetrainingandsubsequentappointmentofcandidatejudgesbytakingintoaccountRussiantraditionandexperienceandtheprevailingpracticeinanumberofforeigncountries
84 Lawintransition
Thetrainingofcandidatejudgesshouldtakeplaceduringthelaststageoftheirselection,aftertheyhavepassedaqualifyingexamination,beenvettedandobtainedarecommendationfromtherelevantexaminingcollege.
■ theobligationforjudgestoengageincontinuingprofessionaldevelopmentnotlessthanonceeverythreeyears.
Incontrasttoforeignlegislation,whichregulatesthejudicialselection,trainingandappointmentprocessindetail,onlythecoreaspectsofexistingproceduresfortheselection,trainingandappointmentofjudgesareincludedinfederallegislationandregulations.Someexistingproceduresarenotincorporatedinlegislationwhileotherproceduresareregulatedbysecondarylegislationwhich,inpractice,leadstodifferentinterpretationsofestablishedregulations.Becauseofthis,itisessentialforfederallegislationtobeexplicitaboutthepowersofalltheagencies,structuresandinstitutionsinvolvedintheselectionofcandidatejudges.
Allcostsoftrainingcandidatejudgesmustbebornebythestatethroughtheallocationofthenecessarybudgetarysupport.Forexample,aJointResolutionofthePlenumsoftheSupremeCourtandtheSupremeArbitrazhTribunaloftheRussianFederation,Numbers16,17of12November2001‘On Submission to the State Duma of the Russian Federal Assembly of a draft Federal Law On Amendments and Additions to the Law of the Russian Federation “On the Status of Judges in the Russian Federation”’firstproposedregulationsofanentirelynovelnature,includingtheproposalthatcandidatejudgesshouldbeappointedonlyafterspecialprofessionaltrainingofatleastoneyearandthatthisprofessionaltrainingshouldbeentrustedtotheacademy.
ThisisinlinewiththeEuropeanCharterontheStatusofJudgeswhichlaysdowntheEuropeanstandardsonthisissue.Inparticular,paragraph2.3providesformandatoryprofessionalretrainingofcandidatejudges,requiring“by means of appropriate training at the expense of the State”,thepreparationofthechosencandidatesfortheeffectiveexerciseofjudicialduties.[emphasisadded]HowevertherelevantdraftlegislationhasstillnotbeenconsideredandasaresultapplicantsforpostsasjudgesinRussiacurrentlyreceivenoprofessionaltraining,inspiteoftheacuteneedforit.
Theeffectivenessofthejusticesystemdependsonhowsuccessfullythismatterisdealtwith.However,officialacceptanceoftheneedforpre-appointmenttrainingwillnotresolvealltheseproblemsandarationalmethodofselectingcandidatejudgeswillbeessential.Onlywhensuchaprocedurehasyieldedresultscanitbeadoptedasthebasisforalegalstandard.
Thetrainingofcandidatejudgesshouldtakeplaceduringthelaststageoftheirselection,aftertheyhavepassedaqualifyingexamination,beenvettedandobtainedarecommendationfromtherelevantexaminingcollege.
Rearrangingtheabovesuggestedchronologywouldbeinadvisablesinceacandidatewho,forexample,hasnotpassedthepreliminaryselection,isnotlikelytoproceedtothenextstageintheprocess.Allocationsfromthefederalbudgetforthetrainingofacandidatewhohasfailedthepreliminaryselectionwouldbeunjustified.Itfollowsfromthisthattheprofessionaltrainingofacandidatemustonlybecarriedoutatthelaststageofselection,beforehisorherofficialappointment.
ThecreationofaunifiedEuropeanlegalandjudicialsystemshouldfacilitatetheparticipationofjudicialtraininginstitutions:
■ inestablishingthatsystemandincreatingacourtculturebasedonunifiedapproachestothedispensingofjusticebyEuropeanjudges,takingintoaccountparticularnationalfeaturesoflegalprocedureandcourtsystems
■ inproviding,bothduringtrainingandcontinuingprofessionaldevelopment,traininginEuropeanlawandfamiliarisationwithEuropeaninstitutions
■ inprovidingtrainingprogrammesforthestudyofEuropeancollaborationbythejudiciaryintheapplicationofinternationallaw,and
■ incarryingoutexchangesofexperienceintrainingthejudiciaryandimplementingcontinuousprofessionaltrainingofjudges.
Tothisend,theacademymustimplementinternationalprojectsinvolvingconferencesandseminars,researchintocomparativelaw,jointpublicationsofacademicandpracticalmanualsforjudgesandtheorganisationoftrainingschemesabroadforteachersandacademicstaff.
Intheperiod2000-05theacademy,jointlywithitsforeignpartners,arranged76internationalconferencesandseminars.Theacademyhasalsoenteredinto21contractsforcollaborationwithforeignpartners.
0 10 20 30 40 50 60 70 80 90 100
Percentage of respondents
Autonomous decision-making
Improving interpretation of law
Finding ways to deal with defects in areas of law
Practical application of professional knowledge
Justi�cation of decisions made or views expressed
Speci�c matters in a speci�c area of law
Setting out and justifying a decision
Conduct of a trial
Bene�ting from the experience of colleagues
Communication with participants in a trial
Ability to communicate with court visitors
Ability to communicate with colleagues
The art of interacting with the authorities
Other
0 10 20 30 40 50 60 70 80 90 100
Percentage of respondents
Seminars
Round-table sessions
Business and role play games
Court visits
Solving speci�c legal situations
Solving and analysing apparent situations
Drafting of legal documents
Academic and practical conferences
Tutorials
Writing and discussion of graduation papers
Showing of �lms
Drafting reports and speeches
Examinations
Testing
Lecture/discussions
Lectures
Russia
TheinstitutionaltrainingofjudgesinRussia 85
Results of a survey on judicial training
Theacademyisconductingresearchamongjudgesinordertoimprovethetrainingprocess.Theresultsareofinterestnotonlytotheorganisersofthetrainingprocess,buttojudgesthemselves.Thefollowingchartsillustratesomeresultsfromoneofthemostrecentresearchprojects.
Thequestionnaireaskedrespondentstonamethepriorityobjectivesofcontinuingprofessionaldevelopmentforjudges.Themajorityofrespondentsmentionedobjectivessuchas:thestudyofnewlegislation,obtainingrecommendationsfromlegislativedraftsmenconcerningpractical
implementation,thestudyofcourtpractice,defectsinspecificareasoflawandwaysofdealingwiththem,improvementstoskillsusedwheninterpretingthelaw,theskillsofadoptingandformulatingdecisionsinspecificcategoriesofcasesandsharingexperiencewithcolleagues.
Whenaskedabouttheirpersonalneeds,themajorityofrespondentsmentionedtheneedtodevelopskillsofinterpretationoflaw,findingwaystodealwithdefectsinlegislation,theapplicationofprofessionalknowledgeinpractice,thesettingoutandarguingofadecisionandbenefitingfromtheexperienceofcolleaguesinobtaininginformationonspecificquestionsinaspecificareaoflaw(seeChart3).
Concerninglearningmethods,themajorityofrespondentsweresatisfiedwithlecture/discussions,round-tablesessionsandvisitstosessionsoftheRussianSupremeCourtandMoscowcourtsandsolvingspecificlegalproblems(seeChart4).
Theanalysisofproposalsforimprovementstothecontinuingprofessionaldevelopmenttrainingprocessshowsthattraineesfeeltheneedformorepracticalsessions;analysisofcourtpracticeinlectures;moreopportunitiestoshareexperience;morelessonsinvolvingjudgesfromtheRussianSupremeCourt;lessonsinvolvingvisitstocourts;lessonsonethicsandpersonalpsychology;importantmaterialstobesupplied
Chart3WhatRussianjudgesthink:Trainingneedsattheindividuallevel
Chart4WhatRussianjudgesthink:Preferredlearningmethods
Source: Russian Academy of Justice 2003
0 10 20 30 40 50 60 70 80 90 100
Percentage of respondents
More practical sessions
Students’ experiences to guide programme development
More contact with Supreme Court judges
Cultural and leisure activities
Provision of written overviews and schemes
Drafting of decisions
Answers to questions
Lessons on ethics and psychology
Better solutions to organisational problems
Lessons involving visits to courts
0 10 20 30 40 50 60 70 80 90 100
Percentage of respondents
Heavy workload of judges
Insuf�cient training, lack of experience
Disruptions caused by non-appearance of persons involved in trials
Lack of court of�cials
Principle of continuity in the court process
Problems with peoples' jurors and jury chairmen
Impossibility of applying the principle of controversy
Late arrival of advice on court practice from higher courts
Local authority interference in the dispensing of justice
Insuf�cient information
Position of the appeal court
Incorrect conduct by chairman of court
No adverse in�uence
Dif�cult to say
Lack of police professionalism
Con�ict of laws, defective legislation
Lack of IT facilities, literature and suitable working conditions
Out of date conduct of cases
86 Lawintransition
Chart5WhatRussianjudgesthink:Possibleimprovementstothetrainingprocess
Chart6WhatRussianjudgesthink:Factorsadverselyaffectingin-courtperformance
Source: Russian Academy of Justice 2003
inawrittenformthatisusableintheirwork;andbetteradministrationforthetrainingprocessitself(lessontimetables,organisationofaccommodation,foodandtransportandsoon–seeChart5).
Regardingfactorsadverselyaffectingtheirownprofessionalactivities,themajorityofrespondentsmentionedconflictoflawsanddefectivelegislation,theheavyworkload,thelowlevelofprofessionalismofemployeesinlawenforcementanddisruptionstocourtsessionsduetothenon-appearanceofpersonsinvolvedintrials(seeChart6).
Analysis of the questionnaire responses
Thedatasuggestthatthereisaneedforimprovementsinjudicialworkbothinthecontextofcontinuingprofessionaldevelopmentprogrammesandinawidercontext.
Judgesfeelaclearneedforadditionalopportunitiestocommunicatewithintheprofessionalcommunityofcourtsystememployees.Theyareshortofinformationaboutthecurrentstateofcourtpracticeandtheyalsodonotcommunicateenoughwithcolleaguesbothincourtsofthesamelevelandinhighercourts.Theorganisationofsuchadditionalopportunitiesisapriorityareaofworkwithjudges.
Whenformulatingteachingplansfortheforthcomingacademicyearitisessentialthatmoreattentionbepaidtoquestionsofimprovingtheinterpretationoflawsandwaysofdealingwithdefectsinvariousareasofthelawandtosolvingspecificlegalproblems.
Asregardsthewishesofjudgesinrelationtotheorganisationofthecourtprocessandtheirownproblem-solvingactivities,anumberofbasicareasforpossiblefutureactivitiescanbeidentified.
Theyincludeinformationtechnologysupportforjudges,includingprintedpublications,aninternet-basedinformationservice,familiaritywithinternetresourcesandtheoptimisation
TheinstitutionaltrainingofjudgesinRussia 87
Notes1 RussianPresidentialDecreeNumber528of11
May1999,“OntheRussianAcademyofJustice”,andRussianGovernmentResolutionNumber1199of28October1999,“OntheRussianAcademyofJustice”ledtothefoundationoftheRussianAcademyofJustice.
2 TACISisanassistanceprogrammeimplementedbytheEuropeanCommissiontohelpthe12memberstatesoftheCommonwealthofIndependentStatesintheirtransitiontodemocraticmarket-orientedeconomies.
3 V.P.Verin.ConcerningcertainproblemsinbringingintoforcethenewcodeofcriminalprocedureoftheRussianFederation.In:“CourtReform:Conclusions,Priorities,Prospects.ConferenceMaterials.”AcademicReportsSeries,Number47.Moscow,MoscowSocialFund,1997,p.85.
AuthorVladimirPeysikovProvostRussianAcademyofJusticeTel:+7495332-5111Fax:+7495718-5077Email:[email protected]
RussianAcademyofJustice,69NovocheremushkinskayaStreet,Moscow,117418Russia
ofcommunicationsbetweenjudgesatvariouslevels.Carefulattentionshouldbedevotedtoopportunitiesforbuildingsuchcommunicationsinthecontextofthecontinuingprofessionaldevelopmentsystemforjudges,viewingitnotonlyasawayoforganisingtrainingbutasaformofstructuringimprovedcommunicationwithinthejudiciarygoingforward.
Respondentsnotedthattheyuseparticipationincontinuingprofessionaldevelopmenteventsasawayofcommunicatingwiththeircolleagues.Itmakessensefortheacademytobecomeinvolvedinthisprocesssoastoensuremoreefficientcommunication,toprovidethesubjectmatterforthatcommunicationandtomanageit.
Manyrespondentsapprovedofcertaintypesoftrainingsuchasround-tablesessions.Itisworthencouragingagreaterlevelofparticipationinthistypeoftrainingandalsointheorganisationofsuchsessions,proposingtopicsfordiscussion,speakersandsoon.Thiswillmakeitpossiblebothtosatisfyrequestsfromthejudiciaryandtoidentifyitsmostactivemembers.
Fromthepointofviewofformingaunifiedinformationenvironmentthatwouldallowjudgestoobtaintheinformationtheyneedfortheirprofessionalactivitiesefficientlyandtosupporttheprocessofprofessionalcommunication,asignificantstepwouldbethecreationofawebsitewhichwouldsupplyup-to-dateinformationaboutchangestolegislationandtheparticularfeaturesofitsapplication,providejudgeswithcommunicationopportunitiesintheshapeofforumsoropportunitiestopublisharticlesbythemostauthoritativemembersofthecommunityand,ingeneral,actasatoolofconstructivecommunicationforthejudiciaryandthestudentsoftheacademy.
Suchawebsitecould,atthesametime,becomeaneffectivetoolforinfluencingtheprofessionaldevelopmentofjudgesbysuggestingtopicsfordiscussionandbypublishingarticlesabouttheposition
ofthejudgeinsociety,thedemandssocietymakesonjudgesandthesocio-economic,politicalandculturalchangestowhichjudgeshavetoreact.
Timemanagementandestablishingprioritiesmustbeimproved.Accordingtothedata,respondentsaredevotingmuchoftheirpersonaltimetoissuesoftimemanagementandsystematisation.Thisassistancehasbeenspecificallyaskedforandisurgent.Coursesandtrainingsessionsontimemanagementandexperience-sharingonimprovingtheefficiencyofprofessionalactivitiesareeffectivemeansoftacklingtheseissues.
Conclusion
Evenwithalltheundoubtedsuccessesachievedbytheacademyintrainingpersonnelforthecourtsystemandintrainingsittingjudges,therearedifficultiesandunresolvedproblemswhichmakeitimpossiblefortheacademytocarryoutitsfunctionsinfull.
Inthefirstplace,thestatusandfunctionsoftheacademyarenotenshrinedinlegislation.Secondly,fundingfromthestatebudgetisinsufficientanddoesnotallowtheacademytoexpanditsphysicalpresenceeitherinMoscoworintheregions.Forexample,theFederalSpecialProgramme“DevelopmentoftheCourtSysteminRussia”for2002-06didnotmakeprovisionsforthefundingoftrainingforjudges.Thereisnoplantoallocatefundsforthatpurposeinthebudgetforthesameprogrammein2007-11either.
Theassertionthat“uptonowthereisnoresolution,andintheabsenceofsufficientfundsthereisnoprospectofaresolution,totheproblemofprovidingasufficientquantityandahighprofessionalleveloftrainingforthosewhohavebeencalledontoapplythelawcorrectly–thejudges”3seemsperfectlyvalidgiventhepresentdaysituationintheRussianjudicialtrainingsystem.
88 Lawintransition
BOO Build-own-operate
BOOT Build-own-operate-transfer
BOT Build-operate-transfer
CEE CentralandeasternEurope
CIS CommonwealthofIndependentStates
DBFO Design-build-finance-operate
DBFT Design-build-finance-transfer
DESA DepartmentofEconomicandSocialAffairs
EBRD, the Bank EuropeanBankforReconstructionandDevelopment
EIB EuropeanInvestmentBank
EPEC EuropeanPPPExpertiseCentre
EU EuropeanUnion
FYR Macedonia FormerYugoslavRepublicofMacedonia
GDP Grossdomesticproduct
IOSCO InternationalOrganisationofSecuritiesCommissions
IPO InitialPublicOffering
LIS LegalIndicatorSurvey
MDG MillenniumDevelopmentGoals
MEDT MinistryofEconomicDevelopmentandTrade
MEI Municipalandenvironmentalinfrastructure
MICEX MoscowInterbankCurrencyExchange
PFI Privatefinanceinitiative
PPP Public-privatepartnership
TTF Treasurytaskforce
UN UnitedNations
UNCITRAL UnitedNationsCommissiononInternationalTradeLaw
Abbreviations
The European Bank for
Reconstruction and Development
(EBRD) is an international
institution whose members
comprise 61 countries, the
European Community and the
European Investment Bank. The
EBRD aims to foster the transition
from centrally planned to market
economies in countries from
central Europe to central Asia.
The EBRD’s countries of operations
are: Albania, Armenia, Azerbaijan,
Belarus, Bosnia and Herzegovina,
Bulgaria, Croatia, Czech Republic,
Estonia, FYR Macedonia,
Georgia, Hungary, Kazakhstan,
Kyrgyz Republic, Latvia, Lithuania,
Moldova, Mongolia, Montenegro,
Poland, Romania, Russia,
Serbia, Slovak Republic, Slovenia,
Tajikistan, Turkmenistan, Ukraine
and Uzbekistan.
The EBRD works through the Legal
Transition Programme, which is
administered by the Office of the
General Counsel, to improve the
legal environment of the countries
in which the Bank operates.
The purpose of the Legal Transition
Programme is to foster interest
in, and help to define, legal reform
throughout the region. The EBRD
supports this goal by providing or
mobilising technical assistance for
specific legal assistance projects
which are requested or supported
by governments of the region.
Legal reform activities focus on
the development of the legal rules,
institutions and culture on which
a vibrant market-oriented
economy depends.
General Counsel of the EBRDEmmanuel Maurice
Co-Editors-in-Chief Gerard Sanders, Michel Nussbaumer
Focus EditorAlexei Zverev
SupportRichard Bate,
Veronica Bradautanu, Joanna Daniel, Matilda Kentridge, Anthony Martin,
Jon Page, Kareen Tolson, Helen Warren
Photographs Aleksandar Andjic (pages 60 and 76)
Richard Bate (pages 6, 22, 30 and 38)
Haris Memija (cover and page 2)
Yuri Nesterov (pages 60, 66 and 80)
Law in transition 2007
Law in transition is a publication of the Office of the General Counsel of the EBRD. It is available in English and Russian. The editors welcome ideas,contributions and letters, but assume no responsibility regarding them. Submissions should be sent to Michel Nussbaumer, Office of the General Counsel, EBRD, One Exchange Square, London EC2A 2JN, United Kingdom; or [email protected]
The contents of Law in transition are copyrighted and reflect the opinions of the individual authors and do not necessarily reflect the views of the authors’ employers, law firms, the editors, the EBRD’s Office of the General Counsel or the EBRD generally. Nothing in the articles should be taken as legal advice.
© European Bank for Reconstruction and Development, 2007
All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, without the written permission of the copyright holder. Such written permission must also be obtained before any part of this publication is stored in a retrieval system of any nature.
European Bank for Reconstruction and Development One Exchange Square London EC2A 2JN United Kingdom Tel: +44 20 7338 6000 Fax: +44 20 7338 6100 Web site: www.ebrd.com
Law in transition is printed on Hannoart Silk, an environmentally responsible paper which is 100% TCF (Totally Chlorine Free).
Printed in England by Moore using environmental waste and paper recycling programmes.
Ref: 6871 Law in transition 2007 (E).
ISSN 1683-9161
www.ebrd.com/law
Legal transition developments Information on legal developments in the EBRD’s countries of operations can be found on the EBRD web site at www.ebrd.com/law.
Law in transition online Law in transition online is published in the autumn of each year. It is available in English and Russian at www.ebrd.com/law.
EBRD Legal Transition and Knowledge Management Team
Michel Nussbaumer Chief Counsel, Team Leader
Frédérique Dahan Senior Counsel, secured transactions project
Paul Moffatt Senior Counsel, infrastructure regulation and competition
Alexei Zverev Senior Counsel, concessions/Russia legal reform
Jay Allen Counsel, insolvency legal reform
Gian Piero Cigna Counsel, financial markets and corporate governance
Paul Byfield Legal Information Specialist
Veronica Bradautanu Associate
www.ebrd.com/law
Law in transition 2
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European Bank for R
econstruction and Developm
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Law in transition 2007 • Public-private partnerships • Legal reform in Russia