The Legal 500

The successful financial close of first major PPP project in Slovakia related to construction and operation of R1 expressway should be without any doubt regarded as important milestone in facilitating of partnership between the public and private sector in the Central and Eastern European region. This article briefly outlines legal regulation of PPP in the Slovak Republic and recent developments in Slovak law aiming to provide additional comfort for financing parties interested in partnership with public sector through PPP projects as well as certain outstanding legal issues which investors should take into account when considering their participation in such projects.

Legal Regulation of PPP in Slovak Republic

There is no specific law devoted to the PPP projects in Slovak Republic, hence the Slovak law is silent on general definition of projects based on partnership between the private entities and public sector. However, such lack of complex and comprehensive legal framework does not mean that contracting parties may freely negotiate terms and conditions under which respective PPP project would be implemented. Generally applicable regulations governing e.g. enforcement of contractual rights and obligations, public procurement process and disposal with property owned by Slovak Republic or its municipalities establish binding rules which need to be followed by contracting parties when structuring their transaction.

The Slovak law explicitly regulates only concession for construction works and provision of services as one of many forms of PPP projects recognized in the countries where partnership between private and public sector has a long tradition. As regards the substance of the concession for construction works under the Slovak Act No. 25/2006 Coll. on Public Procurement, as amended (the "Public Procurement Act"), following the award of concession to the concessionaire, in exchange for the completion of construction works the concessionaire shall gain the right to use the construction in question for specified amount of time or the right to receive benefits thereof. In addition, such right of use/right to receive benefits may be connected with monetary payment(s) from the public sector counterparty. There is no explicit statutory restriction regarding upper limit of the concession period, however the law stipulates that it may not be agreed for indefinite period of time. The Public Procurement Act only sets forth certain requirements which contracting parties should take into account when calculating duration of the concession period (such as the subject-matter of the concession agreement, amount of the monetary compensation paid by the public sector counterparty, estimated reasonable profit of the concessionaire arising out of (i) the right of use of the subject-matter of the concession agreement or (ii) the right to receive benefits from the subject-matter of the concession agreement).

Pursuant to respective provisions of the Public Procurement Act valid and effective until 31 December 2009, the concessionaire acquired rights and obligations of the property administrator and the property under concessionaire's administration could not be disposed of, encumbered, sold at an auction. Neither could its administration have been transferred to a third person. However, the Slovak law did not provide further clarification of the terms "property administrator" and "transfer of administration". Therefore, in practical terms, it was rather unclear whether certain concepts widely used in foreign jurisdictions (purpose of which is to strengthen the position of financing parties by possibility to effectively replace the concessionaire in case of its default, e.g. the right of step-in), would be permissible or would rather qualify for prohibited "transfer of administration". The strict statutory prohibition of disposal or encumbrance of property administered by the concessionaire also precluded concessionaire from establishing security over such property. Therefore it was not possible to use such assets as security interest for funders.

Above statutory restrictions regarding prohibition of disposal or encumbrance of infrastructure assets had been stipulated both in the Public Procurement Act as well as the Slovak Act No. 639/2004 Coll., on the National Motorway Company, as amended (the "NMC Act"). Despite the fact that as of 1 January 2010 the Public Procurement Act no longer prohibits disposal or encumbrance of constructions procured under the concession agreement, equivalent statutory restrictions under the NMC Act applicable to highways, expressways and first-class roads remain still valid and effective. However, since the current wording of the Public Procurement Act and the NMC Act does not stipulate that the administration of the highways/expressways may not be transferred to a third party ("new" concessionaire), it is believed that it may be theoretically possible to agree right of step-in of the financing parties following the default of the concessionaire under the finance agreements. Nevertheless, such possibility should be firstly anticipated under the original tender documents and contractually agreed with the public sector counterparty.

The main purpose behind enacting of legislation necessary for awarding of concessions for construction works was to ensure construction of expressways/highways in Slovak Republic. However, as we have briefly outlined above, private entities are precluded from disposal of or encumbrance of assets being construed. Consequently, in order to facilitate implementation of PPP projects in Slovak Republic, the public authorities are trying to find out other ways which would allow funders to effectively secure their investments - e.g. by means of state guarantees (see below).

Recent Developments in Slovak Law Aiming to Protect Interests of Finance Parties

Restriction of Right to Apply for Invalidation of the Concession Agreement

Generally, awarding of concessions for construction works is regulated by the public procurement rules and therefore remedial mechanisms under the Public Procurement Act are available for affected parties that wish to challenge awarding of such concession to the concessionaire.

In order to strengthen the legal certainty of the financing parties involved in concession for R1 expressway, amendment to the Public Procurement Act had introduced longstop date for the Office for Public Procurement and third parties to file a petition asking a court to nullify the concession agreement. Such petition had to be filed within 30 days following the day of the publication of the respective award in the European Journal.

Furthermore, financing parties involved in new infrastructure projects procured under the concession agreements executed as of 1 April 2010 may benefit from last amendment to the Public Procurement Act under which the Office for Public Procurement is no longer entitled to ask the court to nullify the concession agreement. Therefore, following the execution of the concession agreement, the Office for Public Procurement shall no longer be entitled to initiate judicial proceedings leading to invalidation of the concession agreement. Third parties specified in the Public Procurement Act (e.g. unsuccessful bidders) may invoke nullity of the concession agreement before the court within (i) 30 days period following the day of the publication of the respective award in the European Journal or (ii) 6 months period following the day of execution of the concession agreement in other cases specified under the Public Procurement Act (e.g. in case the award of concession has not been published in the European Journal). However, the grounds for invalidity of the concession agreement are strictly limited and generally cover only major procedural defects occurring in course of the public procurement such as failure to publish the public procurement notice in the respective official journal.

State Guarantee for EIB and EBRD

As of 1 October 2009 the amendment to the Slovak Act No. 386/2002 Coll. on National Debt and State Guarantees, as amended (the "State Guarantees Act") has become effective. This amendment should allow European Investment Bank (the "EIB") and European Bank for Reconstruction and Development (the "EBRD") to obtain commercially acceptable state guarantee for repayment of facility provided to the concessionaire in connection with financing of construction of other major infrastructure PPP project in Slovak Republic - D1 highway. The new legislation has introduced the possibility to secure not only repayment of principal provided to the concessionaire but also payment of interests under facility agreement(s). However, it should be noted that possibility to obtain state guarantee under such conditions applies solely to EIB and EBRD in respect of their financial participation in D1 project. Furthermore, respective state guarantee should be granted only upon fulfilment of conditions arising out of applicable state aid rules.

Room for Negotiation: Filling Blank Spaces by Contractual Arrangements

As we have noted above, the Slovak law does not provide complex and comprehensive legal regulation of concessions and therefore many important aspects of the transaction have to be contractually agreed - e.g. allocation of risk, termination of the concession agreement, payment mechanism or terms and conditions of direct agreement entered into among the financing parties and public entity awarding the concession. However, despite the recent developments in Slovak law, the potential financing parties still consider the Public Procurement Act and other applicable legislation to be either inflexible or unclear in certain aspects.

Due to extremely difficult situation on the market of financing infrastructure projects in CEE region, the question of having comprehensive PPP legal regulation allowing major banks or other financing parties to effectively secure their investments in Slovak Republic should not be underestimated.

Peter Strempek (associate), Katarina Mihalikova (partner / executive)

This article is for information purposes only. Should you need any further information, please contact directly ARS IURIS Slovakia.

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