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Guidelines on Public Private Partnership

May 2007 - Corporate & Commercial. Legal Developments by BABIC & PARTNERS Law Firm .

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On 1 September 2006, the Croatian Government issued the Guidelines for Purely Contractual Public Private Partnerships (the "Guidelines"). The Guidelines prescribe: (i) the principles which have to be complied with by the PPP project and the procedures of cooperation between public and private partner; (ii) the rules for foundation and execution of PPP which would mitigate the risks for public budget, and (iii) the competences of public authorities to enter into PPP.

The following long-term contractual arrangements between public authorities and private partners are expressly excluded from the scope of the Guidelines: (i) long-term contract on the procurement of services to public authority without any capital investment by the private partner; (ii) the contract on the project and construction of building for the public authority; (iii) the establishment of a new company with shareholding of both public authority and private partner; (iv) joint venture (not being a legal entity) between public authority and private partner; (v) guarantees provided by the public authority for the purposes of business activities of private partner; (vi) leasing of private partner's buildings to the public authority and (vii) privatization (in the meaning of sale) of publicly owned assets.

Public Authorities Falling Within the Scope of the Guidelines

Public authorities that can enter into PPP are: (i) Republic of Croatia (through the competent ministry), public institutions and companies controlled by the Republic of Croatia and (ii) local and regional authorities (municipalities, cities and counties), local public institutions and companies controlled by local and regional authorities (together: "public partner"). The private partner within the meaning of the Guidelines is defined as resident legal entity that is dominantly controlled by private capital.

The public partner can join in the PPP (i) by investing the tangible or intangible assets or (ii) by paying the regular remuneration to the private partner for its services. The Guidelines enumerate following assets that can be contributed in PPP against the public partner's share: donations, lease of real estates to private partner, concession, right of construction on the particular real estate (the right of construction represents a special in rem right allowing its holder to construct buildings on the land owned by the different person), transfer of ownership over particular building and completed project documentation acceptable to the private partner.

Procedure of Awarding the Contract

The private partner is selected through the public tender process. The Guidelines expressly provide that the tender process has to be conducted in accordance with Articles 44-51 of the Directive 2004/18/EC of the European Parliament and of the Council on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts. In cases of complex agreements the "competitive dialogue" as defined in EU documents should be utilized. The public partner may decide to conduct the selection as (i) one stage or (ii) two stage process. In latter case, the first stage encompasses the public invitation for submission of applications that has to be accessible to resident and non-resident legal entities equally. In any case the selection process should be characterized by the transparency, equality of treatment of all applicants and the award based on objective and nondiscriminatory criteria.

The PPP Agreement

The award of the project is completed through the execution of PPP Agreement. The Guidelines prescribe that following issues have to be dealt with by the PPP Agreement:

  • the purpose and the object of the agreement;
  • definition and allocation of risks;
  • obligation of the private partner to bear the expenses of the project partially or fully;
  • the consequences of the breach of contract;
  • obligations of the public partner (including the definition of its contribution to the project);
  • modes of participation of financing institutions in the project;
  • minimum standards applicable to the project;
  • possibility that the quality of services be improved during the duration of the project;
  • methods of payment;
  • the participation of end customers in the costs of project;
  • the obligation of public partner to publicize the information regarding the PPP;
  • the right of private partner (in the agreement with the public partner) to rationalize and improve the execution of the project;
  • the right of supervision of the public partner;
  • the term of the agreement and the requirements for the prolongation and for the termination of the agreement;
  • guarantees for the performance of the contract;
  • the ownership over assets after the termination of the contract;
  • the right of the public partner to unilaterally cancel the agreement and the compensation for the private partner;
  • method of disputes resolution;
  • the right of private partner to assign the receivables form the agreement; and
  • the right of the private partner to transfer its obligations towards the public partner to the third person.

Through these Guidelines the Government strives to achieve double goal. On one hand it sheds initial light in a very important (and very lucrative) field of interaction between public and private sector which had been very under-regulated while on the other hand, it continues with its efforts in approximation of Croatian legal system with the European Acquis.

 

Contributed by Boris Andrejaš, Associate at Babić & Partners

 

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