EBRD Law in Transition PPP and Russia

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

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

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


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).


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

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*Bela

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Mol

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Russ

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ongo

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Pola

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Ukra

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Esto

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Alba

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Latvi

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Serb

ia*S

lovak

Rep

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FYR

Mac

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iaBu

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*Cze

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0

20

40

60

80

100High levelof effectiveness

Low levelof effectiveness

10 Lawintransition



■ 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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Ukraine FYR Macedonia International standards

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.


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.


Althoughthefindingsofthissurveygiveanindicationofhoweffectiveconcessionsregimesareinthetransitioncountries,theresultsmustbetreatedwithcaution.

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12 Lawintransition



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.


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Countries that had only implemented one concession project or none at all by July 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: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: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]


interestedgroupsasrecommendedapproachestoPPPs.ThesebestpracticesshouldbecultivatedwithinaPPPunitandwithintheadministrationactingasacentralresourceforPPPsupport.Thiswouldhelpwiththestandardisation,costeffectiveness,preservationofinstitutionalmemoryandconsistencyinapproach.

TheEBRDhasbeenactivebothasanequityparticipantandalenderinPPPtransactionsinawidecrosssectionoftheBank’scountriesofoperations.TheBankwillcontinuetopursuethispromisinginfrastructureprocurementmethodasPPPshavegreatpotentialfortransitionandtheBankcancomplementprivatesectorfinancinginthestructuringoftheseprojects.Whilepursuingthis,theBankwillneedtostayawareoftheneedforprojectstorepresentvalueformoney.AchievingthisrequiresacarefulanalysisatthestructuringphaseandtheEBRDiswellplacedtohelpitsclientsonthispath.

PromotingPPPsforinfrastructuredevelopment,

innovationandcompetitiveness:theroleoftheUNECE

GeoffreyHamiltonChiefoftheEconomicCooperationandIntegrationDivision,UNECE1


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.



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.



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-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



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.



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-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

40 Lawintransition

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.


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.

42 Lawintransition

■ 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.



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.

44 Lawintransition

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.



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.

46 Lawintransition

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?



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


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


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%

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Reorganisationprocesses

Access and degreeof formality

Creditor-initiated insolvencies

Cost

Bankruptcyadministration

creditor involvement/trustee competence

Speed

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Court identi�cationand experience

Complexity

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and competence

Access and degreeof formality

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Speed

Managementof debtor

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and competence

Debtorprotection

Creditorinvolvement

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Russia


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.


Chart4HowinsolvencylawsworkinpracticeEffectiveness by principal criteria

Russia


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]


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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providers

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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


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


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]


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


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


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


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


0 10 20 30 40 50 60 70 80 90 100


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


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


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


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

007

European Bank for R

econstruction and Developm

ent

Law in transition 2007 • Public-private partnerships • Legal reform in Russia

EBRD Law in Transition PPP and Russia

Documents

Transcript of EBRD Law in Transition PPP and Russia