In theory, a private-public partnership has many advantages. Unfortunately, though, in practice this solution is applied only very rarely, and representatives of local governments often lack sufficient knowledge of the rules and benefits stemming from the implementation of tasks in cooperation with a private partner.

In many cases, agreements negotiated with private entities are not successfully concluded because the public entity tries to transfer all of the risk of the undertaking onto the private partner, or on the contrary, agreements are concluded under conditions which are disadvantageous for the public entity. It is vital to correctly formulate the provisions of a public-private partnership agreement, but it is also necessary to have first conducted studies and analyses. Even though the preparatory stage of PPP projects can be quite long and may require the involvement of various advisors, this makes it possible to identify potential risk at the beginning, and to take proper steps to safeguard the interests of the public entity in the agreement with the private partner.

Content of the Agreement

Under a public-private partnership agreement, the private partner undertakes to carry out an enterprise for remuneration, and to incur all or some of the expenses of the enterprise or to have these incurred by a third party, and the public entity undertakes to cooperate towards achieving the objective of the enterprise, in particular by making its own contribution. A PPP agreement is the key document regulating the relations between the public entity and the private entity. When well prepared, it secures the interests of the public entity and the performance of the joint venture, and defines the rules for remunerating the private entity and sharing risk in a manner adequate to the project. It is important for the security of the interest of a unit of local government to be based not only on setting out a system of contractual penalties or detailed rules of the obligations of the private entity, but above all on a precise description of the project. A detailed specification of the project parameters, technical and quality requirements, and the standard and timetable for implementing the enterprise constitutes security for the public entity during the performance of a specific public task corresponding to specific needs of the local community. Provisions on contractual penalties or the rules for reducing remuneration, though very important in terms of securing the interests of the public entity, may in reality fail to fulfil their protective function if the scope of the obligations of the private partner is not property defined. A detailed project description also makes it possible to verify whether the private entity has discharged its obligations towards the local government unit and, where necessary, to establish liability for the improper performance of those obligations. Inspections of the performance of the enterprise are vital in this context. They provide an instrument with which to discipline the private partner, and enable the local government unit to verify at every stage whether the project is being performed in accordance with the agreement. It is true that the Public-Private Partnership Act provides the public entity with ongoing control over the private partner’s implementation of an enterprise, but the rules and detailed procedures for carrying out inspections must be set out in the public-private partnership agreement. It is also extremely important to describe the rules under which the private partner may engage subcontractors, and its liability for their actions, as well as the procedures for making amendments in the planned enterprise, the security required for the proper performance of obligations (such as a bank guarantee or suretyship) and, in the case of construction projects connected with subsequent operation, the rules for maintaining and operating the facility.

Remuneration

Another very important element of a PPP agreement is the provisions concerning the remuneration of the private partner. Pursuant to the Public-Private Partnership Act, the source of the private partner’s remuneration may be benefits from the subject of the partnership, benefits together with monetary remuneration from the public entity, or solely a monetary amount. A partnership agreement should therefore precisely define from what source the remuneration of the private partner is to stem, and should set out appropriate mechanisms for calculating that remuneration, as well as a payment schedule. If all or some of the private partner’s remuneration is to come from revenue generated by the enterprise, the PPP agreement should contain a series of supplementary provisions setting out in great detail those issues connected with calculating that remuneration. It is possible, for example, to specify the minimum or maximum remuneration of the private partner and the effects of these being exceeded or not achieved. An agreement, then, may provide rules for a possible supplement of remuneration by the public entity in the case where the minimum indicators are not achieved, or for the allocation of any surplus to improve the project or increase the quality of services provided if the private entity exceeds its maximum level of profit. Such regulations make it possible to adjust the amount of remuneration to a specific project and secure the interests of both parties to the agreement. The rules determining remuneration for the performance of a joint venture are closely connected as well with specifying the duration of the agreement, which should be adequate to the period of return on expenses. If the life of the agreement is too long, this may unjustifiably increase the private partner’s remuneration and expose the local government unit to indirect losses. For this reason, the conclusion of every public-private partnership agreement should be preceded by appropriate studies and analyses by the public entity. Further, if a PPP project is to be implemented by a special purpose vehicle established by the public entity and the private partner, it is necessary to ensure that the body of the articles of association or statute of that company provide adequate protection of the position of the local government unit as a partner, and in particular that they set out the rules for dividing and paying out dividends.

Division of risk

One of the most difficult tasks connected with constructing a public-private partnership agreement is that of establishing an appropriate division of the risk entailed by the performance of the joint venture. It is significant that, in many cases, if the contractual provisions are too restrictive and transfer too much of the risk onto the private partner, this may prove disadvantageous for the public entity, and may even forestall the implementation of the project. Especially in the case where the private partner finances a project out of funds stemming from credit, overly restrictive conditions of cooperation involving, for example, inflated contractual penalties or rules for deducting remuneration from the private partner may significantly increase the costs of credit or render the entire project unprofitable. Equally, if the public entity avoids involvement in the issue of the financing of the project by the private partner, this may constitute a serious obstacle to the efficient, optimal financing of the implementation of the enterprise. A refusal to conclude an agreement directly with the lending bank or establishing security in favour of the bank in the form of a mortgage or pledge on asset components belonging to the local government unit may in essence increase the risk of the joint venture not being completed successfully, rather than strengthen the position of the public entity and secure the property of the local government. As practice shows, the main cause of public-private partnership projects not succeeding is their being improperly prepared, including through a failure to adequately identify risk and conduct appropriate analyses, which is reflected in improperly prepared PPP agreements. Securing the interests of the public entity in PPP projects consists above all in responsible preparation for the implementation of the task in cooperation with the private partner, and in properly regulating the mutual obligations of the parties to the public-private partnership agreement, taking account of the specific nature of such agreements based on the element of cooperation.