3 June 2002
In Poland, the Czech Republic and Hungary, a process of economic transformation is taking place as each country works towards entry into the EU in 2004.
Decades of underinvestment in the maintenance of poor-quality infrastructure during communist rule has led to a vast demand for essential elements such as transport, power and water. This has resulted in the transition economies legislating for the grant of concessions to private investors and, in some cases, procuring projects.
The EU is providing extensive grant aid to these countries, funding the development of projects and the preparation of invitations to tender, monitored by its delegation.
But the public infrastructure projects funded through these grants are projects that could be funded privately through a public-private partnership (PPP). The finance and transport ministries of transition economies want to utilise the UK PPP model, with variations taking account of risk profiles, legal and political environments and public sector expertise.
One of the principal factors behind the willingness of Eastern European governments to consider and adopt PPP-style schemes is the politicians' reluctance to sell state assets to the private sector outright . PPPs satisfy the need to keep strategic assets (the 'family silver') in the hands of the state, while also finding a structure that can deliver private sector investment. The key issue is whether existing economic, legal and administrative structures in Eastern Europe are able to attract and support private investment under this model.
So what progress has been made? Experiences vary enormously. In Poland, a law on toll motorways was passed in 1994, following which there have been three calls for tender resulting in the construction of one 60km connection between Krakow and Katowice. The other two projects have not commenced construction. This may be because of an insufficient traffic flow to make tolls viable and a lack of the State Treasury's guarantee of proceeds. A new Polish government programme has announced that it will consider changing from a directly collected toll to the 'vignette' concept, involving the purchase of an express passway.
The Czech Republic has no comprehensive enabling legislation for PPPs and the government has relied on several small amendments to procure its only PPP project to date - the D47 motorway to Ostrava. But controversy surrounds this project. It has been awarded to a private company without holding a tender competition and without agreeing a contract, despite the existence of the Public Procurement Act. Further legislation will probably be needed to enable the government to transfer state assets to the private sector and to provide rights and obligations on concessionaires. This can proceed after this month's parliamentary election.
By contrast, Hungary does have concession and public procurement legislation, but progress has not been without inherent difficulties. The government there has tried to transfer major development and operational risk to the private sector, but in some instances it has had to guarantee part of the debt financing. Major completed projects include the M1, M15 and M5 motorways. Low traffic volumes on the M1 and M15 led to the insolvency of the concessionaire, but the M5 is still operated by the private sector. Another project, Budapest Sports Hall, has been undertaken by Bouygues under a 20-year design, build, finance and operate contract.
Further behind most other candidate countries in terms of transition to join the EU is Romania. But this year it introduced a PPP act intended to attract urgently needed private funds for its ailing infrastructure. Public projects had previously been carried out under concession and public acquisition legislation. The Romanian government has announced its intention to carry out seven major projects to upgrade road, rail and sea transport infrastructure, valued at $2.98bn (£2bn).
The experiences of each country demonstrate that, while the need for renewed infrastructure and the desire to procure it through the PPP route is key, there are also real hurdles to overcome for the successful implementation of the PPP model. What these are and the degree to which they are manifested vary from country to country.
Each country has implemented legislation enabling PPPs, but this has sometimes been of unclear application or contained gaps. Some civil code legal regimes do not allow the taking of security, including security over income streams that are crucial to international lenders, although others, such as Romania, have enacted quite modern secured transaction laws.
Although public procurement legislation existed in the Czech Republic, the government's perceived failure to operate a competitive and transparent tender has not enhanced private sector confidence. There is also an unsurprising lack of professional expertise in the public sector that makes it heavily dependent upon external advisers.
The ongoing transformation process, supervised by the Delegation of the European Commission and involving the overseeing of all infrastructure projects funded by the European Commission, should go a long way towards establishing an economic environment conducive to the successful implementation of PPPs. As and when the transition economies succeed to the EU, this will provide greater stability and confidence.
Anthony Fine is head of global projects and Cathy Harris is senior associate at Altheimer & Gray