ROBERT JUODKAPartner, Attorney-at-law, MBA

Law firm Sutkienė, Pilkauskas & Partners

Lithuanian Legal Lithuanian Legal Perspective of Perspective of

Structuring a PPP Structuring a PPP ProjectProject

1. Possibilities for the implementation of PPP projects. Concession; Public Procurement; Joint-ventures.

2. Meaning of the concession under the applicable legislation.

3. Public procurement as a mean for implementation of PPP projects.

4. Main differences between the two ways of implementation of PPP projects.

5. Possibilities to implement PPP projects through joint-ventures.

6. Conclusions.

Outline of the Outline of the presentationpresentation

Legal questions to consider Legal questions to consider when implementing PPPswhen implementing PPPs

Legal questions to Legal questions to consider when consider when implementing PPPsimplementing PPPs Correct distribution of risks; Borrowing limits of public sector; Regulatory environment of a sector; Transfer of state/municipal property to the

concessionaire; Land usage; Competition law and state aid; Taxation, etc.• All of the questions may be addressed differently

depending on the tool chosen for the implementation of a PPP project.

Three possibilities for Three possibilities for implementation of PPP implementation of PPP projectsprojects

Concession – in accordance with the Law on Concessions.

Public Procurement – through a contract concluded as a result of a pubic tender.

Joint-ventures – through joint-venture contracts with public bodies

Concession under the Concession under the Law on ConcessionsLaw on Concessions

According to the Law on Concessions :• Concession is the authorisation to the

concessionaire: (1) to engage in the economic activity related to

designing, construction, development, renovation, change, repair, management, usage and/or maintenance infrastructure objects,

(2) to provide public services, and/or(3) manage and/or use state-owned or municipal

property (including natural resources),

Concession under the Concession under the Law on Concessions Law on Concessions (continued)(continued) (cont’d)

• where the concessionaire assumes all or major part of the operating risk

and• the consideration for such activity consists

only of the income from such activity or the income plus the payment payable by the awarding authority.

The maximum term of a concession agreement is 25 years (Law on Concessions).

Legal questions to consider Legal questions to consider when implementing PPPswhen implementing PPPs

ConcessionsConcessions Concessions may be granted in a number of areas,

including:• 1) energy (incl. heating, electricity, oil, gas extraction

transfer, distribution and supply);• 2) water and waste water systems;• 3) waste management;• 4) road infrastructure;• 5) health care system;• 6) telecommunications infrastructure;• 7) educational system;• 8) transport infrastructure;• 9) public transport infrastructure;• 10) tourism infrastructure;• 11) culture, sports, leisure infrastructure.

Granting of Concessions Granting of Concessions

Public sector should be extremely careful when choosing to implement a project through the grant of a concession.

Law on Public Procurement contains imperative provisions, therefore, if all of the conditions for the concession are not satisfied, the Law on Public Procurement should be applied.

Otherwise, the granting authority risks that the procedure might be challenged.

Granting of Concessions Granting of Concessions (cont’d)(cont’d) Under the Law on Concessions the procedure

comprises of the following steps:1) announcement of the public tender; 2) preliminary selection of the candidates; 3) submission of preliminary non-binding offers; 4) evaluation of preliminary non-binding offers;5) submission of detailed binding offers; 6) evaluation of detailed binding offers; 7) negotiations and conclusion of the concession

contract. • Stages 2, 3 and 4 are complimentary

Public Procurement Public Procurement

PPP projects are in general possible to implement through public procurement, however, the possibilities are limited, because:

• Operating risk in most cases remains with the public sector;

• Public sector body may not be a party to any of the ancillary agreements;

• Step-in rights are not allowed;• Normally contracts may be concluded only for a

term of up to 3 years.

Public Procurement (cont’d)Public Procurement (cont’d)

Public sector needs to do its “homework” before the project may be implemented:

• Basis for conclusion of contracts for a period exceeding 3 years needs to be found;

(Government Decree of 5 May 2006 No. 432 provides for a final list of cases when a public procurement contract may exceed 3 years:1) for purchase of electricity, gas, hot and cold water, sewerage and

waste removal services;2) for purchase of loans, other financial services;3) for purchase of goods by virtue of leasing (financial leasing),

rent, hire-purchase;4) for purchase of maintenance, repair or supervision services,

when the agreement on purchase of an object also includes these services;

5) for purchase of works;

Public Procurement (cont’d)Public Procurement (cont’d)

6) for purchases necessary to companies engaged in water, energy, transport and post sectors;7) in cases of implementation of investment projects included into the State Investment Program of the ongoing year, including projects co-funded by EU, or projects with NATO;8) in cases of implementation of long term (over 3 year) Programs approved by the Parliament, Government or Local Municipality Council.

• Necessity to choose the relevant procurement procedure and to justify the selection;

• Necessity to define the object of the procurement (works or services)

So what are the So what are the differences?differences?

So what are the So what are the differences?differences? Concession:• Realization of a public function is transferred

to a concessionaire;• Financed in full or partly by a concessionaire;• Remuneration is based on the usage of an

infrastructure developed by a concessionaire or a public service provided by it;

• More freedom in modeling the transaction structure;

• More freedom in the procedure of choosing the concessionaire;

So what are the So what are the differences?differences?

Public procurement:• Public body remains responsible for the

realization of a public function.• Financed by public sector;• Payment based on the work completed /

services rendered; • Limits imposed on the structure and term of

the transaction;

Differences in Differences in distribution of distribution of riskrisk The most important aspect of distribution of risks is

the ultimate responsibility for the commercial exploitation of the project:

• The risk may be transferred to the concessionaire;

• However, in case of public procurement, it remains with the public sector as the contractor may be responsible only for the availability of the infrastructure (service). Nonetheless, in public procurement the project may be structured so, that most of the other risks connected to the design, construction and operation remain with private sector.

Usage of state/municipal Usage of state/municipal propertypropertyin a PPP project in a PPP project

Usage of state/municipal Usage of state/municipal propertyproperty

PPP is No Privatization:

• Neither the Law on Concession nor (obviously) the Law on Public Procurement foresee a possibility to transfer the public real property to the ownership private counterpart.

Gratuitous use of property:

• May be provided for undertakings in charge of certain state/municipal public function;

• Decision is adopted by the Government or the relevant Municipality Council

• Investments into the property are not refunded

• The user is obliged to insure the property

• Taxation

Usage of state/municipal Usage of state/municipal property (cont’d)property (cont’d)

Rent of state/municipal property:

• Generally granted through a public tender;

• Exceptions possible under a concession structure;

• Municipal property is rented in accordance with the procedure established by the Council of a municipality;

• State property is rented in accordance with the procedure established in the Law on Management, Usage and Disposal of State and Municipal Property and Decree of the Government (No. 1524, 14.12.2001) and other acts;

Usage of state/municipal Usage of state/municipal property (cont’d)property (cont’d)

Problematic where state owned property is required for the implementation of a concession awarded by a municipality:

• Coordination between the state and municipal institutions;

• Potential discrepancies in the procedure (e.g. state owned property, except for land, may be rented for a period of up to 10 years);

Borrowing limits of Borrowing limits of Municipalities Municipalities

Borrowing limits of Borrowing limits of Municipalities Municipalities • Limits for municipalities for borrowing money are set by the

Lithuanian Parliament (Seimas) each year whilst passing the Law on Approval of Financial Rates of State Budget and Municipalities’ Budgets for the certain year.

• The said limit cannot exceed certain amount of the revenues of the municipality budget of a certain year.

• The Law on Approval of Financial Rates of State Budget and Municipalities’ Budgets for the Year 2006 sets forth that:

a) the debt may not exceed 35 % (50 % for Vilnius and Kaunas) of the approved revenues of the municipality’s budget for this year (excluding special purpose allocations by state budget).

Borrowing limits of Borrowing limits of Municipalities Municipalities • The annual net amount of municipalities’ debt may not exceed 20 %; and • The short term annual loan amount may not exceed 10 %;

of the approved revenues of the municipality’s budget for this year (excluding special purpose allocations by state budget).

The annual net amount of municipalities debt comprises of:

a) loans,

b) financial leasing and

c) other debt documents undertaken during the ongoing financial year, deducted by the already repaid amounts under these obligations;

• The amount of a) municipalities’ loans, b) interest and c) other payments in connection to obtainment of the loan, which are repayable on this calendar year may not exceed 20 % of the approved revenues of the municipality’s budget (excluding special purpose allocations by state budget);

Borrowing limits of Borrowing limits of Municipalities Municipalities • The limit of guarantees and sureties, which may be issued by

municipalities is 5% of the approved revenues of the municipality’s budget for this year (except special purpose allocations by the state budget).

• The municipalities engaged in implementation of investment projects financed by EU support funds are granted an additional loan limit of 6%. However, this exception does not apply to Vilnius and Kaunas municipalities.

• Notwithstanding the above, municipalities, whose investment projects are included into the State Investment Program for the years 2006-2008 may by decision of the Government be granted higher borrowing limits, except for those municipalities which do not lower their amount of indebtedness.

Joint-venturesJoint-ventures

Joint-venturesJoint-ventures

It is established in the applicable laws and confirmed in the case law that municipalities may only conclude joint-venture agreements with other state and municipal bodies.

However, there no restrictions imposed on state and municipal controlled companies or public institutions, therefore joint-venture agreements may be concluded with:

• Hospitals (structured as Public Institutions);

• Universities;

• Special purpose companies (e.g. water, heating, electricity);

• etc.

Joint-venturesJoint-ventures

The Law on Management, Usage and Disposal of State and Municipal Property (since 8 August 2006):

• prohibits transfer of state or municipal property to other legal or natural entities or other binding of this property by virtue of an Agreement on Joint-venture.

Sutkienė, Pilkauskas ir Partneriai

Didžioji 23, LT - 01128 Vilnius

Tel.: (+ 370 5) 251 4444

Fax: (+ 370 5) 251 4455

E-mail: spp@spp.lt

www.spp.lt

Thank You for your attention!