Tuca Zbarcea & Asociatii

Romania: Is the new PPP legislation giving a boost to infrastructure projects?

27 Noiembrie 2018   |   Oana Vodă, Senior Attorney at Law & Valerie Stropșa Associate- Schoenherr

This seems to be a hot year-end for Romanian infrastructure, with the government recently launching the first public procedure for the award of a strategic infrastructure project under the new Romanian PPP legislation: the construction of the Ploiesti-Brasov motorway.

This seems to be a hot year-end for Romanian infrastructure, with the government recently launching the first public procedure for the award of a strategic infrastructure project under the new Romanian PPP legislation: the construction of the Ploiesti-Brasov motorway. If successful, the project will validate the effectiveness of the new PPP legal framework, while also putting an end to a series of failed attempts to build this motorway under concession or PPP regimes.

Interested investors may submit their initial bids by 17 December, pursuant to the tender documentation published by the National Commission for Strategy and Prognosis (NCSP) for the award of the PPP contract regarding the construction of the Ploiesti-Brasov motorway. Given the complexity of the project and the fact that the Romanian authorities are only taking their first steps in awarding PPP contracts, we believe this is a good time to recap the main aspects of interest for both investors and lenders.

To ensure the success of a project of such magnitude, a vital step concerns the clear definition of the object of the contract. When clearly and unequivocally set out, this allows the correct qualification of the scope and legal nature of the contract, thus mitigating the risk of uncertainty in establishing the contractual relationship. Likewise, the contracting parties must be clearly identified from the beginning. Formerly, where the procurement process was initiated by a state entity, a public authority or institution operating at a central, regional or local level, Romanian contracting authorities sought "fronting" by a state-owned company, especially in case of important strategic projects. The shifting of primary responsibility in a PPP scheme from governmental authority towards a quasi-public entity may raise liability concerns, as well as budget-related risks. Provided Romania's limited experience in implementing and managing complex projects such as PPPs, potential investors' worries would be alleviated if the counterparty includes decision-makers at a central level and/or authorities with policymaking powers in the relevant field.

Another aspect that should be clearly addressed in a PPP contract is the rights that will be transferred to the private partner for the execution of works and their legal nature. A correct qualification of the nature of such rights may seriously impact the execution of works in terms of obtaining authorisations, building permits, etc. In this respect, the Emergency Government Ordinance no. 39/2018 (EGO no. 39/2018) expressly sets out, inter alia, the rights over goods that are deemed public property which can be transferred to the private partner, such as concession rights or rights ensuing from the lease of public property goods. Accordingly, a clear presentation of the current legal regime governing the land which will be affected by transport infrastructure projects, especially in terms of the current expropriation status, is more than welcome to ensure that potential bidders are fully informed.

A sine qua non condition for potential investors is the provision of an estimated project calendar, as well as a comprehensive risk matrix within the tender book, to allow investors to conduct a thorough economic and legal analysis. Based on this information, the performance terms, applicable penalties and even the duration of the project will be outlined, among others. Explicit clauses will be included in the contractual framework to ensure predictability for potential private investors and to minimise the risk of the contracting authorities' decisions being qualified as discretionary.

Considering the complexity of the contract as well as the long duration of PPP projects, financing related aspects are paramount for potential investors. Accordingly, a clear perspective regarding required financial resources to be committed to project implementation as well as the means to recuperate such investment are required, to ease the negotiation of facility agreements with third-party lenders. Compared to previous PPP-related legislation, EGO no. 39/2018 expressly regulates step-in rights. According to this legal deed, the PPP contract must provide for a step-in mechanism, addressing the possibility of the contracting authority to agree on a procedure for lenders to step in and rescue a project before it is terminated. These new provisions seem to address former requests from private investors regarding the consent to the internationally recognised concept of step-in rights and their application by the Romanian authorities. Once recognised under the applicable legal framework, the practical implementation of this concept shall be translated into detailed wording to be included within the terms and conditions governing the contractual set-up in a PPP project.

Finally, a few tax-related matters should be carefully analysed and assessed, especially considering the two PPP forms provided by the applicable legislation, namely contractual and institutional PPP. Tax-related aspects may cover several areas and can be highly complex. It is therefore important that they be carefully addressed, to avoid negative consequences affecting the profitability or liquidity of the parties involved. Moreover, the Romanian legislation contains a general framework for stimulating investments in certain fields and provides for certain schemes that should be analysed to determine possible benefits on a case-by-case basis. If foreign personnel are dedicated to the implementation of projects in Romania, aspects related to immigration and taxation should also be considered.

All these aspects should be considered and addressed in the procurement procedures organised for the award of PPP contracts, especially as this project aims to be the first in a series of strategic PPP investments to be prepared and awarded by the Romanian government.

To close the trust gap between the public and the private sectors, public authorities should allocate the required resources to carefully prepare award procedures targeting the modernisation of infrastructure of national interest. Doing so will address investors' and lenders' demand for clarity and predictability as regards the implementation of such projects.







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