Public and private arenas

The construction of a road, a car park or a sports  facility in a public-private partnership is nothing out  of the ordinary. However, it would be something of  a novelty if a retail centre was to be developed with  the participation of a public partner wanting to build  its own non-commercial project. Now one of the first schemes of this type is to take place in Olsztyn

A public-private partnership (PPP) involves long-term cooperation between entities from the public and private sectors on a project. Its aim is to provide public utility services or to carry out projects that satisfy the needs of the community. In public-private partnership projects, the public entity concentrates first of all on producing the end result, i.e. providing the community with the facility to use public services while not being forced into continuous organisational involvement or the long-term investment of public funds in a given project. However, exclusively commercial facilities such as shopping centres can be built as part of the process, subject to an agreement between the parties. In short, a private partner develops a project, e.g. a stadium with an accompanying shopping gallery, on a site provided by the local council as its own-contribution. After a certain period specified in the agreement has elapsed, the stadium becomes the property of the public partner, while the private partner is ‘left’ with the shopping gallery. This represents an effective means of developing interesting kinds of commercial projects in city centres.
The pros of PPPs
The numerous advantages of projects developed under the PPP formula amply demonstrate that it is well-worth considering. this approach. A partnership of this type makes it possible for public partners to acquire the funds needed for the realisation of their ambitions from private sources, and also gives them the chance to benefit from the know-how, the expertise, and the management and technical skills of professionals from the private sector.
One clear advantage of this type of partnership for the private sector is to gain ownership, leasing or other legal rights to what are often highly attractive plots, as well as the possibility of negotiating payments of various kinds from the public sector. The payment does not need to be in monetary form, because the public entity can instead hand over the title deeds or the usufruct rights to the property being developed. In addition, the private entity cooperating on the project could also be given the rights to manage the facility, which would allow it to influence the prices of the services it eventually offers, among other advantages.
It is also possible to receive financial support from the EU Cohesion Fund, which has declared an interest in supporting projects of this type. The Cohesion Fund is the basic source of funding for public projects, and can provide financial support of up to 85 pct of the costs of a project. However, in countries where such public-private projects have taken place for a long time and where co-funding from the Cohesion Fund has been available, any significant growth in the number of enterprises granted EU funds has yet to be registered (Bejm M. [ed.], Commentary to the Act on Public-Private Partnership, Beck 2010). The reason for this could be the fact that the funds can only be accessed after the costs have been incurred. This goes against the grain of one of the aims of such partnerships, i.e. the deferment of payments incurred by the public partner. One of the basic problems connected with the acquisition of project funds in Poland is securing the own-contribution of the public entity. Projects which could be profitable from the economic point of view will not be easily or generously funded, whereas projects unprofitable by nature will not generate sufficient revenue for the public sector (Public-Private Partnership as a Form of Public Financing of the Tasks Related to Waste Management in the Context of the Use of EU Funds, the Institute of Public Private Partnership, Warsaw, November 10th, 2010). Despite this there is a great deal of hope in Poland with regard to the co-financing of public-private partnership projects.
Galleries as the fruit of cooperation
At a time of economic slowdown and when land prices are nevertheless continuing to grow, a project carried out in cooperation with a public entity, where the payment is made in the form of transferring the ownership of the land, could be the ideal approach. Consultations with the private sector by public entities that are still at the preparation stage for a PPP project can be of great value. The consultations can reveal what form of remuneration is required for the private party, and so can allow a model to be worked out that secures both the completion of a public task as well as making the profitability of the project more probable for the private investor. It has positive results for both parties.
The project can be carried out either by the conclusion of a PPP contract or a contract to enable the setting up of a commercial company.
For example, the project in Olsztyn involves the renovation of the city stadium, as well as the development of a mixed-used shopping centre with service, cultural and recreational functions and a leasable area of app. 40,000 sqm. The planned own-contribution of Olsztyn city council is in the form of the land for the retail project in exchange for the re-construction of the stadium. A significant disparity between the value of the land and the investment outlay for the stadium has been covered by the municipality. Over the duration of the PPP contract, both the stadium and the shopping gallery, including the car park, will be managed by the private entity, and only upon the termination of the contract will these facilities be returned to the local authorities.
The above cooperation model consists in the development of an enterprise directly by the private partner and the public entity. In simple terms, it can be said that two targets will be accomplished as a result. The first (public) target is the re-construction of a stadium and the second (private) goal is the development of a shopping centre.
The PPP act also allows for the development of a project by the setting up of an SPV company (a limited partnership, a limited joint-stock partnership or a limited liability company) by both parties. Such a company can be established either before or after the conclusion of a PPP contract. Operating via an SPV company enables the project and assets connected with it to be separated from the rest of the business and financial activities of the private partner, i.e. it creates a ‘protective umbrella’ over the project in the event of the liquidation of the assets of the private entity. It is in the interest of the private party to secure first-purchase rights for the shares in the SPV company set up by the PPP contract.
Olsztyn paves the way
The growing number of projects carried out under the PPP format makes it worth checking whether in any given case it is profitable to develop commercial facilities, particularly shopping centres, in cooperation with public entities. It is important to considerate the attractiveness of the land, because the most sought-after locations often turn out to be in the possession of local authorities, and so this form of partnership often provides the only chance to obtain the legal title to such land. The pioneering project in Olsztyn shows that it is possible to realise a commercial project, such as the construction of a shopping centre, while accomplishing the goals of the public sector.
Rafał Trusiewicz, partner, and Michał Siwko, partner, Trusiewicz/Siwko Kancelaria Prawna