Let’s get together

The new public private partnership law encourages entities which have so far rarely worked together to cooperate more closely with each other. It opens up some promising prospects, especially for the development of Polish cities. However, there are many things still to be learned and many to be changed in adapting the law to the market realities

Zuzanna Wiak

According to Marcin Borek, a partner of consultancy Ernst & Young: “Cooperation between private and public entities could have been regulated by the civil code – it was not legal issues that made the execution of PPPs impossible in Poland for so many years. However, thanks to the introduction of a new, clear PPP law, the climate for this type of investment has definitely improved. I have not seen PPP processes being prepared as quickly anywhere as they are in Poland nowadays. Preparing such projects in just ten months might result in unsound planning. Nearly half of such schemes are now being invalidated.” The previous legislation limited to a large extent the flexibility of both private and public entities with regard to this type of investment. “The new law governing PPPs is still not precise. There are no frameworks or limitations, as a result of which municipalities are afraid to make decisions over this type of investment,” says Andrzej Wójcik, development director of Nexity Polska.

How to use it - and use it well

According to a report prepared by Tuna Tasan-Kok and Magdalena Załęczna for Ernst & Young’s ‘Better Government Programme’, the success in implementing urban development projects under the PPP formula depends on such factors as the experience of both parties, how well devised the legislation is, administrative effectiveness and institutional possibilities. According to the research itself, big cities, which attract most investors, are best able to handle PPPs. These are usually entities which are considerably richer and can allocate bigger funds to refining the projects and using professional consultants. “A gigantic city development machine operating according to the PPP formula has been launched. In Warsaw hospitals and bus stops are to be built this way, as well as an incineration plant. We only need some time now to prepare these projects and to employ reliable consultants with good knowledge about the subject, thanks to which city councils will have to guarantee that the projects will be carried out according to the law and will be beneficial. Illusory savings on consulting services for such proceedings will sooner or later backfire on municipalities. Solving problems resulting from the negligence of consultancy companies, and a lack of specialist knowledge or experience, is much more costly than good preparation for the whole process from the very start,” says Rafał Trusiewicz, a partner at the Trusiewicz Siwko Law Office.

A number projects with a combined value of over PLN 1 bln are to be carried out in Kraków in cooperation with private investors. Thanks to this type of cooperation new streets and multi-storey car parks are to be constructed, as well as such public buildings as a new town hall, a registry office and an investor service centre, among others. PPPs could build over a thousand council flats at a cost of PLN 225 mln. Such are the plans of the biggest cities, but which of the smaller urban centres are best positioned to manage PPP projects? According to the Ernst & Young report, Słupsk is one of the more ideal smaller cities – as is Sopot, which is currently preparing for the development of the area around the town’s railway station.

Station beautification

On the well-known Sopot street of Monte Casino, a complex with an area of 17,000 sqm is to be built, which Sopot council is to carry out in cooperation with the Polish State Railways (PKP) and a private investor. According to the spatial development plan, together with a new railway station, which will have an area of 300-500 sqm, a number of service buildings are to be developed, including retail, office, catering and hotel facilities. A hotel is planned with an area of app. 6,000 sqm, which will be of a 2- or 3-star standard and will offer 90 rooms. The design also includes a 2-storey municipal car park for 338 vehicles (an absolute requirement for any investor). Shops and services are also to be built. The town council is planning to select an investor this year and to start construction in 2011. The total investment expenditure amounts to app. PLN 168.4 mln net. At the beginning of this year, Sopot started consultations with investors to get the selection process moving as soon as possible. “The council and the PKP have diligently prepared for the execution of the development project for the area around the railway station. However, their projections are, in my opinion, slightly too optimistic. For example, the design includes a lot of retail space. Looking at it from the business point of view, you have to take into consideration that the town is alive for the 5-6 months of the tourist season. This is slightly too short a time to commercialize a facility well and to make a profit from a sale,” argues Andrzej Wójcik, development director of Nexity Polska, who took part in the seminar for potential investors organized by the council and the railway representatives. Contracts concluded under the PPP formula must be precisely formulated so that neither the public nor the private party loses money due to them. “When a project is not thoroughly analysed and does not guarantee high competitiveness, using the PPP formula might not bring the public sector the desired effects. It could be that the only advantage for the local authority is that a project in which the financial aspects seem to be very dubious is carried out on an off-balance sheet basis. Long-term contracts, such as for example a 70-year contract for the construction of one Poland’s car parks, may prompt questions about the attractiveness of such cooperation models for the public sector. And a further question arises: are we doing everything we can so that the reputation of such a good idea as PPP does not suffer as a result of the evolution of good practices being too slow? In some places in the West, an ordering party is able to return the costs of offer preparation to a company which was rejected during the process because it believes that selecting the winner on a competitive basis will result in a considerably better offer,” adds Marcin Borek.

The recipe for success

Both sides emphasize that in order to be successful with this type of project you have to rely on professional knowledge because concluding contracts under the PPP formula is difficult. At the moment we do not have a lot of experience with such projects in Poland and our law is still not fully adjusted to the market realities. “The preparation of such processes requires specialist knowledge of the complicated financial schemes which can spread out over many years. We are currently creating our own PPP model, which will protect public assets as much as possible and will ensure that the public entity makes a profit. We still need two years for this process to be completed and for everything to become systematized. We are all still learning about this,” adds Rafał Trusiewicz. This is probably why the biggest emphasis is on the protection of public assets, while in a sense the incentives for the private sector have been forgotten. Nexity carries out many projects under the PPP formula in France, because of the significant incentives on offer in the country for investors in this kind of scheme. For example, the value of land where projects are to be developed is reduced by 15-20 pct. This is clearly a better starting point for a project than in Poland, where plots of land are valued at the market price,” laments Andrzej Wójcik of Nexity Polska about the situation in his homeland. According to investors, we should adopt one other practice from the West. The local authorities there pay to participate in offer preparation proceedings. Thanks to this model, they are more competitive and transparent, something which is of prime importance for public private projects. ν