PPP financing: the challenges

Some of the obstacles to efficient PPP in Poland have been removed and the country is on the right track to manage other outstanding issues. The last unconquered bastion seems to be the lack of clear guidelines on financing

The past year has brought many positive changes to public-private partnerships (PPP) in Poland. The implementation of the new PPP law, a clear green light from the government, and significant educational efforts addressed to public sector decision-makers are just a few examples of such changes. Consequently, the overall climate around PPP as a method of financing public undertakings has improved significantly. But an optimal finance model for PPP projects – a model that will deliver maximum benefits to all parties involved and help them manage their risks – still remains to be found. Various PPP finance models that have been tested on other markets could be considered for implementation in Poland. Among them the German forfeiting model seems to offer advantages interesting enough to be worth further exploration.

Forfeiting - how it works

The forfeiting model of financing PPP projects involves a private entity selling its specific payment receivables, such as remuneration for construction work under a PPP project agreement (a ‘PPP agreement’) to a bank. The public entity (for example a municipal authority) that contracts the private entity to undertake construction work (e.g. a school, hospital or town hall) is then required to make payments directly to the bank, while simultaneously providing the bank with a waiver for any potential objections it might have towards the bank in connection with the improper performance of the project by the private entity.

The finance structure of the forfeiting model can be divided into two phases depending on the stage of the project: the construction phase and the operational phase. During the construction phase the private entity does not receive any remuneration for its construction services. Its claim for remuneration arises upon the public entity’s acceptance of the construction work. Moreover, until the public entity has accepted the construction work, the private entity is obliged to cover all the expenses connected with financing the construction work, without any contribution from the public entity.

During the operational phase, the public entity is obliged to repay its debt under the PPP agreement in instalments directly to the bank, regardless of any claims the public entity may have towards the private partner. The PPP agreement will contain provisions concerning the private entity’s improper performance of any obligations and will provide the public entity with adequate measures to manage the related risk. Also, during the operational phase the public entity pays the maintenance and operational fees directly to the private entity.

Increased confidence that the debt will be paid

The key differentiator of this model is that as a result of the agreement on the sale of receivables, the bank becomes a creditor of the public entity and at the same time is liable to pay the private entity an agreed price for the purchased receivables. Following the effective sale of such receivables, the public entity is wholly liable to the bank for the repayment of the debt. As a consequence, the bank obtains a reliable debtor in the form of the municipal authority and can offer better terms for the financing of the transaction. The sale of receivables is conditional upon the public entity submitting relevant statements and waivers of objections. The aim of such statements and waivers is to ensure that the public entity repays its debt directly to the bank, regardless of any circumstances or further legal dealings with the private entity. Since the bank’s certainty with regard to the repayment of the debt is one of the main factors that influence the cost of the financing, the forfeiting model gives the private entity the possibility of acquiring cheaper finance.

Making it fully operational

Our analysis of the relevant law has shown that the forfeiting model for financing PPP projects could be implemented in Poland. Also, as indicated by potential investors and the banks which we cooperate with, this model is commonly considered while discussing financing for PPP schemes. In order for the private entity to sell its project construction receivables under the PPP agreement to a bank, the receivables would need to be described separately and in detail in the PPP agreement to ensure clarity as to exactly which part of the receivables would be sold. It is not entirely clear whether in Poland the municipal authority’s waiver of objections would also cover unforeseen objections in the future. However, in order to give some additional comfort to the bank, we may assume that the public entity would be required to make such statement to the bank after accepting the completed construction work. This would minimize the possibility of it making any objections over the repayment of the debt to the bank, even if such objections to the private entity were justified.

From the public entity’s perspective, the key area of uncertainty is the balance-sheet treatment of the debt and other financial obligations arising from the PPP agreement, particularly in the context of a municipal authority’s permitted debt limits. The lack of clear guidelines in this area creates an interesting challenge to those seeking to benefit from the forfeiting finance model.

The power to solve this issue lies with the Ministry of Finance and it should be treated as an urgent matter since it has a significant impact on the development of PPP schemes in Poland. The forfeiting model of PPP project financing is definitely worth exploring for medium and large-scale projects.

Dominika Uberman, partner – banking and international finance department

Wadim Kurpias, partner – energy, projects and construction department

Daria Pałasz, associate – banking and international finance department

CMS Cameron McKenna