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Highway to development

17. 2. 2010

The new issue of The PPP Journal (Issue No. 66) published an article written by the Executive Director of the Slovak PPP Association about the current state of PPPs in Slovakia. Read more here:

Irma Chmelova, Executive Director of the Slovak PPP Association, describes how public private partnerships are gathering momentum in the country.

Slovakia is, in a sense, a latecomer when it comes to PPPs in Central Europe, where Hungary pioneered the PPP market in the early 1990s. However, during the past two to three years, Slovakia has made up the deficit in PPPs. In August 2009, the first road infrastructure PPP project reached financial close and two more are to be closed in 2010. A number of PPP projects also emerged in other sectors, such as healthcare.

PPPs in the transport sector
The concept of PPP projects first became well-known in Slovakia in connection with road infrastructure projects. The Slovak government had been considering PPP implementation in the road infrastructure programme in 2005-6, but it was not until 2007 that the government officially announced it would make use of PPPs to promote an ambitious programme of three DBFO (Design, Build, Finance, Operate) projects of a total length of more than 150km. The government approved a selection of motorways and expressways and divided them into three so-called PPP packages: five stretches of motorway D1 (75km), four stretches of expressway R1 (52km), and four stretches of motorway D1 (29km, with almost 10km in tunnels). All three projects were based on availability payments.

The second package, consisting of four stretches of the expressway R1, reached financial close on 27th August 2009. Unfortunately, the whole process was slowed down by the financial crisis. The concession agreement with the concessionaire Granvia (owned 50% by Vinci Concessions and 50% by Meridiam Infrastructure) was signed in March 2009, but the process of financial close proved to be difficult and included some tough talking. In the end, an agreement was reached on an amendment to the concession agreement, where the Slovak state negotiated favourable refinancing conditions (refinancing gains are split 90:10 until a certain level, after which gains are split 75:25). As the situation finally began to look brighter, the banks began to require state guarantees. However, the Slovak government stood firmly behind its decision to not provide any such guarantees. This decision has, in the end, proven to be correct, as the project reached financial close without the guarantees, and commercial funding actually exceeded the expected level (12 commercial banks, besides the European Bank for Reconstruction and Development, participated in funding the project).

The next project to be finalised was the first package, in which a concession agreement was already concluded with the concessionaire, headed by Bouygues Travaux Publics – financial close was expected by February 2009, with the extensive participation of EIB. The fate of the third package is still not completely clear, as talks continue with EIB and the selected concessionaire.

Another complex PPP project in the field of transport is the electronic toll collection, which is realised in the form of a DBFOT project. Toll collection will be introduced for vehicles exceeding 3.5 tons on motorways, expressways and on some first class roads of a length of approximately 2,400km as of January 2010. After a lengthy selection of the private partner, a contract was concluded with a supplier at the beginning of 2009 for a period of 13 years.

Regulatory environment
The Slovak government has been strongly supporting PPP projects, which was clearly demonstrated in its involvement in the road infrastructure projects, but also elsewhere (it even included PPPs as a measure in the anti-crisis programme). The support has also been demonstrated through the creation of a PPP unit at the Ministry of Finance, which has relatively generous funding, from EU structural funds, available to support a favourable PPP environment. Only a few months after the establishment of the PPP Unit in 2007, the Slovak PPP Association was founded as a representative of the private sector in matters of PPP.

Slovakia does not have any specific act on PPP projects, but relies mainly on the Act on Public Procurement, which defines a concession agreement and some of the concessionaire’s rights and obligations. Experience in other countries seems to suggest that it is more advisable to revise the existing legal acts, as PPP is merely an alternative form of providing public services and should not be excluded into separate legal acts.

During the preparation of the road infrastructure projects, it became apparent that revisions will have to be made to a number of legal acts. Many ad hoc amendments were made during the process, including the issues of ownership, administration and usage of roads or the matter of expropriation. Due to the strong political will supporting these projects, all necessary amendments were passed in time. However, it became clear that if PPPs were to proceed in Slovakia, the whole legal system had to be analysed and potential barriers had to be mitigated.

In order to facilitate PPP projects, the PPP Unit at the Ministry of Finance hired a legal firm to analyse the Slovak legal system and suggest amendments to make the system more PPP friendly. This analysis was finalised in September 2009 and first amendments are already taking place. The changes affect many areas, including public procurement, state property administration and bankruptcy law.

Slovak PPP market
PPP is to be used in other sectors in Slovakia. One of the first projects prepared as a PPP (DBFO) is the common media complex for Slovak Television and Slovak Radio, to be built in the capital of Bratislava. The private partner will operate the media complex for 28 years and will be rewarded with availability payments. The project with capital investment of approximately €140m was approved by the government in summer 2009, but is still waiting to be launched.

The Ministry of Health has also officially declared support for PPPs. A pilot project is currently in tender (Institute of Nuclear and Molecular Medicine in Kosice) and another project concerning the modernisation of a military hospital in central Slovakia has just started the feasibility study phase.

A possible PPP project in the near future could be the large Faculty Hospital Rázsochy in Bratislava, where the Ministry is still evaluating possible options for its realisation. Other projects in preparation include, for example, the construction and operation of a municipal administrative complex for public offices.

Latterly, proposals for the construction of a ‘government city’ in the form of PPP have also appeared. An interesting future PPP project, proclaimed by the Transport Ministry, is the Bratislava ring road, the so-called D4, which could be based on direct collection of fees, or toll. The first PPP project has also appeared in railways, where a private partner – currently procured– will be responsible for the revitalisation of four major railway stations and, as a reward, will receive long-term rights for use of commercial areas within the revitalised stations.

Future of PPPs
The global financial crisis has, naturally, had a negative influence on Slovak PPP projects. However, financial close of the first pilot road PPP project, as well as planned PPPs in other sectors, provides evidence that, even today, PPPs provide an interesting alternative to the classical method of public services provision. The success of the Slovak PPP projects could influence further development in the field of PPPs not only in Slovakia, but within the whole Central European region.

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