Romania is a country in clear need of huge investment in infrastructure. The Romanian state, either using its own resources or EU financing, has so far assumed most of the investment cost, with little or no involvement of the private sector. The roads infrastructure has been built by the Romanian state on the basis of public procurement works contracts but eventually, the state’s resources have proved to be inadequate for the generally undeveloped infrastructure system of Romania.
Against the background of the international economic crisis which directly affects Romania and its investment resources, the Romanian state has started to look towards developing major infrastructure projects by way of a partnership between the public and private sectors. This approach is likely to create interesting new opportunities for private contractors to invest in large scale infrastructure projects in Romania.
There are many advantages of public-private partnerships— they provide different solutions for private funding of public projects, reduce costs for central and local authorities, use private sector know-how and management skills in public projects, bringing increased efficiency to project development, involve a shorter implementation period and greater technical innovation, and ensure a high level of quality in the public works provided. In turn, the private investors have the opportunity to invest and to make returns on projects backed by the state or the local authorities.
The form of partnership used by the Romanian authorities is a concession arrangement for public works which means that private entities are awarded a contract for the construction and operation of a project, using their own resources. Romanian legislation does govern public-private partnerships, but due to lack of clarity in its provisions, the authorities have not used it yet, and nor are they expected to do so in the near future.
A concession arrangement for public works is characterized by the fact that, in exchange for the public works executed by the contractor at its own cost, as concessionaire, the contractor receives from the contracting authority the right to operate the facility created for a specified period of time with or without the payment of a predetermined amount of money.
The first concession arrangement for public works in the infrastructure domain in Romania is the construction and operation of the Comarnic- Brasov highway, awarded by the Romanian state in 2010 to a French and Greek consortium, Vinci-Aktor. However, following submission of its winning tender, the consortium abandoned the project because it could not obtain the necessary financing for the project. In 2013, the Romanian state re- initiated the tender procedure for the project and awarded the contract to the same consortium, this time comprising not only Vinci-Aktor, but also an Austrian company, Strabag. According to press releases, the consortium is again negotiating the financing of the highway, with a view to commencing work under the contract by the middle of this year.
The success of the Comarnic-Brasov highway project may be prove to be a key starting point in the performance of similar infrastructure projects by the Romanian state, which is likely to apply this model as much as possible to address the urgent need for infrastructure development in Romania.
Procedure for the award of a concession of public works contract
Under the relevant legislation, for any public investment project, the contracting authority is required to conduct a feasibility study, which is to cover the main features of the project and be based on a technical and financial analysis of the proposed investment, ensuring a rational and efficient use of public funds, in order to meet the economic and social requirements of the specific area.
The technical analysis consists of general information regarding the proposed investment, such as the name of the project, its location, the objectives, the beneficiaries, a description of the works to be undertaken, an analysis of the land, the necessary technical standards, environmental aspects and preliminary estimation of the costs involved in the investment.
In order to assess the financial feasibility of the project, the analysis is required to take into account the following:
- an estimation of cash flows (all revenues and expenses to be incurred during the preparation phase and construction);
- the actual net value of the project;
- the cost-benefit ratio.
The contracting authority must decide on the most appropriate procedure for the award of the concession, based on the features of each project and the status of the contracting authority. The contracting authority is required to award a concession agreement for public works using one of the following procedures:
- an open tender procedure;
- a restricted tender procedure;
- a competitive dialogue procedure;
- in exceptional cases, a negotiation procedure, after the publication of a participation notice, when, after an open or restricted tender procedure or competitive dialogue has been adopted, there have been no offers submitted or none of the offers submitted could be considered admissible.
According to international practice, the contracting authority is to determine in a specific manner the technical, legal and financial structure of the project.
In the event that the contracting authority can establish the technical, legal and financial structure of the project, it can choose to award the contract through an open or a restricted tender procedure, taking into account that after publishing the participation notice, the contracting authority cannot make substantial alterations to the tender documentation.
However, if the contracting authority cannot establish the technical, legal and financial structure of the project, because the project is very complex, then the contracting authority may use the competitive dialogue procedure.
Although open and restricted tender procedures generally take less time and are less expensive, they are much less flexible than negotiating after publication of a participation notice or the competitive dialogue procedure. In particular, the lack of communication with the applicants can be a serious disadvantage, as concession agreements for such projects tend to be very complex, and the private contractor’s expertise is required in order to achieve the best result.
The criteria for the qualification and selection of bidders generally include:
- their personal circumstances;
- their ability to conduct business;
- their financial situation;
- their technical capacity;
- environmental protection standards; and
- quality standards.
Characteristics and risks
The main purpose of a concession of public works contract is to procure performance at an appropriate level in the delivery of public works, and at affordable prices for the end users, as well as the maintenance and development of the assets entrusted by the contracting authority to the concessionaire for executing the works.
The term of a concession arrangement for public works should be established in a manner that:
- avoids artificially restricting competition;
- ensures a minimum profit for the contractor by allowing it to operate the works for a given period;
- ensures a reasonable level of prices for the works or services that will be performed during the contract (prices that are to be paid by the end users).
For example, the term of the Comarnic-Brasov highway contract is 29 years, three years for the construction and 26 years for the operation of the highway by the concessionaire.
A concession agreement for public works contract includes clauses which expressly provide for the allocation of risk that may arise during the performance of such a contract, the contractor taking the largest share of the risk, in particular, construction risk. The manner in which the contractor recovers the costs incurred in the execution of the public works is provided for so as to ensure such costs are kept to a minimum.
The main risks that may arise during the performance of a concession agreement for public works are:
- the availability risk, which involves failure to meet certain criteria relating to the performance and quality of the works, for the entire life of the works; and
- the market risk, which places limitations on the use of the works by end-users even though the performance and quality criteria have been met.
Availability risk and market risk may be assumed or shared with the contracting authority in order to increase the cost recovery by the concessionaire and thus, to increase the bankability of the project and its chances of success.
Although this is not a legal requirement, the assessment of whether a project is bankable or not is essential to ensure the ultimate feasibility and effective performance of a concession. The results of such an assessment have an important role in determining the structure of the project.
In the event that only the end-users pay for the use of the public works rendered by the contractor, the financial objectives of the project depend on the estimated number of users, on the actual use of the public works and on the willingness of users to pay. Where this is the case, the contracting authority should perform a careful assessment of the financial feasibility of the project, as a contract where the concessionaire assumes all the risk is not likely to attract the necessary financing and will eventually be abandoned.
In view of the latest developments in the market, the contracting authorities in Romania seem more open to sharing the various risks related to a concession arrangement for public works. Thus, depending on the outcome of the Comarnic-Brasov highway project, Romania may start offering multiple opportunities for bankable investments to private companies active in the infrastructure field.