What risks need to be addressed in a PPP agreement?
Public-private partnerships (PPP) are quite developed in Europe. In Kazakhstan, this format is also gaining popularity. In two years, 500 PPP projects were launched in our country. Meanwhile, many entrepreneurs remain skeptical about the PPP format. “Kapital.kz” decided to dispel the myths and found out what the risks and benefits of such projects are.
There is no single platform
Entrepreneurs who want to create a project in the PPP format should follow the news in the media or view the website of the Kazakhstan PPP Center. “The problem is that there is currently no single platform or database where all the complete and reliable information on already implemented and future PPP projects is accumulated, which entrepreneurs and interested parties could also use to consider possible investments in Kazakhstan. Even on the website of the “Kazakhstan PPP Center” the information is limited, chaotic and not always complete. Often, even specialists who are involved in consulting on PPP projects find it difficult to understand where and under what conditions competitions for PPP projects are and will be held. Projects of republican significance, such as BAKAD, are best tracked in the media and news on the Internet. The fact that we do not yet have a single platform slightly hinders the more active development of the PPP area,” says Shaimerden Chikanaev, partner of the law firm GRATA International.
What is the price?
If you decide to implement a PPP project, then the entrepreneur does not necessarily need to hire a consulting company. “It is advisable for the head of the organization to independently understand the nuances of the Law “On Public-Private Partnership.” For small projects, for example, less than $3 million, it is not necessary to hire lawyers, financiers, etc. According to the law, contracts for projects less than 4 million MCI are implemented under simplified PPP procedures. In this case, standard contracts are used, which can be found in the public domain on the Internet. In the form of such an agreement, it is enough to enter the name of the company and other basic data. In practice, according to standard contracts, at least 3 months pass from the moment the competition for PPP projects is announced until the conclusion of the contract,” the interlocutor notes.
It is advisable that large PPP projects should still be serviced by consultants, including lawyers. The cost of their services will depend on the complexity of the project and the scope of work. For example, preparing a PPP agreement can cost from $3 thousand to $20 thousand. “But often such expenses are borne by the state if it is the initiator of the project. For example, if the akimat is the partner, then it can prepare an agreement, announce a competition, and the private individual will only have to agree and accept all the terms of the contract. Meanwhile, if the project is quite large and there are many nuances, then, of course, it is more rational for the company to hire its own lawyer. In this case, she will be sure that all her rights and risks regarding the project have been taken into account,” the interlocutor advises.
In the access area
All industries can implement a PPP project. There are no direct restrictions in the legislation, with the exception of a certain and rather short list of specific property that cannot be transferred to PPP.
PPP projects, unlike projects implemented within the framework of public procurement legislation, must be structured so that part of the risks associated with the creation of the facility and its operation are accepted by the private partner. But at the same time, the entrepreneur must clearly see how he will make a profit.
It must be taken into account that the main benefit for the state and society from PPP is that the funds available in the budget are not immediately spent on infrastructure, but instead are paid in installments.
A PPP agreement in Kazakhstan can be concluded for a period from 3 to 30 years. On average, such projects are implemented in 5-10 years. The PPP format is convenient because there is freedom of choice. That is, two parties can provide in the agreement those conditions that they consider necessary, subject to compliance with the mandatory requirements of the law. There are no strict requirements that PPP agreements must meet.
Could the budget be tightened?
This is why PPP projects are attractive to businesses. “One of the significant advantages is the entrepreneur’s confidence in the fact that he now has a creditworthy counterparty in the form of the state. It is also important that the state meets its obligations with its entire budget. If the partner is a local executive body, the budget of the city or region, if the ministry is the republican budget. In addition, a PPP project is usually implemented for a long period, on average 15-25 years. And thus, an entrepreneur, working under PPP, has a guaranteed cash flow for many years. Thus, the company has confidence that its production facilities will not be idle, and it will be in stable demand for 15-25 years,” notes Shaimerden Chikanaev.
As it turned out, the state cannot sequester, that is, reduce the amount of the PPP project. This nuance is spelled out in the Tax Code. “For example, when conducting public procurement, if the state does not have enough funds to implement the project, then it can, in theory, reduce the budget. For PPP projects, such a risk does not exist: contractual obligations will be fulfilled in any case,” notes the interlocutor.
What about the difficulties?
Meanwhile, entrepreneurs may often encounter certain difficulties with PPP projects. “First of all, it is bureaucracy. The state, of course, is trying to solve this problem, but for now it still exists. If the project is local, then initially entrepreneurs need to contact the akimats. You need to write a letter to the akimat addressed to the relevant department. For example, if the project is in the healthcare sector, then it will be in the Health Department. If the project is of a republican scale, such as BAKAD, then the letter must be sent to the relevant ministry. For example, if the project for the construction of a road is of national importance, then most likely the letter is sent to the Ministry of Investment and Development. You can ask for a meeting in a letter, and you should not be refused. The akimat or the ministry is obliged to meet and provide the entrepreneur with public information,” advises Shaimerden Chikanaev.
He clarifies that the speed of consideration of an application for a PPP project directly depends on the competencies of the akimat. “If the akimat or the ministry is really interested in the project, you are in luck. Thus, you will receive political support from local executive bodies. And besides, entrepreneurs need to be prepared for the fact that they will have to conquer all the offices with akimat specialists. The reality is that if you negotiate the terms with one akim, then if he changes, there is a risk that the new akim will have to present the project again,” the interlocutor notes.
Focus on risks
The expert reminds that there is no long-term and cheap money in Kazakhstan. “It is difficult for entrepreneurs to obtain financing in tenge at reasonable interest rates. Let me clarify: for those projects where many expenses are in dollars, it is important to provide for currency risks. Thus, devaluation risks are usually specified in the PPP agreement. For example, in an agreement you can indicate that if the tenge weakens by so many percent, the state will compensate the company for the realized risk. But usually the state does not want to take this risk. In Kazakhstan, there are rare cases when PPP agreements indicated currency risk as a state risk. It is important to indicate currency risk if the project costs are in dollars. Otherwise, due to a jump in the company’s exchange rate, more funds may be required to implement the project,” says Shaimerden Chikanaev.
That is, the PPP agreement must initially clearly state which risks the state is responsible for and which risks the company is responsible for. The legislation even spells out some typical risks. For example, the risk of premature termination of the contract, the risk of strikes, inflation risks and others. “There are a lot of risks, it’s better to think them through in advance and indicate them in the contract. Also, one should not forget about industry risks,” the interlocutor advises.
Should we expect high profits?
There is an opinion that all PPP projects are low-margin. But, according to the interlocutor, this is not so. “Profit will depend on many factors: the terms of the contract, the situation in the industry, contractors. If the company has agreed with the state on profit and has structured the deal competently, then the PPP project can be very profitable. And if some risks were not thought through, all costs were not taken into account, then expectations for profit may not be justified. That is, like in any business,” notes Shaimerden Chikanaev.
Is it possible to leave the project ahead of schedule?
A company can withdraw from a PPP project early, but it must fulfill certain conditions. “Usually the agreement stipulates that the project company cannot change shareholders or participants without the prior consent of the state. Otherwise, the PPP agreement will be violated. And in this case, the state may terminate the contract early and demand recovery of damages. Meanwhile, the company may cede the right to implement the project to someone, for example, a limited liability partnership. But in this case, it will also be necessary to obtain consent, for example, from the akimat or provided that the LLP meets the requirements of the tender documentation. In my practice there was no assignment of rights,” notes Shaimerden Chikanaev.
The material was first published on the portalkapital.kz
