Public private partnership in the Republic of Macedonia – legal framework (Part I)

Public private partnership in the Republic of Macedonia – legal framework (Part I)

When we speak about PPP, we can analyze first the main objective of PPP. Namely, the main objective of the PPP is the inclusion of the private sector in providing public services, with the result that the role of the public sector changes from an owner towards а buyer and a guardian of public interests.

This is driven by the belief that the public sector should focus on its basic functions, leaving the private sector to perform its own function efficiently and effectively. One of the key policy guidelines behind the concept of PPP is the desire to improve national infrastructure in the country and to support public services, without burdening public funds and without the need to increase the taxes. [1]

Macedonia’s overall performance in PPP implementation was ranked high in 2012. The country adopted a set of concession, PPP, sectorial and public procurement laws for PPPs at both the national and local levels, which are in alignment with EU directives on public procurement. The PPP Unit located in the Department for Legal affairs, receives policy development support from the Ministry of Economy and assistance for advisory and promotion tasks from the Council on PPPs. However, familiarity with technical and practical aspects of PPPs remains low in government agencies and experience in risk management is limited.[2]

Successful PPPs have been carried out in the power and transport sectors and the country has allowed private sector participation in the form of concessions, divestitures and greenfield projects in several sectors. The two international airports “Alexander the Great” in Skopje and “St. Paul the Apostle” in Ohrid are examples of PPP projects within the country.

PPP - Definition

Public Private Partnership (PPP) can be defined as cooperation between the public sector (central or local authority) and the private sector in order to provide financing, construction (reconstruction), and maintenance of public infrastructure and/or the provision of public services that are "exclusive" to the public partner.

Depending of the means of remuneration by the public partner for the provided public works and/or public services, as well as allocation of the key operational risk, the PPP projects implemented in Macedonia by central and local government are the following:

1. Public works concessions (airport, landfill for waste disposal);

2. Public services concessions (waste management, parking system and public lightning);

3. Public works contracts (administrative offices buildings and green markets).

Public works and/or services concession contracts according to the international terminology are concession contacts, such as Build – Operate – Transfer (BOT) or Design – Finance - Build – Operate - Тransfer (DFBOT) projects i.e. the user pay principle projects. Public works and/or services contracts according to the international terminology are works and/or services contracts i.e. contracting authority pay projects.

The objective of the PPP shall be to enable engagement in financing contracts establishing a PPP based on the principles of equality, transparency, non-discrimination, proportionality, mutual recognition, environmental protection and efficiency of the procedure for concluding contracts establishing a PPP, as well as quality and efficient realization of the works and services from the concluded contracts establishing a PPP.

In accordance to the Law on Concessions and Public Private Partnership (PPP law)[3], PPP shall imply a form of contractually regulated long-term cooperation between the public partner and the private partner, characterized by the following:

a) Private partner assumes the obligation to provide public services to end users within the area of public partner competence and/or the obligation to ensure the public partner necessary preconditions for the provision of public services to end users and/or activities within its area of competence;

  1. - finance, design, construct or/and reconstruct/renovate public infrastructure facility, operate and maintain a newly constructed or/and reconstructed/renovated public infrastructure facility, or - use, operate and maintain an existing public infrastructure facility, or - any combination of the above mentioned obligations as long as the combination of those obligations is for the purpose of fulfillment of objectives set in item a) of this paragraph.

PPP contracts may be awarded at central and local level. All PPP contracts stipulated by the PPP law shall be concluded for a period of up to 35 years, calculated as of the day of concluding the contract, i.e. as of the day of entering into force of the contract, if this date differs from the former one, unless otherwise provided by a special law. The provisions from the PP law shall be adequately applied to the award procedures for contracts establishing a PPP, unless otherwise provided by the PPP law. The procedure for awarding contracts establishing a PPP shall be implemented in accordance with the principles of transparency, non-discrimination, proportionality, efficiency, equal treatment and mutual recognition.

Legal framework of PPPs

PPP in Macedonia is governed by set of legislation such as: Law on Concessions and Public Private Partnership (PPP law), sectoral laws governing the services of public interests and Law on Public Procurement [4](PP law) which applies to the awarding of public contracts (public procurement contacts and PPP contract ). In addition to these legislation 6 (six) by-laws adopted by the Government for the implementation of the PPP law. The Law clearly defines its scope of application, regulates the selection procedure (publication, pre-selection and procedure for requesting proposals, publication of concession award, possibility of review procedures) and provides for a flexible framework for the project agreement (with reference to termination/compensation, tariff setting/service standards, etc) as well as the manner and procedure for granting of the agreements regarding other types of public private partnership, contest of the agreement of public private partnership, rights and obligations of the public and private partner and legal protection in procedure for granting of the agreements for public private partnership.

The PPP law is quite well drafted and constitutes a solid basis for the development of PPP in the country provided the financing and arbitration issue can be solved in accordance with international best practice for PPP. PPP law and PP law as well generally are aligned with the EU acquis, and are duly enforced.

Pros and cons of existing legislation

The use of the lowest price as a unique criterion for awarding a public-private partnership/concession contract can violates the principle of “value for money”. Using the economically most favorable bid as the criteria for awarding the public-private partnership/concession contract is allowed but is subject to the consent of the Public Procurement Council. There is no explicate provision in the PPP law prescribing the prior consent of the Public Procurement Council for using the economically most favorable bid as the criteria for awarding the PPP contract, but in practice such consent is required. This comes from the fact that PPP law prescribes that provisions from the PP law concerning the awarding procedures shall be adequately applied to the award procedures for contracts establishing a PPP, unless otherwise provided by the PPP law. Such understanding looks like unnecessarily bureaucratic approach. In additional to this, existing legislation on public procurement and public -private partnerships and concessions should be harmonized with the newest EU directives on PP and concession.

Since 2014 the PPP law obliged the public partners to use e-auctions (positive and negative auction)[5] in awarding procedure i.e. in evaluation bid process. According to the PPP law "electronic auction" shall mean a positive or negative auction realized after an initial full evaluation of bids, in which the bidders have a possibility, exclusively by electronic means to revise the offered prices so that the ranking is done automatically by electronic means.

The PPP law, however, applies to "possessions of common interest", an ambiguous phrase and much rely on specific sectorial law for implementation purpose. Also, the law does not contain clear provisions concerning government support and financial security and overall the possibility of international arbitration remains questionable except with respect to ICSID arbitration.

A general policy framework for improving the legal environment and promoting PPP has not been identified in Macedonia. Policy documents like programs and strategies related to PPP have not been adopted, yet.

Institutional framework

The quality of public institutions needed to avoid any bribery and corruption in the PPP contracts is of utmost importance. PPP needs to serve the public interests. Namely, it's a very delicate issue for many countries, not just the very poor countries but even for more advanced emerging countries. The institutional framework in Macedonia consists of few institutions.

The Ministry of Economy (MoE) is responsible for implementing the PPP law as well as of 6 (six) by-laws adopted by the Government. The MoE is authorized to keep and maintain the Register for the awarded contracts establishing a PPP, as well. The PPP unit established within the MoE is meant to serve as a basis for support and training for all stakeholders.

The PPP Council which should consist of 15 members, to include central and local governments, utilities, business and independent experts, has been established but it is still not operational. The PPP Council has an advisory role to the Government in the PPP area, promotion of the PPP, proposes projects for PPP, and gives initiative proposals to amend the legislation in this area. However, in practice the PPP Council does not carry out the responsibilities prescribed by the PPP law

Mutual institutions

The State Appeals Commission (SAC) is the independent review body for public procurement procedures. Since 2012 it had became responsible body for review of public private partnership procedures as well. It is composed of a president and four members appointed by the Assembly for a term of five years, with the possibility of re-appointment.

The State Audit Office (SAO) monitors the legality of procurement/awarding procedures, detects deviations from the PP law and PPP law and procurement principles, as well as violations of the principles of legality, efficiency, effectiveness and economy in public funds management.

It can be concluded that in the country there are a solid institutional framework.

Stakeholders in PPPs

According to the PPP law a public partners are the following:

- the Republic of Macedonia,

- the municipality, the City of Skopje and the municipalities in the City of Skopje,

- the public enterprises, public institutions, companies established by the Republic of Macedonia, the municipality, the City of Skopje and the municipalities in the City of Skopje and companies over which the state or the bodies of the municipality, the City of Skopje and the municipalities in the City of Skopje have a direct or indirect influence through the ownership thereof.

Competences between the central and local governments in awarding of contract establishing a PPP are divided. This means that the central government has no authority to interfere the local government in the implementation of the PPP project that is its competence. The private partner is not involved in deciding on PPP but can give initiative for PPP project, especially at local level. However, the interests of the end users of public services in PPP project should always be the most important. Therefore, public sector retains the right to regulate public services, but also the responsibility for the quality of service even in the case when the service is given by the private partner.

Mechanism for private sector participation in preparation of the PPP project is so-called technical dialogue. The public partner prior to publication of the contract notice organize a technical dialogue with potential bidders.  For this purpose, the public partner makes available to the public through the electronic system for public procurement technical specifications which it plans to use in the procedure and allows all interested economic operators to give their suggestions and comments on the published technical specifications.

Modalities of PPPs[6]

In order to achieve the fundamental obligation to provide public services to the ultimate user in the area of competence of the public partner, and/or the obligation to provide the necessary requirements for the public partner for public services to the ultimate users, and/or activities in its jurisdiction, the private partner can:

1. Finance, design, build and reconstruct an object of public infrastructure;

2. Design, build and reconstruct / renovate facility of public infrastructure;

3. Build and maintain new objects and/or reconstructed / renovated facilities of public infrastructure;

4. Use, manage and maintain an existing public facility;

5. Any of the above combinations, as long as the combination of these obligations is aiming to fulfill the basic obligation of the private partner.

Some of the PPP modalities types are the following:

1. Service Contract

- Certain services are out-sourced to a private company;

- Private company provides agreed services to the central or local government; and

- Government retains general control and supervision.

2. Operation and maintenance contract (O&M)

-Management and operation of a public infrastructure is out-sourced to a private company; and

-Similar to a service contract but the scope of services is wider with greater control passed to the private company.

3. Build Operate Transfer (BOT)

-Government finances the facility;

-Private company builds the facility;

-Private company operates the facility on a concession; and

-At the end of the O&M concession the facility is transferred to the government.

4. Design Finance Build Operate Transfer (DFBOT)

-Private partner design the facility;

-Private partner finance the construction of the facility;

-Private partner build the facility;

-Private partner operate the facility; and

- At the end of the concession the facility is transferred to the government.

Forms and models of PPPs[7]

PPP can be established either as:

1. Public works concession; or

2. Public service concession; or

3. Public works contract; or

4. Public service contract.

Numerated types of PPPs have the following meaning:

1. “Public works concession” shall be a contract of the same type as a public works contract except that the remuneration for those works shall consist either solely of the right to exploit those works or in that right together with payment;

2. “Public service concession” shall be a contract of the same type as a public service contract except that the remuneration for those services shall consist either solely of the right to exploit those services or in that right together with payment; A public private partnership is established by contract.

3. According to the PP law “Public works and service contract “shall be a contract of financial interest, which includes utilities contracts, concluded in writing between one or more contracting authorities on one side and one or more economic operators on the other side, the subject of which is the execution of works, or provision of services, in accordance with the PP law.

PPP can be implemented as a contractual or institutional PPP.

Contractual PPP usually is implemented by a special purpose company/vehicle (SPC/V) which is established by the selected private partner or consortium. Institutional PPP is implemented by a joint venture company which is established by the public and private partner.

Regarding the forms of PPP given in items 3 and 4, contracts for public works and services, CPPPL differs from classical contracts of works and services of The Law on Public Procurement in terms of implementation of the agreement by the operator. In the first case follows the payment by the contracting authority, and the second establishes a long-term partnership between the public and private partners that the public partner carries certain rights and obligations of the private partner in the use, maintenance and management facility or service performance, and that the private partner provides venture funding for the effective performance of work or service for a specified period of time.

As the Public Private Partnerships (PPPs) is relatively new topic in the Republic of Macedonia, the first part of this brief report gives an overview of the legal and institutional framework for PPPs, and then it looks into current challenges/weaknesses focusing on policy and legislative framework, institutional capacities or public sector bodies and external factors. The second part of the report will give analysis on good and bad PPP practices/cases on national and local level. Also it will look into PPPs at sub national (local) level and risks of corruption and possible ways for preventing these practices. At the end, certain recommendations will be given for improving the understanding of the PPP framework in the country, transparency of financing PPP projects and improved legislation.

[1]Correlation of (non) applicability of the Penal Provisions to the Law on Public Procurement in procedures for Concessions and Public Private Partnership In the Republic of Macedonia, written by N. Tupanchevski and V. Shakleva, published in Balkan Social Science Review, Vol. 3, June 2014, 27-47

[2] PPP knowledge lab, Macedonia, https://pppknowledgelab.org/countries/macedonia-fyr

[3] Law on Concessions and Public Private Partnership (PPP law) ”Official Gazette of the Republic of Macedonia (No. 6/12, 144/14, 33/15 и 104/15 and 215/15).

[4]Law on Public Procurement”Official Gazette of the Republic of Macedonia No. 27/2015 - consolidate text and amendments of the Law No. 78/15, 192/15 and 27/16).  

[5] Positive auction cannot be provided by the Electronic System fo Public Procurement.

[6] Law on Concessions and Public Private Partnership (PPP law) ” Official Gazette of the Republic of Macedonia No. 6/12, 144/14, 33/15 и 104/15 and 215/15).

[7]Law on Concessions and Public Private Partnership (PPP law), Official Gazette of the Republic of Macedonia No. 6/12, 144/14, 33/15 и 104/15 and 215/15.