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Establishing a PPP Framework

21.5.1 How Varying Legal Traditions Interact with Different PPP Types

Countries vary widely in how they document and give force to PPP frameworks. Countries with “common law”[27] legal systems tend to rely on policy documents and administrative guidance materials. Countries with “civil law”[28] legal systems are more likely to enact the PPP framework in statute law, and spell it out in detailed rules and regulations with legal force.

The different legal traditions interact with different types of PPPs – see table 2.3. Civil law countries have used concession contracts and similar arrangements for the private provision of public services for over 200 years. In contrast, most common law countries do not have a tradition of concession contracts, instead using fully private (“investor-owned”) companies to provide infrastructure services, generally under government regulation.

TABLE 2.3: Legal Traditions and PPP Types in Civil and Common Law Countries

Legal Tradition

PPP Types

Civil Law

Common Law

User-pays PPPs

(Concessions and similar contracts)

Later development of the framework

Government-pays PPPs

(PFI-style contracts)

Later development of the framework

Concession contracts have a long history in civil law countries

In France and other civil law countries, concessions and related contracts have been used for more than 200 years. A concession for water supply in part of Paris was let in 1782 (then later revoked following the French Revolution).[29] The municipal concession for water supply became an important mode of water service provision from 1850 to 1910. While municipally financed and operated systems became more common from 1910 to 1970, lease (or affermage[30]) contracts for operations of publicly financed systems became increasingly important from 1970.[31]

Belgium, Germany, Italy and Spain, all used concessions for municipal water supply from around 1885. In Istanbul, the French company Generale des Eaux (now Veolia) was granted a water supply concession in 1881. Concessions were also granted to operate railways, tramways, ports, gas, electricity, and waterworks.[32] The Suez Canal was developed by French interests under a concession granted in 1854 by the Turkish Viceroy of Egypt.[33]

The civil law tradition of concessions was also followed in Latin America. Private investment in infrastructure was generally not a policy priority from the 1950s to the 1970s. However, from the 1990s a number of Latin American countries enacted legal reforms to once again encourage private investment in infrastructure. Chile was a pioneer in this regard, passing a Concession Law in 1991, which, with various amendments, still provides the framework in use today.

In common law jurisdictions, investor-owned utilities provided user-pays infrastructure services

In contrast, in Britain and its former colonies, concessions were not generally used. Rather private companies raised capital and built infrastructure, which they then operated and charged people to use. The right to operate and manage the infrastructure did not need to be ‘delegated’ by the state (as was done in civil law countries). These private utilities and railway companies were generally granted licenses to operate, and they were regulated (meaning that in economic substance they were quite similar to concessions). However, the legal framework was different, and such operations were considered to be fully private, and not PPPs.

Investor ownership of infrastructure was curtailed in Britain after World War II. The Labor government nationalized electricity, gas, and inland transport (including railways, road haulage and canals). However, this tendency was reversed in the 1980s when the Conservative government, led by Margaret Thatcher, privatized state-owned enterprises in telecommunications, gas, electricity, water, railways, buses, ports, and airports. These sales were termed “privatizations” not Public-Private Partnerships.[34]

In the United States, many of the early highways, canals, railways, transit systems, water supplies, and electricity utilities were financed and operated by private companies. Federal government involvement in financing infrastructure started to increase under the “New Deal” Administration of Franklin D Roosevelt from 1933. Following this, local and state governments mostly funded infrastructure with bonds sold by special purpose corporate entities that operated like private companies, but were in fact government-owned (known as public authorities, special districts, and so on.). Examples include the Port Authority of New York and New Jersey, and the Washington Metropolitan Area Transit Authority.[35] Interest in Public-Private Partnerships, both as a way to privatize existing infrastructure and to attract private finance for new infrastructure, started to increase in the 1990s. The State of Virginia was among the pioneers, passing a PPP law for transport assets in 1995 after a lengthy process. Prior to 1995 most infrastructure assets were financed through tax-exempt bonds.

Common law countries then developed the “government-pays” PPP model

In the early 1990s, with most of the user-pays infrastructure having been privatized, the Conservative government in Britain looked for ways to bring private finance and operations into the services which were publicly funded. Health and education were the most important of these. Prisons, national defence, and social housing were others. The model chosen was to have private companies construct and maintain the capital intensive facilities such as school and hospital buildings.[36] It was termed the “Private Finance Initiative” (PFI).

This new kind of “government-pays” PPP was enthusiastically embraced by the new Labor administration led by Tony Blair, which came to power in 1997. By 2001, £100 billion (US$ 150 billion equivalent) had been committed by the UK government and 400 PFI contracts were in force.[37] Similar initiatives were developed in Australia and Canada. The State of Victoria in Australia developed the “Partnerships Victoria” program, for example. Since 2002-03, Partnerships Victoria projects have accounted for approximately 10 per cent of annual public asset investment commitments.[38] Canada uses government-pays models of PPPs across a variety of sectors, including transportation, transit, social housing, corrections, health care facilities, and utility services such as water treatment plants.

Civil law countries develop frameworks for government-pays PPPs

Following the lead provided by the UK and other Commonwealth[39] countries, many civil law countries have introduced legal frameworks to allow and control the use of “government-pays” PPPs. This has been done using different approaches: creating specific laws for government-pays PPPs (and retaining the existing laws and the traditional form of concession for user-pays PPPs), creating a new law that governs any kind of PPP (user-pays, government-pays, and hybrids), or expanding the application of (and sometimes amending) the existing procurement legislation.

In 2004, France introduced the contrat de partenariat (partnership contract) and set the basis for a central PPP unit (the Mission d’appui aux partenariats public-privé or “MAPPP”). The PPP laws were designed to fill the gap between using traditional works contracts (marchés publics) and “user-pay” concession arrangements (délégations de service public).[40]

Spain also created a framework for “government-pays” PPPs. Unlike France, this was not done through a stand-alone statute. Concession provisions in the government procurement law were used for government-pays PPPs when they began in the early 2000s. In 2011, the government procurement law was extended to allow a new type of contract designed for PFI-type projects. These contracts are named CPP (Collaboration Private-Public). The CPP allows more flexibility in risk allocation and other contract features. However, it has been used only for projects that are very technically complex. Most government-pays PPPs are still done under the provisions in the procurement law dealing with concession contracts.

In Latin America, Chile also extended its Concession Law to include government-pays PPPs.

Conversely, other Latin American countries — including Colombia, Mexico, and Peru[41] — have created specific statutes for PPPs (generally referred to as Alianza Publico Privada (APP) once they started to use government-pays PPP structures. These statutes cover both categories of PPPs.

Poland also passed a specific law to govern PPPs. It defines PPPs in a narrow way so as to include only projects where there are government payments (although there are doctrinal and legal controversies as to whether that law applies also to pure user-pays projects). Brazil introduced the PPP figure (Parceiras Publico Privadas) under a specific law to refer to government-pays PPPs, including any PPP with public payments.

Where legal requirements differ between government-pays PPPs and user-pays PPPs, the need arises to define which PPPs are which. This is not as easy as it sounds since many user-pays PPPs have some level of government payment. For example, the government may make a contribution to up-front capital costs, or it may pay a subsidy to keep charges to certain groups below cost. A common approach is to define a PPP as government-pays if more than half the funding comes from government.

 

[27] Common law is generally uncodified. This means that there is no comprehensive compilation of legal rules and statutes. Although common law does rely on some scattered statutes, which are legislative decisions, it is largely based on precedent, meaning the judicial decisions that have already been made in similar cases (University of California at Berkeley).

[28] Also referred as the civil code. Civil code or civil law is codified. Such codes distinguish between different categories of law: substantive law establishes which acts are subject to criminal or civil prosecution, procedural law establishes how to determine whether a particular action constitutes a criminal act, and penal law establishes the appropriate penalty. In a civil law system, the judge’s role is to establish the facts of the case and to apply the provisions of the applicable code. Much civil law originates from “Code Napoleon”. (University of California at Berkeley)

[29] McCarthy, S. and Perry, J. (1989) BOT Contracts for Water Supply. London: World Water.

[30]Refer to Section 0.4. for an introduction of terms used that may refer to a PPP transaction.

[31] Pezon, C. (2011) How the Compagnie Ge'ne'rale des Eaux survived the end of concession contracts in France 100 years ago. Water Policy, Volume 13, pp. 178-186.

[32] Eldem, E. (2005) Ottoman financial integration with Europe: foreign loans, the Ottoman Bank and the Ottoman public debt. European Review, 13(03), pp. 431-445.

[33] McCarthy, S. and Perry, J. (1989) BOT Contracts for Water Supply. London: World Water.

[34] There were exceptions. Passenger rail services were loss making and needed government subsidies, so these were structured under contractual franchises that could properly be described as public-private partnerships. A similar approach was followed with the franchising of tram and train services in the State of Victoria, Australia in 1999.

[35] The Port Authority of New York and New Jersey. History of the Port Authority (n.d.). [Online] Available at http://www.panynj.gov/about/history-port-authority.html;  Washington Metropolitan Area Transit Authority (2015) About Metro. [Online] Available at http://www.wmata.com/about_metro/?

[36] In principle it would have been possible to pay private providers to provide the full educational and medical services. Privately-owned schools could have taught children at no cost to the families, to established national standards, and been paid by the government to do it. In fact, since 2000 in the health sector, the UK has adopted such an approach under the rubric Independent Sector Treatment Centers. These centers perform routine operations under contract to the publicly funded National Health Service. However, in the 1990s when the PFI program was established, fears of union and popular opposition to “privatization” of services in these ways meant the focus was on private provision of facilities, not the full service, and it is this focus that has been most widely imitated internationally.

[37] Hodge, G. A. & Greve, C. (2005) The Challenge of Public-private Partnerships: Learning from International Experience. Northampton: Edward Elgar Publishing.

[38] State Government of Victoria (2013) About Partnerships Victoria. [Online]  Available at: http://www.dtf.vic.gov.au/Infrastructure-Delivery/Public-private-partnerships/About-Partnerships-Victoria

[39] The Commonwealth is a voluntary association of 53 independent and equal sovereign states. Its origins go back to the British Empire when some countries were ruled directly or indirectly by Britain. Membership today is based on free and equal voluntary co-operation; no historical ties to the British Empire are required.

[40] European PPP Expertise Centre (2012) France: PPP Units and Related Institutional Framework.

[41] The first government-pays PPPs in Mexico were called proyectos de prestation de servicios or service provision projects (PPS) and had to rely on two regulations: the concession regulations to grant the title to operate economically the asset, and the leasing law (Arrendamientos), as the concession contract as established did not contemplate the service payments as a revenue or compensation form to the private partner. APP legislation (both at Federal government and state level) has solved this issue.

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