Public and Private Partnership Association

About Authors

Background

Political situation

Legal framework for PPP’s

Characteristics of local PPP model

Competition and access to market

Availability of funding

Recently completed projects

Review by sector

Project Pipeline

Key contacts

About Authors ^

Viesturs Tamužs – Public and Private Partnership Association (PPPA) charter member, Chairman of the board from 2006.

PPPA objectives are: improvement of PPP environment in the state, corruption risk reduction in PPP projects realization, accumulation of competence and information, as well as private partner interest’s representation in dialog with public partner.

Andris Pārups – Ministry of Economics National economy structural policy department director deputy in PPP issues.

Līga Neilande - Investment and Development Agency of Latvia, director of PPP department.

Background ^

Thought globally PPP has already become a successful solution for providing public services, developing and maintain infrastructure in the order to promote economical growth and ensure prosperity of society, in Latvia only recent years interest started to rise about the possibilities that PPP provides for development of national economy.

We can start to initiate determined evolution of PPP politics since 20th century 90’s when Ministry of Transport paid attention to necessity of putting into use the opportunities provided by PPP finance models and in 1998 working group started work on elaboration of Concessions Law.

In the beginning of 2000 Parliament adopted Concessions Law. In spring 2002 Promotion of Concessions (private fund involvement in performance of state’s functions) conception was approved.

Accordingly to the conception mentioned before, in September 2003 in Ministry of Economics started to work Concessions division (to reorganized as PPP division in 2006) and in February 2004 Investment and Development Agency of Latvia (LIDA) begins its work on development of PPP by creation of division of PPP in May 2004.

Since 2004 Ministry of Economics and LIDA have been promoting potential launch of PPP implementation as well as taking active part in organization different types of meetings and providing consultations for representatives of private and nongovernmental sector, hence encouraging development of PPP in Latvia.

In 2005 LIDA started arrangement for five PPP pilot projects in order to generate the good praxis and study the obstacles that could appear in implementation of that kind of projects. Pilot projects were selected in various fields as well as with different PPP model types:

• Building and operations of a pre-school in Cēsis town” (BOOT);

• Reconstruction of district heating system in Jēkabpils (Concession);

• Renovation and operation of Ogre town art school (RFO);

• Renovation and operation of streets in Cēsis town” (DBFO);

• Building and operation of dwelling-houses with social apartments in Salaspils town” (DBFO).

On the basis of pilot projects mentioned above, there were indicated several essential obstacles in laws and regulations related to the implementation of PPP projects. Due to this there were initiated changes in appropriate laws and regulations.

Based on two pilot projects LIDA elaborated standard procurement documentation (tender rules and PPP contract) for construction and operation of kindergarten and concession of district heating system projects.

Feasibilities studies for pilot projects as well as necessary legal documentation were elaborated using state special purpose grant funding.

At the moment there have been implemented (renovation works have been finished and entered into maintenance phase) only one of the pilot projects - renovation and operation of Ogre town art school.

Until 2008 in Latvia’s Register of Concessions there were registered 14 comparatively small concession contracts and identified couple of cases when in public projects there was indirectly launched structure of PPP. Thought it is a very small amount of cases considering the high necessity of investment projects in Latvia. However taking into account constantly growing interest from state institutions about PPP as a tool for providing possibility to implement qualitative service and infrastructure projects, it could be considered that PPP is becoming a new potential alternative for state’s procurement in order to carry out significant infrastructure projects. During next years it is possible to expect initiation of several large and for national economy substantial projects.

In 2007 the work on the law that would define main issues of PPP was started. It is planned that at the end of 2008 the law could be adopted and replaced the existing Concession Law.

Political situation ^

Pursuant to Statutes of Ministry of Economics this ministry is managing institution of state administration that develops PPP policy and coordinates its implementation. LIDA is a state institution in control of Ministry of Economics that is responsible for promotion of PPP projects implementation by proposals for PPP development elaboration and supporting development and implementation of such projects. LIDA provides information, consultations, juridical assistance and other services in PPP matters to state and municipal institutions, as well as to other legal and natural persons.

Besides Ministry of Economics and LIDA there are other institutions too, for example, Ministry of Finance, State Treasury, line ministries and municipalities.

To explain and strengthen public and private cooperation, there was founded Association of Public and Private Partnership (APPP) in 2002 involving entrepreneurs, foreign partners and society. Founders were: 26 well-known politics, entrepreneurs and social collaborators who saw perspectives in using of PPP in promotion of state wellbeing. APPP associates more than 40 members, mostly from private sector from all PPP connected areas, in 2008.

To improve cooperation among institutions involved in PPP process was established PPP Consultative Council in January 2007. The Council consists of representative from Parliament National Economy Commission, Ministry of Economics, Ministry of Finance, State Treasury, Ministry of Education and Science, Ministry of Culture, Ministry of Welfare, Ministry of Regional Development and Local Government, Ministry of Transport, Ministry of Justice, Ministry of Health, Ministry of Environment, Latvian Association of Local and Regional Governments, Riga City Council, LIDA, State Regional Development Agency, Association of Commercial Banks of Latvia, APPP, Constructors Association, Association of Large Cities, Council of National Economy, Chamber of Trade and Industry of Latvia, Confederation of Employers of Latvia. The Council is managed by minister of economics.

Aim of PPP Consultative Council is to participate in solving of political PPP issues and in this way to promote establishment of beneficial environment for PPP projects implementation and promote application of PPP instrument by attraction of private capital for public infrastructure building and for public services. Council decisions are permissive for state institutions and municipalities.

PPP becomes slowly for one of the instruments of single and coordinated state investment planning process in Latvia. It justify fact that in the end of 2007^th was approved Declaration of Cabinet of Ministers on implementation of intended activities of Cabinet of Ministers and in the Action plan of Government adopted in the beginning of 2008^th was introduced some instruments of PPP promotion. Similarly several actions related with PPP development are involved in the Latvian National Development Plan for 2007 – 2013 that is medium-term strategic planning document and states main development directions and shows the most important tasks of the state and society in way to reach long term targets.

Legal framework for PPP’s ^

1. Planning of politics

Main planning documents of PPP policy are:

· Concession promotion (private capital attraction to perform state functions) conception, adopted by Cabinet of Ministers on 16 April 2002. With this document was established Concession division in Ministry of Economics, as well as expanding of area of responsibility of LIDA by annexing PPP issues;

· Public and private partnership promotion guidelines of Latvia, adopted by Cabinet of Ministers on 22 March 2005, that states main political principles, aim and it results;

· Action plan for implementation of Public and private partnership promotion guidelines of Latvia for 2006 – 2009, adopted by Cabinet of Ministers on 15 November 2005, that states action direction for promotion of PPP till 2009.

According to Action plan is implemented different activities in such action directions:

- Coordinated action of institutions and organizations involved in PPP process;

- Research of PPP in different sectors – there is done national economy sectors analyze in which according to international practice are defined suitable sectors for PPP, as well as identified suitable models of PPP;

- Establishment of promoting instruments of PPP – to help understand essence of mechanism of PPP and PPP projects development way, in 2007 was elaborated Guidelines for implementation of contractual PPP projects. Similarly in 2008 is elaborated Methodology on risk assessment in PPP projects. There are elaborated PPP projects standard documentation in few national economics sectors.

- Improvement of legal framework on PPP;

- Improvement of understanding and knowledge on PPP – regular consultative support to potential implementators of PPP projects. To give maximal wide range of information to society about ongoing and actual issues, elaborated projects of laws and regulations, reached progress in connection with PPP, has established web page (ppp.gov.lv) where are published actual information and summed up actual information and all informative resources about PPP in Latvia.

Similarly PPP using possibilities are accented in several planning documents, for example:

· Latvian National Development Plan for 2007 – 2013 in several priorities;

· Action Strategy of Ministry of Transport for 2007 – 2009;

· Transport Development Guidelines for 2007 – 2013;

· Secretariat of Special Assignments Minister for Electronic Government Affairs Action Strategy for 2007 – 2009 (actualized for 2008 – 2010);

· National Sport Development program for 2006 – 2012 etc.

In 2007 have been started actions for on establishment of single and coordinated state investment planning process conception and its introduction in state administration. This conception prescribes PPP as state development instrument.

2. Legal provisions

Despite, that PPP law is elaborating now, existing legal provisions in Latvia allow implementation of PPP projects. This kind of projects is able to implement based on Concession law (adopted in Parliament on 20 January 2000, effective from 16 February 2000) and Public procurement law (adopted in Parliament on 6 April 2006, effective from 1 May 2006).

Concession law states, that concession is the transferring of rights to provide services or exclusive rights to utilize concession resources, which are transferred for a specified time period pursuant to the entering into of a concession agreement between a conceder and concessionaire in regard thereto.

Concession law allows entering into the concession agreement for term that not exceed 30 years.

Concession granting system is seen in figure 1.

Figure 1. Procedure of granting of concession in Latvia under Concession law.

Public procurement law is elaborated in accordance to corresponding EU Directives. There is a special statement in this law, that public service contract should be concluded for term that not exceeds 5 years. PPP service agreement is possible to conclude to term that no exceeds 30 years if this term is vitally important for agreement and if there is about this fact decision of Cabinet of Ministers.

PPP agreement granting system is shown in figure 2.

Figure 2. DBFO contract type granting system under Public procurement law.

Shareholders agreement or institutional PPP cooperation model that is implemented between public and private partner by joint venture, regulates State administration structure law, Commercial law and Law on state and municipality capital shares and capital companies, as well as other related legal provisions.

Existing legal provisions that regulates granting of rights of entering into PPP agreement, not enough explain private partner selection procedure. There is need for improvements in legal framework of PPP. Besides legal framework of Latvia should be harmonized with directives (2004/17/EC that coordinates the procurement procedures of entities operating in the water, energy, transport and postal services sectors, and 2004/18/EC that coordinates procedures for the award of public works contracts, public supply contracts and public service contracts) of the European Parliament and of the Council. In 2007 was established working group which task was to elaborate new PPP law. One of the tasks of the new PPP law was consolidate in one legal act provisions about concessions, partnership procurement contracts and shareholders agreement, as well as define in legal acts term of PPP. The new law would provide appropriate institutional framework, PPP projects accountancy, risk sharing and competition dialog.

3. PPP projects accounting

In legal provisions of the Republic of Latvia stipulates registration and accountancy of concession agreements. Registration of all PPP contracts is planned in new PPP law.

Characteristics of local PPP model ^

In the laws of European Community have not been given yet special definition of PPP, but there has been given general explanation of PPP. Similarly in Latvia there is going on the process of elaborating the definition of PPP.

In Latvia according to the specification of the project, for example, terms of contract, schemas of financial flow, specification of object or service, there can be indicated different models of PPP.

Concession contract or Concession

Presently in Latvia granting of concessions is regulated by Concession Law. It determines the procedures for the granting of concessions, terms, legal procedure, registration, record keeping, and other substantial information about preparation of tender documentation (contract, tender rules etc.) and rules and regulations accordingly to the appropriate sector legal regulation. In this case of that kind of PPP model, private partner regains its investments with user payments for particular service or operation of the facility. In the validity time of Concession contract private partner maintains ownership rights for new created values but after the contract validity period ownership rights are passed to public partner according to the terms of contract (ownership rights for already existing resources remains for the public sector).

In order to implement PPP project as a concession, it is necessary for public partner to make project’s feasibility studies with evaluation of net present value (NPV) by comparing various versions of implementation of the project – as a public procurement, concessions ect.

After appraisals have been made, if concessions have been seen as the most beneficial alternative for project implementation, public partner can start to launch PPP project by announcing tender procedure or auction.

Partnership procurement contracts or DBFO and BOT types of contracts

Presently those kinds of contracts are implemented under Public procurement law paragraph 67 part 3. Due to this in DBFO, BOT and other similar PPP contracts, depending on its specification, private partner is responsible for financing, design, construction and operation of the object. The main part of investments in construction and operation private partner regains from annual availability payments from public partner during the period of contract.

Similar as in the case of concessions, before implementing the project it is necessary to make project’s feasibility studies with evaluation of net present value. Sequential after providing such kind of appraisals, public partner, preparing procurement documentation under paragraph 67 part 3 of Public procurement law.

After receiving the approval from Minister Cabinet concerning the implementation of PPP project, appropriate public procurement procedure can be launched. It can be done by preparing tender rules and project’s contract draft version, as well as selecting the private partner.

Shareholders contract or institutional model of PPP

Joint venture is one of the models of institutional PPP. In Latvia joint venture is understood as mixed capital (public and private) companies and its operate in accordance with private laws and with aim to provide functions of particular municipality, to improve municipality’s work culture (by overtaking more effective methods of work organization from private sector), weather to provide services in the construction and real estate operation market.

However joint ventures are not the way that could be suggested as PPP model. In PPP the main idea is that public partner provides private partner with opportunity to act and main control over particular object. In case of joint venture, in the long term there exists a great risk to lose control over the object. Furthermore incase of joint venture there are problems in risk sharing and when the PPP contract period is over, process of liquidation of the organization is complicated.

Competition and access to market ^

Laws and regulations do not determine specific restrictions for foreign companies to take part in implementation of PPP projects.

Knowledge of local market might give advantage for local companies. If involving in implementation of PPP projects in Latvia, it is important taking into account that PPP is understand in two levels – national and regional. In the national level acts line ministries – with its funding, human resources and responsibility of this level is such spheres: defence, education, transport etc. sectors. In regional or level of municipalities – municipal funding in health sector, in education, culture, sport etc.

Main PPP project recourse holders in Latvia are Ministry of Transport, Ministry of Culture, Ministry of the Interior, Ministry of Justice, Ministry of Environment etc., as well as lagest municipalities – Riga, Venstspils etc. As one of the limiting factors in attracting foreign companies to implement PPP projects in Latvia, is the size of projects, which makes them financially not interesting for big international companies.

Availability of funding ^

For PPP project that have been impelemnted so far investor has been private partner who has implemented the project by using its own or borrowed capital.

Speaking about availability of funds for PPP projects – almost all banks acting in Latvian market shows interest about possibility to take part in PPP projects. As well the foreign financial institutions have shown interest about PPP in Latvia but so far they are not widely represented. Considering that large size projects so far have not been implemented, it is difficult to give the precise determination of Latvia’s fund capacity. However state and municipalities for banks are the most reliable borrowers, therefore it is reasonable to affirm that banks have interest to participate – not only in large ministry projects but as well in municipality’s projects.

Similar as in other countries in Latvia at the moment it is outstanding issue about possibilities to combine state, private and EU fund financing.

Besides promoting PPP project implementation, in 2006 there were initiated activities on Norwegian government dual finance instrument financed programme “Promotion of Public and private partnership in Latvia” which will be operated by LIDA. The main goal of the programme is to support state and municipality institutions in its efforts to realize consequent and reasonable PPP access to the development of infrastructure and public services. Within the framework of the programme there will be supported the activities that include elaboration of feasibility studies and elaboration of procurement documentation, including the subprojects submitter’s and cooperation partner’s involved workers training.

Co-financing of the Program that consists of Norwegian government dual finance instrument co-financing and Latvian State grant, pretenders are Ministries and local or region municipalities.

Recently completed projects ^

As mentioned already before, PPP project development in Latvia is in its early stage – in the Register of Concessions are registered 14 considerably small concession contracts. Lately only one PPP project had been implemented by using the RFO model (Renovation and operation of Ogre town art school). There had been indicated several cases, when indirect model of PPP had been used in public projects.

The concessions mentioned before are implemented in fields like: communal service, tourism, health care, energy sectors.

Review by sector ^

Similar as in other EU member states in Latvia PPP projects are possible to implement in all sectors of national economy:

Social sector (old people homes, social houses etc.);
Energy sector;
Education and culture (schools, kinder gardens, student hostels, concert halls, museums);
Transport (highways, bridges, airports, public transport, transport infrastructure, for example, station buildings etc.) as well as municipality’s street construction and renovation;
Environment (water handling facilities and waste management);
Heath care (hospitals, health centers);
Justice (police buildings, prisons).

It is observed that in identified PPP projects dominates partnership models of PPP (e.g. DBFO). They are applied for creating infrastructure and operation in different project sectors (roads, hospital buildings, schools, state administration building etc.).

In sectors (public services, public transport etc.) where it is possible to gain user payments from service users, possible PPP model is concession.

Main promotional factors of PPP model in Latvia are:

Tremendous needs of state and municipality in financing for development of infrastructure projects;
Stable political support in applying of PPP model for infrastructure projects in particular sectors (for example, transport, interior, justice);
Existence of support units for performers of PPP projects – with in the Ministry of Economics and in the Investment and Development Agency of Latvia there are PPP divisions which provides advisory and methodology support for state administration institutions about PPP project implementation.
Experience of PPP pilot projects implementation as well as LIDA elaborated support documentation (standard documentation, guidelines) which substantially has increased the awareness of all parties involved.
There would be support for PPP projects feasibilities studies and for preparation of procurement documentation under Norwegian government dual finance instrument programme.
The adoption of PPP law would make easer PPP procurement procedure and would make it more efficient (e.g. launching of competitive dialog, municipality will decide by itself about launching in PPP project).
Opportunities provided by project packaging, taking into consideration the regional reform.

Project Pipeline ^

There is ongoing restructuratisation of infrastructure int.al. optimization of schools, preschools, as well as revision of administrative functions in Latvia now. These factors, along with saturation of municipalities’ credit limits, are created interest about PPP development.

PPP in transport sector

Contracting authority	Ministry of Transport
Objective	Reconstruction of roads § road E77 section from Riga by-pass to Sēnīte (pilot project), length 24 km, ~236 M EUR; § road E67 Ķekava by-pass, length 15.9 km, ~136 M EUR § road E22 section Riga (Tīnūži) - Koknese, length 75 km, ~ 199 M EUR. § road E22 section Priedaine - Sloka, length 19,4 km, ~ 163 M EUR; § road E77 section Riga - Jelgava, length 40,7 km, ~ 326 M EUR; § road E67 Riga by-pass, in section Baltezers – Saulkalne, length 19.4 km, ~163 M EUR;
Planned cooperation model	DBFO, contract to 30 years
Implementation stage	Till 2013 is decided to start preparation works for potential six projects realization
Planned budget	~ 1’223 billion EUR
Pilot project	road E77 section Riga by-pass - Sēnīte (24,6 km) Estimated project costs – 320 – 350 M EUR Project length – 3(4) construction + 20 years for operation Model – DBFO Stage – elaboration of tender documentation (2007)

Contracting authority	Riga City Council Development department
Objective	Riga Northern transport corridor Project objective is to establish convenient and good, connected with city transit road in East – West direction, not to touch historical city centre. Approximate road length – 24 km.
Planned cooperation model	DBFO
Implementation stage	Project preparation has begun in December 2005. In 2008 was completed research stage (technical solution, worked out traffic and PPP model). Planned construction would start in 2010, would be completed in 2018.
Planned budget	~1 billion EUR (2006).

Contracting authority	City Council of Riga
Objective	Sarkandaugava cross-over Project objective – to relieve Sarkandaugava level crossing of rail road. Cross-over with 2 lanes in each direction, pedestrian walk, bikeway. Cross-over width 21 m, height – 14 m. Slip roads – 22300 sq.m.
Planned cooperation model	In elaboration process.
Implementation stage	Work on feasibility studies. Object planned to put into operation till 2010.
Planned budget	67 – 71 M EUR (2007)

PPP in health care sector

Contracting authority	Ministry of Environment
Objective	Multifunctional cyclotron centre Cyclotron centre would provide scientific researches, performance of complicated medical analyses, production of medical preparations.
Planned cooperation model	Concession – 30 years
Implementation stage	Approved concession conditions in 2008.
Planned budget	33,8 M EUR (2007)

PPP in state administration and defense

Contracting authority	Riga City Council Development department
Objective	Administrative centre of Riga City Council Building of administrative premises to consolidate Riga City Council divisions and reduce administrative costs.
Planned cooperation model	Not yet defined.
Implementation stage	Elaboration of feasibility studies, reserved territory for project implementation.
Planned budget	~ 61 M EUR (2006)

Communal and social services sector

Contracting authority	City Council of Jēkabpils
Objective	Reconstruction of direct heating system and provision of heating supply services. Heating mains length 25,2 km
Planned cooperation model	Concession – 30 years
Implementation stage	All documentation is elaborated, waiting for new PPP law because municipal enterprise isn’t able to be as concedent under current legislation.
Planned budget	~ minimum investments 5,72 EUR (2006)

PPP in housing sector

Contracting authority	City Council of Salaspils
Objective	3 five store living houses with 150 flats (50 social and lease flats as well as 100 commercial flats) would be built.
Planned cooperation model	DBFO, contract for 30 years
Implementation stage	Project realization is planned from 2006 till 2009, project exploitation time – 30 years (2008 – 2038).
Planned budget	Project investments Projekta kopējās investīcijas 8 221 428 EUR,-

PPP in Culture sector

Contracting authority	State agency “The new three brothers”, Ministry of Culture
Objective	Now concert hall building
Planned cooperation model	Not yet defined
Implementation stage	Detail plan public discussion, in Summer 2008 is planned to start design works and construction is planned to start in 2009.
Planned budget	~ 42 M EUR
Objective	Modern art museum
Planned cooperation model	Not yet deffined
Planned budget	27 M EUR