Property law

The government has approved a draft act on concessions for construction work or services prepared by the Ministry of Infrastructure. The substantiation of the act states, among other things, that "the purpose of the Act is to create additional options related to the mode of selecting a private partner for implementing public projects." According to the authors of the act, its solutions "should, along with the solutions that are already present in the Public Procurement Law or the provisions on public-private partnership, form the basis for initiating cooperation between the public and private sectors."

It follows from both the provisions of the act and its substantiation that the new legislation is designed to be applied in projects in which services are rendered to third parties (not entities granting concessions). In other words, this refers to entities using the subject of the concession and, in return, paying fees to the concessionaire.

The potential for concessionaire-third party agreements is provided for in the wording of the provision, according to which "payment effected by the grantor of the concession to the concessionaire shall not result in recovering the whole expenditure incurred by the concessionaire related to performing the concession. It is the concessionaire who shall mainly bear the economic risk of performing a concession."

Application of the draft act

Consequently, it is worth considering how the new legislation will actually be applied. The act stipulates that in a project implemented as a concession at least a part of the concessionaire's revenues derive from the users of the subject of the concession.

It will therefore not be possible to apply the new legislation to the construction and operation of public healthcare institutions, prisons, free education institutions, construction and operation of public authority facilities (e.g., courts, or operation of street-lighting systems). It will be impossible to apply the new legislation to the construction of toll-free roads; thus the solutions proposed by the act will not be applied to the construction of divided highways or city ring roads.

What, theoretically, could be the application of the act on concessions in its current form? Possibly to construct and operate paid parking lots. Perhaps public transport, or questionably, to construct and operate sports and recreation facilities.

Before we embark on such a project, let us have another glance at the provision of the act quoted above. I am afraid that it should be interpreted in the following way: that even an insignificant payment to the concessionaire from the grantor of the concession (e.g. amounting to five percent of the concessionaire's total expenditure) will be contrary to the new legislation if it "results" in the concessionaire recovering its total expenditure. Does the legislator assume that the concessionaire will run its business at a loss?

Securing against risk

Since the concessionaire will not only seek to recover its total expenditure, but also to make a profit on the concession, it can be inferred that no financial support from the grantor should be expected. Therefore, the new legislation may be only used in projects where the concessionaire will be able to make a return on equity solely on the basis of the fees collected from the users of the subject of the concession.

Even if a potential concessionaire successfully convinces itself that it will make a profit on the concession, it will also have to convince a bank to lend money to finance its project. Even moderate optimism should not be expected in this case - banks are unlikely to enthusiastically back a project whose financial model is based on revenue from third parties (unsecured by a long-term agreement for using the subject of the concession) and for which public-sector support is unavailable.

Irrespective of the risk of a concession-project archetype, the public sector must make some allowance for the concessionaire to secure lenders. This is especially crucial in the event the concessionaire is unable to repay the loan due to circumstances which, according to the concession agreement, then it is not held liable. Otherwise no one will apply for a concession and the new legislation will never be applied.

Michał Zieniewski is a partner in law firm DLA Piper's Warsaw office