Challenge the future Delft University of Technology Tuna Tasan-Kok, Delft University of Technology, OTB Research Institute, The Netherlands Magdalena Zaleczna, University of Łódź, Department of Investment and Real Estate, Poland 16th ERES Conference, Stockholm 24-27th June 2009 Formal and non formal obstacles by entering into Public Private Partnership in urban development projects in Poland

2 | xx This paper is prepared within the framework of the research project funded by the Ernst & Young Better Government programme in Poland.

3 | xx The idea of Public-Private Partnership The public-private partnership (PPP) is the form of the cooperation between public and private actors on the basis of contracts and legal arrangements. In general, PPPs have been used as an instrument throughout the EU to finance infrastructure for water and waste water treatment; solid waste management; and transport infrastructure as well as other areas like public health, education, public safety, etc. in most of the Member States. The involvement of private sector should reduce the risks and provide input into different stages of project design, completion, implementation and funding.

4 | xx PPPs in EU legal documents * Since the beginning of 2000s the Commission has been trying to provide a common framework for PPPs that are mushrooming throughout Europe, however, there is no specific legal framework for PPPs at European level. There are, among others: - COM(2004)327Green paper on public-private partnerships and Community Law on Public Contracts and Concessions, Brussels, COM(2007)6661, Commission Interpretative Communication on the application of Community law on Public Procurement and Concessions to Institutionalized Public-Private Partnerships (IPPP), Brussels,

5 | xx Some problems with PPPs However, due to the unclear definition of this type of collaboration within the EU legal framework some implementation problems occur in various areas concerning the use of PPPs. These projects face implementation problems especially due to the single European market rules that aim to regulate state aid and public procurement to ensure free and transparent trade across Europe.

6 | xx PPPs in large-scale urban projects: PPPs are also commonly used by local governments across Europe to finance large-scale urban projects (mainly for regeneration purposes but as well as for many other types of projects such as employment and investment in deprived urban areas). The public authorities (mainly municipalities) have a twofold aim: they want to upgrade, revitalize, or renew neighborhoods; but they also want the kind of spatial restructuring that will attract private investment and help to improve the social conditions of a larger territory. Thus, the public initiators usually encourage involvement of private-sector stakeholders in order to stimulate capital accumulation (Tasan-Kok, 2009).

7 | xx PPPs in Poland – the history In the 1990s, first projects emerged in Poland as the first forms of PPPs. These involved municipal services and the construction/improvement of technical infrastructure facilities, and were mainly small investments implemented by local governments (Moszoro 2000). At that time, the institution of public-private partnership did not formally exist within the legal system and no legal act defined this concept, but the mechanism itself was used, which created high risk for both public and private partners.

8 | xx The first Polish act about PPP The use of the full potential of PPP in Poland, in view of earlier experiences, was not possible since the legal risk was too high. In October 2005 the new law settled the question of the nature and legality of PPP. However, the law was not used in practice, so its implementation may not be considered a success. The Act was highly criticized, starting with the definition of public- private partnership. According to it, projects that had been implemented before the act came into force or projects underway on the day of enforcement could not be classified as PPP, even if cooperation of public and private entities was stipulated by other regulations.

9 | xx The legal obstacles in using PPPs The biggest obstacle to using PPP was the requirement to prepare profitability analysis, especially in the case of smaller projects. According to the Act, analysis results of various potential ways of project implementation should be compared, and PPP may only be used if PPP brings the greatest benefits for the public interest. Moreover, a general approach to other types of project implementation created ambiguity, since there were many possibilities of choosing the manner of the implementation of public tasks.

10 | xx The other obstacles in using PPPs Difficult and expensive procedures hindered the application of PPP in Poland, but there are other problems: How to find the right private company interested in a project (profitability is usually not high, and ambiguity and frequent changes in the law create additional risk, particularly when a project is envisaged for many years). Little knowledge and experience with PPP as well as the unwillingness, or sometimes even opposition, of local politicians and citizens.

11 | xx The new Polish act about PPPs On 6 of January 2009 President of Poland signed the new law about PPP. A new act developed by the Ministry of Economy promises a new direction in the use of public-private partnership by public and private entities. The act has a framework character and the idea of describing the subject of partnership has been abandoned. The Act clearly refers to the existing institutions of the Polish law, and in particular civil law. Rather than creating new institutions, it makes use of existing, reliable ones. According to the Ministry the proposed regulations are easily understandable and applicable. The new Act abolishes the obligation to prepare preliminary analyses.

12 | xx The most important rules of the new act The choice of a private partner will be made according to either of two sets of standards. If its remuneration is fully covered by the public entity, then the use of the Public Procurement Law will be mandatory, especially the provisions concerning competitive dialogue. On the other hand, if part of the private partner’s remuneration is to be covered by profits resulting from the partnership, it will be obligatory to use the Act on Building and Service Concessions. In the new Act, the parties are given the possibility to create flexible partnership with reference to the general system of law in Poland and also to best practices and behaviour patterns without imposing statutory obligations.

13 | xx Potential of PPPs implementation in Poland in urban areas Under the socialist system, no attention was paid to the principles of rational land development and city planning, and the prevalence of industrial development resulted in the fact that considerable parts of cities, including city centres, were used for industrial production. Vast plots in cities, often with industrial buildings and polluted soil constituted excessive burden for the companies. The development and management of these areas was and still is a problem. Their new owners – very often public entities - have been looking for new functions for the land and organisations with sufficient funds to implement these functions.

14 | xx Experience of PPPs implementation in Poland in urban areas Due to legal problems with the application of the PPP formula in Poland, cooperation of public and private entities in land development was not called PPP, although the scheme was quite often similar. During the transition period demand for developing large-scale projects often came from international commercial companies, who, on the basis of negotiations with the responsible public authority, triad to develop projects in various forms of public- private cooperation. Conflicts among administrative bodies often obstructed the formation of partnerships and thus delayed construction of several large-scale projects.

15 | xx The current approach to PPPs in Polish cities Authors have been conducting a qualitative research searching for factors encouraging and obstructing use of PPPs in Poland. The analysis have been based on interviews with municipal officers and review of existing literature. The obstacles (even barriers) can be divided into legal, economic and socio-institutional ones.

16 | xx The legal obstacles: The previous regulation was too strict to use. The new one is too general, not giving expected answers or solutions for existing problems: The analysis which were too detailed and too costly in the previous regulation are not described in the new regulation (but there is a necessity to have some background for the project preparation and introduction). No legal base for diminishing the share of the public body. Common threat of being accused of misconduct or corruption (too general legal descriptions of partnership’s details) The resignation from using “public task”, can produce differences in interpretation among public administrative bodies.

17 | xx The economic obstacles: Problems with profitability of the project, the level of risk and the responsibility shared by partners: Public task connected with commercial profits means low level of expected profits for private partner (long term investment). Main part of the risk should be taken by private partner but the cooperation is long-term so some unexpected problems can arise.

18 | xx The socio-institutional obstacles: The unwillingness of public partner to take part in PPP: Too general regulation leaves a space of being accused of breaking the law by preparing a partnership. The citizens opinion about PPPs (homo sovieticus mentality) Public opinion about cooperation between the public and private actors is often negative, citizens link such partnership to corruption. The unwillingness of taking the responsibility by municipal officers The problem of preparation of municipal officers to negotiations, the needed knowledge and time are not made up in money, it means that officially there is a willingness to create PPP but there is no institutional background for it.

19 | xx Conclusions: The number of public tasks carried into effect by local governments is enormous and public funds rather modest. The solution is in credits and loans taken by local authorities but legal regulation is strict in describing public debt limit. In these circumstances many municipalities hope for PPPs as a vehicle for fulfilling their duties – public tasks - but by means of private money, decreasing public spending. Especially, remembering about improper urban structures and functions in Polish cities the very important field, where PPPs could be used, are big urban projects.

20 | xx Conclusions: In some cities there is a growing understanding of need of this kind of cooperation in big urban projects, very often linked to regeneration of old parts of the city and development of new function. Some of the local government officials state clearly that without private means number of this kind of projects will be very limited due to their financial and organisational complexity. Potentially, the most common projects are sport and recreation halls, often with aquaparks and some commercial space (hotels, shopping centres), commercial car parks and rail stations re- development.

21 | xx Conclusions: The problems blocking introduction of PPPs in Poland have twofold character, some of them are typical for this kind of projects (mainly economic) but it seems that they are not the most important barriers. The main obstacles have informal character, there is a problem of a post-socialist mentality of citizens and local government actors. The additional factor is often negative experience from the past. The problem of preparation of municipal officers to negotiations, their needed knowledge and time is also very current and serious. Some of the municipalities have chosen simple sale of land due to the existing problems with PPPs. Some of them have “wait and see” approach aimed at following well-trodden path.

22 | xx Conclusions: This current Polish environment is not promising for PPPs in big urban projects. They usually need long and detailed preparation, the risk is quite high for both partners: The private partner analyses the possibility of gaining the required profits as long-term investment but he is not sure about legal regulation in long time perspective and local political support. The public partner is afraid of being accused of corruption or misconduct, even by political opponents. It should be also mentioned that the important problem is a public task fulfilled by this kind of cooperation, there is a question what can be interesting from the point of view of private investor as enough profitable.

23 | xx Conclusions: As a recommendation for removal of existing obstacles for PPP development in Poland can be mentioned that some public bodies activity is needed: The special public center for exchange of information should be established. Some local government officers with experience in PPP should share their knowledge and experience with others. This activity should produce some standards for contracts and detailed legal solutions, model organization of PPP departments in local government structure. There should be also the special media campaign explaining the idea and advantages of PPP among the Polish society.

24 | xx Thank you for your attention Please, send comments to: -Magdalena Zaleczna