Ensuring sustainable growth

Rita Waked Jaber examines the key clauses of the new law regulating Public Private Partnership in Lebanon, introduced to attract foreign investment into the country.

The long-awaited promulgation by the Lebanese Parliament of a new Law on Public Private Partnership[1] (hereinafter referred to as the PPP Law) is significant in that it reflects the clear intention of the Lebanese State to resort to private financing and expertise to meet its future infrastructure needs. Indeed, the promulgation of the new PPP Law sends a clear message to investors, promoters and international lenders that Lebanon is open to a non-traditional approach to procurement and management of public service projects, such as the PPP. It confirms that PPP, which finds a solution to the double constraint of the strong budgetary restrictions on the one hand and the need for public entities to meet infrastructure needs on the other hand, now benefits from the support of the Lebanese State.

The scope of the PPP Law

The PPP Law is rather horizontal[2] – in that it covers several sectors. Indeed, its article 2 (2) of the PPP Law stipulates that, notwithstanding any clause to the contrary, the PPP projects (hereinafter referred to as the PPP Projects) relating to electricity, telecommunications and civil aviation sectors shall be governed by the provisions of this Law.

Article 2 also states in its first paragraph that the PPP Law applies to all PPP Projects[3] undertaken by the State and public institutions and all moral persons of public law, except for municipalities and municipal federations, which may nevertheless choose to submit their PPP Projects to the provisions of this Law.

Models of PPP accepted by the PPP Law

The PPP Law does not provide for the forms of contracts that can be executed by the PPP technique. It can be a management contract, a BOT, BOOT, BTO, BOO contract or any other model, involving design, installation, construction, renovation, development, equipment, maintenance, rehabilitation and operation.

The competent authority for the award of a PPP Project

– The PPP Project must be proposed by the President of the High Council for Privatization and PPP (hereinafter referred to as the Council) or by the concerned minister.

– The Council’s Secretariat General shall prepare a comprehensive study of the proposed PPP Project and submit a report to the Council enclosing its recommendation related to the feasibility of the proposed PPP Project, and specifying to what extent the private sector would be interested in financing it and investing in it. It is on the basis of this report that the Council makes its decision to approve or refuse the concerned project.

– Following the approval of the PPP Project proposal by the Council, the latter shall proceed with the appointment of a project committee (hereinafter referred to as the Project Committee) that shall be responsible for preparing a complete study on the PPP Project covering its technical, legal and financial aspects. It shall specify the pre-qualification criteria and the extent of investors and lenders’ interest. A report including the above and the recommendations of the Project Committee must be submitted to the Council[4].

– After the Council agrees to proceed with the PPP Project, the project file shall be referred to the Council of Ministers. Once the PPP Project has been approved, the Project Committee shall launch the procedure for selecting the private partner on the basis of the principles set out in the Law (Article 6 of PPP Law).

The procedure of selection of the private partner

Sections 7 and 8 of the PPP Law have regulated the issues relating to prequalification, preparation of specifications and the selection phase of the private partner.

The selection procedure of the private partner shall be subject to the principles of transparency, freedom of participation by competing bidders and equal treatment of the same; and sufficient publicity should be assured to ensure a multitude of competing bidders.

The Project Company

The selected candidate shall establish a Lebanese joint-stock company (hereinafter referred to as the Project Company) and with nominative shares.

The partners of the Project Company shall not transfer their shares to third parties before the PPP Project reaches the operational phase[5].

The public entity (hereinafter referred to as the Public Entity) shall be allowed to participate in the formation of the Project Company and to contribute to its capital.

The Project Agreement

Section 10 of the PPP Law has mentioned the mandatory clauses in the partnership agreement (hereinafter referred to as the Partnership Agreement) that govern the relationship between the parties. It shall include the following:

– The obligations and rights of the parties;

– The financing basis of the PPP Project;

– The duration of the Partnership Agreement, which shall not exceed 30 years.MoreMore

– All revenues that the Project Company shall receive from the Public Entity or revenues that the Public Entity shall receive from the Project Company, depending on the nature of the PPP Project;- The fees, tariffs and royalties related to the PPP Project that can be collected by the Project Company on the authorization of the Government;- The key performance indicators of the Project Company;- The reports that the Project Company shall prepare on the execution of the PPP Project and shall submit to the Public Entity and the Council;- The allocation of risks between the Public Entity and the Project Company and the actions to be taken and procedures to be followed to reduce the impact of such risks;- The rules on the modification of the main clauses of the Partnership Agreement;- The guarantees, obligations and commitments to be granted by the Project Company and/or the Public Entity for the implementation of the PPP Project;- The money and properties of the Public Entity which are put at the disposal of the Project Company throughout the term of the Partnership Agreement for the performance of its obligations, in addition to the rights and obligations of the Project Company in respect of such money and properties;- The procedure of transfer of the PPP Project to the Public Entity when the nature of the project requires such transfer;- The procedures required to ensure the continuity of the PPP Project and the works performed under the Partnership Agreement upon termination of the Partnership Agreement;- The procedures and penalties that may be imposed on either party in the event of any breach of its contractual obligations and the detailed mechanisms to execute such procedures; – The dispute resolution mechanism, including mediation and domestic and international arbitration. The role of the Public Entity in the PPP Project Article 11 of the PPP Law has clarified the rights of intervention of the Public Entity during the two phases of the PPP Project, the first being the formation phase[6] and the second the operational phase.

The assets necessary for the execution of the PPP Project

According to article13 of the PPP Law, the Public Entity shall have the right to put at the disposal of the Project Company real estate properties that it owns and that it deems necessary for the execution of the PPP Project for the duration of the Partnership Agreement.

The Public Entity can also expropriate the properties required for the implementation of the PPP Project in accordance with the legal expropriation procedure.

Despite the many advantages of enacting a PPP Law, there are still some gaps in the Lebanese PPP Law that should be underlined. In particular, the question of qualification of the Partnership Agreement has not been raised whereas an administrative qualification of the PPP Agreement would give the Public Entity the unilateral right to modify it in the public interest, thus threatening the interests of foreign investors seeking to be placed on an equal position with the public party and not being exposed to discretionary changes in the terms of their Agreement. The administrative qualification of the Partnership Agreement would similarly restrict the recourse to arbitration[7]. The absence of any reference to the question of sovereign immunity and to the possibility for the Lebanese government to issue sovereign guarantees – whereas the financial support of the Public Entity will often be necessary -are also noteworthy. Nonetheless, it should be admitted that the promulgation of a PPP Law in Lebanon constitutes a praiseworthy step towards a better security of private investment in this country but which must, no doubt, be complemented by a genuine political will to make the PPP a national priority.

Text by:

Dr. Rita Waked, Ph.D; legal consultant, Frayland Construction and Interiors LLC; lecturer at Saint-Joseph University, Dubai

Footnotes:

[1] The Law has been enacted by the Parliament on 16 August 2017, signed by the President on the 7^th of September 2017 and took effect when published in the Official Gazette no. 42 on the 14 September 2017.

[2] A vertical law on PPPs would relate to the development of PPPs in a particular sector.

[3] Defined as any public utility project in which the private sector contributes to the financing, management and at least one of the following activities: design, installation, construction, renovation, development, equipment, maintenance, rehabilitation and operation.

[4] Article 5 of the PPP Law.

[5] The operational phase is defined as the period from the start of service provision and operation and maintenance till the completion date as stipulated in the Partnership Agreement.

[6] The formation phase is defined as the period from the date of signing the Partnership Agreement by the parties to it till the date of the completion of the design and installation and/or construction, and/or development, and/or restoration, and/or equipment, and/or maintenance and/or rehabilitation processes, as stipulated in the Partnership Agreement.

[7] According to Law no. 440-2002 of 29 July 2002.