There has been a positive development in the PPP legal framework in Azerbaijan as an entirely new Infrastructure-Investment Law has been enacted.
PPPs in Azerbaijan are governed by the Law of the Republic of Azerbaijan “On the implementation of special financing for investment projects related to construction and infrastructure facilities” dated 15 March 2016 (the “Infrastructure Investment Law”) and by the Presidential Decree enacted on the basis of the Infrastructure Investment Law on 7 December 2016 “On the establishment of conditions for the realization by investors of investment projects connected with construction and infrastructure facilities within the Build-Operate-Transfer (BOT) model, requirements imposed on investors according to types of construction and infrastructure facilities, features and conditions of the signed agreements and the value of the goods and services obtained as a result of the investment“ (the “PPP Decree”).
The Infrastructure Investment Law only provides for the BOT model and mostly contains general provisions regarding the financing of BOT projects, while the PPP Decree further elaborates the definition of an agreement, the predefined criteria, the selection process, the feasibility study, the powers of the authorized governmental body, etc.
“The Law only governs BOT models”
The BOT model is defined under the Infrastructure Investment Law as the payment of investment costs (including future profit) to the investor for certain investment projects through the purchase of the produced goods and services by consumers or an authorised body in accordance with a BOT agreement. Investment projects which can be the object of a BOT model must relate to construction and infrastructure facilities as specified in the Infrastructure Investment Law (see Article 3.1).
The BOT agreement is defined under the PPP Decree as a written agreement signed between the authority and the investor in relation to the implementation of investment projects. Such an agreement must provide for the (i) construction (comprising construction works in the narrow sense but also including routine maintenance and overhaul repairs, reconstruction, renovation), (ii) operation and (iii) transfer of the construction and investment objects and similar objects to them (“similar objects“ are the structures surrounding construction and investment objects). As mentioned above, the object of an investment project is specified in Article 3.1 of the Infrastructure Investment Law.
The Infrastructure Investment Law requires that the private party carries out a pre-feasibility study with the option of government support. But the details of the provisions regulating the pre-feasibility study and the government support need to be detailed by implementing rules.
With regard to bankability, there are no provisions regarding the possibility of direct agreements, step-in rights, international arbitration and security in the Infrastructure Investment Law, although there are some provisions in the Law of the Azerbaijan Republic on Investment Activity and on arbitration and security. This Law stipulates certain rules regarding the types of investment activities. However, it is not clear whether and to what extent the Law of the Azerbaijan Republic on Investment Activity applies to PPP.
The value of the goods and services produced under the BOT agreement (except for the value of goods and services regulated by the state) are determined by an agreement between the parties, taking into account their nature, amount of consumption or use, quality, safety and other criteria. Based on the agreement between the parties, the Ministry of Economy may provide a guarantee for the purchase of goods and services up to a certain limit.
After the expiration of the term of the agreement, construction and infrastructure projects shall be transferred to the management of the Ministry of Economy free from any debt and obligations and suitable for use in accordance with their purpose, free of any charge and taking into account depreciation.
Prior to the expiry of an agreement term, the construction and infrastructure projects may be purchased from the investor for state needs with all costs covered, including expected revenues from the project.
According to the PPP Decree, the investor may be chosen either in a tender available to all or to certain candidate companies, or in direct negotiations.
“Uncertainties regarding termination of contract”
Early termination rights favour the authority. Under the PPP Decree, the authority may unilaterally terminate the agreement if the private party defaults or violates the terms of the agreement, or in case of investor’s bankruptcy or liquidation. The private party has no right to terminate early.
Termination compensation rules also require further clarification as do the provisions on tariffs and service fees. There are no provisions allowing for security interests over the private party’s rights or assets or the possibility of direct agreement. There are no provisions that would clearly provide for step-in rights. During the term of the agreement the investor is entitled, with the consent of the authority, to transfer the rights and obligations under the agreement, in entirety or partially, to another investor that conforms to the established requirements. If such transfer is carried out, the rights and obligations under all other agreements signed in connection with the agreement are considered transferred to this investor.
Additionally, the term “concession” is defined under the Civil Code of the Republic of Azerbaijan and under the Law of the Republic of Azerbaijan on the Protection of Foreign Investments (“Foreign Investments Law”). The Civil Code treats concession agreements as a type of commission agreement so the “concession” as defined under the Civil Code cannot be understood as a concession for the purposes of this exercise.
However, the Civil Code and the Foreign Investments Law contain quite a few general rules which are applicable (e.g. grounds for termination). Article 40 of the Foreign Investments Law limits concession agreements to “natural resources”, while concessionaires can only be foreign investors. The Foreign Investments Law provides for the settlement of disputes through international arbitration.
It is not clear whether and to what extent Public Procurement Law applies to the granting of concessions, whereas it is explicitly stated in the Infrastructure Investment Law that the Public Procurement Law does not apply to BOT agreements. The Public Procurement Law sets the basis for public procurement, rules of tenders, the selection of the contractor and complaints procedures, as well as other methods of public procurement.
“Positive developments since June 2016”
Since the Law of the Azerbaijan Republic on Licenses and Permits entered into force on 1 June 2016, a positive development has been noted regarding the permitting requirements (the “Law on Licenses and Permits”). The Law provides for a one-stop-shop procedure for issuing the licenses, known as the “one window” principle. It is yet not clear how it operates in practice.
Additionally, a very positive sign is that the Republic of Azerbaijan has ratified both the New York Convention on recognition and enforcement of foreign arbitral awards (1958) and the Washington Convention on the Settlement of Investment Disputes (ICSID) (1965).
There is no general national policy framework for PPPs and until recently, the major obstacles to implementing PPPs were a lack of political will and social understanding of developing PPPs. This was the case until oil prices fell globally and the country’s national currency was devalued. The announced economic reforms at the governmental level are going to eliminate these obstacles.
With regard to the institutional framework, the Ministry of Economy has been designated as the body to enter into project contracts on the side of the government. However, it does not deal specifically with PPP strategy and policy matters.
There is no available information on the award statistics and the PPP business environment is not developed.
Following the above, the Republic of Azerbaijan should adopt a general policy regarding its PPP legislation in order to clearly define concessions and possible models for PPPs. It should also further elaborate on the selection process, the award criteria, the feasibility study etc. A general policy will achieve legal certainty and create more transparency in the award of PPPs.
There should also be substantial efforts to develop a suitable PPP business environment.