2017/2018 Review: CZECH REPUBLIC

Overall rating

64%
0 Bankability (%)
 Red Flags

None

1. Compliance
64%
2. Effectiveness
64%

Compliance / Effectiveness

≥ 90% Very high
70 - 89% High
50 - 69% Medium
30 - 49% Low

< 30% Very low

1.

Concession/PPP Legislative Framework Assessment (LFA)

Concession/PPP Legal Framework
67%
Selection of a Project
37%
Selection of the Private Party
89%
Project Agreement
60%
Security and support issues
48%

2.

Legal Indicators Survey (LIS)
on Effectiveness

Policy Framework
60%
Institutional framework
0%
Award Statistics
83%
PPP Business Environment
64%

Summary Report

CZECH REPUBLIC

Overview

In general, there is a comprehensive legal framework in the Czech Republic for both non-concession as well as concession PPPs. However, until October 2016, there was only one specific Act (No. 139/2006 Coll.) on concession contracts. Against an international trend, this Act was replaced by the Act No. 134/2016 Coll., on Public Procurement (“PPA“), which inter alia regulates the public procurement process for concessions and non-concession PPPs. Even though the legal framework remained essentially the same, there are some significant changes which have yet to be tested in practice. As the Public Procurement Act was adopted quite recently, few if any projects have yet been awarded and so little or no guidance/model documentation has yet been issued under the new regime.

The Public Procurement Act only gives a general definition of a PPP project agreement and does not stipulate any mandatory provisions that such agreements would have to contain. Therefore, the legal framework allows the parties to choose various PPP models and gives them flexibility with respect to the content of the project agreement.

In line with the European Directives, the selection process regulated by the Public Procurement Act, is based on the principles of non-discrimination and transparency and stipulates limited circumstances under which direct negotiations are allowed. Further, the private parties are given broad legal remedies allowing them to have the selection process reviewed and to challenge the decisions of the contracting authorities.

The already mentioned flexibility regarding the terms and conditions of a PPP contract combined with a developed equity/bond capital market in the Czech Republic provides for a favourable business environment. Under the old, specific regime for concession, the use of PPP models in large public projects in the Czech Republic has been very limited on the national level. Nevertheless, it has been successfully used in smaller projects at the municipality/regional level. International investors and the consulting industry are now waiting to see whether the new approach of harmonised award rules combined with maximum flexibility for the content of contracts triggers an increased flow of projects.

“More detailed guidance or more flexibility?”

Room for Improvement

As the legal framework for PPPs and concession is almost identical, also the results of the 2017/2018 PPP assessment deviate only to a very limited extent. The main areas of lower compliance for non-concession PPPs are:

• project preparation: there are hardly any provisions foreseen in the applicable laws about this issue;

• securities and support (where there are no special statutory provisions for PPPs and concessions at all);

• missing rules for public participation in the project company, early investors' exit and IPPP;

• lack of explicit provisions about unsolicited proposals;

• only very few rules about the project agreement, including termination compensation: there are no provisions jeopardizing an investor's interests but all the matters for which this assessment recommends an explicit provision in the project agreement are left for the parties to agree; and

• tariff setting and permitting is governed in the respective regulatory laws without a special regime for PPPs and concession (like in very many jurisdictions).

Due to a strong compliance with EU procurement law, the Czech Republic's compliance for the selection of the private party is very good for non-concession and concession PPPs. This means a high (89%) if not yet outstanding score.

“Room for improvement in project preparation”

The Law does not explicitly set out an obligation to conduct preliminary or feasibility studies, or an audit by the contracting authorities concerning financial sustainability.

Nevertheless, such studies/audits are usually carried out prior to the commencement of the selection process. The public is not typically involved in the selection process.

The Law neither permits nor prohibits entering into a project agreement that is subject to international arbitration. However, this is not typical in practice. The Public Procurement Act does not mention security instruments, direct agreements or step-in rights. Nevertheless, all such instruments are used in practice.

Effectiveness

Regarding effectiveness, there are several templates available to guide awarding authorities, but no explicit PPP policy and absolutely no institutional framework – both of which are the main reasons for the very low scores, which seem to correspond with the situation in the market. Although the existing track record in the Czech Republic is wide-ranging spread for non-concession PPPs, the total number of projects is still low.

PPP Policy

In 2004, the government adopted a general policy of how to support PPPs and has since issued various guidelines, model contracts and recommendations. However, most of this documentation is outdated and does not reflect the new legislation adopted in 2016.

Institutional Framework

A coherent institutional framework that would deal with PPPs has not been established. Some support is provided by the Ministry of Finance, which has been authorized by the government to prepare guidelines for the preparation and realization of projects and to methodically support individual Contracting Authorities. Under the PPA, the Ministry of Finance is authorized to give an opinion before a project agreement is concluded by a contracting authority which is either a municipality or a company owned by the municipality. Also, there is an Association for Infrastructure Development (Asociace pro rozvoj infrastruktury), which consists of private members, that seeks to support PPP in the Czech Republic.

National PPP experience

Although the score of the Czech award statistics is high (only 1% is missing for a very high score), the total score for the business environment is medium. This comfortable effectiveness rate for the award statistics is misleading because it is due to the wide range of projects in different sectors which nevertheless only account for a low total number of projects all of which had a relatively small size. The effectiveness score is second to none regarding banks, insurance and FX regulations, but fails to achieve the top rank when all aspects are combined because of its failure to collect any of the available points for funds.

The areas in which the Czech Republic can improve its effectiveness are easy to spot:

• PPP Policy;

• institutional framework;

• infrastructure funds.

Summary

So, if the new legal framework is not sufficient to boost the flow of large scale infrastructure projects, the eyes of national and international investors, contractors and advisors will again turn to the government, asking whether it is willing to actively promote projects and support awarding authorities with a clear policy and an institutional framework.

The overall compliance and effectiveness is medium for both non-concession and concession PPPs.

General LFA Compliance exactly the same as general LIS effectiveness: 64%

No Red Flag issue and no deal breaker were identified. However, the score achieved for the bankability issues (44%) leaves room for improvement – again because of a lack of specific provisions, not because of discriminating or restrictive laws.

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