Although Hungary has significant experience with infrastructure PPPs, there is no PPP Law. The actual tendering process for PPP projects is governed by the Public Procurement Act and as such is regulated in a very detailed manner. The system is therefore very much a combination of two extreme approaches: the detailed and mandatory regulation on the procurement process and almost total freedom as regards project agreements. The EUROSTAT rules and the relevant EU legislation are to be used for guidance. Professional support for smaller projects is not very good and the EUROSTAT and EU sources are often overlooked or ignored until it is too late.
No specific rules on content of contract
In the absence of a framework legislation covering non award-related topics, the freedom to contract is extensive, relying mainly on the Civil Code as the background legislation and on the willingness of each individual contracting authority to comply with international best practice and bankability requirements.
A balanced risk allocation, fair rules for termination of contracts and compensation in such scenarios are left to be drafted into the contracts, as are the availability of securities and government support.
Securities and Government Support
State aid law provides a framework for government support and sector specific regulatory laws as set forth the framework in this respect.
Finally, the legislation does not contain any rules of pre-assessment and value for money analysis and related issues. No PPP units or knowledge management of the public side are included.
There are over 100 PPP projects in the operating phase, ranging from motorway DBFOs (concessions) to small municipal sports facilities PFIs. PPPs started as early as 1991 as toll road concessions.
Much experience in the past, but obstacles for the future
There are major political obstacles for new PPPs. Starting from 2009, the newly elected Hungarian government began to review the ongoing PPP projects in order to renegotiate and to put an end to the “disadvantageous, disproportionately high risk-taking and/or economically unviable“ projects. Projects that are “on the balance sheet“ under EUROSTAT rules will be very much in the focus. The current government has carried out a systematic termination or buy-back of existing BOT PPPs started after 2011 and has repeatedly communicated that this form is not favourable any more.
The PPA is applicable to all sectors. In theory, the contracting authority is obliged to prepare its procurement properly, but unless otherwise provided for by sectorial rules, it is not expressly obliged by the PPA to conduct feasibility studies before the procurement. Based on the PPA, the contracting authorities are not obliged to involve the public in their selection process. As a general rule, a fair and transparent tender selection process is required by the PPA. Procedures with restricted competition and without prior publication of a contract notice may only be applied in exceptional cases.
The PPA does not regulate unsolicited proposals and conflict of interest rules may mainly be applicable in this respect. The bidder shall not influence the award decision and the conduct of the contracting authority.
The PPA also regulates review procedures related to the selection process. Compensation may also be claimed regarding an unlawful selection process. The PPA allows proper remedies for a breach of PPA rules.
The PPA also provides for certain mandatory contract provisions. The PPA provides for step-in-rights in certain cases and it contains restrictions on the transfer of a project company’s shares. The PPA allows government financial support for the contracting authority. The Concession Act does not regulate these issues and the concession agreements utilise the security instruments generally available under the Civil Code.
Arbitration may be applicable, but it is not possible to apply foreign legislation for contracts related to national assets, unless otherwise provided by an international treaty. In practice, the contracts are under Hungarian law and related disputes are settled by Hungarian dispute resolution bodies.
The concession legislation is just part of the Public Procurement Act. In order to integrate the new EU 2014 Directive on Public Procurement, the new Act CXLIII of 2015 on Public Procurement was adopted (the “PPA”) and amended in 2017. The PPA no longer makes any reference to the Concession Act, which apparently has not been repealed but should no longer apply.
Hungary is one of the jurisdictions where the concession legislation is restricted to implementing EU Law, i.e. rules concerning the award of contracts. By doing so, the chance to include other aspects in the legislation has been lost, the result being a lower score against international standards.
The statutory rules on concessions (concession awards) are less detailed compared to procurement rules for PPPs and other contracts, and provide for more flexibility.
More flexibility but also more responsibility for content of contract
Due to the absence of framework legislation covering non award-related topics, the freedom to contract is even more extensive, relying mainly on the Civil Code and on the willingness of each individual contracting authority to comply with international best practice and bankability requirements. As for PPPs a balanced risk allocation, fair rules for termination of contracts and compensation in such scenarios as well as availability of securities and government support are incorporated into the concession contracts.
State Aid Law and sector specific regulatory laws provide a framework for government support. The contents of the concession agreements are usually determined by the contracting authority with little or no room for negotiation.
No rules on project development
The legislation does not contain any rules on pre-assessment/value for money analysis and related issues. No PPP unit or knowledge management of the public side are set forth. There is no government policy for the development of PPPs. There is no inter-ministerial committee for PPP. Ad-hoc committees may be established for projects of great volume. While the financing and insurance background for projects is present in Hungary, there are no specialised instruments for PPP.