Lebanon has recently passed a new Law on public-private partnership (“PPP Law”). It was passed on 16 August 2017 and then approved by the President of the Republic. The PPP Law was enacted with the main objective of promoting and encouraging investment in the infrastructure sector.
The PPP Law, newly issued, intertwines with the general legislative framework involving a number of laws, including:
• the Public Accounting Law issued by Decree no. 14969/1963,
• the Tenders’ Regulation issued by Decree no. 2866/1959,
• the Law no. 360/2001 on the Promotion of Investments in Lebanon issued on 16.08.2001,
• the Law 288/2014 and the Law 54/2015,
• the temporary amending Law 462/2002 which regulates the electricity sector, and
• the Law no. 58/67 issued on 05.07.1967 .
Prior the Issuance of the PPP Law
Before the new PPP Law was passed, procedural rules applicable to PPP projects were set out in the general procurement framework as established by the Public Accounting Law no. 14969/1963. However, the Public Accounting Law is deemed non-suitable for PPP projects, thus justifying the need for a PPP-specific law. In Lebanon there are examples of industry-specific procedural rules which are defined in distinct laws enacted for specific projects (e.g. Law 218 from 13.05.1993 subjecting the deployment of the GSM cellular digital system to specific tender documentation approved by the Council of Ministers).
The old framework allowed for a range of PPP models (incl. BOT and its derivatives) and non-concession PPP models, but it is often criticised for non-transparency. As per the Public Accounting Law, public tenders are announced in the official gazette and in at least three local newspapers at least 15 days prior to the deadline for submission of tenders. The Tender Directorate, operating under the Central Inspection Directorate, publishes tender announcements on its website in Arabic only . Tenders are evaluated against a predefined set of evaluation tender criteria, but there is a formal obligation neither to publish the award notice nor to notify the participating but unsuccessful tenderers of the tender result. Furthermore, contracts that have been awarded are not published. There are no restrictions on the period of the negotiations with the selected tenderer between the award and the signing. The terms of the contract are often renegotiated during that period.
There is no requirement to perform a socio-economic assessment prior to the selection of a project. However, there is a requirement to perform a strategic environmental assessment for policies, plans and programmes in the public sector, and an environmental impact assessment for each project.
Funds for the project preparation are limited resulting in projects being poorly prepared. The risk of obtaining the required permits for the project is on the investor. There is no provision allowing unsolicited proposals. A mechanism for managing the project implementation/monitoring is missing.
In terms of the institutional framework, there is no specific body for procuring PPP projects. The authority is shared between various ministries, public institutions, municipalities and federation of municipalities. The Council of Ministers approves PPP projects before launching the tender and/or the execution of the contracts.
As to arbitration, it can be contracted only upon an approval of the Council of Ministers and a recommendation of the competent ministry. The approval is discretionary. The possibility of recourse to arbitration was explicitly reiterated in the new PPP Law. Lebanon is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) which is applied under the principle of reciprocity.
As to financing, banks play a very crucial role in respect to PPP lending. Participation in the international financial institutions and export credit agencies can provide support to the banks. The Lebanese Pound (LPB) is closely tied to the United States Dollar (USD), which leads to funding in USD. The exchange rate risk falls on the contracting authority.
New PPP Law: Main Provisions
The PPP Law answers a genuine concern: Lebanon is in crucial need of infrastructure development but its legal framework for PPP projects does not offer the customary guarantees that foreign investors and international financial institution often seek in order to (i) have transparency about the rules of the game and (ii) reduce the project risk. The absence of these parameters reduces the success rate of PPP projects. The new PPP Law provides a specific framework for PPP projects. An overview of its key provisions now follows:
The PPP Law defines “PPP projects” as projects of public interest in which the private sector participates through (i) financing and administration and (ii) carrying out at least one of the following activities: designing, building, constructing, developing, restoring, equipping, maintaining, rehabilitating and operating.
The scope of application of the PPP Law extends to all PPP projects carried out by the state, public institutions, or any entity considered as “public”. Such scope may also be extended to PPP projects carried out by municipalities and unions of municipalities, provided certain conditions set out in the PPP Law are complied with.
One of the key features of the PPP Law is that it defines the “PPP Agreement” as the main legal instrument regulating the PPP project, together with all annexes, undertakings and guarantees related to it that govern the contractual relationship between the public party, the PPP project company and all other third parties. The PPP Law outlines the key provisions to be included in the PPP Agreement, as follows:
• The parties’ respective rights and obligations;
• The basis for financing the PPP project;
• The maximum duration of the PPP Agreement, which should not extend beyond 35 years;
• The respective revenues to be received by the PPP project company from the public party or by the public party from the PPP project company, depending on the nature of the common project and the corresponding means of payment;
• The fees and dues which the PPP project company can receive on behalf of the public authority and on its account;
• Key performance indicators;
• The reports to be submitted by the PPP project company;
• The allocation of PPP project risks and mitigation measures;
• The guidelines governing the potential amendment to the basic conditions of the PPP Agreement;
• The guarantees, undertakings, and commitments which may be provided for the fulfilment of the PPP project;
• The public assets put at the disposal of the PPP project company;
• The transfer procedures;
• The procedures guaranteeing the non-interruption of the PPP project and its related operations upon termination of the PPP Agreement or breach of its contractual obligations;
• The procedures and remedies in case of a breach as well as detailed enforcement procedures with respect to these remedies;
• The dispute settlement mechanism, including mediation as well as internal and international arbitration.
The PPP Law relabels the “High Council of Privatisation” instituted by virtue of the Privatisation Law dated 31.05.2000 as the “High Council of Privatisation and PPP” and vests in it the authority to:
- assess and evaluate potential “PPP projects” submitted to it by the President of the “High Council of Privatisation and PPP” or by the competent minister;
- establish a “PPP Project Committee” for every approved PPP project; and
- decide on the prequalification outcome and approve the tender protocol in the phase following the approval of the project by the Council of Ministers and the launching of the selection process of a private partner.
The PPP Law institutes a PPP Project Committee presided over by the secretary general of the High Council of Privatisation and PPP and has among its members representatives of the competent ministry, the ministry of finance and, where applicable the commission regulating any relevant sector.
The PPP Project Committee is in charge of preparing an all-encompassing study governing the technical, economical, legal and financial aspects of the PPP project, including the prequalification criteria, assessment of investors’ interest and the likelihood of attracting the required financing.
It is aided in its functions by a team of financial, legal and technical consultants.
The High Council of Privatisation and PPP then examines the study and the recommendations of the PPP Project Committee and determines whether to reject or to pursue the project; in the latter case, it submits the project to the Council of Ministers through the Prime Minister’s office for approval. If the project is approved by the Council of Ministers, the PPP Project Committee launches the process of selecting a private partner .
The PPP Project Company
The selected private party is required to incorporate a Lebanese joint stock company which will act as the PPP project company and be in charge of executing the PPP project. The PPP project company will be exempted from the nationality restrictions set out in the Lebanese Code of Commerce as well as from the requirements to appoint an additional auditor or to obtain a work permit for its Chairman should he/she be non-Lebanese.
The PPP Law distinguishes between the establishment phase and the operation phase of the PPP project and provides that the private partner may not transfer its shares in the PPP project company to third parties before the start of the operation phase without the approval of the Council of Ministers.
The public party may participate in the establishment of the PPP project company and may contribute to its capitalization, including through contributions in kind.
New PPP Law: Commentary
The greatest advantage presented by the newly enacted PPP Law is that it is clear when it comes to the parties involved and their duties, specifically the ministries' involvement to the extent that they are relevant to the envisaged PPP project, as well as the procedures to be followed for every PPP project from the initial phases of bidding through execution to monitoring. It also subjects the process to a clear economic evaluation/feasibility study, identifies the key provisions of the PPP Agreement, and makes specific reference to the possibility of resorting to arbitration or to other alternative dispute resolution mechanisms in case of disputes with the private partner.
However, the PPP Law has the following limitations:
- The PPP Law is aimed at the major infrastructure projects that fall under risk/return sharing schemes, excluding concessions or any user pay structures;
- it does not provide for specific timeframes to be respected from the moment the PPP project is proposed until the PPP Agreement is ultimately signed;
- it does not deal specifically with PPP project financing nor does it give the sufficient means to seek such financing;
- it does not explicitly grant the PPP project company nor the right to create security, or pledge its assets or its shares in the PPP project company;
- it does not institute a grievance committee or a similar body in charge of examining potential recourses by the private partner against the decisions of the relevant authorities involved in the PPP project processes;
- it does not specifically delineate various models of PPP Agreements depending on project nature and specific risk and does not include clear force majeure rules; and
- it does not expressly provide for (i) “step-in” rights for lenders (not requiring re-tendering), (ii) termination compensation for assets transferred to the public entity including employer termination or (iii) stability clauses protecting against discriminatory changes in law; however, nothing in the PPP Law excludes the incorporation of provisions to this effect into the PPP Agreement.
Despite the limitations outlined above, the PPP Law institutes a comprehensive legal framework for PPP projects largely in line with international standards and presents no red flags.