The constitutional and legislative structure of Bosnia and Herzegovina (BiH) is complex since it is composed of two entities – the Republic of Srpska (RS) and the Federation of Bosnia and Herzegovina (FBiH) – and Brcko District (BD) as a separate unit, and the legislation is adopted on the state level, entity level, and – in FBiH – on the cantonal level. This means that in BiH as such there is no unified Law on PPP, but rather 12 laws on PPP. While the RS and BD adopted their PPP laws in 2013 and 2010, the FBiH drafted a Law on PPP in 2009 which remains in the adoption process. In addition, the cantons in the FBiH have their own set of PPP laws.
The Current Status
The current state of infrastructure project and investment needs pushes a multi-billion euro obligation on the state/entity/canton which they, with the current budget structure, simply cannot cope with. There are a number of infrastructure projects, including roads (most prominently the highway corridor Vc), water (the renewal of city water systems, or the regional “Blue Water” Project) and health care (a dialysis center) which depend on finding alternative finance sources. PPP’s are considered to be an option which could present a win-win situation for the public institutions, private investors, and the general population which would benefit from such projects.
So far, however, the few large scale PPP’s in BiH have occurred mostly in the RS, where, most prominently, the International Dialysis Center and Fresenius Medical Care successfully implemented PPP projects in the health sector. The RS also entered into two PPP projects for the construction of thermal power plants: Stanari and Ugljevik 3. The FBiH has several times announced PPP models for the realization and construction of certain sections of the Vc corridor, but concerns about the bankability of the projects obviously blocked them from realization.
Contractual Issues in PPP’s in BiH
Most projects from the PPP sphere are realized through concessions, as the law on concession is in place on every level. Through a concession contract the private partner provides services for a certain period of time to the users instead of the public partner. Other projects were implemented as institutional models, under which a joint venture between the public and private partner is established.
Ultimately, all forms of PPPs require the conclusion of an adequate contract between the public and private partner. In this regard the private partner and public partner sometimes put too little effort in the creation of a contract adequately covering or specifying obligations and risk. So for example during the procurement of the PPP, the public partner will evaluate the experience and financial standing of the shareholders in the private partner. After the contract has been signed the public partner should take care to ensure that the identity of the shareholders cannot change to the detriment of the PPP. The contract therefore should foresee that the private partner has to obtain the public partner’s prior approval before any change is made to the private partner’s ownership structure.
Furthermore, in almost all cases it is necessary to obtain additional approvals and consents. Certain milestones can therefore be determined and the parties can agree to which extent the public partner has to support the private partner. The PPP contract must, among other matters, regulate a subsequent inability to perform the contract, including details regarding changed circumstances that may lead to a complete inability to perform the contract.
Operation and maintenance clauses specifying the individual responsibilities can be very different from sector to sector and project to project because many projects require the private partner to provide ancillary services to the public partner in addition to the on-going maintenance of the relevant asset(s) that were developed by the private partner. Therefore the parties should agree on aspects such as lifecycle maintenance, third party use, and demand risks.
Several incentives and projects by international organizations and NGO’s are currently being realized involving attempts to foster PPP framework on all levels. This should also promote PPP’s and the possibility of realizing them in the future.
By Nihad Sijercic, attorney at law, Amina Dugum, attorney at law, Karanovic & Nikolic
This Article was originally published in Issue 5.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.