On 1 May, 2008, the Act 30/2007 of 30 October of Public Sector Contracts (Act 30/2007), entered into force six months after its publication in the State Official Bulletin.

The Act introduces into Spanish legislation the European Parliament and Council Directive 2004/18/EC of 31 March, 2004 “on the co-ordination of procedures for the award of public works contracts, public supply contracts and public service contracts”. In addition, the new Act carries out a revision of the structure and the content of Spanish public procurement legislation.

Among other innovations, the Act introduces into Spanish law a new type of contract, the Public Private Partnership contract (PPP), based on the “Green Paper on public-private partnerships and Community law on public contracts and concessions” (COM (2004) 327 final), and the closely-related competitive dialogue procedure.

Background of the introduction of the PPP

The regulation is a new mechanism to develop infrastructure projects offsetting the budgetary constraints resulting from EU-imposed budget deficit limitations. Specifically, the Resolution of the European Council on the Stability and Growth Pact (Amsterdam, 17 June, 1997), the Council Regulation (EC) No 2223/96 of 25 June, 1996 on the European system of national and regional accounts in the Community (SEC-95), and the Decision of Eurostat 18/2004, of 11 February, on deficit and debt treatment of public-private partnerships (implemented in Spain through the Statutory Act 5/2001, of 13 December, supplementary to the Budgetary Stability General Act and the Act 18/2001, of 12 December, General of Budgetary Stability).

In Spain, public administration first relied on the so called “German Model” (the “Konzession Modell” developed by the task force created in the German Ministry of Finances after German reunification) for the development of infrastructure plans.This was introduced in Spain by means of article 147.6 of the Act 13/1996, of 30 December, of tax, administrative and social order measures, the Royal Decree 704/1997, of 16 May, of legal, budgetary and financial regimen of the administrative works contract under the modality of total payment of the price, and articles 47 and 48 of the Act 47/2003, of 26 November, General Budgetary.

Through this mechanism, the Spanish Government developed 32 projects (31 roads and a railway) between 1997 and 2002. Some autonomous communities (regional governments) have also legislated for this type of contract including Valencia, which has used it for some water projects. In principle, the Spanish administration liked this type of contract because it is a construction contract. In this sense, the Spanish administration considers that in a works (construction) contract it keeps control over the design and over the cost compared with a concession contract.

However, Spanish public administrations have now lost interest in that type of contract. This is due to the rules issued by Eurostat regarding the accounting of the German Model under SEC-95.According to Eurostat in the German Model, the public administration has to register in its annual accounts the value of the works built during the relevant year as debt (even though they will be paid in instalments after the acceptance of the work). This also happened in Germany where the Government changed to the concession contract (Betreiber Modell).

In Spain, the PEIT (Infrastructures and Transport Strategic Plan) of 2005 still included, among others, the use of this type of contract for new developments. However, the Tribunal of Accounts in the Report 718 of 20 July, 2006 confirmed the treatment of this structure for national and regional accounting. After that, the possibility to use this type of contract further diminished.

In Spain, as a result, public administration also turned to the traditional public works concession contract.

The parliament approved Act 13/2003, of 23 May, regulating the public works concession contract to develop and modernise the already existing regulation. In particular, the new regulation introduced the shadow toll, the availability risk, the different sources of financing for the concessionaire, and the express regulation of the restatement of the financial and economic balance (already developed by the Doctrine and by the Supreme Court, received from France’s Conseil d’Etat). The new regulation has been very successful and all national, autonomous community and local entity (provinces and municipalities) administrations have made a broad use of this type of contract during these years for various projects including roads, hospitals (through the shadow toll), theatres, and others.

But the concession contract has revealed some rigidities for many public procurement projects. The concession is based on the concessionaire building and charging consumers for the use of the public facility. This structure does not fully fit with projects such as healthcare system hospitals, schools, prisons, and government office buildings and others. On some occasions, public administration has used the regulation flexibly such as with hospitals or the renewal of first generation highways. Other cases have relied on the amalgamation of different contracts, such as with prisons (a surface agreement for the construction of the prison, the lease back of the prison and a maintenance agreement) or hospitals. In any case the Consultancy Board of Administrative Contracting of the Ministry of Finance has condemned this situation in several reports during the last years (Report 61/03 of 12 March, 2003, Report 70/04, 11 March, 2005, and others).

According to Eurstat (Decision 18/2004, of 11 February), in the PPP, the investment will not be considered as public debt for SEC-95 effects, provided that there is an actual assignment from the public administration to the private promoter of the construction, and demand or availability risks. In addition, in the PPP type of contract , the private promoter assumes the construction and the maintenance of the public facility, excluding the commercialisation. Thus, it can be a mechanism for administrators to assign to the private sector a diversity of activities which did not fit under the former types of contracts. The use of an already accepted contract type will probably help to avoid the problems that have arisen in the past with Eurostat regarding the treatment of the debt attached to certain projects such as the project Madrid Calle 30, or the Metro Madrid.

The relevant regulation of the PPP

The new Act 30/2007 defines the PPP as the contract by means of which the public administration assigns to a private entity, for a period of time based on the amortisation term of the investments or the financing structure foreseen, the performance of a global and integrated activity.

This includes, in addition to the financing of the non-material investments or the works or the supplies needed for the fulfilment of certain objectives of public service or in relation to a general interest, the performance of some of the following activities: the construction, installation or transformation of works, equipment, systems, complicated products or goods, as well as their maintenance, modernisation or renewal, their exploitation or management; complete management of the maintenance of complex infrastructures; the manufacturing of goods and the provision of services that incorporate technology specifically designed for the purpose of providing solutions more advanced and financially beneficial than those present in the market; or the provision of other services relating to the development by the public administration of a public service or activity of public interest assigned to it. In addition, the contractor, who co-operates with public administration, can arrange, according to the terms regulated in the contract, the design, the construction management of the works, and retain the necessary services.

The contractor will be entitled to be paid a consideration from the public administration during the term of the contract for the fulfilment of certain service output specifications. Under the former Spanish legislation, the public administration provided for the outline or full technical specification, the clients were the citizens (demand risk), and the consideration was in principle linked to the demand. The PPP foresees the substitution of the technical specification by a service output specification (typically from the UK Private Finance Initiative / Public Private Partnership system). The client will then be the public administration (that eventually will provide services to the citizens), and the consideration can be based on the service output specification.

The choice of PPP is determined by an evaluation of the applicability of the contract. The public administration will be able to use this type of contract for a project when:

• it can evidence through a previous evaluation process the complexity of the contract;
• it is not in the position of defining, previous to the tendering, the technical means necessary to achieve the purpose foreseen or to establish the legal and financial means to carry out the contract; and
• it can carry out a comparative analysis of other contracting options that show the benefits of this option in view of “value for money”, the global cost, the efficiency or the risk allocation, the legal, economic, administrative and financial grounds.

Such criteria will limit the effects of the new type of contract. However, it will be still a useful tool to carry out the hospitals, prisons, office buildings, schools, and other projects mentioned above. Finally, it is uncertain how public administration will implement this new perspective. The public works concession contracts for first generation highways tendered in 2007 already included the mechanism of the service output specification. However, they also included a detailed determination of the technical specifications. The authority, at least so far, and probably by tradition, is relying in the technical specifications more than the service output specifications.

Apart from the above characteristics, PPP lacks a specific regulation. PPP is currently regulated by the provisions applicable to other types of contracts whose scope corresponds to PPP’s main scope, including contracts for work, public works concession contracts, supply contracts or service contracts (including public services concession contract). The maximum term will be 20 years which can be extended to 40 years when the PPP corresponds to the scope of a public works concession contract.This lack of a precise and comprehensive regulation will probably cause construction problems in future. It is already causing some puzzlement within the civil servants who have to implement this new type of contract.

The competitive dialogue procedure

PPP has brought with it another significant innovation, which is the competitive dialogue procedure. In principle, the PPP tender will be awarded by means of this competitive dialogue procedure. This makes sense as among the requirements for the PPP to be applicable, as already mentioned, are the complexity of the contract and the inability of public administration to determine the technical, legal or financial means to achieve the purpose of the contract.

In the competitive dialogue, public administration directs a dialogue with the candidates, in order to determine and define the appropriate means to achieve the needs of public administration. The dialogue may cover all the aspects of the contract. The dialogue can be structured in consecutive phases and at the end the public administration will fix one or several solutions and ask the remaining candidates to file a final offer.

This procedure represents a revolution in the Spanish public procurement legislation. Under former Spanish legislation, tender documentation was prepared internally including the legal conditions (Administrative Particular Clauses Document), the technical conditions (Technical Particular Specifications Document) and the technical projects (when applicable) and the bidders had to accept them in full and file the offer. But the competitive dialogue procedure opens the legal and technical conditions of the contract to discussion.

Under the traditional mechanism a tender could be called and awarded in six months, but this will most probably become longer under the new mechanism. Also, the new mechanism, according to the experience in other countries, should produce an increase in the costs of the offer (including technical, legal and financial consultant fees, which currently are irrelevant). However, the law foresees the payment of a bonus to the bidders. The dialogue should ensure that at the end, the bidders file an offer and avoid tender vacancy declarations, and help to produce the best adjusted solution, both technically, financially and legally.

Recent developments

The current international economic situation may twist the contractual scenario.

During recent years, the public administrations adopted the concession contract to develop the public infrastructures for budgeting grounds; the payments were accounted as current expenses; the price was paid in instalments during the term of the contract (from 20 to 40 years) against the current budget; that allowed the public administration to develop projects based on the future current incomes.

Now, some public administrations are turning to the construction also for budgeting grounds; as a consequence of the crisis, the public administration has seen a diminish in the current incomes; the public administration consumes most of the current budget to pay the personnel and social expenditures (leaving little money to pay the instalments of the PPP projects); thus, public administrations must rely on the investment budget and the finance provided by the Government and by the European Union for infrastructures; such finance has to be used for investment expenditures, thus excluding the PPP (as according to the accounting rules, the payment of instalment in the PPP is considered as current expenditures).

The goal now is to achieve structures that allow paying the construction price in instalments after the delivery of the works (against the future investment budget).

This article was written by lawyer Oriol Prosper, a senior associate at the Madrid office of law firm Salans LLP.