Law in transition

Advancing legal reform Spring 2001

Concessions Mobilising private finance for development

A decade of legal transition EBRD’s first General Counsel reflects Rebuilding Yugoslavia’s infrastructure How the concessions regime works Maribor waste water project A case study of concession financing Law in transition

Advancing legal reform Spring 2001

Contents

General Counsel of the EBRD EBRD's legal transition assistance: 10 years of evolution 1 Andre Newburg, first General Counsel of EBRD Emmanuel Maurice Corporate governance: regulating board-level management of enterprises 2 Co-Editors-in-Chief Sarah Worthington, Senior Lecturer in Law, London School of Economics and Political Science Gerard Sanders, David Bernstein Bosnia and Herzegovina's continuing struggle: legal and 11 institutional challenges in the post-Dayton era Focus Editor Francis Delaey, Counsel, EBRD Walid Labadi Overview of Uzbekistan’s Civil Code 16 Ikram Zokirov, Professor of Civil Law, Tashkent Law University The European Bank for Reconstruction and Development (EBRD) is an international institution Production Editor Nodir Akhmedjanov, Postgraduate Student, Nagoya University Law Department whose members comprise 60 countries, the European Community and the European Investment Bank. Anila Gramshi Focus on concessions 19 The EBRD operates in the countries of central and eastern Europe and the Commonwealth A favourable concessions regime: a lender’s perspective 20 of Independent States committed to multiparty democracy, pluralism, and market economies. Consultant Editor and perceptions from transition countries Yasunobu Sato The EBRD’s countries of operations are: Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Walid Labadi, Senior Counsel, and Anila Gramshi, Associate, EBRD Bulgaria, Croatia, Czech Republic, Estonia, FR Yugoslavia, FYR Macedonia, Georgia, Hungary, Anita Ramasastry, Professor of Law, University of Washington Contributing Editors Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Moldova, Poland, Romania, Russian Federation, Slovak Republic, Slovenia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan. Hsianmin Chen, Frederique Dahan, International efforts to promote and harmonise concession law 29 José Angelo Estrella Faria, Legal Officer, UNCITRAL Alexey Kiyashko, Meni Styliadou, Alexei Zverev The EBRD works through the Legal Transition Programme, which is administered by the Office of the Geoffrey Hamilton, Regional Advisor, and Travis D. Coleman, General Counsel, to improve the legal environment of the countries in which the EBRD operates. The Special Assistant, United Nations Economic Commission for Europe Support purpose of the Legal Transition Programme is to foster interest in, and help to define, legal reform Richard Drummond, Export Credit Guarantee Department throughout the region. The EBRD supports this goal by providing or mobilising technical assistance for Sandy Donaldson, Amanda Lillywhite Walid Labadi, Senior Counsel, EBRD specific legal assistance projects which are requested or supported by governments of the region. Anthony Martin, Olivia Oddi, Tabitha Sutcliffe Roger McCormick, Partner, Freshfields Bruckhaus Deringer Legal reform activities focus on the development of the legal rules, institutions and culture Jurgen Voss, Consultant, OECD on which a vibrant market-oriented economy depends. Drawing on the concessions experience of developed jurisdictions: 32 the example of France Antoine Maffei, Partner, and Valérie Hulst, Associate, Law in transition is a publication of the Office of the General Counsel of the EBRD. It is published several times each year and is available in English and Russian. The editors welcome ideas, contributions and letters, De Pardieu Brocas Maffei & Leygonie The Office of the General Counsel but assume no responsibility regarding them. Submissions should be sent to David Bernstein, Office of the General Legal framework for infrastructure projects in FR Yugoslavia 41 Counsel, EBRD, One Exchange Square, London EC2A 2JN, United Kingdom; or [email protected] gratefully acknowledges the generous Dragan Karanovic, Partner, Karanovic & Nikolic The contents of Law in transition are copyrighted and reflect the opinions of the individual authors and do not support of the Government of Japan necessarily reflect the views of the authors’ employers, law firms, the editors, the EBRD’s Office of the General Bulgarian law on concessions 45 in funding the production of this issue Counsel or the EBRD generally. Nothing in the articles should be taken as legal advice. Wayne McArdle, Partner, and Lisa Booth, Solicitor, Paul, Hastings, Janofsky & Walker of Law in transition Stephan Kyutchukov, Partner, Djingov, Gouginski, Kyutchukov & Velichkov © European Bank for Reconstruction and Development, Spring 2001. Implementation of the Romanian concessions law – an update 51 All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, without the written permission of the copyright holder. Such written permission Michel Lequien, Senior Associate, Ashurst Morris Crisp must also be obtained before any part of this publication is stored in a retrieval system of any nature.

Slovenia case study: the Maribor waste-water project 56 European Bank for Reconstruction and Development Christopher Clement-Davies, Partner, and Artem V. Faekov, Associate, Vinson & Elkins One Exchange Square London EC2A 2JN Legal transition developments 61 United Kingdom Tel: +44 20 7338 6000 Legal transition events 65 Fax: +44 20 7338 6100 http://www.ebrd.com

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Ref: 4857 Law in transition, Spring 2001. Andre Newburg, first General Counsel of EBRD 1

EBRD’s legal transition assistance: 10 years of evolution

As the EBRD marks its 10th anniversary in April, its first General Counsel looks back at the Bank’s legal reform efforts over the past decade and emphasises the critical role that legal reform plays in the political and economic transition of the EBRD’s countries of operations.

In the past decade the Office of the General governments of the EBRD’s countries of international community’s emphasis on Counsel of the EBRD has focused on three operations for various types of assistance in international legal standards as a key to crises principal areas: support of the EBRD’s invest- their legal reform efforts. In 1995, John prevention should motivate continued legal ment, lending and treasury operations; policy Taylor, my successor as General Counsel, reform. A key concern for all the EBRD’s and institutional issues, including inter- institutionalised the EBRD’s law reform work countries of operations is how to attract their pretation of the Agreement Establishing the with the creation of a Legal Transition Team share of the large flows of private capital to Bank; and helping the Bank’s countries of for the specific purpose of delivering legal help meet the region’s infrastructure needs. In operations in their efforts to create the modern technical assistance in accordance with a this context, the transition countries are legal framework necessary for their economic defined programme. In 1998, Law in trans- recognising the importance of creating a and political transition. ition was transformed into a legal journal, proper legal foundation for the public-private with in-depth articles on key aspects of the partnerships that can mobilise this private From its earliest days, the Bank recognised the region’s legal issues. capital. Concession laws and transparent, fundamental role of a sound and effective legal competitive tender procedures, the focus of system in the transformation of the institutions The present General Counsel, Emmanuel this issue of Law in transition, are essential to and societies of the countries of central and Maurice, has taken the Legal Transition this foundation. eastern Europe in accordance with the Bank’s Programme a step further by mainstreaming mandate to assist countries “committed to and legal reform into the strategies and policies of I am glad to see that what was started a applying the principles of multiparty demo- the EBRD’s investment operations. The decade ago with an effort to coordinate legal cracy, pluralism and market economics”. As programme now focuses on four key activ- reform efforts has grown to become a core early as 1991, within months of the Bank’s ities: legal assessments, international stand- component of the Bank’s activities and that the inauguration, we convened at the Bank’s head- ard setting, legal reform projects and out- EBRD’s Legal Transition Programme and Law quarters a colloquium of representatives of reach. This seeks to ensure that the lessons in transition have become an important voice international institutions and leading technical learned from legal reform efforts are taken for legal reform in the region. As the financial assistance providers to assess the resources into account in the EBRD’s investment crises in Russia and other emerging markets available for law reform and to consider means activities, as well as in ongoing and future have demonstrated, we ignore law reform and of cooperation between providers. In 1992 we legal transition projects. legal institution-building at our peril. Legal commenced publication of Law in transition, a reform must remain a key component of newsletter on legal cooperation and training, in Ten years is a short period in the transition development and transition assistance if we an effort to publicise information on legal process and the EBRD’s legal transition work are to help countries to achieve sustainable projects, programmes and developments in the is, of course, far from complete. Major chall- and equitable economic growth and to ensure region. Also in 1992, following a legal round- enges still lie ahead for each of its countries of that democratic values take deep root. table at the EBRD’s first annual meeting in operations. For the accession countries, har- Budapest, we began to develop a standard for monisation with European Union directives modern secured transactions laws in the and regulations continues to be a priority, but region. The Model Law on Secured Transactions additional resources will need to be directed was subsequently published in 1994. towards the building of more effective imple- menting institutions, particularly the judiciary. During these early years, we were faced with For other transition countries, the focus on a growing number of requests from the improving their investment climate and the Foreword 2 Sarah Worthington, Senior Lecturer in Law, London School of Economics and Political Science*

Corporate governance: regulating board-level management of enterprises

Transition countries wishing to attract either capital or business need to ensure that potential investors have confidence in the market. Part of that confidence comes from knowing that the country’s companies are well managed and that there is a legal regime in place that can and will insist that good management practices are enforced. How transition countries select and implement such a regulatory regime varies enormously. However, they all stand to learn from the successes and failures of more developed jurisdictions. The discussion here draws on the experience of the United Kingdom, particularly in relation to boards of directors. Law in transition 3

Corporate governance is not a term of art. It social and even political power.1 Few if any 1 Of the world’s 100 largest economies, 50 are encompasses all of the various mechanisms individuals are left untouched by their act- companies and 50 are states. designed to ensure that a corporate organis- ivities. The compelling conclusion is that 2 In the United Kingdom alone, the past ten years have seen publication of the Cadbury, Greenbury ation pursues only those objectives for which it better-managed companies will produce ben- and Hampel Reports (all reports from government- was set up, and pursues them in a way which efits for all; hence the prevailing focus on sponsored private committees). The proposals from embodies best business practices. Here the corporate management, especially the corp- these committees are now enshrined in the Combined Code (Appendix to the London Stock focus is solely on the legal regulation of orate management function provided by Exchange Listing Rules). The Law Commission corporate management, especially boards of boards of directors.2 This stance views produced a report on company directors: Law directors. It excludes consideration of the corporate management principally through Commission, Company Directors: Regulating Conflicts of Interest and Formulating a Statement of myriad of other options for legal and non-legal the eyes of the state; it explains why the state Duties (No. 261, 1999). The Department of Trade regulation of corporate governance. This is interested in regulating companies. The and Industry (DTI) announced a comprehensive narrow focus has been adopted in the light of state can implement its various regulatory review of the whole of company law (DTI, Modern Company Law for a Competitive Economy (1998)) the current attention being devoted to this area objectives in a number of ways. One of the and the Company Law Review Steering Group has, by governments and financial markets in most common is to enact general laws regu- accordingly, produced a number of consultation major Western democracies. This degree of lating the activities of companies. Accord- documents, including Modern Company Law for a Competitive Economy: The Strategic Framework attention suggests that the area is – or certain- ingly, companies are invariably obliged to (Feb. 1999); Modern Company Law for a Compet- ly will become – equally important for econ- comply with the state’s laws governing issues itive Economy: Developing the Framework (March omies in transition. Moreover, the process of related to employment, consumer protection, 2000); and, most recently, Modern Company Law for a Competitive Economy: Completing the self-assessment and reform being undertaken securities regulation, environmental protect- Structure (Nov. 2000). in Western democracies can perhaps save ion and so forth. Of course, these laws will 3 An insight articulated by A. A. Berle and G. C. emerging economies from mistakes already stand for nothing unless the state also has in Means, The Modern Corporation and Private made elsewhere. place sound enforcement mechanisms for Property (rev.ed., 1986). ensuring adequate compliance with them. Different Western democracies have them- selves opted for quite different forms of The regulation of board-level corporate a balanced regime of protection to these regulation in this area. Here the focus is on activity also has a much narrower and less vulnerable groups. the UK (or Anglo-American) approach. By ambitious objective. This is the protection of definition, this is a model forged from lib- individuals who have an immediate vested In short, the functioning of a company’s board eral, capitalist, free-market practices. Yet interest in the success of the company. The of directors is perceived as critical. It is seen this model has not survived without incorp- primary focus of this concern has always as the crucial ingredient affecting the wealth orating and accommodating lessons learned been the shareholders. With large companies, and welfare not only of the companies them- from civil law jurisdictions, nor without and even with many smaller ones, the selves and the individuals directly associated adopting more interventionist practices in shareholders are not directly involved in the with the company, but also the individuals the interests of protecting both the markets management of the company: although the only remotely associated with the enterprise, and individual players. company is “owned” by the shareholders, it and at a more general level the state itself. is “controlled” by the board of directors.3 Companies themselves are certainly aware of This places the shareholders in a vulnerable this. Few if any of the major corporate players The importance of position, exposing them to the vagaries of fail to devote time and energy to developing regulating board-level board activities. The position is complicated their own corporate governance regimes. They corporate management still further because one of the central tenets see the importance of these regimes reflected of company decision-making is “majority in internal personnel performance as well as The reasons why Western democracies are rule”. This has the potential to enable in external relationships. currently subjecting board-level corporate majority shareholders to silence dissenting management to increasingly intense scrutiny minorities who express dissatisfaction with Because of this crucial and central role, all are not hard to divine. The corporate form the current board. But shareholders are not emerging economies – like all Western dem- has become the preferred mechanism for the only group exposed to potential abuse by ocracies – are likely to be legitimately con- conducting business, whatever the size of the deficient board-level management. cerned about the regulation of boards of enterprise. Companies, both large and small, Employees and corporate creditors are also directors from both the state and the individ- contribute enormously to the economic and vulnerable. Accordingly, another objective in ual perspectives. A sound financial and social well-being of a country. Indeed, the the regulation of boards of directors is to offer capital market demands confidence in the largest companies wield enormous economic, Law in transition 4

state’s ability to regulate and enforce its laws; recognised that if Germany, for example, warned is forearmed”, and the various in addition, investors need to know that their imported the United Kingdom’s corporate regimes are all designed to give appropriate interests are protected from abuse by self- governance practices the practical outcome information to the relevant interested parties. interested or uninterested boards of directors. would not be the same as in this country: The Organisation for Economic Cooperation Moreover, it is well recognised that new, fast- German practices would ensure a uniquely and Development (OECD) Principles of moving markets provide both incentives and German outcome.4 It follows that when Corporate Governance recognise the central opportunities for deficient – and even fraud- transition economies are devising their own importance of effective and efficient ulent – management practices. In these corporate governance strategies, they too need disclosure regimes.6 markets, effective, and visibly effective, to be sensitive to context. There are many mechanisms for the regulation of board-level models to choose from, and many ways of Disclosure regimes can be implemented in management are critical. adapting and refining them. various guises.7 The stock exchanges of most countries have mandatory rules imposing As well as country differences, corporate continuing general disclosure obligations,8 and Different options for the governance regimes need to be sensitive to specific disclosure obligations in relation to regulation of boards of directors company differences. The same mechanisms new offerings of securities; the US regime is If the stated aim is to raise the standard of are unlikely to work for both large multi- perhaps the most demanding. The aim of these board-level management within every reg- nationals and small local businesses. Further- regimes is to maintain confidence in the mar- istered company, then the law seems to have more, once all these country and company ket, and to create a level playing-field for open to it three broad routes: imposing differences have been accommodated every investors and other market participants. The demanding legal duties upon directors and regulatory regime needs to ensure that its potential sanctions for non-compliance include backing those duties by efficient and effective specific rules are clear, comprehensive and de-listing, a very effective threat which creates sanctions mechanisms; compelling disclosure comprehensible, and that any breaches will its own incentive for compliance. of companies’ and directors’ activities; and be easily and efficiently remedied. requiring compliance with particular decision- Whether listed or not, all companies are also making structures within the company. All required to provide the general public with Compulsory disclosure regimes three routes are integral to the most effective full, accurate and verified information about functioning of the law in this area, although Whatever the difficulties in articulating the certain aspects of the company’s operations. they are listed here in their perceived order of precise obligations which ought to be imposed The aim is to put those who are about to invest importance. Of course, non-legal pressures on directors, the associated benefits of com- in the company – in any way – in a position to also contribute enormously to the raising – or pulsory disclosure are widely and enthusiast- assess the company’s business before they lowering – of corporate governance standards. ically accepted. Instinctively it is appreciated commit themselves, and to enable those who Market pressures, including the threat of bad that if both companies and directors are have already invested to keep track of the publicity, shareholder and general public obliged to make full and formal disclosure of company’s continuing performance. In the activism, and domestic and international their various activities and functions then the United Kingdom this form of public disclosure competition, can all provide incentives for occurrence of abuses is likely to be mini- is made by registering certain documents at particular modes of board behaviour, some mised. The fear of discovery is a powerful Companies House. Apart from the initial desirable, others not. motivator. Moreover, any breaches which do information provided when the company is occur are more likely to be pursued and first registered, the company is obliged to file Certain issues are addressed in more detail remedied. If close supervision by independent annual returns9 which include the company’s later, but it ought to be clear from the outset monitors (e.g., by the stock exchange and the annual accounts (prepared to conform to that if regulation is to be effective, then it must securities market regulator, by non-executive specified accounting standards), the directors’ recognise national business practices and directors, and perhaps also by powerful report (containing, among other matters, a fair expectations. Different countries have different institutional shareholders) is added to this review by the directors of the development of ways of doing things. Among Western econ- disclosure regime, then the risk of breach is the business of the company and its subsid- omies it is well-recognised that Japan and likely to fall still further. Compulsory dis- iaries during the financial year and their Germany have quite different corporate closure is also likely to inspire “good” behav- position at the end of it, and the directors’ governance regimes from the United Kingdom iour, not just deter the bad. These simple ideas recommendation for dividend payment),10 and and the United States. Notwithstanding this, underpin much of the input of corporate the auditor’s report (confirming that the all four countries have strong and successful governance reformers in the United Kingdom accounts have been prepared properly and economies. Moreover, it is increasingly this decade.5 The general idea is that “fore- give a true and fair view of the company’s Law in transition 5

position, and that the directors’ report is United Kingdom and the United States are 4 See, e.g., J. Kay and A. Silberston, “Corporate consistent with company operations).11 regarded as tolerably well enforced, the Governance”, National Institute Economic Review, Vol. 84 (1995). European experience confirms that enforce- 5 Supra note 3. Current UK reform proposals are set to in- ment can prove problematic.15 6 OECD, Principles of Corporate Governance, SG/CG crease still further the disclosure required (99)5 1999 (available at www.oecd.org), Principle IV, from directors. Directors of all public and states that ‘The corporate governance framework Regulation of decision-making large private12 companies will be required to should ensure that timely and accurate disclosure is structures within the company made on all material matters regarding the corpor- produce a mandatory Operating and Financial ation, including the financial situation, performance, Report (OFR) as part of the company’s annual There is a widely held perception that some of ownership, and governance of the company.’ Also report. The OFR is designed to be a full acc- the problems associated with corporate man- see Principle V on the responsibilities of the board, and the Annotations to both these Principles. ount by the directors of the performance and agement can be traced back to the structure of 7 See P. L. Davies, Gower’s Principles of Modern direction of the company’s business, including the board. For example, if the board of dir- Company Law, chs 19-21 (6th ed., 1997). a review of achievements, trends and strategic ectors has the power to determine board 8 In the United Kingdom these obligations are direction. In addition, the OFR is to include a remuneration, there is an inevitable general contained in the Stock Exchange’s Listing Rules. report on the company’s wider relationships, suspicion that excessive salaries may be paid. See especially chs 9-16. risks and opportunities, and social and envir- The biases can also be more subtle. In the 9 Companies Act 1985, Part XI, ch III. onmental impacts, where these are relevant to United Kingdom the shareholders have the 10Companies Act 1985 sec.s 234, 234A. Schedule 7 to the Act contains a long list of specific matters 13 16 an understanding of the business. This prop- right to elect and remove the directors. A to be addressed in the directors’ report. osal for a mandatory OFR marks a formal reasonable assumption in these circumstances 11Companies Act 1985, Part VII. recognition of the increasing interest of a wide is that directors may be easily persuaded to 12The suggested level is an annual turnover of range of stakeholders in the greater public make corporate decisions which favour the £500 million. disclosure of corporate functions and activ- shareholders to the detriment of other 13Company Law Review Steering Group, Modern ities. The OECD Principles of Corporate interested groups, especially the employees. Company Law for a Competitive Economy: The Strategic Framework (Feb. 1999), paras 2.16- 14 Governance reflect a similar objective. Even within the general body of shareholders, 2.18; Modern Company Law for a Competitive minority shareholders may feel that their Economy: Completing the Structure (Nov. 2000), Clearly there is a powerful and universal interests are overshadowed by the greater paras 3.1-3.4, 3.32-3.42. intuitive allegiance to the value of disclosure influence of the better-represented majority. 14OECD, Principles of Corporate Governance, Supra note 6, Annotations to Principle IV A.2 suggest that regimes; so much so that it is inconceivable Since one of the goals of corporate governance ‘in addition to commercial objectives, companies that they could be done away with. Never- best practice is to ensure the fair treatment of are encouraged to disclose policies relating to theless, one of the current challenges of interested groups,17 the issue demands a business ethics, the environment and other public policy commitments.’ Also see Principle III on the modern law reformers is to balance the per- considered response. role of stakeholders in corporate governance. ceived benefits of a system of compulsory 15Responding to criticism of European transparency disclosure against the mounting costs of For a long time Anglo-American corporate law regimes, the European Commission passed a compliance. Already smaller companies have did little or nothing. It left interested parties to Transparency Directive in 1993. However, it is widely conceded that this Directive has achieved to comply with a reduced spectrum of oblig- negotiate for better representation if they little, if anything. ations. In addition, it is recognised that greater could, and, if they could not, to seek out the 16This right of removal is given by statute, and efforts are needed to ensure that the inform- few legal remedies available for provable operates regardless of any private arrangements ation provided is intelligible to those it is injustices.18 German19 corporate law was to the contrary: Companies Act 1985, sec. 303. intended to assist. The battle is between brev- always perceived to provide a starkly contrast- 17See OECD, Principles of Corporate Governance, supra, note 6. ity and simplicity on the one hand, and ing model. It provided for a two-tier board (a 18The statutory “unfair prejudice” provisions were accuracy on the other. As well as these cost- management board and a supervisory board), designed to afford relief in the worst of these cases, benefit issues relating to the form and content with compulsory employee representation on but the relevant sections have been restrictively of mandatory disclosure, transition countries the latter20 and, often, in practice, creditor interpreted by the courts, so that shareholders in public companies are now unlikely to be successful drafting their own regimes need to address the representation as well (admittedly restricted to in pursuing relief: Companies Act 1985, sec. 459. issue of effective enforcement. A well-drafted large creditors, such as banks). The percep- 19And, similarly, Austrian, Belgian and Netherlands law. scheme on the statute books which is routinely tion, at least from the outside, was that such a 20Contrast this with the very weak UK legislative ignored or evaded by companies and their structure was likely to produce a more bal- provision simply requiring board of directors to boards of directors is probably worse for anced treatment of the various vested interests “have regard” to the interests of the company’s employees: Companies Act 1985, sec. 309. market confidence than having no scheme at in the company, and yet the United Kingdom all. Although the disclosure regimes of the was not keen to adopt a similar framework.21 Law in transition 6

Now, however, matters have changed a little – although only a little – in the United Kingdom. There are still no statutory provisions man- dating particular forms of board structure. Instead, voluntary codes of practice have been introduced for public companies. These codes were formulated in response to several major corporate collapses in the United Kingdom in the 1980s and 1990s. The collapses were regarded as potentially damaging to the rep- utation of national financial markets, and several committees were formed to address specific issues. Their work resulted in the Cadbury, Greenbury and Hampel reports, all produced in the 1990s and eventually synth- esised to generate a Combined Code, append- ed to the London Stock Exchange Listing

22 Rules. Although this is merely a code of best United Kingdom large companies are typically things will be for all, it is assumed. Accord- practice, not a mandatory set of obligations, widely held; elsewhere in the developed world, ingly, directors in Western economies are now listed companies are, nevertheless, required to such companies generally have a dominant subjected to a raft of legal obligations designed declare in their annual reports the extent to shareholder, be it an individual or the state or to improve their contributions to the manage- which they comply with the guidelines and to a bank.24 This difference profoundly influences ment of the corporate enterprise.26 explain any non-compliance. Compliance the issues to be addressed. Where companies therefore tends to be high: there is a percep- are closely held, the emphasis typically shifts One of the principal challenges in this area is tion that otherwise the company will need to from shareholder-focused governance instit- to balance the desire to impose high stand- justify something that is “wrong”. As well as utions to a broader set of devices for managing ards of conduct on directors against the risk the introduction of the Combined Code, there the issues of ownership and control. For ex- of deterring potentially good directors from is also statutory provision for certain decisions ample, in many countries where companies accepting the role, thereby stifling successful to be approved by the shareholders in general are closely held, Germany aside,25 legislators and beneficial entrepreneurial activity. meeting before the company can commit itself have found it unnecessary to specifically reg- Another is to articulate in a simple, compre- to the proposed course of action. The issues ulate the composition of boards of directors. hensible and comprehensive way precisely mandated for this form of special consent are The dominant shareholder is seen as providing what is expected of directors. The duties those where it seems most likely that the an effective monitoring function. Transition described below apply to all directors of all directors (whatever the board structure) might countries may feel this is a more appropriate companies, regardless of the size of the act in a self-interested way to the detriment of model, although the pattern of shareholder company, the type of business it conducts, the general good of the company and its ownership does appear to be diversifying even and the age and experience of its managers. shareholders. These include any substantial in countries where the closely held company However, clearly this does not and cannot property transactions between the company has been the traditional model. mean that precisely the same is expected of and its directors, as well as certain issues directors managing multi-national corporate 23 related to remuneration of the directors. giants and directors managing the corner Specific regulation of grocery store. The importance of corporate management: directors’ duties Transition countries contemplating the poten- context is also well recognised in the OECD tial advantages in regulating the structure and Since the objective is to raise the standard of Principles of Corporate Governance. There, composition of boards of directors will appre- board-level management, the regulatory frame- unlike the United Kingdom the responsib- ciate that any regulation must be specifically work should provide for the legal imposition of ilities of boards of directors are set out very designed to address the principal pressure minimum standards of conduct to which dir- succinctly. All of the matters which, in the points in their own system. These pressure ectors must adhere. The higher these mini- United Kingdom are regarded as critical are points are largely determined by the dominant mum standards, the better the general level of articulated in one provision and one sub- legal structure of the companies being reg- corporate governance. And the better the gen- provision.27 In considering the UK regime, it ulated. In both the United States and the eral level of corporate governance, the better is useful to divide the relevant obligations Law in transition 7

imposed on directors into four broad but First, it is quite difficult to say what sort of 21In the late 1970s the European Commission em- distinct classes. conduct is negligent when directors are carry- barked on an extensive programme of harmon- isation, as permitted by the Treaty of Rome, Article ing out their management functions, at least 54(3)(g). The focus has been directed largely at when the conduct is neither grossly negligent public companies and the degree of success has i) Formal restrictions on nor fraudulent. Companies are set up to take been mixed. For example, no agreement has yet directors’ activities been reached on the Draft Fifth Directive on the risks; directors are employed because they are structure of public companies. The German model, The first class comprises obligations requiring good at this – they are entrepreneurs. The fact which formed the basis for the initial proposals on strict compliance with specific restrictions on that a company makes a loss, or even fails this Directive, failed to command support and has now been revised to provide a much-watered-down directors’ conduct. For example, in the United totally, is not of itself indicative that its direct- menu of options.

Kingdom the Companies Act 1985 demands ors have been negligent in the management of 22These guidelines suggest, for example, that boards that directors perform certain activities28 and the company’s affairs. This has led to calls in of public companies should contain a greater pro- prohibits them from engaging in others.29 The the United Kingdom for the introduction of a portion of independent non-executive directors (in the United States such directors typically form over company’s own corporate constitution (in the statutory ‘business judgement rule’, as oper- half of the board), and that these independent non- United Kingdom the memorandum and art- ates in the United States and several other executive directors should be in the majority on the icles) may impose similar types of restriction countries. Such a rule would confirm that sub-committees responsible for determining matters related to director nomination, director remuneration which are particular to the company’s needs. directors who make loss-generating decisions and company audit.

Directors are required to adhere strictly to reasonably, after collecting all the appropriate 23See Companies Act 1985, Part X. these statutory and constitutional require- evidence, and after appropriate consultation 24R. LaPorta, F. Lopez-de-Silanes and A. Shleifer, ments, and to any similar terms in their and evaluation, will not be found guilty of “Corporate Ownership Around the World”, Journal personal contracts of appointment. In most negligence in the management of the comp- of Finance, Vol. 54, p.471 (1999). Banks are seen as having a particularly important role in corporate cases, breach of these requirements exposes any, and so will not be held liable to compen- governance in Western Europe, but not elsewhere the director to claims for compensation from sate the company for the losses suffered. To in the developed world. the company for any loss the company may date the United Kingdom has resisted the 25The Netherlands, Belgium and Austria also provide have suffered as a consequence. Where the pressure, rightly it seems. There appears to be for employee representation on supervisory boards. In the United Kingdom and the United States such breach is a breach of the statutory regime, no need for such a rule, since the normal representation as there is generally arises from criminal sanctions may be imposed. However, rules of negligence clearly admit that damage employee share ownership schemes. directors are rarely pursued for breaches, with and harm are not invariably caused by neglig- 26In the United Kingdom most but not all of these one significant and important exception: where ence, a director who offered proof of the specific obligations applying to directors are imposed by the general law, not by explicit the breach relates to disclosure requirements matters outlined above would clearly not be provisions in the Companies Act 1985. imposed by statute. These disclosure require- found negligent, even in jurisdictions without 27OECD, Principles of Corporate Governance, Principle ments are regarded as so important that a business judgement rule in place. V A. (“Board members should act on a fully informed directors can be disqualified for persistent basis, in good faith, with due diligence and care, and in the best interests of the company and its share- 30 failures in this area. The other related issue is that the standard of holders”) and V D.4 (“The Board should … [monitor care imposed is commonly perceived as too and manage] potential conflicts of interest of low to be effective in regulating directors. management, board members and shareholders, ii) Directors’ duties of care and skill including misuse of corporate assets and abuse in Shareholders suffer; and, if the company fails, related party transactions”). 31 Directors must exercise due care and skill in creditors suffer too. Historically, directors 28See the reporting requirements noted earlier: carrying out their management functions. This were usually part-time, non-executive mem- Companies Act 1985, Part XI, Ch. III and Part VII, duty is simply one manifestation of the general bers of the board, not expected to devote much sec.s 234-234A. duty of care imposed on all individuals in of their time to company business32 and not 29Companies Act 1985, Part X. conducting their activities. If an individual is expected to bring any special skill to bear on 30See the Company Directors Disqualification Act 1986. Disqualification can, of course, be ordered negligent and thereby causes harm to some- their deliberations. The old cases reflected for many other forms of failure by directors. one, then the law requires the individual to this: few directors were ever found liable in 31The company’s creditors in fact received better pro- pay compensation. All of this is straight- negligence for the corporate losses which tection, by statutory fiat, some years earlier than the forward, and there would seem to be no reason resulted from what appeared to be clear mis- shareholders: see Insolvency Act 1986, sec. 214. to exempt directors from the general operation management of the company’s business.33 32See the specific reference in the OECD Principles to this matter; OECD, Principles of Corporate of the law. However, two specific matters have Judges and commentators seemed unwilling or Governance, supra note 6, Principle V E2 (“Board caused concern in the corporate context for unable to recognise that this old legal prin- members should devote sufficient time to their much of the history of this duty. ciple demanding that directors exercise care responsibilities”). and skill – and its modern counterpart in the 33See e.g., Re City Equitable Fire Ins Co [1925] Ch. 407. Law in transition 8

law of negligence – was capable of adapting to courts). This divide was initiated when the It is difficult to advise transition countries on modern circumstances and assumptions to King gave his Chancellor jurisdiction to deter- the benefits associated with incorporating this produce a result in conformity with contem- mine appeals from the common law courts particular duty into their corporate governance porary commercial expectations.34 Within the brought by petitioners dissatisfied with the rules and the best manner of any such incor- United Kingdom judiciary only Judge treatment they had received. Typically the poration. In the United Kingdom the current Hoffmann (now Lord Hoffmann) was prepared petitioners would plead special circumstances reform proposals advocate adoption of a stat- to take this seemingly radical step, and insist which made it unjust, or unconscionable, for utory statement of the rule, one which insists that modern circumstances now required more the other party to rely on his or her strict legal that “a director must exercise his powers hon- of directors and, in particular, that these (common law) rights. If the Chancellor was estly and for proper purposes”.42 This stark requirements would be assessed objectively.35 moved to do so, he would give the petitioner a statutory statement offers no specific guidance Now, however, the current law reform pro- remedy which effectively prevented the def- to the courts; courts will still need to make gramme proposes to introduce a statutory endant from insisting on his strict legal rights. their own assessments of what should count as statement of the duty confirming this view.36 Its The basis for such intervention was “equity” a breach. If this degree of judicial discretion effect will be to ensure that directors adhere to or “conscience”. This broad-ranging discretion is unacceptable in transition countries, then a minimum, objectively assessed, reasonable gradually hardened into its own rigid rules, an alternative approach is to recognise that standard of care. If directors have even greater although the policy issues underpinning these the duty finds its most important application skills or knowledge than this minimum rules remain the same today. in the context of corporate take-overs; in requirement, then they will be expected to use other circumstances, affected parties can those greater skills for the benefit of the The equitable duty to act for proper purposes often rely on alternative protective regimes. company and the standard of care in those has application where the directors have power Transition countries might therefore consider circumstances will be assessed subjectively.37 to manage the company, but they use that it preferable to insert specific provisions power for unacceptable ends. Typical instances limiting the discretionary powers of directors are where the directors have power to issue to advance or inhibit potential take-over bids iii) Directors’ duty to act in good faith shares, but use that power to ensure their own for the company. and for proper purposes continued role in the management of the com- This next duty often seems less intelligible pany, or where directors use their position on iv) Directors’ duties of loyalty – fiduciary outside common law jurisdictions than within the board to ensure that the company enters duties not to profit them, yet the more highly developed and into an engagement for the benefit of a third widely accepted civil law conception of a duty party rather than for the benefit of the com- This final duty imposed on directors is to act in good faith covers the same territory in pany. In such circumstances the directors another equitable duty, but also a fiduciary a different manner. In common law systems, clearly have power to issue shares or to commit duty. Equity typically saw fit to impose this duty requires directors to act honestly in the company to an engagement with a third onerous obligations on anybody who had the interests of the company, and to use their party, but because of the specific circum- undertaken to exercise a discretion in man- powers solely for proper purposes. At first stances surrounding the deal, this duty allows aging the affairs of another. The gist of the glance this duty would seem to ask little of the company (usually via its shareholders) to obligation is to require loyalty. In the corp- directors that more positive duties could not insist that the directors cannot rely on their orate context this fiduciary duty of loyalty is demand equally well; moreover, it would seem strict legal rights to drive the arrangement designed to deter directors from acting in inordinately difficult to prove a breach of the forward.39 The usual remedy is to order an ways which might prejudice the interests of duty since it appears to demand an insight into injunction to prevent the directors doing this, their company. Directors are not allowed to the mind and motivations of the director.38 On or to make an order undoing things that have favour their own interests over their duty to these grounds the duty would seem to have already been done (so long as this does not the company when the two are in conflict; nor little to recommend it. However, to understand affect the rights of any innocent parties to the are they allowed to use their positions to the duty and its limited function it is necess- arrangement).40 The court does not, and cannot, make a secret profit. If they do, then any ary to go back to its roots. tell the directors how their powers ought to profits they make must be handed over to the have been exercised; the court does not impose company. This disgorgement remedy is a The duty is equitable; it is not a common law its own management views on the company’s powerful disincentive to breach. duty. In the United Kingdom there is an his- operations. As a result, this duty cannot be torical jurisdictional divide between the Courts used to support an obligation imposed on These fiduciary rules are necessary because, of the King’s Bench (the common law courts) directors to act in the interests of the share- in granting directors the power to protect and and the Courts of Chancery (the Chancellor’s holders, or any other stakeholder group.41 advance the interests of their company, direct- Law in transition 9

ors are also necessarily given the opportunity between acceptable and unacceptable activity 34But see S. Worthington, “The Duty to Monitor: A to do the exact opposite. The company cannot by directors. The same is true of the OECD Modern View of the Director’s Duty of Care”, in F. Patfield, ed., Perspectives on Company Law: 2, be adequately protected from this risk by the Principles of Corporate Governance. These do ch. 11 (1997) and the references cited there. laws of contract, tort or abuse of power rules. not specifically identify this form of disloyal 35Re D’Jan of London [1994] 1 BCLC 561 The fiduciary duty of loyalty is designed to fill activity as unacceptable; instead, they simply (Hoffmann J). this void. It is the breach most often alleged require disclosure of the relevant facts to the 36The format will follow that of Insolvency Act 1986 when a company decides to sue its directors, shareholders.47 To Anglo-American eyes, this sec. 214, although with simplified wording. and it is easy to see why. An appearance of does not seem to go far enough unless there is 37The OECD Principles of Corporate Governance do not make specific mention of directors’ duties of disloyalty, rather than active disloyalty, is a remedy open to shareholders who object to care and skill – perhaps regarding theses duties sufficient to constitute a fiduciary breach; the the conduct revealed to them in accordance as encompassed by the general law – but the director’s carefulness or good faith are irrel- with this disclosure principle. And if a remedy thrust of Principle V, dealing with the respons- ibilities of the board, makes it clear that careful evant. Moreover, the company need not have is to be made available, then the difficulties of and considered management of corporations is suffered any loss, but it can nevertheless claim defining the boundaries between acceptable internationally regarded as essential to corporate all the profits gleaned by the defaulting and unacceptable conduct will need to be governance best practices. director from the breach.43 addressed. It seems impossible to do this by 38And in practice this has proved to be the case: it is inordinately difficult to prove a breach unless no statutory statement of an absolute rule; the reasonable director could have acted in such a It is clear from this that the duty of loyalty is huge variety of possible fact patterns make it fashion except for improper purposes, or unless about proscriptive rules, not prescriptive ones. inevitable that the courts will have to exercise there is clear evidence of such a purpose. Never- theless, the duty still serves an important function. The duty demands self-denial: certain attract- discretion. But a regime which allows 39See e.g., Bamford v. Bamford [1970] 1 Ch 212 ive opportunities are open to all bar the direc- breaches of the law to be assessed by a judi- (CA); Howard Smith Ltd v. Ampol Petroleum Ltd tor, unless, of course, the company grants its ciary exercising discretion is clearly only [1974] AC 821 (PC). fully informed consent. The danger in allowing acceptable if the judiciary commands the 40It is not clear whether defaulting directors can be otherwise is that the director will be swayed by confidence of the country’s citizens. made personally liable for any losses the company may have suffered as a result of the arrangement: 44 personal interest rather than by duty. When see S. Worthington, “Corporate Governance: the policy behind the rule is considered, These, in outline, are the four principal Remedying and Ratifying Directors’ Duties” 116 certain situations are clearly “risky”: for duties owed by directors to the companies LQR (2000). example, a director’s use of corporate confid- they manage. When transition countries are 41See the many writings on the “stakeholder” debate. For example, P. Goldenberg, “Shareholders v ential information for personal gain; or trans- considering the merits of adopting these four Stakeholders: The Bogus Argument”, Company actions between the company and one of its duties in their own legislative regimes, the Lawyer, Vol. 34 (1998); P. Ireland, “Corporate directors. However, the difficulty is to find a UK experience suggests that the first two Governance, Stakeholding and the Company: Towards a Less Degenerate Capitalism”, Journal of Law and balance between compelling directors to act duties – the duty of strict compliance and the Society, Vol. 23, p. 287 (1996); J. Parkinson, exclusively for the benefit of the company by duty to act with care and skill – are relatively Corporate Power and Responsibility (1993). denying them the possibility of taking a per- easily incorporated into statute. The second 42Company Law Review Steering Group, Modern sonal benefit from any available opportunities two duties – the duty to act honestly and for Company Law for a Competitive Economy: The Strategic Framework (Feb. 1999), para. 3.40. and allowing the most productive and efficient proper purposes and the duty to act loyally – 43Regal (Hastings) Ltd v. Gulliver [1967] 2 A.C. – but fair – use of resources by all the players are not. Yet these second two duties appear 134n, at pp.144-5 per Lord Russell. in the market. This tension is clear in judicial more important in promoting confidence in 44Bray v. Ford [1896] A.C. 44, at pp.51-2 per statements of the duty. How to define these the corporate governance regime. These Lord Herschell. boundaries has been a major concern of duties aim to limit the potential for directors 45See e.g., R. P. Austin, “Fiduciary Accountability for fiduciary law.45 to abuse the enormous discretionary power Business Opportunities”, in P. D. Finn, ed., Equity and Commercial Relationships ch.6 (1987); G. which they wield. Jones, “Unjust Enrichment and the Fiduciary’s The current UK reform proposals really pro- Duty of Loyalty” (1968) 86 L.Q.R. 472; Peso-Silver vide little of assistance to transitional coun- Mines Ltd v. Cropper [1966] S.C.R. 673, (1966) Regulation of boards of 58 D.L.R. (2d) 1 (SCt Canada). tries in dealing with these practical diffi- directors: enforcement 46See Company Law Review Steering Group, Modern culties. Although there is a proposal for a mechanisms Company Law for a Competitive Economy: Develop- statutory statement of the relevant duty, the ing the Framework (March 2000), para 3.40. statement affords no assistance in addressing As already noted, a regulatory regime will not 47OECD, Principles of Corporate Governance, supra, the critical difficulties identified here.46 The be successful unless it has efficient and eff- note 6, Principle II C. judiciary will still be left with precisely the ective enforcement mechanisms. By and large same problems in judging the boundaries the corporate governance duties imposed on Law in transition 10

directors are duties owed solely to the com- It is universally recognised that even the best 48This is known as “the rule in Foss v Harbottle”, pany; only the company has the right to sue for designed regulatory rules will be worthless in (1843) 2 Hare 461. their breach. This can be problematic if the improving corporate governance if the rules 49Company Law Review Steering Group, Modern Company Law for a Competitive Economy: wrongdoing directors are themselves in control are not effectively enforced. Effective enforce- Developing the Framework, paras 4.129-4.139 of the company. The shareholders must then ment demands a properly functioning, cred- (March 2000), relying on the earlier work of the be given some mechanism to obtain a remedy ible, national civil and criminal justice system. Law Commission, Shareholders’ Remedies, Law Com No 246, Part 6. for the wrongs done to the company. The UK Law on the statute books which is not trans- 50This is not addressed here, but the greatest system has, at present, a very arcane system of lated into law in practice counts as nothing. In disincentive to action by shareholders is the common law regulation of this issue, which is truth, this must often be the difficult starting- burden of legal costs. Various mechanisms for designed to protect companies from unwarr- point for emerging economies and the goal for reducing this disincentive have been mooted, but none adopted. anted interference in the proper management transition economies. Reforms focusing on 51Clearly the state, too, has an interest in some of the company, but to allow wrongs to be enforcement are recognised as often both more parts of this governance regime. It, too, needs to remedied effectively.48 However, it appears that important and more difficult than reforms be in a position to monitor activity and pursue this, too, is to be replaced by a statutory focusing on changes to the letter of the law. wrongdoers, imposing disqualification orders and criminal sanctions where appropriate. regime for a derivative action in an effort to 52The German model is illustrative. It is recognised enhance the enforcement mechanisms in this Conclusions as having weak shareholder protection laws, but area.49 Transition countries contemplating a these are seen as balanced by strict competition similar statutory provision need to be sensitive Corporate governance covers an enormous policies, far-reaching labour-participation laws, two- tier board structures favouring extensive to the potential damage to corporate activity field. It involves the full set of relationships managerial networks, and tax laws favouring that can be caused by over-active litigious between a company’s board, its management, corporate cross-ownership. shareholders wanting the company to pursue its shareholders and its other stakeholders. * Dr Sarah Worthington different objectives. The objective of any legal Poor governance undermines confidence in Law Department London School of Economics and Political Science regulation in this area must be to allow the the markets and so can hold the whole finan- Houghton Street board free rein in managing the business; the cial system hostage. If companies are to London WC2A 2AE shareholders’ right to intervene in the com- attract and retain long-term capital from a Tel: 020 7955 6389 Fax: 020 7955 7366 pany’s name must remain conditional on large pool of investors, they need credible Email: [email protected] improper board practices. and recognisable corporate governance arrangements. Companies and governments Beyond this, if the shareholders are to enforce recognise this and are making increasingly their respective outcomes is broadly similar. these duties then they must be in a position to determined efforts to improve governance. Of Certainly it is clear that any regulatory have access to intelligible information from course, governance is influenced by matters regime must be sensitive to national and which they can infer that such duties have ranging well beyond corporate law issues. local context, to the types of enterprises been breached; they must also have some Emerging and transition countries can often being regulated, and to the costs of 50 incentive to pursue the company in court. do much to strengthen their financial markets compliance. Nevertheless, it is essential that The first issue harks back to the importance by looking to other mechanisms, such as certain minimum standards of conduct are of disclosure obligations. These obligations regulation of competition, or regulation of imposed on corporate managers, and done so 52 perform two important functions: as already labour markets. Nevertheless, regulation of in a way which ensures that the rules are noted, they are a form of regulation in them- corporate governance is an integral part of comprehensible, that breaches are easily selves, providing incentives for the pursuit of the whole process. detectable, and that sanctions are effectively best practices by the board of directors; and and efficiently enforced. All these elements they are a key tool in the effective enforce- The search for the perfect mechanism for the present difficulties, but the goal is to provide ment of all the various duties imposed on regulation of board-level corporate manage- a regime which imposes sufficient, but not boards of directors. This double-barrelled ment is like the search for the end of the excessive, regulation. The regime must work function of proper disclosure regimes accounts rainbow: the end remains constantly and and be seen to work if it is to inspire for the attention devoted to its enhancement infuriatingly within sight, but out of reach. confidence in the country’s markets. in Western democracies. Effective and This is as true of established economies as of efficient disclosure is regarded as crucial to any others. Different countries have adopted effective corporate governance.51 different strategies, and yet the success of Law in transition Francis Delaey, Counsel, EBRD* 11

Bosnia and Herzegovina’s continuing struggle: legal and institutional challenges in the post-Dayton era

Crippled by war, torn along ethnic divides and burdened with a complex, hybrid legal and administrative framework, legal and economic transition in post-war Bosnia and Herzegovina (BiH) has been slow to take off. Recent developments, however, may allow for a cautiously optimistic note.

Constitutional legacy of Dayton national community. The result is a country "Entities" which themselves ratify the instru- with a hybrid legal framework of unparalleled ment that creates them. Initialled in Dayton, Ohio, USA on 21 Novem- complexity, falling somewhere in between a ber 1995 and signed in Paris, France, by the sovereign state chaperoned by the international Reflecting deep-rooted mistrust between the Republic of Croatia, the Federal Republic of community and a protectorate. three principal ethnic groups, BiH’s constit- Yugoslavia (FRY Serbia and Montenegro) and ution established a decentralised governmen- the Republic of Bosnia and Herzegovina, the Annex 4 to the Dayton Peace Accords sets tal structure. The State has only limited powers General Framework Agreement for Peace in forth the constitution of BiH, which is some- (most of which pertain to foreign affairs). Any Bosnia and Herzegovina (the “Dayton Peace thing of an oddity. Unlike most constitutions residual powers are automatically assigned to Accords”) marked the end to a violent chapter that are the work of a constitutional assembly, the two Entities: the Federation of Bosnia and in the short history of BiH. Set out to create a BiH’s constitution is an annex to an inter- Herzegovina (the Federation) and Republika multi-ethnic society, the Dayton Peace Accords national treaty signed by three different states. Srpska (RS). In practice BiH’s constitution has consist of an elaborate set of annexes which In addition, the constitution establishes two created two states within a weak central state. provide for extensive involvement of the inter- Law in transition 12

The State has strictly limited authority to laws as it sees fit. OHR has since then wielded ership Relations and the modernisation of the regulate internal affairs. It has no army or its powers to push through a number of laws court and land registries, the new laws remain police force. It cannot raise taxes, does not whose core objective is to reinforce BiH’s weak largely unimplemented. control its own borders and has a legislature central state. These state building measures which in practice cannot formulate laws have been largely welcomed by the Bosniacs Human rights and civil liberties without the Entities’ approval. but are strongly resented by the Bosnian Croats and the Bosnian Serbs who view them In the Annual Survey of Political Rights and The Entities are the true repositories of power as violating the Dayton Peace Accords. Civil Liberties 1999-20001 carried out by in BiH. RS has a centralised structure. The Freedom House, a non-governmental organ- Federation, on the other hand, has a federal The complexity of BiH’s constitutional frame- isation whose purpose is to promote political structure composed of several Cantons, each work is matched and possibly surpassed by rights and civil liberties worldwide, BiH re- with its own constitution, government, parli- the complexity of its legal framework. BiH ceived a meagre score of 5 on a scale of 1 to 7, amentary assembly and judiciary. This may inherited its core legislation from the pre-war with 1 being the most free country and 7 the seem rather strange considering that the Fed- statutes of the former Socialist Federal least free country. The survey describes BiH eration is itself part of a federal state. The Republic of Yugoslavia (SFRY), hardly an as a partly free international protectorate explanation lies in the Washington Agreement inspiring source of legislation to develop a where people enjoy relatively few political of March 1994 which marked an end to the modern market economy. The Dayton Peace rights and civil liberties. hostilities between the Croat Defence Forces Accords create an overall framework to which and the Army of the Republic of Bosnia and state, Entity and cantonal level laws must con- This situation contrasts with the extensive Herzegovina and which created the Federation. form. Post-war legislation both at the state and human rights protection and monitoring instit- At the time, the international community was the Entity-level is largely created in response utions in BiH. The Dayton Peace Accords as hopeful that, soon afterwards, a peace settle- to the demands imposed by the Dayton Peace well as the Constitutions of BiH, the Feder- ment with the Bosnian Serbs would be reached. Accords and OHR. The result is an intricate ation and RS contain wide-reaching provisions The Federation was to provide the federal patchwork of sometimes contradictory and on human rights and personal freedom and framework which was to contain Bosniac, often inconsistent laws. The law relating to provide for the creation of several bodies to Bosnian Croat and Bosnian Serb-controlled collateral provides an example of the com- ensure their implementation.2 Cantons. However, fate decided otherwise. In plexity inherent to BiH’s legislation. Pursuant November 1995, when a global peace settle- to BiH’s constitution, collateral legislation falls Despite this elaborate framework and substan- ment was reached, the approach adopted by within the ambit of the Entities. Each Entity is tial progress made since the Dayton Peace the Washington Agreement was abandoned in therefore free to regulate the taking of collater- Accords, numerous problems persist. The favour of BiH’s current hybrid structure. al as it sees fit, provided such legislation does majority of the war crimes and human rights not breach BiH’s constitution or the Dayton violations committed during the 1991-95 war Annex 10 to the Dayton Peace Accords estab- Peace Accords. Both Entities draw extensively remain unaddressed. According to Amnesty lishes the Office of the High Representative on SFRY laws, in particular those on Obliga- International’s Annual Report 2000,3 more (OHR) to oversee, on behalf of the international tions, on Ownership Relations and on Enforce- than 20 of the 53 suspects publicly indicted community, the implementation of the civilian ment Procedure. These laws are largely out- by the International Criminal Tribunal for the aspects of the Dayton Peace Accords in BiH. dated and require a major overhaul. Cognisant former Yugoslavia are still at liberty (among Frustrated with the lack of progress in BiH, of the importance of good collateral legislation them Radovan Karadzic and Ratko Mladic). the Peace Implementation Council (PIC), a to attract investors, both Entities are taking More than 17,000 persons remain unaccounted group of 55 governments and international active steps to upgrade their legislation. The for and some 1.2 million persons are displaced. organisations that sponsor and direct the peace Federation has enacted a new Law on Mort- The number of actual returnees to pre-war implementation process, has subsequently gage and both the Federation and RS have places of origin is on the increase. However, expanded OHR’s mandate. Among the most prepared, with USAID’s assistance, a draft compared with the number of displaced people, important milestones in the peace implemen- Law on Registered Pledges on Movables and the number of returnees remains insignificant. tation process was the PIC Conference in Bonn Shares. These recent initiatives should encour- Returnees and their property continue to be in December 1997. At that conference, the age the granting of credit and development of targets of violent attacks. Police protection is PIC empowered OHR to remove from office commercial activities. Yet, pending several inadequate and perpetrators of crimes are public officials who violate legal commitments amendments to the SFRY based Law on Own- rarely arrested, let alone prosecuted. Most and the Dayton Peace Accords and to impose displaced persons, rather than returning to Law in transition 13

their pre-war places of origin, prefer to reclaim There have, however, been significant legal 1 Freedom House, Annual Survey of Political Rights their property in order to sell it at a fraction of developments designed to enhance the inde- and Civil Liberties 1999-2000. (The report can be found at http://www.freedomhouse.org/survey/ the price to the current occupant. According to pendence and impartiality of the judiciary. In 2000/reports/country/bosnia.html.) 4 the 1999 Semi-Annual Report of the Human June 2000 judges and prosecutors in both 2 Annex 6 to the Dayton Peace Accords established Rights Coordination Centre and the 1999 Entities adopted identical codes of ethics. the Office of the Human Rights Ombudsman and Country Reports on Human Rights Practices5 Under the auspices of OHR, an independent the Human Rights Chamber which together form the Human Rights Commission. This Commission is compiled by the US State Department, dis- judicial commission will be created to super- incorporated in Article 2.1 of the BiH constitution. crimination on the basis of ethnicity, political vise the two judicial commissions set up in The constitution of the Federation furthermore opinion and gender remains endemic in BiH. each Entity. These Entity judicial commissions provides for the creation of a Human Rights Court and the RS constitution boasts an impressive list of Ethnic minorities frequently suffer abuses (whose members will have to be acceptable to human rights and personal freedoms. Finally, OHR when exercising their basic rights such as the OHR-created independent commission) has established a Human Rights Coordination repossessing their property, registering their will carry out a one-off vetting procedure of Centre which functions as a forum for international organisations active in the field of human rights in residence, applying for an identity card, secur- the current judges. It is hoped that the comm- BiH and coordinates their activities. ing pensions, connecting to utilities networks, issions will weed out many of the corrupt and 3 Amnesty International, Amnesty International securing employment, accessing schools, etc. ineffective judges, although some critics have Annual Report 2000. (The report can be found at already voiced doubt about the willingness of http://www.web.amnesty.org/web/ar2000web.nsf.) BiH’s poor human rights record is partly due to the judicial commissions to criticise their 4 Human Rights Coordination Centre, Semi-Annual Report April-September 1999. (The report can be its recent history. In addition, a lack of state- peers. Finally, the Federation is currently dis- found at http://www.ohr.int/hr-report/sr9902.htm.) level enforcement mechanism essentially cussing the adoption of a draft Law on the 5 US State Department, 1999 Country Reports on means that OHR must rely on the Entities to Court Budget and Office of the Court Budget Human Rights Practices, 25 February 2000. (The enforce human rights and civil liberties in their Administration which will ensure that an inde- report can be found at http://www.state.gov/ www/global/human_rights/1999_hrp_report/ territory. While OHR and non-governmental pendent budget is prepared, supervised and bosniahe.html.) organisations can condemn human right viola- administered by members of the judiciary. 6 International Crisis Group, Rule over Law: Obstacles tions, they are relatively powerless to prevent to the Development of an Independent Judiciary in them or prosecute the perpetrators. The rule of law is also hampered by the lack of Bosnia and Herzegovina, Bosnia Legal Project Report No. 1, released 5 July 1999; International inter-entity judicial cooperation. The Dayton Crisis Group, Rule of Law in Public Administration: Peace Accords have largely deprived BiH of a Confusion and Discrimination in a Post-Communist Challenges for the rule of law cohesive administration of justice. Instead, Bureaucracy, Bosnia Legal Project Report No. 2, 15 December 1999. (Both reports can be found at According to the 1999 Semi-Annual Report of each Entity has its own legal system, judiciary http://www.crisisweb.org.) the Human Rights Coordination Centre, there and law enforcement agencies. The problem is are serious issues relating both to the indepen- further compounded by the Entities’ varying dence and impartiality of the Bosnian judicial attraction to the so-called “fatherlands”. RS mutual recognition of judgements, and cross- system as well as to the quality of justice dis- largely models its laws and administration on entity enforcement of judgements is decided pensed by the courts. In both Entities judges FRY, whereas the Bosnian Croat-controlled on an ad hoc basis by individual courts. are largely appointed (and dismissed) on the Cantons in the Federation emulate the Rep- basis of party affiliation and political creden- ublic of Croatia. Laws, jurisprudence and These are but a few of the impediments that tials rather than experience and skills. Politics doctrine are to a large extent influenced by obstruct the rule of law. The International also determines their livelihood. The court their fatherland equivalent. On 2 February Crisis Group produced two highly revealing budgets in RS are determined by the Minister 1998 the BiH Presidency established the Inter- papers in 1999 that relate in detail the legal of Justice. In the Federation, the Minister of Entity Legal Commission in order to reinforce and bureaucratic limbo that citizens and Justice determines the budgets of the Feder- legal cooperation between the Entities (whose companies alike have to face in BiH.6 These ation Courts and the cantonal ministers of mandate has since expired). On 20 May 1998 reports call for an overhaul of the public justice determine the budgets of the Cantonal the Ministers of Justice of both Entities further administration and the judiciary and denounce, and Municipal Courts in their respective executed a Memorandum of Understanding on among others, the lack of experienced and Cantons. As a result, judges in both Entities Inter-Entity Legal Assistance concerning qualified officials, the shortage of funding, risk their jobs and income if they render issues such as serving subpoenas, tracing of political nepotism and the wall of silence politically unpopular decisions. witnesses and facilitating ad hoc cooperation. faced by Bosnians when attempting to Despite these initiatives, there is still no exercise their rights. Law in transition 14

Implications for BiH’s Perceptions of Commercial Laws in the Balkans investment climate 100

In 1999 the International Crisis Group pub- lished a 25-page report entitled Why Will No 80 One Invest in Bosnia and Herzegovina? An Overview of Impediments to Investment and Self 60 Sustaining Economic Growth in the Post Dayton Era.7 In addition to widespread

corruption, the complex patchwork of laws and 40 Commercial Law Index an inefficient and partial judiciary, the report cites obscure and insidious business regula- tions as a major obstacle to all forms of invest- 20 ment in BiH. Many business regulations, a legacy from the communist SFRY, are intrinsi- 0 cally pro-government and hinder private sector Albania Bosnia and Bulgaria Croatia FYR Macedonia Romania Slovenia Herzegovina initiative. As a result, businesses face an array of administrative forms. The report also records Extensiveness Effectiveness of implementation

that the state often expects private companies Source: EBRD Legal Indicator Survey 2000 to solve social problems, such as unemploy- ment, or financial problems, such as the low be on a par with regional legal developments, Slobodan Milosevic’s recent downfall as presi- level of revenue collection. The general ille- its implementation is far less effective. The dent of FRY and the death of Franjo Tudjman, gality in which businesses operate creates implementation gap is undoubtedly due to the president of the Republic of Croatia, in ample opportunity for nepotism and bribery. intrusive and conflicting nature of BiH’s leg- December 1999, mark the end of an era and Those businesses which are willing to pay islation and its inefficient and arbitrary admin- hail a turning-point in Balkan history. Having bribes may expect clemency from government istration and judiciary described above. rid themselves of their nationalist figureheads, officials; those who don’t face fines or impris- Narrowing the gap between what the law pro- the two countries gained in international stat- onment. Either way, BiH’s intrusive and con- vides on paper and what it means in practice ure and acceptability. As they turn towards the flicting business regulations generate unfore- should be an urgent priority for the state and international community, and the European seen costs and impediments which threaten Entity governments. This is essential if respect Union in particular, for their salvation they the economic viability of businesses. for the rule of law is to have any chance of will come under growing pressure to forgo taking hold, which is a pre-requisite for an their nationalist pretensions and embrace the The findings of the International Crisis Group attractive investment climate. principles of democracy and pluralism. are corroborated by the EBRD’s Legal Indica- Publicly abandoned by their respective tor Survey, which measures the perception of “fatherlands”, the nationalist discourses of local lawyers of the extensiveness and effect- Cautious grounds for optimism Bosnian Serb and Bosnian Croat hard-liners iveness of the commercial and financial legis- The future of BiH as a self-sustaining country should slowly lose their credibility. Simul- lation in the transition countries. According to is inextricably linked to the elimination of taneously, the internal markets of the Entities the 2000 Survey, BiH’s commercial laws political obstruction and the intensive devel- are too small for businesses to achieve econ- (pledge, bankruptcy and company) are gener- opment of a coherent legal and social frame- omies of scale necessary to increase profit- ally as extensive as its Balkan neighbours, work supportive of economic development. So ability. As a result, businesses are likely though BiH does score slightly lower than all far, nationalist parties have blocked the devel- increasingly to attempt to operate on a but Albania (see chart below). However, in opment and functioning of modern social, country-wide level. terms of effectiveness, BiH scores significantly political, legal and economic structures which lower than the other Balkan countries and, as BiH needs to attract the high investment flows In autumn 2000 the Micro-Enterprise Bank a result, has the single biggest gap between it urgently needs. Recent events, however, based in Sarajevo was the first bank to open a extensiveness and effectiveness. This imple- cautiously augur a brighter future for BiH. branch in Banja Luka. Other banks have mentation gap indicates that while practition- ers consider BiH’s commercial legislation to Law in transition 15

already indicated that they will follow suit. ary economic reforms such as privatisation. 7 International Crisis Group, Why Will No One Invest Another example is the recent debacle over Dwindling donor funds may provide an awak- in Bosnia and Herzegovina? An Overview of Impedi- ments to Investment and Self Sustaining Economic mobile telephone licences. After much ening and should provide an incentive to use Growth in the Post Dayton Era, 21 April 1999. (The indecision the telecom authorities in the RS remaining funds efficiently and establish a report can be found at http://www.crisisweb.org.) and the Federation (both Bosniac and Croat) self-sustaining economy before the complete 8 The account to tribunal of former RS President finally acknowledged that setting up Entity- withdrawal of international assistance. Biljanc Plavsic, who surrendered to the tribunal in early January, is still awaited. wide (as opposed to country-wide) licences would be economic folly. The combined effect These events, combined with the introspection * Francis Delaey of political developments in the Republic of that the International Criminal Tribunal for the Office of the General Counsel EBRD Croatia and FRY and economic realities will former Yugoslavia will encourage among One Exchange Square hopefully encourage a closer cooperation Bosnians as the war time activities of more London EC2A 2JN between the Entities. Bosnians comes under scrutiny,8 may warrant Tel: 020 7338 7352 Fax: 020 7338 6150 a more positive outlook for BiH. For the fore- Email: [email protected] Milosevic’s demise has another important con- seeable future, BiH can be assured of the sequence for BiH. As international sanctions continued backing of the international com- against FRY are lifted, donor attention is munity. The international community can gradually shifting from BiH to FRY. Already assist BiH in putting in place social, political governmental and non-governmental organ- and economic structures which will allow it to isations have started reducing their operations evolve as a modern European state. However, in BiH and are progressively reallocating their in order to ensure a truly viable, prosperous resources to FRY. Paradoxically, this may be a and peaceful future, the people of BiH must good thing for BiH. Comforted by the financial come to terms with their past before they can largesse of the international community, BiH resolutely embrace their future. lacked incentive to tackle painful but necess- Law in transition 16 Ikram Zokirov, Professor of Civil Law, Tashkent Law University

Nodir Akhmedjanov, Postgraduate Student, Nagoya University Law Department*

Overview of Uzbekistan’s Civil Code†

This article provides a general overview of Uzbekistan’s 1997 Civil Code, focusing on contract and property protections, and identifies the key changes from Uzbekistan’s communist past.

In the late 1980s Uzbekistan adopted laws on rights may be exercised. It also regulates irrigation, private ownership of agricultural property, denationalisation and privatisation, contractual and other liabilities and other land would result in a significant decline in enterprise and cooperation that created the relations involving property and associated the use of machinery and in loss of efficiency legal framework for the initial stage of tran- non-property rights. in agricultural production. This special treat- sition to a market economy. ment is above all due to the country’s natural and climatic conditions, its historical develop- Ownership rights and other The current Constitution of the Republic of ment and demography as well as to the property rights Uzbekistan was adopted in December 1992. mentality of the peoples of Uzbekistan. Chapter XII establishes the economic found- One of the key issues addressed by the Civil ations of Uzbek society, while Article 53 pro- Code is the issue of ownership rights. Those Under Uzbek legislation, legal entities and vides the statutory basis for a system of able to exercise private ownership rights are private individuals can acquire ownership market-based relations in Uzbekistan.1 The private individuals, companies and partner- rights to land in the prescribed manner, as Civil Code has expanded these constitutional ships, cooperatives, public associations, funds part of the privatisation of commercial and provisions.2 The new Civil Code is the first and other legal entities not owned by the state. consumer service organisations, which are statutory instrument to enshrine the principle Any property may be privately owned, except privatised together with the land on which they of freedom of contract (Art. 354) and the prin- for specific types of property whose private are located.3 ciple of inviolability of property ownership ownership is forbidden by law. Such property (Art. 1660). While the principle of freedom of is strictly defined, and includes assets that Ownership rights to the sites of diplomatic contract grants the freedom to enter into var- may be owned solely by the state (mineral missions, as well as international organisations ious transactions, the principle of inviolability wealth, water, air space, flora, fauna and other that are accorded the same status as diplo- of property ownership guarantees the legal natural resources). matic missions, which are accredited in the rights of property owners and safeguards their Republic of Uzbekistan, arise when buildings interests in their relations with third parties. Land may be privately owned in some or parts of buildings in which they are housed, circumstances. However, agricultural land, including the residence of the head of the Uzbekistan’s civil legislation defines the legal common land and the land reserves cannot be mission, are sold to them in the prescribed positions of participants in civil transactions, privately owned. Agricultural land may be manner, together with the land on which they the circumstances giving rise to ownership owned solely by the state, and is leased to are located and land on which it is proposed to rights and the manner in which they and producers of agricultural products. Since the build diplomatic mission buildings. other proprietary and intellectual property bulk of Uzbekistan’s agricultural land requires Law in transition 17

Unlike private property, state property is div- deals with the special features of the partici- † Translated from Russian. ided into republic property and the property pation of individuals and legal entities, as well 1 “The basis of Uzbekistan’s economy, aimed at the of the country’s administrative subdivisions as the state, in civil rights processes. The Civil development of market-based relations, is property (municipal property). Code stipulates that individuals achieve full ownership in its diverse forms. The state guarantees the freedom of economic activities, entrepreneurship legal capacity upon reaching the age of 18. In and labour, with due allowance for the priority of In addition to ownership rights, the Civil some circumstances (lawful marriage, starting consumer rights, and the equality and legal Code also deals with other property rights, a business, entering employment on the basis protection of all forms of property ownership. Private property, alongside other forms of property including (Art. 165): of a labour contract) minors can also achieve ownership, is inviolable and protected by the operating control and management rights, full legal capacity. state. The owner may be deprived of his property lifetime ownership of land with hereditary only in the circumstances and in the manner envisaged by law” (Constitution of the Republic of succession, A legal entity is defined as an organisation Uzbekistan, Art. 53). right of permanent use of land, and which owns, manages or operates specific 2 Part One of the Civil Code was adopted on 21 easements. individual assets, has the right to acquire and December 1995, and Part Two on 29 August exercise property and personal non-property 1996. The Civil Code as a whole came into effect on 1 March 1997. An innovation introduced by the Civil Code is rights on its own behalf, assume liabilities and 3 Cf. Art. 18 of the Uzbekistan Land Code. the inclusion of the right of limited use of land act as a plaintiff and defendant in a court of 4 Cf. Art. 44(2) of the Civil Code. owned by another party (easement). The owner law. In contrast with the laws of many count- of real property (land or another kind of real ries, the Civil Code of Uzbekistan stipulates property) has the right to ask for the grant of that irrespective of whether a legal entity is a the law, are refused official registration. The the right of limited use (easement) of a neigh- commercial or a non-commercial organisation, Code provides no other grounds for a refusal bouring plot of land, or if necessary of another it has a specific legal capacity, i.e., its legal to register a legal entity.4 plot of land from its owner. An easement may authorities are specified in its charter, regu- be granted in order to provide pedestrian or lations or by law. Pursuant to Article 53 of the Civil Code, a vehicular right of way through another person’s court of law may declare the registration of a property, access for the construction and oper- Uzbekistan’s Civil Code provides for the estab- legal entity established in breach of the law to ation of electricity supply lines, telecommun- lishment of business partnerships and associ- be invalid if the breach cannot be remedied. ications lines or pipelines, the provision of ations, which are recognised as commercial The burden of proof of the failure of the legal water supply or other supplies required by the organisations with capital divided into inter- entity’s statutes or other incorporation docu- owner which cannot be provided unless an ests or shares. Assets formed of contributions ments to comply with the law rests with the easement is created. The creation of an ease- made by the founders or payments for their registering authority. ment does not deprive the owner of his rights to interests or shares, as well as assets generated own, use and dispose of the land. Easements or acquired by a business partnership or a are created by an arrangement between the company in the course of its operations, are Objects of civil rights person requesting the easement and the owner fully owned by such partnership or company. Both tangible and intangible assets may be of the land, and must be registered in the objects of civil rights. Tangible assets include manner prescribed for the registration of real Among legal entities, limited liability com- various kinds of property: things, movable and property rights. If agreement on the creation of panies, joint-stock companies, production immovable property, animals, money, foreign an easement or on its conditions cannot be cooperatives, farms and small agricultural currency and securities. Intangible assets reached, the dispute is resolved by a court of companies are used most frequently in include intellectual property, official and law upon a motion filed by any person request- practice. There are various types of business, commercial secrets, personal non-property ing the easement. Easements may also be defined by law, in which legal entities may rights (life and health, personal honour and created for the benefit and at the request of a engage only if they have obtained a special dignity, inviolability of a person, business person whose interest is based on a lifetime permit (licence). reputation, inviolability of private life, private ownership of a plot of land with hereditary and family secrets, the rights to names and succession, or the right of permanent use of a All legal entities must be officially registered. images, copyright, etc.). land plot. Their official registration particulars are entered in a single official register of legal entities, which is open to the public. Legal Transactions and general Subjects of civil rights entities failing to follow the statutory incorp- provisions on contracts The Civil Code devotes a special subsection to oration procedures, or failing to ensure that The Civil Code devotes a special subsection to the subjects of civil rights. This subsection their incorporation documents comply with transactions. Transactions may be completed Law in transition 18

orally or in writing. Silence is recognised as an these methods, retention is of special interest, * Prof. Ikram Zokirov expression of will to complete a transaction in featuring only in the Civil Codes of Uzbekistan Head of Department of Civil Law Tashkent Law University the circumstances provided by law or by an and Russia. Under the provisions on retention Tashkent agreement between the parties. Transactions contained in Uzbekistan’s Civil Code, a cred- Uzbekistan may be completed in a simple written form, or itor holding a thing intended for transfer to a Tel: +371 133-44-05 may be notarised. Certain transactions involv- debtor or a person designated by the debtor Nodir Akhmedjanov ing real property must be officially registered. has the right to retain it if the debtor defaults Nagoya University Law Department Furo-cho Failure to notarise a transaction or to have it or fails to refund costs and losses associated Chigusa-ku officially registered renders it invalid, and the with this thing until such a time when the Nagoya-shi 464-8601 transaction is regarded as null and void. Other relevant payment has been made. Japan Tel: +81 090-6571-1769 transactions regarded as null and void are Email: [email protected] those which do not comply with statutory Uzbekistan’s Civil Code specifies the circum- requirements, have been entered into by stances giving rise to liability for default. A persons adjudged legally incapacitated or by debtor is liable for the non-performance or developments in agricultural selection, those under 14 years of age and transactions insufficient performance of his or her oblig- information not in the public domain, concluded purely for the sake of appearance ations if he or she is at fault. A debtor is including industrial secrets (know-how), and and not intended to result in any legal con- adjudicated not to be at fault if he or she can marks used to distinguish commercial sequences. The Civil Code also identifies demonstrate that all possible steps have been entities, goods, labour and services, trade various kinds of voidable transactions (e.g., taken to ensure proper performance of their names, trademarks (service marks) and the transactions entered into by persons unable to obligations. The absence of fault must be names of places of origin. comprehend the meaning of their actions or proved by the person who has breached his or control them, etc.). A court of law may deter- her obligations. All prior agreements removing The Civil Code defines the substance of exclu- mine that such transactions are invalid upon a or restricting liability for deliberate non- sive rights to such intellectual property, the motion filed by interested parties. Where this performance are considered invalid from the legal status of its authors, creators, title hold- is the case, such transactions will not result in time of their execution. ers and users, and the forms and methods of any legal consequences, except for the con- safeguarding their rights. sequences arising out of their invalidity. The Civil Code devotes special attention to contracts. In a market system, a contract is the In Uzbekistan, the general statute of limitation principal legal instrument regulating relations Conclusion is three years. However, courts will admit between various subjects. For this reason, both Shaping and perfecting civil laws is an on- motions for the protection of a violated right the general and special parts of the Code deal going and dynamic process. In addition to the even after the expiration of the statute of with the terms and conditions of contracts, the Civil Code, Uzbekistan’s civil legislation in- limitation, and will apply the statute of limit- procedures for executing, amending and term- cludes dozens of statutes (dealing with entre- ation only upon a motion from one of the inating contracts and different types of con- preneurship, secured transactions, business parties to the dispute filed before a ruling has tracts. Specific types of contracts, such as associations and partnerships, property own- been made. The expiration of the statute of contracts on leasing, renting, franchising, ership, enterprises, etc.) and hundreds of limitation, motioned by a party to a dispute, factoring and trusts, are noteworthy as they regulatory acts. Uzbekistan’s parliament and can serve as a ground for the dismissal of the have been borrowed from the experience of interested communities in Uzbek society are lawsuit. At the same time, the Civil Code lists developed countries and included in currently discussing draft laws dealing with cases to which the statute of limitation does Uzbekistan’s Civil Code for the first time. specific forms of property, the securities not apply. For instance, Art. 163 provides that market, intellectual property and other laws the statute of limitation should not apply to Intellectual property essential to the establishment of a market actions for the return of property of historical, economy in Uzbekistan. cultural, scientific or artistic value and other Section IV of the Civil Code deals with intell- valuables exported from Uzbekistan before the ectual property. Intellectual property includes: declaration of its independence. the products of intellectual work: copyright items, i.e., works of science, literature and The Civil Code provides a broad range of art, performances, recordings and broad- methods to secure enforcement of obligations: casts, computer software and databases, various types of fines and penalties, pledge, industrial property: images, utility models

Law in transition deposit, retention, surety and guarantee. Of all and industrial designs, Focus on Concessions

One of the challenges of infrastructure devel- developments in this region generally, and first describes the work of UNCITRAL in opment has always been to identify sources of Yugoslavia especially, make south-eastern developing its Legislative Guide on Privately finance. The Egyptians subsidised the build- Europe particularly topical. Enhanced Financed Projects. The Guide has developed ing of the Pyramids with heavy taxes and a political stability has made private sector over several drafts since 1996, and with its large contingent of slaves. The Romans heav- investment in concessions more commercially adoption in July 2000, has become the starting ily taxed the peoples they controlled to build viable. Moreover, there has been a concerted point for government authorities in preparing road and water systems. However, with the effort by these countries to develop concession new laws or reviewing the adequacy of existing development of democratic institutions and projects. This effort has led to the adoption of laws relating to concessions. Next, the United increased demand for services, governments a number of specific laws providing for the Nations Economic Commission for Europe have looked to means of financing infra- grant of concessions. Furthermore, this region (UN/ECE) describes the work of its Build structure developments more consistent with has focused on infrastructure development in Operate Transfer (BOT) Group in developing modern legal and political norms. sectors which are conducive to limited re- guidelines on best practices, and the estab- course concession financings. In particular, a lishment of two new initiatives – a Regional Concessions and similar contractual or licens- number of municipalities in the region have Flagship Initiative and a Public Private Part ing arrangements which provide for private developed or are developing waste-water nership Alliance – with the objectives of sector investment in infrastructure develop- concession projects in a desire to facilitate assisting governments in developing priority ment pose obvious advantages to forced labour accession to the European Union. For exam- projects, harmonising their regulatory frame- and heavy taxes. For concession finance to ple, last year the EBRD provided financing for work, and providing objective information to flourish it is imperative that investors and gov- the construction of a waste-water construction assist in project assessment. The final piece ernments bear in mind two critical elements: facility in Maribor, Slovenia, and the upgrad- describes the work of an expert group formed clarity and commitment. The legal regime in ing of a water and waste-water facility in Sofia, under the auspices of the Organisation for which investment needs to be made must be Bulgaria. Partly as a result of the success of Economic Cooperation and Development to clear, so that the risks associated with invest- these financings, similar projects are being prepare Basic Elements of a Law on ment may be properly assessed and fairly considered in Albania, Croatia and Romania. Concession Agreements. allocated among governmental authorities and investors. Parties must also be aware that the The first article in this focus section is targeted The next three articles describe the legal development of a successful concession pro- at policy makers and investors assessing the framework in three countries in south-eastern ject with private sector financing is a process adequacy of the concession law regime in the Europe. The first article provides a which requires strong governmental political countries of central and eastern Europe and description of the legal regime applicable to support, and commitment by all involved to the CIS. The article is divided into two parts: concessions in the Federal Republic of hurdle the obstacles to reaching an agreement the first highlights legal issues of concern to Yugoslavia. This article is particularly timely among investors, governments and lenders. lenders in considering financing concession for the EBRD as FR Yugoslavia became a projects and suggests how a legal regime may member of the EBRD in January. The next The following articles focusing on concessions be developed to enhance the bankability of article explains the development of the provide information to policy makers and in- concession projects; the second part describes Bulgarian Law on Concessions and describes vestors on the clarity and efficacy of the legal the results of the EBRD's annual Legal Indi- how the law interacts with other Bulgarian regimes for promoting private investment in cator Survey on concessions in the Bank’s legislation. This section concludes with an central and eastern Europe. This section countries of operations. The second article article on the implementation of the Romanian focuses on assisting policy makers in pursuing illustrates the French experience of developing Concession Law which was adopted in 1998. the development of an effective concessions public service concessions. The author pro- The focus section concludes with a case study regime by describing international efforts in vides an historical perspective that may of the first private sector limited recourse this area, and describing a successful example interest transition countries as they upgrade financing of a waste-water concession in of concession-based financing. their concession laws. central and eastern Europe. The article pro- vides an overview of some of the legal chal- There is an emphasis in the following articles The next three short pieces describe inter- lenges posed in structuring the EBRD financ- on the legal regimes applicable to concessions national initiatives designed to promote con- ing of the Maribor waste-water project. in south-eastern Europe. Recent political cessions and concession-based financing. The 20 Walid Labadi, Senior Counsel, and Anila Gramshi, Associate, EBRD

Anita Ramasastry, Professor of Law, University of Washington*

A favourable concessions regime: a lender’s perspective and perceptions from transition countries

The first part of this article discusses the legal issues of primary concern to lenders generally, and in particular to the European Bank for Reconstruction and Development (EBRD), in assessing the risks associated with lending to a concessionaire in the context of an infrastructure development project. The second part describes the results of the EBRD’s Legal Indicator Survey assess- ing the legal regime for concessions in the transition countries. Many of the questions in the survey focus on issues of concern to both developers and lenders in assessing the legal regime applicable to concessions in a particular jurisdiction.

You are a policy maker in an eastern European competition. Accordingly, the development of Issues of concern to lenders in country with limited budget resources. Your a legal regime which permits the grant of con- concession financing 1 goal is to encourage economic development cessions or specific contractual or licensing Lenders are most comfortable when lending and implement infrastructure projects in your rights to private sector entities, while retaining money against known or identifiable commer- country. You may face some or all of the foll- other public rights and ownership over specific cial risks. Lenders can establish formulas for owing problems that need to be addressed: you assets, is a primary policy objective. assessing the country risk associated with loans lack adequate roads to facilitate trade and to a project in a specific country. Similarly, development within your country and the rest In developing this legal regime, you will need lenders can assess and price the market risk of of Europe; waste-water in your country is to provide an environment which will attract a project (i.e., whether there will be sufficient dumped untreated or minimally treated into foreign equity investment from international demand for the project’s product to make the your rivers; your country possesses monopolies companies with experience in the relevant project profitable). However, lenders, and in over the distribution of heating and electricity, development sectors. However, private sector particular international lenders, are less com- each of which requires large public subsidies companies will generally not undertake large- fortable in assuming many legal and political to operate, massive investment to meet public scale private sector investments without signif- risks associated with a project. Accordingly, in needs and accurate user charges to limit the icant debt financing from financial institutions. determining whether to invest in a company draw on the public budget; and your country While the views of lenders and developers which is awarded a concession and intends to possesses some natural resources, but their often overlap in respect of the importance of develop an infrastructure project, lenders will development requires substantial investment. various aspects of a legal regime necessary to encourage private sector investment through assess the extent to which they are being asked to assume non-commercial risks. In The challenge you face is to develop a legal concessions, lenders generally, and inter- making this assessment, they will look at the regime that will encourage private investment national financial institutions like the EBRD allocation of risks as provided in the conces- in these sectors. Privatisation of public mon- in particular, have specific concerns, which if sion agreement and the general legal regime opolies is an objective, but the outright sale to accommodated can significantly enhance the governing concessions in the country. To the third parties of “public” activities is not a bankability of infrastructure development extent that the general legal regime minimises viable alternative given the resulting lack of through concessions. Focus on concessions 21

legal uncertainty in connection with the award 2. Clarify power of granting authorities 1 The term concessions, as adopted in the Legal and implementation of concessions, allows the Indicator Survey, is “an agreement or license pur- Lenders are obviously concerned that any suant to which a governmental authority grants concession granting authority, concessionaires concession agreement to be financed has been rights and agrees obligations to be undertaken in and lenders to contractually allocate risks relation to the construction, refurbishment or pro- properly entered into by the relevant govern- among themselves and takes into account the vision of infrastructure or the exploration for and/or mental parties. In addition, it is important that exploitation of natural resources (including any interests of lenders to ensure effective security the government’s authority to enter into a related treatment or transport facilities) to a private over a project, such regimes can enhance the sector entity to utilise government assets in order to concession agreement will not be subject to bankability, and thus the viability, of conces- proved facilities or services to members of the challenge. This issue is not always clear. For public or otherwise”. sion projects. More specifically, there are seven example, in a Sofia water and waste-water con- areas where policy makers can act to enhance cession project in which the EBRD provided the bankability of concession projects through overriding legislation that defines in broad financing in December 2000 there was some the development of a concessions regime. terms the tax and licensing regime applicable uncertainty under applicable Bulgarian law to different sectors, thus giving lenders some regarding the respective scopes of authority of assurance of the stability of the legal system. 1. Award concessions fairly the mayor of Sofia and the municipal council. However, it is important to strike a balance It was therefore necessary to exercise great In considering whether to finance a concess- between the issues regulated by the general care in negotiating the concession agreement ion, lenders are particularly concerned with regime, and matters left to the parties to nego- and the financing agreements to ensure that the process by which a concession was tiate and define in the concession agreement. the appropriate level of approval was obtained. awarded. If a concession is awarded to a In any event, lenders are generally unwilling Accordingly, it is essential that either the private investor in a manner which suggests to accept uncertainty in the tax and licensing general concessions law or the sector-specific that the concessionaire obtained such rights regime applicable to a project. concessions laws, if any, identify the auth- through influence, corruption or on the basis ority/authorities that are empowered to enter of having access to non-public information, into concession agreements, and specify the 4. Provide lenders effective security lenders face a number of risks. First, the scope of their authority to modify the terms of credit risk for the lenders is increased A legal regime which seeks to establish a a tendered concession agreement. because it may be easier for the award of the framework for concession financing should concession to be challenged, either legally or allow and encourage structures which provide politically. A new government may decide 3. Clarify tax and licensing regimes for protection of the rights of lenders under that an awarded concession is unfair and their relevant security documents, and in the An important component of lender due dili- actively seek ways of either terminating the event of the termination of a concession. Of gence in a concession project is to ensure that concession or inhibiting the ability of the fundamental interest to any lender considering the concessionaire has (or will obtain) all concessionaire to exercise rights. Second, project finance of a concessionaire is whether licences necessary for the construction and most lenders are wary of risks to their rep- the lender will have effective security over operation of a project. In addition to licensing utation associated with financing a project the assets of the concessionaire. Lenders issues, the financial viability of a project often where there are, or may be, rumours of require security from which they can realise hinges on whether tax or customs duties corruption or unfairness in the award of the value in the event of a borrower’s non- exemptions granted contractually in a conces- concession. Third, international financial compliance with a loan agreement. Such sec- sion will be respected by the relevant author- institutions like the EBRD have a policy urity includes real property, buildings, equip- ities. Unfortunately, in many jurisdictions objective to encourage public tendering for ment, insurance proceeds, bank accounts and inconsistencies among various laws and the concessions as part of their objectives to receivables. Lenders also require security terms of a concession agreement raise uncer- facilitate the transition of the economies of which is readily realisable. For example, some tainty regarding the tax and licensing regime their countries of operations to market econ- jurisdictions have effective legal regimes, applicable to a project. In assessing the effi- omies. By encouraging public tendering for where enforcement of rights is relatively cacy and clarity of the legal regime applicable concessions, the EBRD strives to enhance straightforward and in which lenders feel to a concession, lenders would look at the investor confidence in the process for award- comfortable protecting their loans by taking existence of a general regime that regulates ing tenders, and to allay investor concerns of security. On the other hand, in other juris- the tax and licensing issues relating to the corruption or unfairness in connection with dictions, including some in central and eastern grant of concessions in a number of different the investment in a particular country. Europe, the enforcement of lenders’ security sectors. It is often preferable to have such rights is more problematic. One approach that Focus on concessions 22 Focus on concessions number ofissues: agreements withthegrantingauthority ona undertakings. Lenderswilllookfor direct allow forthegrantingauthoritytomake such the grantingauthority. Thelegalregimeshould government authoritygrantingtheconcession agreement orconsenttoassignmentwiththe Lenders invariablyrequiresomeformofdirect to lenders undertakings government 5. Permit financing, however, isthataconcessionaire One ofthechallengesconcession-based of suchspecialpurposecompany. that lenderswouldtakeliensontheshares foreclosure-friendly jurisdiction,andprovide special purposecompanylocatedina their interestsinaconcessionairethrough in suchcasesistorequirethatsponsorshold lenders mightusetoreduceenforcementrisk of controloverbankruptcyproceedings. and, inmanyjurisdictions,enhancetheirlevel their priorityoverothercreditorsinbankruptcy level ofcontrolovertheconcessionaire,ensure ders requiresuchliensprimarilytomaintaina proceeds, bankaccountsandequipment.Len- cluding theconcessioncontract),insurance those assetsare,suchascontractrights tant forlenderstotakesecurityoverwhatever assets ownedbyaconcessionaire,itisimpor- Notwithstanding thelimitednatureof typically passtothegrantorofconcession. termination oftheconcessionsuchfacilities project (whichisnotalwaysthecase)upon structed orequipmentassociatedwitha cessionaire istheowneroffacilitiescon- built. Undermostconcessions,evenifacon- the realpropertyonwhichprojectwillbe the lendersmaynotobtainamortgageover associated withaconcessionand,accordingly, cessionaire isnottheownerofproperty Under mostconcessionagreements,thecon- aire to terminationintheeventofaconcession- concession agreement,whichmaybesubject primary assetisusuallyacontractright,the ’ s non-compliancewithitsobligations. (in- ’ s might bepossible. stances inwhichterminationofsuch alicence modation tolendersrestrictthe circum- licensing authoritieshaveagreedasanaccom- where theconcessionisineffectalicence, number oftelecommunicationstransactions to repaythelender for there-tenderoflicencetoundertake terminates thelicenceitwillrequirebidders tion byagreeingthatifthelicensingauthority lenders trytominimisetheriskoftermina- gas activitiesunderaproductionlicence, event oftermination. be transferredtothegrantingauthorityin to paythefairmarketvalueoffacilities mination byrequiringthegrantingauthority Lenders alsoseektominimisetheriskofter- the concessionagreement; granting authorityregardingthevalidityof and arerelyingonrepresentationsfromthe an interestintheconcessionagreement, that lendersarefinancingthisproject,have formal recognitionbythegrantingauthority relevant directagreement. arise underaconcessionagreementorthe granting authorityintheeventdisputes clear waiverofsovereignimmunitybythe to lenders;and due totheconcessionaireshallbepayable agreement thatanyterminationpayments financing agreements; forming itsobligationsunderrelevant the existingconcessionaireisnotper- substitute concessionaireintheeventthat permission forlenderstointroducea which giverisetosuchterminationrights; the lendersanopportunitytocurebreaches the concessionagreementwithoutpermitting granting authorityagreementnottoterminate under aconcessionagreement; concessionaire isbreachingitsobligations commitment tonotifylendersintheeventa ciated withtheproject; sion agreementandtheotherrightsasso- that thelendershavealienonconces- acknowledgement bythegrantingauthority ’ s debt.Similarly, ina 2 In miningoroiland terms oftheconcessionagreement. to theinterpretationandenforceabilityof governed byalocallawwhichisuncertainas financings wheretheconcessionagreementis lenders areoftenunwillingtoproceedwith flexible lendersareonthisissue.However, enforcing concessionagreements,themore Obviously, themoredevelopedlocallawisin agreement mustbegovernedbylocallaw. which theprojectislocated,concession ority andacompanyformedinthecountry agreement isenteredintobetweenalocalauth- jurisdictions, however, whereaconcession a systemwitheffectiveenforcement.Inmany erally acceptableinternationally, androotedin a setoflegalrulesthatarewellknown,gen- contracts whensucharegovernedby risks associatedwithfinancingconcession Lenders aremorecomfortablewiththelegal Choice oflaw mechanisms and disputeresolution by investor-friendlychoiceoflawrules concessionstobegoverned 6. Permit forecloses thepossibilityofendless appeals. and providesabindingdecisionwhich according toestablishedrules,confidential mechanism thatisimpartial,regulated UNCITRAL ruleswithadisputeresolution require arbitrationinaccordancewith The EBRD national financialinstitutionsliketheEBRD. noting thespecialrequirementsofinter- In additiontotheseconcerns,itisalsoworth in adjudicatingagainstthegovernment. local courtswhichmaynothaveatrackrecord to avoidanyperceived(orreal)biasinthe regime outsideoftherelevantcountry, inorder accordance withaninternationalarbitration require thatsuchdisputesberesolvedin of thegrantingauthority. Inmostcases,they concession agreementexclusivelyinthecourts enforcing anyrightstheymayhaveundera Lenders arenotcomfortableinrelyingon Dispute resolution ’ s normalpracticewouldbeto 23

While the EBRD will consider other arbitra- It is important that a concession-friendly legal 2 Fair market value is typically determined on the tion regimes, certain regimes can be problem- regime permit the grantor of the concession to basis of a formula, but such formula would nor- mally include an amount not less than the amount atic. For example, in some jurisdictions, like include provisions in the concession contract of the lender’s debt. As the lender’s debt is Croatia, international arbitration between two which would provide for additional compen- normally used solely for the construction of the local entities is not permitted, other than sation in case such events occur. These pro- relevant facility, such a formulation would normally be considered reasonable. arbitration conducted under the rules of the visions are generally known as financial 3 The LIS results are not readily verifiable and reflect International Centre for Settlement of Invest- stabilisation provisions and are fundamental the subjective assessment of survey respondents. ment Disputes (ICSID). However, ICSID mechanisms for allocating risks. One such The information and views provided by respondents arbitration presents a number of problems for risk for which a concessionaire would expect were not always consistent. Where there were large discrepancies, recourse to the EBRD’s in- international financial institutions like the to be compensated would be changes in the house knowledge of the conditions in that country EBRD and the IFC. Under Article 25 of the tax or licensing regime which have financial was used to arbitrate among the differing views. ICSID Convention, the jurisdiction of the implications for a project, as these risks are Accordingly, while the purpose of the survey was to gauge the perception of lawyers concerning conces- Centre extends only to legal disputes arising often in the control of governmental auth- sions law in the region, care must be taken in directly out of an investment between a orities who may have granted the concession reading and interpreting the results. contracting state and a national of another in the first place. While a government would 4 See infra at p.29. contracting state. If the EBRD as a lender not agree to restrict its ability to enact such 5 The LIS concessions survey was divided into sev- were to exercise its rights against the grantor tax laws, it would generally be expected to eral parts and included questions on the following: - the legal framework for concessions (whether a of a concession under a concession agreement place the concessionaire in the same position unified or coherent body of legislation exists that subject to ICSID arbitration (which might be as it would have been had the legal regime identifies which government entities may grant the case in the context of exercising its fore- not changed. With respect to other risks, the concessions and in which sectors); - procedures for the selection of a concessionaire closure rights), it is unclear whether ICSID decision as to which party will bear the cost of (whether a process exists that is fair and would be able to exercise jurisdiction over such events (and in particular the scope of transparent); such dispute since the EBRD is not a national force majeure events) would be the subject of - terms and conditions of the concession agreement (whether the legal framework permits of a contracting state. Similarly, if the EBRD negotiation and discussion in any project. The for clear terms that may include choice of foreign were to assume control over the shares of a decision over how these risks are allocated law and international arbitration); concessionaire, it is not clear whether ICSID will often determine whether a concession - security interests and ownership of concession assets (whether a concessionaire may grant a would view a project company in effect con- project is financeable. security interest in concession property); and trolled by an international financial institution - performance of the concession agreement (whether as a national of a contracting state for the there could or have been any legal disputes arising EBRD Legal Indicator Survey: from the performance of a concession contract and purposes of exercising jurisdiction. perceptions of concessions law whether they are fairly resolved). and climate In any event, the bankability of concession- based financing can be dramatically enhanced In 2000 the EBRD’s annual Legal Indicator practice (referred to as effectiveness). The by the reassurance provided to lenders of a Survey (LIS) included a new section on con- Survey questions focused not only on ele- concession agreement that is governed by an cessions.3 This addition was a recognition that ments of a legal regime that are perceived as internationally recognised and established an increasing number of infrastructure and necessary to encourage private sector invest- commercial law and an independent and inter- utilities projects in emerging markets are ment but also on those which will enhance the nationally recognised dispute resolution forum. achieved using concessions and a key deter- bankability of infrastructure development.5 minant of the success of these investments is the legal regime. The LIS concessions ques- 7. Provide for financial stabilisation Many of the local lawyers surveyed represent tions are based, in part, upon the work of lenders as well as concessionnaires. Their Lenders and concessionaires are particularly UNCITRAL, which has developed a legislative perceptions provide an interesting insight into concerned about the effects of changes in the guide to the financing of public-private whether a country appears legally prepared for tax or licensing regime on the financial viabil- infrastructure projects.4 concessions activity. To the extent that local ity of the project. In a number of projects lawyers perceive that a certain concessions lenders and concessionaires are also concerned As with other LIS segments, the concessions climate is legally uncertain or unfavourable, about the effects of currency devaluation and questions attempt to capture the perceptions this may translate into a lesser degree of force majeure events on the ability of the con- held by local lawyers as to whether a country’s confidence among investors or lenders. cessionaire to meet its debt service obligations. concessions laws are comprehensive (referred to as extensiveness) and whether they work in Focus on concessions 24

Perceptions of the adequacy of the legal framework for concessions in transition countries

Estonia Adequate Barely Adequate Latvia Inadequate Lithuania Russia Detrimental Belarus Poland

Czech Republic Ukraine Slovak Republic Kazakhstan Hungary Moldova Slovenia Croatia Romania Bosnia and Herzegovina FR Yugoslavia Bulgaria FYR Macedonia Georgia Uzbekistan Kyrgyzstan Albania Armenia Azerbaijan Turkmenistan Tajikistan

Note: No country received a rating of “Comprehensive”. No data available for Bosnia and Herzegovina, FR Yugoslavia or Turkmenistan Source: EBRD Legal Indicator Survey 2000

Trends across the region Adequate selection of concessionaires and to legal disputes generally. However, the authority of In general terms, the state of reform of con- The legal framework for concessions is per- the court is unclear particularly in relation to cessions laws can be seen to fall into five ceived as adequate and reasonably effective. the invalidation of improperly awarded broad categories (see accompanying map). The selection process is seen as well defined concession agreements. Rules governing the although not always consistently or transpar- Comprehensive terms of the contract between the contracting ently applied. Mechanisms exist for dealing authority and the concessionaire exist, but are The legal framework for concessions is per- with challenges to the selection of conces- frequently unclear and sometimes ceived as comprehensive and highly effective. sionaires and to legal disputes generally. unenforceable. There are significant The selection process is seen as fair, well de- However, these are not always effective. The restrictions regarding governing law and fined and transparent in practice. Effective rights of concessionaires under the law applic- dispute resolution provisions. The legal regime mechanisms exist for dealing with challenges able to concessions are reasonably clear. The may provide lenders with effective means for to the selection of concessionaires and to legal contracting authority is largely free to enter taking security over or otherwise protecting disputes generally. The rights of concession- into concession agreements as the parties their interest in concessions, although there are aires under the law applicable to concessions agree, although there may be some restrictions significant restrictions on the effectiveness of are clear. The contracting authority is largely regarding governing law and dispute resolution this security. free to enter into concession agreements that provisions. The legal regime provides lenders include governing law and dispute resolution with effective means for taking security over or Inadequate provisions as the parties agree. The legal re- otherwise protecting their interest in conces- The legal framework for concessions is per- gime provides lenders with effective means sions, although there may be significant restric- ceived as inadequate and ineffective. There for taking security over or otherwise protect- tions on the effectiveness of this security. may be no unified framework for concessions ing their interest in concessions. Procedures in the country and the law affecting conces- may exist for certification of a bona fide Barely Adequate sions may be very unclear. The selection concession agreement by a government The legal framework for concessions is per- process is generally viewed as not transparent authority protecting such agreement from ceived as barely adequate with minimal effect- or unfair in respect of at least some key ele- subsequent legal challenge. iveness. The selection process is defined, but ments of that process. Mechanisms may exist not always in clear or consistent terms. Mech- for dealing with challenges to the selection of anisms exist for dealing with challenges to the concessionaires and to legal disputes generally. Focus on concessions 25

However, there is a perception that the courts or telecommunications. Consequently, 6 S. Brown and V. Laconic, “Ukraine: Law on would not be impartial and transparent in their respondents were often unclear as to how Concessions”, Eastern European Forum Newsletter, pp. 45-49 (June 2000). (“The foreign decision making process. Rules governing the concessions agreements were negotiated or investor will not be subject to vague and unfair terms of the contract between the contracting performed in practice. rules of tenders past because the Law provides authority and the concessionaire may not exist clear, concise and detailed terms and conditions for competing in the concession tender.”) or, if they exist, may be highly uncertain or For the majority of countries, concessions grant limited freedom to the parties to agree the scores also showed a perceived gap between terms of their contract. The legal regime may extensiveness and effectiveness (with a few ness of the applicable legal regime. For not provide lenders with effective means for notable exceptions discussed below). At example, Tajikistan has a law on foreign taking security over or otherwise protecting present, none of the countries surveyed are investment that recognises the right of foreign their interest in concessions. perceived as having a “comprehensive” con- investors to use land, other natural resources cessions framework. The majority of countries and property rights, but does not have any Detrimental fell into the “inadequate” or “barely adequate” specific measures for concessions. Tajikistan The legal framework for concessions is per- category for their concession laws, with a also has a general concessions law that ceived as wholly ineffective and may dis- handful obtaining a rating in the “adequate” provides parameters for concessions to be courage economic activity based on con- category. Effectiveness scores were also quite entered into by government authorities. cessions. There is either no unified frame- low. Nearly all of the surveyed countries Accordingly, respondents rated Tajikistan as work for concessions or, if there is, it is not received scores of lower than 50 per cent for generally “adequate” in respect of the exten- utilised in practice. The granting of conces- legal effectiveness and more than one-third siveness of the legal regime. However, respon- sions as a means of promoting infrastructure received an effectiveness score of lower than dents perceived the effectiveness of the con- development and attracting investor partici- 30 per cent. The low effectiveness scores cessions regime to be so ineffective so as to pation is not an established concept in suggest a widely held perception that many place it in the “detrimental” category. practice. The legal regime does not provide jurisdictions are not selecting concessionaires lenders with effective means for taking in a consistent, open and transparent manner. The existence of a framework concessions law security over or otherwise protecting their Only three survey countries fell into the appeared to impact the legal community’s interest in concessions. “detrimental” category. This indicates that in awareness and understanding of concessions the majority of jurisdictions’ lawyers perceived as a subject matter. The majority of countries there to be some framework governing con- that are grouped in the “adequate” and Concessions climates perceived as cessions or infrastructure projects. “barely adequate” categories have a unified adequate at best framework law. The existence of a framework Concessions legislation in many transition Some countries with similar concessions laws law appeared to be a key determinant of countries was not enacted during the first and legal systems were rated differently. For whether a legal system was perceived as part of the 1990s. For many governments, the example, the Czech and Slovak Republics reaching a baseline of adequacy. Respondents decision to grant concessions is a recent one, have virtually identical concessions systems. may have been more aware of a concessions necessitated as a means of financing needed None the less, the Czech respondents rated its framework when it was self-contained within a infrastructure and of exploiting natural re- concessions as “inadequate” rather than single act as contrasted with jurisdictions sources. Legislative activity in this area is a “detrimental”. To some extent, greater econ- where multiple laws, regulations and admin- relatively recent phenomenon. omic activity in the Czech Republic may have istrative decrees cover the same ground. created a more conducive environment for The concessions results indicate that many concessions, or at least the perception of one. With the exception of Estonia, countries concession systems function, but the legal grouped in the “barely adequate” category are framework regulating them is rather weak. The The lack of a coherent legislative framework jurisdictions that have a framework law. overall scores in the concessions category are very often led to confusion as to the scope and Ukraine, for example, enacted a new conces- far lower than in other LIS categories (e.g., in nature of concessions practice. Russia, for sions law which became effective in July secured transactions, company and insolvency example, fell into the “inadequate” category, 1999. The Ukrainian law is comprehensive in law). The lower concession scores may reflect in part because of low effectiveness scores as its scope and provides detailed guidance on the newness of such laws. At most, half of the well as seemingly uncertain or inconsistent the terms to be included in the contract.6 The countries surveyed have enacted consolidated responses about the extensiveness of its legal law provides a clear process for tenders. It also framework legislation. Many countries have framework. However, in some cases even the allows parties to seek international arbitration laws solely on procurement or perhaps have existence of a relatively coherent legislative for disputes when one of the parties is a non- licensing laws for specific sectors like energy framework was outweighed by the ineffective- resident of Ukraine. Survey respondents Focus on concessions 26

Transparency and fairness of concessionaire selection process appear to have taken the substance of the new

law into account when responding to the 100 Survey. Ukraine’s extensiveness score was very strong; its effectiveness score, however, was significantly lower. This may be because there 75 were few, if any, concessions granted in Ukraine during the first year of the new law’s operation. The significant implementation gap caused Ukraine to fall into the “barely 50 adequate” category. Percentage of respondents

Bulgaria also fell into the “barely adequate” 25 category. This may initially seem unexpected, given the enactment of a concession law in October 1995, together with a Law on Muni- 0 cipal Obligations in May 1996. The Bulgarian South Eastern Europe Central Europe and CIS Central Asia the Baltics laws did translate into a fairly strong exten- siveness score, though some respondents Never Rarely Sometimes Frequently Almost always

perceive that the law does have some ambigui- Note: Survey respondents were asked whether in their view the concession selection process in their particular ties or problems.7 Some commentators have country was fair and transparent. noted, for example, that the assignment by a Source: EBRD Legal Indicator Survey, 2000. concessionaire of its rights in a concession Nor does Slovenia have a framework conces- one factor that may contribute to a belief that agreement (or alternatively arrangements that sions law. Some data exists, however, to an adequate concessions climate exists. would provide lenders with the ability to sub- suggest that Slovene concession practice is stitute concessionaires in the event of fore- functioning quite efficiently and frequently in Nevertheless, it should be noted that while closure) are not permissible under Bulgarian the absence of a single framework law.8 It the legal regime in countries perceived as law. In addition, it is unclear under Bulgarian appears that other legislation, combined with adequate would appear generally conducive law whether concession rights are in rem or administrative decrees and customary prac- to the fostering of concession projects, work contractual. If such rights are contractual, tice, has created in Slovenia what is perceived remains to be done in order for the legal disputes can be resolved by arbitration. If they as a well-functioning and predictable conces- regimes of such countries to be categorised are in rem, only Bulgarian courts can resolve sions regime.9 The process of granting a con- as comprehensive, including effective, con- disputes over such rights. Concession agree- cession in Slovenia is based on provisions of sistent and transparent implementation. ments are also non-assignable in Bulgaria. As the Slovenian Public Services Trading Act of noted above, these restrictions in the Bulgarian 1993 (PSTA). The PSTA allows concessions to legal regime make it difficult for lenders to Some concession climates function be granted only through competitive bidding, extend credit to a concession project. without framework laws and provides that the deed of concession shall be a government regulation or a decree of local In a few cases a country received a higher Most countries in the “adequate” category authorities. It provides for a tender process effectiveness than extensiveness score. have a unified concessions framework and and an appeal procedure. The certainty of Respondents may have believed that, despite more importantly, had strong effectiveness Slovenia’s concessions climate has translated the lack of a comprehensive or unified scores. The existence of a legal framework into external lending from institutions such as concessions framework, it was none the less was bolstered by a concessions system that the EBRD. Perhaps one of the reasons Slovenia possible for government entities (at some level) appears largely to be effective in practice. The has done so well in the rating is that a large to effectively grant concessions. Countries adequate countries include FYR Macedonia, number of smaller concessions have been such as Armenia, Azerbaijan, FYR Macedonia Georgia, Hungary, Poland, Romania and granted in Slovenia. Small municipalities have and Kazakhstan all received higher effective- Slovenia. Poland does not have a framework granted a number of concessions for waste- ness than extensiveness scores.10 Of these concessions act, but does have an act on water and gas supply projects. The large countries only FYR Macedonia has a specific procurement as well as a Geological and number of concessions is driven by the lack of law concerning concessions. In practice, a Mining Act and an Energy Law, which provide available municipal finance and the drive for system may work despite the paucity of the for private sector investment. water projects to facilitate EU accession. Fre- legal framework. Focus on concessions quency and awareness of concession activity is 27

Perceived lack of fairness and responded that it was not possible for such a 7 For a discussion of the Bulgarian Concession Law transparency in the selection process security interest to be granted. see “Bulgarian law on concessions”, infra at p.45. 8 The EBRD has recently initiated a legal transition The LIS asked local lawyers whether, in prac- project to assist the Slovene Ministry of Finance Seventy-seven percent of lawyers surveyed felt tice, the concession selection process in their develop a framework concession law. that it is either non-permissible or unclear as jurisdiction was fair and transparent.11 The 9 For a discussion of a concession project in to whether third parties can take security Slovenia see “Slovenia case study: The Maribor chart at left shows the responses received from interests in concessions, a key requirement for waste-water project”, infra at p.56. lawyers in various regions. There appears to lenders interested in financing concession- 10Aykhan Asadv, “Azerbaijan Oil & Gas New Laws be a perception that concessions are not con- Regulate Oil and Gas Exploration”, Russia/Central based investments. As a result, the survey has sistently awarded in an open and predictable Europe Executive Guide (15 May 1999) identified an area where legal reform could http://www/wtexec.com. The author notes that 16 manner. The majority of respondents in all improve the overall concession regime. major production sharing contracts have been four geographic regions believed that the selec- concluded in the oil and gas sector despite the tion process was, at best, fair and transparent absence of a legal framework. It should be noted, We note, however, that the specificity of this however, that some of the concerns of investors some of the time (i.e., less than or equal to 50 question may not have captured other regarding these inconsistencies have been allayed per cent of the time). by the fact that production sharing agreements methods employed by lenders for protecting (which by their terms provide for clarity regarding their security interests in a concession. By the legal regime applicable to a development) Respondents in Central Asia showed the high- way of illustration, while it is preferable for have typically been signed by the President of est degree of scepticism, approximately 33 per Azerbaijan, and ratified by its parliament. lenders to have a so-called “lien” on a con- cent indicating that the selection process is 11Respondents could answer with the following cession contract, the primary interest of never fair and transparent. No respondents in responses: 1 – Never; 2 – Rarely, 3 – Sometimes, lenders is in creating a mechanism for trans- 4 – Frequently, 5 – Almost Always. Central Asia believed that the process was fair ferring the concession to a reputable and 12See, for example, M. Lequien, “Romania’s New frequently or almost always. CIS lawyers also financially capable third party in the event Concession Law”, Law in transition (Autumn appear to lack confidence in the selection 1999), p. 13 (“The [Romanian] Concession Law that the existing concessionaire fails to fulfil process. Only 13 per cent of CIS respondents does not make a clear distinction between its requirements under the relevant financing mandatory and ‘contractual’ provisions of a believed the process worked frequently; none agreements. Such a transfer can necessitate a concession contract and these notions remain selected “almost always”. Both central Euro- effectively untested under Romanian law.”) See lender obtaining further consent from relevant pean and Baltic respondents and south-eastern also Herzfeld & Rubin (Romania), “Getting a Piece governmental authorities for a transfer, pro- of the Pie: What an Investor should Know about European respondents gave more positive vided that such consent would be granted if the Concession Law”, The Romanian Digest responses. Roughly 45 per cent of lawyers Newsletter of Herzfeld & Rubin, Vol. IV(11) (“[T]he certain criteria were satisfied. These “security” surveyed in each of these regions found that [Romanian] Concession Law is noticeably silent on arrangements are typically more compre- several pitfalls associated mostly with the need to the selection process was fair and transparent hensively addressed in direct agreements draft a complete and all-encompassing agreement.) more than 50 per cent of the time (i.e., res- between grantors of concessions and lenders. ponding “frequently” or “almost always”). It is not entirely clear whether respondents took a broad view of whether granting a whether contracting parties could choose an Uncertainty over taking security security interest was possible or a narrow one, applicable law other than the law of the con- although as a practical matter a legal regime tracting authority. Freedom of contract, or the As noted above, it is critical for lenders to be which recognised the enforceability of direct latitude afforded to the contracting authority, able to take some form of security over con- agreements between governmental authorities was the area where respondents appeared the cession assets, including the concession con- and lenders with respect to transferring rights least knowledgeable. This may reflect either tract itself. The ability to obtain a security under a concession would achieve a great an under-utilisation of concessions law in interest promotes certainty for the lender with deal in creating an environment conducive to some jurisdictions or, alternatively, a lack of respect to repayment of the loan. financing concessions. clarity with respect to what can or should be included in a concession agreement.12 The LIS asked respondents whether a contrac- tor could grant a security interest in the con- Uncertainty with respect to freedom Additionally, respondents were often unclear cession itself. Only 23 per cent of respondents to contract whether an international arbitration clause overall indicated that this was clearly possible There were several issues regarding con- could be included in a concession agree- in their jurisdiction. Thirty-five per cent cessions on which respondents did not have a ment. Because respondents were unsure responded that it was unclear whether such clear understanding. For example, a high about the substance of the law, often they assignments were permissible and 42 per cent number of respondents were uncertain as to Focus on concessions 28

were unable to answer how various concepts greater clarity in the legislative framework * Walid Labadi worked in practice. (this could, of course, be achieved via new Anila Gramshi Office of the General Counsel laws or amendment/supplementation of EBRD existing laws); One Exchange Square Conclusion increased transparency in the London EC2A 2JN Tel: +44 20 73386000 In considering whether to finance projects tender/selection process and more public- Fax: +44 20 73386150 based on concession agreements, lenders look ation of information pertaining to the Email: [email protected] to minimise the impact of non-commercial invitation for bids and the selection of the Email: [email protected] risks associated with such financings. To the concessionaire; and Anita Ramasastry extent a legal regime provides a cohesive and more examples of what should be included Professor of Law Faculty of Law clear structure for the grant of concessions, in a concession agreement, either through University of Washington lenders will be encouraged to provide fin- the promulgation of sample contracts or Condon Hall ancing. Similarly, to the extent a legal regime through revisions to the law. 1100 NE Campus Parkway Seattle, Washington 98105-6617 recognises lenders’ interests in establishing United States of America effective security over a project, and in It will be interesting to see in the future Tel: +1 206 6168441 ensuring effective enforcement remedies, whether perceptions of LIS respondents in the Fax: +1 206 6163427 Email: [email protected] lenders will be better able to evaluate such surveyed countries improve with the increased projects on their commercial merits. use of existing laws and the introduction of new or amended concessions legislation. As the EBRD’s 2000 Legal Indicator Survey Additionally, there is room for study of the shows, the transition countries have not yet relationship between a favourable concessions reached the level of providing such a compre- climate and the degree of investor and lender hensive legal regime for concessions. A num- financing of concessions. To the extent that a ber of countries have in recent years focused jurisdiction’s concessions laws remain unclear attention on improving their concessions laws. or seem to be applied inconsistently, there will However, according to the Survey the major be a continued reluctance for lenders to areas where there is a perceived need for finance projects. further reform include: Focus on concessions 29

1 UNCITRAL is a subsidiary body of the United Nations General Assembly. It was established in 1966 with the general mandate of furthering the progressive unification and harmonisation of the International efforts to law of international trade. UNCITRAL is composed of 36 member states elected by the General promote and harmonise Assembly. Membership is periodically renewed, and is structured so as to be representative of the world’s various geographic regions and its concession law principal economic and legal systems. 2 Official Records of the General Assembly, Fifty-fifth Session, Supplement No. 17 (A/55/17), para. 372.

3 The reader will find an excellent overview of the UNCITRAL Legislative Guide on Privately various privatisation techniques that have been used in various countries and a discussion of the Financed Infrastructure Projects legal issues involved in Pierre Guislain, The Privatization Challenge (Washington, D.C., The José Angelo Estrella Faria, Legal Officer, UNCITRAL* World Bank, 1997).

At its thirty-third session (New York, 12 June-7 July 2000) the United Nations Commission on International Trade Law (UNCITRAL)1 adopted the UNCITRAL Legislative Guide on Privately Financed Infrastructure Projects.2 This was the culmination of work that began in 1996, when UNCITRAL first considered the possibility of working in the field of privately financed infrastructure projects.

UNCITRAL has reviewed various draft chap- relevant to private investment in public infra- Scope ters of the Guide since its thirtieth session in structure projects. It also discusses legislative The Guide is concerned with infrastructure 1997. The draft chapters were prepared by the options that would be conducive to attracting projects that require the selected investors to Secretariat with the assistance of outside ex- private capital, both national and foreign. The undertake physical construction, repair or ex- perts from both the public and the private sec- Guide is not intended to provide advice on pansion, in exchange for the right to charge a tors. The Secretariat also held consultations drafting agreements for the execution of priv- price (either to the public or to a governmental with other international organisations, such as ately financed infrastructure projects. Never- agency) for the use of the infrastructure facility the United Nations Economic Commission for theless, it discusses some contractual issues to or for the services it generates. It does not deal Europe (UN/ECE), the United Nations Indus- the extent that they relate to matters that with “privatisation” transactions unrelated to trial Development Organisation (UNIDO), the legislation might usefully address. the development and operation of public infra- World Bank, the European Bank for Recon- structure,3 nor does it address projects for the struction and Development (EBRD), as well as Technique exploitation of natural resources, such as with non-governmental organisations such as mining, oil or gas exploitation projects. the International Bar Association, the Union The legislative recommendations use flexible, Internationale des Avocats, the Berne Union, rather than imperative, language. The level of the Panamerican Surety Association, and the generality varies according to the subject Background to Fédération Internationale des Ingénieurs matter dealt with in each recommendation. UNCITRAL’s work Conseils (FIDIC). Some recommendations lend themselves to In recent years, private investment in infra- transformation into legislative provisions with- structure has rapidly increased. In some dev- out extensive adjustment (for example, most of The Legislative Guide eloped and developing countries it represents the recommendations that deal with the selec- a new business market which requires the tion of the concessionaire). However, the Purpose development of a new legal framework. The implementation of other recommendations Secretariat’s studies of domestic laws and The Guide is intended to become a reference might necessitate various legislative or reg- regulations pertaining to privately financed that national authorities and legislative bodies ulatory measures (such as the recommen- infrastructure projects show a wide array of may use when preparing new laws or review- dations dealing with the general legislative approaches to the legal issues raised by these ing the adequacy of existing laws and regul- and institutional framework for privately projects and varying levels of experience in ations. For that purpose the Guide helps financed infrastructure projects). handling them. It is essential to bear in mind identify areas of law that are typically most Focus on concessions this diversity in order to understand the 30

approach taken by UNCITRAL when formu- The public utilities sector of the United Overview of lating its recommendations. States, for example, has traditionally been Legislative Guide topics open to private investment. A considerable In this short introduction to UNCITRAL’s The United Kingdom, for example, has estab- amount of case law in that country and work in this area it is not possible to include lished a comprehensive legislative framework special regulations are applicable to the a full presentation of the treatment given to for private investment in infrastructure in the terms of public utility franchises and the privately financed infrastructure projects in last two decades. Such framework includes leg- operations of public utilities. Nevertheless, various legal systems and the solutions islation adopted to liberalise the public utilities recent legislation has restructured certain proposed in the Guide. The following para- sectors and to attract private investment to infrastructure sectors and enabled govern- graphs give only a brief overview of some of other types of infrastructure or services through mental agencies to attract private investment the main topics dealt with in the Guide. the Private Finance Initiative (PFI). The PFI for sectors not yet privatised. goes beyond the traditional notion of privatisa- tion to provide a new approach for the procure- Within the civil law tradition, France has for Balancing the interests of public and ment and delivery of services by government. It centuries engaged private entities for the private sector is estimated that a high proportion of public provision of certain public services, and the From the beginning of its work UNCITRAL expenditure investment in the United Kingdom French Conseil d’Etat has developed a rather has aimed at achieving an appropriate over the next years will be financed privately elaborate body of rules and principles of balance between the need to attract private and the experience gained with the PFI has administrative law governing agreements for investment for infrastructure projects and to attracted global attention.4 “delegation of public services”. Although most protect the interests of the host government of the existing general legislation on privately and the public through the Legislative Guide. Significant legislative developments have taken financed infrastructure projects in civil law Of course, achieving such a balance is, to a place in eastern Europe, where new general or countries is relatively recent, as in the case of large extent, a matter for negotiations between sector-specific laws governing private partici- Turkey and most Latin American countries, the parties concerned. However, there may be pation in infrastructure projects have been the notion of private provision of public limitations to party autonomy in the form of adopted as part of the measures taken to allow services is well embedded in most legal implied or mandatory contractual terms. the transition to a market-based economy.5 In systems belonging to the civil law tradition. There may also be certain implied powers of the Asia-Pacific region, the Philippines was public authorities that result in a substantial one of the first countries to adopt a comprehen- International experience shows a varying level inequality between the contracting authority sive legal framework for the development of of success in the implementation of privately and the concessionaire. infrastructure through private investment. financed infrastructure projects. Some of the Many countries of the region have since adopt- difficulties experienced by some countries have This inherent imbalance, either as a matter of ed a policy of promoting private investment in been attributed to deficiencies in the existing law or as a result of government contracting infrastructure. This has in some cases resulted legislative framework. This circumstance had practice, may be found in various legal sys- in the adoption of general enabling legislation led UNCITRAL to offer its legislative advice, tems, but it is more apparent in legal systems (Thailand, Vietnam), or sector-specific legis- in particular to legislators and policy makers in of the civil law tradition. Special prerogatives lation (India) although in some countries, legal developing countries and transition economies. for governmental agencies are justified in developments have been, at least initially, By presenting and explaining best practices, those legal systems by reasons of public limited to the issuance of policy statements (Sri the Guide aims to help those legislators and interest, which the Guide does not question. Lanka) or general guidelines (China). policy makers evaluate the adequacy of laws The Guide recognises, however, that special and regulations relevant to those projects. governmental prerogatives, may, if improperly The large amount of new legislation adopted However, UNCITRAL was mindful of the dif- used, diminish the vested rights of govern- in the past two decades should not lead to the ferent legal traditions and legislative practices ment contractors. The Guide invites countries erroneous conclusion that privately financed in various countries; therefore, the Guide is not interested in attracting private investment in infrastructure projects represent an entirely intended to unify the law of privately financed infrastructure to review their laws on govern- new phenomenon. Not only was there consid- infrastructure projects, nor is it meant to lead ment contracts, so as to provide the degree of erable investment in public infrastructure the domestic legislator to crystallise the law in protection needed for fostering private during the nineteenth century and up to the rigid legislation. Throughout the Guide the investment and remove those provisions first half of the twentieth century, but in some legislator is invited to bear in mind the need to which give rise to concerns about the long- countries there is a well-established legal ensure that the parties have the necessary term contractual stability required for tradition in respect of infrastructure projects flexibility to negotiate contractual arrange- infrastructure projects.

Focus on concessions financed and carried out by the private sector. ments that suit the needs of individual projects. 31

Devising appropriate bidding procedures dence on privately financed infrastructure 4 See T. Wilson, “PFI: The Private Finance Initiative in projects (or on one specific project), on the the UK”, Infrastructure Journal, Winter 1999, p. 35. In line with the advice of international one hand, and general legislative changes 5 For example, in Albania (Law No. 7973: Law on organisations such as UNIDO and the World Concessions and Participation of Private Sector in affecting other economic activities also, and Bank, the Guide expresses a preference for Public Services and Infrastructure (1995)), Bulgaria not only infrastructure operation, on the other (Concessions Act (1995) and Law for Amendment of the use of competitive selection procedures hand. The Guide discusses the most appro- the Concession Act (1995)), Czech Republic (Zákon which several delegations participating at the o podmínkách podnikání a o vykonu´ státní správy v priate risk allocation schemes for each of UNCITRAL deliberations felt necessary in energetickych´ odv tvích (1994)) and Zákon ze dne 5. these categories. ervna 1994 o telekomunikacích (1994)), Hungary order to counter improper practices and (Act XVI on Concessions (1991), Act XLVIII on Mining corruption, as well as to obtain the best value (1993), Act XLI on Gas Supply (1994), Act XLVIII on As regards changes in the economic con- for the host government and the users of the Production, Transport and Supply of Electric ditions, the Guide notes that sometimes their Energy (1994)), Poland (Act on Toll Motorways privately financed infrastructure facilities. impact may be covered automatically in the (1994)), Romania (Ordinance Regarding the However, the Guide proposes selection Conditions for the Concession of Sections of Land project agreement, either through financial procedures specially devised for infra- Lines of Communications, Motorways and Railways arrangements such as a tariff structure that (1995)), Slovenia (Public Trading Services Act structure projects, which differ in many includes an indexation clause, or by the (1993)), Slovak Republic (Law on Concession respects from the tendering process typically Procurement (1996)). assumption by either party, expressly or by used in government procurement. exclusion, of certain risks. However, some * José Angelo Estrella Faria changes might not lend themselves easily to International Trade Law Branch (UNCITRAL secretariat) Facilitating financial closing inclusion in an automatic adjustment mechan- United Nations Office of Legal Affairs ism or that the parties may prefer to exclude Vienna International Centre, Room E0417 The Guide highlights the importance of sec- from such a mechanism. Different remedies A-1400 Vienna, Austria urity arrangements for raising finance for Tel: 26060 4070 may be available to the parties, depending on infrastructure projects. It invites host countries Fax: 26060 5813 the law governing the project agreement. The Email: [email protected] to review their laws on security interests; it Guide stresses the importance of ensuring that stresses the importance of ensuring that dom- * The views expressed in this article are those of the contracting authority has sufficient powers the author and do not necessarily reflect the views estic laws provide adequate legal protection to to agree on contractual mechanisms to deal of the United Nations. The domestic legislative secured creditors and do not hinder the ability and regulatory texts referred to in this article are with changes in the economic or financial of the parties to establish appropriate security available from the author. conditions that render the performance of the arrangements. The Guide also invites govern- concessionaire’s obligations substantially more ments to take account of international develop- onerous than originally foreseen at the time cessionaire, the project site and easements, ments in the area of security interests, includ- they were entered into. financial arrangements, security interests, ing the Model Law on Secured Transactions, assignment of the concession, transfer of which was prepared by the EBRD to assist controlling interest in the project company, legislative reform efforts in central and eastern Conclusion construction works, general conditions for European countries. The preceding paragraphs have provided only infrastructure operation, guarantees of per- a few examples of issues discussed in the formance, insurance arrangements, force Dealing with changed circumstances Guide. In addition the Guide considers majeure, events of default, step-in rights of matters such as: the contracting authority and the lenders); The Guide stresses the importance of contrac- general legislative and institutional frame- duration and extension of the project agree- tual mechanisms for dealing with changes in work for the implementation of privately ment, termination of the project agreement circumstances, with a view to preserving the financed infrastructure projects (constitu- and consequences thereof; and long-term sustainability of infrastructure pro- tional and legislative framework, scope of settlement of disputes. jects. In that connection, it calls the attention authority to award concessions, administra- of legislators to two particular categories of tive coordination, institutional arrangements change: legislative or regulatory changes and It is expected that the Guide will be a useful for the regulation of infrastructure services); unexpected changes in economic conditions. tool to assist domestic legislators, in particular project risks, risk allocation and in developing countries and in economies in government support; For the purpose of considering the appro- transition, in the establishment of a favourable legislative and contractual agreements for priate solution for dealing with legislative legislative framework for the implementation of the construction and operation of infrastruc- changes, the Guide distinguishes between privately financed infrastructure projects. ture, including core terms of the project legislative changes having a particular inci-

agreement (such as organisation of the con- Focus on concessions 32

Public-private partnerships for infrastructure development: The next steps

Geoffrey Hamilton, Regional Adviser, and Travis D. Coleman, Special Assistant, United Nations Economic Commission for Europe*

Public-private partnerships (PPPs) continue to attract the interest of governments across Europe and around the world, as they look for a more affordable and effective means of developing infrastructure projects. In response to this demand, the United Nations Economic Commission for Europe (UN/ECE) established an expert group to promote best practices in PPPs for the countries of central and eastern Europe and the Commonwealth of Independent States (CIS).

After recently completing its guidelines, the BOT Expert Group was formed in January sectors come together to espouse a set of group is undertaking a new initiative aimed at 1996. Led by its Chairwoman Ms Corinne common objectives, which should be clearly accelerating the delivery of PPP projects by Namblard-Bouverot, the UN/ECE BOT drew presented to the public at large. emphasising training, regional cooperation, upon experts from enterprises, governments, enhanced coordination among regional and international organisations, regional develop- Negotiation Platform international bodies, and the active partici- ment banks, and most notably from the Euro- pation of the private sector. pean Bank for Reconstruction and Develop- In addition to the Guidelines, members of the ment (EBRD) and UNIDO. In pursuing its Group prepared a Negotiation Platform6 on Over the course of the last decade many tran- goal to promote new project financing tech- PPPs. Intended to facilitate and ensure the sition countries have encountered a number of niques, the BOT Group’s work has fallen into implementation of PPPs by providing a basis challenges as they seek to develop a modern three related areas: for training public officials charged with infra- infrastructure that not only attracts invest- structure development in the negotiation of ment, but supports continued economic ex- 1. Preparation of Guidelines on Best Practices PPPs, the Platform provides a balanced pansion. Facing the reality of limited re- 2. Development of a Negotiation Platform approach to reconciling and harmonising the sources, the governments of central and east- 3. Consultative meetings and visits with interests of the public and private sectors. ern Europe and the CIS began to look towards governments. While the Platform does not focus on any forging public-private partnerships (PPPs)1 as individual infrastructure sector, it does high- a means to meet the growing demands of their light the major issues relevant to PPPs in Guidelines on Best Practices citizens and economy. At the request of its general. Beginning with a discussion of the member governments, the UN/ECE2 responded The Guidelines on Best Practices in PPPs4 basic structures of PPPs, the Platform goes to this growing interest by establishing an provide a comprehensive overview of PPPs further by: examining the principles of risk advisory group of experts in 1995, which later including: a historical perspective, political allocation; providing an analysis of the major became known as the UN/ECE BOT (Build and institutional aspects, financing and risk interests of the host government, private Operate Transfer) Group. Recently, the BOT allocation, how to create a national PPP Unit, sponsors, and lenders with respect to a PPP; Group has launched a new initiative in con- and the necessary social considerations. covering the pre-development phase proced- junction with the release of its Guidelines on Since the guide is designed to be a continual ures and documents; discussing the issues Best Practices for PPPs.3 This article will dis- work in progress, space is made available for related to project construction and completion; cuss the experiences of the UN/ECE BOT updates and various case studies. and providing an analysis of the most signifi- Group, the reasons behind its newly estab- cant issues related to the operation of a PPP lished initiative, and how this initiative will Linked to its legal, technical and policy advice infrastructure project. help enhance the quality and effectiveness of the Group further prepared principles and PPPs in the region. objectives governing the social, environmental, Consultative meetings good governance and human rights objectives of PPPs.5 Although a variety of projects can be In developing its Guidelines the BOT Group UN/ECE BOT advisory group accomplished through PPPs it should be gauged support for, and examined the experi- Pursuant to a decision taken by the UN/ECE understood that some endeavours are better ences of, governments in the application of member governments to promote the concept left completely within the hands of either the PPPs by holding an extensive round of con- of PPPs in infrastructure development in public or the private sector. Accordingly, PPPs sultative meetings with several governments central and eastern Europe and the CIS, the can work only when the public and private from central and eastern Europe.7 These con- Focus on concessions 33

sultations were designed to evaluate the legal legal and regulatory structures; 1 Public-private partnership is not a precisely defined and regulatory framework and the feasibility of properly trained civil servants in dealing term. It embraces a range of structures and con- cepts, which involve the sharing of risks and respon- applying PPPs to certain infrastructure pro- with PPPs; and sibilities between the public and private sectors. The jects. Extending its reach beyond Europe, the enhancing interest among the private sector approaches and techniques range from the simple BOT Group, in cooperation with UN/ESCAP,8 in the region, especially by the commercial commercialisation of assets that remain under pub- lic ownership right through to virtual privatisation. also conducted a consultation and training banks, in PPP schemes. The way in which risks, responsibilities and powers programme with representatives of the govern- are allocated between the public and private sectors ment of Bangladesh. will vary enormously from structure to structure Regional Flagship Initiative across this spectrum. 2 The UN/ECE was created in 1947 and currently has In the aftermath of the recent war in Kosovo, Filling the public sector skill gap 55 member states in Europe, North America and and other conflicts in south-eastern Europe, Israel. The ECE’s areas of work include environment, During the course of the BOT Group’s work reconstruction has become a major concern to transport, statistics, trade facilitation, industry, agri- culture and forestry, as well as housing and planning. the importance of establishing a specialised the international community in securing peace The commission also undertakes various activities to agency or task force to promote and enhance and stability. Even though the international assist countries of central and eastern Europe and the effectiveness of PPPs within governments community under the Stability Pact10 has the CIS in their transition to market economies. became evident. The complexity and sophisti- already made progress in earmarking funds for 3 The initiative was launched at an International Forum in Geneva entitled, "Public-Private Partnerships for cation of PPP arrangements places a signifi- quick start projects, the amount is clearly Infrastructure Development: The Next Steps" on 4 cant burden upon the government. Such insufficient for such a massive undertaking. and 5 December 2000. projects require the development of new skills As a result, the active participation of the 4 The Guidelines, which are still draft form, were prod- in public officials such as skills in writing private sector will be necessary to fill the gap. uced as background information for the WP.5 Forum on Public-Private Partnerships for Infrastructure output specifications, negotiating long-term In response to this shortcoming, a Regional Development: The Next Steps (4 and 5 December contracts, and a solid understanding of the Flagship Initiative (RFI) under the auspices of 2000) and were edited by Xavier Bezançon and financing products used to fund PPPs. Recog- the (OECD/UK government) Investment Rees Griffiths. nising this burden, a number of Western gov- Compact11 of the Stability Pact was launched 5 The United Nations Global Compact was introduced by the UN Secretary-General, Kofi A. Annan, on 31 ernments with significant PPP programmes on 5 December 2000. The RFI will help to: January 1999 at the World Economic Forum in have sought to address their own skill shortage develop PPPs, create support for regional Davos, Switzerland by challenging business leaders by creating specialised units, staffed in the cooperation, raise awareness of new project to "embrace and enact" a set of nine principles covering human rights, labour and environment. main by private sector experts. These experts finance techniques, enhance opportunities for See http://www.unglobalcompact.org are recruited to support the public sector in the local business community, improve legal 6 A special thanks to Richard Ornitz and Stanely developing high-value PPP projects. Recog- and regulatory frameworks, and generate Parks of the law firm Coudert Brothers in nising that government officials in the greater coordination among multilateral and preparing the Negotiation Platform. transition economies are no better grounded in bilateral as well as international and regional 7 The BOT Group is at present exploring oppor- tunities for involvement in the Russian Federation. the requisite skills than their counterparts in financial institutions. 8 The United Nations Economic and Social Commission Western economies, the Group perceives that for Asia and the Pacific (UN/ESCAP) has a mandate this skill shortage could be a primary bottle- The RFI will address these challenges in a to address the economic and social issues of the neck to implementing projects in the region. step-by-step process in order to bring about region it represents which includes 48 member states and 10 associate members. Along with the As a result the BOT Group is prepared to the greatest results possible. Stage one will in- UN/ECE and three other regional bodies, it reports to assist transition countries in addressing this volve the creation of strategic task forces for the Economic and Social Council and operates under skill shortage.9 regional partnerships in project development the authority of the Secretary-General. in order to develop priority projects. In bring- 9 The BOT Group has been requested by the govern- ment of the Czech Republic to provide advice on ing these priority projects forward, members of Next steps establishing a special task force within its govern- the task forces will use their experiences with ment to develop PPPs. While the work of the UN/ECE BOT Group successful projects to develop similar projects 10The Stability Pact is a political declaration of commit- and other international organisations has in south-eastern Europe. In addition, govern- ment and a framework agreement on international cooperation to develop a shared strategy among assisted in the development of PPPs in the ment representatives will present projects that more than 40 countries, organisations and regional transition countries, much still needs to be could be developed on a private financing groupings for stability and growth in south-eastern done. The pace of project development is far basis for initial assessment. Members of task Europe. See http://www.stabilitypact.org slower than in other regions of the world. A forces will also help in determining the degree 11The Investment Compact of the Stability Pact sets out a number of commitments for policy reform detailed account of why this is so is beyond of government involvement and support which countries in south-eastern Europe need to the scope of this article; however, the critical necessary to make proposed projects viable implement in order to create a robust and sus- tainable market economy and to encourage areas in need of improvement are: while looking for ways in which regional Focus on concessions increased local and foreign direct investment. 34

cooperation could be helpful in the develop- within the Ministry of Finance or the Office of 12United Nations Publication, Public-Private Partner- ment of these projects. Finally, the task forces the Prime Minister. In order to help govern- ships, A New Concept for Infrastructure Develop- ment, p. 18 (1998). A special thanks to will evaluate the enabling legal and institu- ments achieve this result, the UN/ECE BOT Christopher-Clement Davies for his contribution to tional environment that is required for Group will advise governments on establishing that publication. developing these projects. a PPP Task Force Unit capable of developing * For further information on how to join or become projects at a pre-feasibility stage. Further, a involved in the UN/ECE BOT Group or the PPP The second phase of the RFI will focus on training programme on how to develop these Alliance, please contact: regional legal and regulatory harmonisation units, the structure and modalities of devel- Geoffrey Hamilton Travis D. Coleman to simplify the environment for investors. A oping projects, as well as a programme on United Nations Economic Commission for Europe regional symposium on the legal issues re- project appraisal will be held. Coordination Unit for Operational Activities lated to PPPs will be held in the first half of Palais des Nations – Office 433 CH-1211 Geneva 10 2001 to promote the improvement of the legal Public-Private Switzerland and regulatory framework in the region. This Tel: +41 (022) 9172838/1379 Partnership Alliance symposium, organised in cooperation with Fax: +41 (022) 9170178 Email: [email protected] UNCITRAL and to be held in Slovenia, will In addition to the RFI, a Public-Private [email protected] determine legislative and institutional gaps Partnership Alliance was recently created. Website: http://www.pppgroup.net

that need to be filled in order to attract priv- Open to governments, companies and inter- This article represents the views of the authors ate investment for infrastructure. The final national organisations, it aims at providing a and not necessarily those of the UN Secretariat. phase of the RFI will focus on institutional framework for cooperation between the public capacity-building. It is important that govern- and private sectors and creating a network of ments at both the national and local levels government agencies and private-sector Conclusion learn how to protect their interests and those partners throughout Europe to provide infor- “The demand for infrastructure development in of their citizens when negotiating with skilled mation and advice on best practices. The PPP central and eastern Europe and the CIS is counterparts from the private sector. To Alliance is designed to stimulate interest in acute. For governments and private sector address this challenge, several extensive and awareness of PPP methodologies, support alike, this represents both a challenge and an regional training seminars will be held for the development of PPP projects that take opportunity. The challenge is unquestionably negotiators, using real PPP cases. Provision- account of social development and environ- complex, but the potential rewards are imm- ally, the governments of Albania, Bosnia and mental sustainability within a market oriented ense: not only do PPPs provide a means of Herzegovina and Bulgaria have expressed an framework, offer a neutral mediation service meeting an immediate need for services and interest in hosting these seminars. for recovering projects that encounter difficul- facilities, but their implementation will serve to ties, provide policy-makers with details of promote economic and commercial growth and In addition to the actions described above the successful PPPs and provide examples of development. Even if progress in this field to RFI will encourage and support the creation of legislation that can enhance the probability of date has been limited, there is now widespread PPP structures within governments. Such a developing a successful PPP. The scope of the recognition that PPPs represent one of the keys body, either regional or national, should also Alliance expands beyond that of Europe and to development in the transition economies.”12 become a centre of excellence for the public the CIS, to other regions of the globe looking sector and a “one stop shop” for the private for support and cooperation in the promotion Ultimately, the success of PPP projects will sector. Encouraging such a culture over time of PPPs. Within this framework, the success depend on ensuring a proper synthesis of ensures clarity and efficiency, particularly and failures of projects are tracked so that new public and private sector strengths, skills and where BOT and concession projects are con- innovative processes can be developed taking resources that satisfies the priorities of both sidered. This development eventually trans- into account the unique circumstances of each within each project. The PPP Alliance hopes lates into lower risk profiles and finer margins region and avoiding a “cookie cutter” approach to harness the vision and determination of on the financing. Such a coordinating body to ensure the maximum impact of a PPP. both the public and private sectors to bring can focus on policy and lessons learned from about PPPs capable of making a valuable and previous projects and may be best placed lasting impact sustainable for the economic and social revitalisation of the region. Focus on concessions 35

Model Concession Law 1 The group is comprised of representatives from seven countries (Bulgaria, Bosnia and Richard Drummond, Export Credit Guarantee Department; Walid Labadi, Herzegovina, Georgia, Kazakhstan, Romania, Turkey and Ukraine) and by the authors of this Senior Counsel, EBRD; Roger McCormick, Partner, Freshfields Bruckhaus article with the help of UNCITRAL. Deringer; Jurgen Voss, Consultant, OECD*

In early 2000, under the auspices of the Organisation for Economic Cooperation and Development (OECD) managed Centre for Private Sector Development in Istanbul, an expert group was formed with the objective of preparing Basic Elements of a Law on Concession Agreements.1 Set forth below is a discussion of some of the considerations of the expert group in connection with the development of the Basic Elements.

The group initially focused on clarifying areas more fully realised by making the scope for Among the more controversial provisions were of law that may be uncertain and which may the law as broad as possible. A consensus those defining the scope for concessions to be cause difficulties in the implementation of emerged that the Basic Elements would be awarded without competitive procedures. build-operate-transfer (BOT) concession-style given as broad a scope as possible, leaving Some in the group argued that the Basic transactions. A policy paper in the form of a individual countries to exercise their dis- Elements should include provisions which draft principles for the Basic Elements was cretion on whether to exclude certain sectors clearly provide that concessions should be developed in early February 2000. This from the application of the law. awarded only in accordance with specified and working document has evolved over several detailed public procurement procedures. drafts in response to comments, and in parti- Others believed the Basic Elements should Contracting authority cular following an OECD organised seminar in offer more flexibility to permit the direct award May/June 2000 in Istanbul attended by One of the fundamental objectives of the Basic of concessions in a number of circumstances. representatives of a number of OECD mem- Elements is to minimise uncertainty regarding Much of the discussion focused on the scope bers. The group members have now generally the power of contracting authorities to enter for possible exceptions to public tendering of agreed on these basic provisions, and explan- into concessions. Accordingly, the Basic Ele- concessions. A structure has evolved which, atory notes on the Basic Elements are under ments include clear provisions specifying the under certain limited circumstances, would preparation. Ultimately, the draft Basic Ele- powers of contracting authorities. In addition, provide for the possibility for the award of ments and explanatory notes will be circulated the Basic Elements clarify that contracting concessions through mechanisms which would to a wider “Expert Group” which will include authorities are empowered to enter into an- not involve the more conventional public representatives from the relevant countries. cillary or related agreements associated with a tender procedures. concession, including any agreement for the purpose of facilitating related financing (such Scope of the Basic Elements Invalidating concession as a direct agreement with lenders). agreements for fraud An important issue for the working group was to determine the intended scope of the Basic The expert group discussed a number of Selection procedures/ Elements. Some members in the group argued alternatives which would balance the object- procurement requirements that the Basic Elements should focus solely ives of concessionaires’ and lenders’ need for on infrastructure developments and not pro- The provisions of the Basic Elements in re- certainty regarding the validity of concessions ject financings in the energy/mining sector on spect of selection and procurement require- with public policy concerns against permitting the grounds that grants of concessions in ments were among those which involved concessions awarded corruptly to continue these sectors were typically governed by a significant discussion. There was a consensus indefinitely. Among the options proposed for separate legal regime. Others were of the view that the procurement procedures for conces- addressing the issue is the creation of a certif- that the core principles of the Basic Elements sions in a country should, to the extent ication procedure for concessions, limiting were equally applicable to projects in the possible, tie into that for other public sector possible challenges to such certification pro- energy/mining sector, and that, as long as the contracts. However, it was also felt important cedure, and providing that in the event the law permitted countries to exclude certain that the Basic Elements include general certification procedure is successfully chall- sectors from the application of the law, the criteria for pre-selection, requesting proposals enged, a concession may be terminated by the objectives of the Basic Elements would be and evaluation criteria. granting authority only if loan financing has Focus on concessions 36

been fully repaid. It is intended that this Basic Elements offer some clarity on the * Richard Drummond approach would encourage private sector ability of concessionaires to grant a security Export Credit Guarantee Department P.O. Box 2200 financing of concessions. interest in the concessionaire’s rights under a 2 Exchange Tower concession agreement. Harbour Exchange Square London E14 9GS Provisions in Tel: 020 7512 7000 concession agreement Settlement of disputes Fax: 020 7512 7649 Email: [email protected]

Given the broad scope of the Basic Elements The Basic Elements include provisions which * Walid Labadi there was some disagreement as to whether specify that concession agreements may Office of the General Counsel they should specify mandatory provisions of include provisions providing for international EBRD One Exchange Square the concession agreement, or merely clarify arbitration procedures. London EC2A 2JN that the granting authority would have the Tel: 020 7338 7361 authority to contractually agree whatever Fax: 020 7338 6150 Financial stabilisation Email: [email protected] terms were commercially appropriate for the proposed concession agreement. A consensus While arguably addressed by provisions which * Roger McCormick Freshfields Bruckhaus Deringer was reached, however, that most jurisdictions provide that the content of the concession 65 Fleet Street would benefit from a list of core items which agreement is subject to negotiation, the expert London EC4Y 1HS should be included in any concession agree- group felt it important to clarify that the con- Tel: 020 7936 4000 Fax: 020 7832 7001 ment, but clarify that the relevant granting tracting authority is authorised to include pro- authority would have the authority to visions which would have the effect of provid- * Jurgen Voss Organisation for Economic determine when such provisions were not ing appropriate assurances to a concessionaire Cooperation and Development appropriate in a particular concession. that it will be protected from the financial 2 rue André Pascal circumstances of legislation which becomes 75775 Cedex 16 Paris, France Among the core elements of a concession effective after the date of the concession Tel: 33 1 45 24 78 64 agreement the Basic Elements include: the agreement, subject to certain limitations. Fax: 33 1 45 24 18 42 nature and scope of the work to be performed; Email: [email protected] the duration of the concession; a degree of This article represents the views of the authors and Conclusion exclusivity; the right of the concessionaire to not necessarily those of the organisations with which they are associated. charge third parties for services; methods for The Basic Elements are not intended as Copies of the current draft of the Basic Elements adjustment of payments due to the contractor detailed legislation for direct incorporation are available to interested readers by contacting by the contracting authority or third parties; into local legal systems. Their main objective Roger McCormick at Freshfields Bruckhaus Deringer obligations of the concessionaire in respect of will be to provide a reference for governmental in London. the environment; and remedies available to the authorities and Parliaments in preparing new contracting authority in the event of default of laws or reviewing the adequacy of existing the other party. laws and regulations. The development of the Basic Elements will also provide a useful focus point for investors evaluating the effi- Security cacy of a concession law regime. It is intended While the Basic Elements will need to fit that the Basic Elements with suggested ex- within an overall legal regime which planatory notes will be circulated to a wider addresses the ability of lenders to take expert group in the middle of 2001. security over a concessionaire’s assets, the Focus on concessions Antoine Maffei, Partner, and Valérie Hulst, Associate, 37

De Pardieu Brocas Maffei & Leygonie*

1 The Law dated 29 January 1993 relating to prevention of corruption and relating to transparency of economic activities and public proceedings, better known as “Law Sapin”, which is one of the first attempts to regulate public service concessions, does not provide a general definition of such notion.

2 See R. Chapus, Droit administratif général, p.625 (14th ed., 2000); J. Dufau, Concessions de service public, Jurisclasseur administratif, Fasc. 530, 2000, no.3; G. Liet-Vaux, Identification de la concession de service public, Revue administrative, 1968. p.715.

Drawing on the concessions experience of developed jurisdictions: the example of France

Policy makers in transition countries, in developing their concessions frameworks, may wish to look to the experience of jurisdictions with dev- eloped concession laws and practice. This article looks at the example of France, a civil law jurisdiction with a long history of regulating public service concessions.

French public law was one of the first legal private or public (the concessionaire), freely conceded activity and the financial conditions systems to recognise the potential uses of pro- chosen, to manage and operate, at its own risk, of the concession. viding a framework for the grant and financing a public service activity, including the carry- of “public services” through concessions. ing out of investments. This person is paid Contractual relationship between Accordingly, concession finance and the dev- essentially by the users of the service through public and private entities elopment of concession projects in France has direct fees. Despite the lack of a legal con- a history of success in providing public firmation of such definition by any constit- There are three main elements of the contract- services efficiently. utional or legal sources,1 the above definition ual relationship established under a concession is generally accepted by most French authors.2 agreement, the scope of which can have Under French law, a public service concession significant implications on the development of is commonly defined as a long-term contract This article discusses the evolution of French concessions. These elements include the iden- under which a public entity (the conceding concessions law in three general areas: con- tity of the conceding authority, the identity of authority) entitles another person, either tractual relationship between public and the concessionaire and the legal regime applic-

private entities, the scope and nature of the able to concessions. The evolution of conces- Focus on concessions 38

sions in France is essentially an evolution of authorities granting concessions and the num- mixte). Such companies are specifically creat- the legal nature of these three elements. ber of concessions awarded has increased ed and dedicated to manage a public service dramatically during the last 50 years. and seek to optimise cooperation between public and private sectors. Concession agree- The nature of the conceding authority ments concerning motorways could have been The nature of the concessionaire Public service concessions are granted by entered into with this type of company only public entities. The presence of a public It has long been natural for public entities to until 1970, as laid down by a law of 1955. entity as a conceding authority distinguishes choose a private company with which to More recently, a number of motorways and such contracts from commercial concessions conclude their concession agreements; it was motor tunnels have been managed by joint- regulated by commercial law (for instance, considered that private sector entities, chosen venture companies. Such companies have also the grant of rights in a motor vehicle through through competitive tender procedures, would been granted concessions relating to the a lease or conditional sale by a private person function more efficiently than publicly owned management of national food interest markets to another private person). Historically, companies. However, French law evolved (marchés d’intérêt national) created by law to public entities involved in public service gradually to permit the award of concessions to organise food distribution on French territory. concessions were the French state and local companies which were in effect state majority public entities (collectivités locales such as owned and controlled, but which had a corpor- The legal regime of towns, districts, regions). ate structure which allowed management to public service concessions function relatively independently, having effi- Historically, the state granted concessions ciency as their primary objective. This evol- Concession agreements have been character- only in specific sectors, such as railroads, ution addressed concerns about placing ised by the French judicial system as public electricity production and distribution, gas sectors of particular national interest under the contracts and constitute the most represen- transportation or public highways. Similarly, control of private entities. However, it was tative category of such contracts. Indeed, con- local administrative entities entered into con- critical to this evolution that the management cession contracts are concluded by at least one cessions only in specific municipal sectors, of these state majority owned entities should public entity and are entered into especially such as water or electricity distribution, function in practice like a private sector for the operation of a public service, both heating or management of theatres and company, with a degree of autonomy which elements being necessary to qualify them as cultural buildings. would not be typical of entities which are administrative contracts.3 publicly owned. Over time French public (administrative) law Concession agreements are therefore governed began to recognise the ability of other public This development in French law resulted in by French public law, and related disputes are entities, such as autonomous public entities the award of concessions to some of the under the jurisdiction of the French admini- (établissements publics) or state companies largest and most successful French compan- strative courts. This introduces peculiarities (sociétés d’Etat), to enter into concession ies. For example, concessions were granted to due to wide powers granted to public entities agreements. Various laws organised a transfer public companies such as Air France for air in contractual relationships, such as the right of power from local public entities for the transportation, Société Nationale des Chemins to unilaterally terminate a concession benefit of autonomous public entities and de Fer (SNCF) for railway transportation, agreement for reasons of public interest or the created new public entities dedicated to the Electricité de France (EDF) for electricity and right to modify the regulatory provisions of the operation of several public services on behalf Gaz de France (GDF) for gas. As the state is contract during its existence. In this respect, it of the participating local entities (établisse- the only or the main shareholder in these should be emphasised that a concession agree- ments publics de coopération intercommunale). companies, its financial interest in the con- ment is made of several contractual docu- Such autonomous entities also began to enter cession is strengthened by its shareholding. ments. Apart from the concession contract into concession agreements delegating the However, such ownership structures raise executed by the conceding authority and the power vested in them in certain public some questions as to whether a conflict of concessionaire, which is freely negotiated services: such as water distribution, electricity interest arises when, in the administration of within the boundaries set by French public production or domestic waste disposal. This the concession agreement, the state acts as law, a concession agreement includes a transfer or devolution of power to public enti- both co-contractor and shareholder. document called “cahier des charges partic- ties and public companies has encouraged ulier” which defines the specific terms and such companies to seek alternative private Concessions have also been concluded with conditions of the concession; that is to say, the sources for financing the provision of infra- joint-venture companies, including public and rights and obligations of the parties. Such a structure and other public services. As a private shareholders, but with a voting major- document is based on a standard form docu-

Focus on concessions consequence both the number of conceding ity for public entities (sociétés d’économie ment established by the state, “le cahier des 39

charges-type”, and is published in the Official stages. During the first period, from the end of 3 See Conseil d’Etat, Sect. 20 avril 1956, Epoux Gazette (for instance, for water distribution, the nineteenth century until the First World Bertin et ministre de l’agriculture c. consorts Grimouard, Rec. pp.167-68. under a decree dated 13 August 1947, or for War, the scope of concession agreements 4 See also decree dated 28 November 1953 for electricity distribution, under a decree dated developed increasingly rapidly in response to public station operation; decree dated 6 October 22 November 1960).4 economic development in France as a result 1981 for water cleaning service. of the industrial revolution. Most of the public 5 See Conseil d’Etat, Ass. 5 mai 1961, Ville de Under French law, the conceding authority, works in connection with large substructure Lyon, Rec. p.294. in particular the French state, may, at any projects, such as the railway network, elec- 6 See Conseil d’Etat, 21 mars 1910, Cie générale française des tramways, Rec. p.216. time during the term of a concession, modify tricity and gas production and distribution or 7 See Conseil d’Etat, 21 décembre 1906, Syndicat those provisions of the agreement which are water distribution, were managed through Croix-de-Seguey-Tivoli, Rec. p.969; Conseil d’Etat, 11 regulatory (clauses réglementaires) and which concession agreements. Such development mars 1910, Cie française des tramways, Rec. p.223. are not exclusively within the purview of was based on liberal theories justifying the 8 Conseil d’Etat, Ass. 9 décembre 1932, Cie des contractual negotiation.5 For instance, the choice of private companies to bear the cost of tramways de Cherbourg, Rec. p.1050. conceding authority may decide to modify the necessary investments. A combination of 9 Conseil d’Etat, 30 mars 1916, Cie d’éclairage de Bordeaux, Rec. p.125. one of the regulatory conditions for the long-term agreements and monetary stability 10Law dated 29 July 1979 and decree dated 19 operation of a public service in order to during this first period ensured the success of October 1980. improve its quality. In this case, the conces- concession agreements. 11Laws dated 12 July 1979 and 19 August 1986. sionaire is not allowed to refuse the modifi- 12Law dated 31 December 1970. cations decided by the conceding authority. In the period from the first World War until the 13See the annual report of the Conseil d’Etat dated The concessionaire is entitled to request end of the second World War with the eco- 1999 concerning “General interest”, La financial support only if the modification nomic situation subject to dramatic change, documentation française, 1999. changes the general balance of the some concessionaires went through financial concession contract.6 difficulties, thus threatening the quality of service. In this context, French administrative new fields of development of concession This distinction among provisions of these courts recognised the right of the concession- agreements appeared within other legislative documents is also important for the users of aire to receive financial support from the regimes: such as the development of local 10 the public service, because it entitles them to conceding authority when the economics of the transportation services, the regulation of 11 request the concessionaire to comply with the concession contract became unbalanced by bridges and ferries and the administration of 12 regulatory provisions of a concession. Users external events; this right is better known as public hospitals. are also entitled to challenge before admini- the théorie de l’imprévision.8 When external strative courts the consistency of the conces- events prevent the concessionaire from contin- This brief description of the expansion in the sion agreement with the legal requirements of uing the operation of a contract, the conces- sectors in which concession agreements may regulatory provisions of the public service, sionaire is also entitled to seek early termin- be granted demonstrates the importance of whereas, not being party to the concession ation of the concession.9 The development of concessions in the development of the French contract they are not entitled to challenge the these principles under French public law has economy since 1945. other provisions of the contract.7 become an important element of the conces- sion regime. In order to ensure financial Main fields of concession agreements equilibrium under a concession, the French The scope and nature of the state also decided during this second period to Initially limited to industrial and commercial conceded activity nationalise some concessionaires. The most services (services publics industriels et comm- The scope of the conceded activity has also famous examples of this were the national- erciaux; SPIC), the scope of public services been significantly expanded during the twen- isation of the five existing private railway eligible for concession agreements has been tieth century and that modification reflects the transportation companies in 1937, which expanded to include administrative services evolution in France of the concept of public became SNCF, and the nationalisation of the (services publics administratifs; SPA). The service itself. private electric and gas producers in 1946, development or decrease of the scope of which became respectively EDF and GDF. concession agreements reveals the evolution of the concept of public service in France. Milestones in the development of After the Second World War, reconstruction The evolution of that concept is mainly due concession agreement required new developments to encourage to the development of the idea of “general The evolution of French concession agree- concessions in connection with the reorgan- interest” which is essential in the definition of French public law.13 ment may be divided into three historical isation of public services. During this period Focus on concessions 40

One of the main fields of concession conditions of the service and the financial 14Other areas where concessions can be granted agreements is in the energy sector: solutions to achieve it.15 On this hypothesis, are: i) public transport, including sea transport (Compagnie générale maritime), air transport (Air electricity distribution: the state is in the concessionaire has no say in the France, Air Inter) and railway transport (SNCF); ii) charge of general supply concession; organisation of the service. individual transport, including motorways building electricity distribution: local public entities and operation, bridge building and operation (Saint-Nazaire/Saint-Brévin), tunnels (Mont-Blanc, are in charge of local public distribution; The concessionaire is paid directly and mainly Fréjus, Sainte-Marie les mines) and parking lot gas distribution with local public entities; by the users of the service. Concessions are operation; iii) water and heating, including water gas transportation with the state. not, in principle, financed by taxes or subsid- distribution, water cleaning, local heating services and domestic waste treatment; iv) health services, ies. This method of payment, based on user including public hospital building and operation, The specificity of such concessions is that at fees, is one of the most important elements of funerals, public baths, public slaughterhouses; v) an early stage the concessionaire became a concession agreements and is considered by entertainment, including renting of theatres under exorbitant conditions, casino management in unique type of company due to nationalisation French case law as a condition of the exist- spas, management of harbours and cleaning and (apart from a few remaining private compan- ence of a concession agreement.16 commercial business on beaches. ies), following which concession agreements 15See Conseil d’Etat, 30 mai 1975 Sté d’équipement became uniform for every local public entity de la région Montpelliéraine; Tribunal des conflits, Cooperation between private and 7 juillet 1975, commune d’Agde. without scope for negotiation.14 public financing 16See Conseil d’Etat, 15 avril 1996 Préfet des Bouches du Rhône, Rec. p.137. Recent developments in concession agree- Financial aspects of ments authorise the possibility for the conced- * Antoine Maffei concession agreements Valérie Hulst ing authority to finance a portion of the nec- De Pardieu Brocas Maffei & Leygonie Under the commonly accepted definition of a essary investments to help the concessionaire 64-66 avenue d’Iéna concession agreement, the concessionaire is to ensure the quality of the service. Thus BP 2004 75761 Paris Cedex 16 responsible, at its own risk, for the manage- financing is more and more often established France ment and operation of a public service, includ- on a cooperative basis between private and Tel: +33 01 53 57 71 71 ing the carrying out of investments, and the public funds. Fax:+33 01 53 57 71 70 Email: [email protected] concessionaire is paid by the users of the [email protected] service through direct fees. At the end of the It has now been accepted that the conceding concession, all investments made by the authority may grant various advantages to the concessionaire automatically become the concessionaire for the financing of public Conclusions property of the conceding authority without services, and in particular: Historically, concessions have provided an any obligation by the conceding authority to interest support to ensure a minimum level important means for private parties to provide indemnify the concessionaire. of interest for subscribers of bond- traditional public services in France. This subscription; historical review of the French notion of a investment subsidies for financing works Responsibility of the concessionaire for concession agreement reveals a modification and the building of the concession; financial risks of its nature concerning the parties to the con- net loss compensating subsidies to cover cession agreement, the scope of concession The concessionaire is responsible for the net losses incurred by the service; and contracts and the financial means used to supply of the service towards both the con- indemnities to cover unenforceable costs achieve quality of service. These changes have ceding authority and the users of the service. resulting in a loss of economic equilibrium contributed towards the evolution of conces- The conceding authority and the users are of the concession. sion agreements as a vehicle for providing entitled to check the adequacy of the service public services in France. The French conces- supplied pursuant to the contractual provi- Apart from such support provided by the sions model may provide a useful framework sions, in particular in terms of quality of conceding authority, the concessionaire has for other countries developing their own con- service, the area covered and the level of the also developed alternative financing mechan- cession legal regime. In addition, the evolution annual fees. isms to ensure the financial viability of a in French concessions law may presage a sim- concession project. For instance, it is now ilar evolution in the laws of countries seeking It has nevertheless been considered that for commonly agreed that the concessionaire may to develop concession-based financing. some specific projects, such as motorways, lease equipment used in a concession for the concessionaire is only an agent of the advertising and receive funds in return for it. conceding authority, which determines the Focus on concessions Dragan Karanovic, Partner, Karanovic & Nikolic* 41

Legal framework for infrastructure projects in FR Yugoslavia

The development of infrastructure is one of the main challenges currently facing the Federal Republic of Yugoslavia. Concessions are consid- ered an effective vehicle to enable such development to be achieved. This article gives an overview of the legal framework governing conces- sions. It points out the lack of cer- tainty and consistency of the existing legal regime, and the need for thorough review and harmonisation, taking account of the economic and political issues at stake. Focus on concessions 42

The strong one-party system of the late 1980s the largest utility with 8.5 GW net of primarily investment in infrastucture development. It in Yugoslavia revealed the direct impact of the thermal capacity. would also appear more politically expedient state in the economy and particularly in an for the government to solve legal problems area such as infrastructure: telecommunica- EPS is a state-owned company, which most relating to concessions rather than privatisa- tions, roads, railways and waterways. With the importantly means that company management tion. However, privatisation will have to play collapse of Communism in eastern European has been appointed by the government and its role, as a separate method or combined countries in the late 1980s, Yugoslavia entered electricity prices were set by the government. with concessions. the process of transition towards democracy However, the price of electricity has declined and an open market economy. However, wars over a number of years as various govern- Currently, in both Yugoslav republics, Serbia in Croatia and Bosnia, sanctions imposed on ments have attempted to use cheap electricity and Montenegro, concessions are regulated at the Federal Republic of Yugoslavia (Serbia as a means of assisting the impoverished two levels: federal and republic. and Montenegro) by the UN Security Council population, and as a result, the total amount in 1993 and 1998, the Kosovo conflict and of accumulated funds available for The Federal Foreign Investment Law1 (the NATO intervention in 1999 effectively stopped investment has been shrinking. In addition, “Federal Law”) provides that foreign persons this process before it could get started, this lack of finance has led to problems in (entities or individuals) may be granted particularly in Serbia. In the last couple of the proper maintenance of the existing concession rights on the condition of bilateral years Montenegrin policy has evolved more generating capacity. reciprocity. Such concessions may be granted independently. The federal elections in FR for use of (a) a natural resource, (b) goods for Yugoslavia in September 2000 and elections Such regulatory problems present a number of public use, or (c) to provide a service in the in Serbia in December 2000 resulted in a obstacles to eventual privatisation, which will public interest. new beginning for long-awaited democratic require well-designed stages. Privatisation of change. However, FR Yugoslavia generally, existing enterprises will be a long process for The Federal Law defines the legal framework and Serbia specifically, enters the new a number of reasons. In the legal field for for concessions, providing for the general century with a shattered economy. example, legislation is not harmonised with procedure through which concessions are the new technical and economic environment, granted, and approval of applications and One of the most vivid examples of neglect, regulations are unclear and there are no reg- registration of concessions. The maximum poor maintenance and decline in the past ten ulatory bodies. In addition, price levels are concession period provided by this law is 30 years is the transport and power infrastructure. low and the political risk is markedly high. A years and public tender is mandatory. Con- There are a number of reasons for this decay. further major issue in the country is payment cessions are granted on the basis of a con- Irrespective of wars in Croatia and Bosnia, UN of arrears, since a large portion of industrial cession agreement made with the federal sanctions or the NATO campaign in 1999, users and households fail to pay their state. The main elements of such concession inappropriate management, a practical ban on electricity bills. agreements are defined in this law, which, importation of technology and little or no among other elements, defines “build, operate investment in infrastructure were character- A similar situation can be found in other and transfer” (BOT) as a type of concession. istics of the past decade. An official policy infrastructure areas, such as public transport, The republics can define concessions and restricting prices for these services as a social water supply and other communal services. concession agreements in greater detail but valve contributed significantly to the process. they must be consistent with the Federal Law. The lack of appropriate legal environment, and Concessions as direct in particular an inconsistent system of law at The only limitation on foreign entities being investment federal and Republic levels, also contributed. granted concessions, as defined by the Federal For these reasons almost all infrastructure Direct private investment in infrastructure is Law, is the prohibition of foreign investment in services have gradually collapsed. possible by privatisation or concessions. Con- mass media and telecommunications, “if such sidering that privatisation has occurred only investment may distract the unity of the sys- intermittently in Serbia and Montenegro over tem”. This prohibition, of a historical nature, A typical infrastructure the past ten years, and given the legal and obviously creates uncertainty for parties con- company: EPS regulatory reform necessary to establish effect- sidering investing in telecommunications or A typical example of infrastructure decay is ive preconditions for privatisation, it is most mass media. the production and distribution of electricity. likely that concessions in the area of commun- Electric Power of Serbia (EPS) is the only al services and infrastructure will be the first Under the Federal Law concessions may be company in Serbia producing electricity. It is instrument to be used to boost private sector assigned (as security for lenders or otherwise), Focus on concessions 43

partly or in full, subject to approval from the 3) If the applicant is someone other than a 1 Official Journal of the FR Yugoslavia no. 79/94, concession granting authority. There are no ministry, the Agency must obtain the opinion 15/96, 29/96. restrictions on termination of concessions of the respective ministry (for example, the 2 Official Journal of Republic of Serbia no. 20/97, 22/97, 25/97. under this Law. The parties to the concession Ministry of Energy or of Transport) before agreement may agree on any international submitting the proposal to the government. dispute resolution mechanism as long as the otherwise agreed by the parties to the con- concession is granted to a foreign individual 4) Once it has received a valid proposal from cession agreement. Similarly to the Federal or entity and the subject matter of the dispute the Agency, the Cabinet of Ministers “takes a Law, all partial or full assignments are subject is not immovable property. position” on starting the concession-granting to approval from the granting authority, the process. The Cabinet of Ministers itself Serbian Cabinet of Ministers. On the Republic level, the Serbian Parliament informs the applicant of its position. enacted the Concession Law of the Republic The concession may be terminated under the of Serbia in 1997.2 Although both laws (the 5) In accordance with “the position of the Serbian Concession Law for the following Federal and the Republic) were made by Cabinet of Ministers’ intention to grant a con- specified reasons: (a) endangerment of life and virtually the same regime, significant diff- cession”, the Agency, together with the rele- nature, (b) war and state of war, (c) imposs- erences in important matters, such as the vant ministry, prepares a draft concession ibility of activities due to destruction or conditions for granting concessions, proced- decision. Such decision results from economic, substantial damage of concession object, and ures and respective granting authorities, exist financial, social and other relevant consider- (d) other circumstances provided by the between the two laws. ations, including an analysis of possible concession agreement. environmental issues. The Serbian Cabinet of Under the Serbian Concession Law the Ministers must then approve a Concession Serbian Law also provides that disputes development, maintenance, reconstruction, Decision. This signals the commencement of between the parties may be resolved by modernisation or exploitation of telecommun- the concession-granting process. Public international or foreign forums unless both ications by foreigners falls within the scope of tender is required for granting concessions. parties are domestic or the subject matter of concessions as opposed to the general Federal All issues relating to the public tender are the dispute is immovable property (i.e., not Law prohibition of foreign investment in mass under the responsibility of the Agency. related obligations, such as payment, media and telecommunications. performance, etc.). 6) The decision to grant a concession is made The Serbian Concession Law imposes a by the Cabinet of Ministers. Montenegro also has a Concessions Law, complicated and bureaucratic procedure for enacted in 1991, before the Federal Law. granting a concession. In accordance with 7) Within 60 days of making the decision the Although brief (12 articles long), the this law, the Republic created the new Cabinet of Ministers and the winner of the Montenegrin Concessions Law also regulates Agency for Investments of Special Interest to public tender must conclude a concession the general procedure for granting concess- the Republic. This advisory Agency serves agreement. Such agreement must be in accor- ions, the approval process and the regis- as mediator between the government and dance with the Cabinet of Ministers’ Concess- tration of concessions. The main difference third parties. ion Decision, the Republic’s Concession Law from the Federal Law is that Montenegro’s and the Federal Foreign Investment Law. law does not provide for granting concessions The procedure is defined as follows: to domestic entities, but only to foreign 8) If the object of the concession is comm- individuals and corporate entities. It also 1) Every applicant interested in obtaining a unal activities or providing community ser- appoints the Montenegrin Cabinet of concession may request the government, in vices, the concession agreement is concluded Ministers as the granting authority. particular the Cabinet of Ministers, to comm- between the concessionaire and the respect- ence the concession-granting procedure. ive local authority, with the permission of the In 1996 the Federal Constitutional Court Cabinet of Ministers. decided that a number of provisions of the 2) The applicant cannot, however, propose Montenegrin Law on Concessions (five arti- directly to the Cabinet of Ministers: the 9) When the concessionaire is a foreign entity cles) were in conflict with the Federal Law and proposal must be made through the Agency. or individual, such agreement is registered at were therefore not valid. However, for political The applicant may be an entity, individual, the Federal Ministry for Foreign Investment. reasons the Montenegrin Law on Concessions even a ministry or local authority. still applies as it was originally enacted. Assignment of concession is permissible

under the Serbian Concession Law unless Focus on concessions 44

The Montenegrin Law on Concessions does not an agreement for provision of public services * Dragan Karanovic contain any specific provisions related to par- directly with any local company. There is no Karanovic & Nikolic Dzordza Vasingtona 42 tial or full assignment of concessions, termin- restriction regarding ownership or sharehold- 11000 Belgrade ation of concessions or dispute resolution ing of the local company. Yugoslavia mechanisms. Practice does not provide clear Tel: +381 11 3222 486 Fax: +381 11 3344 054 guidance, so it remains to be seen whether In practice, as a result of this law any foreigner Email: [email protected] Montenegro will follow solutions provided by (entity or individual) could, through a local the Federal Law and the Serbian Concession company, apply for and receive public service Law regarding these issues. provider status through direct negotiations companies that provide infrastructure services with the government. Foreigners must comply is vital for both the Serbian and Montenegrin There is a significant disparity between the with the Foreign Investment Law’s require- economies. It is expected that the new federal legal regulation of concessions at federal and ment of reciprocity (i.e., the country where the and republic authorities will provide for republic levels. This results in lack of clarity foreign entity is incorporated or otherwise org- conditions that will make possible transparent and transparency in concession-granting anised must allow similar dealings to Yugoslav and legally secured foreign investment. It is procedures. One of the major tasks facing the companies) and registration at the Federal necessary that several steps be taken: new federal government, as well as the Foreign Trade Ministry. Similar provisions Montenegrin and new Serbian governments, exist under Montenegrin laws and regulations. 1) Establish political stability, without which will be to close such legal loopholes and great interest from foreign companies to traps, in order to create less bureaucratic and This “indirect” investment possibility allows invest into the Yugoslav economy cannot be more investment-friendly procedures. both the Serbian and Montenegrin govern- expected. ments to avoid public tender and the compli- cated concession procedure. However, the 2) Make legislation compatible with EU stan- “Indirect” investment position of the investor is significantly weak- dards. The governments should draft new As noted above, the concession laws are er because it obtains only national status. regulations to establish legal frameworks that among the few laws that allow direct foreign The permitted legal remedy under this status will secure the position of investors and investment in infrastructure. Direct investment is within the national legal framework only. investments in general. in itself does not exist in an explicit legal As a result the investor cannot resort to form. A form of “indirect” investment foreign arbitration, foreign ruling law, foreign 3) Separate infrastructure from the states. infrastructure is regulated at republic levels jurisdiction, etc. The regulation and operation of infrastructure only. In Serbia it was regulated by the Law on should be commercialised in order to allow Communal Services (1997-98) and the Law of for provision of efficient services. The tariffs Conclusion Public Enterprises and Executing Service of for such services should be regulated not by Public Interest of the Republic of Serbia Given the shattered Yugoslav economy and the state but by the market. (2000). The latter law generally covers various banking system, raising finance for infra- industries in the public services, including: structure projects within that country is 4) Establish a supportive legal and economic production and distribution of electricity; extremely difficult. Due to the lack of framework for private and foreign investment production and processing of coal; experience, legislation in the area of project in infrastructure in order to secure such research, production, processing, transport finance is far behind the standards required. investment. and distribution of oil and natural gas; petrol stations; Although it is currently a few steps behind, 5) Establish secure investment climate, with railway, postal and air transport; FR Yugoslavia is expected to undergo a period no interference from political authorities. telecommunications; of democratisation and transition to become a media; and modern European state. Recent political 6) Ensure compliance of infrastructure communal activities (i.e., water supply, changes could establish a stable and secure services with high environmental and safety sewage systems, recycling, etc.). political environment to allow for economic provisions and standards. progress; however, Yugoslav infrastructure In accordance with this Law public services requires substantial restructuring and invest- 7) Privatise the entire economy in a swift, are carried out by public enterprises. However, ment in order to be modernised and made thorough and transparent manner. the Serbian government is entitled to conclude operational. Privatisation of state-owned Focus on concessions Wayne McArdle, Partner & Lisa Booth, Solicitor, Paul, Hastings, Janofsky & Walker 45

Stephan Kyutchukov, Partner, Djingov, Gouginski, Kyutchukov & Velichkov*

1 Official Gazette, Issue no. 56, 13 July 1991.

2 Art. 18, Paragraph (5) of the Constitution.

Bulgarian law on 3 Official Gazette, Issue no. 92, 17 October 1995.

4 Official Gazette, Issue no. 44, 21 May 1996. concessions 5 Art. 2, Paragraph (1), Sub-paragraphs (1) and (2) of the Law on Concessions and Art. 67, Paragraph (1) of the Municipal Ownership Act.

6 Art. 2, Paragraph (1), Sub-paragraph (3) of the Law on Concessions and Art. 67, Paragraph (1) of the Municipal Ownership Act.

Bulgaria’s law on concessions has provided a basic framework to facili- tate the granting of concessions and the execution of concession agree- ments. The recent development of more detailed and specific legislation, in particular in areas such as tele- communications and energy, has meant that the significance of the law on concessions itself has diminished. This article explains the development of the law and examines its inter- action with other relevant legislation. It also considers a number of obstacles presented to potential investors under the current regime.

The concept of a “concession” was first intro- activities. The law therefore provided a frame- identity of the grantor, a concession has two duced in Bulgaria in the new Constitution of work whereby public control of public property aspects. The first is as a right to use public 1991.1 The Constitution itself did little more and resources could be maintained while property5 or resources; the second is a permit than list the types of property and the activities private participation could be encouraged. A for carrying out public services which are in respect of which a concession could be “concession” is the constitutionally defined otherwise exclusively reserved for the granted, but it enabled Bulgaria’s National legal means whereby the state or municipality, state/municipalities.6 Assembly to enact legislation on the basis of while retaining its responsibility for the public which the state would grant concessions in interest, is able to grant rights to a private party The situation has also become more complex respect of certain property and activities.2 The to utilise such restricted resources and to because the Concession Law and the Muni- first relevant legislation to appear included the engage in such restricted activities. cipal Ownership Act were enacted at a time Concession Law3 and the Municipal Ownership when the Bulgarian legal system was under- Act.4 As a result, the “concession” concept was Concessions may be granted by both the state developed, particularly in the areas of energy, developed on the basis that, although the state and individual municipalities in their capacity telecommunications, water and natural re- or individual municipalities, as public author- as public authorities, and different procedures sources. The recent enactment of legislation in ities, should continue to enjoy exclusive rights are provided by the Law on Concessions and these areas means that the importance of con- and powers in relation to certain property and the Municipal Ownership Act, respectively, cessions under the Concession Law and the activities, the private sector should not be depending on the identity of the grantor. In Municipal Ownership Act has gradually dim-

excluded from investing in such property or addition, as indicated above, regardless of the inished. In relation to certain types of resource Focus on concessions 46

(such as in the case of telecommunications erty the use of that property is also subject to and energy services) the original concession the grant of concession by the state. Although mechanism has been abolished and replaced this category of property is listed in both the by different procedures, including those for Constitution and in the Concession Law, the licences and other permits. In other areas, Concession Law does not include those items such as water and sewage services, the con- which are covered by different legislation. cession component in respect of certain re- For example, the utilisation of the radio- sources has become relatively narrow, while frequency spectrum is subject to the grant of licensing or other procedures have come to a licence by the state under the Telecomm- dominate the overall concession arrangement. unications Law11 and not to a concession, and Exploitation of public property or the provision is therefore not specifically addressed in the of public services by the private sector is now Concession Law. governed not only by the Concession Law but by a combination of laws and regulations, the Concessions for the use of property application of which is often not straight- 17, Paragraphs (2) and (4) of the Constitution and resources which may be state-owned forward. Some aspects of the legislation are enables the National Assembly to enact legis- or privatised discussed below. lation concerning the ownership rights of the Another category of property specified under state and municipalities. Accordingly, the the Concession Law includes property which National Assembly has the authority to may be either public state-owned property or, Scope of concessions declare additional properties as public alternatively, may be privatised and owned by The scope of permissible concessions under property of the state or municipalities. Such private entities, including the state acting in Bulgarian law and the legal regime governing property may not be transferred by its “public” a private capacity. This category includes: such concessions are largely determined by owner to third parties, nor utilised in the way harbours and civilian airports for public the nature of the state interest in the rights or allowed for private assets. It may therefore be use; the law expressly extends the possib- assets which are to be the subject of a con- utilised by private entities only under a grant ility for grant of concession rights in respect cession, and how such rights or assets fall of concession. both of existing facilities and facilities to be within specific categories provided for in developed at the concession holder’s Bulgarian law, as more fully described below. As noted above, the legal regime applicable to expense;12 and concessions granted in respect of state or water-supply facilities and systems; as noted “public” property is defined both by the Con- above; however, in the case of water, a con- Character of state interest in cession Law and by sector-specific legislation cession right over water-supply facilities and concession assets (municipal concessions are discussed separ- systems may not be sufficient and a “water The interest of the state in assets which may ately below). Sector-specific legislation in- utilisation permit” under the Water Act may be subject to a concession has four different cludes the Law on Underground Resources8 also be required in order to secure rights in possibilities under Bulgarian law. and the Water Act.9 However, even within such respect of the supply of raw water. specific legislation, the proposed nature of a Concessions for the use of publicly owned concession right can have implications on Again, the character of state ownership of property and resources whether the grant of a concession would be such assets can have implications in respect The Constitution lists property and resources governed solely by sector-specific legislation of the scope of concession rights which may which may be owned only by the state and the or a combination of such legislation and the be granted. Obviously, the ability of a con- utilisation of which by private entities may Concession Law. The Water Act, for example, cession holder to obtain private ownership of therefore be permitted only by way of conces- distinguishes between the utilisation of water assets can have significant implications on sion. This property includes underground in the economic sense (for the purpose of his or her ability to control the development resources, beaches, national thoroughfares, generating profit) and the mere usage of the of a concession and obtain financing for it. waters, forests and parks of national import- water, including as a means for the conduct of ance, and natural and archaeological reserves. profit-generating activities.10 Concessions for the use of property and Such property is not limited to existing state- resources which may be owned by a owned property; it also includes property In addition, the Constitution and the Con- municipal entity which is developed at the concession holder’s cession Law provide that, where the state If assets are owned by a municipal entity, the expense.7 This list is not exhaustive, as Article exercises sovereign rights over certain prop- Municipal Ownership Act sets out the con-

Focus on concessions cession regime in respect of property owned 47

by municipalities. Again, this regime may Restricted activity concessions concern the 7 Art. 2, Paragraph (1), Sub-paragraphs (1) and (2) have to be interpreted in conjunction with the grant of permission to carry out activities in of the Law on Concessions and Art. 67, Paragraph (1) of the Municipal Ownership Act. procedure set out in other applicable legis- respect of which the state has exclusive rights. 8 Official Gazette, Issue no. 23, 12 March 1999. lation, such as the Water Act and the Law on A “permit” concession may be granted either 9 Official Gazette, Issue no. 67, 27 July 1999. Underground Resources. together with or independently of a “utilis- 10A concession would be required if a private com- ation” concession, depending on the nature of pany intends to provide water supply services to a Concessions for the use of property and the grantor and the rights sought by the poten- city by way of utilising state-owned water, but the resources which may be owned by 100 per tial concession holder. For example, where a supply of raw water necessary for the provision of water services must be authorised by way of a cent state or municipal owned entities concession holder is granted a permit to pro- water utilisation permit. This means that the Water The Concession Law and the Municipal vide water services on the basis of property Act is likely to dominate any structure where a con- Ownership Act were enacted at a time when a which is not public property but is owned by cession is to be granted under the Concession Law. large proportion of state and municipally the state or a municipality in its private cap- 11Official Gazette, Issue no. 93, 11 August 1998. owned mining, water and energy industries acity, a “utilisation” concession is not required. 12Art. 4, Paragraph (1), Subparagraph (6) of the Concession Law. had been restructured as commercial com- “Permit” and “utilisation” types of concession 13Paragraph 3 of the Transitional and Concluding panies wholly owned by the state or by muni- are also capable of being granted together, Provisions of the Concession Law. cipalities. It was not considered appropriate however, as would be the case if a concession 14Paragraph 9 of the Transitional and Concluding that such entities should be required to were granted to utilise a publicly owned water Provisions of the Municipal Ownership Act. compete for concessions and for the right to and sewerage network together with a conces- 15Official Gazette, Issue no. 64, 4 August 2000. carry on these industries. For this reason, an sion to provide water supply and sewerage 16Official Gazette, Issue no. 97, 28 November 2000. exception was created whereby 100 per cent services in respect of that network. 17Official Gazette, Issue no. 133, 11 November 1998. state-owned commercial companies are authorised to utilise property and engage in The state’s exclusive rights in respect of cer- The Concession Law provides that a conces- activities for which a concession would tain activities arise from the concept of state sion is required for the manufacture of weapons otherwise be required under the Concession monopoly. According to Article 18, Paragraph and explosives but the Law Concerning the 13 Law, without the need for a concession. A (4) of the Constitution, the National Assembly Control over Explosives, Fire Arms and similar rule exists under the Municipal Own- may establish a state monopoly over railway Ammunitions,17 on the other hand, provides ership Act in respect of companies wholly transport, national postal and telecommuni- that such activities are instead subject to a owned by municipalities in respect of prop- cations networks, nuclear energy, and manu- permit. The position of Bulgarian law as to the erty and activities requiring a municipal facture of radioactive products, weapons, manufacturing of “powerful” toxic substances 14 concession. Until such time as these explosives and powerful toxic substances. is also unclear. Various laws address and reg- companies are privatised, no concession is Concessions may be granted by the state only ulate manufacturing and other activities related therefore required by those industries. in respect of those activities over which it has to drugs and poisonous or other biologically a monopoly. The Telecommunications Law has active substances, but none of them clarifies not established a state monopoly in respect of Nature of activity in respect of whether the substances addressed by such telecommunications networks (except in the a concession laws fall within the constitutional category of case of certain fixed telephone services where “powerful toxic substances”. None of these Apart from the impact of the character of the the Bulgarian Telecommunications Company laws establishes a concession regime, but state or a municipality’s interest in a con- was granted an exclusive licence) and con- instead they set out permit or licensing cession on the rights of a concession holder, cessions therefore do not apply to telecomm- requirements. Therefore, to the extent that the the specific asset or activity with respect to unications services. Similarly, the Law on manufacturing of “powerful toxic substances” 15 which a concession is to be granted will largely Postal Services did not establish a state is addressed by specific laws, it is solely determine the legislative regime applicable to monopoly in respect of postal services. The permits or licences which are required. Thus, 16 such concession. As noted above, a number of Law on Railroad Transport also abolished the the requirement of the Concession Law for the such regimes exist in respect of water conces- state monopoly over railroad services and grant of a concession in respect of manufact- sions, natural resource concessions, telecom- opened the door for private undertakings to uring of “powerful toxic substances” has not munications concessions and other sectors. In carry these out under a licence. The potential been translated into law and no state mono- addition, in respect of certain restricted activ- scope of concessions authorised by the poly has been established for these activities. ities, both the form in which such concessions Constitution has therefore not been realised Until the legislation is clarified, the applic- are granted and the legal regime applicable and certain activities have been made subject ation of the Concession Law in respect of such thereto differ from those in other sectors. to a licensing regime instead. activities remains unclear. Focus on concessions 48

Procedures for granting concessions

The general rule: tender or auction

With limited exceptions, concessions are awarded by way of competitive tenders or auctions. When a concession is proposed the Council of Ministers is responsible for deter- mining whether the concession should proceed and whether the concession should be awarded following a tender or an auction for the selec- tion of the concession holder. However, where particular legislation allows a concession to be granted without a tender or auction (see below) the Council of Ministers itself will directly award the concession. The decision of the Council of Ministers is made only following consideration of a report on the legal, Concessions in respect of municipal property, ible, if determined by the Council of Ministers economic, financial, social and environmental as well as in respect of activities over which a or the Municipal Council, as the case may be. implications of the tender. The decision of the municipality has exclusive rights, are granted Upon the expiry of a concession, Article 3(3) Council of Ministers as to whether a proposed by the relevant municipal council. In this of the Concession Law, unusually, appears to concession scheme will proceed is final and case, the procedure is initiated by the mayor of give priority to the incumbent concession may not be the subject of appeal. that municipality and the municipal council holder for the grant of a new option. There determines whether the concession procedure would appear to be no reason to include such The Prime Minister is responsible for appoint- proposed by the mayor should proceed. The a right of priority in the law and, as no con- ing the tender or auction commission, as the municipal council determines whether the cession granted under the Concession Law case may be, and determines which Minister concession is to be awarded following a tender has yet expired, the procedure has so far not shall be responsible for running the procedure. or auction procedure for selection of the con- been tested. Applicants for admission to the procedure are cession holder. Following the completion of required to submit comprehensive plans, on the tender or auction, the mayor executes the the basis of which they may be precluded from Direct award of a concession concession agreement with the concession participating in the procedure. Following the holder. In practice, the subject of a concession Both the Concession Law and the Municipal tender or auction, this commission submits its may be owned by several neighbouring muni- Ownership Act authorise the grant of the con- report on the results to the Council of Mini- cipalities, requiring the proposed concession cession without a tender or auction in parti- sters together with its recommendation for the holder to enter into negotiations with each, cular cases provided for by law. In the absence award of the concession. The Council of thereby inevitably prolonging and compli- of such authorisation, the concession may be Ministers then determines to whom the con- cating the procedure. This administrative granted only pursuant to a tender or auction. cession shall be granted and authorises the difficulty has been addressed by the recently relevant Minister to execute a concession enacted Water Law in the case of water supply An exception to the tender/auction require- agreement with that person. Article 19 of the concessions. Concessions for water supply ment, common to both state and municipal Concession Law provides that the concession systems which are co-owned by several muni- concession, arises in the case of privatisation. agreement must be concluded within one cipalities may now be awarded by the Council As mentioned above, the law authorises com- month of the date of announcement of the of Ministers, provided that the prior consent of panies wholly owned by the state or a munici- successful bidder, a period which may be the representatives of the individual pality to utilise property and to carry out act- insufficient in many cases, particularly as, in municipalities is obtained. ivities which would normally require a con- practice, the successful applicant may need cession without the need for a concession. time to carry out further independent testing A concession may be awarded for up to 35 However, at such point as these companies before being in a position to negotiate the years, although an extension of the term to a are privatised, the privatised companies, terms of the agreement. total maximum duration of 50 years is poss- whether privately owned in full or in part, Focus on concessions 49

must be able to continue their normal opera- is a competitive process the competitive com- 18Clause 3, Paragraph (1) of the Law on tions. In these circumstances, the Privat- ponent is considered to have been addressed International Commercial Arbitration, Official Gazette, Issue no. 60 of 5 August 1988. isation Law authorises the Council of Mini- already. The non-competitive award of a con- 19Article 9 of the Concession Law. sters to award the required concession to the cession has not to date caused problems or privatised company, without a tender or invited allegations of abuse or corruption, auction. The procedure requires the relevant although the overall privatisation process the non-transferability provisions of the Con- concession agreement to be entered into itself (with or without the grant of a conces- cession Law were made subordinate to any before the privatisation agreement is signed. sion) has provoked such allegations. agreement of the Bulgarian government to This procedure was utilised in the privat- permit assignments to lenders. In structuring isation of the potash producing company Sodi security arrangements involving concessions Transferability Deyvna, which was sold in 1997 to Solvay lenders have therefore sought to secure not the S.A.. In this transaction the purchaser was A concession is non-transferable, unless trans- concession itself but the shares of a special able to acquire the company in a manner that ferability has been allowed by exceptional purpose company incorporated to hold the ensured that the company had in place the provision of a specific statute which applies to concession. Care has to be taken to ensure necessary concession to carry on business the particular concession. There exist two such that the concession agreement does not in- under private ownership. The concession cases. The first is the provision of Clause 2, clude as a termination event the change of agreement is made conditional upon the Paragraph (3) of the Concession Law, which control of the concession holder. In addition to transfer of ownership pursuant to the privatis- provides that “the rights and obligations of a pledge of the shares of the concession holder, ation agreement. A similar rule exists under concession holders pursuant to contracts ent- lenders have also secured the right to vote the the Municipal Ownership Act, whereby the ered into during 1991 following an inter- shares of the company following an event of municipal council is authorised to award a national auction, concerning exploration and default and to appoint a specialist manage- concession to a municipally owned company extraction of oil and gas from the continental ment company to the board. in the process of privatisation without a tender shelf of the Republic of Bulgaria, may be or auction. transferred only once to third parties which Dispute resolution have a merchant capacity, following a permit Another significant exception to the tender/ by the Council of Ministers”. The second case Of significant concern to international invest- auction rule is provided by the Concession is provided by Article 25, Paragraph (2) of the ors is the question of dispute resolution in Law in cases where a wholly state-owned Law on Underground Resources, whereby the relation to concession agreements. Although company owns a significant shareholding in rights and obligations pursuant to an extrac- the state may freely agree to submit to the potential concession holder. A concession tion concession may be transferred to certain arbitration, Bulgarian law prohibits the sub- may therefore be awarded without a tender or qualifying third parties following a permit by mission to domestic arbitration of any disputes auction to a company in which (i) a state- the Council of Ministers. There is no apparent to which the state is a party.18 Since this would owned company owns at least 25 per cent of reason why this solution as provided in the be the case with all state-granted concessions, the equity of such company and (ii) the value Law on Underground Resources should not be international arbitration is the obvious alter- of such equity exceeds BGN 300,000. developed to apply to all types of concession. native to the domestic Bulgarian courts. This This would, it is suggested, increase the presents another major obstacle, however, as Bulgarian law provides certain other circum- commercial viability of concessions generally. under the Concession Law a concession may stances in which a concession may be awarded be awarded only to an entity registered to do without a tender or auction. Principally, the It is of principal importance to lenders that the business in Bulgaria19 and Bulgarian law law specifically allows this in relation to concession holder has the ability to assign the prohibits international arbitration where both privatisation procedures. The justification of concession rights and other related agreements parties to the dispute are Bulgarian entities. If this approach is twofold. First, the law seeks to the lenders as security. At present, Bulgar- the concession holder is a Bulgarian registered to exclude the potential for cases where a ian law prohibits assignment other than in the company, international arbitration involving successful purchaser of a former state-owned limited circumstances noted above. The the state would therefore be prohibited. It may, company may end up not obtaining the con- assignment should also provide “step-in” however, be possible for a foreign company to cession required to enable the company to rights for the lenders, enabling the lenders or a register a branch in Bulgaria and have the continue its activities. Second, the grant of a special purpose company controlled by them concession awarded to that branch. In this concession without a tender or auction in the to be substituted as concession holder but, case the foreign nationality of the concession course of privatisation is in any case preceded again, this is not permitted by Bulgarian law at holder (a branch is not a separate legal entity by the privatisation procedure itself. As this present. This situation could be addressed if under Bulgarian law) should mean that inter- Focus on concessions 50

national arbitration is possible. There is grow- uncertainty as to the validity of an arbitration * Wayne McArdle ing support for these limitations on the avail- clause concerning disputes over a “utilisation” Lisa Booth Paul, Hastings, Janofsky & Walker LLP ability of international arbitration to be lifted. concession right. Tower 42 Foreign private companies are uneasy that any 25 Old Broad Street disputes to which they are party in relation to Finally, another issue should be addressed in London, EC2N 1HQ United Kingdom a concession will by law be a matter only for the case of concessions granted by a munici- Tel: +44 20 7562 4000 the domestic courts, which may not always pality. Under Bulgarian law municipalities Fax: +44 20 7628 4444 have the expertise to deal with the complex- (unlike the state) are not prevented from Email: [email protected] [email protected] ities of certain commercial disputes and may becoming parties to domestic arbitration. If the not be perceived to be entirely impartial. concession holder is a Bulgarian-registered Stephan Kyutchukov Djingov, Gouginski, Kyutchukov & Velichkov entity any arbitration involving the munici- 10 Tsar Osvoboditel Blvd. Another issue of concern is the prohibition pality would have to be domestic Bulgarian 1000 Sofia under Bulgarian law for disputes concerning arbitration. Bulgarian arbitration law requires Bulgaria Tel: +359 (2) 9321 100 rights in rem in real estate to be submitted to the arbitrators appointed to serve on the panel Fax: +359 (2) 980 3586 arbitration. While this concern should not be to be Bulgarian nationals and the language of Email: [email protected] relevant to a concession which is solely for the the arbitration to be Bulgarian. Again, how- carrying out of certain activities, any conces- ever, the technique of having the concession and licences for the provision of public sion related to the utilisation of property awarded to a Bulgarian branch of a foreign services represents a significant challenge to classified as real estate is affected. Bulgarian entity, thereby introducing a foreign party to investors, both domestic and foreign. law is not clear as to the precise nature of the the arbitration, would be equally valid in these “utilisation” concession right and the courts circumstances to enable international arbi- On the other hand, the general spirit of have not yet had an opportunity to take a tration to take place. Bulgarian law and the widely supported econ- position on this issue. Lawyers are divided as omic policy towards enabling, strengthening to what is the legal nature of a “utilisation” Conclusion and broadening private initiative should not be concession right. One view is that this is of a ignored. Bulgaria has consistently ranked in purely contractual nature and, therefore, The Bulgarian concession law should be the top quartile in the EBRD’s Legal Indica- should be treated as akin to a rental right. Dis- viewed as a statement of principle, rather than tors survey of effectiveness and extensiveness putes concerning such a right should therefore as an established and detailed system of rules of commercial laws. Such spirit and principles be capable of submission to arbitration. and solutions. Each concession project is should ensure that Bulgarian authorities will Another view, however, maintains that the therefore capable of becoming a test case and act prudently, reasonably and diligently to “utilisation” concession right is a special kind may require creative solutions to unanticipated solve the problems that will arise in the area of of “usufruct”, i.e., a typical right in rem. In problems. Private sector investors who wish to concessions. It can also be stated with confid- that case, the “utilisation” concession right utilise state resources or engage in the provi- ence that with each project the legal frame- being a right in rem, disputes related thereto sion of public services must expect to comply work for concessions and the implementation would not be capable of being submitted to not only with the Concession Law but with of concession legislation and other related arbitration. Until Bulgarian law takes a clear other laws and regulations. Coordinating the legislation becomes more settled and accom- position on this issue there will be some grant of the necessary concessions, permits modating in respect of future concessions. Focus on concessions Michel Lequien, Senior Associate, Ashurst Morris Crisp * 51

Implementation of the 1 Law No. 219/1998 “on the Regime of Concess- ions”, adopted on 28 October 1998 at a plenary session of the Chamber of Deputies and the Romanian concessions Senate and promulgated on 24 November 1998 by the President of the Republic.

2 See Michel Lequien, “Romania’s New Concession law – an update Law”, Law in transition, Autumn 1999, p.9. 3 A number of concessions regulated by specific sectoral concession regulations, such as Law 1 On 29 January 1999 a new law on concessions came into force in Romania . No. 134/1995 “on Petroleum”, Ordinance No. 30/95 “on the Concession Regime for Construction The Concession Law brought clarity to the legal regime applicable to and Exploitation of Land Communication Lines, concessions and appeared as an important step towards the development of Highways and Railways” (approved by Law No. 136/96), Law No. 61/1998 “on Mining” and concession projects in Romania. This article provides an update on its Emergency Government Ordinance No. 198/1998 “on the Privatisation of Commercial Companies practical implementation after two years of application. Administering Agricultural Land or Land Continuously Covered with Water” have been or are in the course of being awarded. These do not, however, fall within the scope of this article.

In Autumn 1999, Law in transition published introduced to the Romanian legal framework Ploiesti). The signing of a third one (in an article describing the new Romanian Con- to allow for the smooth implementation of Timisoara), also in the water sector, is pending cession Law,2 which we concluded on a rather concession projects. In particular, we pointed at the time this article goes to print. positive note. In our opinion, the Concession out that improvements to tariff regulations Law was to bring significant improvements to were required. The uncertainties and risks arising from the the reliability and consistency of the legal imperfections of the Romanian legal framework applicable to concessions and In fact, since February 1999,3 to our knowledge framework are of a nature that international foster the development of concession and only two concession contracts have been utility companies interested in developing build-operate-transfer (BOT) projects in signed under the new regime, both concerning concessions in eastern Europe would find Romania. At the same time, we indicated that the operation of municipal water and sewage acceptable. Accordingly, the reasons for substantial improvements remained to be services (one in Bucharest and another in Romania’s limited track record of successfully Focus on concessions 52

completed concession projects should be In structuring the project the City chose to mentation was signed within days following sought in the country’s economic and political “spin off” the main private property assets of the official announcement of the award. circumstances rather than in the inadequa- the Regia Generala de Apa Bucuresti (RGAB), cies of the Romanian legal framework. The the self-managed public enterprise that was Concession contract fundamental difficulties that operators are responsible for the “administration” (i.e., the currently facing when attempting to develop use and operation) of the Bucharest water and The Bucharest concession project and its concession projects in Romania relate to the sewage system belonging to the public domain contractual structure are likely to influence lack of institutional and political support for of the City of Bucharest. These assets (prim- the manner in which concessions (in partic- concession projects. arily equipment dedicated to the operation of ular water and sewage services concessions) the system) were then contributed by the City, in Romania will be structured and docu- Notwithstanding these difficulties, certain in return for shares, to a new concession mented in the future. This, in fact, is already significant new developments relating to the company established by the winning bidder the case with a municipal concession project implementation of the Concession Law merit for the purposes of receiving the right to use on which the author is currently advising. reporting. The concession of the water and and operate the system and provide the sewage services of the City of Bucharest has concession services. It would be beyond the scope of this article, been awarded and has recently come into however, to provide a detailed review and force.4 Prompted by the requirements of the The concession, formally awarded on 22 analysis of all of the terms of the Bucharest Bucharest project, the Romanian Government March 2000, is now operated by a comm- concession contract. The following, therefore, has finally adopted a new tariff regulation that ercial company controlled by an international focuses only on certain of its main allows for the operation of contractual tariff operator, in which the City of Bucharest and characteristics. formulas in concession contracts and est- employees hold a minority shareholding. The ablishes the competence of the Competition RGAB remains responsible only for the use The approach taken by the City of Bucharest Office as the “economic regulator” of con- and operation of certain non-core public and IFC in structuring the tender and the cessions in Romania. Lastly, the adoption by property assets of the City, in particular a concession contract was strictly “output the European Commission of its Interpretative number of lakes situated in Bucharest and based”. The City and IFC structured the con- Communication on Concessions under used for leisure activities. cession contract around a stringent obligation Community Law of 12 April 2000 will, upon placed on the concessionaire to achieve and Romania’s accession to the European Union, maintain compliance with specific levels of Concession tender impact on certain provisions of the Concession services (LOS), without regard to the manner Law and current concession contracts. The tender was organised pursuant to the in which they are achieved and maintained by tender procedures provided in the Concession the concessionaire. Under the concession Law.5 It involved three rounds of comments by contract, the concessionaire is bound by the The Bucharest water and the shortlisted tenderers on the concession terms of the tariff proposal submitted during sewage services concession documentation provided by the City of the tender and remains completely free to The Bucharest water and sewage services Bucharest. Participants in the tender were not determine the nature, timing and level of concession, awarded in March 2000, is in required to submit any technical offer. The investments in the water and sewage system many respects a landmark project for selection of the concessionaire was based necessary to achieve and maintain the levels Romania. The fact that it was successfully exclusively on a comparison of the bidders’ of services. At the same time, the concession completed demonstrates that a concession tariff proposals, with the bidder submitting contract provides for substantial penalties in project can be developed and awarded under the lowest tariff bid, calculated as the average the case of non-achievement of, and/or subse- the Concession Law and in accordance with water and sewage tariff over the period of the quent discontinued compliance with, the international practice. concession, being the winner. levels of services.

Participants in the tender were required to The other terms of the contract are relatively Project structure base their tariff proposals on the terms of the standard for a project of the nature and size The City of Bucharest, advised by the final draft of the concession contract and the of the Bucharest concession. The duration of International Finance Corporation (IFC), other project documentation as finalised by the concession is 25 years, extendable by initiated the international tender for the the City and its advisers. The tender rules agreement of the parties in accordance with award of the concession of the municipal expressly excluded any negotiation of any the provisions of the Concession Law. Inter- water and sewage services of Bucharest in part of the project documentation after the estingly, the City agreed to set the concession € Focus on concessions February 1999. award of the concession. Thus, the docu- fee at the strictly nominal amount of 5,000, 53

thereby agreeing not to draw revenue from regulation of the prices and tariffs of basic 4 The concession contract was signed between the the concession through the concession fee public services was wholly inadequate. City of Bucharest and Apa Nova Bucuresti (a subsidiary of Vivendi Water) on 30 March 2000. It (which, in any event, the concessionaire came into force on 17 November 2000, following would have passed through to consumers). As a general rule, Emergency Ordinance satisfaction of all conditions precedent (which No. 7/1998 provided that the tariffs of these included, among others, the adoption of new tariff regulations allowing for the operation of the tariff The contract also contains extensive provi- public services, whether organised at the formula provided in the concession contract). sions regulating the adjustment of the terms of national or the local level, could be adjusted 5 As set out in Chapters II and III of the Concession the contract, primarily its tariff provisions, only with the approval of the Competition Law (Articles 6–27). upon occurrence of certain circumstances Office. In addition, this adjustment could be 6 See Lequien, supra, note 2 at p.14. affecting the financial balance of the con- made only upon the variation of certain in- 7 Emergency Government Ordinance No. 7/1998 cession, which circumstances cannot be fac- dices (local inflation index or the ROL/USD “on the prices and tariffs of products and services that are produced or delivered on the national tored in the tariff formula. In this respect, the exchange rate, depending on the service con- territory within the scope of a natural monopoly, City took the view that the list of grounds for cerned) in excess of 5 per cent. As a result, which are governed by a special legal regime, adjustment referred to in paragraphs (a) and concession contracts relating to the services which are charged by regii autonome, which are established with the consent of the Competition (b) of Article 32 of the Concession Law covered by Emergency Ordinance No. 7/1998 Office”. The goods and public services, whose (change in law and force majeure) can be con- could not provide for an automatic escalation price and tariff are regulated by the Emergency tractually expanded to include other grounds, and/or adjustment of tariffs in accordance with Ordinance No. 7/1998, are: - General railways transport services (excluding in particular, “a fundamental change in the a formula taking into account the internal and related services and international services); underlying economics of the concession” external factors affecting the price of the ser- - Certain water transport services in the Danube resulting in a decrease of the billable water vices, such as the operator’s operating costs, delta and Orsova–Moldova Noua, Braila- Hârsova and Galati-Grindu; 6 consumption. In addition, the contract pro- financing costs or changes in the production - Underground urban transport services; vides for a regular rebasing of the tariff by and/or consumption of the relevant services. - Basic postal services; agreement of the parties, the purpose of which - Raw water; - Potable water and sewage; is to ensure that the return of the concession A draft law “on Local Public Services” pre- - Services provided by the Ministry of Interior is within, and does not exceed, a predeter- pared by the Ministry of Public Works and (passports, identity cards, driving licences); mined target return band. Territorial Planning contemplated the liberal- - Pharmaceutical products for human use produced domestically. isation and decentralisation of the setting of 8 Article 1 states that “[i]n certain particular cases, A key condition precedent to the coming into tariffs for local public services. In particular, such as the restructuring or reorganisation of regii force of the concession contract consisted in the draft law proposed to leave the establish- autonome, public services concessions, [or] the modification of the cost structure or the conditions of the adoption of a law or other appropriate ment of such tariffs within the responsibility of production in sectors other than electrical and ther- regulations allowing for the application of the the relevant local authorities and to allow such mal energy, the Competition Office will analyse costs sophisticated tariff provisions in the contract. tariffs to be determined on the basis of factors levels, prices and tariffs (…), [and] the terms and conditions applicable to the determination and that actually affect the price of the relevant adjustment of the tariffs referred in the Annex [to the Thus, the successful conclusion of the tender service. Although these principles appeared to Emergency Ordinance] and will submit to the approval for the Bucharest concession played an impor- establish a sound basis for a reform of the of the Government the prices and tariffs, and the terms and conditions applicable to the determination tant role in the development of the Romanian regulation of utilities tariffs, they have not and adjustment thereof, as well as, in each case, the legal framework applicable to concessions. It been implemented. The draft law, which was specific rights and obligations of the Competition prompted the government to adopt a much- submitted to Parliament in September 1998 Office. In the case of local public services concess- ions, the Competition Office will submit the prices awaited amendment to the rigid tariff control and was later replaced and completed by a and tariffs, and the terms and conditions applicable regulation until then applicable to the public new draft law “on Public Services” (Autumn to the determination and adjustment thereof to the services regulated by Emergency Government 1999), has not yet been adopted. approval of the Government with the prior approval of the [relevant] conceding authority (…).” Ordinance No. 7/1998.7 In this context, and given that the adoption of suitable tariff regulations – a prerequisite for 150/2000 amends and replaces Article 3(3) of A new regulation of public the successful completion of the Bucharest Emergency Ordinance No. 7/1998.8 services tariffs water concession – had become urgent, the Before the adoption by the Romanian Gov- Romanian Government finally adopted Emer- In substance, the new regulation of utility ernment on 28 September 2000 of Emergency gency Ordinance No. 150/2000 for the amend- tariffs allows the government to approve by a Ordinance No. 150/2000 for amending Article ment of Emergency Ordinance No. 7/1998. simple decision any type of tariff formula 3 of Emergency Ordinance No. 7/1998, the Article 1 of Emergency Ordinance No. agreed in a concession contract, subject, Focus on concessions 54

however, to such tariff formula being accept- formula for a given concession. At the same that a concession must systematically be able to the Competition Office. Emergency time, the discretion granted to the Competition tendered. However, the grantor of the con- Ordinance No. 150/2000 does not determine Office and the government will require con- cession must select the operator with which it any precise rules governing the costs of the ceding authorities and operators to involve the will negotiate the final terms of the concession concessionaire that shall be taken into account Competition Office at an early stage of the after having given the possibility to several when determining the tariff or, alternatively, structuring of the project and the determin- candidates to submit proposals; and the select- any principles concerning the limitation or ation or renegotiation of the principles govern- ion made by the grantor must be based on capping of the tariff or the profitability of the ing the tariffs of the concession, in order to objective criteria. concession. In fact, the Emergency Ordinance secure the Office’s approval and its favourable does not take a view on the model of tariff recommendation to the government. It remains Concerning the renewal or extension of a con- regulation that should apply to public services to be seen whether this discretionary compet- cession, the Commission’s Communication tariffs in Romania (e.g., “cost plus”, “tariff ence left to the Competition Office and the states that any renewal of a concession that cap” or “rate of return” models). As a result, government will result, in practice, in excess- comes to its term shall be considered as equiv- neither the Competition Office nor the govern- ive central government control over local alent to the granting of a new concession. This ment is bound by any regulatory principles in concessions or, to the contrary, will be used by means that the grantor cannot renew and/or their assessment of the appropriateness of a the Competition Office to progressively extend a concession without complying with tariff formula submitted to their approval, develop an expertise in concession tariff the rules applicable to the award of the which remains, therefore, largely discretionary. matters which will benefit to local authorities. concession.

The new regulation brings, however, a useful The European Community Treaty is not yet The impact of the clarification to the uncertainty created by the applicable in Romania. At present, a pro- Commission’s Interpretative terms of Article 2.3 of the Concession Law, vision in a concession contract pursuant to Communication on Concessions which states that public property, activities or which the parties to the concession may under Community Law services cannot be granted in concession if extend the term of the concession by mutual there does not exist a regulatory authority Until recently, European Community law agreement for a period of up to half of the “whose opinion is binding concerning the regulated only the public procurement of original duration of the concession would be prices and tariffs applied by the concession- works and services.10 In such a context, it was perfectly valid.12 However, when the Treaty aires”. Emergency Ordinance No. 150/2000 unclear whether the publicity and competition becomes applicable in Romania, upon now designates the Competition Office as the rules set out in the Treaty and the relevant Romania’s accession to the European Union, regulatory authority referred to in Article 2.3. directives were applicable to public services the Concession Law will have to be reviewed The Emergency Ordinance, however, contains concessions. In order to clarify the question, so as to ensure its compliance with the prin- only a very summary characterisation of the the European Commission issued an Inter- ciples identified by the Commission in its role of the Competition Office as the regulator pretative Communication in April 2000 Interpretative Communication. of concession tariffs. In fact, its “rights and setting out the main principles applicable to obligations” as the “economic regulator” of the award of public concessions.11 In this context, it is most likely that the concessions must be determined, on a case- provisions relating to contract extension in by-case basis, in the government decision According to the Communication, it is not concession contracts concluded before the approving the tariff formula and other tariff because there are no specific European Treaty came into force in Romania will also be adjustment mechanisms of the relevant Community regulations governing concessions deemed inapplicable, irrespective of the fact concession contract.9 that the general principles derived from the that these provisions were valid at the time Community Treaty, such as the principles of they were agreed. This means that a concess- Although formulated in summary terms, transparency, non-discrimination, equality and ionaire whose contract provides for the poss- Emergency Ordinance No. 150/2000 brings a proportionality, do not apply to concessions. ibility to agree with the conceding authority an major improvement to the legal framework of extension of the term by a certain period of concessions in Romania by allowing con- It shall therefore be inferred from the terms of time at the end of the original concession cession tariffs to be structured in an economic the Communication that, as a result of the period will soon not be able to rely on that manner. In this respect, the generality of its applicability of the principles of transparency, provision in its legal and financial assessment terms, which in the Romanian context appears non-discrimination and equality, a concession of the concession. It will, for example, no appropriate, provides a great flexibility in the may be awarded only following publicity and a longer be possible for the concessionaire to determination of the most appropriate tariff competitive procedure. This does not mean Focus on concessions 55

undertake significant investments shortly Conclusion 9 The tariff formula and adjustment mechanisms app- before the term of the concession for the licable to the Bucharest concession were approved Notwithstanding its imperfections, the on 26 October 2000, by a Government Decision primary purpose of being in a better position Romanian Concession Law provides a solid No. 1019 “on the Approval of the Methodology for to secure a contract extension. the Establishment and Adjustment of the Tariffs for basis for the development of concession the Water and Sewage Public Services in the City of projects. In fact, the Romanian legal and Bucharest”. The Government Decision also estab- This might not be an issue in the context of regulatory framework of concessions is, in lishes the “rights and obligations” of the Competition concessions granted for longer durations (20- Office as the regulator of the concession through the many respects, more practical than that of 25 years) as seems to be currently the trend ratification of the terms of the concession contract other central European countries, such as prepared by the City and the IFC, and which contains for concessions in Romania. This is much Poland or the Czech Republic. extensive developments on the role of the “economic more an issue, however, for concessions regulator of the concession”. granted for shorter periods, where the oper- 10See, in particular: Works Directive 93/37/EEC, In these countries, the lack of an appropriate ator will, in fact, have to rely on a future Special Sectors Directive 93/38/EEC, Services legal framework for concessions13 is probably Directive 92/50/EEC. Based on the Commission’s extension to be able to make a decent return, one of the key reasons for the limited number communication, it is now possible to clearly distin- as would appear to be the case in certain guish between concessions and public procure- of completed public services concessions ongoing concession projects in other central ments. In substance, a concession under EC law is projects at present. By comparison, in a contract in which (i) the private operator bears the European accession countries. Romania the obstacles to the development of risk of the operation of service that is the subject matter of the concession; and (ii) the private concession projects are not primarily of a operator derives a significant part of its revenue legal nature, but result essentially from the from charges paid by the users of the service. lasting economic and institutional difficulties 11Commission Interpretative Communication on that the country has endured since 1990. Concessions under Community Law, Official Journal 2000/C 121/02, 29.4.2000, p.2.

12Such possibility is expressly contemplated in Article 30(1) of the Concession Law.

13In particular, the absence of a distinction between public infrastructure assets and private property assets, and of general laws governing public services concessions. * Michel Lequien Ashurst Morris Crisp 22 rue de Marignan 75008 Paris France Tel: +331 53535353 Fax: +331 53535354 e-mail: [email protected]

The author would like to acknowledge with gratitude the assistance provided by Sorin Mitel, partner at Musat & Associates (Bucharest), for his contribution to this article. Focus on concessions 56 Christopher Clement-Davies, Partner, and

Artem V. Faekov, Associate, Vinson & Elkins*

Slovenia case study: the Maribor waste-water project

This article gives an overview of some of the main legal challenges posed by the structuring of the project financing for the Maribor waste-water concession project in Slovenia. Arguably the first water-sector infrastructure project in the region, the Maribor project provides an interesting example of how important issues, such as negotiating the concession and direct agreements as well as structuring the security package, can be dealt with successfully in an environment relatively new to complex project finance transactions.

Recent years have witnessed a sharp rise in by the European Bank for Reconstruction The composition of the sponsor group was the frequency and sophistication of attempts and Development (EBRD) and a syndicate of designed to maximise the skills and strengths to apply public-private partnership and participant banks,1 and sponsored by a con- represented by international corporations with project finance structures to infrastructure sortium of European water companies led by wide experience in the water sector and in projects in the countries of central and east- Suez Lyonnaise des Eaux SA (SLDE) and infrastructure projects in the region. ern Europe. Governments in the region have Degremont SA, involved a broad range of turned to this approach to infrastructure dev- issues typical for the region and for a The concession was granted by the Munici- elopment for fundamentally the same reasons concession-based infrastructure project. As pality of Maribor to a locally incorporated as have governments in numerous other such, it may represent something of a bench- special purpose entity, Aquasystems d.o.o. jurisdictions across the globe. Tight budgetary mark for similar projects in the future. This wholly owned by the project sponsors. The constraints, a growing faith in the virtues of article discusses some of the main challenges EBRD provided senior debt financing to privatisation, the extent and urgency of the faced in connection with the structuring of Aquasystems using an A/B Loan structure, in need for new infrastructure, the search for the financing for the project.2 a total principal amount of €28.1 million (of better value for money in public services, and which the A Loan amount constituted €14.8 the rapid evolution of the techniques and million, and the B Loan amount comprised Project structure skills deployed in structures of this kind have €13.3 million).3 all played their part, as they have in so many The project involves a concession for the con- other regions and countries around the world. struction and operation of a waste-water pro- Somewhat unusually for emerging markets cessing plant to serve Maribor, the second projects, the project involves a public-sector One of the recent successes in this sphere, largest city in Slovenia. Maribor is located sourced revenue stream. Aquasystems will and arguably the first water-sector infra- close to the Slovenian-Austrian border; in not be obliged or entitled to collect service structure project financing to reach financial addition to SLDE and Degremont, the project charges directly from the consumers in close in the region, is the Maribor waste- sponsors include two Austrian water com- Maribor, but will instead be paid a tariff by water concession project. The deal, financed panies: Aquanet GmbH and Styrcon GmbH. the Municipality in compensation for perfor- Focus on concessions 57

mance of its construction and operational term of the concession. This exclusivity is 1 The syndicate of participant banks included services. The tariff will be paid out of a important not only for the concessionaire from Bayerische Hypo-und Vereinsbank AG as co-arranger, Raiffeisen Zentralbank Osterreich AG and Dexia dedicated account to which municipal water a commercial point of view, but also as a state- Project & Public Finance International Bank. taxes are to be transferred. In the event of a ment of commitment of the Municipality to the 2 Vinson & Elkins acted as Special Counsel to the shortage of funds in this dedicated account, concession structure and to the success of the EBRD. the Municipality will be obliged to pay the project, thus providing a valuable degree of 3 Under the EBRD A/B Loan structure, the B Loan tariff out of its available financial resources. reassurance to the project lenders. As with any amount is syndicated through the sale of part- icipations to international commercial financial cash-flow-based financing structure, a high institutions. Aquasystems has in turn entered into a fixed- level of confidence about the revenues to be price turnkey construction contract with SLDE generated by the project in future is essential. and Degremont, and into technical assistance Competition with the project company’s rights relevant conditions could not be satisfied, but and know-how licence agreements with SLDE to provide services and generate these at the same time that it contained enough (thus ensuring that it would have sufficient revenues could have seriously undermined certainty to ensure the bankability of the technical resources available from the spon- that confidence. project and full recovery of financing costs. sors at all times to perform its concession The intention was to make the implementation agreement obligations). As part of the security of each phase dependent as far as possible on Term and phases package for the loan, Aquasystems has granted objective criteria and procedures, however, to the EBRD first-ranking security interests The term of the concession is 22 years from avoiding the risk of a wholesale renegotiation of over its receivables (including the tariff the scheduled acceptance of the first phase of its terms at each stage. During the construction payments to which it is entitled under the the facility (perhaps a comparatively long per- period this is achieved in part by means of a concession agreement), its project contracts, iod for an infrastructure concession, but one mechanism for determining start and target bank accounts and assets. justified by the nature and economics of the acceptance criteria and dates for each phase, project). The agreement is split into separate and for modifying the overall project schedule The sponsors in turn have provided the Bank construction and operational periods in a way (and the construction delay penalties payable with a full construction completion guarantee, which is designed to isolate the risks relating by the concessionaire). The tariff applicable to and the EBRD has entered into a direct to each and thus facilitate the concessionaire’s the operational period also had to be structured agreement with the Municipality, providing for ability to manage them. The construction per- in a way which preserved this flexibility (see step-in rights in favour of the Bank in case of iod in turn consists of three phases, based on further below). a default under the loan or a purported termin- the technical capabilities of the purification ation of the concession. By way of security for units to be designed and constructed during Principal issues its obligations under the concession agree- each phase: a mechanical pre-treatment facil- ment, Aquasystems is also obliged to provide ity during phase one; a biological treatment Any number of issues can arise as concession- the Municipality with a completion guarantee facility for carbon removal during phase two; based projects are structured and negotiated and, upon commencement of operation, a and a biological treatment facility for the in the transition economies of the region. further operation period performance bond, as removal of nitrogen and phosphorous This is one of the reasons standardisation of security for its operating obligations. compounds during phase three. concession agreements has proved so elu- sive at an international level. Set out below This phasing of the project represented a chall- is a brief description of some of those issues Concession agreement enging complication of the transaction. Each and the way they were handled on the phase is subject to specific conditions, only the Maribor transaction. General initial phase being treated as a full commit- The Maribor concession agreement is between ment of the project company from the outset. Permits and consents the project company, Aquasystems, and the Phases two and three are, in effect, contingent, Municipality. The sponsors are not party to it their implementation being conditional on the One of the challenges on any infrastructure but are identified as owners of Aquasystems outcome of further technical and commercial project is to allocate the parties’ prospective (certain restrictions being placed on their tests and studies, and the satisfaction of certain responsibilities for obtaining permits and con- ability to sell-down their interests). resourcing conditions. It was therefore impor- sents. This is rarely as straightforward as it tant to ensure that the concession agreement seems. The consents needed can be numerous The agreement grants an exclusive right to the provided sufficient flexibility to allow the and occasionally unclear, and obtaining them concessionaire to provide water and waste- parties to delay or cancel a phase if any of the can be a difficult and time-consuming process.

water services in the Maribor area during the Focus on concessions 58

The concessionaire’s confidence in the integ- Municipality of monthly operating reports rity and transparency of the local permitting and annual technical and financial reports) system will play a part in this allocation, as have been put in place to allow the will its view of its own ability to obtain the Municipality to discharge this function. necessary consents quickly and efficiently.

Tariffs In the case of the Maribor project, most of the permitting responsibility is allocated to the Structuring the tariff payable to the concess- concessionaire, with the Municipality being ionaire was one of the project’s main chall- obliged to provide all reasonable assistance to Public sector monitoring enges. This area will typically represent one Aquasystems in obtaining and maintaining Another contentious area in negotiating of the focal points in the pattern of risk the permits. This is suitable for Slovenia’s concession agreements tends to be the extent allocation on a concession-based project. This comparatively well-developed permitting of the public sector entity’s control over the was so in the case of Maribor. The tariff had system, but may not be appropriate for coun- concessionaire’s activities. Government bodies to be sufficiently certain from the date of tries with less sophisticated and transparent often view concessions as merely another form signature to meet the project’s commercial permitting procedures. The exposure of the of public procurement, and can find it difficult and funding requirements, but also flexible concessionaire to permitting risks is also to break with the more traditional procurement enough to accommodate its contingent invest- mitigated by the fact that the receipt of the methods and habits of the past. Excessive ment features (see further above). It was also relevant required permits is made a condition control – or “micro-management” – can be structured to reflect a number of the central precedent to the concessionaire’s obligations. counter-productive, however, inhibiting the risks being borne by the concessionaire and If the permits were not obtained, the project effective deployment of private sector skills the Municipality respectively. For example, would not be able to move forward and, thus, and innovation. On the other hand, govern- construction cost is treated as a concession- the Municipality has ample motivation to ments cannot take the concessionaire’s aire risk, as are many of the basic cost provide support to the permitting process. performance of its obligations entirely on trust. elements of operation, although changes in There is always a balance to be struck, in certain taxes are a pass-through. Site other words. The Maribor concession agree- ment seeks to achieve a reasonable balance This is accomplished primarily by breaking Concession-based projects often involve ex- between the desire of the Municipality to have the tariff down into a number of distinct tensive discussion of how the site needed for a sufficient degree of control over the project components: a capital charge, an operation the project is to be acquired and the risks to protect its legitimate concerns as a public charge and a tax pass-through charge. The associated with it borne by the parties. In diff- authority, and the importance of granting the capital charge provides for the recovery of icult investment environments it rarely makes concessionaire enough autonomy and freedom costs for the design, construction and start-up sense to attempt to transfer too much of this in its management decision-making to enable of the facility. It is based on fixed monetary risk to the private sector. The Maribor con- it to run its business effectively. The pre- amounts set forth year-by-year (as adjusted for cession agreement approaches the subject in a scribed monitoring regime is based mainly on changes in certain economic conditions, the straightforward way. In common with many the concessionaire meeting construction Municipality’s construction change orders, other concession agreements, the Municipality deadlines and performance standards, and and certain other public sector risks). The is responsible for obtaining and providing to complying with pre-agreed operating plans agreement contains a mechanism for re- the concessionaire the site and appropriate and procedures. Within these constraints, the calculating these components as and when rights of use and access to it. These include concessionaire retains a reasonable level of each new phase is implemented. rights of use for the duration of the concession, independent decision-making. with a warranty of vacant possession granted The operation charge consists of a fixed by the Municipality. The agreement also gives The concessionaire is subject to the general monthly component, in Slovenian tolars (SIT), the concessionaire such additional rights of supervision of the Municipality (as required by and a variable component, being a fixed rate access to the site as it may require for the local law). The Municipality is allowed to mon- in SIT per cubic metre of influent. The volume purposes of performing its obligations, thus itor the project and verify that it is being oper- component is designed to transfer a share in providing a degree of flexibility to cater for the ated and maintained in accordance with the the risk of performance (e.g., quantities of uncertainties of construction. requirements of the concession. Appropriate water and waste-water treated under normal record-keeping, information and reporting circumstances) to the concessionaire, but to requirements (including the provision to the Focus on concessions 59

leave the risk of less predictable changes in “financial balance” mechanism – an almost (after completion of phase two) the net book volume with the municipality. Both of these invariable feature of concession agreements for value of the plant. elements are subject to escalation based on emerging markets projects – used a combin- the Slovenian Retail Price Index. ation of a renegotiation mechanism and the In the event of termination for Municipality agreement’s dispute resolution procedures default, the Municipality will in addition be The tax pass-through charge is designed to where the parties cannot agree on the adjust- liable for the expenses and costs resulting enable the concessionaire to recover the cost ments needed. In extreme cases a right of from early termination of any concession- of a number of identified Slovenian taxes, termination may arise. related contracts, and for the lost profits of including, inter alia, sales tax and VAT. Other the concessionaire over a number of years. taxes, including profit and income taxes, are The Municipality also has the right, under Termination payments specifically not reimbursable. the agreement and Slovenian law, to term- One of the most difficult areas in the nego- inate the concession for “convenience”. tiation of any concession-based project is the Where it does so, however, as a disincentive Force majeure, hardship and subject of termination payments if the con- to use this right except as a matter of strict financial balance cession agreement is terminated before it has need, its liability would be further increased The agreement’s force majeure provisions are run its full term. What amounts should be paid to include the concessionaire’s lost profits typical of a concession contract of this kind. to the concessionaire by the public sector in until the end of the term of the agreement. On some projects, the attempt is made to use these circumstances, especially where the a narrow definition of force majeure, based on former is at fault? The main difficulty here is Direct agreement a list of limited events. This is unlikely to be the possible mismatch between the sums acceptable to sponsors or lenders in a rela- likely to have been invested by the project Direct agreements can take time and patience tively new investment environment, however, company and its lenders when termination to negotiate. Often, the public sector promoter where few projects of the kind in question occurs, and the losses which the municipality will not have come across them before, and may have been financed. This was the posi- stands to suffer as a result of a breach. There will need to be convinced of the need for tion with Maribor. The innovative nature of is often little correlation between the two. The them. The idea that it should, in effect, sus- the deal and long-term nature of the con- issue tends to be highly emotive. The public pend or forgo its termination rights on a cession agreement meant that future unanti- sector may be deeply surprised by the sugges- concessionaire default in order to leave the cipated (and unidentified) events had to be tion that it should pay anything at all on a con- senior lenders with control of a troubled allowed for. An open-ended definition was cessionaire default. Yet, on an early termin- project can be far from self-explanatory. Yet, therefore adopted. Many of the public sector ation of the concession agreement, a valuable the reality is that, without the step-in rights risks against which the concessionaire needs set of assets may change hands, long before which direct agreements are designed to give protection are also built into the definition. lenders and investors have been paid out from effect to, the typical limited-recourse infra- The agreement provides for the extension of the cash-flows generated by those assets. structure project will not be bankable. The deadlines for the performance of obligations termination of the concession agreement will where events of force majeure occur (as well These difficulties certainly played their part otherwise render the lenders’ security package as relief from liability). It also contains a right in the structuring of the Maribor project. As virtually valueless. These issues were much in of termination for prolonged events of force with so many emerging markets projects, one evidence on the Maribor project. Detailed and majeure (i.e., lasting six months or more). critical consideration in this context was the lengthy discussions took place about the project’s bankability. Lenders will frequently rationale for a direct agreement, the powers The concession agreement also provides for be unable to lend unless their position is at and responsibilities exercisable by the EBRD appropriate adjustments to its provisions to be least substantially covered on a premature after it was invoked, the conditions relating to made in certain circumstances to address the termination. Thus it may be necessary to pro- “step-in” and “step-out” procedures, and the consequences of force majeure, changes of law vide that termination payments will always be criteria governing an acceptable substitute or “hardship” (i.e., an event beyond the sufficient to pay out the senior lenders, irre- entity. In addition, the EBRD worked with the reasonable control of the parties which makes spective of the cause of termination. This is Municipality to address concerns that the performance substantially more onerous). the case with Maribor. This means that, even direct agreement should not be perceived as Where this occurs, adjustments are to be made in the event of a termination for force maj- an amendment to the concession agreement or on the basis that the concessionaire should be eure, hardship or concessionaire default, the as otherwise relieving the concessionaire of its left in no better and no worse financial posi- Municipality will cover the outstanding obligations under it. In the end, an agreement tion as a result of the relevant event. This principal and interest of the project loan or was settled on terms acceptable to the Bank Focus on concessions 60

and the Municipality, and may well prove to take a movables pledge, at least until such * Christopher Clement-Davies be a valuable precedent elsewhere. time as the company would acquire suffic- Artem V. Faekov Vinson & Elkins iently valuable movables. A mechanism was Regis House put in place to allow the lenders to call for the 45 King William Street Security documents execution of security later on in identified London EC4R 9AN Tel: +44 20 761 86000 Determining the structure of the security circumstances. Currency-control issues were Fax: +44 20 761 86001 package to be taken by the project lenders encountered in attempting to set up offshore Email: [email protected] often represents a challenging risk- bank accounts of the project company (a [email protected] management exercise for a limited-recourse mechanism often used in emerging markets financing in the emerging markets. Close projects for mitigating exchange rate, convert- coordination with local counsel is necessary ibility and transferability risks), and only erned by Slovenian law, as the underlying to review and examine the types of security onshore Slovenian bank accounts were used. shares are shares in a Slovenian company), available under local law and the extent to Appropriate local security over such accounts and security over any compensation the which it can satisfy the expectations of inter- was taken by way of a Slovenian law cession of sponsors or the concessionaire might receive national lenders. Again, this was very much claims for security. in case of expropriation or nationalisation of the case with Maribor. In many respects, this the project. The pledge of shares proved is one of the most difficult areas of the “law No security could be taken over immovable particularly challenging to structure since in in transition” process, since the development property of the project independently of the Slovenia a bank cannot be given effective of security structures compatible with free- concession, as, under Slovenian law and the power to manage a company’s affairs (e.g., to market banking techniques in countries with concession agreement, the concessionaire had appoint an administrative receiver) without a different legal traditions of their own is never a licence only to use the project site, which full transfer of equity interests, i.e., enforce- straightforward. could not be mortgaged or otherwise encumb- ment of the pledge. ered by way of security. However, security A number of alternative security mechanisms taken over the rights of the concessionaire Conclusion were considered in structuring the Maribor under the Concession Agreement (by way of a project and achieving the requisite level of Slovenian cession of claims and rights, the The Maribor waste-water project was, we comfort. Inevitably, a number of compromises local law equivalent of an assignment), believe, the first limited-recourse concession- had to be reached to accommodate aspects of together with the provisions of the direct based municipal infrastructure project finan- local law. For example, under Slovenian law, agreement, were accepted as sufficient, as they cing in eastern Europe to reach financial security over after-acquired tangible property provided a right to the lenders to take over close. As a result of this first-mover status it would not be effective without the execution of control of, and operate, the project plant and is likely to be treated as a standard against further documents after the acquisition of the facilities. Other security taken included which similar projects will be measured. It is new assets. Potentially, this could have called security over the concessionaire’s receivables hoped that the success of the Municipality for a cumbersome procedure involving the (including project revenue under the concess- promoting and financing the Maribor project execution of new documents each time further ion agreement), security over the project will provide a sound basis for investor and assets were incorporated in the project. As the contracts (Slovenian or foreign, depending on lender confidence in the use of other project company initially had very few mov- the governing law of the underlying contract), concession-based project financings in able assets, it was therefore decided not to pledges of shares of the concessionaire (gov- central and eastern Europe. Focus on concessions 61

developments LegalLegal transition transition developmentsdevelopments developments

ARMENIA BULGARIA i) an amended definition for insolvency that is confusing and is likely to discourage rather LEGAL REFORM PROJECTS LEGAL DEVELOPMENTS than promote timely filings; ii) further erosion of the rights of secured Telecommunications Bankruptcy law creditors in realising or protecting their The European Bank for Reconstruction and In October 2000 the Bulgarian Parliament secured interests in the debtor’s property; Development (EBRD) has been providing passed amendments to the bankruptcy law iii) the possibility for the courts to dismiss the technical assistance to the Armenian govern- (published in the State Gazette issue 84 of creditors’ committee without well-defined ment in establishing the telecoms regulatory 13/11/2000). The amendments are aimed at criteria; and processes that will permit the effective monito- speeding up bankruptcy and bringing bank- iv) the introduction of special treatment for ring and control of the incumbent operator to ruptcy procedures in line with the three-stage enterprises under the programme operated by be achieved. The consultants have produced a process of judicial review contemplated by the the Revitalisation Agency. study on the quality of telecommunication Civil Procedure Code. In particular, the In addition, the amendments now give courts services that Armenian authorities could amendments introduce an improved system for discretion to decide whether general non- reasonably expect and the tariff methodology preparing lists of claims, time restrictions for payment of liabilities is of an adequately that would be best suited to Armenia’s situa- raising claims and an amended timeframe for “long period of time” to justify a declaration tion. Following a thorough consideration of the raising repeal actions. of insolvency. The amendments also restrict consultants’ recommendations, the Armenian secured creditors’ rights by requiring that 30 authorities have recently decided to create an CZECH REPUBLIC per cent of net recoveries from the enforce- independent regulator separate from the gov- ment of collateral lose their priority and fall ernment but possibly merged with the energy LEGAL DEVELOPMENTS into the general creditor pool. regulator. The EBRD has assisted with the Bankruptcy law drafting of a new law establishing this reg- Unfortunately, the amendments do not address ulator and the draft law has been submitted to On 1 May 2000, Law No. 105/2000 Coll., such pressing reforms as the need to align the the Armenian Minister of Justice for comment. which amends the Czech Bankruptcy and bankruptcy treatment of secured creditors with Composition Act No. 328/1991 Coll., entered commercial bargains and expectations, the AZERBAIJAN into force. The amendments introduce a need for a functional corporate rehabilitation number of positive changes but fail to address process and the development of a functional LEGAL REFORM PROJECTS key weaknesses as well as introducing some regulatory system. negative changes. Securities Market Financial markets The positive changes include: At the request of the State Committee for In September 2000 a new Law on Bonds was Securities of Azerbaijan, the EBRD has i) allowing for the preservation of a debtor’s adopted which removes the need for prior undertaken a three-phase project to assist property and the appointment of interim authorisation for issuing debt securities on Azerbaijan in improving its laws and legal trustees prior to a bankruptcy declaration; foreign capital markets. institutions governing the securities market ii) permitting professional firms (in addition to On 1 January 2001 amendments to the Secur- in order to bring the Azeri laws into line with individual persons) to act as administrators; ities Law entered into force, allowing the Czech international practice and to facilitate the iii) allowing creditors greater control over the Securities and Exchange Commission to issue functioning of the Baku Stock Exchange. The selection and some of the actions of the new licences to foreign companies interested in project started in early 2001 and the first liquidator (e.g., service contracts); and floating and selling stocks, bonds and mutual phase is expected to be completed during the iv) introducing a more realistic and flexible funds on the Czech market. It is hoped that the course of the year. fee structure for administrators. new law will help level the playing-field for However certain amendments have been Czech and foreign investment funds. Law in transition subject to criticism. These include: 62

Secured transactions ber 2000, to the pay-as-you-go pension system. Law until March 2001. The decision to delay The legal framework for a fully funded manda- the review of the law was made in light of the On 14 September 2000 a new law was adopted tory second pillar is now in place and the sys- legal dispute between the government and the which provides, among other measures, a tem will be introduced over the medium term. Sonera-controlled consortium, which has a 49 complete restatement of the Civil Code sec- per cent stake in Lattelekom, the fixed-line tions on pledge, yet without major practical GEORGIA monopolist. During the privatisation of changes. The new provisions, which entered Lattelekom, the Government had given the into force on 1 January 2001, allow parties to LEGAL REFORM PROJECTS company a monopoly over public voice ser- create a valid pledge without dispossession of vices until 2013. However, during the World the charged assets from the debtor. Instead, Telecommunications Trade Organisation (WTO) negotiations it was there are two options: either the pledge can be In July 2000 the EBRD launched a telecom- agreed that the monopoly period be shortened registered on the ownership certificate in cases munications regulatory project to assist the to 2003. This has given rise to a dispute with where transfer of title requires transfer of such newly established Georgian regulator in draft- the consortium which claims compensation for a certificate, or the charged assets can be ing legislation in the areas of universal access, the shortening of the monopoly period. The labelled with the name of the creditor on the tariffs and licensing. However, the adoption of matter is currently before the International debtor’s premises. This amendment clarifies a sector policy defining the Government’s Court of Arbitration in Paris. the validity of these techniques under Czech priorities and a complete re-registration of all law. These remain, however, of limited use. existing licences (over 1,200) were necessary KAZAKHSTAN LEGAL REFORM PROJECTS before legislative drafting could begin. The Georgian authorities are presently reviewing LEGAL REFORM PROJECTS Secured transactions consultants’ reports on universal access, tariffs Telecommunications The EBRD has recently started discussions and licensing. Once the sector policy is with the Ministry of Finance and the Ministry adopted, efforts will focus on the drafting of the In September 2000 a telecommunications of Justice to explore the possibility of initiating relevant legislation. regulatory project was launched to assist in the a comprehensive reform of pledge legislation. creation of an independent regulator and the The Central Bank and the Banking Association HUNGARY adoption of a modern regulatory framework have both expressed their support. The Czech compatible with WTO principles and capable Republic is one of the few transition countries LEGAL DEVELOPMENTS of attracting investment. As part of the project, that has not undertaken comprehensive secur- Secured transactions a complete sector overview and an analytical ed transactions reform since the beginning of comparison of the telecommunication policies the 1990s. By Act CXXVII of 2000 on the modification of of some major countries was carried out. legal regulations on charges, Hungary has The consultants have worked in close cooper- amended the provisions of the Civil Code on ESTONIA ation with the Kazakh authorities on the form- charges over movable assets. Although the ulation of a sector policy, which has recently LEGAL DEVELOPMENTS structure of the new law is significantly diff- become available for public review, and all erent from the former Sections 251 – 269 of existing operators have been asked to parti- Financial markets the Civil Code, the basic provisions remain cipate in public hearings and provide their In November 2000 the Ministry of Finance similar but have introduced a number of comments. A broader conference to present approved a draft of a new Securities Law, which features that were lacking previously. modern trends in international telecommun- is expected to take effect on 1 July 2001. The ications policy-making and to solicit support for law has been forwarded to the Ministry of LATVIA the reform measures currently under consid- Justice for comments. It aims to further align eration is planned for the first quarter of 2001. the Estonian securities market legislation with LEGAL DEVELOPMENTS European Union and international norms and Commercial Law POLAND covers, among other factors, public offerings. On 1 January 2001, a new Commercial Law LEGAL DEVELOPMENTS entered into force. The new law provides for FYR MACEDONIA re-registration of enterprises and is expected to Financial markets LEGAL DEVELOPMENTS improve the business environment in Latvia. On 12 October 2000 the Lower House of Parli- Pension reform Telecommunications ament amended the Law on Investment Funds. The amendments provide for the establishment The government of FYR Macedonia has enact- The Latvian Parliament again delayed the Law in transition ed a number of reforms, effective from Septem- review of the new draft Telecommunications 63

of venture capital funds, which will be the only pursuant to private contract was closed. This tions with such Accounts”. The Instruction funds with the right to invest in real estate. restructuring involved United Export Import establishes new rules, introduces new types of Bank (Uneximbank), whose licence was accounts and replaces Instruction 16. It will Telecommunications withdrawn by the Central Bank of Russia in enter into force on 7 March 2001 and will be In August 2000 a new Telecommunications summer 1999 when a bankruptcy petition was applicable to all foreign investors in Russia. Law was finally adopted by the Parliament and filed against it. The Instruction affects the permitted currency signed by the President. The Law entered into of individual investments and the ability of a In its position as lender, the EBRD acted as force on 1 January 2001 and introduces com- foreign investor to repatriate the proceeds of co-head of an informal steering committee of petition in all telecommunication markets with an investment. Western creditors of Uneximbank. Pursuant to the exception of international telecommuni- a Restructuring Framework Agreement the LEGAL REFORM PROJECTS cations services, which will be liberalised at obligations of creditors, domestic and foreign, the end of 2002. The Polish authorities have Secured transactions were relinquished in exchange for a cash already awarded three “long-distance” licences legislative reform down-payment and a package of restructuring to new entrants. The Law also provides for the instruments. As part of the process of closing In November 2000 a roundtable on secured creation of a Telecommunications Regulatory the restructuring, the bankruptcy proceedings transactions reform in Russia was held in Authority that will become the sole indepen- instituted against Uneximbank in the Moscow Moscow. The roundtable, organised by the dent regulator of the sector. Arbitration Court were terminated and the EBRD and the Private Law Research Centre LEGAL REFORM PROJECTS Central Bank of the Russian Federation restor- under the President of the Russian Federation, ed Uneximbank’s general banking licence. Securitisation was led by Professor Alexandre L. Makovsky, This restructuring constitutes an important and included Russian experts and organisa- At the request of the Ministry of Finance of milestone in the development of Russian tions interested in the field. Throughout the Poland the EBRD has initiated a project to commercial bank insolvency administration. debates there was a general consensus that the conduct a feasibility study on the ministry's Company law present legal provisions do not work satisfact- plan to securitise impaired receivables of the orily and that reform is necessary. The EBRD Social Security Fund of Poland, Zaklad Following the completion of an EBRD tech- is now exploring possibilities for undertaking Ubezpiecze´n Spolecznych, in order to improve nical assistance project to assist the Russian such reform with the support of the Russian the Fund’s liquidity. Subject to the outcome of Federal Commission for the Securities Market Ministry of Economic Development and Trade. the study, the project will propose changes to (FCSM) in revising the Russian Joint-Stock Corporate governance Polish law necessary to implement the plan. Companies Law, the proposed amendments have been passed by the State Duma. In order Roundtable ROMANIA to become law the draft needs to be approved As part of its efforts to help improve corporate by the Federation Council (the upper chamber) governance in Russian companies, the EBRD LEGAL DEVELOPMENTS and signed by the President. The draft has has undertaken a number of initiatives involv- Secured transactions been rejected twice by the Federation Council ing other international financial organisations, in spite of the recommendation of a concilia- Russian authorities and the private sector. The Electronic Archive of Secured Trans- tory committee of both chambers to the Parlia- These include active participation in the actions has recently started its operations in ment to approve the bill. biannual roundtables organised by the OECD the country. The Archive implements the 1999 Taxation and The World Bank, the preparation of a Law “on the Legal Treatment of Security corporate governance White Paper, and two Interests in Personal Property”, which allows On 1 January 2001 four chapters of Part II of legal technical assistance projects. non-possessory charges to be established on a the Tax Code entered into force. The adoption of wide range of assets. The Archive ensures the new chapters is part of long-term tax reform Corporate governance publicity of charges. in Russia. The chapters deal with value added, ratings system excise, personal income and social taxes. This legal reform project, initiated in RUSSIAN FEDERATION Currency regulations September 2000 and expected to be completed within 18 months, aims to assist the Institute of LEGAL DEVELOPMENTS On 12 October 2000 the Central Bank of the Corporate Law and Corporate Governance in Bankruptcy Russian Federation adopted Instruction 93-I developing the methodology for a corporate “On the Procedure for Opening Bank Accounts governance rating system and in applying it to In July 2000 the first work-out of the indebt- of Non-residents by Authorised Banks in the a number of companies in Russia. This system edness of a major Russian commercial bank Currency of the RF and Carrying out Opera- would ultimately provide a clear indication of Law in transition 64

those Russian companies applying best inter- LEGAL REFORM PROJECTS EBRD’s Office of the General Counsel Legal Transition Team national practice of governance. The rating Secured transactions system will also create an incentive for com- David Bernstein Chief Counsel/Team Leader Craig Averch Counsel (Corporate Recovery The EBRD, in cooperation with the Office of panies to apply good governance standards in Team), bankruptcy order to increase their attractiveness for pot- the Prime Minister (Economic Affairs), has Hsianmin Chen Counsel, financial market ential investors. The ratings information will be undertaken a project to improve the Slovak regulation Frédérique Dahan Counsel, Secured secured transactions legal framework (see Law made available to subscribers to the system. It Transactions Project is expected that investors, multilateral instit- in transition, Autumn 2000, p.72). The draft- Meni Styliadou Counsel, telecommunications utions and development banks will become ing of the new Civil Code provisions and re- regulatory reform Alexei Zverev Counsel, concessions/Russia lated legislation, as well as preparations for subscribers to the rating system. legal reform their implementation, has begun. In particular, Anila Gramshi Associate, financial Corporate governance code there are plans to create a central registry market regulation This project aims to assist the Russian FCSM where all collateral transactions will be regis- to develop a Corporate Governance Code tered. It is anticipated that a draft law will be LEGAL REFORM PROJECTS accompanied by an explanatory commentary considered by Parliament at the beginning of that would be used as a central reference for summer 2001. Telecommunications issuers of securities. In September 2000 the EBRD commenced a UKRAINE The proposed code will be based on the OECD telecommunications regulatory project, follow- Principles of Corporate Governance and will LEGAL DEVELOPMENTS ing the initiation of the privatisation of the provide guidance for improved corporate by- Ukraine’s incumbent operator in the late sum- laws and operating procedures. The code will Banking sector mer of 2000. Telecommunications policy is at be developed and approved by the FSCM and On 7 December 2000 the Supreme Council of present the focus of attention in the Ukrainian its application is expected to be discretionary. Ukraine passed a new Law on Banks and Government. At the request of the Ukrainian However, the FSCM will require Russian com- Banking Activity. The Law regulates the authorities the EBRD organised a roundtable panies to disclose the degree of compliance structure of the banking system, the economic, on 1 November 2000 on the fundamental prin- with the code’s provisions and justify any lack logistical and legal foundations of its activities ciples of a market-oriented telecommun- of compliance. It is hoped that the code, and the establishment, reorganisation and ications law and policy. Presentations during broadly publicised and accessible (through the liquidation of banks, as well as other financial this roundtable focused on some particularly assistance of other organisations), will ulti- and credit institutions. The adoption of the sensitive issues of a telecommunications policy mately serve as an important tool for the Law aims to bring the rules on creation, including service and access, licensing and assessment by investors of Russian com- activity and liquidation of banks in line with interconnection. The roundtable also covered panies’ compliance with best international international standards. the main factors of a successful telecom practices of governance. privatisation. Under the Chairman of the State Telecommunications Committee for Communications, it was SLOVAK REPUBLIC On 13 July 2000 the Ukrainian Parliament, attended by senior members of the Ukrainian after long debates, adopted a law that permits administration as well as senior representatives LEGAL DEVELOPMENTS the privatisation of Ukrtelecom, the country’s of most telecommunication operators. In paral- Financial markets incumbent telecom operator. Under the new lel with the roundtable, the EBRD and its law 25 per cent plus one of the company’s consultants have had bilateral meetings with On 1 November 2000 a new watchdog for the shares can be sold to a strategic investor officials of the State Committee to present and financial markets, the Financial Markets chosen through an open tender. Only com- discuss a comparative analysis of telecommun- Office (FMO), took over the role of licensing panies with a proven capacity to operate fixed ications policies and law in other countries, as and supervising the capital markets and in- telecommunication networks can qualify as well as to put forward their recommendations surance sector, which had been until then potential strategic investors. The law explicitly for Ukraine’s regulatory reform. under the jurisdiction of the Ministry of Fin- permits the transfer of management control to ance. The Office will decide on the rights and this strategic investor. The law provides for the legally protected interests and duties of cor- creation of a privatisation committee whose porate entities and private individuals in both tasks would include launching an open sectors. It is estimated that the FMO will take competition for the appointment of over pensions and banking regulation in 2002. privatisation advisers. Law in transition 65

events LegalLegal transition transition events events

IMC Forum on Broadcasting, corporate governance standards for high-level UN Economic Commission Multimedia and Telecomm- managers from some of Russia’s largest for Europe, Public-Private unications, Sarajevo companies. Representatives from Gazprom, Partnerships for Lukoil-Perm, Norlisk Nickel and AvtoVaz Infrastructure Development: On 7 June 2000 the Independent Media participated. Alexei Zverev, EBRD counsel, The Next Steps, Geneva Commission (IMC) of Bosnia and Herzegovina made a presentation on international corp- (BiH) organised a conference on convergence orate governance standards and the work of On 4-5 December 2000 the UN Economic among broadcasting, multimedia and tele- the EBRD in assisting the development of Commission for Europe (ECE) convened a communications, and its implications for BiH. such standards in Russia. forum of representatives from the public and The IMC is an institution with the specific private sectors and international organis- mandate of overseeing the democratic, plural- ations to discuss ways to expand the use of ITU Regional Seminar on Rural istic and transparent function of the media public-private partnerships (PPPs) for Telecommunications and industry in the post-war BiH. infrastructure development in the transition Universal Access, Moscow countries of central and eastern Europe and Conference speakers included represen- the Commonwealth of Independent States. tatives of the European Commission and On 26 October 2000, the International The forum was designed to discuss the work other international organisations involved in Telecommunications Union (ITU) organised a of the UN ECE’s Build Operate Transfer telecommunications policy, as well as foreign seminar designed to raise awareness on the (BOT) Working Group and to solicit support and local investors and representatives of the development of the rural networks generally for the launch of a number of new initiatives. local authorities. The EBRD was invited to and in the CIS countries in particular. Rural The BOT Working Group described the participate in view of its long and active networks are often unprofitable and therefore development of its guidelines of best prac- involvement in the development of the unsustainable in a competitive environment. tices for PPPs in infrastructure, which were Bosnian telecommunications regulatory As a result, there is a need to design mechan- being finalised for publication. The Working framework. Meni Styliadou, EBRD counsel, isms that will permit efficient subsidisation Group also presented its Negotiation Plat- presented the telecommunications law of without distorting competition. During the form, which takes the perspective of a trans- BiH. She explained how this law allocated ITU conference Meni Styliadou, EBRD ition country government that is supervising powers and responsibilities among the counsel, and Sofia Bianchi, Senior Banker in the development of a PPP project. The Plat- various local authorities, and interfaced with the EBRD’s Telecommunications Team, form is designed to serve as a tool to train broadcasting and media issues. proposed and discussed the creation of a and educate local public sector officials on Universal Access Fund that would provide the steps and techniques involved in PPPs. soft loans for the creation and operation of Conference on Corporate rural networks. The Fund would provide During the forum it was agreed that the UN Governance Standards, London financing following open tenders and assess- ECE would launch a Regional Flagship Initia- ments of each proposal’s commercial viability In September 2000 the Institute of Manage- tive to promote PPPs among the countries and social impact. ment and a number of leading consultancy covered by the Stability Pact for South-east and law firms organised a conference on good Europe. The Initiative would help to improve Law in transition 66

the legal framework for PPPs, develop local Europe, as reinforced by the findings of the Global Workshop on capacity, identify pilot projects and improve EBRD’s most recent Legal Indicator Survey. Implementing Emerging regional cooperation on PPP projects. The (See Law in transition, Spring 2000, p.34.) Financial Sector Standards: Forum participants also endorsed the formation Kamen Zahariev, EBRD senior counsel, A Public/Private Sector of a PPP Alliance consisting of private com- contributed to a panel discussion evaluating Challenge, Versailles panies and regional and international organ- and synthesising the submissions to the Coll- isations. The Alliance would promote the BOT oquium. He noted the difficulty in the implem- On 18-19 December 2000 the World Bank and Working Group’s principles and would encour- entation of the various proposals and opened a the Bank of France held a conference on the age private funding of infrastructure projects in debate about the direction of future work to implementation of emerging financial sector the transition countries. implement some of the initiatives discussed at standards which consisted of six sessions of the Colloquium. presentations and panel discussions. The ses- sions discussed the recent work of the Task International Insolvency The participants unanimously agreed on the Force of the Financial Stability Forum on im- Colloquium, Vienna importance of effective insolvency regimes plementation of standards. Several international and on the need to coordinate the global and organisations reported on their assessment On 4-6 December 2000 UNCITRAL and regional initiatives aimed at improving the initiatives and the relevant issues relating to the INSOL International, in collaboration with the functioning of those regimes. The Colloquium implementation of financial sector standards. International Bar Association, held an inter- concluded with an announcement that national insolvency colloquium aimed at UNCITRAL would establish a working group assessing the status of the work carried out by to prepare, and disseminate for discussion, World Bank Insolvency Initiative: various agencies in the field of insolvency law detailed guidelines for effective insolvency Working Group Meeting reform and providing guidance and recomm- systems for businesses. Suggestions on the endations for the future work of UNCITRAL on scope and nature of the guidelines were On 15-16 January 2001 the World Bank con- a possible model law on insolvency. Approx- solicited from the delegates. The process to vened a working session of insolvency experts imately 170 delegates from 48 countries finalise and obtain UNCITRAL approval of from private practice and international organ- attended the Colloquium. The delegates the guidelines was anticipated to take at least isations to finalise its International Principles included judges, international insolvency two years. Representatives from UNCITRAL, and Guidelines for Effective Insolvency Sys- practitioners and academics, as well as official however, indicated a desire that the working tems. The experts met in six working groups representatives from various nations, inter- group prepare a working draft of the guide- (credit/collateral/enforcement, legal frame- national lenders, global agencies and lines within the following six months. work, institutional framework, regulatory international financial institutions. framework, corporate rescue and international issues) to address the various aspects of an The three-day Colloquium presented a number FDA/CFA Global Finance effective insolvency system contained in the of panels to consider the reports and the needs Conference, Dublin draft of the Principles and Guidelines of nations either undertaking or considering (wbln0018.worldbank.org/legal/gild/). This undertaking reform of part or all of their On 5-7 December 2000 the Factors and Dis- second draft reflected comments received by domestic laws relating to insolvency. The counters Association (FDA) and the Comm- the World Bank during five regional work- Colloquium was also used to determine the ercial Finance Association (CFA) held a Global shops held since November 1999 and covering manner in which UNCITRAL and other inter- Finance Conference. In addition to discussing approximately 75 countries. During the ses- national organisations could give the greatest the latest legal developments on factoring and sions in London the insolvency experts assistance in the furtherance of insolvency law the profession in general, the Conference worked to distil clear principles and present reform. Specific consideration was given to the included a session on global opportunities for them in a form that provides developing and tools necessary to assist countries to enact factoring. The effect of the draft UNCITRAL transition country legislators and policy- insolvency laws that provide a fair, equitable Convention on Assignment of Receivables in makers with a “road map” for building an and transparent process to resolve issues International Trade was discussed, as well as effective insolvency system. In particular, the facing financially troubled businesses. the work of the UK Department of Trade and participants struck a balance between inter- Industry as part of the draft’s negotiations. national best practice and the practical needs Craig Averch, EBRD counsel, participated on Frederique Dahan, EBRD counsel, presented (and limitations) of developing markets, and a panel that identified issues of importance to the EBRD Secured Transactions Project, high- identified links among the various facets of countries about to reform insolvency law. He lighting the progress made in creating the legal an insolvency system. presented the EBRD’s views on the status of foundation for secured financing and the insolvency reform in central and eastern potential for foreign investment. Law in transition 67

The London meeting also helped to develop a The Hague Conference on series of annexes to the Principles and Guide- Private International Law: lines which will contain supplementary mater- Group of Experts’ Meeting on ials, detailed guidelines for specific areas and the Law Applicable to the lists of source materials. The participants Transfer or Pledge of Securities discussed the development of an assessment held through Indirect Holding template that will be used to evaluate and Systems, The Hague benchmark the development of insolvency systems against the Principles and Guidelines. On 15-19 January, the Hague Conference on The World Bank and IMF plan to conduct six Private International Law held a four-day regionally diverse pilot assessments using the meeting of experts to examine the feasibility template during the course of 2001. These of drawing up a new instrument on the sub- assessments will be conducted as part of the ject of the law applicable to the transfer or WB/IMF programme of Reports on Observ- pledge of securities held through indirect ance of Standards and Codes (ROSC). holding systems. The group comprised repre- sentatives from Member States, experts and The finalised Principles and Guidelines and international governmental and non-govern- annexes were presented to the World Bank’s mental organisations specialised in the field, Board for approval early this spring. such as ISDA (International Swaps and Derivatives Association), the IBA (Inter- national Bar Association) and UNCITRAL. Due to the practical importance of the issues discussed and the lack of clear conflict of laws rules in most countries, the Hague Con- ference has given the project high priority. The EBRD participated in the discussions and conveyed its support for the project. Law in transition SECURED TRANSACTIONS PROJECT

For the latest information on secured transactions laws and the work undertaken by the EBRD’s Office of the General Counsel in this area, visit the EBRD’s Web site (www. ebrd.com/english/st.htm). Here you will find:

the Model Law on Secured Transactions, in English, German and Russian;

the EBRD’s Core Principles for a Secured Transactions Law;

the Regional Survey, which provides a short analysis of existing secured transactions law in the Bank’s 26 countries of operations;

reports and working papers on a number of country projects, such as Moldova’s Registration of pledges under the Law on Pledge of 23 May 1996, June 1998; and

other publications, such as the Glossary of secured transactions terms (English-Russian and Russian-English).

All this information may be accessed and downloaded free of charge.

The Secured Transactions Project welcomes all comments and suggestions – please send to [email protected]. www.ebrd.com/english/st.htm Law in transition

Advancing legal reform Spring 2001

Contents

General Counsel of the EBRD EBRD's legal transition assistance: 10 years of evolution 1 Andre Newburg, first General Counsel of EBRD Emmanuel Maurice Corporate governance: regulating board-level management of enterprises 2 Co-Editors-in-Chief Sarah Worthington, Senior Lecturer in Law, London School of Economics and Political Science Gerard Sanders, David Bernstein Bosnia and Herzegovina's continuing struggle: legal and 11 institutional challenges in the post-Dayton era Focus Editor Francis Delaey, Counsel, EBRD Walid Labadi Overview of Uzbekistan’s Civil Code 16 Ikram Zokirov, Professor of Civil Law, Tashkent Law University The European Bank for Reconstruction and Development (EBRD) is an international institution Production Editor Nodir Akhmedjanov, Postgraduate Student, Nagoya University Law Department whose members comprise 60 countries, the European Community and the European Investment Bank. Anila Gramshi Focus on concessions 19 The EBRD operates in the countries of central and eastern Europe and the Commonwealth A favourable concessions regime: a lender’s perspective 20 of Independent States committed to multiparty democracy, pluralism, and market economies. Consultant Editor and perceptions from transition countries Yasunobu Sato The EBRD’s countries of operations are: Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Walid Labadi, Senior Counsel, and Anila Gramshi, Associate, EBRD Bulgaria, Croatia, Czech Republic, Estonia, FR Yugoslavia, FYR Macedonia, Georgia, Hungary, Anita Ramasastry, Professor of Law, University of Washington Contributing Editors Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Moldova, Poland, Romania, Russian Federation, Slovak Republic, Slovenia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan. Hsianmin Chen, Frederique Dahan, International efforts to promote and harmonise concession law 29 José Angelo Estrella Faria, Legal Officer, UNCITRAL Alexey Kiyashko, Meni Styliadou, Alexei Zverev The EBRD works through the Legal Transition Programme, which is administered by the Office of the Geoffrey Hamilton, Regional Advisor, and Travis D. Coleman, General Counsel, to improve the legal environment of the countries in which the EBRD operates. The Special Assistant, United Nations Economic Commission for Europe Support purpose of the Legal Transition Programme is to foster interest in, and help to define, legal reform Richard Drummond, Export Credit Guarantee Department throughout the region. The EBRD supports this goal by providing or mobilising technical assistance for Sandy Donaldson, Amanda Lillywhite Walid Labadi, Senior Counsel, EBRD specific legal assistance projects which are requested or supported by governments of the region. Anthony Martin, Olivia Oddi, Tabitha Sutcliffe Roger McCormick, Partner, Freshfields Bruckhaus Deringer Legal reform activities focus on the development of the legal rules, institutions and culture Jurgen Voss, Consultant, OECD on which a vibrant market-oriented economy depends. Drawing on the concessions experience of developed jurisdictions: 32 the example of France Antoine Maffei, Partner, and Valérie Hulst, Associate, Law in transition is a publication of the Office of the General Counsel of the EBRD. It is published several times each year and is available in English and Russian. The editors welcome ideas, contributions and letters, De Pardieu Brocas Maffei & Leygonie The Office of the General Counsel but assume no responsibility regarding them. Submissions should be sent to David Bernstein, Office of the General Legal framework for infrastructure projects in FR Yugoslavia 41 Counsel, EBRD, One Exchange Square, London EC2A 2JN, United Kingdom; or [email protected] gratefully acknowledges the generous Dragan Karanovic, Partner, Karanovic & Nikolic The contents of Law in transition are copyrighted and reflect the opinions of the individual authors and do not support of the Government of Japan necessarily reflect the views of the authors’ employers, law firms, the editors, the EBRD’s Office of the General Bulgarian law on concessions 45 in funding the production of this issue Counsel or the EBRD generally. Nothing in the articles should be taken as legal advice. Wayne McArdle, Partner, and Lisa Booth, Solicitor, Paul, Hastings, Janofsky & Walker of Law in transition Stephan Kyutchukov, Partner, Djingov, Gouginski, Kyutchukov & Velichkov © European Bank for Reconstruction and Development, Spring 2001. Implementation of the Romanian concessions law – an update 51 All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, without the written permission of the copyright holder. Such written permission Michel Lequien, Senior Associate, Ashurst Morris Crisp must also be obtained before any part of this publication is stored in a retrieval system of any nature.

Slovenia case study: the Maribor waste-water project 56 European Bank for Reconstruction and Development Christopher Clement-Davies, Partner, and Artem V. Faekov, Associate, Vinson & Elkins One Exchange Square London EC2A 2JN Legal transition developments 61 United Kingdom Tel: +44 20 7338 6000 Legal transition events 65 Fax: +44 20 7338 6100 http://www.ebrd.com

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