University of Tilburg, Tilburg Law School LL.M. in International Business Law 2017/2018
THE DEVELOPMENT OF PUBLIC-PRIVATE PARTNERSHIPS
AND THE 2018 LAW REFORM IN FINLAND
LL.M. Thesis
TIMO ANTERO SAARINEN ANR. 2009890
June 11, 2018
Supervisor: Prof. Dr. Joseph A. McCahery J.D.
LL.M. Thesis
THE DEVELOPMENT OF PUBLIC-PRIVATE PARTNERSHIPS
AND THE 2018 LAW REFORM IN FINLAND
Timo Antero Saarinen
University of Tilburg, Tilburg Law School LLM in International Business Law Programme
Acknowledgements
I would like to express my gratitude for Prof. Dr. Joseph A. McCahery J.D. for introducing me to the discipline of PPPs and project finance, and for acting as inspiring and encouraging thesis supervisor as one can only hope for.
To my Family
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ABSTRACT
Until recently, infrastructure projects in Finland were managed by means of a conventional procurement model structured across the entire life-cycle of the project. In 2017, the Finnish government enacted government draft HE 155/2017 vp which allowed the use of public-private partnerships with collaborations with private parties in infrastructure projects (other than public highways and roads). In this thesis, I provide an examination of the new legal rules and regulations under the new regime. I demonstrate that the legislative changes fall short of the requirements for establishing a successful PPP model in Finland. Based on this account along with industry evidence from interviews, I conclude that HE 155/2017 vp provides a promising new way for PPP project. Finally, I provide a set of suggestions and recommendations to address some of the problems and limitations of the new legislation.
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LIST OF ABBREVIATIONS
ABS Asset Backed Securities
BOO Build-Operate-Own
BOT Build-Operate-Transfer
BOOT Build-Operate-Own-Transfer
D&M Design & Build
DBM Design-Build-Maintain
DBMF Design-Build-Maintain-Finance
DBMFO Design-Build-Maintain-Finance-
Operate
DBMO Design-Build-Maintain-Operate
E18 European Route 18 Eurooppatie 18
EIB European Investment Bank
EPEC European PPP Expertise Centre
EU European Union
EVL Finnish Business Income Tax Act Elinkeinoverolaki (24.6.1986/360)
FCF Future Cash Flow
FTA Finnish Transport Agency Liikennevirasto
GDP Gross Domestic Product
HankL Finnish Act on Public Laki Julkisista Hankinnoista ja
Procurement and Concession Käyttöoikeussopimuksista 1397/2016
Contracts
HE Government Proposal Hallituksen Esitys
HMRC Her Majesty's Revenue and
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Customs
KuntaL Local Government Act Kuntalaki 410/2015
KVL Finnish Central Tax Board Keskusverolautakunta
M&O Maintain & Operate
NIB Nordic Investment Bank
Oy Limited Company Ltd. Osakeyhtiö
OYL Limited Liability Companies Act Osakeyhtiölaki 624/2006
PBS Project Backed Securities
PFI Private Financing Initiative
PPP Public-Private Partnership
SEC United States Securities and
Exchange Commission
SOTE Service Structure Reform of Sosiaali- ja Terveydenhuollon
Social Welfare and Health Care Palvelurakenneuudistus
SPV Special Purpose Vehicle
VAT Value Added Tax Act Arvonlisäverolaki (30.12.1993/1501)
VT Highway Valtatie
VVM Finnish Ministry of Finance Valtiovarainministeriö
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ACKNOWLEDGEMENTS...... II
ABSTRACT ...... III
LIST OF ABBREVIATIONS...... IV
TABLE OF CONTENTS ...... VI
LIST OF TABLES ...... VIII
LIST OF FIGURES ...... VIII
LIST OF ANNEXES ...... IX
CHAPTER I: INTRODUCTION...... 1 1.1. INTRODUCTION TO THE THESIS ...... 1 1.2. IMPORTANCE AND AIMS OF THE THESIS ...... 4 1.3. STRUCTURE OF THE THESIS ...... 5 1.4.METHODOLOGY ...... 6 CHAPTER II: PPPs IN GENERAL – THE THEORY AND PRACTICE ...... 9 2.1. INTRODUCTION TO PPPs ...... 11 2.2. INFRASTRUCTURE GAP ...... 13 2.3. ESTABLISHING THE DEFINITION AND IDENTIFYING THE PPPS ...... 16 2.3.1. Five Families of PPPs ...... 16 2.3.2. Theory and Schools of PPP ...... 18 2.3.3. Rationale for PPPs ...... 22 2.3.4. Prerequisites for PPPs...... 25 2.4. STRUCTURAL MECHANICS OF PPPs ...... 26 2.4.1. Bundling ...... 26 2.4.2. Project Company ...... 26 2.4.3. Income Mechanics of PPPs...... 28 2.4.4. Financing Mechanics of PPPs ...... 29 2.4.5. Taxation ...... 30 2.4.6. Securitization ...... 31 2.4.7. Project Risks and Risk Allocation...... 34 2.5. CONCLUSIONS ...... 35 CHAPTER III: PPP REGIME IN FINLAND ...... 37 3.1. INTRODUCTION TO PPPs IN FINLAND...... 37
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3.1.1. The Lifecycle-Model ...... 38 3.2. MARKET CONDITIONS AND THE CURRENT STATE OF INFRASTRUCTURE REGIME IN FINLAND...... 39 3.3. PROCUREMENT PROCESS UNDER THE FINNISH AND EU PROVISIONS ...... 42 3.3.1. Procurement in Finland ...... 43 3.3.2. Relationship of the Finnish Procurement Regime and the EU Provisions ...... 44 3.4. HISTORY OF THE PPPs IN FINLAND, THE PRE-2018 REGIME ...... 46 3.4.1. Pre-2018 Governing Laws ...... 46 3.4.2. Case 1: VT4 Järvenpää-Lahti...... 47 3.4.3. Municipalities and use of PPPs ...... 47 3.5. SHORTCOMINGS IN PRE-2018 REGIME ...... 48 3.5.1. Lack of Competition and Capacity...... 48 3.5.2. Case 2: Pohjanmaan rata Kokkola-Ylivieska ...... 49 3.6. TAXATION BEFORE 2018 ...... 50 3.6.1. Act on the Taxation of Business Profits and Income from Professional Activity ...... 50 3.6.2. Value Added Tax Act ...... 53 3.7. FUTURE OF THE PPPs IN FINLAND, THE POST-2018 REGIME ...... 54 3.7.1. Changes in Law: Act on the Taxation of Business Profits and Income from Professional Activity ...... 55 3.7.2. Changes in Law: Value Added Tax Act ...... 57 3.7.3. Future of the Legal Regime ...... 59 3.8. CONCLUSIONS ...... 60 CHAPTER IV: RESULTS OF THE ANALYSIS OF THE FINNISH PPP REGIME ...... 62 4.1. PRE-2018 LAW REFORM, THE LEARNING PROCESS ...... 64 4.2. 2018 LAW REFORM, THE IMPLEMENTATION PROCESS ...... 67 4.3. FINANCING ...... 70 4.4. ISSUES REMAINING AFTER 2018 LAW REFORM ...... 71 4.4.1. Supply and Demand ...... 71 4.4.2. Future Demand for PPP Model in Infrastructure Repair and in Municipalities ...... 72 4.4.3. Financing Issues ...... 73 4.5. OVERCOMING THE ISSUES PRESENT - INCENTIVES AND SOLUTIONS ...... 74 4.5.1. Establishing the Rationale to Use PPPs ...... 75 4.5.2. Bundling and Service Networks ...... 78 4.6. FUTURE OF THE REGIME AND FINAL THOUGHTS ...... 78
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4.6.1. Demand for PPP Unit and the Pipeline ...... 79 4.6.2. Closing Remarks of the Interviewees ...... 82 4.7. CONCLUSIONS ...... 83 CHAPTER V: CONCLUSIONS AND RECOMMENDATIONS ...... 85
BIBLIOGRAPHY ...... 105
LIST OF STATUTES AND LEGAL DOCUMENTS ...... 109
STATEMENT OF INTEGRITY ...... 110
LIST OF TABLES
Table A: Components of PPP and Lifecycle-Model Contracts ...... 39 Table B: Sector-specific Infrastructure Provisions ...... 42 Table C: National and EU-Level Procurement Thresholds 2018 ...... 46 Table D: Infrastructure Sectors and Sub-Sectors ...... 92 Table E: Advantages of PPP ...... 94 Table F: Disadvantages of PPP ...... 95 Table G: PPP Projects in Finland ...... 98 Table H: Interview Sheets: Jon Forssell, Inspira Oy ...... 100 Table I: Interview Sheets: Anna Myllylä & Seppo Toivonen, Liikennevirasto ...... 101 Table J: Interview Sheets: Jussi Niemi, Kuntaliitto Oy...... 102
LIST OF FIGURES Figure 1: Framework for Assessing the Infrastructure Needs ...... 15 Figure 2: Different Assumptions within the Co-Responsibility Dimension...... 20 Figure 3: Overview of Dimensions and Approaches Used to Define the PPP Concept ...... 21 Figure 4: Project Backed Securitization Model ...... 33 Figure 5: Organizational Differences of PPP and Lifecycle-Model ...... 39 Figure 6: Number of Infrastructure Constructions in Finland per Year ...... 41 Figure 7: PPP and Lifecycle-Projects in Finland ...... 41
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LIST OF ANNEXES Annex I: Infrastructure Sectors and Sub-Sectors ...... 91 Annex II: Advantages & Disadvantages of PPP ...... 93 Annex III: PPP Projects in Finland ...... 97 Annex IV: Interview Sheets ...... 99
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CHAPTER I: INTRODUCTION
1.1. Introduction to the Thesis
This thesis aims to evaluate the current state of play and the future development of the Public-
Private Partnership (PPP) regime in Finland. The now 20-year-old regime has undergone legal reform since the beginning of 2018 enabling wider applicability of PPPs. The law reform introduced minimal statutory changes, however the effect of these changes in the four respective statutes in question can be argued as reasons to initiate change in the market for
PPPs in Finland. This thesis provides proposals and possible solutions relating to the ongoing development of the regime. Even though the current PPP regime in Finland has been in effect for two decades, the state of PPPs can further be argues as having been in the developing stages as only four projects by one authority has been conducted. Since PPPs are considered as being an interdisciplinary subject, this thesis also highlights and evaluates economic and financial rationales to complement the legal aspects studied.
Using the PPP model in infrastructure construction is not a new phenomenon. The definition of PPPs has been somewhat vague in good and bad ways, due primarily to the applicability of regulations, as well as leaving room for strategic, legal and tax maneuvering. However, the following main factors are commonly agreed to be found in PPPs: private financing, long- term contracts spanning commonly over 20 years, establishment of a Project Company, transfer and allocation of risks away from the project company to the parties most suitable to bear the risks, construction or repair of an infrastructure project, which provides services directly or indirectly to the public1, and lastly, the Contracting Authority is either obligated or has the right to purchase the project at the end of the project‟s maintenance and service contracts.
1 Public Private Partnership Programme, the New Zealand PPP Model and Policy: Setting the Scene, a Guide for Public Sector Entities pp. 5, New Zealand Government, 2015. 1
Prior research shows us that the PPP model has gained interest in Europe and has established two contesting views on how the framework of the partnership should be incorporated. As a financing model PPPs provide great advantages for infrastructure construction when conducted properly. Initiated in the 1990s, PPPs were widely used and studied in Europe for the following fifteen years. However, the interest in the model declined along with the implementation of projects by almost half during due to the 2008 financial crisis. Most of the studies conducted in the Western Europe took place a year or two after the financial crisis during the recovery of the markets.
After 2011, research focusing on PPPs had somewhat diminished, before once again showing increasing interest around 2014. Research after 2014 declined both, in terms of quantity and the areas covered. However in the past few years, now that the markets have proved to be more viable once again, interest in PPPs shows signs of further revival as it‟s once again developing more demand and applicability throughout many sectors and countries.
Even though interest in PPPs has spanned multiple disciplines (legal, finance and political) for decades, the research regarding the regime in Finland has arguably been left for marginal consideration. The almost non-existent uniformity of the studies and the lack of the published research have largely shifted the interest in research to the private parties operating within the market, therefore risking the establishment of the best practices. The actuality of the topic is once again on the table as the Government of Finland enacted a law reform in the beginning of 20182. Contrary to the regime before 2018, this law reform now enables the use of PPPs by extending the scope of application to other parties other than Government Authorities in other projects than highways and railroads (EVL3 19 a §). Therefore, the scope and viability of the
2 HE 155/2017 vp, Hallituksen esitys eduskunnalle laeiksi elinkeinotulon verottamisesta annetun lain 19 a ja 27 c §:n sekä arvonlisäverolain 15 ja 29 §:n muuttamisesta - Government’s bill on the reform of Business Taxation Law Articles 19a and 27c and Value Added Tax Act Articles 15 and 29. 3 Finnish Business Income Tax Act, Laki elinkeinotulon verottamisesta 24.6.1968/360 2
market will widen and hopefully enhance more consideration of using PPPs in infrastructure construction and allowing the private participants and investors to enjoy the advantages created by PPPs. The law reform further makes the markets more attractive to foreign participants, provided the markets and their foundation will be established adequately. The value-added tax and business income tax advantages in PPPs regarding the timing and dividing taxation expenses arise in Finland under the EVL Articles 19(a) and 27(c) and VAT
Articles 15 and 29(1) paragraph 10. These four articles are currently the only legal statutes acknowledging PPPs in Finland.
In Finland, the first PPP commenced in 1997. PPP in context of this thesis will consider
Design, Build, Maintain and Finance components of the project. Despite the attractiveness and benefits of the PPPs, a somewhat similar variation called the lifecycle-model has been adopted in Finland to overcome the obstacles that did not allow for the use of PPPs by parties other than the Government, excluding the municipalities from the possibility to implement
PPPs. The lifecycle-model does not include the financing component of the project, whereas the PPP does. To date, the PPP model has only been used in four occasions in Finland, whereas the lifecycle-model is estimated as having been implemented in around 50 projects.
Currently, as the PPP has been made available to other parties other than the Government, it creates an interesting question why the other parties should shift towards use of PPPs rather than the lifecycle-models which have already been widely implemented and understood within the Finnish markets.
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1.2. Importance and Aims of the Thesis
The fact that PPPs in Finland have been implemented by only one party before 2018 creates the need to assess the regime anew, as the 2018 reform provides both opportunities and concerns to the regime. On one side, as the current legal regime has only been in effect for six months, it is possible to identify and counter the pitfalls and undesired effects of the regime before accustoming to possibly harmful or hindering traditions. Therefore, prevent the establishment and incorporating such traditions long-lasting manner. On the other side, identifying the aforementioned pitfalls will be a more complex task due to the lack of research and experience in PPPs. As chapter IV of the thesis argues, even though the regime and use of
PPPs in Finland come with uncertainties and problems, it has been able to evolve in the right direction for the past 20 years. Because of the introduction of the 2018 law reform, new market participants are expected to enter the markets, therefore it is crucial to establish a reasonable and sound plan for the future.
Despite PPPs being studied to some extent in Finland before the reform, no prior study has been conducted and published after the 2018 law reform. During the course of the thesis the following matters will be discussed: the comparison between the two thoughts of underlying philosophies of PPPs and their role in society, the old and current legal provisions will be analyzed. Chapter IV provides further data and views from professionals in different positions in the market through semi-structured interviews.
The focus of the thesis will therefore concentrate on the following questions:
What is the impact of the legal rules and regulations adopted in the 2018 reforms on improving the necessary conditions for PPP projects to succeed?
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In order to build a successful market with private sector participation, what is required in terms of establishing best practices and developing a national capacity and institutional set up to develop PPP projects?
How can the new regulations help to remedy the obstacles to private sector solutions?
1.3. Structure of the Thesis
This thesis is divided into five Chapters and is structured as follows. This chapter I is an introduction to the thesis itself. Chapter II works as an introduction to PPPs and establishes the framework for the PPPs, the contesting two theories and the rationales behind them. The main participants and factors will be covered in order to provide a thorough understanding of the subject. Annex II will supplement the chapter II providing advantages and disadvantages of PPP model in Tables E & F.
In Chapter III, the contesting academic views on PPPs are aligned and evaluated against the
Finnish PPP regime in detail. This chapter looks at the history of the Finnish PPPs along with regulating legal and tax regimes as well as brief case overviews of PPP projects in Finland will be provided. The chapter further analyzes the current state of the markets and the PPP regime in Finland both before and after the 2018 law reform.
It will be seen that a crucial feature that is missing from the Finnish regime is the absence of the framework on the future of the regime and PPPs. As the interest and demand in PPPs is rising, the prevention of the partitioning of best practices within the market needs to be prohibited to ensure its continuity. Chapters III – V will provide suggestions where suitable.
Chapter IV in turn presents and analyzes the results of the semi-structured interviews in an organized manner creating a clear path reflecting the matters discussed in chapters II and III.
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The aim of the interviews is to provide further insight from different professionals involved in
PPPs about the obstacles encountered in the projects in practice where academic research fails to identify them. Views on the impact of the 2018 law reform and the future views on the markets will further be provided by the interviewees.
The conclusive Chapter V will analyze the results of interviews together with the findings of the research. Chapter V summarizes the main aspects of prior Chapters in a comprehensive manner. Suggestions and results of analyses will be evaluated against the academic approach discussed in Chapter II. Suggestions and reasoning will be provided on maintaining and enhancing the future functionality of the markets as well as complementing the market with the pipeline and a PPP-Unit. The suggestions will be based on the interviews, research and comparative analysis of parts of different PPP regimes in the European Union.
The prefix „pure‟ in PPPs will be used in this thesis to differentiate the PPPs from the Finnish lifecycle-projects. This results from the fact that often in Finland the lifecycle-models are discussed as being PPPs, which they technically are not. This will further be seen in Chapter
III where the differences between these two models will be identified and analyzed. At this point, the main difference between the terms is that „pure‟ PPP allocates the financing part away from the Contracting Authority.
1.4. Methodology
The aim of the thesis is to assess and evaluate the current and future regime of PPPs in
Finland. This is done by emphasizing the phases of development, enhancement and maintaining of the market. To achieve this, the methodology used in this study can be divided into three methods. The first method, the documentary research was used to study both academic and commercial material available related to the PPPs. These materials included
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books, papers, statements, dissertations, suggestions, guides and informative presentation materials. Second method was face-to-face semi-structured qualitative interviews. I believe this was the best approach to gather first-hand information from market participants in order to provide primary data to complement the lack of research regarding the relationship between
Finland and PPPs. Third, the legal impact analysis is used to research and analyze both the pre-2018 law regime as well as the impact of the 2018 law. The legal impact analysis combined with research of comparable regimes provides opportunities for suggestions based on compared regimes previous experiences.
i. Documentary Research
The materials researched in this thesis included articles, journals, theses, statements, guides, consultative presentations and similar secondary works. Most of the materials studied in this research are in English due to the lack of publications and research conducted in Finnish and the fact that the regime is relatively new and inactive. This meant that in order to further deepen the understanding of the state of the regime in Finland conducting semi-structured interviews was required to complement this gap.
ii. Semi-structured Qualitative Interviews
Interviews were carried out with experts from chosen organizations representing different positions in the PPPs. PPPs extremely complex transactions with numerous parties to the agreements, which therefore deviate from interests, incentives, obstacles, advantages and disadvantages of the parties. As the interests of the parties differ from each other in various aspects the questions were left somewhat open-ended to achieve and identify different views provided, while at the same time establishing the structure for analysis in a consistent and coherent manner. Conducting the semi-structured interviews has provided us with valuable
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up-to-date information and data to otherwise sparse data publicly available. Despite the inconvenience resulting from not having many experienced professionals within the field, the small number of interviewees resulted in identifying significantly important viewpoints of the practical aspects of the matter. Interviews were conducted in one round due to the interviews taking place in other country than the author‟s residence.
iii. Legal Impact Analysis
The legal impact analysis approach was chosen due to the fact that a law reform changing the markets and opportunities was enacted only a few months before writing of this study. Prior to this study no documentation about the state of the current regime had been published. The aim of the legal impact analysis is to study the law in action. As will be discussed later in more detail, only four Articles of Finnish law applies specifically to PPPs. Having recently experienced a change in the law, using other means of analysis and legal research would have limited the scope of the study resulting in a narrow set data. After all, PPPs are at an intersect with legal, financing and political aspects of the regime.
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CHAPTER II: PPPs IN GENERAL – THE THEORY AND IN PRACTICE
Before delving into the detailed practice of the PPPs, it is worthwhile covering briefly the theory and underlying rationales of why and where to consider implementing the PPP model.
The PPP model does not always provide a feasible solution in all cases, nor can it be applied in all cases. Where it does and can be applied, depends mainly on adequately organizing the structure of the contractual agreements between the parties, and the right project to establish a
Project Company (SPV) to generate valuable benefits and advantages both in terms of lower expenses and shorter completion time, when compared to the traditional procurement.
The Chapter will first cover the history of the PPPs, beginning from the use of PFI model
United Kingdom in the early 1990s. The infrastructure-gap will be examined, which provides the basis for the next part of the Chapter, concerning the theory in forming the PPP model. To fully implement the PPP and achieve the advantages of the model, the theories behind the
PPPs should be applied in the legal regime in question when drafting the laws. Will the PPPs act as tools to complement the pitfalls of the public sector, or the failure of the private sector markets? Further, will the emphasis be added on the partner-level of the project, or on the partnership-level of the project?
After defining PPPs and where they should fall between the public sector and the private sector, we will discuss the practice of the PPPs. Once the underlying reasons and theories are explained, the contractual arrangements, SPVs, the fee and financing models, identification and allocation of the risks and taxation will be all covered in turns, creating an overview of how the projects work in practice.
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Lastly, the chapter provides an analysis of the different (but in no ways exhaustive) advantages and disadvantages of PPPs compared to the traditional procurement. After establishing the understanding of the complex nature of PPPs in theory and in practice, the next Chapter will turn to study the PPP regime in Finland.
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2.1. Introduction to PPPs
The first PPPs were designed in the United Kingdom (UK) in the 1980s as a mechanism to undertake the privatization process in the UK. Historically, PPPs begun as Private Financing
Initiatives (PFIs) and the term PFI is still widely used especially in the UK.4 The PPPs (or
PFIs) role in the privatization process in UK was to provide initial private sector investments in previously solely public activities and facilities, while still providing the same services to the public (Sadka, 2006). However, this model does not completely privatize and outsource the projects and facilities as the public sector will still have to continue to be involved in the project as a stakeholder or shareholder, as contrary to outcome of privatization. Yet what distinguished at least the early PFIs from the present definitions of PPPs was that in the first
PFIs the role of the private sector was only to provide financing for the project. Currently, the
PPPs have evolved into mutual partnerships rather than being only a model for inducing private financing. The management and the efficiency of the private sector plays a significant additional role to the private financing it provides.
As shown in Chapter I, the PPPs5 do not fall under one rigid single definition, due to the nature of complexity while leaving some room to maneuver within the needs of different types of contracts explained below, all falling under the term PPP. This is the case in Finland as well, where most PPPs are in reality life cycle projects. The lifecycle-projects can briefly be summarized as commercial agreements where the Contractor undertakes usually the designing, building, maintaining, and operating (DBMF(O) Agreement) of a project ordered by the Contracting Authority for a long period of time (terms spanning usually between 13-25 years in Finland, more in Chapter III). In Finland, the Contracting Authority (the party ordering the project) is a Municipality or a City (later referred together as Municipality), as
4 Sadka, E. Public-Private Partnerships: A Public Economics Perspective, IMF Working Paper WP/06/77, 2006 p. 3 5 Also known as 3P, iii 11
will be seen later in chapter III, where a more detailed analysis of the projects conducted in
Finland will be provided. Basically, the main difference which separates the PPPs from the lifecycle-projects is that the lifecycle-projects rarely include the financing part of the project as part of the contractual obligation of the contractor.
PPP projects are conducted through a Project Company, a special purpose vehicle (SPV)6, which is a form of company incorporated by the Contracting Authority and the Service
Provider. Therefore, it is possible for the Contracting Authority to allocate and transfer the risks, debts and obligations to the project company, without tying the parent entities direct obligations to the Project Company. The risks will be then further allocated away from the project company to the parties best suitable to bear and counter them.
With a PPP, there is both public- and private-sector parties involved, working together as a partnership towards the completion of the project, as the term PPP suggests. The main characteristics of the PPPs are: A contract between a public authority7 and a private party; a long term contract ranging usually between 20-30 years and ultimately after the agreed term the public authority has the possibility to purchase the sole ownership of the project/assets and the creation of the Project Company between the public and the private parties.8 Due to their complex nature, PPPs may seem confusing. To this end, the following part of the Chapter provides analysis of the PPPs to provide a better understanding of the subject. To be sure, a single and clear definition of PPP is not always possible since there is a gap between practitioner and academic definitions of the model.
6 Or a Special Purpose Entity, SPE (see section 2.4.2) 7 For example the government, municipalities, branches or ministries under the government, or other similar party with the authority or granted powers to enter into such agreements 8 Katz, D., Financing Infrastructure Projects: Public Private Partnerships (PPPs), New Zealand Treasury Policy Perspectives Paper 06/02, 2006 12
Now as the basic understanding of the PPP model is understood, it‟s time to cover the definitions of concepts relating to the PPPs. The first one, Infrastructure Gap, is one of the most used arguments towards the use of PPPs to meet the growing demand of the markets.
2.2. Infrastructure Gap
Different factors within different countries influence the supply and demand of the infrastructure, along with the type and quality of infrastructure needed and already established. Even though the previously built infrastructure can be used, either the capacity or the quality is often not enough to meet the growing demand or moving trends of the population of the country in question. In The World Bank‟s Policy Research Working Paper
7032, the authors establish the methodology on how to identify this gap and draw the boundaries of different factors.9 Next, we will provide the methodology.
The first step that should be taken into account is where the country in question is today in terms of level of investments against the percentage of the GDP used in infrastructure construction. This first step has to reflect the overall coverage, quality and efficiency of the infrastructure services as well as the investments made in the current existing infrastructure.
However when conducting the analysis, it was important to use the methods best applicable to the type of infrastructure in question.
Second, the target of the country of which level it is desired or necessary to achieve and ensure the fluid workings of society and meet the demands of the population of infrastructure
(point 2 in Figure 1). Here again an estimate was conducted conducted with sector-specific
9 Andres, L.A., Andres, L., Biller, D., & Dappe, M.H., Infrastructure Gap in South Asia: Infrastructure Needs, Prioritization, and Financing, The World Bank Policy Research Working Paper No. 7032, 2014 13
targets and analysis instruments. The difference between these prior two steps indicated the size of the infrastructure gap.
Third, based on the model and scale, it was suggested to research the predicted level that it would take a country some time to complete (point 3 in Figure 1). This indicates where the use of current resources and models could take the level of infrastructure in the long term.
Different financial and policy options should be weighed and evaluated against alternatives to achieve the highest possible outcome. For example, if the use of PPPs is not encouraged and efficiently enabled in a country in it remains unclear whether promoting PPPs would make the predicted level (point 3) higher. If it does not, then is there a more viable alternative which could achieve the predicted desired level? This is the current case in Finland. Before 2018, the
PPPs were not able of being implemented by other parties other than the government. There is some data, evidence and experience for using PPPs Finland. An example of the establishment framework would be what happened with the 2018 law reform, encouraging private interests and extending the applicability of PPPs. Implementing and developing the existing options by extending the capability to draw the line closer towards the target (point 2). However, if the
PPPs are not predicted to raise the predicted level of outcome (point 3), this naturally does not mean that the further development of PPPs in this example should be left completely out of question. What remains between the levels of target (point 2) and the predicted level achieved using existing policies (point 3) will indicate the existing financial and policy gap.
Fourth, adding to the previously established third point the extent of potential new financial options and policy options using current resources (point 4) can be predicted to narrow the gap between the level achievable using current policies (point 3) and level achievable using the new policies and financial options with existing resources (point 4). The gap between the highest level achievable with existing resources (point 4) and the earlier established target level (point 2) will be the final (point 5), the financial gap. To narrow this gap (the required
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financial policies to meet the target) new sources such as, for example tolls, higher user fees or better allocation of financing within the public framework can be imposed. Furthermore, this will establish the effective access to private financing.
The importance of the financial gap should be evaluated on a country-by-country basis
(Andres, L. et al, 2014). However, The World Bank research found that when assessing the coverage, it is crucial to remember that in the long-term the demand evolves over time with economic growth. Figure 1 below presents visualization how to draw the previous steps and maps the assessment of infrastructure needs.
Figure 1: Framework for Assessing the Infrastructure Needs
Source: Framework for Assessing Infrastructure Needs, Andres et al. (2014) p. 510
10 Andres et al., 2014, p. 5 15
2.3. Establishing the Definition and Identifying PPPs
2.3.1. Five Families of PPPs and Different Contract Models
First, to examine the scope of the term PPP, it is well-established that there are five families of PPP-projects11. Those five families are 1) Institutional cooperation for joint production and risk sharing; 2) Long-term infrastructure contracts that emphasize a tight specification of outputs in long-term legal contracts; 3) Public policy networks in which loose stakeholder relationships are emphasized; 4) Civil society and community development; and 5) Urban renewal and downtown economic development. These differences and similarities in the overall aim and use of it make it difficult to provide a single definition of the PPP.
Hodge and Greve (2007) argue that when distinguishing the five families of PPPs, the key is to focus on the specific contractual relationships between the parties involved. Therefore, imposing a too rigid definition of PPPs, especially when drafting and wording a legal act, imposes the possibility for a material risk to arise due to a narrow space. This could further create obstacles for the development of these five types of PPPs targeting the development of different sectors of society.
Prior research shows that there are three following agreed elements to be included to qualify as a PPP. “PPPs (1) are collective as opposed to individual actions[12], (2) Include actors from the public and private sector as opposed to sector-intern cooperation, and (3) perform a public as opposed to private task.“13
Once the contractor‟s or service provider‟s contractual agreements, construction, maintaining and operating the project and the related facilities (let‟s say for 25 years) are created, the
11 Hodge, G. & Greve, C., Public-Private Partnerships: An International Performance Review, Public Administration Review, Vol. 67, No. 3, 2007, p. 547 12 i.e. contrary to solely private or solely public actions 13 Stelling, C., An Excursion Into the Public-Private Partnership Jungle: Stay Precise and Keep on Mapping, International Public Management Review, Vol. 14, Iss.1, 2014, p. 8 16
contracting authority is offered a possibility (or may, in some cases be contractually obliged if certain criteria regarding the asset‟s condition and state is met) to buy the project asset(s), based on the previously agreed conditions. This creates a strong incentive for the contractor or the service provider to maintain the facilities in question in an adequate condition. Otherwise, the contracting authority will not buy the project out after the service term, and therefore the constructor or service provider loses the chance of a significant part of the transaction revenues.
The aforementioned provides a feasible solution, for example, to the problem of the mold in schools, one of the most discussed public problems in Finland14. If the facilities or assets in question are not kept in the ex ante agreed state, the contractor will not be „rewarded‟ when the term ends and, therefore create a significant (monetarily) incentive. The primary difference between the most popular models, (DBMF(O), BOO, BOT and BOO) is that in the
BOO model, the ownership of the project at the end of the contractual term remains within the private partner, whereas, with the BOT model, the ownership is transferred to the contracting authority in the end. The characteristics of these models and the role of the private sector in each are briefly discussed next.15
DBMF(O), the design-build-maintain-finance(-operate) model is most comprehensive contract model in PPPs. This requires the private sector to undertake all these dimensions during the lifecycle of the project.
In the BOO the build-own-operate model, the private sector undertakes these aspects in a project that provides services or goods to the public. The public sector counterparty is under
14 It is estimated that generally 560.000 to 960.000 persons in Finland are exposed to interior air problems resulting from moisture. and mold-damages in Finland. Respectively the numbers represent ~10% to 17.5% of total population of Finland. Roti, 2017, p. 18 15 Barbatunde, S., Perera, S., Udeaja, C. & Zhou, L., Identification of barriers to Public Private Partneships implementation in developing countries, International Conference on Construction in Changing World, 2014, p. 4 17
different contracts according to which it is obligated to buy the services or goods in question for the contract term, or via some other payment mechanism. The ownership of the facilities and assets in question remains within the private sector during and after the contractual period.
BOT build-operate-transfer model, is otherwise similar to the aforementioned BOO model, however after completion of the contractual period the ownership of the facilities and assets in question are transferred to the public sector.
Lastly, the, as the term suggests, BOOT is a combination of the above-mentioned elements: the build-own-operate-transfer model.
2.3.2. Theory and Schools of PPP
As mentioned earlier, the definition of PPP remains somewhat vague. This is seen to follow either from the debate on „how‟ and „why‟ to define PPPs or from the cautiousness from defining PPPs in a too strict manner (and therefore potentially eliminating the advantages of using the PPP-model).
One of the aims of this thesis is to contest views of PPPs in light of the possible approach to
Finland‟s PPP regime. It also be argued that in some cases PPPs do not necessarily fall into these two categories in an „either-or‟ manner, as many countries (including the Finnish model of lifecycle-projects) have apparently slight variations in their definition of PPPs, be it because of legal, taxation, customary or other reasons. What can be argued however, is that between the different views and schools of thought, is that there is no one single definition of
PPP.
18
In her article about definitions of PPPs16, Stelling addressed and identified the definitions of
PPPs from more than one hundred sources, including international journals, books and publications, she establishes two different „main‟ dimensions found within the dominate patterns. The first dimension is the co-responsibility dimension, and the second dimension is the relational governance dimension (Stelling, 2014) The „Co-Responsibility Dimension‟ focuses on the distribution of responsibility, mainly through the division of financing, ownership and risk allocation. In this co-responsibility dimension, the focus is not how the cooperation will be organized, but rather on how the parties contribute in the project. The co- responsibility dimension can be seen to be based more on a marketization view, as the contracting authority seeks to minimize the risks and responsibilities when transferring them to a private-sector actor, along with monetary compensation for bearing them. The co- responsibility dimension can be viewed as implementing the PPP view at partner level.
19
Figure 2: Different Assumptions within the Co-Responsibility Dimension
Different assumptions within the co-responsibility dimension, Stelling (2014), Figure 4, Page 11
The second dimension, the „Relational Governance Dimension‟, on the other hand, focuses on the of degree of collaboration, such as joint decision-making, governance, and other related aspects. In contrast to the co-responsibility dimension, relational governance evaluates the
PPPs in their degree and extent of collaboration through a close organizational relationship and collaborative management. In this view, the focus is on the actual interaction between the parties to perform an effective solution for the society by building the Public Authority‟s responsibilities. The relational governance dimension in turn is seen to be implemented at the partnership level.
20
Figure 3: Overview of Dimensions and Approaches Used to Define the PPP Concept
Overview of dimensions and approaches used to define the PPP concept, Stelling (2014), Figure 5, Page 14
Based on the above-studied and illustrated dimensions, it could be argued that the Co-
Responsibility Dimension is better suited in the Finnish regime. There are a number of reasons in support of this view.
First reason is the increased private responsibility. The need for incentives to enhance efficiency, quality and lifecycle of projects is essential to overcome the issues encountered in
Finland.
Second, the distributed responsibility rather than the collaboration of parties is more advantageous for the future PPP models users. What municipalities seek for example, is the allocation of risks to third parties that are best. Due to the size of most municipalities, there is a need to overcome the restraints and the burden, as the budgets of the municipalities do not allow even minor mistakes in infrastructure projects.
Third, as Chapters III and IV will further analyze, the core for the future efficiency gains is in the public sector. To be sure, if the public sector could implement private sector‟s know-how
21
and management it should be used. However the Co-Responsibility Dimension viewpoint doesn‟t enhance the use of these advantages.
Fourth, chapter III will assess the PPP governing laws in Finland which are practically non- existent. Having only four articles applicable to PPPs, we will argue that the Co-
Responsibility Dimension model provides a more suitable framework to establish a better PPP regime.
Lastly, in terms of the new regime, we will argue that the law reforms implemented at the beginning of 2018, the Co-Responsibility Dimension, which emphasizes on the concentration of the partner-level (contrary to Relational Governance Dimension), provides a better starting point for a study on how the new regime unfolds. In the next sub-section, we will focus on the rationale for introducing a PPP model for infrastructure development.
2.3.3. Rationale for PPPs
This thesis aims to establish the best option from the various alternative methods of construction. The rationale and justifications must be evaluated whether they are best achieved with the PPP model. Prior literature indicates that the following elements are the driving factors to the attractiveness of PPPs: lower cost of financing, better risk transfer, bundling and the higher quality of the project and the process.17 18 These will be examined in more detail during the course of thesis.
Studying the construction phase of infrastructure projects, prior research shows that the private sector costs, when compared to the public sector within the infrastructure construction
17 Moszoro, M. & Gąsiorowski, P., Optimal Capital Structure of Public-Private Partnerships, IMF Working Paper WP/08/1, 2008, p. 5 18 Iossa, E. & Martimont, D. The Simple Micro-Economics of Public-Private Partnerships, CEIS Tor Vergata, Research Paper Series, Vol. 6, Issue 12, No. 139, 2013, p. 3 22
are 15-30% lower, due to the enhanced efficiency of the private sector.19 Further investigation by Arthur Andersen and Enterprise LSE estimated that the costs would be around 17% in the
UK when compared to traditional means of procurement.20 However, Blanc-Brude,
Goldsmith and Välilä21 found that when comparing the construction contract prices between traditionally procured and the PPP-model within the road construction sector, that costs of infrastructure projects where the European Investment Bank (EIB) was involved from 1990 to
2005 were actually higher. Based on more than 200 observations they concluded that PPPs produced 24% higher construction costs in the public sector. Note that the study covered only the costs after the construction phase and therefore does not take into account all of the lifecycle costs of the projects as whole from the very beginning to the end of the terms, which might have resulted into savings consistent with the results of Wallace and Junk‟s and
Andersen & the LSE‟s study.22 Thus, Blanc-Brude, Goldsmith and Välilä suggest that the overall costs and benefits should be calculated ex ante as extensively as possible to analyze the entire lifecycle of the project until the end of the contract and not only for the construction phase costs.23
From the perspectives of the parties organizing the project, the problem is that the cost of financing from the private sector is usually higher than public authority loan rates. As we will see in the next chapter, one of the most common arguments for choosing the PPP model is the increased access to the capital. The question is, whether this a sufficient rationale for employing the model in Finland?
19 Moszoro, M. & Gąsiorowski, P., 2008, p. 5 20 Arthur Andersen and Enterprise LSE, Value for Money Drivers in the Private Finance Initiative, A Report, 2000 21 Blanc-Brude, F., Goldsmith, H. & Välilä, T., A Comparison of Construction Contract Prives for Traditionally Procured Roads and Public-Private Partnerships, Review of Industrial Organization 35(1):19-40, 2009 22 Id., 39 23 Blanc-Brude, F., Goldsmith, H., & Välilä, T., Ex Ante Construction Costs in the European Road Sector: A Comparison of Public-Private Partnerships and Traditional Public Procurement, EIB Report, 2006, p. 3 23
Interestingly, Moszoro & Gasiorowski found that, when the ownership of the SPVs in PPP projects predictable macroeconomic policies that are conducive to securing cheaper financing. An equally important advantage is a reliable legal system that provides the instruments to secure the interests of the public partner vis-à-vis the private partner. A lack of confidence between the partners, an insufficient legal framework and the pursuit of other than stability-oriented macroeconomic policies would undermine the Pareto-efficient[24] solution derived from the model. If any or all of these conditions are violated the possible savings achieved with the PPP scheme diminish.” (Moszoro, M. & Gasiorowski, P. 2008)
That said, PPP should thus be viewed as an efficiency enhancing, quality improving, and cost reducing model when optimal organization and sound legal rules are established.
Furthermore, Bland-Brude et al. (2009) found that PPPs are well-suited where the enhanced quality (as compared to traditional procurement) of the infrastructure is achieved and will significantly reduce the costs.
In order to realize the full benefits of PPPs, we argue that a framework is required for the entire term of the project to yield savings, and transfer the risks away from the Project
Company and the Public Authority.
24 Pareto-efficiency can be argued to be the instrument of evaluating the PPPs efficiencies. Pareto-efficiency aims to evaluate the performance and achievement of better quality at lower expenses, or same quality at lower expense, and comparing it to either sole public or sole private variations. 24
2.3.4. Prerequisites for PPPs
Based on the five different types of PPPs discussed above, this chapter will next examine the practical aspects of the organization and operation of the PPP model.
This thesis focuses mostly on the role of PPPs in infrastructure projects. However, the use of
PPPs covers a much wider selection of sectors, mostly transportation, energy, water, accommodation, healthcare, schools and prisons. 25
Given the diverse sectors where the PPP model is employed, it is crucial to analyze the distinct sector in which it operates. In this reason, it is important to consider the underlying economic environment, the market and industry concerned, the aims, facilities to be constructed as well as the political matters and financing requirements. That said, each PPP should be evaluated only on a case by case basis in order to establish whether it is likely to provide the best possible outcome from the alternatives available.
Several studies suggest that some components are appropriate in successful implementation when considering adopting PPP in a project. One of the most crucial aspects is the transparency in the project. When the public sector is involved in the project, it involves taxpayer‟s money. Conversely, when the private sector is mostly in control, transparency, attracts a framework by securing protection of the interest of taxpayers. (Sadka, 2007)
The second element is the element of bundling of activities, which means that the constructor undertakes DBMF(O)/BOO/BOT contracts (or some variants at least including the building and operation of the project) and hence creates a set of strong incentives for the constructor as compared to the traditional procurement process. These incentives ensure maintaining the
25 Iossa, E. & Martimont, D. The Simple Micro-Economics of Public-Private Partnerships, CEIS Tor Vergata, Research Paper Series, Vol. 6, Issue 12, No. 139, 2013, p. 1 25
quality and upkeep of the project together that lead to lower cost solutions from the very beginning of the construction phase to the end of transfer of project.
Economists have frequently shown that the PPP model is inappropriate where the public sector would be better having sole control and ownership of the project (Sadka, 2007).
Therefore, whether it be roads or highways, the possible extensions arising from the project may be more efficiently implemented in PPP, as the prices and time do not need to be agreed and specified ex ante. The result is that it leaves sufficient flexibility for the contracting authority to agree on such extensions after the launch of the project and the establishment and proof of the demand.
2.4. STRUCTURAL MECHANICS OF PPPS
2.4.1. Bundling of Project Phases
Bundling of project phases refers to the activities contracted to the contractor or consortium.
Bundling includes several main phases of the project allocated to the contractor or the consortium as a mean of risk managing. The contractual models were in more detail examined in section 2.3.1.
2.4.2. Project Company
The establishment of the project company is an essential part of a PPP and the project as whole. As indicated, the project company is controlled and owned by both the public and private parties and works as a backbone for the whole concept and practice of PPPs.
The establishment and the use of the project company arise from various reasons.
26
First, the project company works as an independent entity apart from its public and private sector parents. The parent will not be liable or obligated to claims, bankruptcy, receivables or other similar matters related to the project company. The taxation of the project company will also be independent from its parents.
Second, the project company is established only and for the project and performs no other tasks at all which do not relate to the project in some way. This creates security for the investors that the project company is segregated from other projects or business that could directly increase the possible risk for investors to bear. Further, the capital raising process and control over expenses is likely to be more efficient when there are no other distorting factors
(other business or projects) involved.
Third, the future cash flow (or FCF, see 2.4.3.) and the financing mechanics (see 2.4.4.) can be posted as collateral when accessing financing and investments. As the project company does not have assets at least before and during the construction phase, the risk for the investors needs to be mitigated in some manner to make the project bankable.26 Otherwise investors are unlikely to be interested in providing financing to a project that does not account for the significant risks the investors absorb in the event of a major contingency such as bankruptcy. Further, the supply and intake contracts are also seen as having significant value because the terms and flow of income they provide will likely provide considerable sums for decades.
Fourth, as will be seen in section 2.4.6., project company‟s bond financing through a SPV will create a legal barrier for the project company for certain securities law related requirements and claims
26 Bankability means having established the aspects of the projects to make it attractive to access financing. For example, the right sponsors involved, guarantees from public sector, sufficient risk allocation and assessment etc. 27
Lastly, by considering the macro-economic facilities in the planning of the project, the distribution of ownership between the public and the private parties can be used to achieve desired effects. Since there are no ex ante rules regarding the balance ownership and the equality of proportions within the project company, it is left for the partnership to decide how to structure the project company.
2.4.3. Income Mechanics of PPPs
The previous section discussed the mechanics of the project company. We now turn to examine the income mechanics of PPPs, which we then relate, in the next section, to the financing of PPPs.
Depending on the project, the revenue stream can be generated either from fees, or the use of the asset (for example highways). This can be implemented either by imposing tolls on the roads or shadow-tolls which require the contracting authority to pay to the project company previously determined sum calculated by the actual use by the public27. In other families of
PPPs (for example power-plants or oil refineries) the payment mechanism can involve an intake contract obligating one party to buy the goods produced.28 In cases of public buildings, schools for example, the contracting authority pays monthly or yearly fees for the use of the facilities to the contractor, which on the other hands carries the construction, operation and maintenance of the facilities.
27 Reddel, P., Payment Mechanisms Issue Paper, Extract from a Paper Reviewing Various Tolling Mechanisms for an Australian Toll Road Project, World Bank, 2004 28 Ireland Department of the Environment and Local Government, Payment Mechanisms, Public Private Partnership Guidance Note 12, 14 April 2000 p. 29 28
The rule of the thumb is that whatever the mechanic for revenue is, it should be directed to the public partner and the public partner pays the private partner by rates (or whatever the agreed scheme is) previously agreed.
2.4.4. Financing Mechanics of PPPs
The financing mechanic of PPPs is called project financing. As explained in Section 2.4.2., the project company in the initial phase and the construction phase, is without assets which it could collateralize via loans or other forms or financing. Consequently the risk taken by investors must be mitigated in some manner, for which project financing provides the answer.
Project financing is a field of study within finance and as a consequence will not be extensively discussed in this thesis. Nonetheless, project financing research, particularly in respect of the „new‟ regime in Finland, would be more than welcome as an academic field of research.
As seen with PPPs, project financing does not provide itself with a single definition.
However, the common factor is the debt service paid principally out of the assets financed and the future revenues arising from these assets.29 The main difference between project finance and corporate finance is that in corporate financing the lender has the recourse to all the assets of the borrowing entity, whereas in project financing the same recourse is limited to an identifiable pool of assets.30
As noted earlier, without being an adequately established project company, ensures that parents and sponsors are able to shield them from the project company‟s failures to meet its obligations giving rise to claims.
29 A Guide to Project Finance, Dentons 2013, p. 2 30 Id., p. 4 29
Depending on the nature of the project, the PPP project can be financed by non-recourse financing, or limited-recourse financing. Whilst the two models differ in some respects, both provide the security and reimbursement for investors from the future cash flows of the company. Project finance also permits the establishment of projects off-balance sheets, which will be seen in Chapter III as one of the main reasons for the municipalities to use the PPP model in infrastructure construction.
Non-recourse financing, is defined as having reliance only the project‟s established cash flow as, no guarantees will be involved. Limited-recourse financing, on the other hand, involves some limited guarantees from the sponsors to the investors in case of defaults. For example, this includes guarantees to inject additional financing in case of cost-overruns, above certain level interest payments, completion guarantees and so on.31
The debt-equity rates of projects are usually considered to have a 70%/30% debt/equity starting point, but can in some cases be debt financed amounting to 90% total. Due to the high debt to equity rates and non-recourse (or limited-recourse) nature, investors are likely to require sponsors involved in the project to ensure that it is as credible as possible; otherwise the project will not be bankable.
2.4.5. Taxation
Taxation is one of the biggest obstacles that often prevent the use of PPPs. The statutory regime governing taxation may either make the use of PPPs impossible, or at least not beneficial, or allow the use of the PPP model in an advantageous and correct way. Taxation plays a major role in most regimes and is often the leading reason that PPP is implemented.
31 Yescombe, E.R., Principles of Project Finance, 2nd Edition, YCL Consulting Ltd., Elsevier, 2014, p. 266 30
There are several factors that must be justified which include: first, a regime which doesn‟t allow for the timing of the taxes to be paid, due to be divided for the project term as whole, which will likely preclude the use of PPPs. This is the case in Finland for example, where the only qualifying entity for this was the government and its subsidiaries. Particularly, only highway and road projects were eligible for this taxation scheme. Hence the business income taxation and added value tax laws need to be specified to apply for the PPPs. As this was not the case, the tax regime did not allow municipalities, which had significant interest in the establishment of projects with PPP models, to implement the structure for their infrastructure projects.
Second, a sufficient taxation regime allows the transfer of assets to be taxed at the moment of transfer, or in other words at the end of the project‟s maintenance and contract terms. If the yearly taxation is not allowed for the contracting authority, it would need to pay the taxes of the whole 20-30 year term in the beginning of the project. If contracting authority has the need and desires to use the PPP model, it usually often lacks capability to pay all of the taxes at the beginning in one single lump sum.
The compatibility of the tax laws or absence of a suitable set of regulations, is the most important factor that gave rise to the lifecycle-model implemented in Finland. This was one of the major legal obstacles for PPPs in Finland, and the application of tax laws and the taxation will be studied more in detail in the following Chapter III.
2.4.6. Securitization
Securitization involves the contracting authority‟s sale of some claims to the project company, which would in turn finance those claims with bond issuance, collateralizing the future cash flow towards the payments of interests and installments to be paid. Securitization
31
provides a number of advantages to cope with the construction phase expenses and in future project refinancing. 32
In the UK and U.S., securitization takes place through a SPV. Absent this medium, the project company would be required to satisfy the extensive and strict securities market liabilities, rules and regulations under the SEC and HMRC. Further, the use of an SPV eliminates the exposure of information that‟s not deemed to be wanted to be exposed to the third parties.
Also the tax planning and the bankruptcy related protection planning can be better planned through the SPV. 33
Huomo (2003) defines the organizing and the structure of securitization as follows: The
Project Company sells the claims to an SPV established only for the process of securitization34. In turn, the SPV will pay the transaction with financing from issuing bonds.
The bonds issued by the SPV are project backed bonds where the future cash flow works as collateral, hence when combining the project financing and securitization, the term Project
Backed Securitization (PBS) is used.
In a way, the project company is able to raise financing from the capital markets. Lastly, using a SPV rather than the project company, will meet the obligations of investors directly.
The beneficial aspects of securitization include, for example, quick access to capital, when compared with traditional ways of financing. This process is illustrated below.
32 Huomo, Laura, Julkisyhteisöjen tulevaisuuden rahoitusmuoto: Arvopaperistamisen ja Projektirahoituksen Yhdistäminen?, Defensor Legis N:o 5/2003, pp. 849-852 33 Huomo, Laura, 2003, p. 855 34 The SPV in this case doesn’t mean the Project Company itself, which is sometimes also called SPV. The rule of the thumb is that SPV performs only one task at time, whether be it financing and bond issuance of the overall control of the project. 32
Figure 4: Project Backed Securitization Model
Source: Huomo, L., Julkisyhteisöjen tulevaisuuden rahoitusmuoto: Arvopaperistamisen ja Projektirahoituksen
Yhdistäminen?35
As noted, the SPV should have priority over claims in the event that the project company is liquidated or in the event of a crucial failure. Moreover, this allows for the ability for the project company, contractual „step-in‟ rights to take place, which is the subject of the next section. Step-in rights are related to the investor‟s rights in the PPP projects. Simply put, the step-in rights allow investors or the leading party representing the interests of investors to
„step-in‟, or take control of the project company upon materializing of certain ex ante agreed non-desired events or reduced economic capacity.
Due to the limitations of the study, the role of securitization will not be discussed further in this thesis. That said, the research of securitization of PPPs is an important issue for the success of project finance in Finland.
35 Huomo, Laura, 2003, p. 853 33
2.4.7. Project Risks and Risk Allocations
The last, but one of the most important factors to be covered is the project risks and risk allocation. The project, as any other business venture faces risks from the initial stage to the ultimate end of the lifecycle of the project. One of the main advantages of the PPP model, is that these project risks will be first transferred away from the parents to the project company, from where they will be further allocated to the parties involved and most suitable best to bear them (and if the parent is best participant to mitigate and bear the consequences of the risk materializing, it will be allocated to the parent).
Project risks can be divided into at least nine categories in the case of infrastructure PPPs: 1) technical risk; 2) construction risk; 3) operating risk; 4) revenue risk; 5) financial risks; 6) force majeure risk; 7) regulatory/political risks; 8) environmental risks; and 9) project default risks.36
These risks are involved more or less in most PPP projects. However, the extent of the risks varies from country to country, the markets in question, the political, economic and legal state of the regime in question and so on. The next chapter will analyze the risks related to the PPP regime in Finland.
In sum, six main points should be emphasized regarding the project risk and their allocation:
1) parents bear only those risks that are allocated to them, 2) the project company should try to allocate the risks as much, and as far as possible away from it, 3) almost every aspect imaginable can materialize and thus create risk, 4) those bearing the risks will be compensated for the risk and effort, and 5) insurance and other instruments mitigating the risks are available.
36 Grimsey, D. & Lewis, M.K., Evaluating the Risks of Public Private Partnerships for Infrastructure Projects, International Journal of Project Management 20:107-118, 2002, p. 111 34
2.5. CONCLUSIONS
This chapter has assessed the history of PPPs in general. While having concentrated on aspects regarding the evolution of PPPs and PFIs while briefly reflecting on them, the state of affairs of markets in Finland, and the basic framework and understanding before moving to regime-specific evaluations in the next chapter. PPPs are long term commitments from both public and private sector parties involved and therefore need to be carefully organized.
The Infrastructure gap, which arguably exists more or less in every country, has been studied as well as the mechanism to assess and draw the indicator of it. Theories of five families of
PPP help guiding where the PPPs can and should be beneficially applied and what characteristics each family involves. Depending on which family the PPP falls into, certain specific considerations need to be considered. What will be seen in chapter III is that Finland can be argued to lack the future framework of the regime. Therefore, it is important to first establish, what are the aims that the model seeks to achieve and where does it fall? Different countries have different rationale for establishing PPPs, therefore the regulation and underlying philosophy should reflect the aims desired to be achieved. The co-responsibility dimension as well as the relational governance dimension is evaluated against the state of the regime in Finland. Providing justifications and reasoning, the co-responsibility dimension is argued to be implemented in Finland in order to secure the benefits and efficient development of the market which has at this point hinted at only being in the initial starting phase despite having been implemented for the past two decades.
After providing the underlying framework and rationales to implement the PPP in practice, the chapter turns to structures of PPPs. PPPs are extremely complex and therefore every aspect is not possible or in the interest of the author and reader to include in this thesis. This in mind, some basic concepts are needed and included for the further understanding of the
35
thesis. These are project company, SPVs, income mechanics, financing mechanics, taxation matters, securitization, brief mention of existence of step-in rights and lastly, one of the main reasons for the use of PPPs in Finland, the project risks and risk allocation.
36
CHAPTER III – PPPs IN FINLAND
3.1. INTRODUCTION TO PPPs IN FINLAND
In this chapter we will discuss the state of the PPP regime in Finland. This account of the
Finnish regime will look at pre-2018 and the subsequent law reforms. The law reform was proposed in HE 155/2017, and came into force on 1st January 2018.
I will examine the two examples of four PPPs that were conducted in Finland. In all of these, the Finnish Transport Agency was a public actor. Some characteristics of life cycle projects where the municipal authorities were involved will also be provided. This research will first look at the differences between the lifecycle-projects and the PPPs, and shifts mainly to PPPs.
As described above, the lifecycle-projects involving municipal authorities represent almost 50 cases in Finland. Throughout this chapter, interdisciplinary matters, such as taxation and financing complement the legal research are also taken into account.
In the first section of this chapter, we examine differences between PPP and life cycle projects. Even though life-cycle projects are categorized as a PPP model in Finland and often used interchangeably having the same definition, it is however important to analyze the characteristics and differences in those two models.
This chapter will further consider the shortcomings with the pre-2018 law regime. It also looks at the state of the Finnish infrastructure markets and at applicable laws both on a national and EU-level. Legal positions of project companies and of the procurement are investigated, as well as expected impact of the 2018 law reform.
To give some perspective regarding the Finnish governmental organization and scale, Finland is divided into 311 municipalities. Approximately 39% of the population lives in one of the nine municipalities with a population of over 100.000. Furthermore, 133 of the 311
37
municipalities have a population of less than 5000, and the median population in municipalities is 6137. Keeping this in mind, the following chapter brings to light the problems encountered by these smaller municipalities which typically have very limited budgets. 37
3.1.1. The Lifecycle-Model
As noted, the term PPP is seen and commonly used in Finland in association with the lifecycle-model. The lifecycle-model is a variation of the partnership between the public sector and the private sector implemented within the Finnish markets.
Stated simply, the differences between the PPPs and the lifecycle-projects emerge in respect of how the respectful partnerships are structured to be as a consequence of legal reasons. In
„pure‟ PPPs38, a project company will be established to bear and allocate the risks and the process of the project throughout the entire term and lifecycle of the project. However, the establishment of the project company is not a requirement in the case of lifecycle-projects.
The legal requirements restricting the eligibility of the municipalities to enjoy the benefits and advantages of both the economic and taxation perspectives prior to the 2018 regime resulted in the establishment of a new set of legal rules, as put forward in the 2018 law reform. It should be further noted that in practice the lifecycle-projects are categorized as not involving the financing of the project, whereas the PPPs do. Figures 6 and Table A below show the basic distinctions between PPPs and lifecycle-projects.
37 Kuntaliitto.fi, Väestötietoja Kunnittain, March 2017 38 The term ’pure’ PPP in the context of this thesis excludes the lifecycle-model 38
Figure 5, Organizational Differences of PPP and Lifecycle-Model
Source: Tolvanen, Riku/Inspira Oy, 201839
Table A: DBMF Components of PPP and Lifecycle-Model Contracts
Design Build Maintenance Private Financing
Life cycle models x x x
PPPs x x x x Source: Tolvanen, Riku/Inspira Oy, 201840
3.2. MARKET CONDITIONS AND THE CURRENT STATE OF INFRASTRUCTURE
REGIME IN FINLAND
Before turning to the legal aspects of PPPs and the practicality of PPPs in the Finnish regime, the infrastructure market characteristics and conditions should be established.
Recent studies have shown that the current Finnish infrastructure regime looks healthy.41
Even though a minor decline in the infrastructure demand is projected to occur in 2018, the
39 Tolvanen, R., Miksi PPP-hankkeet ovat ajankohtaisia juuri nyt ja PPP-mallin käyttökohteet, Inspira Oy, 13.4.2018, p. 2 40 Id.,, p. 3 41 Nippala, E. & Vainio, T., Infra-alalla täystyöllisyys – 2018 kasvu taittuu, Teknologian Tutkimuskeskus VTT Oy, Report, 2017 (VTT Report) 39
data shows that the demand will mostly remain steady at its current level. Figure 6 points out the rising demand in infrastructure construction within the last few years. Conversely, or because of this, the previously mentioned „last wave‟ of academic interest in PPPs took place during the decline in infrastructure construction between 2010 and 2014.
Indeed, the 2017 infrastructure regime was more active than previously estimated (1-2%) due to the positive economic development. Most of the construction sectors remain busy but there has been no growth in 2018, especially when comparing Figure 6 total projects with the
Figure 7‟s limited use of partnership-contracting (both PPP and lifecycle-model) in Finland.
Furthermore, the total overall partnership-projects in Finland during the regimes 20-year history does not in total reach the same leverage of 2014 levels when infrastructure- constructions were at lowest during the last decade.
Figure 6, Number of Infrastructure Constructions in Finland per Year.
Years 2017 and 2018 are estimated projections. Source: VTT Oy Report, 2017, p. 1.
40
Figure 7: PPP and life cycle projects in Finland42
9 8 7 6 5 4 3 2 1
0
1998 2003 2008 1997 1999 2000 2001 2002 2004 2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 2017 1996
Published information available of partnership projects in Finland. 4 PPP projects and 45 lifecycle-models
conducted. Numbers might vary depending on method of separating bundled projects.
The largest municipalities that play an active role in infrastructure construction, particularly
Turku and Espoo experienced considerable growth in investment. In Helsinki and Oulu, the growth has steadily come to halt, and it is projected that Vantaa will experience growth in
2019.43
The continuous growth and degree of GDP has sustained infrastructure construction. Later, in chapter V, the relationship of increase in GDP and number of infrastructure PPPs will be further studied. Further, the results also indicate that the increased sector specific growth shown in Table B is supported by the level growth of Finland‟s trade partners.
42 Data compiled from: Elinkaarihankkeiden markkinat Suomessa (Inspira, 2017), Kansallinen Elinkaarimalli (Elron, 2009), Porvoon elinkaaritehokkaat päiväkodit (Junnonen, 2011) 43 VTT Report, 2017 41
Table B, sector specific infrastructure provisions:
Sector Change in 2018 Highways Increase Roads Increase Railroads Decline ICT Decline Energy Increase Water Supply Increase Other road- and environment projects No change New mine openings No change Foundations of houses Decline Outdoor area maintenance of housing No change Overall No change Source: VTT Oy Report 2017
3.3. PROCUREMENT PROCESS UNDER THE FINNISH & EU LAWS
Whereas the PPPs involve a public authority as counterparty, and the projects are designed to serve the public, the procurement laws will still apply. Finland is a Member State of the
European Union, therefore laws both at the national level and Union-level are applicable and have to be taken into account. Procurement regulations are extensive and overall general in
Finland, spanning dozens of books written about the subject and the interpretation of best practices and the law. Therefore it is not possible to provide an extensive review and analysis of the procurement laws and regulations. However, summarized thesis-related aspects will be provided in order to establish and understand the nature of the surrounding legislature. The national legislation applicable will be covered first before moving on to the Union-level legislation.
42
3.3.1. Procurement in Finland
The definition of public procurement in Finland arises from the EU procurement directives covered in the next section. Public procurement means that the procurement is paid with taxpayers‟ money. This covers the acquisition or leasing of services, supplies or contracted work.44 As indicated below, when the national thresholds in Table C have been surpassed, therefore the jurisdiction of the Act on Public Procurement and Concession Contracts
(HankL) becomes applicable.
By law, the procurement process in Finland is two-phased. First, the contracting authority publishes the tender notice. After having published the tender notice, the next phase is initiated as the call for tenders. Tender notice, compared to call for tenders is more general in terms to enable further investigation of the requirements of the project and encourage discussion between potential bidders and the contracting authority. The tender notice needs to reflect the call for tenders. If there‟s conflict between these two instruments, the tender notice will prevail (Hippeläinen, 2016).
The contracting authority is obligated under the HankL to initiate the call for tenders when the project exceeds the thresholds and thus becomes governed by the Articles of the HankL. The fundamental principles of the European Union set in TFEU45 needs to be applied towards all of the candidate bidders throughout the procurement process.
The bidder bears the responsibility for the bid to meet the requirements set out in the invitation to tender.46 In contrast, the contracting authority has the obligation to provide sufficient detailed information regarding the requirements of the project, including the
44 Hippeläinen, A., Julkisen ja Yksityisen sektorin kumppanuus hankinta- ja verolainsäädännössä, pro Gradu, Helsingin Yliopisto, 2015, p. 15 45 For further reading and applicability of the four principles, see Hippeläinen, 2015, pp 24-27 46 Hippeläinen, 2015 , citing MAO 283/05, p. 15 43
technical requirements. 47 The bids are required to be exact and in expressing the information in an equivalent manner in order for the contracting authority to evaluate the bids against each other. 48
Later, in chapter IV, one unsolved issue arises where a bidder offers the financing of the projects with bonds, and the competing bidder proposes some form of more traditional financing. It is seen that currently this will render the bids unfit for evaluation against each other, as the bond financing requires the assessment of costs throughout the lifecycle of the project. The current regime acknowledges only those bids with immediately ascertainable nominal face value.
Under HankL Article 6(1), the contracting authorities in this context are the government, municipalities and consortiums of municipalities.
Lastly, under HankL, there is no predetermined limitation regarding the lengths of the contractual terms. Despite the absence of such limitations, HankL Article 19(1) which aims to ensure the efficient and realistic competition: the contractual length needs to be based on a fixed-period rather than an indefinite time (Hippeläinen, 2014).
3.3.2. Relationship of the Finnish Procurement Regime and the EU Provisions
Under the resolution of the European Parliament49, PPPs need to be tendered according to
HankL as the public sector is involved.
47 Hippeläinen, 2015. p. 17 48 Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement and repealing directive 2004/18/EC (‘Traditional Directive’) 49 European Parliament Resolution on Public-Private Partnerships and Community Law on Public Procurement and Concessions, 2006/2043(INI) 44
In February 2014, the Concession Directive50 was established in the European Union. The aim of the Concession Directive is to further enhance and promote cooperation between the public and the private sectors, enabling the SMEs participation in PPPs. The Directive seeks to achieve these goals by requiring the partitioning certain types of projects to subprojects.
The subprojects may further be combined if the private partner is the same in more than one of the different subprojects (Hippeläinen, 2015). The regulations in the Concession Directive are more general and vague in terms of achieving the aims of the Directive.
To note, the EU-level procurement thresholds are adjusted biannually.
However, somewhat conflicting remains the statutory relationship between the Concession
Directive and the Limited Liability Companies Act (OYL).51 Under OYL Article 5, “the purpose of a company is to generate profits for the shareholders, unless otherwise provided in the Articles of Association”. As the project company is not an association, this conflicts with the primary aim of PPPs which can be argued as being there to enhance the efficiency of providing public service(s)
50 Directive 2014/23/EU of the European Parliament and of the Council of 26 February 2014 on the award of concession contracts (Concession Directive) 51 Finnish Limited Liability Companies Act 45
Table C: National and EU-level Procurement Thresholds 2018
Type of Thresholds excluding VAT Procurement
Supply and service contracts and design €0 - €60.000 €144.000 contests (Central Government Authorities) Public Works and Concession €0 - €150.0000 €5.548.000 Contracts Procedural Law - HankL52 EU53 Applicable
3.4. HISTORY OF THE PPPs IN FINLAND, PRE-2018 REGIME
This section will study the role of PPPs in the period before 2018.
3.4.1. Pre-2018 Governing Laws
Before the initial PPP project which will be summarized below, there was no need for laws governing the public-private partnerships and therefore no legislation was promulgated to support the model. The pre-2018 laws were created to meet the needs of the Finnish Transport
Agency (FTA), which was the Contracting Authority in Case 1: VT4 Järvenpää-Lahti. The
VT4 Järvenpää-Lahti project was established in 1997. Further, the more detailed data of the four PPPs will be compiled in Annex III.
52 Article 25, HankL 53 Concessions Directive & Traditional Directive 46
3.4.2. Case 1: VT4 Järvenpää-Lahti
Since the VT4 Järvenpää-Lahti (Case 1) we have seen three other projects undertaken by
the government classifying as ‟pure‟ PPPs (between 2005 and 2018). Each of these projects
constitutes as part of E18 infrastructure project. The E18, or European Route E18 is
European road-project between Craigavon, Northern Ireland (West End) and Saint
Petersburg, Russia (East End). The road covers approximately 1900 kilometers from
Northern Ireland through, Scotland, Norway and Finland to Russia. The project was
completed in 1999, the service and maintenance contract ended in 2012, and the ownership
of assets was transferred to the Finnish Transport Agency (FTA).
The VT4 Järvenpää-Lahti was the first PPP in Finland. In order to enjoy the income
taxation and VAT schemes, the laws were amended to apply to government‟s public road
and highway projects. In total there are four articles explicitly governing and
acknowledging the existence of PPPs in Finland. Each of these four articles regulates and
relate to taxation matters. Other aspects, such as the establishing of partnerships, required
balance of control, insolvency of PPPs, or other similar PPP-specific provisions are absent
from the Finnish Law.
3.4.3. Municipalities and use of PPPs
The majority of projects by the municipalities were conceived with DBM/DBO-model54, with the exception of a few projects characterized as DBFM-model, or as financing projects.
The Local Government Act55 establishes the obligations and the activities of municipalities.
The required actions and service arranging responsibility of municipalities under KuntaL, is
54 Design – Build – Maintain / Design – Build - Operate 47
to provide services and facilities (for example to teaching, healthcare, and in the context of this thesis, to infrastructure). However, Section 9 of the KuntaL does not preclude the possibility of delegating the provision of services to other parties other than the municipality in question.
Section 9 of the Local Government Act describes the provision of services by municipalities.
Section 9 – Provision of Services (1) Municipalities or joint municipal authorities may themselves provide the services for which they have a service arranging responsibility, or they may acquire these from another services provider on the basis of an agreement […] (2) Municipalities may, however, assign a public administrative function to a party other than a public authority only if this is provided separately by law. (3) When municipalities or joint municipal authorities acquire services provided by law from another services provider, they retain the service arranging responsibility referred to in section 8(2). In addition, the services provider‟s responsibility for the services is determined in accordance with the provisions of this Act or those laid down elsewhere, and on the basis of what is agreed between the municipality or joint municipal authority and the services provider.
3.5. SHORTCOMINGS IN PRE-2018 REGIME
In this section we will discuss some of the shortcomings of the pre-2018 regime.
3.5.1. The Lack of Competition and Capacity
One of the main issues encountered regarding PPPs in Finland is the lack of competition in the bidding process. Specifically this relates to the lack of companies with the possibility to design, build, maintain, finance and operate projects of this scale for such a long term (as previously mentioned, the maintenance terms in successful projects in Finland vary from 13 to 25 years). As seen in Annex III, there are very few companies in the market capable of
55 Kuntalaki 410/2015 (KuntaL) 48
undertaking projects of this scale. Moreover if the companies are not the primary party or main contractor, there is some evidence that they will still be involved in the projects.
As an example of a failed project due to possibly the lack of competitive bidders/service providers is the railroad-project “Pohjanmaan rata Kokkola-Ylivieska”, which is to date the first and only failed PPP-project where a government authority was involved. We will discuss the case below as well as the reasons for the failure of this project.
3.5.2. Case 4: Pohjanmaan rata Kokkola-Ylivieska56
The 79 kilometers long railroad between Kokkola and Ylivieska was designed to widen the
one-rail-track to a two track railroad. This was first initiated as PPP, and would have been
the first PPP railroad project in Finland. In May 2010 the FTA unveiled the plan to order
the project. The preliminary estimate of the expenses of the project was 650 million euros,
including the (estimated) service term of 30 years and planned construction phase of 3
years. Only two consortiums (Destia Oy & YIT Rakennus Oy and Lemminkäinen Infra Oy
& VR Track Oy) placed bids, which were considered to be too high by the FTA. As a
result, this led to the abandonment in March 2011 of the PPP model in the project.
As the Kokkola-Ylivieska case shows, even two consortiums formed by four large
companies (and VR Track Oy being partially state-owned) were unable to meet the pricing
condition required by the budget set out by the FTA.
Furthermore, it has been reported that one reasons for the failure of the Kokkola-Ylivieska
case was that the E18 Koskenkylä-Kotka project was under bidding at the same time. This
reveals an interesting aspect about the PPP regime in Finland. As the study ordered by the
56 Elinkaarimallin Jälkiarviointi, Liikennevirasto 2013 49
FTA described, this caused a “lack of resources in a country of the size of Finland, which
in turn led to very few bids being placed”57. Furthermore, the study suggests that in the
future, the timing of PPP projects should be better coordinated in order to allow for
successful executions. The following chapter IV further reflects the Kokkola-Ylivieska
project through quotations by interviewees.
3.6. TAXATION BEFORE 2018
Under the business taxation law58, PPP-projects were not found attractive for parties other than government. The reason was that they could not be taxed and tax-deducted on a yearly basis for the duration of the contracts. Instead, they were taxable immediately upon handing, and for the entire tax-sum indivisibly. EVL explicitly states that under Article 19a, only the
Government would be eligible for such a payment scheme. Further, Article 19a required the government to construct either a “public road or railway”.
As seen above, the denied eligibility of divided taxation and deduction for parties (other than government-involved), is one of the main reasons for the lack of „pure‟ PPP-projects in
Finland. Since this did not go unnoticed, the proposal was enacted to reform the statutes relating to taxation schemes more favorably to other parties other than the government.
3.6.1. Act on the Taxation of Business Profits and Income from Professional Activity59
The definition of „comprehensive maintenance service‟ should be established following implications of the 2018 law reform. This refers to the DBMF(O)-aspects of the project,
57 Liikennevirasto, 2013 58 Laki Elinkeinotulon Verottamisesta 24.6.1968/360 (EVL) 59 Laki elinkeinotulon verottamisesta (24.6.1986/360) EVL 50
where the amount to be paid is determined by the transport performance or a similar mechanism.
The second matter to make note of is that the English translations of the Finnish Acts within this section are unofficial translations. The unofficial English translations by the Government
Authorities are not legally binding in Finland. Further, some translations are made by the author, for example the post law reform Articles are not available in English through government‟s translations.
The first act governing the PPPs is the Act on the Taxation of Business Profits and Income from Professional Activity, or in short, EVL. As seen below, this Act allows for the division of the taxation in yearly installments calculated by the actual traffic intensity, or some other indicator. The first project, VT4 Järvenpää-Lahti used the shadow toll payment mechanism whereas the later project used the quality-based payment mechanism which is discussed later.
The Act allowed for the tax being divided into equal annual instalments when the comprehensive maintenance term is at least ten years. The time of the tax becoming payable is triggered by the opening of the railroad or road for the public.
EVL60
Article 19(a):
The compensation by Government from the comprehensive maintenance of public road or railway is to be taxable in that tax year when the comprehensive maintenance is delivered. The comprehensive maintenance means at least 10 year period of contract related to the design, building, financing and maintenance services of a public road or railroad, where the consideration is
60 To note, the English translations of the Finnish Acts within this section are unofficial translations. The unofficial English translations by the Government Authorities are not legally binding in Finland as according to the law, only Finnish and Swedish texts of Acts are binding. Further, I have provided translations of affiliated articles as, for example, the post law reform Articles are not available in English through Governments translations. 51
determined on the basis of the quantity of traffic, or on the basis of some other indicator of the intensity of use of the road or railroad (traffic intensity). The consideration is determined on the basis of the actual quantity of the traffic intensity.
Article 27(c):
Abovementioned Article 19(a) comprehensive maintenance related expenses and the financing costs of the construction of the road or railway incurring interest during the construction are deducted in equal annual instalments from the year when the road or railway was opened for public to the remainder of the term of the agreement.
Withstanding the provisions of paragraph 1, the applicability of provisions regarding the maintenance expenses of road or railroad will be applied only when the likely term of the expenses is exceeding three years.
As seen from these Articles, the use of the PPP model was not possible before the 2018 law reform by parties other than government authorities, in projects outside the segment of public roads or railroads. The next section illustrates one of the main reasons for the 2018 law reform, enabling and extending the scope of PPPs other parties than Government Authorities.
The change reflects the demand to allow municipalities to initiate projects off-balance sheet or without budgetary restraints.
The Provision further emphasizes that in a PPP model there must be “at least 10 years period of contract related to the design, building, maintenance and financing”.
Having analyzed the EVL act, the other Act regarding the Finnish PPP regime is the VAT
Act.
52
3.6.2. Value Added Tax Act
Chapter 2, Liability to Tax, the Time at Which the Liability to Pay Tax Arises
Article 15, Paragraph 4:
A comprehensive maintenance service of a public road or railroad, referred to in Article 29, paragraph 1, section 9) below is considered to have been performed in the manner referred to in paragraph 1, section 1) at the end of the period of calculation of the traffic intensity.
Chapter 4, Exemptions from Taxable Sales, Supplies of Immovable Property
Article 29(1):
Notwithstanding the provisions of Article 27, tax is payable:
10) on the supply of the comprehensive maintenance service of a public road or highway to the Government.61
Comprehensive maintenance services referred to in paragraph 1, section 10) above mean the building and maintenance services of a public road or railroad, where the consideration is determined on the basis of the quantity of traffic, or on the basis of some other indicator of the intensity of use of the road or railroad (traffic intensity)
Chapter IV illustrates some problems arising from the narrow applicability of the provisions.
For example, in almost every case, before the law reform, when some new aspect is present in the PPP (for example bond financing), the Finnish Central Tax Board (KVL)62 had to be consulted to ensure that the procedural and legal aspects are not contrary to the accepted practice.
61 The English translation No. 1501 of Value Added Tax Act of 30 December 1993, includes only the amendments of the Act, which have entered into force on and before 1. July 2003. Therefore Article 29, Paragraph 1, Section 10 is not available as a translation made by the Government 62 Finnish Central Tax Board, Keskusverolautakunta 53
3.7. FUTURE OF THE PPPs IN FINLAND, THE POST-2018 REGIME
This section examines the HE 155/2017 proposal and its impact on the regime.63
On page 2 of the proposal, the comprehensive maintenance service term is defined to include the construction and maintenance of (public) road or railway64, where the amount to be paid is determined by the transport performance or other similar mechanism.
Section 2.1 sets forth the aim of the proposal, which roughly translated is “Making it possible taxation-wise for other parties than Government to use PPP-project models efficiently in other projects than highways, which no longer would be limited only to public parties and projects”.
This section also widens the scope to include both construction and repairs of roads, railways, buildings and other permanent structures (including directly related movable property, ships, vessels, trains etc.), as well as their design, building, financing and maintenance related services.
For the private sector, this grants access to new financing and investment market – as companies and associations are able to finance and build for example their new headquarters or offices with the PPP-model. Of course, it is likely to establish growth in construction in
Finland, as it eliminates the need for a large lump sum of capital and introduces the tax incentives mentioned earlier for the companies or other private parties to initiate construction.
The taxation and tax deductions would be made after the ownership of the project is transferred to the public authority, and is available for use and opened for the public (for example in case of the roads).
The new rules regarding the VAT indicate that, VAT must be paid on the basis of the contract terms and the length of the contract, rather than at commencing of the project.
63 HE 155/2017 vp 64 Id., p. 2 54
3.7.1. Changes in Law: Act on the Taxation of Business Profits and Income from Professional
Activity
Prior to the law reform, The Business Income Tax Act (EVL) Article 19a included a specific provision regarding differentiation of the revenue created from the transfer of assets after the term in a comprehensive maintenance service, when the government is involved and the project is either a highway or a railroad project. According to this special provision the company acting as the service provider in the project including a highway or a railroad project, is able to divide the revenue annually, paid by the government for the services of design, build and maintenance services, creating the comprehensive maintenance service. The annual division of the income received is calculated to correlate to the public‟s usage of the project [yearly number of cars using the highway for example].
This was a special provision, as usually under the general provisions for example, the construction service of the road will be chargeable upon the event of opening it to the public.
Further, the EVL Article 27c provides that in case of comprehensive maintenance service, the purchase price of the highway or railroad will not be deducted upon opening it to the public, but can be divided for the whole length of term, contrary to the general provisions.
Specific provisions discussed above were applicable to the comprehensive maintenance service which was only available to the government‟s public highway or railroad projects.
This left for example all projects made by the municipalities out of the applicability of the special provisions.
Post-2018 statutes regarding the previously defined comprehensive maintenance service would thus be defined to be applicable to the building and maintenance services of a road, railroad, building, permanent construction and the design, building, financing or maintenance
55
services of directly related assets, where the consideration is determined on the basis of use or usage of the subject. The inclusion of the project finance characteristic payment mechanism is included and acknowledged in the revised provisions.
The revised provisions of EVL no longer scope the specific application to government and exclude the word „public‟ from the provisions. The proposal further seeks to modify the EVL so that the applicability of comprehensive maintenance service regulations would include other projects than the government‟s highway projects.
Some scholars have further made suggestions affecting the taxation that would enable the taxation to be further divided. For instance, if the taxable sections of the business are categorized under different classifications, the proposal would allow them to be combined under the income/loss of those sections. For example, taxation from income from the use of premises is different than taxation of income from business. In another example, the construction phase under Norwegian law is categorized as its own construction contract and taxed differently than the second phase or part of the contract, which is the revenue that results from the providing of goods or services (Hippeläinen, 2014).
The articles of EVL, post-2018, provided as follows.
EVL Article 19(a):
The compensation from the comprehensive maintenance is to be taxable in that tax year when the comprehensive maintenance is delivered.
The comprehensive maintenance means at least 10 year period of contract related to the road, railroad, building, permanent construction and the design, building, financing or maintenance services of directly related assets, where the consideration is determined on the basis of use or usage of the subject. The comprehensive maintenance is deemed to be delivered each tax year by the actual quantity of the traffic intensity in that year.
56
What is provided in paragraph 1 and Article 27(c) is not applicable if the party commissioning the comprehensive maintenance is related to the party delivering the services, as set in VML65 Article 31(2).66
EVL Article 27(c):
Abovementioned Article 19(a) comprehensive maintenance related expenses and the financing costs of the construction of the road, railway, building or permanent construction and financing or maintenance services of directly related assets incurring interest during the construction are deducted in equal annual instalments from the year when the asset in question is taken into use.
Withstanding the provisions of paragraph 1, the applicability of provisions regarding the maintenance expenses of road, railway, building or permanent construction or directly related assets, will be applied only when the likely term of the expenses is exceeding three years.
3.7.2. Changes in Law: Value Added Tax
In Section 1.3 of the proposal:
The VAT Act (1501/1993) requires the VAT to be paid to government in business transactions related to sale of goods and services. The VAT Act does not require the VAT to be paid in transactions related to real estate. However, the VAT must be paid from construction services and sale of some real estate services.
Article 29(1) Section 10 states that the VAT is to be paid from delivering comprehensive maintenance services related to the public road.
The applicability of VAT Article 15 includes the provisions of inception of the VAT to be chargeable. VAT is chargeable when the goods are sold or the services have been delivered. If a good or service provided in continuous manner, it will be deemed to be sold or delivered upon the end of accounting periods related to the transaction.67 The comprehensive
65 Laki Verotusmenettelystä 18.12.1995/1558, Act on the Tax Assessment Procedure 66 This means that either of the party has de facto or de jure control over the other party. 67 VAT Act Article 15 Paragraph 2 57
maintenance service provided to highways or roads is seen to be sold or delivered upon the end of the calculation period of the transport performance.
The VAT Act is therefore changed so that the provisions and the wordings regarding comprehensive maintenance service of project correspond to the reform of the EVL.
The provisions related to the comprehensive maintenance service, has been applied with the so-called post-financing model (DBT68) in the Government‟s highway and railroad projects.
The main difference between the general provisions is that the VAT payable from construction or development- services is chargeable upon the completion of the road and it‟s opening to the public.
The revised provisions apply to the scheduling and division of the long-term income and expenses, according to the lifecycle of the project and the inception of the VAT chargeable event. Under these new statutes, the VAT to be paid will be determined on the basis of the contract terms and the length of the contract, rather than the moment handing out the project.
Articles of VAT Act, post-2018:
Chapter 2, Liability to Tax, The Time at which the liability to pay tax arises
Article 15, paragraph 4 (new)
A comprehensive maintenance service, referred to in Article 29, paragraph 1, section 10) below is considered to have been performed in the manner referred to in paragraph 1, section 1) at the end of each the accounting period related to the performance of the comprehensive maintenance service.
68 Design-Build-Transfer, the payments from public authority can be made after completion or having made certain project. 58
Chapter 4, Exemptions from Taxable Sales, Supplies of Immovable Property
Article 29(1) section 10 (new):
Notwithstanding the provisions of Article 27, tax is payable:
10) on the supply of the comprehensive maintenance service.69
Comprehensive maintenance services referred to in paragraph 1, section 10) above mean the building and maintenance services of a road, railroad, building, permanent construction and the design, building, financing or maintenance services of directly related assets, where the consideration is determined on the basis of use or usage of the subject.
3.7.3. Future of the Legal Regime
With the inclusion of HE 155/2017, effective 1.1.2018, the PPP-model and its benefits are no longer only the privilege enjoyed by the government in highway/railroad-projects. The change amended the business taxation laws and value added tax act so that private parties and municipalities are able to plan their projects according to the division of the tax-payments for the whole project term, for example 20 years when the maintenance and operation periods agreed are of that term. Earlier, if party other than government ordered a DB(F)M-model project, the VAT-payments were not able to be divided for the whole term of the agreement.
This in turn led to issues regarding the tax-payments, as the sums tend to be too high for municipalities and private parties to pay all at once.
As at the time of writing only a few months have passed since the implementation of the 2018 law reform, studies, statements and research of major significance have not yet been published.
69 The English translation No. 1501 of Value Added Tax Act of 30 December 1993 includes only Amendments to the Act which have entered into force on and before 1. July 2003. Therefore Article 29, Paragraph 1, Section 10 is not available as a translation made by the Government. 59
3.8. CONCLUSIONS
To summarize the chapter, two charts were drawn to illustrate the PPP regime in Finland within the last 21 years. This study covered aspects of most of the PPP-projects in Finland, with exception of few non-public projects. Now that the timeline has been divided in two parts, pre-2018 and post-2018 regimes, the chapter IV will analyze through interviews of professionals in the field on the shortcomings and needs of a post-2018 regime.
After having learned the underlying factors of PPPs in chapter II, this chapter in turn studies the state of the regime and PPPs in Finland. Before 2018, other parties than other than government were not able to use the PPPs beneficially. This came to change with the law reform HE 155/2017 or 2018 law reform, as it is referred to throughout this chapter. Before the law reform, the municipalities had adopted a variation of PPPs called the lifecycle-model.
The lifecycle-model is usually in practice referred to as PPP in Finland. Table A, argues that this should not be the case. Similar aspects of the two models are the private financing of a long-term project which includes comprehensive maintenance service. However, when comparing Table A, referred to above, the organizational structures are different, and the main characteristics of PPPs, the project company, is not established in lifecycle models.
The current state of the infrastructure regime in Finland will be sketched out and further analyzed. Findings include steady growth between the second half of 2014 all the way to
2018, where the growth is expected to incur a minor decline. Sector-specific changes are provided in Table B. This is analyzed in correlation with the number of partnership-projects in Finland, including the lifecycle-projects. It can be found that the lifecycle-projects are dominant over the PPPs, as there have been only four PPPs and around 50 lifecycle-projects.
However, this can be argued to change now that the PPP model is available for wider scope of parties to implement. Having established the status of the current regime for PPPs, it should
60
be tested if the law reform is capable of being applied to the list of definitions of infrastructure provided in Annex I.
Procurement laws are demanding due to their general and extensive application in Finland.
Further the applicability of EU laws indicated that thresholds create more obligations. The procurement process is explained in very general manner with PPPs in mind. Dividing the
PPP regime in two timelines, pre-2018 and post-2018, part 3.3. begins the evaluation of the pre-2018 laws in Finland. These laws were promulgated to serve the interests of the Finnish
Transport Agency. Therefore, and without previous experience of PPPs, they have been somewhat sufficient for the FTA but not without some uncertainties, regarding the different income mechanics for example.
Two different Acts and four provisions govern PPPs in Finland and explicitly indicate the existence of the model. These are EVL, the Business Income Act, and VAT, the Value Added
Tax Act. After examining the two in respective order, the issues encountered in Finland will be set out.
Lastly, the law reform and new sets of provisions in the post-2018 regime will be analyzed.
The law reform provides reasoning and aims for the laws to be changed. Turning to chapter
IV, it is time to evaluate whether the changes in the law are sufficient through the interviews providing insight from the experts within the field.
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CHAPTER IV: RESULTS OF THE ANALYSIS OF THE FINNISH PPP REGIME
Chapter 4 provides a closer and more practical assessment of the Finnish PPP regime. This chapter discusses the results of the semi-structured qualitative interviews which were conducted to provide accessible insight through analysis of the practical aspects within the regime and provide up-to-date views from professionals within the field. As mentioned earlier, the lack of studies published led to conducting the interviews to achieve a better understanding of PPP regime in Finland. Therefore, a qualitative method was used as to achieve a more complete overall understanding the PPP and project financing complexities, barriers, gaps, experiences and views of the future along with the future proposal. The perspectives of professionals working in the field offer unique insight that would not be achieved through quantitative methods. This chapter is structured so, that an organized path through the questions answered by the participants will be established while covering the topics discussed in a well-established manner. As each participant has provided a significant amount of information, the sample to be studied and researched will rely on a small number of participants.70 Furthermore the small number of interviewees was chosen due to the limited number of experts available in Finland, who possess thorough thoughts and long-term experience regarding PPPs in most aspects concerned.
All the interviews were recorded. The interviews have been analyzed and compiled after translation so, that a structured path could be provided that fits the context of this thesis and provides an interesting path through various related topics discussed. Interviews are available upon request and consent of the interviewees.
The method of research in this chapter will rely on analyzing the answers and thoughts of interviewees, more than counting and drawing specific variables along with factors and
70 Weiss, R.S., Learning From Strangers – The Art and Method of Qualitative Interview Studies, Page 3 62
correlating them, as a quantitative study would do.71 Therefore, the semi-structured qualitative interview model, and sets of questions for interviewees can be tailored to provide information which wouldn‟t be possible to obtain from some other interviewee, and vice versa. As PPPs always involve more than two parties, the qualitative interview study provides a feasible tool to integrate and investigate the perspectives, aims and expectations of various parties in different positions around one complex matter.
The participants have been provided with the possibility to proofread their parts. Not only is this a regular course of interview cooperation, but also desirable for the interviewees as well as interviewer to avoid any misunderstandings or misstatements ending up in the final public thesis. Due to the fact that the International Business Law Program was conducted in an
English curriculum the interviews have been translated from Finnish to English. Therefore the material and information provided by the interviewees can be confirmed to not have anything
„lost in translation‟ and published without jeopardizing their positions or companies they represent.
Persons, questions, answers, contractual matters and other possibly sensitive information will be presented as agreed. The views of the respondents are seen to be their own personal views and not reflect the views of their company. The answers are organized by their subjects for the reader to follow more organized structure.
The chapter divides the interviews in 6 sections and various subsections. In order of matters covered, the sections are pre-2018 law reform or history, post-2018 law reform or
„implementation phase‟ as it could be characterized, access and availability to financing, current issues within the reformed regime, overcoming issues – incentives and solutions and
71 Weiss, R.S. p. 3 63
ultimately the last section provides the views on the future of the regime and the final thoughts.
4.1. Pre-2018 Law Reform, the Learning Process
To begin discussion of the interview-part of the thesis, the first thing to study is the reasons behind the implementation of the four initial Articles governing the PPPs and what led to the change of laws to amend them to be applicable to other parties than the Government
Authorities. The Finnish Transport Agency (FTA) was the first party to implement the PPP model in Finland.
“Before the first PPP in Finland, one of the issues was the construction with yearly budgets. For example in Turku the yearly budgetary funds were given and then used to build the highway as much as possible, and eventually stop when the budget has run out. This resulted in situations where the highway would end in the middle of the forest and could only be continued when the budgets for the next year were granted.72
Using this kind of model doesn‟t serve any party in society or in the contract. After the VT4 Järvenpää-Lahti, similar large-scale projects were granted the budgets of the whole project at once, therefore allowing the possibility to procure the project as a whole and not on a year-by-year basis. With Finland‟s ascension into the European Union in 1995, the Northern Triangle73 was promised to be in use for the public on time [at around the time of writing this thesis]. The only way for Finland to maintain and meet this promised schedule was through the implementation of the PPP model. Raising private financing incentivizes and requires the scheduling to work and to maintain it. Using traditional budgets wouldn‟t have been sufficient to conduct a project of this scale efficiently.” (FTA)
72 Also known as so called construction of ‘white-elephants’ which serves no one. 73 Finland’s part was the E18 projects. More information in Part III, Case 1. 64
Jon Forssell, Assistant Manager at Inspira Oy74 shares the same point of view with Finnish
Transport Agency about the rationales for using the PPPs.
“Where the use of PPPs has been possible, the Finnish Transport Agency has had positive experiences. One main underlying reason for this has been the proper establishment of the large-scale projects where the yearly limits of the budgetary framework would otherwise create an obstacle to use such significant scale of funding. To adequately establish and secure the projects, they are financed and amortized for a longer term in a way that the PPP model allows for. Whereas earlier if one would establish three €100 million projects, the more efficient option would‟ve been establishing one €250 million project. The procurement processes and the efficiency gains thus have been seen to materialize when there is no need to divide the project into non-optimal parts”. (Forssell, J.)
In Finland, raising low debt capital is only one of the reasons to use the PPP-model. To be sure, it is not always the main reason. As discussed in Chapter III, the private financing aspect in Finland might not even be among the most important reason because of the access of low- cost capital by the public. Recalling the highway project in Turku, illustrates why the reasons for PPP has been risen in large-scale projects. Indeed, to collar the constructors with the schedule gives them no other option than to complete the project on time, resulting in the shareholders and the public avail.
The next issue we turn to shows that initial laws established, having VT4 Järvenpää-Lahti
PPP in mind, have not all been met without suspicion, even for the FTA.
From the perspective of the FTA, the pre-2018 legal regime has been mostly sufficient.
Indeed, when the laws were drafted in the 1990s, they were emancipated a little bit too specific as the first project (VT4 Järvenpää-Lahti) was a shadow toll project, for which the initial Articles covered in previous section were enacted. Note that the experience of overcoming the practical issues arising from the PPP-model occurred in every project. As
74 Jon Forssell has left the position at Inspira during the writing of this thesis and is currently a partner at Caped Advisors Oy. 65
noted the VT4 Järvenpää-Lahti was the first PPP used in Finland, which created a number of the main practices.
Later when the payments were made on the basis of usage and service level rather than on shadow toll basis, it didn‟t exactly meet the statutory definitions. In the later three PPPs in Finland the decisions about the comparability and the applicability of the provisions had to be requested by the KVL. Before the implementation of HE 155/2017, effective January 1st 2018, this had been a highly burdensome process. In E18 Muurla-Lohja (2005) the process was lengthy and expensive. Therefore the bidders are not able to bid in the projects before the preliminary ruling by the KVL has been requested and received. The requesting (and also paying) party has to be the potential winner of the bid”. (FTA)
As the PPP model became available to be used by other parties with no previous experience in
PPPs or in lifecycle-models, the regulation should be amended in a way that limits bureaucratic (procurement) processes while retaining the projects within the legislative framework. For example, if smaller participants begin to use the PPP model, smaller will probably face numerous obstacles and additional expenses when interpreting the laws and their applicability. Further questions about the applicability could arise from the use of newer more innovative and experimental financing instruments within the PPPs structures.
“In PPP projects, the Finnish Transport Agency has initiated the basis so that cross-border competition could be established and attract foreign participants, as the markets in Finland are quite small scaled. One issue that has to be taken into consideration is the timing of the projects. This needs to be done so, that one project would not exhaust all the competition and supply as the scale of the markets and the number of participants are not large enough to (probably) handle two large-scale projects where the timeframes overlap. Consortiums have involved both national and foreign companies working together to meet requirements of the regime, business culture and infrastructure construction in particular this climate. Most probably this couldn‟t have been met by foreign participants without the advice and aid from local participants”. (FTA)
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So, the experiences of the FTA seem to show that the regime is moving in right direction. For municipalities and other new participants, the most important factors to be deducted from the previous quotations are the thorough understanding of the PPP as a viable financing instrument. In fact, the quicker the legal regulations and the tax implications from the initial talks between the participants in the projects, the more likely they are to yield the best results in the PPP project in question. Where the PPPs engage the parties for decades, there is no room left for mistakes as the contracting authority is under obligation to pay the agreed fees to the project company throughout the whole contractual term.
Let‟s now look at the post-2018 regime and the evidence in order to gauge how effective the legislation has been for the parties.
4.2. 2018 Law Reform, the Implementation Process
As the interviews have covered the pre-2018 regime, it is time to turn to the present „post-
2018‟ regime and assess the functionality of it.
“The 2018 regime can be expected to work efficiently. Both national and cross- border bidders have participated in procurement processes with similar legislation in Finland and advisors of parties have been able to work well within the legal rules and the documentation of the Finnish Transport Agency. This should make future processes and transactions understandable, working and bankable. The law reform is welcome and significantly establishes more attractive conditions to develop a better market around it.” (Forssell, J.)
“However, as the public sector has access to very low cost financing, some argue that something should be invented to minimize the expenses of the financing. This kind of fine tuning should be left for later time as first the securing of the market and it‟s development (to what direction it takes, is left to see) should be the priority to prevent the possible risks of shifting away from standard market practice even before a practical culture in PPP has been established. To elaborate further, the priority should now be the practicing of the use of PPPs and standard models so that the participants understand the model and its benefits and are to attract international bidders and advisors to assist in realizing the projects.” (Forssell, J.)
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“On the global scale we think we have got the terms of financing and the allocation of the risks pretty good. These terms and allocation of risks are clear and reasonable, therefore attracting the parties to the contracts.” (FTA)
If the municipalities were to use the same instruments that the FTA had at their disposal, it seems that there would be no obstacles to make such projects profitable, bankable and attract cross-border investment.
“The interest in the PPPs from parties others than Government towards projects other than highway and railroad-projects has been increasing through the possibility enabled by the HE 155/2017 law reform. However at the moment, the PPP-model is considered to be suitable only in the large-scale projects in Finland. If positive experiences arise due to the new law reform over the long term, it could be possible to see if it is it possible to adapt PPPs into smaller- scale projects. Already an initiative has been formed to standardize contractual models into template form by assembling a working group led by local organizations Rakennustieto Oy and Rakli Ry75.” (Forssell, J.)
On the other hand, there remains much to be developed to ensure the efficient implementation of the PPPs nationally now that other parties will be participating in the public-private partnerships. Consider the two previous sets of quotations which explain that the aim should be to establish the reliance and understanding of the PPPs before turning to more complex issues. This would otherwise create the risk that there would be some deviation from the common practices before they are actually established. With time, this could create a confusing foundation for the PPPs in Finland, where it is arguably in its initial phase.
“The feedback from some cities has been positive and having interested in the PPPs. Initiatives around healthy public accommodation and development of life-cycle thinking is one possible way to bring this subject into wider knowledge. On the public side, there‟s the ongoing debate about the so called „repair debt‟ and the results oriented procurement”. (Forssell, J.)
75 Rakli Ry is an interest organization for parties involved within the construction industry. Rakennustieto Oy produces guidelines and template documents to be used in construction contracts and procurement processes. 68
“Espoo is currently investigating the possibility to use the PPP model. If implemented, Espoo would be the first party in Finland other than the Finnish Transport Agency to use the „pure‟ PPP in other than highway/railroad- projects. Espoo has contracted for the DBMF of four schools”. (Niemi, J.)
“Half a dozen Municipalities are currently examining and following the experiences and findings from the [aforementioned] PPP-project of Espoo. Now we know that there will be one PPP-project by another party other than Finnish Transport Agency, and now we are waiting for the next step that will provide the results to inspire more projects. If the project goes well and therefore creates more demand, we will need professional designers that can meet the requirements of the climate, both in construction and maintenance”. (FTA)
What remains to be seen is how the regime will take off and evolve in practice after this law reform. As only around five months have passed from the law becoming effective to date of writing this thesis, concrete evidence is not yet available. This provides an interesting subject for future research as well as comparison between the municipalities and other private parties capacity to achieve the same positive experiences and results than what the FTA has had with the PPPs.
“The question before us is, will the municipalities bring us more potential, will local participants concentrate more on them or will the international participants enter the markets? There could be situations where on the one hand some projects are Government-level projects and on the other hand other projects will be municipal-level projects. There might be a situation where one project is an infrastructure project and the other one is some other form of project. It remains to see whether there will be new supply in the market or are we going to find ourselves in similar situation like what happened with the Kokkola-Ylivieska railroad project, that there will be too many projects at the same time and therefore the market runs out of potential participants to conduct the projects.” (FTA)
In the following section we assess the detail in financing. Specifically looking at how to assess the access to low cost public loans compared to private financing.
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4.3. Financing
For the last decades, both the EIB and NIB have been involved in all previous PPP projects in
Finland. We previously argued that restricted access to capital is not the sole motivation for use the PPP model. The following quotations from the interview of Jon Forssell provide us with an important insight why the private finance channel can be seen as a valuable option.
“The perk of having EIB involved in the projects is that it signals to the investors and other lenders that the project satisfies the international project financing standards and requirements. Therefore international banks that are able to provide debt financing to projects of such significant scale and provide project financing including long maturities are able to participate without any problems in Finnish projects. One question arises from future changes in bank regulation and what level of capital requirements banks should hold to finance long-term assets” (Forssell, J.)
“As the PPP financing is tied to the currently very low interest rates they should be found attractive by the Contracting Authorities. However, as our credit rating of the central Government and local Government in the markets is also top-notch, the public financing costs are extremely low at the moment. This provides the most significant consideration to the municipalities at this point: the advantages of PPPs have to be found from somewhere else than from the access to (low cost) private financing.” (Forssell, J.)
The possibility of using bond financing provides an option to consider plausible if the interest rates of bank financing are to rise beyond previously mentioned levels in future.
“During the financial crisis the bond financing would‟ve been actually quite advantageous and a low-cost option to finance the project. In our last project we established the possibility to use this instrument and acceptance from our advisor for the possibility. Bond financing in Finland is quite a familiar instrument, however it hasn‟t been used in PPPs. The current contract form we are using should mostly allow the bond financing, with only a couple clauses that would have to be changed. We think it‟s only a matter of time when the first bond-financed PPP will happen.” (FTA)
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4.4. Issues Remaining After 2018 Law Reform
The 2018 Law Reform was a desired change to create new possibilities within the Finnish
PPP market. However, some of these issues and problems have yet to be solved.
4.4.1. Supply And Demand
“One of the main issues is the [lack of] availability of resources and whether the demand solves it.” (FTA)
As noted earlier, a question was whether there is sufficient supply to answer the possible rising demand. To answer this question it should be divided in two parts. First, „will there be more demand‟ and second, „if there will be more demand, will the demand create the necessary supply to satisfy it‟. Jussi Niemi, Head of Facility Services in Kuntaliitto76 expresses rational concern over the role of the smaller municipalities in the post-2018 PPP regime:
“The scale of the projects with municipalities and especially in smaller municipalities tends to remain so small in size, that the required size of the project to be considered as attractive will not be met. Therefore it should be further studied to determine how to make this more attractive. One possible solution could be the bundling of the projects over several municipalities as a one project with several parts”. (Niemi, J.)
The FTA elaborates on the view of the supply and demand problem by asking, how the supply of small municipalities relating to the issue will be addressed by construction companies:
“What might create obstacles in the future is that only the large construction
companies and service providers which we only have handful, are able to
provide their services in PPPs. Therefore it remains to see how much can the
supply meet the possible demand, as the larger ones already need to form
consortiums and have some of the smaller ones tag along with them”. (FTA)
76 Finnish Association of Municipalities 71
4.4.2. Future Demand for PPP Model in Infrastructure Repair and in Municipalities
The following quotation from the interview with Jussi Niemi highlights yet another problem faced by the municipalities and the allocation of resources:
“One thing that might hinder the use of PPPs in Finland is that many PPP and Lifecycle-model projects are adequate for construction of new facilities but not for the repairing of the existing ones, where the risk control is totally different. From the total of €1.8 billion of infrastructure-related investments made by the municipalities, half is repairing construction and half is new construction. Therefore this creates a significant barrier for the use of PPPs because now the PPP model doesn‟t work for the repairing of the constructions. When the portfolio of buildings and infrastructure under the municipal ownership is studied in more detail, the foundation is seen to be quite old. Therefore repairing would be a more attractive option to them, rather than demolishing the existing infrastructure and building a completely new infrastructure”. (Niemi, J.)
The existing brownfield assets in need of repairing can be argued to become a considerable market, and the PPPs applicability in Finland should be tested in brownfield projects immediately. As Niemi stated, half of the infrastructure-related investments are brownfield- investments. The repairing in the sense of PPPs means the operation, servicing, maintaining, modernizing and adjusting of the existing assets in satisfactory condition to meet the requirements of current demand. Further, this includes the environmental requirements as well.77 Regarding the political decision making and commercial viability which should be found in PPPs, Jussi Niemi further states that:
77 Weber, B., Staub-Bisang, M. & Alfen, H.W., Infrastructure as an Asset Class – Investment Strategy, Sustainability, Project Finance and PPP, 2016, Page 2 72
“If the [local] decision makers are left out of the core of the process it signals easily that they have been completely left outside from the decisions and the planning of the project. The experience, skills and understanding related to PPPs should be shared with those having the power to affect the Government- or municipal level decisions. Especially important for involving local decision makers in the process is in a scenario where a PPP is used where the participants are large scale companies and the local (municipal level) practitioners are not able to participate in the projects due to their small size. Where the larger companies have their own contractors and subcontractors, this leads to a situation where the local practitioners will be left out of the project established in „their‟ municipality, therefore further leading to the harm of those small companies to lose viable business opportunities, leading to a loss of tax revenue of the municipality ultimately to other cities, municipalities or even abroad. The regional business viability of the companies within the municipality is an important topic to keep in mind, especially in political views when establishing the project. This is not the case in the biggest cities or Municipalities, but rather tends to create problems in the smaller ones”. (Niemi, J.)
As many municipalities in Finland are suffering from the outbound-movement of populations which can cause diminished tax income of the municipality and the profitability and employment of local businesses, the concern about the use of non-local labor and allocation of tax money may seem reasonable. Many municipalities in Finland constantly struggle with attracting inbound-movement of population. If targets are not achieved, the possible PPP project may very well to be established at the wrong time and at the wrong place, ultimately resulting in non-profitability of the project, or in other words, to the failure of the project.
4.4.3. Financing Issues
By most measures, the issue of the increased costs, when using PPPs as compared to traditional procurement, seems to be the main concern whether to implement the PPP model.
“Naturally, the price of the project financing is the most important and most common question that arises. Will the long terms of the contracts guarantee the
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benefits? This was a debated topic in the 1990s when we were starting the first PPP in Finland. Now that the Municipalities are able to participate in the PPP markets, the discussion has begun all over again. It is true that private loans are more expensive that public loans or financing the expenses from the taxpayer‟s pockets. PPPs include a lot of balancing elements, but the financing still remains more expensive”. (FTA)
Further uncertainty creates a situation where one bidder offers traditional financing and other bidder offers bond financing. There are currently no established rules of how to compare these respective bids, therefore creating real obstacles that need to be overcome. In Finland, bond financing especially remains in somewhat of a grey area in terms of the applicability and comparison of the bids in the bidding phase.
“This [comparability of bids when competing bids include different financing instruments] especially arises in Finland where the projects are conducted by using the nominal value of the projects without discounting the interest and inflation rates at all. Therefore, the nominal value of the project doesn‟t indicate the price and expenses in reality when deciding whether or not to commence the project and if the budget is sufficient. In some projects the project financing might even be less expensive in the long run while at the same time providing the benefits and advantages of the model. However the present customary approach is to see one euro today as one euro in fifteen years. After all, the expenses of both models are estimated to fall at quite similar levels after all when compared with each other. (FTA)
“Bond financing can be seen to raise one difficult issue on valuation, as there‟s currently no legal statutes applying to the following: during the bidding phase, if one participant offers bond financing and another competitor offers bank loan financing, how should it be decided, as the final expenses regarding the bonds, timing and expenses will be calculated only at the time when the offering will take place”. (FTA)
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4.5. Overcoming the Issues Present - Incentives and Solutions
We have already acknowledged that there are many benefits to the use of PPPs. This does not mean that these are not legitimate problems with the PPP model. As the debate and discussion has identified the problems earlier, this section asks how to overcome some of the problems we have seen.
4.5.1. Establishing the Rationale to use PPPs
“In many other countries the availability and access to financing might be a significant part of the project‟s risks which needs to be allocated. Therefore, the project financing might be a more suitable option when compared to Public Authority‟s budget financing. For example in more countries with non- investment grade credit ratings or other constraints to debt taking,, the project financing can allow initial establishment of beneficial projects that otherwise wouldn‟t be possible to commence.” (Forssell, J.)
Prior studies show that the allocation of risks is better in the PPP model when compared with the lifecycle-model. This is reflected in the requirement of the contracting authority to pay service fees which will be used to finance the maintenance costs and in the end of the dividends. Of course, as the exposure of the public sector in the PPP model increases, it comes along with the advantages and benefits, whereas in the lifecycle model they are present from the very beginning. Risk allocation could be used as a valid argument as to why to select the PPP model.
The low cost loans available for the municipalities and Government might be a significant „obstacle‟ for the use of PPPs, as it may completely make the PPP- model unnecessary from the financial point of view. There needs to be reliance on the benefits and advantages in other aspects of the PPP when using it. One argument that comes in mind is the property (real estate) portfolio, and better risk management by diversifying it. When the responsibilities and risks are
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diversified, the maintenance and other expenses will reduce the burden of expenses from the balance sheets. (Niemi, J.)
“Allowing the dividing of the expenses in the long term, the PPPs will be able to fit into the budgets given. This was in first place the main reason for the implementation of the model in Finland and it has provided satisfying results. Another reason was the possibility to budget large scale projects within a short schedule. Third, was that the constructors will have such strong incentives to tighten the budget, use the best quality available, innovate and finish the project even before our set times. This doesn‟t provide real (monetary) benefits to the VVM, but definitely establishes societal influence, transportation advantages, safety regarding highway accidents, fluency and viability – which we ourselves take into account as benefits. But after all, it‟s hard to put a price tag on these.” (FTA)
As discussed in the last quotation by the FTA, it is entirely understandable that the direct expenses and savings are important for those in control of the budgets. Naturally the emphasis should also be given to some extent on the indirect effects of PPPs, mainly the safety, impact on society and the reliance provided by the certainty and definitiveness of the model throughout the initial steps of establishing the project to the possibly extended lifecycle.
Further examples stated by the FTA and Niemi:
“Using the PPP model could even in some cases provide cheaper final prices to the projects. It is of significant importance to have the projects finished within the timeframes or even earlier, as difficult as it may be to financially put a value on it. For example the E18 project from Lohja or Turun väylä to Muurla was under construction for decades. Then the project was continued with implementing the PPP model in it, resulting in that the project‟s 50 km highway being completed in two years.” (FTA)
“Using the PPP model clearly eliminates the need for the excess expenses arising from the extra work and the changes in the project. The advantages of risk allocation and significantly faster completion are also very valuable aspects of the project. The probability of the project staying within the budgetary limits is also relatively high and secure when using PPPs. When
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using the budgetary balance sheet model, there‟s always the risk that the necessary actions required will not be performed or when the budget starts to run out the actions will be performed carelessly and with lowered quality, which in turn is prone to create higher expenses sooner or later. In PPPs the investors, sponsors and other participants have increased interests in doing the project adequately at the beginning which results in increased performance and quality in all areas of the project.” (Niemi, J.)
Lastly, providing more rationale is the discipline, obligations and liabilities- aspects of the
PPPs.
“After all the PPP model is about the discipline where the investors and sponsors provide the whip. Like the classic example of uncontrolled construction, first you build 10 floors and notice that the competitor has built 20 which in turn will lead you to scale up the project. This leads to unreasonable amounts of wasted money and time and the projects might end up never being completed. The PPP model completely eliminates these kinds of problems. Before starting to do anything, you contractually agree that „here is the budget, here is the timeframe and here is the final result‟.” (FTA)
The traditional construction models include the liabilities and guarantees within limited timeframe. If, for example, potholes appear in the highway, the Contracting Authority may not have interest or enough assets to properly fix them. Further, it might slip through the fingers as the degree of the matter may be underestimated while investing the money elsewhere. Where the PPP is a project with ex ante agreed lengths of terms and budgetary provisions the Contracting Authority can rely that the potholes will simply get fixed. The contract brings guarantee and security for the Contracting Authority to receive the required quality for possibly decades or the fees will not be paid to the constructor or service provider in full. This also eliminates the debate whether or not to invest the limited funding in the maintenance. In the 1990s financing was expensive and interests were high, so Valtiovarainministeriö78 (VVM) was very skeptical towards the PPPs which at that time was only reasonable. (FTA)
78Finnish Ministry of Finance 77
4.5.2. Bundling and Service Networks:
Next we turn to one idea that has come up in every interview. Bundling of the projects, is seen as a solution to overcome the obstacles encountered by small-scale municipalities (and possibly other parties as well) that seek to establish infrastructure construction or repair through PPP.
“…other argument [to use the PPP model] could be the bundling of projects between the municipalities, where every Contracting Authority pays their respective share of the costs. For example in possible economic infrastructure[79] projects, there could be different revenue models established. One innovation could be for example a revenue model similar to the model of usage fees in transport infrastructure where users would pay a part of the cost arising from the infrastructure. This model could provide an appropriate and reasonable for the development of the PPP model in Finland.” (Forssell, J.)
The central aspects should be established through the service networks. Best option would be if the neighboring municipalities would together plan and create them, therefore enabling the possibility of combining the required projects and bundling them as one. At the moment it seems that the municipalities are not able to have opinions on that far-sighted development, even though they should. However, it can‟t be considered as being an easy task as further trust is required that the neighboring municipalities complement and think in the same way. The municipalities have the right to organize their service networks freely, ranging from dense web covering the municipality, to establishing facilities only in couple places within the municipality. (Niemi, J.)
4.6. Future of the Regime and Final Thoughts
The last section of this Chapter will provide views on the future of the PPP regime. This part seeks to answer questions like „What is needed in order to maintain the efficient market and regime surrounding the PPPs‟, „how should it be done‟ and „what should be further studied‟?
79 Infrastructure that are used for economic purposes (roads, networks etc.), as compared to social purposes (education, health-care). See Annex I 78
4.6.1. Demand for PPP Unit and the Pipeline
The interviewees were asked to provide thoughts about the future of the regime, the viability of the PPPs and their applicability. On many occasions the desire for a sufficient pipeline 80 and PPP-unit81 to be established was expressed and the following part after this will concentrate on the thoughts of the PPP unit, as well as the pipeline.
“Along with the standardized contract form for the PPPs, a PPP-unit would be desirable. For example, the advisors of EPEC have commented that it should be established and would help the PPPs to be implemented in more adequate way. A PPP-Unit and a transparent and well prepared method for producing a project pipeline, are what is still missing after law reform. There is motivation, reasons and interest towards the PPPs but no concrete pipeline to demonstrate actual demand.” (Forssell, J.)
“Previously, until now, the need for a PPP-Unit hasn‟t arisen as we have been the only party being able to use the model. PPPs in other words have been us. However, now that the new legislation enables the wider scope of application, the situation is different. There is no reason why participants wouldn‟t aim for synergy-efficiencies and coordination, which would be crucial so that different models or approaches would not arise in the PPPs around the country.” (FTA)
Previously mentioned in the „Post-2018 Regime‟ part of this chapter, the concern of deviant behavior leading to disruptive effects within the market arises again. The pipeline and the
PPP-unit would eliminate and counter this, and further develop the evolvement of the markets. Further, standardized forms and behavior can be argued to attract and benefit all parties involved in PPPs whether it be banks, construction companies, sponsors or
Contracting Authorities. As said before, it is not desirable to deviate from the rules before establishing them:
80 Ideally, a pipeline could be a formal list of well-prepared, bankable PPP projects with information on when these will be brought to procurement (Forssell, J.) 81 The characteristics of PPP Units will be discussed in the subsequent chapter 79
“Banks in the Nordic countries haven‟t been that much involved in the projects simply because there hasn‟t been that much projects to participate in these countries. Larger banks and international scale banks are able to participate in these projects. Availability of the private financing is not a problem, whereas the culture and experience is. Without an established pipeline everything begins always from scratch and in a situation where project financing is always more demanding on financiers when compared to other types of financing.” (Forssell, J.)
“Regarding the pipeline, it would mean that market participants would know that there will be more PPPs in the future and therefore incentivizes them to establish readiness to bid for and construct more projects in Finland This would make the dialogue between market participants and the contracting authorities continuous, eliminating the situation where every individual project would be need to start from the very beginning and an analysis of the local market. Where there is a three to four years gap between projects, extra effort is needed to pull the team and participants together once again. The financial markets have evolved positively during recent years so that there is capital to be provided along with the expertise and experience of PPPs Therefore the next step would be to establish and maintain a continuous pipeline in Finland if that is, the project model is seen as attractive from the procuring authorities‟ perspective.” (Forssell, J.)
While the early evidence indicated that using PPPs in Finland has been overall positive, there has been very few. In order to establish necessary rules and legislation with a long-term view, it is submitted that the legal provisions should reflect as much as possible the needs of parties where the PPPs have lots jurisdiction. As the demand for PPP-unit is established, we suggest that comparative research should initially be carried out within the European Union.
The PPP-unit would be crucial to vitalize the markets properly. As we have had only four PPPs within the past 20 years, it creates lack of customs and pipeline which are what the foreign participants are after. They can be seen to willingly come and participate in one project. The foreign participants would however be more interested in case where there would be verified and maintained continuity in the markets. Therefore especially now that no single post-2018 regime PPP has yet to start its construction periods, foreign participants are eager to „take
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over‟ and conquer the markets and create a strong foothold. So, competition would arise if the standard rules would be such that the foreign participants could count on them. European companies are interested and willing to participate in these kinds of projects [smaller-scale municipal project] as well, rather than only large-scale infrastructure projects. PPP-projects are very global, and the investors and sponsors will first check if we have implemented the standard rules in our regime. (FTA)
Research of other European Union Member State‟s PPP laws would provide a good starting point. In Sweden for example around one and a half years ago, a committee paper proposed that the „new coming‟ of PPPs would be tested with three projects. However, before starting the projects it was noted that an establishment of a PPP-Unit would be crucial and required. The plan was therefore first to enable the proof of competence, demand and experience, only after that the establishment of the projects. In Finland it‟s the other way round: first commencing the pilot projects and 20 years later maybe give some thought about the establishment of the Unit. (FTA)
Also the scheme implemented in Sweden may also create positive benefits. Since Finland is largely a low risk environment, such schemes are likely to help alter the risks as providing a possibility of researching them. Lastly, according to Jon Forssell, establishment of the pipeline would beneficial both in terms of income and increased competition in markets in
Finland.
“If we predict that there would be PPP projects worth of hundreds of millions, here again the pipeline would be required. A transparent pipeline would attract foreign participants to Finland and with capacity to handle the projects, and to build co-operation with local medium size participants. There could be for example interest from international construction company with experience of working with investors, willing to run projects with local market participants.” (Forssell, J.)
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4.6.2. Closing Remarks of the Interviewees
The last section of this chapter contains statements and thoughts of interviewees provided below.
“At the moment the [possible82] Provinces don‟t have any rights of taxation or loan taking, but if this will change with the province-renewal politics in Finland, it could create good things. PPP works for us, there‟s good competence, experience and results from using the model, so there‟s no real reason why others couldn‟t enjoy it.” (FTA)
“It remains to see how many [reliable construction companies] are after all able to commit themselves to these projects within the local level and how we are able to attract foreign participants. In the [PPP] infrastructure sector there has been foreign investors involved, however their interest in [PPP] construction of public accommodation for example remains interesting to see.” (Forssell, J.)
To conclude, many issues that are or have been problematic will evolve now along with the market, in either a good or bad way. (Forssell, J.)
The interest rate legislation at the moment applies to all companies and market participants. There is some research ongoing that studies whether PPP-specific clauses could be enabled so, that the interest could be deducted from the taxation of the companies and therefore provide a more attractive regime. We don‟t have the law enacted yet, it is in EU Directives and we have expressed our interest for such Article to be enforced. (FTA)
One thing that we haven‟t used but would like to know the possibilities is, are municipalities or the government able to be a shareholder in the project company. (FTA)
82 The result of possible social welfare and healthcare reform in Finland (SOTE) would, if enacted, divide Finland into autonomous areas for the purpose of organizing social welfare and health care services. One discussion is the capability of these possible future ‘provinces’ in regarding the ability to take debt towards the infrastructure construction required by these services. 82
In the next chapter, we will draw conclusions and findings of the thesis. The chapter provides a summary of results of the chapters, as well as suggestions of the development and maintaining of the Finnish PPP regime.
4.7. Conclusions
In order to gain insight in the market and a more practical view and evaluation, semi- structured qualitative interviews were conducted to supplement the absence of data available.
Four persons in different positions were interviewed to provide insight from different sides of the table. As the data existing is quite absent, the qualitative manner of interviews was decided to deepen the understanding of the regime.
The interviews evaluate the pre-2018 regime, which can be naively referred to as the
“learning process”. As we found in this section, during this period only the FTA was able to use PPPs. The positive experiences have occurred along with the practice, experience and evolution of the PPP in Finland.
Turning to the post-2018 period, the law reform will be analyzed. Generally speaking, the law reform is seen as sufficient. However, the future development of the markets, were it in a positive or negative direction and the implementation of new financing instruments within the model might not be within the scope of the post-2018 provisions. Financing is in turn covered, which creates an interesting comparison point to the existing literature regarding
PPPs and project finance. Literature usually regards countries where the access to financing may be difficult, and therefore PPP provides excellent way to conduct projects. This is not the situation in Finland. Even more so, the public financing is very cheap and easily accessed.
Furthermore, resorting to private financing does not impose greater expenses, as it is indicated that the difference is around 1-2%. Uncertainty regarding financing exists, for example in the
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comparability of assessing competing bids including traditional financing, project financing and bond financing.
As the access to financing is not creating obstacles within the Finnish regime, the benefits need to be found from other aspects when implementing the PPP model. These are identified to be for example, the predetermined expenses which are not able to access the agreed sum, the schedules imposed to the constructors, overall earlier completion, and incentives for the constructor to apply better quality, confidence in project authority for the maintained quality and service possibly for decades and the increased safety and efficiency of infrastructure. As noted, all of these do not provide direct monetary savings, but should therefore be taken into account and seen as including benefits, or excluding possible future adverse events, therefore indirectly providing monetary benefits.
Lastly, the interviews provide us demands for the PPP unit and the pipeline. The characteristics are identified as well as the working models. Therefore, chapter V provides suggestions also regarding the establishment of a PPP-unit as well as the pipeline, along with the conclusions of the thesis.
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PART V: CONCLUSIONS AND RECOMMENDATIONS
This thesis examines the challenges of PPP financing of infrastructure in Finland. It provides an analysis of the regime, which is a complex matter that spans over several disciplines. Put simply, our approach to PPPs, which focus on the legal and regulatory measures, shows that there are benefits for governments that undertake legal and procurement regulatory effort.
The growth of PPPs is linked to the development of project financing. While traditional infrastructure financing has been funded via the government, numerous problems arise from this approach. For example, those who receive bids for infrastructure projects are often subject to bribes and corruption; therefore, they require complex regulation, which often results in delays and higher costs. Moreover, recent studies have shown that public sector funding of infrastructure is insufficient to fund and manage the risks associated with many projects (OECD, 2011). Nevertheless, this analysis also suggests that private sector investment in infrastructure may be needed to fill the finance gap discussed in chapter II in many countries discussed in chapter II (Della Croce, R. & Gatti, S. 2014).
In the first chapter, the research question was raised: “What is the legal impact of the legal rules and regulations adopted in the 2018 reforms on improving the necessary conditions for the PPP projects to succeed??”
The second chapter in this thesis provides an introduction to the PPP framework and terms, and it explains the parties included in PPPs. We used two contesting dimensions to analyze the Finnish market and argued that the dimension of co-responsibility provides a setup to a better foundation in Finland. We also found evidence that the PPP regime, once established, provides a sufficient foundation that can be shifted slowly towards the governance dimension if needed. However, like other countries, this process requires a long transition period, and it is unlikely to take place in the near future.
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In chapter II, we provide an overview of the infrastructure gap, constraints and barriers to investment in infrastructure assets. In chapter III, turning to markets in Finland, we discuss the fact that private parties are beginning to be able to be more involved in PPP infrastructure projects in Finland, which are of considerable scale. Moreover, there is high demand for these capital-intensive projects.
More recent attention has focused on the use of PPPs, which has become common in recent years. As noted in chapter II, a PPP bundles the investment and service provision of infrastructure into a single long-term contract. A group of private investors finances and manages the construction contract and then maintains the facility for a period of 20-30 years, after which the assets may be transferred to the contracting authority or the public.
The preferences of the municipalities and other actors to participate in PPPs were evaluated with the popular life cycle model. However, there is currently little evidence because the post-
2018 regime has yet to be implemented.
The second research question was as follows: “In order to build a successful market with private sector participation, what is required in terms of establishing best practices and developing a national capacity and institutional set up to develop PPP projects?” This was examined in depth in chapter III.
Our analysis suggests that the 2018 law reform is not sufficient. As described in chapter III, the 2018 law reform only involves four articles in two acts. Both of these acts, EVL and ALV, govern the taxation of projects, specifically the taxation of the income and the VAT.
We argue that a reform that includes only four articles may require more changes, it may be difficult to efficiently introduce such changes. The reasons identified in chapter III and the evidence supplied by the interviewees in chapter IV explain the nature of the market policies
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implemented and the rules governing PPPs. The possibility of using PPPs is a good starting point, but the market is currently restricted without regulation and guidance.
That said, the 2018 law reform may be sufficient to extend the possibility of using PPPs. As can be seen, PPPs offer advantages to all parties involved (and, arguably, to the public) when considered and planned properly. Therefore, risking deviation from best practices before they are even identified and established is a serious concern for the Finnish regime.
The third research question was ”how can the new regime help to remedy the obstacles to private sector solutions?” Insight from interviewees, the demand for the PPP model and a pipeline of projects to ensure the continuity of the new regime will lead to more attractive regime for foreign participants to participate.
As argued above, Finland has the potential to establish a textbook example of an efficient PPP regime. Our analysis suggests that support of the current regime is needed to look beyond the current stage in order to capture the benefits of the professional knowledge and skill throughout the infrastructure sectors. As the interest in PPPs grows, the implementation of sound practices could also establish the possibility to export knowledge and skills in PPPs and to become involved in foreign or cross-border projects.
Lastly, it is worth noting that the interviews revealed demand for the PPP unit and the pipeline. The interviewees indicated that the characteristics implemented into the working models are of great importance. Therefore, chapter V provides suggestions and evaluates the establishment of a PPP unit and pipeline.
Having looked at different PPP units and pipelines globally, our objective was to provide suggestions regarding how to provide a sound foundation. As noted, supporting infrastructure projects in Finland,
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First, we found that there is a need for regulatory reforms and for a central PPP unit.
The role of PPP units is to oversee and provide advice regarding PPP projects. Moreover, PPP units coordinate regulatory matters with ministries of finance, planning ministries, line ministries and their PPP cells.
We also found that municipalities without extensive budgets to finance consultants may experience high costs associated with making PPP projects profitable. PPP units, for example, evaluate and assess the preparedness, feasibility, bankability and risk management of proposed PPPs, which all relate to investors‟ views of whether a project is attractive.
Furthermore, the tasks of PPP units in the Finnish markets are related to policy and development work, as well as database and information management.
Database and information management further helps to establish the pipeline because everything does not need to be researched every time a project is considered. The regulatory advising of PPP units, for example, includes the creation of a competitive environment in monopoly and semi-monopoly situations. While Finland does not currently suffer from a monopoly situation, as indicated in chapter III and in the data provided in Annex III, there may be cause for concern: The nature of the market and the number of participants in the market who are able to meet the requirements of projects may be borderline oligopolistic.
Bureaucratic pressure could further be diminished by providing a one-stop shop entity with regards to PPPs. As noted in previous chapters, the preliminary statements from KVL reveal a long and bureaucratic process, which was found arise from uncertainty in interpreting the statutes regarding taxation.
Studies further suggest that the PPP unit would be initiated as a „PPP cell‟, usually located within the ministry of finance. Having achieved increasing results, experience and improved market conditions through an increased number of PPP projects and transactions, the PPP cell
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can be developed into a fully functioning, semi-independent unit (PPIAF, 2009). PPIAF83 further indicates the main points of action and areas where a PPP unit could provide or undertake the functions of guidance and support for PPP development, oversight and coordination. We offer suggestions with regard to the further design of a PPP unit.
From this, in Finnish perspective, the function of supervising and monitoring of PPPs consistent with policies, regulations and laws, and, assist with drafting future legislation regarding PPPs, propose of modify existing laws, and strengthen the legal capacity of various governmental levels to enter into PPP arrangements with the private sector.
Because there is no experience for non-highway PPPs in Finland, they may be prone to creating issues, whether minor or major ones. Therefore, it is necessary to investigate how to implement the model in other sectors or across sectors.
Hard evidence regarding a PPP unit‟s impact on the market has been provided by studies.
When a certain level of PPPs and a pipeline is achieved, it has a direct effect on GDP growth.
Between 1990 and 2003, countries with more than 70 PPPs in the infrastructure sector realized a 25% GDP growth rate. Large-scale projects tend to bring capital and create long- term employment, both of which ultimately lead to increased consumption, wealth generation and a stronger economy. It is also clear that private investments and the attractiveness of PPPs bring additional private investors to the market.84
To conclude, the Finnish PPP regime is heading in the right direction and evolving; however, it lacks a common policy and regulations to govern it. This is prone to create divestiture in
83 Public-Private Infrastructure Advisory Facility is a technical assistance facility under World Bank. The aim of PPIAF is to strengthen the policy, regulatory and institutional underpinnings of private sector investment in infrastructure. PPIAFs foundation by building institutions, reducing policy, regulatory and institutional risks, and building the capacity of counterparties, allows governments to generate a pipeline of bankable projects.” (“About Us”, PPIAF website https://ppiaf.org/, retrieved 3 June 2018) 84 Cherevykov, Y., Defining PPP Opportunities in the Road Sector of Ukraine, LAP LAMBERT Academic Publishing, Pages 1-42, April 2017 89
practices, ultimately leading to a fragmentation of the regime. Therefore, because the 2018 law reform will significantly increase the number of PPP projects conducted, a development plan should be implemented as soon as possible. The legal regime allows for the use of PPPs by other parties other than FTA. However, the regulatory regime currently only concentrates on taxation issues of PPPs with four articles within two acts. As noted, this is not sufficient.
The regulations of countries similar to Finland provide a good starting point. Moreover, the characteristics of the municipalities studied in chapter III should also be considered.
Amendments to the existing framework should be implemented as soon as possible to harness and ensure the benefits of PPPs.
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ANNEX I
Infrastructure Sectors and Subsectors
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Table D: Infrastructure Sectors and Sub-Sectors85
Economic Infrastructure Social Infrastructure Transport Energy Water Communication
Land Generation Conventional Supply Telecommunication Health -Roads -Coal -Domestic -Fixed networks -Diagnostic -Rail networks -Oil/Gas -Industrial -Mobile networks -Therapy/Treatment -Public local -Nuclear -High-speed internet -Care transport Sewerage -Towers (cell & -Rehabilitation Renewable -Rain water broadcast) -Elderly housing -Solar -Domestic -Wind wastewater Space Education/Culture Water -Water -Industrial -Satellite network -Schools -Inland -Biomass wastewater -Observation -Student housing waterways -Geothermal (campus) -Sea Other Services -Libraries -Canals (e.g. Transmission/Distribution -Theatres Suez) -Electricity -Museums -Ports -Gas -Oil/Fuels Waste Sport Air -Recreational -Airport services District Heating -Professional
-Airline services -Domestic -Air traffic Public Waste control Administration -Industrial -Offices Waste -E-government Multimodal -Inland terminals Security (road/rail-freight) -Prisons -Cruise terminals -Police -Defence Source: Weber, B. et al, 2016
85Weber, B. et al., 2016, Figure 1.6 Infrastructure: Sectors and subsectors, p. 13
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ANNEX II
Advantages & Disadvantages of PPPs
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Table E: Advantages of PPP
Advantages of public-private partnerships Allocation of Tasks The tasks required to be performed by the parties involved, whether in the structure of the project or via project agreements, enhance performance. The tasks allocated to individual parties are designed to suit their expertise, thus allowing the parties to concentrate on what they do best. Allocation of Risks Similar to allocation of tasks, risks are allocated to parties who are most suited to bear or „suffer‟ the risk. Furthermore, this creates incentives to perform because inter-party risks are not present. Individual performance, therefore, is aligned with individual risks and sanctions. Completion on Schedule Rather than using „traditional‟ procurement, the PPP model mitigates the delays of completion by imposing liquidated damages, for example, in the event of late performance. Once again, parties are responsible for their own performance. However, adequate timing and planning of contracts are required to establish a secured performance. A 2013 report by the Finnish Transport Agency mentions that the Finnish bidding and negotiation phases of PPPs are significantly shorter than those of their international counterparts. In two of four PPP projects in Finland, the construction period was estimated to be one year shorter than if those same projects would be constructed using traditional models.86 Financial Planning The PPP model allows the contracting authority to plan the financial expenses and the need for investment funding beforehand, with little to no unexpected expenses (subject to adequate planning and contracts). The timing of the payment is also known from early on. Elimination of „Hit-and-Run‟ Construction and Maintenance of the Value of Project Using the PPP model eliminates the problem of a constructor avoiding liability for poor quality of construction or the lack of proper maintenance of the project. The liability of the constructor may be too short in cases of housing projects and schools, for example. Recourse Financing Compared to „traditional‟ non-recourse financing, the revenues made during the lifetime of a PPP project enable a company to meet its debt, interests and other obligations with the revenue made after the construction phase. Therefore, with adequate planning, the project company establishes a waterfall priority of payments, with which it meets its obligations – instead of doing so out of the balance sheets of parents. Off-Balance Sheet Payments This is seen in Finland – especially for the municipalities – as one of the most important factors when using a PPP model and financing. The off-balance sheet payments and debt servicing enables the municipalities to conduct larger scale construction projects without having debt in their balance sheet – therefore, eliminating budgetary problems.
Elimination of Investment Distortions This reduces overinvestment and underinvestment by isolating the project risks to the project company (compared to „traditional‟ corporate financing). The losses made by a subsidiary would cause financial problems or even trigger default to the parents. Furthermore, because expenses are mostly known, it minimizes distortions at the project level and requires minimal future investments.87
86 Liikennevirasto, Elinkaarimallin Jälkiarviointi, 2013, Page 9 87 Etsy, B.C., Petrozuata: A Case Study on the Effective Use of Project Finance, Harvard Business School Journal of Applied Corporate Finance 12, No. 3:26-42, 1999, Page 31
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Minimizing Agency Costs Because each party is responsible for its own actions and risks and are incentivized to perform well with sanctions, it is in each party‟s discretion and interest to perform in as timely and precise a manner as possible. Furthermore, a pre-determined waterfall payment scheme eliminates managerial discretion.88 Limiting the Liability of Parents Unlike joint ventures, in PPPs the SPV is liable for itself. Parents support the project by sponsoring and providing equity, but the liability remains with the SPV.89 Expertise of Private Management The most competent managers tend to be in the private sector. Therefore, PPPs connects private sector managers to public projects. For example, the operational risk in the Auckland Indoor Arena90 project was allocated to a private sector partner because the contracting authority (Auckland City Council) did not possess the skills and experience required to profitably run a „major events venue‟.
Table F: Disadvantages of PPP
Disadvantages of public-private partnerships Contractual Complexities When comparing the PPP model with the „traditional‟ procurement methods, traditional procurement provides more flexibility because re-tendering is possible and because the contracts are more open.91 As a result, it is estimated that the tendering costs are around 3% (compared to traditional procurement‟s 1%) of the total project costs.92 Costs of Contract Re-Negotiation When the need for re-negotiations arise, it has often not been possible to pre-determine such situations, and to find the common goal in negotiations. One main factor giving rise to this is the long-term contracts and government policy changes.93 Political Acceptability
88 Etsy, B.C., Petrozuata: A Case Study on the Effective Use of Project Finance, Harvard Business School Journal of Applied Corporate Finance 12, No. 3:26-42, 1999 89 Brealey, R.A., Cooper, I.A. & Habib, M.A., London Business School Journal of Applied Corporate Finance, Volume 9, No. 3, Fall 1996 90 Auckland Indoor Arena PPP was entered into by the Auckland City Council in May 2004. Katz, D., Financing Infrastructure Projects: Public Private Partnerships (PPPs), New Zealand Treasury Policy Perspectives Paper 06/02, March 2006, Appendix, page 11 91 Katz, D., Financing Infrastructure Projects: Public Private Partnerships (PPPs), New Zealand Treasury Policy Perspectives Paper 06/02, March 2006 92 BEC & Sir Michael Latham, Constructing the Team, reproduced in Dr. Eamonn Butler & Allan Steward MP, Seize the Initiative, Adam Smith Institute, 1996, quoted in Grahame Allen (2001), page 34 93 Katz, D., Financing Infrastructure Projects: Public Private Partnerships (PPPs), New Zealand Treasury Policy Perspectives Paper 06/02, March 2006, Appendix, page 7
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The New Zealand PP 06/02 states, “Given the difficulty in estimating financial outcomes over such long periods, there is a risk that the private sector party will either go bankrupt, or make very large profits. Both outcomes can create political problems for the Government, causing it to intervene”. This means that if the government increases the profitability of the private sector party during a bankruptcy, it would be seen as a negative outcome.94 On the other hand, if the government allows the private party to go bankrupt and, therefore, threatens the future of the project, it would also be seen as a bad thing. Dysfunctional Partnerships This may arise when parties involved in a PPP are themselves not sure what a PPP is or how the opposing party sees it.95
94 Katz, D., Financing Infrastructure Projects: Public Private Partnerships (PPPs), New Zealand Treasury Policy Perspectives Paper 06/02, March 2006, Appendix, page 11 95 Stelling, C., An Excursion Into the Public-Private Partnership Jungle: Stay Precise and Keep on Mapping, International Public Management Review, Vol. 14, Iss.1, 2014, Page 2
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ANNEX III
PPP Projects in Finland
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Vaalimaa
-
Oy & Meridiam & Oy
E18 Hamina E18
2015 Years 19 Agency Transport Finnish Oy Vaalimaa Tieyhtiö 3/5 (YIT Consortium MY Rakennus II Finance Infrastructure S.à.r.l 3 0/100 Level Service & Usage Quality €265m €643m
Kotka
-
uality)
m
E18 Koskenkylä E18
2011 Years 15 Agency Transport Finnish Oy 7 Valtatie Tieyhtiö 3 (YIT Consortium Pulteri Oy) Destia & Oy Rakennus (YIT Consortium Pulteri Oy) Destia & Oy Rakennus 2 20/80 Payment Based Availability Q & (Quantity €285 €623m
Lohja
-
ty)
uali
E18 Muurla E18
2005 Years 24 Agency Transport Finnish Oy Ykköstie Tieyhtiö 5 Oy Infra (Skanska Consortium E18 Oy) LemminkäinenInfra & Oy Infra (Skanska Consortium E18 Oy) LemminkäinenInfra & 5 10/90 Payment Based Availability Q & (Quantity €300m €700m
Lahti
-
Tekra Tekra
- -
VT 4 Järvenpää 4 VT
1997 Years 15 Agency Transport Finnish NelostieOy Tieyhtiö 2 Skanska TYL Skanska TYL 5 10/90 (Quantity) Toll Shadow €84m €240m
y
Costs
Initiated Year Length Term Contracual Authority Contracting Compan Project Financiers D&B M&O Bidders of Number %: in bids of Weighing Price /Quality Mechanic Payment Expenses Investment Total
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ANNEX IV
Interview Sheets
99
Name Title Organization Date of Interview Jon Forssell Assistant Manager Inspira Oy 17.4.2018
Inspira Oy, Jaakonkatu 3, Place of Interview 00100 Helsinki, Finland
Length of Interview 45 minutes 55 seconds
Number of Interview Questions 9
1. Present Regime in Finland How would you view the establishment and successfulness of the PPP- and life cycle model projects and the regime in Finland? Is the (post-2018) legal regime sufficient or is there something to make better? For example from financing, taxation and legal points of view.
2. Access to Financing How do you see the availability of financing in Finland? What would you describe as being the most significant obstacles and hindering factors? How is the supply- side market of financing?
3. Biggest obstacles encountered in PPPs/Life cycle model construction? What do you find to be the biggest obstacles and issues encountered in PPP/Lifecycle-model projects?
4. How the make the access to financing better? Is the regime of access to financing working at the moment in legal and taxations terms? What would you suggest to enhance the access to financing?
5. Infrastructure Gap – How do you view the supply and demand? Many times the discussion about the disequilibrium between supply and financing has arisen in Finland. How do you think the disequilibrium could be reduced?
6. Effects of HE 155/2017 ‘2018-Law Reform’ Do you think that the Government proposal HE 155/2017 has succeeded in its aim to attractive more parties to use PPPs? How has the interest in the field shown?
7. Is the HE 155/2017 enough? Do you find HE 155/2017 providing enough tools to solve the problems and issues faced?
8. Future of the Regime? How do you see the future of the PPP regime in Finland and what would you suggest to be done to improve the regime?
9. Closing thoughts and remarks? Translation Approved Interview Recorded X X by the Interviewee
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Name Title Organization Date of Interview Anna Myllylä Lawyer
Procurement Development Liikennevirasto 20.4.2018 Seppo Toivonen Manager
Liikennevirasto, Opastinsilta 12 A, Place of Interview 00520 Helsinki, Finland
Length of Interview 111 minutes 24 seconds
Number of Interview Questions 6 Confidential + 11 General
1. Access to Financing How do you see the availability of financing in Finland? What would you describe as being the most significant obstacles and hindering factors? How are the supply and demand markets of financing? How much financing is provided from abroad and where from?
2. Present Regime in Finland How would you view the establishment and successfulness of the PPP- and lifecycle- model projects and the regime in Finland? Is the (post-2018) legal regime sufficient or is there something to make better? For example from financing, taxation and legal points of view.
3. Procurement Documentation “The procurement documentation is seen to have been of high quality by the interviewees. However, changes to the documentation, especially with respect to risk allocation, have been necessary in order to secure bankability. These changes have been negotiated in the procurement process after the preferred bidder has been chosen. The client should be better able to anticipate the requirements of the project financing banks in the procurement and contractual documentation before selecting the preferred bidder”. 96
Do you find this to be changed in anyway during the last five years? What desires have the financing parties expressed regarding the risk allocation? What factors do you find troublesome to predict?
4. The Price of the Project Financing “The higher cost of project financing compared to public sector financing was a reoccurring theme in the interviews.”97
This seems to be the occurring problem when reading the studies and experiences from Finland as well as abroad regarding the PPP markets. Most of the criticism arising from Finland is mainly about the higher price of the private financing and municipalities and cities lending „expensive and irresponsible money from the future‟ when constructions are not financed from the balance sheet. The problems of municipalities and cities are not directly FTA‟s concerns, however some comments
96 Liikennevirasto, Public Private Partnership (PPP) Review, 2013, p. 8 97 Id., p. 25
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about the eternal problem of „high-cost‟ financing would be nice to hear.
Further, many materials mention the higher price correlating with other benefits and value creation resulting for example from reduced agency problems and information asymmetry. For the interviewer, this model sound sufficient especially in the Finnish regime where the condition of airs in schools are constant debate, as this extends the responsibility of other party than Contracting Authority for possibly decades.
How do you see the reasonability of the criticism? What factors should be taken into account other than financial matters when deciding between the use of PPP or some other more traditional procurement model?
5. Overlapping projects “The procurement timelines for Kokkola-Ylivieska and E18 Koskenkylä-Kotka were partially overlapping. In a country the size of Finland this resulted in resource shortages to the number of bids received. The procurement of PPP projects calls for improved coordination in the future”98
Could it be deducted from this that there should be more participants in a country the size of Finland to adequately response to the demand or is this case a single coincidence which might‟ve resulted to the Kokkola-Ylivieska railroad project not to be conducted with the PPP model?
6. Company forms of Project Companies? What criteria are weighed in establishing the Project Company in desired form?
7. Bond Financing in Finland Has FTA used or considered the use of bond financing in previous PPPs? Has bond financing been used in any project in Finland?
8. Effects of HE 155/2017 ‘2018-Law Reform’ Earlier only Government‟s railroad and highway projects have enjoyed the income- and VAT taxation benefits of PPPs. Can the effects of the law reform be noticed in your course of business, or in general in the markets? How do you find this to change the established behavior within the regime?
9. Is the HE 155/2017 enough? Do you find HE 155/2017 providing enough tools to solve the problems and issues faced?
10. Future of the Regime? How do you see the future of the PPP regime in Finland and what would you suggest to be done to improve the regime?
98 Liikennevirasto, Public Private Partnership (PPP) Review, 2013, p. 8
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11. Closing thoughts and remarks?
Translation Approved by the Interview Recorded X x Interviewee
103
Name Title Organization Date of Interview Municipal Facilities Jussi Niemi Kuntaliitto Oy 20.4.2018 Specialist
Kuntatalo, Toinen Linja 14, 00530 Helsinki Place of Interview Finland
Length of Interview 48 minutes 55 seconds
Number of Interview Questions 9
1. Present Regime in Finland How would you view the establishment and successfulness of the PPP- and lifecycle- model projects and the regime in Finland? Is the (post-2018) legal regime sufficient or is there something to make better? For example from financing, taxation and legal points of view.
2. Access to Financing How do you see the availability of financing in Finland? What would you describe as being the most significant obstacles and hindering factors? How is the supply- side market of financing?
3. Biggest obstacles encountered in PPPs/Lifecycle-model construction? What do you find to be the biggest obstacles and issues encountered in PPP/Lifecycle-model projects?
4. How the make the access to financing better? Is the regime of access to financing working at the moment in legal and taxations terms? What would you suggest to enhance the access to financing?
5. Infrastructure Gap – How do you view the supply and demand? Many times the discussion about the disequilibrium between supply and financing has arisen in Finland. How do you think the disequilibrium could be reduced?
6. Effects of HE 155/2017 ‘2018-Law Reform’ Do you think that the Government proposal HE 155/2017 has succeeded in its aim to attractive more parties to use PPPs? How has the interest in the field shown?
7. Is the HE 155/2017 enough? Do you find HE 155/2017 providing enough tools to solve the problems and issues faced?
8. Future of the Regime? How do you see the future of the PPP regime in Finland and what would you suggest to be done to improve the regime?
9. Closing thoughts and remarks? Translation Approved Interview Recorded X X by the Interviewee
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Legal Acts And Proposals
Arvonlisäverolaki 20.12.1993/1501 (ALV)
Directive 2014/23/EU of the European Parliament and of the Council of 26 February 2014 on the
award of concession contracts Text with EEA relevance
Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on
public procurement and repealing Directive 2004/18/EC Text with EEA relevance
English Translation No. 1501 of Value Added Tax Act of 20 December 1993
Hallituksen esitys eduskunnalle laeiksi elinkeinotulon verottamiseksi annetun lain 19 a ja 27 c §:n
sekä arvonlisäverolain 15 ja 29 §:n muuttamisesta, HE 155/2017 vp
Kuntalaki 410/2015 (KuntaL)
Laki Elinkeinotulon Verottamisesta 24.6.1968/360 (EVL)
Laki Julkisista Hankinnoista ja Käyttöoikeussopimuksista 1397/2016 (HankL)
Laki Verotusmenettelystä 18.12.1995/1558 (VML)
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Tilburg University Law School
Statement of Integrity (Article 13 par. 2 Master’s Thesis Regulations (Scriptiereglement)) Name student Surname: First name(s):
ANR: E-mail address:
Title of the paper or thesis
Name of the supervisor(s)
The RULES AND REGULATIONS OF TILBURG LAW SCHOOL’S EXAMINING BOARD (Regels en Richtlijnen van de Examencommissie van de Faculteit der Rechtsgeleerdheid, R&R) contains the following rules in connection with plagiarism.
Article 7, paragraph 6 – Rules for the examinee / fraud ...... g. in a Master’s thesis or other assignment, copying data, texts, arguments, or ideas of others without a correct reference or without quotation marks. The following instances, among other things, constitute plagiarism. - Passages from the work of another are copied almost verbatim without a correct reference or without quotation marks and/or - passages from the work of another are paraphrased without an indication that the opinion or idea of another is concerned and without a correct reference or without quotation marks and/or - the elaborated ideas or discoveries of another are presented as the student’s own ideas or discoveries. h. in executing a (final) research project, manipulating or incorrectly presenting the research results with a view to misrepresentation. The following acts, among other things, constitute fraud. - The data used in the study were distorted, made up, or represented in an irresponsibly selective way; - points of view, interpretations, and conclusions of others were intentionally twisted; i. at any time providing opportunities or inducement for fellow students or examinees to commit fraud.
In Article 8 it is stated what sanctions the Examining Board can impose. For more information, see http://plagiaat.rechten.uvt.nl/files/doc.asp?lang=en
Version September 2010 1 110
Statement of the student: I hereby declare that I will not commit plagiarism or fraud or otherwise act in breach of the R&R in doing research for and writing the above-mentioned paper or thesis.
Date: Signature:
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