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 II 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. III 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 IV 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 UK United Kingdom VAT Value Added Tax Act Arvonlisäverolaki (30.12.1993/1501) VT Highway Valtatie VVM Finnish Ministry of Finance Valtiovarainministeriö V 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 VI 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,