Cyprus: The Legal Implications Of Public Private Partnerships With A Focus On Cyprus

Last Updated: 21 January 2002

Introduction

Not long ago, privatization meant that public assets, such as a hospital or a waste treatment plant, would be sold to a private company that would own and operate the facilities. Over the past few years the term has become more complicated and now refers to a range of situations, starting with full privatization and ending in a loose kind of co-operation between the public and the private sector.

The most prevalent term used for such co-operation is "Public Private Partnership" (PPP). PPPs are not entirely new. They have existed, in one form or another, for quite some time. Governments and private firms have worked together through simple agreements, for example government purchase of products manufactured and produced by the private sector. What is new, is the direction in which this co-operation is taken by all levels of government to bring together the public and the private sectors and also the increasing complexity of the ensuing relationships and agreements.

The term "Public-Private Partnership" now applies to a whole spectrum of potential relationships between the public and private domains for the joint provision of infrastructure services. The only essential ingredient for such a partnership is some degree of private participation in the delivery of traditionally public domain services.

International interest

There is now great international interest in PPPs. The UK Treasury alone has been consulted on this subject by over 50 countries and the British Government has recently entertained representatives from at least 13 countries, including Australia, Japan, South Korea, China, Germany and Poland.

All over the world there have been numerous discussions and arguments about the advantages and disadvantages of PPPs, both generally and specifically for distinct sectors. Several countries, such as Japan, Italy, Ireland and the Netherlands, have already organized ways to deliver such partnerships. Others are in the process of creating a legal framework to enable them to establish PPPs. In South Eastern Europe PPPs are being used to effect as successful transition to democracy and to aid the recovery of the economies, though further efforts are needed to promote private sector participation.

PPP projects are already taking place in Europe, the USA and Australia. Countries are adopting this system with enthusiasm. A few examples are: Japan, which has several extensive programmes, Canada, which is working on a PPP road project and Norway, where a rail scheme is under way. In Ireland PPP has now become a central feature of public policy. Of the mainland European countries, only Germany and France have been slow to follow this trend, Germany because the legislation is prohibitive. In the forefront of this international movement is the UK’s Labour government, which has given its blessing to almost £20bn worth of PPP projects, ranging from revamping the London Underground to outsourcing school services.

Cyprus is one of the countries showing an interest in this type of privatization and the government has already taken steps to form the necessary legislative and institutional framework. Every medium in the legislative and executive process has given PPPs its seal of approval and the first have already been formed.

There are already plans in place involving more than CYP 500 million in investment. The PPPs involved include airports, ports, marinas, refuse disposal, sewage schemes and road schemes.

Legal framework

The legal framework within which PPPs function is very important for their effective application and, indeed, for their very existence. Local governments around the world have found that many of the opportunities for embarking on PPPs were constrained by numerous provisions in the relevant national legislation. Such partnerships need legislative, administrative, political and social environments that support their development and the achievement of their objectives over time.

The UK, the US, Canada, and many other countries have set up legal frameworks that support PPPs. The systems that have been created have some common rules that are found in all their regulations and legislation.

What differs in each country is the environment surrounding the legislation. The UK, for example, has a poor record as far as privatization is concerned. As a result, suspicion and negativity arise at the very mention of the word. Too often in the past, privatization had been used as a means of lowering workers' wages and conditions rather than improving the delivery of services. The US, on the other hand, has no such history. That, coupled with a cultural bias to entrepreneurship, means that they have more ability to introduce private sector innovation into public services.

The keyword in establishing both the legal framework and the PPP itself is "flexibility". Flexibility is necessary in choosing parties to play the different roles and in drafting the agreement. The choice of which party and what agreement best serve the interests concerned varies from city to city and from country to country. Flexibility is also required in the choice of response, so that effectiveness is maximised and system efficiency optimised. The legislation should allow the central government or local authority to follow different criteria both in deciding whether a PPP is the best option for a project and in choosing a private partner.

PPPs are context-based. Methods used in one community will not necessarily work in the same way, or indeed at all, in another, and the surrounding environment is a very important factor in the feasibility of a PPP. In observing the way in which other states have utilised PPPs a government can draw out ideas and models which may be adapted to suit the community’s needs, but it should not transplant the system as a whole without modifying it to serve its own country better.

Legal framework in Cyprus

In its decision dated May 12th 1999 the Council of Ministers in Cyprus approved the creation of an institutional and organizational framework for PPPs.

The framework approved provides for the creation of a Ministerial Committee under the chairmanship of the Minister of Finance and a Central Service Committee under the chairmanship of the Permanent Secretary of the Planning Bureau. These Committees will be responsible for the systematic introduction of the Design-Build-Operate-Finance (DBOF) method of PPPs to Cyprus.

Acknowledging the complex character of PPPs the Council of Ministers, in its decision dated March 14th 2001, has approved the creation of a Central Unit in the Planning Bureau which will process policy issues in relation to the DBOF method. The Council has also approved the establishment of Steering Committees in some Ministries, to promote the implementation of specific projects through the DBOF method, and has determined the role and competence of the Project Managers and the Technical Committees.

Enabling framework

In all countries the local authority or central government is enabled to make agreements or contracts in respect of its activities, works or services, including their undertaking, provision and operation. It is also empowered to acquire, hold, manage and dispose of any interest in all kinds of property. The disposition of real property may not be part of a PPP as such but it is an integral part of many partnership agreements and, as such, very important to their continued existence.

In Cyprus an Administrative Process has been approved by the Council of Ministers to apply in the assignment of works to the private sector using the DBOF method. The Planning Bureau has been designated as the relevant service that will be concerned with the policy issues relating to the DBOF method and the securing of consultancy sources, where necessary, to deal with financial and legal matters, including the preparation of bid documents.

All regulations must be designed not only to protect the public interest, but also to create the conditions under which private firms can operate effectively and efficiently. Issues like predictability and certainty are very important to private operators and should be provided for in the legal framework.

Regulatory environment

It is imperative that mechanisms are put in place to minimise the likelihood or appearance of corruption, especially in contract procurement and private sector investment. Unpredictable and unfair procurement and investment processes that are vulnerable to corruption will reduce both the political acceptability of PPPs and the interest of many private investors. A regulatory framework is essential to the acceptance of a scheme both by the general public and the private sector.

The government can impose strict penalties on civil servants who accept bribes and on the firms that bribed or attempted to bribe them. Such firms may be prohibited from contracting with the government for a specified period. The government could also encourage local and international non-governmental organisations as well as the media to act as "watchdogs".

In the UK performance-related penalties are now built into most contracts in the hope that they will ensure a continuing improvement in standards. US states have also provided for similar penalties in their contracts with private parties.

Cyprus should follow the example of the UK and make sure that there are penalties inserted in contracts with private parties that ensure compliance with safety and quality standards.

But the creation of a regulatory framework is not enough to guarantee effective regulation. Transparency at the contract procurement stage and in evaluating the performance of the private party will go a long way towards combating corruption. The traditional "competitive bidding" procedure seems to satisfy this but it can only be used for the simpler agreements such as maintenance and service contracts. The structures of the more complex PPPs, such as joint ventures and Build-Operate-Transfer (BOT) contracts, make the procedure inefficient. Despite this inherent incompatibility, fear of corruption makes governments reluctant to contemplate alternative procurement procedures.

Any alternative procedure must satisfy the transparency requirement. The use of "behind closed doors" negotiations adopted by the UK has raised the suspicions of public employees and the general public, thus damaging the standing of PPPs. The very appearance of corruption will dissuade many private investors and injure the credibility of the parties involved.

This is especially important in Cyprus where, due to the small size of the community and the ties between families, it is easier for corruption to take place or to be alleged. Making clear publicly that everything is above board will make it more difficult for aspersions to be cast on the credibility of the scheme or the people involved in it.

Monitoring and control systems are also necessary to protect future governments. The temptation to sign a BOT contract is great and the length of time needed for infrastructure projects to be realised means that the government that signed the contract will not have to undertake the repayment of it. That onerous duty will pass to the next government.

Comparison of PPP suitability in different sectors

As mentioned before, PPPs are very context-based. While one sector may be ideally suited to such a partnership, another may be completely incompatible with it. Comparison between two sectors can be difficult, as there may be no common ground between them. Sectors can be divided into two types: sectors in which operations are traditionally contracted out to private firms, and sectors that are traditionally handled by the state. The past treatment of different sectors affects the way in which the public views their privatization.

Reactions to PPPs have differed in intensity from one sector to another, with stronger opposition shown in areas like public health and education that are linked to fundamental human rights. Less opposition is shown to sectors such as waste management and construction that belong to the second type. It is nearly impossible to make a comparison between the two types of sector, as they require different approaches from both the public and the private operators. Neither is inherently unsuitable to privatization but greater caution is required in areas which are more vulnerable to deterioration after the process is finalised.

Health care

In the field of health care, one of the most sensitive subjects of PPPs, reaction to them has been strong. There are fears that close association with industry could have negative effects for the health bodies involved and ultimately the public interest would suffer. A great number of campaigns against PPP projects involving public health were organised, especially where hospital privatization was concerned.

The motives of the private health sector to become involved are looked upon with even more suspicion than in other sectors. The industry increasingly operates under a spotlight and has been repeatedly criticised of doing little to meet public health needs. It has often been pointed out, at the international as well as the national level, that working in ‘partnership’ with leading public health institutions at all levels is an effective way of countering that negative image.

Another argument put forward against the use of PPPs in public health is that public-private initiatives can redirect national or international health policies and priorities. They can defeat crucial national efforts already under way. They are also often seen as promoting conditions that favour branded products and newer, more expensive drugs.

In America, although PPPs have been tried and tested in various areas, their use in the health care field is relatively new. In Los Angeles such partnerships have only been in place for a couple of years and the cause of their introduction was a severe financial crisis faced by the county in 1995. Matters seem to be improving but progress must be cautious so as to safeguard the quality and availability of services for everyone.

In the UK, by contrast, there has been considerable co-operation and partnership between the National Health Service and the private sector for quite some time. For example, general medical practitioners and dentists are independent contractors. What is being discussed now is the widening of this co-operation. With evidence showing that Private Finance Initiative (PFI) hospital schemes are unnecessarily expensive there are concerns about value for money, inflexibility, risk transfers and service cuts that have not been adequately addressed. There is no resistance to wider use of PPPs as such, but the way in which they will be effected is much debated. PFIs may still be in their infancy for hospitals and schools, but already there are problems and obstructions to their development that should be addressed before other schemes are undertaken.

In Canada, where PPPs have been enthusiastically accepted, there has been intense reaction against their use in health care, with many people pointing at the UK as an example of the unsuitability of this sector for such treatment.

Public confidence in health care privatization took another blow when a loophole in the private ambulance field was discovered in the UK. People involved in the private ambulance sector are allowed to drive casualties to hospital under a blue light without first having to undertake specialist training. At least one provider of such services was found to have a record of serious convictions relating to dangerous driving. Such people are not required to undertake special driver training as no regulatory framework exists. The government has said that it is aware of the anomaly in standards and is considering a change in legislation, but much damage has already been done.

This type of sector, one that is closely linked to fundamental human rights, is difficult to privatize. There is strong public resistance to the wider introduction of PPPs in education or health care amid fears of lower quality and limited availability of services. Past experience in the UK has shown these fears to be, if not justified, based on reality.

Health care in Cyprus

Cyprus has, so far, refrained from using PPPs in the field of health care. No matter how flexible and comprehensive the legal framework is, privatization of such a sector should not be undertaken lightly. In a country like Cyprus, where PPPs are still a fairly recent development, the likelihood of falling into traps and making fatal mistakes is even greater, due to a lack of experience in PPP management. The sensitivity of this field requires more expertise in handling PPPs than Cyprus has at the moment.

When the time is right and there is confidence in the system of PPPs, the option to privatize health care may be taken up. But there must be exhaustive research done beforehand to ascertain the suitability of any aspect of health care for PPP treatment and to ensure that the quality and availability of the service is not compromised. The government should remain cautious in following that path and learn from the mistakes of the countries already involved in the process of privatizing their health care systems.

Construction

The public more easily accepts the privatization of the second type of sector though there is still some distrust of the process. PPPs are most commonly used in the construction area, whether it be roads or buildings, with the type of agreement modified to fit the situation.

In Ireland the National Roads Authority has enthusiastically embraced PPPs. So far 11 schemes have been identified in the national roads improvement programme to be developed as public-private partnerships projects. The contracts used for the public-private partnership road schemes will be design-build-finance-operate contracts with a long-term concession period of no less than 30 years. The Authority recognizes it has a duty to ensure that the public-private partnership projects are successfully implemented to complete its 2000-2006 roads program and effectively redress current deficiencies which threaten regional development and economic growth.

The US has used PPPs in road and other construction as well as using private money successfully to run its prisons and is exploiting the same ideas to turn around its schools. Last year, in what was seen as a groundbreaking arrangement, $80m from private investors was used to build and equip Niagara Falls High School in New York.

In the UK PPPs are already well established as a way of paying for new roads and prisons. For example, there are now eight new private prisons, with more in the pipeline, and major road schemes like the Thames crossing and the Birmingham relief road are being financed through PFI.

The private management model has already proved effective in UK and US prisons, where it has been easier to push through ideas because "prisoners don't have the same public sympathy". Compare this to the public reaction when PPPs were applied to schools and hospitals where the affected people are closer to the public’s heart and it will immediately be obvious how important public opinion is to this process.

The complex nature of PFI contracts and the political obstacles involved in getting large, controversial schemes such as the London Underground PPP off the ground mean that progress in some areas has been slow. There has also been great resistance from Trade Unions as workers fear for their jobs.

The ongoing need for transparency is highlighted by the reaction of employees in the UK and the US. Although employees are at the core of the emotionally charged anti-privatization argument, they often stand to benefit the most from privatization. This is because they are affected the most by, and are pivotal to the success, of any privatization contract. And yet the reaction of civil employees to PPPs has been vigorous and in most cases has involved the Trade Unions.

Before any government or local authority contracts with a private company, it should work with the company to evaluate how privatization will affect current civil employees. Any reduction in staff or changes in benefits or job positions should be part of the contract negotiations and the employees should be made aware of the government’s attempts to ease the transition for them.

Construction in Cyprus

In Cyprus, construction projects are the most popular area for PPP treatment, with CYP 158 million allocated to roadworks, 20-30 million for an Archaeological Museum, 16 million for schools and 35 million for waste management. Eight projects in all have been identified as suitable for PPPs, and a Steering Committee has been set up to examine each one.

The most advanced and ambitious PPP scheme planned in Cyprus is the development of the Larnaca and Paphos Airports using the BOT method. Last year PriceWaterhouseCoopers agreed to draft the procurement documents to be used in the selection of the concessionaire who will undertake to develop and operate the airports. Pre-approval forms have already been given to interested parties and the evaluation procedure is under way.

The House of Representatives has recently given its approval to the plans. The finalization of the BOT agreement with the chosen private party and the commencement of the development works are expected to take place during 2002.

The Cyprus Tourism Organization has prepared bid documents for the development of five marinas in Paphos, Limassol, Larnaca, Ayia Napa and Paralimni using the BOT method and the relevant legislation has recently been approved by the House of Representatives. The procurement process is expected to begin shortly.

The same method has been approved for use in the development of the seaport at Larnaca. PriceWaterhouseCoopers has undertaken the drafting of the procurement documents and the procurement process will take place in 2002.

Cyprus has not remained unaffected by employee problems. Fear of redundancies and cutbacks in wages has driven civil employees to take strong measures against privatization. The decision to use PPPs for the development of the Paphos and Larnaca Airports has resulted in a forceful reaction by the affected employees, culminating in a number of strikes and protests at the airports.

Public v private interest

The public and private operators must understand and respect each other’s goals otherwise the planned PPP is doomed to fail. Partnerships are sustainable only if they are mutually beneficial. They are effective only to the extent that the goals of the major stakeholders are mutually compatible and only if those goals are understood and accepted by all parties. For partnerships to function effectively, the goals of the different parties do not have to be identical, they merely have to be compatible. For partnerships to function effectively the goals of the different parties do not have to be identical, they merely have to be compatible.

In general, private sector companies prefer the contract to serve as the major regulatory mechanism. Local governments like to have a wider regulatory discretion. This difference is usually settled during negotiations and upon signing the agreement the matter is decided, for better or for worse.

When we talk of partnerships we must be very clear about the objectives of companies. A private company is driven by profit and it will strive to obtain the most favourable terms to achieve that goal. It should not be forgotten that corporations have a fiduciary legal duty to maximize profit for their shareholders.

If unregulated, this pursuit of financial gain can lead to under-investment in the human and social capital that is necessary for meeting the basic infrastructure needs. Governments must maintain responsibility for ensuring that adequate and affordable infrastructure services are provided for all citizens.

A conflict of interest may arise where the public sector, in the form of a local authority, wishes to tie the partnership to operate within its community so as to attract and retain local businesses. The ultimate aim of the private company to maximize its profit may work against the wishes of the public sector in this case, especially if the location is commercially unattractive or remote.

As the regulator of the service, the government must ensure that basic social needs are met and that the individual goals of the other parties are honoured. This requires the public sector to take charge and find the appropriate balance between making a partnership attractive to private firms and protecting the rights and interests of the citizens.

Flexibility, both in the legal framework and in the agreement itself, is very important for both the public and the private partners as the contracts usually last for an extended period of time. During the life of the contract the nature of the services and the methods of delivery may change. Other changes may also take place and it inevitably it will be necessary to respond to unforeseen circumstances. Clear procedures for dealing with such events will reduce the chance that they will have a negative impact on the partnership or the project itself.

Conclusion

PPPs constitute one of the most promising forms of public-private collaboration, but even their proponents point out that they are not a cure-all. Private involvement does not provide an automatic solution to all the problems faced by government. What a PPP may do is help state-owned businesses provide better services for their customers while allowing the government to retain responsibility for public interest issues.

All governments must be very careful when choosing PPP projects and deciding on the partners to handle them. Governments that are just beginning to use PPPs should be doubly careful. Many countries have made mistakes when applying this system of privatization and governments should learn from them and try to avoid making the same mistakes from the very beginning.

Before reaching the decision to privatize, the government or local authority should examine the sector and project in question to see if a PPP is the right way to go. Some sectors are not suitable for PPP or require extensive preliminary work.

The government should also make sure that it is capable of meeting the costs involved in the contract. Many PPP contracts, such as BOTs, commit the parties to long-term expenses and great care must be taken to ensure that the financial demands of the contract do not get out of hand.

When a government or local authority does decide to privatize, it is crucial to do so in the correct way. Transparency and co-operation with the other stakeholders are key elements. The procurement must take place in a competitive environment where bidders that are financially stable, experienced and have the ability to deliver the required services should naturally be at the forefront. The terms and conditions of the agreement are vital to the effectiveness of the project and should be examined carefully.

The Institute of Public Policy Research (IPPR) in the UK released its long-awaited report on PPPs in June 2001. The report questioned whether PFI projects were really good value for money in health and education, as opposed to the roads and prisons sectors.

Instead, the report argued for a pragmatic rather than a dogmatic approach to the use of the private sector in providing public services, and claimed that several flagship privatizations by the British Government, including the London Underground and the National Air Traffic Services, had been mishandled.

The lessons to be learned from the IPPR report are useful for all governments involved in PPPs. To use a cliché, "some things should not be rushed". If a sector is not ready for privatization it should be left alone. If a sector seems suitable, then the best possible solution should be found without rushing into a PPP. Cyprus, and any other country just beginning to implement PPP measures, must take care that the proper foundations are set. Countries that have a history of using PPPs must take care that past mistakes are remedied. Only then will the public begin to take PPPs seriously and consider them as a legitimate option.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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