1.Brief perspective of the portuguese legislation in the real estate sector
In Portuguese Law a true cycle of legislative revision is under way for the real estate sector.
At the beginning of this year, several diplomas were published, namely, the Decree-Law no. 12/2004, of 9 January, which regulates the legal system for entry and permanence in the construction activity; the Decree no.14/2004, of 10 January, which establishes the requirements and procedures to be fulfilled for the concession and revalidation of registration title-deeds; the Decree no.15/2004, of 10 January, which establishes the rates owed for the administrative procedures regarding the issue of licences and registration title-deeds for the construction activity; the Decree no. 16/2004, of 10 January, which establishes the minimum number of personnel for companies classified for carrying out the construction activity; the Decree no. 17/2004, of 10 January, which establishes correspondence between the kind of qualifications contained in the licences of construction companies and the values of the works that their title-holders are authorised to execute; the Decree no. 18/2004, of 10 January, which establishes which are documents of proof of fulfilment of the requirements for entry and permanence in the construction activity; the Decree no. 19/2004, of 10 January, which establishes the categories and sub-categories related to the construction activity, as well as the Decree-Law no. 6/2004, of 6 January, which establishes the system of revision of prices for public and private works contracts.
The government has already announced that the new System of Urban Construction [Regime de Edificação Urbana (RGEU)] is practically concluded; this diploma will constitute the basis of the regulations regarding construction.
In a recent seminar promoted by the Association of Civil Construction and Public Works Industrialists on the theme “Construction Economy”, the government also informed that the new diploma that will regulate the Legal System of Public Works Contracts is also almost concluded, with adaptation to the community system.
On 3rd June of this year, a new decree-law was also approved, not yet promulgated on the date this work was written, that regulates the new Real Estate Mediation Law; a new Urban Leasing Law is also foreseen for the near future.
All these new regulations together with the equally recent alterations to the Municipal Tax on Real Estate Code [Código do Imposto Municipal sobre Imóveis (CIMI)] and the Municipal Tax on Onerous Conveyance of Real Estate [Código do Imposto Municipal sobre as Transmissões Onerosas de Imóveis (CIMT)] deeply alter the civil construction system, real estate law and respective related rights in Portugal, with the aim of enlivening the sector and harmonising with community rules.
It seems to me that this initial framework, though not included in the theme, will be of interest to My Colleagues, since we are dealing with comparative jurisprudence.
2.
THE GENESIS OF PUBLIC-PRIVATE PARTNERSHIPS IN Portugal
In Portugal, the PPP concept has been known for only a short time.
The first experiences occurred with the SCUT concepts, which turned into a system of design, construction, maintenance and exploitation of stretches of motorways in a no charge or virtual toll system for users, whose administration was approved by DL 267/97, of 2 October.
The SCUTS permitted the construction of about a thousand kilometres of motorways in partnership with private entities that support the formation of capital and the corresponding risks inherent to the tasks that are the object of the concession.
With recourse to the Project Finance the PPPs substitute the traditional model with costs shared between the initial investment and the exploitation costs, for rendering of services costs to be paid from the moment the investment begins to be exploited, the assets reverting to the grantor public entity at the end of the period of concession.
Previously, the concession agreement made with a private consortium created to build the Vasco da Gama Bridge, called Lusoponte, was the first experience of a Project Finance contract approved by Decree-Law no. 168/94, of 15 June; it was a concession agreement whose bases included the design, project, construction, financing, exploitation and maintenance by the concessionaire, the obligations of the grantor State, in financial matters, being limited to handing over a subsidy attributed by the European Union, without prejudice to the concessionaire’s right to financial rebalance.
The Project Finance consolidates a form of financing guaranteed by the revenue, assets and duties of a specific project, as it is a financing structure based on the activity of a certain project and not on the credit analysis of the private entity as is the case in corporate finance. Therefore, the Project Finance is based on the project’s capacity to generate resources that guarantee the payment and remuneration of the invested capital.
The Audit Court, in the audit scope on the application of the contractual model and on the agreements of financial restitution to the State-Lusoponte concession (Report no. 31/2000, 2nd section, June 2000) defines Project Financing as “a means of transferring to the private sector the responsibility of constructing, financing and exploiting large public undertakings, which were traditionally developed by the public sector”, adding “the financial structure of a Project Finance is based on the prospect of the financial means released by the project, without effective need to resort to the traditional forms of guarantees rendered by the governments, or by the private entities involved in the development of the project. It is the cash-flows generated by the exploitation of the undertaking that should, by themselves, guarantee the coverage of the financial charges and assure the desired remuneration for the equity capital invested”.
The assumption of risk undertaken by the private entity is counterbalanced, in terms of the concession agreement, by the prevision of exception clauses that attribute to the concessionaire a right to restitution of the financial balance, in the terms of a complex financial equation.
3. health partnerships
3.1. Juridical regulation of health partnerships
The first legal approach of the development of partnerships and private financing appeared with Decree-Law no.185/2002 of 20 August which defines the legal system for health partnerships with private management and financing.
As can be read in the preamble of this Decree-law, the health partnerships fundamentally aim at obtaining better services by sharing the risks and mutual benefits among the public entities that are responsible for the public services and other entities that associate with them permanently. The management contract becomes a privileged instrument that covers the nature of a true public service concession contract.
It is thus defined in article 8 no. 2 “the management contract may also have as its object the design, construction, financing, maintenance and exploitation of the business, or of a functionally autonomous part.”
Besides referring the need for guarantees of capacity, technical qualification and financial capacity that the managing entity must offer, article 10 demands that it be a business corporation with headquarters and main administration located in Portugal and whose exclusive objective is the exercise of the activity to be awarded.
Article 11 clarifies that the management contract may not exceed the period of 30 years; however, it may be extended in contractual terms.
Article 14 determines that the programme of procedure prior to contracting, as well as the standard specifications of the management contract are approved by superior executive decree, with the programme of procedure and the particular specifications relative to each one of the management contracts being approved by order of the Minister of Health.
The duties of the managing entity are described in article 16, of which we point out the need for it to attribute to the execution of the works and to the exploitation of the service the human, technical and financial means necessary to the good execution of the contract, as well as carry out the tasks necessary to the good maintenance of the premises and equipment, and accompany the technical evolution of the exploitation process that was adopted, maintaining the quality standards defined in the contract.
The managing entity should also fulfil the community rules and principles on public contracts regarding the execution of public works undertakings; it may not alter its corporate object, nor reduce its share capital, nor alienate the share capital to third parties or cede its contractual position or proceed with the transformation, merger, division or dissolution of the company without prior authorisation from the contracting public entity under penalty of nullity of the act.
In article 18, the same diploma establishes the forms of remuneration of the managing entity, and article 22 the responsibility of the managing entity for obtaining the financing necessary to develop all the activities that are part of the object of the contract; it is not opposable to the contracting public entity any exceptions or means of defence that result from the loan agreements established by the managing entity with its financing entities.
Article 33 foresees that any lawsuits must be resolved appealing to arbitration; the respective contracts should establish the composition and rules of operation of the arbitration courts.
3.2. Regulations of the general conditions of the procedures prior to the contracts
The Superior Executive Decree no.10/2003, of 28 April, approved the general conditions of the procedures prior the management contracts for the creation of health partnerships establishing the following phases of procedure prior to contracting:
a) Announcement;
b) Public act;
c) Qualification;
d) Selection of the proposals;
e) Negotiation;
f) Award;
g) Formation of the contract.
The announcement for the start of the procedure is published in the 3rd series of the Diário da República and in the Official Journal of the European Union. The announcement will identify the contracting public entity, the object of the contract with indications as to the duration of the contract and the financing and payment conditions, the juridical nature of the entities that may be admitted to the tender, the admission of alternative proposals, the criteria for qualification of the candidates and appraisal of the proposals, the specificities regarding collateral or any guarantees that are demanded eventually, as well as the other formalities indexed to no. 3 of article 6.
Article 10 establishes the nature and nationality of the candidates; candidates that are nationals of other Member States of the European Union, or established there, and of the contracting parties of the European economic space agreement, may tender on equal footing with the national ones.
This Superior Executive Decree determines the qualification documents and its requirements, the manner for presentation of the proposal and its wording.
In the public act, the proposals and documents of the candidates are opened followed by the opening of the proposals and qualification of the candidates.
Article 21 and following regulates the possibility of claims being made and, in that case, the interruption and subsequent reopening of the public act, followed by the opening of the proposals and other formalities foreseen in articles 26 to 31.
The procedure of qualification of the candidates is carried out by the committee for evaluation of proposals, which evaluates the applications, shortlists them and establishes the prior qualification of the candidates.
After the pre-qualified candidates have presented the final proposals, the selection of the proposals is carried out before the evaluation committee; the selected short list is sent to the Ministers of State, Finance and Health.
There follows the negotiation phase with the candidates, which will be made by the committee for evaluation of the proposals and the candidate’s representative delegation. The committee will produce a reasoned report of the results obtained that will have to be approved by the mentioned Ministers.
Finally, the award will be made though it may be revoked when the awardee does not fulfil the obligations that have been established for him in the programme of procedure; in that case it may be awarded to the candidate that came second.
The candidate must also give security in the terms foreseen in article 46, and only then will the formation and signing of the contract take place.
4. Superior Executive Diploma of Public-Private Partnerships
Only with Decree-Law no. 86/2003, of 26 April, did Portuguese Law regulate and define the general rules applicable to the State’s intervention in the definition, design, preparation, tender, award, alteration, inspection and overall supervision of Public-Private Partnerships.
In its article 2, this diploma defines the Public-Private Partnership as the contract or combination of contracts by means of which the private entities are put under obligation in a lasting manner before a public partner to ensure the development of an activity apt to satisfy a collective need, and where the financing and responsibility for the investment and exploitation is totally or partially entrusted to the private partner.
The preamble of the Decree-Law clarifies that the final objective of the Public-Private Partnerships is to use the traditionally better management capacity of the private sector, so as to improve the quality of the public service that is rendered and generate savings in the use of public resources.
No. 2 of the mentioned article 2 defines as public partners:
a) The State and State Public Entities;
b) The Funds and Autonomous Services;
c) Public Companies and Entities it set up with the aim of satisfying common interests.
No. 4 of the same article exemplifies some contracts included as instruments of juridical regulation of the collaboration relationships between public and private bodies, such as the public works concession agreement, the public utility concession agreement, the continuous supply contract, the rendering of services contract, the management agreement, and the collaboration contract when at stake is the use of an already existing business or infrastructure belonging to other entities other than the public partner.
No. 5 of the same article expressly excludes from the application scope of this decree-law regulating the rules for Public-Private Partnerships:
a) The public works contracts;
b) The leases;
c) The public supply contracts;
d) All the public-private partnerships that involve an up-dated accumulated expense of less than ten million euros or an investment of less than twenty-five million euros (excluding from these amounts those coming from community funds);
e) All the other contracts to supply goods or for the rendering of services with a duration period equal to or less than three years, that do not involve the automatic assumption of obligations for the public partner at the term or beyond the term of the contract.
Article 4 defines the essential purpose of the PPPs as the increase of efficiency in the use of public resources and the qualitative and quantitative improvement of the service, brought about by efficient control methods that permit its permanent evaluation on the part of potential users and the public partner.
The presuppositions for launching and contracting a Public-Private Partnership are:
a) Whenever is the case, the fulfilment of the rules regarding the pluri-annual financial programme included in the budgetary framework law;
b) The clarification of the objectives of the Partnership with the definition of the intended results and a suitable attribution of the responsibilities of the parties;
c) A Partnership model that offers advantages to the public partner in relation to other alternatives for achieving the same goals, and that, simultaneously, offers the private partners a probability of obtaining suitable remuneration for the amounts invested and the degree of risk they incur;
d) The prior adjustment to the applicable rules, as well as obtaining the required authorisations and administrative opinions;
e) Models that preferentially exclude any clauses or long term indemnity systems on the part of the public partners to the private partners;
f) The adoption of the measures and recognition of the requirements appropriate to obtain an economically competitive business result.
Article 8 establishes that the evaluation of the PPPs is made by a supervisory committee consisting of a minimum of two members and a maximum of five in representation of each one of the Ministers of Finance and of the sector. The supervisory committee may issue the recommendations that it considers convenient according to the evolution of the works.
When the Entity charged by the ministry of the sector with the preparation of the project considers that it is ready to go on to the launching phase, it will notify the supervisory committee in writing and will send the necessary documents to instruct the ulterior order from the minister of the sector launching the partnership.
Besides the Supervisory Committee, before the issue of the order from the Ministers of Finance and of the sector who approve the conditions for launching the partnership, also necessary is the issue of two independent opinions, non-binding on the part of the members appointed by each of the ministries to the Supervisory Committee, as is set down in no.7 of this article 8.
After the issue of these opinions, the Ministers of Finance and of the sector approve the conditions for launching the partnership by means of a joint order.
The joint order from the ministers shall contain:
a) The programme of the tender;
b) The specifications;
c) Analysis of the options that determine the shape of the project;
d) Description of the project and its method of financing;
e) Demonstration of its public interest;
f) Justification for the model of partnership chosen;
g) Demonstration of the affordability of the costs and risks resulting from the partnership according to the pluri-annual financial programme of the administrative public sector.
There follows the creation of a Committee for the evaluation of the proposals, appointed by joint order from the Ministers of Finance and of the sector, which, besides evaluating the relative merit of the proposals, should quantitatively evaluate the risks and expenses in which the public partner incurs.
As soon as the partnership is awarded, the powers of supervision and control of the execution are carried out by an entity or service to be indicated by the Minister of Finance for economic and financial matters and for the other matters to be indicated by the Minister of the sector.
The Ministers of Finance and of the sector are charged with the overall supervision of the partnerships, carrying out the permanent supervision of the partnerships with the objective of evaluating their costs and risks and improve the process of setting up new partnerships.
The ministers should also take the necessary measures towards an efficient disclosure of the knowledge acquired by the entities entrusted with the supervision of the partnerships, as well as good collaboration between them.
The partnerships may be altered by agreement of the parties or by initiative from any of them, under cover of any legal or contractually applicable provisions in the terms foreseen in article 14.
This diploma also altered some articles in Decree-Law no. 185/2002, of 20 August, that regulates the health partnerships with private management and financing.
It must be pointed out that Decree-Law no. 86/2003 is of imperative nature, prevailing over any other rules relating to public-private partnerships whenever it conflicts with others, even if created by special sectorial systems, as is set down in its article 3.
5. Advantages and disadvantages of the PPPs
The restriction on the possibility of contracting loans that imply the increase of the net indebtedness of public entities (see municipalities) makes recourse to Public-Private Partnerships a way of finding an alternative to the traditional financing of the local authorities for implementing infrastructures and collective equipment with greater efficiency and effectiveness.
This recourse to PPP allows the municipality, on selling the project to the entity with whom it is making the partnership, even to have revenue instead of an expense, as it is the private company that pays the project of architecture, engineering and the contractor.
This means may, naturally, even contribute to increased electoral value, as it will allow the public entity to carry out more works in apt time.
Perhaps only in following administrations, that is, after the completion of the works, will the public entities have to pay a suitable consideration to the private entities, as remuneration for the updated value of the costs they bore in the design and construction phase, plus the exploitation costs that are not compensated for by revenue. As a matter of fact, this consequence is perhaps the greatest disadvantage of these contracts, taking into account that they are made for twenty or thirty years, or possibly more, if prorogations are admitted.
In Portugal the financing models used in the Scuts were studied bearing in mind a certain volume of traffic; however, with the alteration in the toll system, there proved to be a significant increase in costs, since with real tolls there would have been much less traffic.
In the traditional way, in order to obtain results the public entities had, on the contrary, to finance them and run into initial public expenditure in order to make the payments inherent to the projects until these were completed.
The models of financing with recourse to Public-Private Partnerships also have another advantage.
That is, the investments being made by private entities, which naturally want to make a profit on their investments, if the contracts duly safeguard the guarantees of the public entity and of the public service they are for, we will surely end up with a service that will cost less, either in terms of initial investment, or in terms of exploitation costs, or in costs brought about by delays or project errors. Besides, if that is not so, and in the presupposition that the contract safeguards this, it is the private entity and not the public entity that will suffer the losses.
Therefore, it has to be concluded that the adoption of Public-Private Partnerships effectively permits a more efficient allocation of resources than the public investment made directly by the State.
6. The recent introduction of partnerships in higher education
The Public-Private Partnerships will also go ahead in the canteens and residence halls of higher education institutions as was recently revealed by the Assistant Secretary of State of the Minister of Science and Higher Education.
The proposal of the model of Public-Private Partnerships to correct the lack of social measures in schools was made by several higher education institutions, amongst them the University of Coimbra.
This way, the aim is to ensure the construction of canteens and residence halls whose construction and exploitation will be the responsibility of private entities, with the cost for such services guaranteed to the students at prices subsidised by the State.
7. New Public-Private Partnerships
The Portuguese State is foreseeing the launching of several public tenders for the design, construction and financing of ten new hospitals until 2007 as Public-Private Partnerships.
The president of the Mello Group, which is the largest group operating in Portugal in the Health area, defends a progressive withdrawal of the State from providing health care, by increasing the Public-Private Partnerships programme so as to allow the private entities to go from the present market share of 3% to 20%. Besides, this group defends that to resolve the problems of the National Health Service in Portugal, the private entities should reach a market share of 50%.
It might be of interest to mention that in a recent interview to the newspaper Diário Económico, the person responsible for Grupo das Misericórdias para a Saúde (GMS), another of the groups in Portugal interested in winning tenders in this area, calculated the cost of each presentation of a credible proposal for tender at about one million euros.
It is known that for the construction and management of hospitals the dominant criteria in the evaluation of the proposals from the candidates are the technical quality of the proposal and the resulting charges for the State.
The Secretary of State for Public Works recently referred, in an interview of April this year, at a corporate forum, that “in the construction activity scope, the adoption of the system of Public-Private Partnerships (PPPs), namely for the development of the national network of motor-ways, results from the objective of accelerating the completion of the national road plan”.
The Ministry of Justice allowed the recourse to Public-Private Partnerships for the construction of prisons. The construction and maintenance of prisons will be an example of a non-profitable exploitation, as in this case it is not foreseeable that revenue will come from the users; the State will be responsible for the payment of services rendered, and the public entity will only gain the added value of efficiency in the projects and construction as well as in the maintenance and supply of services.
8. Conclusions
In the construction scope the PPPs have application in the contracts made between an owner of public works and a public works contractor, that have as its object both the execution and the joint design and execution of public works, having as compensation the right of exploitation of the works accompanied or not by payment of a price.
The partnerships between the public and private sectors constitute an important strategic instrument of modernisation and expansion of the public services, allowing the governments to economise means and improve the efficiency and quality of the public services rendered, financially assuring its future feasibility.
Until now, in Portugal, the majority of the projects were developed mainly in large undertakings in the Energy and Transport areas, at present extended to the Environment and Defence areas, as well as the Health, Education and Justice sectors.
At the moment, Portugal already has good legislative framework on the PPPs, although in the outline law of 26.04.2003 the creation of more special sectorial systems is expressly foreseen with own rules whenever it is so justified.
The development of Public-Private Partnerships thus opens a market for consultants, architects, designers, contractors, investors and, naturally, also lawyers.
© UIA
JORGE LEÃO - Advogado
2 September, 2004
UIA 48th Congress – Geneva
Av. da Boavista, nº 1681 – 7º S. 1, 4100- 132 Porto
+351 223 391 990
+351 223 391 999
jfl@jorgeleao.pt