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25 February 2020
The previous experiences of various countries prove that public-private partnerships (PPPs) are an effective method for developing long-term infrastructure projects. When applying a PPP model, the government remains focused on its primary regulatory role, while the private sector supplies funds and provides expertise for the benefit of the government and, eventually, the public.
The private sector entity commonly allocates the funding for the project, reducing the burden of costs and project risks. However, for a PPP to be successful, a comprehensive legal framework based on the principles of transparency, competitiveness and accountability is crucial.
On 7 September 2017 Parliament passed Law 48 Regulating Public-Private Partnerships (PPP law). The law aims to attract foreign direct investment and bring specific expertise to Lebanon. Further, it institutes a legal framework that is, to a certain extent, in line with international standards and presents no particular red flags. This article analyses the new legal framework for PPPs in Lebanon, the relevant authorities and the law's advantages and limitations and showcases PPP projects which are currently underway in Lebanon.
Lebanon's history of using PPP-like structures dates back to the late 1950s, when the Beirut-Damascus road became one of the first successful PPP-like concession in the history of the Middle East. In the 1960s, the Beirut port and Electricité du Zahle, a private electric company, were both the results of successful PPP projects. In 1998, through a build-operate-transfer agreement with Canada Post and SNC Lavalin, the Lebanese National Postal Services was transformed from an inefficient government-owned entity into a private multi-service operator.
In 2000 the government passed the Privatisation Framework Law (228/2000) and increasingly began pursuing private participation in infrastructure projects. This law sets out the general framework for privatisation, including PPPs, and established the Higher Council for Privatisation (HCP).
Before the new PPP law came into force, the procedural rules applicable to PPP projects were mainly found in the Public Accounting Law 1963 (Law 14969), which sets out a general framework for public procurement. Due to transparency issues and limited funds resulting in poorly planned projects, among other deficiencies, the Public Accounting Law was deemed to be unsuitable for PPP projects, justifying the need for the enactment of a PPP-specific law.
The PPP law responds to issues undermining the successful implementation of PPP projects in Lebanon as it provides for more transparency along the lifecycle of PPP projects and certain de-risking instruments that would positively contribute to the commercial viability of such projects. Key provisions of the PPP law are summarised below.
Scope of application
The PPP law defines a 'PPP project' as any project of public interest initiated by the public sector and managed and financed, in whole or in part, by the private sector, which must carry out one of the following activities:
The new PPP law renames the High Council of Privatisation the High Council of Privatisation and PPP (HCP) and vests therein the authority to:
Further, the HCP establishes a PPP project committee for every admitted project. PPP project committees are chaired by the secretary general of the HCP and contain members of the relevant ministry, the ministry of finance and, if applicable, the regulatory commission regulating a specific sector (eg, electricity and telecoms). The PPP project committee will evaluate the technical, economic, legal and financial aspects of the project in collaboration with selected specialised consultants, subject to the approval of the HCP, thereby identifying the criteria for qualifying the private partner.(3)
In order to ensure competitiveness in the tendering process, the PPP law requires private partners to submit both a technical and a financial proposal.(4) Further, at least three offers must be submitted to the HCP. If this threshold is not reached, the project will be reopened for another round of bidding.(5)
Once a private party is selected, it must incorporate a Lebanese joint-stock company that will act as the PPP project company and oversee the implementation of the PPP project. The project company will be exempted from nationality restrictions set out in the Code of Commerce and is not required to appoint an additional auditor or obtain a work permit for its chair if they are not Lebanese.
The PPP law defines a 'PPP agreement' as the main legal instrument regulating a PPP project, together with its annexes, undertakings and related guarantees. By governing the contractual relationship between public and private parties and defining the procedures that should be applied by each party and their respective obligations, the PPP law aims to provide private parties with sufficient clarity and visibility as to the implementation of the project.
Besides its basic features – such as the parties' rights and duties and the PPP agreement's duration – a PPP agreement must include a number of mandatory provisions as set out in the PPP law, such as:
This set of rules is perceived as a significant development, as previous project failures in Lebanon have arguably arisen from the implementation of flawed or incomprehensive contractual provisions.
Although the PPP law is relatively comprehensive with respect to parties' rights and obligations and the overall regulatory framework for PPP projects, it still presents certain limitations.
With regard to financing, the effect of the PPP law on parties' ability to enter into a direct agreement remains to be defined. In a PPP context, a 'direct agreement' is an agreement that allows a lender to step into the project company's shoes when the project company is failing to meet its contractual obligations and there is a risk of the public entity terminating the contract.
In general, direct agreements aim to ensure the continuity of the project via collateral warranties. Further, lenders are often granted step-in rights, allowing them to replace the private company in continuing the contractual obligations under the project agreement. Lenders themselves rarely wish to be involved in taking over a project and instead designate a substitute entity to step in on their behalf. Step-in rights usually serve both defensive and offensive functions by protecting a lender against termination of a contract and allowing it to seize control of the company's rights under the project contract.
As noted earlier, the PPP law is relatively silent on matters of financing and provides no specific means to secure financing. It is left to the parties to agree such matters in accordance with the principle of freedom of contract in Lebanon.
With regard to issues of security over PPP project assets, the PPP law specifies that the public entity may put land owned by the state at the disposal of the private entity for the project, but does not specify anything further regarding the possibility of security being placed over assets and properties of the state.
The PPP law further provides that risk allocation should be agreed between the parties under a PPP agreement, but is relatively silent in respect of risk allocation otherwise. As there is no standard Lebanese model for risk allocation in a PPP context, private entities can expect a level of uncertainty in this regard. The law is also not specific when it comes to matters of early termination of a PPP contract and the procedures applicable in events of default. It merely stipulates that the PPP contract should address project and service continuity in case of early termination or the project company's breach of its contractual obligations under a PPP agreement.
In light of the general principle of freedom of contract under Lebanese law – and considering that the PPP law is relatively silent in relation to matters of financing and security – it may be concluded that public entities and project companies may agree to enter into a direct agreement with lenders to grant them, for example, step-in rights in order to carry on with a project. Until the Lebanese courts address such matters, private companies participating in a PPP project must adopt a measure of prudence when contracting with Lebanese state entities and tailor their agreements accordingly. Further, private companies must ensure at all times that Lebanese state entities involved in a PPP project are operating within their mandate and prerogatives as defined under the applicable law.
Despite its limitations, the enactment of the PPP law is a long-awaited development that could contribute to more transparency and efficiency in the Lebanese framework for public procurement.
Several PPP projects have already been proposed or are in progress in accordance with the PPP law, including:
Lebanon can benefit substantially from the private sector's intervention, which can bolster its development and enhance its infrastructure across several industries, including water, electricity, waste management, transport, roads and schools. The PPP law is an indispensable tool which can enable the country to markedly increase its competitive edge in the region, attract foreign direct investment which is urgently required and help to create jobs, thereby ultimately increasing income and inducing economic growth.
For further information on this topic please contact Zeina Obeid, Ziad Obeid, Megan Thompson or Hassan Khalife at Obeid Law Firm by telephone (+961 1 36 37 90) or email (email@example.com, firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Obeid Law Firm can be accessed at www.obeidlawfirm.com.
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