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Specialist Counsel Kadri Matteus: the private sector could provide more innovative solutions to solve Estonia’s problems

2019-09-04

The interview was published in INFRA2019 newsletter on 3rd of September 2019. 

There has been very little talk about PPP (public-private partnership) deals in the public. In Estonia, the first that comes to mind is probably the deal between two businessmen and the mayor of Tallinn for renovating and maintaining Tallinn’s schools. However, on closer inspection we find that PPP deals are not so rare at all and could be used for national big scale projects as well.

So far, public-private partnership projects have been used mainly for carrying out smaller or medium sized national duties. Nevertheless, experiences elsewhere in the world and in the Baltic states have shown that PPP-projects can be a successful solution for creating or maintaining many infrastructural facilities. Kadri Matteus, a specialist council at COBALT law firm and a recognized expert and speaker in public procurement law gave us an overview about public-private partnership and the legal context around it.

How would you explain in short, what does PPP mean as a term?

There hasn’t been much talk about PPP deals so this term is actually unfamiliar to us. In essence it means that both the public and private sector are going to solve a public task together. It’s more than just a usual procurement contract, because instead of procuring a one-time construction work, for example for the construction of Tallinn-Tartu highway, with PPP there’s a transition of certain risk to the private sector. Also, the length of the co-operation is usually quite long, for example 25 or 30 years. The contractor, be that the country or the local municipality, will pay their private enterprise partner according to a long term scheme.

We don’t actually use the term as much because it doesn’t really differ from what the law calls the construction concession. There are unified rules in the European Union, according to which these sorts of projects are framed as construction concessions.

What sort of PPP projects can you find in Estonia?

The most well-known example in Estonia is probably the renovation of the schools in Tallinn, but actually the most recent project is the construction of the “super ministry” building. Riigi Kinnisvara (State real estate) gave the right of superficies of the state’s land to a developer from the private sector, who was supposed to erect buildings according to the government’s vision and later rent the building out to the state. It’s the most typical type of a PPP project in Estonia. In addition to that there’s the on-going construction of Regionaalhaigla’s (Northern-Tallinn Regional hospital) parking house as a concession project and another well-known object in Tallinn – the building of the social houses in Raadiku. Many local governments have built leisure buildings with construction concessions, too.

The thing that usually goes unnoticed is that almost all of the waste management in Estonia is done with the help of the private sector. In addition, the district heating service in Tallinn, that is delegated to Utilitas – the co-operation is regulated with a very long concession contract made in 2001. The same scheme works with many water entrepreneurs. Some regional governments do it themselves, others give it to the private sector. It is their decision whether they feel that they can provide the service themselves or if they will give it to the private sector, who could perhaps be more innovative, flexible and could manage to do things quicker. The courthouse in Jõhvi was built with a PPP deal and the police house in Kuressaare, so actually there are many examples of these kinds projects. What hasn’t yet been done in Estonia, are infrastructure projects: roads, tunnels, bridges, which is actually a very common PPP project elsewhere in the world.

Why should a state fulfill PPP projects?

Usually there are financial reasons behind PPP-projects. As has lately been said in media, we don’t want to increase the country’s debt. So if a long-term project includes some sort of a risk, it will transfer to a concession business and the expenses will be transferred to the concession business’ balance. This means that, deceptively, neither the state or the local government will not have debt.

Also, if the local government or the state is maintaining a public service by themselves, it has to do a public procurement for their every purchase, which is not the most effective way. This is where a concession contract could help. Usually contractors compete on the basis of the cheapest price. Because the price is fixed, the overall winner of the procurement will have the economic pressure to buy the necessary services from the financially best partner possible, that’s settled by the market. Therefore, the everyday maintenance of a private company is much more effective compared to the state or the local government. That’s a big argument to why we should do anything with the cooperation of the state and the private sector.

Why aren’t there any large-scale infrastructure projects fulfilled as PPPs in Estonia so far?

Financial considerations, nothing else. At least based on the recent opinion stories it seems that one important fear is that a PPP will cost more than the state’s own financing. And that is really the only downside. For example, there was a economic report released about Saaremaa bridge last year which stated that PPP was the most expensive alternative to financing the project. That makes PPPs largely a political decision. If we can’t afford a loan, then the road or a bridge will not be built, but if we really need this, we can use an alternative and partner with the private sector, which will not increase debt. What it finally comes down to is whether we care more about the high price of the PPP deal or the fact that the infrastructure development will be built at all. You just have to weigh the pros and cons.

What are the biggest risks regarding PPPs to private enterprises?

The main risk is usually the risk of demand. For example if the project is only financed by the end user. The state can ensure a certain fixed payment but it doesn’t cover all the costs of the project, it’s more like seed money. If the earnings are only collected from the end users, then the total income is purely dependent on the people that for exampe use the road and pay toll. Another risk is whether a company can fulfill all the requirements of the contract. You have to operate the infrastructure for the whole 30 years. It’s hard to predict all the expenses for a period that long. Generally, no-one will compensate the unforeseen expenses for the concessionaire.

But what are the main risks for the state?

I think that the main risk is, again, financial. It’s possible that as the time passes, taking loans would get easier for the state or local municipalities and it would be possible to carry out the same projects at a much better price than under a concession. Secondly, the state will most likely remain tied to the same company for 30 years. But what if that provider goes bankrupt for some reason?

Should we create a separate framework for PPP projects in Estonia? What is Estonia’s legal ground for PPP deals right now?

I think that in Estonia it’s enough if we frame PPP projects as construction concessions or service concessions. That’s why I don’t really see the need nor a realistic way of how to create a complementary legal framework. European Union law defines the term construction concession and prescribes quite detailed rules of how to carry out such procedures. Violating those rules would mean violating the European Union law.

Rather, the question is how to prepare contracts which will be signed in the end of the concession procedure. Will there be negotiations, what is the financing scheme, how is the project paid. For example, if a big fear is that the private sector will get rich, there are ways to manage risks with certain contract clauses that allow to review the paying schemes after some time. The public procurement law is already very long and I don’t see the need for a new law. A guideline or some recommendations that would provide guidance on how act well in the current legal framework would perhaps be helpful.

Do PPP projects have any legal limitations in Estonia?

Our state law prohibits delegating state’s core functions to the private sector. For example we can’t build private prisons, although it’s common in some places of the world. So we do have some limitations. Everything else, which is not state’s core function, could in principle be solved by PPP. There are no insurmountable legal obstacles, it’s purely a matter of rationality.

Are there any examples of PPP projects in the world that Estonia could learn from?

If we go abroad to see the different projects that can be done in co-operation with the private sector, we can get quite good ideas. For example in Lithuania there are many ports and bridges delegated to the private sector. The private sector may offer more innovative solutions to solve state’s problems, but it requires thinking outside of the box which is certainly difficult.

What do you think, what should be Estonia’s next big PPP projects?

I don’t exactly know how feasible it would be, but there has been discussion about the Tallinn’s train roundabout. Right now, we can’t ride a train from the western line to Peetri, for example. If we could build a train line to Tallinn roundabout, then perhaps it could be done as a PPP. Also, there has been talk about connecting the tramways to establish a tram connection to Viimsi. The city of Tallinn already has many experiences with PPPs and maybe would be more inclined to carry out new projects, too.