2 nd Serbian Property & Infrastructure Development Conference Metropol Palace Hotel, Belgrade Tuesday, February 21, 2017

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1 2 nd Serbian Property & Infrastructure Development Conference Metropol Palace Hotel, Belgrade Tuesday, February 21, 2017 Nenad Stankovic, Lawyer Njegoseva 19/II, Belgrade, Serbia; tel.: , ; fax: ;

2 PUBLIC-PRIVATE PRIVATE PARTNERSHIP ( PPP ) Main characteristics and drawbacks Tax aspect

3 DEFINITION OF PPP Public-private partnership is a longterm cooperation between the public and the private sector, in order ensure funding, construction, reconstruction, management, or maintenance of infrastructure and other facilities of public importance and the provision of services of public interest.

4 LEGISLATION IN SERBIA Law on Public Private Partnership and Concessions ( Law on PPP ) is a systemic and framework act for this area. PPP is a subject of direct and indirect regulation by various laws. Provisions that regulate PPP should have a task to establish the balance between public and private interests which overlap, protection of competition and promotion of market discipline followed by absence of redundant control by the state.

5 SUBJECTS OF PPP Law on PPP recognizes two main subjects in the concept of PPP- public and private partner. Subjects of PPP act as equal parties, during conclusion and realization of PPP contract.

6 PUBLIC PARTNER Public partner has two roles: as public authority deciding on initiation of a particular PPP project, and the entity which choses the private partner, as a contractual party in the PPP contract.

7 PRIVATE PARTNER Private partner may be a natural person or a legal entity, domestic or foreign, with domestic or foreign participation or without it, or a consortium of one or more natural persons or legal entities. Law on Foreign Investments explicitly proscribes that a foreign investor when it comes to its investment, it enjoys the same treatment, has an equal position, rights and duties as domestic natural persons and legal entities.

8 MAIN TYPES OF PPP Contractual PPP Institutional PPP

9 CONTRACTUAL PPP Contractual PPP represents a form of cooperation based on contractual relationship between the public body and a private partner, as legally separated and independent entities. The most common form of contractual PPP is concession (which may be also the form of institutional PPP). The subject of concession is commercial use of natural resources, respectively goods in public use or performance of activities of general interest.

10 DRAWBACKS OF CONCESSION Broadly defined obligation of private partner and disproportionate distribution of risk. Risk of the public partner is limited to the selection of the private partner, while the private partner bears all other risks of realization of PPP with elements of concession - assumes the risk of financing (usually obtaining capital through loans), as well as risks of design, construction, exploitation and charging for services from end users.

11 DRAWBACKS OF CONCESSION However, there is also a latent risk that the concessionaire (in case there are no explicit limitations for calculation of fees and costs for service or activity) will follow its own business ethics. That can produce political consequences for the public body.

12 INSTITUTIONAL PPP Institutional PPP is based on the relationship between the public and private partner, which is legally established through membership in a common company. The Law on PPP uses the expression special purpose entity. In practice, this entity is formed in two ways: through establishment of a new company; through participation of a private partner in ownership of the existing public company which conducts the activities or provides the service of general interest.

13 PUBLIC CONTRACT Public contract is a legal base for both contractual and institutional PPP. Law on PPP proscribes that this contract shall be concluded in written form. Without a doubt, these legal transactions are fairly complex and their developing requires expert knowledge and experience, which greatly complicates negotiations and conclusion of a contract. Additional disadvantages of these contracts are their complexity, high costs of developing, monitoring and implementation, which can result in a withdrawal of the public partner from a PPP project. This is when the public body usually makes a decision to independently carry out certain activities, even at the cost of implementing them poorly.

14 OTHER TYPES OF PPP BOT - (Build, Operate; Transfer); BTO (Bulid, Transfer, Operate); BOO (Bulid, Own, Operate); BBO (Buy, Bulid, Operate); PFI (Private Finance Initiative).

15 IMPORTANT DRAWBACKS OF PPP Slow preparation of individual PPP projects (can take up to two years); Lack or inaccessibility of statistical data based on which the PPP project could be compared with the traditional manner of realizing public services, in order to optimize the costs of public administration; Insufficient capacity of the public administration body for negotiations and defining the contractual obligation, as well as for the control of the performance of contracts;

16 IMPORTANT DRAWBACKS OF PPP In the assessment of PPP projects, not enough attention is paid to social and environmental indicators (only the economic indicators are taken into account); In PPP projects, the largest savings are made at the expense of employees, which results in non-performing workforce, which subsequently generates additional costs;

17 IMPORTANT DRAWBACKS OF PPP Chance of a sudden transfer of risk from private to public partner (e.g. in case of bankruptcy of the private partner); As a result of the long-term nature of PPP projects, the mandatory expenditures increase and may lead to hidden long term debt, which may have adverse effects on the future of the project; The success of these big and technical projects primarily depends on external factors. This involves the fact that the demand for these services is influenced by political decisions, price to be paid for the service, and the level of social subsidies. Besides external, there are internal risks such as construction, technology and management;

18 IMPORTANT DRAWBACKS OF PPP Difficulties in financial assessments of PPP are that the set objectives, in terms of successful performance of services, are often modified during the term of the contract, and it is difficult to spot changes in the efficiency. Also, the methods used in calculation of the costs of the project may be in favor of the private sector; Limited impact of municipalities on determining of the price for services charged to the users, as a consequence of the fact that local self-governments cannot direct municipal revenues to infrastructure projects.

19 TAX ASPECT OF PPP Due to the increasing need for building new public infrastructure, through investment in goods of general interest, as well as the provision of services of public interest in the Republic of Serbia, it was necessary to create legal and institutional framework for attracting private investments, i.e. to lay the foundations of a market economy.

20 TAX ASPECT OF PPP Legal regulations are among the most important indicators of the economic environment in a country. According to the World Bank's data, three largest obstacles to business development in Serbia are: obtaining construction permits, registering property and paying taxes. Therefore, there is a need for reform of the public sector, as well as to simplify and shorten procedures, which will consequently reduce costs. Each PPP project requires existence of tax incentives in order to motivate the private sector.

21 TAX ASPECT OF PPP Since tax laws can have a direct impact on the sustainability and profitability of PPP projects, it is very important to provide an answer to the following questions : Is the tax system stable? Which categories of taxes will be imposed to the private partner? (income tax, tax on dividends) Are there any specific tax liabilities imposed to the foreign investors? Is withholding tax likely to be imposed? Is there a relevant tax for environmental pollution? Are there any helpful tax deductions or exemptions available to the private partner? Is it legally possible to introduce specific exemptions to the tax regime for PPP projects?

22 TAX ASPECT OF PPP One of the most common tax law incentives is the "tax holiday", which exempts the investor from local income tax and other taxation for a specific period. The stabilization clause can be considered a variation of a tax holiday. This clause is stipulated by law or contractually stipulated, and it binds the country not to decrease the acquired rights of foreign investors in case of subsequent changes of domestic

23 TAX ASPECT OF PPP Taxes and especially corporate income taxes, could be also observed in terms of the riskiness of a PPP project. Systemic risk of PPP, also known as a market risk, includes factors relating to the overall economic, financial, fiscal, legal and political framework in which the investment exists.

24 TAX ASPECT OF PPP The significance of inflationary risk, which represents a comprehensive systemic risk which is negative for all participants in the PPP Therefore, inflation is harmful for the public partner, as it reduces the capacity of filling the budget from taxes and fees, which consequently affects the liquidity of the public partner in fulfilling its obligations to the special purpose entity.

25 CONCLUSIONS PPP is one of the most complex instruments for encouraging the economic development of modern states. PPP model is insufficiently used in Serbia due to multiple reasons.