Under Ethiopia’s national development program, i.e. the Growth and Transformation Plan (GTP II) (2015-2020), the country has set an ambitious target to become a middle-income country by the year 2025. GTP II plans to execute massive manufacturing, industrial and infrastructure projects in road, railway, power, energy, telecommunication, housing and industrial parks. To date, the majority of infrastructural projects have been financed by the government through the national budget, loans and development assistance fund. In order to meet the growing demand for infrastructure and public service delivery, the government sought to mobilize finance from the private sector through public private partnerships (PPPs). Aside from introducing private sector efficiency, innovation and knowledge, PPPs are considered as key instruments to fill in gaps in infrastructure financing.
Since 2016, the Ministry of Finance and Economic Cooperation (MoFEC) has spearheaded efforts to design a PPP legal framework by drafting a national PPP policy and draft proclamation which culminated in the enactment of the PPP Proclamation No. 1076/2018. (“PPP Proclamation”). We discuss this law in this issue of our legal update.
Scope of Application
Prior to the enactment of the PPP proclamation, procurements by public bodies (defined as government organs wholly financed by government budget) were governed by a set of legislations namely the Public Procurement Proclamation No.649/2009, the Public Procurement and Property Disposal Service Council of Minsters Regulation No. 184/2010 and the Federal Public Procurement Directive issued by MoFEC. These laws are applicable only to public bodies and not public enterprises. (public enterprises are commercial entities wholly owned by the government.) Procurements made by public enterprises were regulated by their own internal procurement rules and there were no mandatory legislations governing procurements of public enterprises.
For the purpose of PPP projects, the PPP Proclamation expanded its scope to include all PPP procurements made by both pubic bodies and public enterprises. PPP is defined by the proclamation as a long term agreement between a public body or a public enterprise and a private party under which a private party undertakes to perform any activity the government would otherwise perform in the general interest of the public but considered private initiative to be inadequate. The private party receives compensation by way of payment from the public entity or directly from end users by way of tariffs or fees. Under a PPP model, the private party is liable for risk arising from the performance of the activity or use of state property. A typical PPP project would have a PPP Agreement and other agreements (Project Agreements) that would govern the relationship between the public and private entities.
Excluded from the PPP scope are oil, mining, minerals, rights of air space and privatization or divestiture of public infrastructure of public enterprises. In addition, existing PPP projects where contracts have already been concluded or are under negotiation are also excluded. The PPP proclamation does not define which projects qualify as “under negotiation”. It is unclear which on-going projects ran by public bodies and public enterprises would be exempted from application of the PPP proclamation.
Forms of PPP
The PPP proclamation envisages the private party to enter into a long term agreement with the public entity to perform tasks involving:
- the design, construction, financing, maintenance of new infrastructure;
- the rehabilitation, modernization, expansion, maintenance or operation of existing infrastructure facilities; and/or
- the administration, management, operation or maintenance of new or existing infrastructure facilities.
Infrastructure facilities are defined as those physical facilities and systems that directly or indirectly provide public service activity. The incorporation of a special purpose project company in Ethiopia by the private party is required to implement any PPP Project. The proclamation provides the possibility of a public entity becoming a minority shareholder in the project company. Any transfer of ownership interests (such as shares) in the project company resulting in the change of control of the project company requires the prior approval of the public entity. The duration of the PPP is left to be determined by the Project Agreement. Ownership of assets of the project company, i.e. those belonging to the public property and those to private property are required to be specified in the project agreement.
Rights and Guarantees provided to the Private Party
The viability of PPP projects largely depend on the support to be provided by the government in terms of land, assets, subsidies, guarantees and other value. The PPP Proclamation provides various rights, incentives and guarantees for the private party including:
- Security Rights over Assets: the private party is granted the right to create security interest over any of its assets (movable and immovable), rights or interests, shares of the project company including those relating to the infrastructure project, as required to secure any financing needed for the project.
- Assignment of the Project Agreement: With the prior consent of the public entity, the private party is permitted to assign its rights and obligations under the Project Agreement.
- Exemption from existing land laws: The proclamation exempts PPP projects from existing land lease regulations in relation to tenure and bidding procedures required to obtain land.
- Government Support: the proclamation provides for government support by way of economic support and various guarantees required to ensure the sustainability, implementation and/ or financial viability of a project. The economic support to the project might come in the form of cash grants or contribution in-kind. Further, the government may provide guarantees in the form of minimum off-take, guarantee the public entity’s performance under the project agreement, payment guarantees, securities, undertaking or binding letters of comfort.
- Stability Clause/Change of Circumstance: If the rights and obligations of the private party or the contracting public entity substantially increases or decreases, due to a new legislation that will be specifically applicable to the infrastructure facility, the affected party is entitled to compensation in accordance with the project agreement.
- Tax or other incentives – where it is appropriate, the PPP Board may recommend for specific PPP project to be granted with tax or other incentives.
- Dispute Resolution – the PPP proclamation allows the parties the freedom to determine their own dispute resolution mechanisms including alternatives to formal adjudication processes. (See below for details)
Institutional Framework for PPPs
The PPP Board - The PPP Proclamation foresees the establishment of a high leve Public Private Partnership Board (the “Board”) which will include 10 members, including but not limited to, MOFEC, the National Bank of Ethiopia (NBE), the Ministry of Water, Irrigation and Electricity (MOWIE), the Ministry of Transport, the Ministry of Public Enterprises and 2 members from the private sector. MOFEC acts as the secretariat of the Board. The Board is mandated to approve PPP projects prior to commencement, approve risk allocation, government support and overall feasibility of the PPP project. It has the power to approve any significant amendments to a project agreement.
The PPP Directorate General - the PPP Proclamation establishes the PPP Directorate General (PPP-DG) to be located within MOFEC. The PPP- DG responsibilities include: guiding and managing PPP projects, providing technical assistance, monitoring and evaluation of PPP projects and reporting to the Board and interfacing with the public regarding PPP projects. This organ serves as the focal entity for all projects designated as PPP and design consistent and uniform rules for all PPP projects.
Project Management Team – the proclamation provides that the public sector contracting authorities that are party to the PPP agreement must establish a project management team consisting of financial, technical and legal team to oversee the PPP transaction process. The project management team will include a member from the PPP directorate General. The teams responsibilities include preparing the feasibility studies, monitoring the implementation of the projects and liaising with stakeholders.
PPP Procurement Modalities
The PPP proclamation establishes layers of procurement procedures that will guide any PPP project. The primary modality for PPP procurement is an open bidding processes with prequalification steps. The proclamation provides detail procedures by which open bidding process must be carried out. Where it is not feasible to carry out an open bidding process for PPP projects, the proclamation provides additional procurement modalities such as two-stage bidding procedures, competitive dialogue, direct negotiations and submission of unsolicited proposals.
Unsolicited proposals can be submitted in relation to projects that have not already been approved by the Board for study or implementation. If the PPP Directorate General accepts the unsolicited proposal, the contracting authority will proceed to prepare a feasibility study then to tender up on the approval of the Board. Unsolicited proposal will be awarded through a competitive selection process. However, the proponent of the unsolicited proposal may be given a bonus on its technical and/or financial score during the competitive selection procedure or financial compensation for studies undertaken if it is not awarded the project.
Governing Law and Dispute Resolution
The PPP Proclamation provides that the PPP project agreements must be governed by the laws of Ethiopia. Definition of the project agreements is limited to the PPP agreement and other agreements entered between public entities and the private party. This provision provides leeway as to what constitutes as project agreement. To the extent that an agreement between the public and private parties is not defined as a ‘project agreement’, there is an opportunity for the parties to determine the governing law of other agreement and choose different laws. The PPP Proclamation permits that contracting parties may determine the dispute settlement mechanism and further provides that the parties may opt for arbitration. This provision amends the existing provision of the Ethiopian Civil Procedure Code which prohibits disputes in relation to administrative contracts (contracts entered by administrative agencies) from submission to arbitration.
It is important to note that even though the PPP Proclamation allows parties to opt for arbitration, Ethiopia is not a signatory to the New York Convention on the Recognition and Enforcement of Foreign and has not yet ratified the ICSID convention. This will oblige parties to be subject to Ethiopian laws for the purpose of enforcing arbitral awards.
Finally, the PPP proclamation envisages for a number of specific procedures to be determined in a directive to be issued by MoFEC. Some of the items that the proclamation states will be addressed by directives include:
- Additional powers of contracting authorities.
- Details of the notice of request for potential bidders on request for pre-qualifications.
- Minimum pre-qualification and proposal submission criteria.
- Details on specific events where Direct negotiations are permitted.
- Details on bid security submission and forfeiture of bid securities.
- Details on preferential treatment to bidders with local content participation.
- Details on period of informing unsuccessful bidders and grievance handling mechanisms.
- Details on publication of tender results and execution of project agreements by the PPP Directorate General.
- Details on events that may cause the termination of Project Agreements.