If we want to evaluate the benefit of a new law or a change to an existing one, we have to know what it aims to do. In this case when a completely new law on concessions is proposed– we need to know what will change in terms of the private sector exploiting public ownership.
It’s nothing out of the ordinary, of course. It is just the ratification of new European Directive on Concessions in 2014 which, like the Public Procurement Directive, we are obliged to transpose into national legislation. At the same time, like public procurements, this is a move towards a significant liberalisation in concessions, both in terms of the offering and the time periods, as well their scope and monitoring. From a positive point of view, this is a good thing. What could be better than attracting private capital into the construction of the public infrastructure and the offering of public services with, what we assume to be, better quality? At the end of the day, this is the aim of the European Commission to deal with the consequences of the economic and financial crisis – by implementing a series of measures (including the Junker Plan) to attract private capital into the public sector. In addition, the expanded range of objects up for concession opens up the possibilities for public-private partnerships. These could be prison management; the management of museums and sites of cultural and historical heritage, various types of social services provided by private companies. As the motives for the Law claim: it opens up the possibilities for concessions over newly built sites by private sector, and not only the existing infrastructure, as it had been up to now.
There are many problems with implementing these good intentions and aims in the new draft law (with its forthcoming first reading in Parliament). However, they have one feature in common: the capacity of the public partner in this public partnership to achieve success is desperately feeble. For this very reason, any liberalisation in Bulgarian conditions may be seen just like Dante’s good intentions paving the path to Hell.
The primary meaning of the new law is not just to attract any old private capital, but private capital which will bring with it the expertise and experience of public private partnerships, in such a way that the tax payers will receive in return better quality and more accessible public services and infrastructure. Current experience in providing concessions, however, doesn’t give much reason for hope. From the concessions register it can clearly be seen that the huge majority of more than 700 state and more than 1000 municipal concessions have been granted to local economic operators who don’t have any prior proven experience (the most essential feature of a concessionaire according to the law) as operators of public services.
Foreign capital and investors with suitable experience, similar to those in the tenders and competitions for public procurement, have almost no access to the Bulgarian public resources. This isn’t because they are forbidden from taking part, but because the procedural conditions and chosen contracting methods make their participation almost meaningless. Some of the more persistent of them realise this perhaps too late, but they give a clear sign to the international investment community about what to expect. The results are clear from the foreign investment statistics.
Let’s look, for example, at the concessions procedure for Sofia airport.
This is a particularly good example of the Ministry of Transport’s contribution to economic science. The concessionaires are expected to make an advance payment of 600 million levs – given 100 million revenue and 5 million levs profit in 2015. In other words, the advance payment is six times greater than the expected revenue. Given that situation, it would take 120 years for the concessionaire just to earn back the advance payment from the profit earned. If they wanted to make the return on investments required in this sort of business, they would have to make a profit, not income, of about 100 million per annum. That is 20 times higher than current levels. We just have to guess what airport taxes and what other prices for airport services the concessionaire might demand at Sofia airport? To top it all, the burden of this advance payment as a criterion for assessment of the proposals is a whopping 55%, while the investment criterion (directly linked with the quality of services) is barely 15% in the tender documents. With such disadvantageous conditions for the investor, even in the framework of 35 years with payments to the state of about 1.2 billion, according to the Minister of Transport, with a current annual profit of 5 million levs which will be returned to the investor – we shall wait to see what hidden cherries this scheme will throw up for the potential concessionaire. If any appears.
Thus the liberalisation of the way in which concessions are granted will to an even greater extent increase the possibility for prior agreement with the future concessionaire. It also has be taken into account that with a new and expanded arsenal of methods, individual ministers and municipal mayors have become grantors of concessions.
The delegation of oversight functions to the current commissioning parties such as the Council of Ministers and the Municipal Councils is a sham, especially taking into account the expectations of the same political authorities and their eminent representatives. And not forgetting their own common interest in mutually overseeing each other. The first version of the draft of the new law even offered “eternal” concessions, i.e. without limit in time, which is nothing more than a gift of public property to former comrades and relations. It is quite clear that after paying for the investment, the concessionaire takes ownership of the difference between the real and normal profit from the corresponding type of public services. Fortunately, the sharp criticism of these eternal concessions appears to have led to their removal from the draft law.
In the same way as in public procurement, the root of the problem is in the process of concession granting, or to be more precise the possibility for prior agreement between the public sector commissioning party and the private sector concessionaire. This goes a long way to explain the almost ubiquitous preference for local private partners without any experience or the experience of a foreign partner in a consortium. So this leads to the same solution – the creation of a central authority to organise the granting of concessions, which is political and administratively independent of the specific commissioning party. This role might be assumed, perhaps, by the Agency for Privatisation and Post-Privatisation Control, on the condition that its management is obliged to report to parliament, and not to the executive, and that its activities are completely transparent and subject to public control.
Evgeni Kanev is Doctor of Economic and managing partner of Maconis investment consulting company.
He was previously Europe director for US Tello Corporation and director of Corporate Finance in the BIG 4 consultancy companies. In his long career as an investment consultant, he has managed a large number of mergers and acquisitions projects, business assessments and financing in a number of countries in Eastern Europe and Ireland.
He has a Master’s Degree in Business Administration from Illinois State University (USA) and a Diploma in Finance and Accounting from the Association of Chartered Certified Accountants in the United Kingdom. He specialised in corporate finance in the United Kingdom, Belgium and Germany.