It has been more than a decade since the launch of public-private partnerships (PPPs) in the UK. Since then, the concept has been successfully exported across numerous jurisdictions in Western Europe and beyond. In Central and Eastern Europe (CEE), however, their use remains limited.

In this part of the world privatisation has been – and in some countries continues to be – the most favoured way for governments to make their economy function efficiently. But while for many years this seemed like the only way forward for governments looking to improve public services and infrastructure without additional public spending, in recent years the wave of privatisation has lost momentum. Now governments are looking for new ways to provide vital services to the public.

PPPs seem to offer a natural solution to governments not wishing to sell off state-owned assets to private investors, but needing to put those assets to the most efficient use. PPPs put the burden not only of obtaining financing, but of designing, building, maintaining and operating the structures related to a particular project on the private sector.

However, the majority of CEE governments have not yet fully embraced the concept of the PPP. Despite their suitability for many projects – hospitals, railways, prisons and others – and despite the interest of both private and public sector participants, an array of practical and legislative hurdles need to be overcome before PPPs can finally occupy their rightful place in CEE jurisdictions.

A number of pioneer PPP projects have raised the general public's awareness of the possibilities they offer. These have succeeded by circumventing certain problematic issues and by finding individual innovative solutions to bring such projects to completion. However, more concerted efforts are needed to bring greater consistency to the process. Local CEE markets are now looking to their respective governments to form a clear forward thinking view on PPPs.

Given the complex nature of these projects, it is widely felt that a better legal framework for PPPs should be established in all jurisdictions. This should be achieved by amending the current legislation on a piecemeal basis, by adopting further legislation to regulate PPP-specific issues, by enacting a framework act detailing the rules for PPP projects, or by a combination of the above.

In Slovakia, for example, concession procurement legislation has been in place since 1996, but so far no large project has tested its suitability for complex structures or its compatibility with other segments of the legal system. In the Czech Republic, the legislative environment does not provide sufficient protection to lenders in the case of the bankruptcy of the project company. Difficulties also arise in connection with the debt assumption/step in rights by the Government. The regulations related to PPP projects are brief and their interpretation is difficult. In some cases they contradict other pieces of legislation.

Certain provisions of the Hungarian Civil Code may also need to be amended – the current five-year restriction on call options in Hungary, for example, was a serious issue in a recent PPP deal. The liquidation of state-owned assets should also be reviewed in light of the limitation that currently exists under Hungarian law which provides for core government assets to remain in state ownership.

Public procurement laws must be brought into line with those of the European Union (EU) and the discriminatory provisions regarding non-domestic bidders that exist in certain cases must be eliminated. Application of public procurement rules is not always in line with the practice of EU countries, which causes difficulties with participation of financial institutions such as the European Bank for Reconstruction and Development (EBRD) or the European Investment Bank (EIB).

PPP committees, such as those set up in Hungary under the auspices of the Ministry of Economics, are a good way to achieve the above goal, provided that the participation of those market players with experience of PPPs is ensured and an international liaison group set up to exploit experience gained in other countries. Pilot programmes are also considered to be a good way forward. Governments need to identify and commit to such programmes to raise the confidence of both public sector procurers and private sector bidders.

There is a general lack of knowledge of the documentary expectations of investors in PPP schemes, which often results in extensive and lengthy negotiations. The formulation of standard documentation would be of great benefit and would help in reducing costs, encouraging confidence in the local markets, thus ensuring a more efficient process to bring the project to fruition. Ensuring the project's bankability is a key element of the process.

A major difficulty for private sector involvement in several CEE jurisdictions is the obligation to comply with public procurement laws when entering into the main contract and sub-contracts. Changes to the law to allow sub-contracting mechanisms for PPP projects when contracting with affiliated entities may be advisable in certain jurisdictions.

Some difficulties in the efficiency of PPP schemes arise through taxation – examples of this include the 22% VAT charged on fees for services in Poland. Often, public support for PPP's take the form of an annual payment to the private sector. It may be argued that this is a fee for a service and thus subject to tax.

In addition, at the expiration of the PPP contract, it is common for the asset to be handed back to the state free of charge. Under current Polish law, the private sector would be required to assess VAT at a fair market value for the asset handed over. These taxes place an extra burden on the state as the private sector, through public payments, would seek to cover the demands made on it.

Similar tax-related issues arise in Hungary. It is widely felt that the tax regime should accommodate PPP investors in a more efficient manner. For example, in a recent Hungarian PPP project it was discovered that the higher education sector was VAT exempt. Thus, investors are unable to recover VAT paid by them during their investment.

PPP projects can be complex and may require a large number of permits, consents and administrative decisions. In Poland, foreign companies or foreign-controlled companies sometimes face additional restrictions especially where the purchase of land is concerned. It is in the best interests of all sides that there is efficient processing of administrative proceedings as delays greatly increase the risks – and costs, which get passed on to the public sector – faced by investors and unnecessarily restrict the implementation of PPP projects.

To ensure the effective resolution of disputes arising from PPPs, the profile of international arbitration and mediation must be raised within the public sector in most of the jurisdictions under review. Governments are usually reluctant to agree with international arbitration as a method of dispute resolution still preferring usual channels of litigation through the ordinary court system.

Other issues for the CEE region include the capacity and authority of public sector bodies to enter into and perform PPP contracts for longer than 30 years. Privatisation/transfer risk must also be addressed at the outset, in light of the potential danger of the public sector body transferring its role under the PPP contract to a potentially less reliable entity.

Resource/credit risk is an important consideration too. Budgets may be annual, biannual or longer, meaning public sector bodies may not be able to comply with long term obligations in the absence of direct revenue raising power if their entire budget comes from the central state purse. While government guarantees could represent a possible solution, their value is limited if they can be withdrawn. The disparity between project costs and project revenues would commonly require that local currency payments be indexed to the value of one or more foreign currencies.

While certain problems may be specific to one jurisdiction, many of those listed above are common to all. It is now up to individual governments to deal with these issues efficiently. If PPP committees, taskforces and international liaison groups enjoy the support of legislation, most of the major hurdles may be removed. It should, however, not discourage either public or private sector participants that certain problems may remain and potentially new ones may arise. These will be solved or circumvented by innovative solutions devised by international project teams and their legal and financial advisers with international expertise.

Eva Hegedus is a partner in the Budapest office, Michael Davies in the Warsaw office, Mikulas Tousk in the Prague office and Igor Palka in the Bratislava office of Allen & Overy.