Can Municipalities exploit their land under a joint venture with a private investor?

In the current "second wave of renewables", there possibility of entering a joint venture (Romanian: asociere in participatiune) between municipalities and private investors for the realization of green energy projects is back on the table again.

While the acquisition of rights in rem (Romanian: drepturi reale) over Municipality’s land is regulated under the Administrative Code and other normative acts via a public tender, the possibility of bringing City Hall land within the framework of a joint venture ("JV”) with a private investor without a public tender is still regarded with reluctance (despite the multiple economic beneficits of such a constraint).

The frequent use of such joint ventures in the "first wave of renewables" led to a rich practice of the Romanian courts for their annulment. However, in the vast majority of the annulment decisions (irrespective if they annulled the joint venture agreement itself or the decision of the Local Councils approving such an agreement), the courts have not challenged the possibility of the Municipalities to enter into such joint ventures without public tendering, but rather annulled them because they considered that such joint ventures were in fact disguised concessions/leases aimed at "circumventing" the tendering requirement.

In the meantime, although the relevant provisions under Law 215/2001 regarding local public administration have been replaced as of 2019 by the Administrative Code, the rules applicable to joint ventures have remained roughly the same. Thus, Article 129 para. 9 lit. a) of the Administrative Code expressly allows municipalities to enter into partnerships with private investors without expressly requiring a public tender. We, therefore, consider that municipalities can validly conclude joint venture agreements directly, without a public tender (since the obligation to organize a public tender is of strict interpretation  - i.e. being applicable only to situations expressly mentioned under the law – and it is not mentioned by reference to joint ventures).

However, what is the rationale for excluding the joint venture from public tendering? Briefly, the legislator intended the participation of the municipality in a joint venture to be an active involvement on its part and not just a transfer of rights in rem over the land in exchange of a fixed lease amount".

Further on, the Administrative Code imposes certain conditions when it comes to joint ventures:

1. Observing the legal requirements (regulated in this case by articles 1949-1954 of the Civil Code) applicable to joint ventures ; within this context, we highlight the mandatory participation of the JV partners to both profits and losses (i.e. no JV partner may benefitof a guaranteed minimum income, nor be exempted from participation to losses; however, there are voices in the doctrine recognizing to the ability of a JV partner to limit its participation to losses!). Clauses whereby the Municipalities benefit from fixed amounts per month not linked in any way to the benefits of the association are therefore incompatible with the joint venture spirit.
2. the project must be of local public interest - as the Energy Law no. 123/2012 establishes as being of public interest the realization of energy capacities, one must only establish the benefits of such a project for the local community (e.g. new jobs, cheaper energy for self-consumption, rehabilitation of local infrastructure, etc.); and

• involvement of the Municipality in the financing and implementation of the project. In practice,the courts have stated that the mere participation in the joint venture through the contribution of rights in rem over the land is not sufficient to exhibit the Municipality’s participationto the financing. In our opinion, one may consider reasonable to consider that the Municipality can participate in the financing only at certain stages of the project (e.g. during the operational phase, after COD, when the project already generates income which is to be divided between the JV partners and, as such, the Municipality may release some of the pressure on its (anyhow limited)budget (which is however subject to various constraints/limitations). As for the second condition (i.e. participation to the "implementation of the project"), it should be noted that the lack of effective involvement of the Municipality has also been sanctioned by the courts; therefore, we believe it is necessary for the Municipality to getinvolved in decision-making and/or through specialists or in any other way in the development and implementation of the project (one may think of various ways of reflecting such involvement).

Lack of clear regulations and the existing courts practice (dating back since the first wave of renewables)  which almost constantly (re)classified the “old” joint ventures as "disguised" concessions/leases, has lead to increased reluctance in using this legal institution under the current RES project wave. Looking at the later stages of a RES project development, one may also expect that the appetite of financial institutions for financing the construction of RES projects built on a joint venture agrement with a municipality might  not be too high, if no creative thinking is put into it.

That’s why, since we observed, on the one hand (i) the need of investors to identify suitable locations for the development and construction of RES projects and, (ii) the Municipalities' increased need to optimize revenues & reduce energy costs for the local community as well as the possibility to optimize the usage of their land portfolio , and also, on the other hand, (iii) certain legal mechanisms enabling the adaptation of the joint venture institution to contemporary realities (departing from the first wave interpretation), we believe that the joint venture is an institution that can and should be more implemented in practice.