Public Private Partnership Strategic planning and drafting for success

Public Private Partnership

Strategic planning and drafting for success

Understanding PPP and the globally competitive market

Public Private Partnership

The purpose and scope of PPP

Some government officials wrongly believe that [PPP]* can deliver public infrastructure without any cost to the government or the public at large, and in some cases there is a political belief that unsolicited projects are a short cut to creating the necessary infrastructure

PPIAF Unsolicited Proposals: an exception to public initiation of infrastructure PPPs (August 2014)

* The original paragraph refers to USPs here rather than PPP in general


PFI should only be pursued where it represents VfM in procurement. VfM is defined as the optimum combination of whole-of-life costs and quality (or fitness for purpose) of the good or service to meet the user’s requirements. VfM is not the choice of goods and services based on the lowest cost bid.

• UK: HM Treasury Value for Money Assessment Guidance (2006)

The purpose and scope of PPP Two key advantages of PFI contracts over conventional procurement:• a planned and consistent approach to maintenance, as the contractor is under an obligation to maintain the asset in good condition until the end of the contract 20 period and, if maintenance is not undertaken, it risks being penalised for not meeting agreed availability and performance standards; and •transparency of pricing in that the public sector knows in advance how much it will be paying and the contract is for the provision of services on a whole-life basis. This removes the possibility of asset replacement costs arising unexpectedly in any one year or being delayed in the event of budgetary constraints

• UK: National Audit Office, Making Changes in Operational PFI (2008)

The purpose and scope of PPPGovernment typically seeks to transfer to the private sector in PPP projects: •cost overrun risk during construction. For example, the private sector is expected to cover extra costs should buildings require more extensive foundations.•timely completion of the facility. No payments are generally made to the private sector until the asset becomes available, and the contracted service commences.•meeting required standards of asset delivery. For instance, the private sector is expected to pay for the cost of redesigning the asset, should it not meet required service needs.•the underlying costs to the operator of service delivery, including the future costs associated with operating and maintaining the asset. •risk of industrial action or physical damage to the asset, and certain market risks associated with the project. For example, in some road schemes, the risk of wear and tear associated with actual traffic volume using the road.

Joint venture unit: key function

• To consider project proposals submitted to it and consider whether or not they:

(i) are affordable to the contracting authority; and(ii) provide value for money; and(iii) provide for the optimum transfer of technical,

operational and financial risks to the counter party; and

(iv) are competitive

• Policy context: • Zim Asset• Joint Venture Bill

Joint ventures: key objectives

• A feasibility study shall:• Demonstrate the advantages of implementing a project

under a joint venture agreement• Demonstrate that the project will

• (i) be affordable to the contracting authority; and• (ii) provide value for money; and• (iii) optimally transfer technical, operational and

financial risk to the counterparty• Joint Venture Bill, clause 9

UK experience: from PFI to PF2

UK experience

PF2 originated from PFI/PPP projects which were:-➢ the use of private capital for public projects➢ early examples

ـ Channel Tunnel 1985ـ Dartford Crossing 1987ـ Second Severn Crossing 1990

➢ the procurement of services leaving the risks of ownership and operation of the asset with the private sector

➢ the development of a relationship between the public and private sectors to allow services provided by public sector assets to be sold to wider markets

UK experience

Why PFI/PPP?➢ Limited annual government revenues encouraged pattern of

piecemeal investment➢ Little regard for quality design and whole life costing➢ Convergence criteria➢ Poor condition of public infrastructure

UK experience

Some features of PFI➢ PFI

ـ Often DBFO projectsـ Usually mixture of new build/refurbishment with continuing

service provisionsـ Public sector pays Unitary/Availability charge

➢ Concession Agreementsـ Charges from end-userـ Hybrids such as shadow tolls where notional end-user

charges are used to work out payments by users

UK experience

Parties and their relationship with each other – see diagram➢ Examples:

ـ Procuring authorityـ SPV/Project Coـ Funder (debt, equity, subordinated, mezzanine, bond holders)ـ Subcontractors (building contractor, hard FM, soft FM)

EquityLenders Insurers

SPV/Project Company

Operation andMaintenance

Input suppliers

Public SectorAuthority

Sub-contractors(including design team)

Contractor

Equipment suppliers

LoanAgreements

Shareholders'agreement

Direct Agreement

Concession AgreementLand Transfer Agreement

Construction Contract

Interface AgreementInterface AgreementSupply Contracts Service Contracts

The contractual framework

UK experience

• Special Purpose Vehicle – only asset = concession agreement• Limited recourse financing• SPV engages sub-contractors (the Contractor, Hard and Soft FM

Contractors)• "back-to-back" contracts• Minimal residual risk in SPV

UK experience

What went wrong with PFI?➢ a "political football"➢ excess profits – re-financing➢ a few projects collapsed➢ overall cost of project – 25 years to 99 years➢ bank financing fell away due to financial crises➢ equity shares – secondary market – excess profitBUT

Over 750 signed and completed projects in all sectorsOver 870 projects in procurement

UK experience: Vfm

Factor Problem Solution

Procurement Skills deficit in contracting authorities

Greater use of centralised procurement units

Risk allocation Inefficient risk transfer

Retain key risks within public sector to avoid private sector pricing inefficiently for those risks

Value for Money Inefficiency in the PFI model

HM Treasury to implement periodic reviews to drive continuous improvement

UK experience: financing


Equity finance Excessive or “windfall” gains by private sector equity providers

Funding competition for part of equity

Equity finance II Insufficient public-private collaboration

Government to take a (minority) equity stake in all projects

Debt finance Lack of competitive long-term finance

Measures to improve project credit rating

Transparency Lack of transparency and accountability

Stronger and more extensive reporting obligations, including levels of equity return

UK experience: risk allocation

Risk Allocation Control/impact

Change of law Public sector Avoids/reduces need for private sector to price for uncertainty

Due diligence and land titles

Public sector warranties

Reduce delay and costs of investigation

Insurance Greater use of public sector self-insurance (eg material damage and business interruption)

Reduce premium costs and delays

Site contamination by external source

Public sector Eliminate inefficient risk transfer and reduce overall cost

UK experience

Philosophy➢ Risks to be borne by the person best able to mitigate and

manage the consequences➢ VFM➢ Payment mechanism – linked to availability/provision of services➢ Payment for services not assets. Output not input specifications➢ Affordability➢ Whole life costing of facilities➢ Private finances/SPV structure

UK experience

PF2 – the son of PFIـ "a New Approach to Public Private Partnerships" (PF2 Policy) –

Treasury 5 December 2012ـ a new draft form contractual standardisation guide (PF2 Guidance)ـ key changes introduced to address apparent weaknesses and

criticisms of PFI – which the Chief Secretary to the Treasury in the PF2 Policy stated had become "tarnished by its waste, inflexibility and lack of transparency".

UK experience

Key points from PF2 Policy: -ـ Competitive tendering from issue of project tender to the

appointment of a preferred bidder will now not last longer than 18 months, unless an exemption from the Chief Secretary is obtained. The sanction is withdrawal by the Treasury of the projects budget.

ـ New set of standard documents which includes, new procurement and contract guidance, Shareholders' Agreement, Standard Facilities Management Service Output Specification and a pro-forma payment mechanism for accommodation projects.

ـ The Government aims to structure PF2 projects to facilitate access to capital markets, institutional investors and other sources of long term finances OTHER THAN bank debt AND use government guarantees.

UK experience

Key points from PF2 Guidanceـ public sector investment in projects as a minority shareholder by

(30 – 49%)

ـ a new centralised vehicle, the Central Government Unit

ـ removing soft facilities management services from the scope of the PF2 contracts and focusing on hard facilities management services

UK experience

Soft FM services •Cleaning•Caretaking and Portering•Grounds maintenance•Waste disposal and recycling•Security•Catering•Pest control•Health and Safety services•Cash Collection•Furniture and Equipment•Vending machines•Window Cleaning

UK experience

Hard FM services•Building and fabric maintenance both planned and reactive•Energy and water management•Building management systems; boiler, heating, air con etc

Assets and Lifecycle Maintenance•Planning, management and control of physical assets and the building through their life time (D&B estate offer)

UK experience

Key points from PF2 Guidanceـ reallocating risks to the public sector in respect of :

ـ incurring capital costs resulting from (i) change of law, (ii) utilities costs (iii) contamination and (iv) insurance

ـ limiting PF2 projects to those requiring capital investment of £50million or more

ـ a competition to identify equity co-investors AFTER the appointment of preferred bidder

ـ delivering VFMـ more transparency

UK experience

Under SoPC4 (Standardisation of PFI Contracts), the public sector was entitled to 50% share of any Refinancing Gain – PF2 provides that the public sector will receive more, being:

➢ a 90% share of the Margin Gain where there is a reduction in the margin from financial close

➢ a share of any further Refinancing Gain as follows:-£1 to £1m, a 50% share£1m to £3m, a 60% shareOver £3m, a 70% share

ـ new interface arrangements due to the exclusion of soft service from the PF2 Contract

ـ new concept of "Elective Services" to allow services to be "added back" including both Hard FM and IT services at a "fixed price"

UK experience – PF2 highlights

ـ The authority takes the risk of delay to the start date, but not clear if the PF2 Contractor will have a direct claim if the authority causes the delay

ـ The costs of acceleration or deferment of programmed maintenance are borne by the authority

ـ Lifecycle savings against budgeted costs are to be shared 50:50 reducing upside for an FM Contractor

ـ Authorities to warrant title to land provided by themـ Authorities to procure the authors of technical reports extend a

duty of care to biddersـ Insurance premium risk sharing between the authority and PF2

Contractorsـ Authorities may step-in if an "Emergency" occurs

UK experience – PF2 highlights

BUTـ there are indications that the Government is to use the capital

bond market and the European Investment Bank to finance its delayed Priority Schools Building Programme – despite PF2 Guidance

ـ The MOD has already said it will not use PF2 structures for its future accommodation deals

What is needed by the market for PF2 to succeed?1. Projects should only go to the market when they are ready2. No government policy changes which derail the process3. PF2 should be allowed to settle down without tinkering4. Deal flow

Key concepts


• “affordable” • "affordable" means that-

• (a) any financial commitment likely to be incurred in connection with the project will result in the least possible impact upon the contracting authority’s existing or future budgetary funds; and

• (b) the cost of delivering a facility or service resulting from the

project by the contracting authority does not impose an unreasonable burden on users or consumers of the facility or service.

•Joint Venture Bill, 2015 (Zimbabwe)


• “affordability” (Kenya PPP Act, s 2)• "affordability" means that- • (a) the financial commitments to be incurred by a contracting

authority in terms of a project agreement can be met by funds

• (i) designated within the existing budget of the contracting authority for its function for which the agreement relates; and

• (ii) assigned to the contracting authority in accordance with its relevant future budgetary allocation: Provided that the commitment shall be sustainable and shall not impose an unreasonable burden to the contracting authority; and

• (b) the cost of delivering a facility or service in relation to the project

by the contracting authority does not impose an unreasonable financial burden on the end users;


• “affordability” – Kenya PPP (County Governments) Regs, 15

• For the purposes of section 33 of the [PPP] Act “affordability” shall mean that the cost, price or other tariff to be imposed by the private party is affordable to:

• (a) the county government, where under the proposed PPP structure, the cost is to be borne by the county government; or

• (b) by end users of the service to be offered where under the proposed PPP structure, the price or tariff is to be paid directly by end users of the service


• “affordability” – Kenya PPP (County Governments) Regs, 15

• In considering whether the price is affordable to end users account shall be taken of the income levels of the end users as well as willingness to pay for the service at the projected price while affordability to the county government shall be decided on the basis of section 2(1)(a) of the Act


• “affordability” – Kenya PPP Act, s 2(1)(a)• "affordability" means that- • (a) the financial commitments to be incurred by a

contracting authority in terms of a project agreement can be met by funds • (i) designated within the existing budget of the

contracting authority for its function for which the agreement relates; and

• (ii) assigned to the contracting authority in accordance with its relevant future budgetary allocation: Provided that the commitment shall be sustainable and shall not impose an unreasonable burden to the contracting authority; and


• “affordability” – end users

the cost of delivering a facility or service in relation to the project by the contracting authority does not impose an unreasonable financial burden on the end users;

In considering whether the price is affordable to end users account shall be taken of the income levels of the end users as well as willingness to pay for the service at the projected price while affordability to the county government shall be decided on the basis of section 2(1)(a) of the Act

PPP Act

CountyGovt


• “value for money" • means that the agreement will result in a net benefit to

users or consumers of the facility or service availed by the completion of the agreed project in terms of cost, delivery, price, quantity or risk transfer, or any combination thereof

• Joint Venture Bill, 2015 (Zimbabwe)


• “value for money" • means that the undertaking of a public function of the

contracting authority by a private party under a public private partnership results in a net benefit accruing to that contracting authority defined in terms of cost, price, quality, quantity, timeliness or risk transfer.

Kenya PPP Act, section 2


• “value for money" • “For the purposes of section 33 of the [PPP] Act “value for

money” shall mean that undertaking the project as a PPP delivers superior economic, environmental and social value to the county government relative to other delivery options available to the county government and the opportunities foregone by the county government in undertaking the project as a PPP

• Kenya PPP (County Governments) Regulations, reg 16

• Section 33 deals with feasibility studies


• “value for money" • “For the purposes of section 33 of the [PPP] Act “value for

money” shall mean that undertaking the project as a PPP delivers superior economic, environmental and social value to the county government relative to other delivery options available to the county government and the opportunities foregone by the county government in undertaking the project as a PPP


• Section 33 deals with feasibility studies


• “contingent liability”• includes any liability assumed by the Government, such

as a Government guarantee for a loan or similar advance, in the event of default by a contracting authority in the performance of its obligations under a joint venture agreement


• “economic advantage”• Kenya PPP Act 2013, s 48(3)• In evaluating a bid… the proposal evaluation team shall

take into account the economic advantage that would accrue to the contracting authority if the bid is accepted and the comparative balance for the financial and technical elements of the bid set out in the tender document


• “best economic advantage”• For the purposes of section 48(3) of the [PPP] Act the

bid that represents the best economic advantage shall be the bid that gives the contracting authority the best economic advantage on the basis of affordability, value for money and public sector comparator

• Kenya Draft PPP (County Governments) Regulations, reg 30(5)


• “public sector comparator”• For the purposes of section 33 of the Act “public sector

comparator” shall mean the total cost to the county government and users of delivering the facility or the public service through a PPP as compared to the all in cost of delivering the facility or service by the county government• Kenya PPP (County Governments) Regulations, reg

17


• “public sector comparator”• For the purposes of this rule total cost means:• (a) the estimate of the cost of constructing, operating,

equipping or maintaining the facility or providing the service based on the prevailing market rates of delivering such facilities or service as derived from competitive bidding, market research or international best practice; and

• (b) a margin to enable the private party to operate efficiently and compensate investors for the risks assumed













• “public sector comparator” – UK experience

• Montpellier Estates v Leeds City Council [2013] EWHC 166 (QB)

• MEL claimed that the contracting authority had deceived it into entering and/or remaining in the procurement competition for development of an arena in Leeds

• MEL claimed that the contracting authority intended to develop the arena itself and undertook the procurement competition simply to provide data to justify that decision based on the public sector comparator


• “public sector comparator” – UK experience

• Montpellier Estates v Leeds City Council [2013] EWHC 166 (QB)

• Alleged false representations:• Contracting authority had no preference for the arena

to be built on its own land• Competition would be fair, open and transparent

• Claims of fraud and dishonesty against eight individuals

The purpose and scope of PPP• “public sector comparator” – UK experience

• Montpellier Estates v Leeds City Council [2013] EWHC 166 (QB). Deceit requires:

• Proof of fraud; nothing short will suffice• Proof that a false representation has been made

knowingly, without belief in its truth, or recklessly careless whether it is true or false

• The representation must be acted on for it to be complete

• Claimant must show he acted in reliance on the representation. If he would have done the same thing in the absence of the representation, the action will fail

The purpose and scope of PPP• “Most economically advantageous tender” in

EU/UK

• Public Contracts Regulations 2015• Regulation 67 confirms that all contract awards must

now be made to the “most economically advantageous tender”, using a cost effectiveness approach such as life-cycle costing to assess this; this may include best ‘price-quality ratio’ assessed on the basis of award criteria.

The purpose and scope of PPP• “Most economically advantageous tender” in EU/UK

• Public Contracts Regulations 2015• Life cycle costing • If this method is used, then Regulation 68 must be

complied with. Costs should include: • costs over the entire life cycle borne by the contracting

authority or other users (ie acquisition, cost of use and energy consumption, maintenance and end of life costs (eg collection and recycling); and

• costs related to related environmental issues, provided the value of these can be ascertained and verified.


EU/UK

• Public Contracts Regulations 2015• The contracting authority must indicate in the

procurement documents the data which bidders must provide in order for a life cycle costing approach be used, and how this will be assessed (following any calculation methods that may be specified at European level).


EU/UK

• Until 2004 broader factors (eg environmental policy, social impacts) could not safely be brought into procurement processes. Vfm = lowest price

• 2004 – 2014 it became permissible to take into account broader policies and social impacts

• 2015 rules now require contracting authorities to take into account broader policies and social impacts - MEAT

PPP structures and business case

Is PPP/JV appropriate?

• Programme level assessment: to ensure PPP/JV is only considered for use in those programmes where it is appropriate and is likely to represent good value for money.

• Project level assessment: an upfront procurement appraisal (may replace or supplement a Public Sector Comparator test)

• Procurement level assessment: an ongoing assessment taking into account factors such as the level of competitive interest and market capacity

Programme level assessment

• Viability: are there any efficiency, accountability or equity issues meaning it would be better for Government to deliver the project directly? Also considers whether requirements can be adequately captured and specified in a contract

• Desirability: assesses the relative benefits of procurement routes – eg relative borrowing costs, capacity to promote innovation.

• Achievability: Assess likely level of market interest and the capacity of the contracting authority/institutional structure to manage the processes involved.

Programme level assessment

• UK experience: Evidence to Treasury Committee, 2000:

• “public sector comparators are often unrealistic, do not properly allow for the risks which the public sector would retain under a publicly-funded solution, and do not accurately cost the maintenance and operation elements of a project”

Project level assessment

• Seeks to verify the initial decision to use PPP/JV• Re-testing of assumptions applied to quantitative and

qualitative test• Carrying out an affordability test to ensure that the

contracting authority can afford the PPP/JV• Market soundings are likely at this stage BUT risk of

tailoring procurement to parties involved in those soundings.

Procurement level assessment

• Aims to identify cases of market failure (eg lack of competition as a result of too few bidders)

• Aims to identify cases of market abuse (eg where bid offered is significantly above similar PPP projects)

• Key decision: proceed with procurement or revisit the programme or project level assessment?

Types of JV agreement

• What factors might you take into account when deciding on the PPP model appropriate for:

• A new rail line?• A new hospital?• Provision of broadband connection for rural areas?• Provision of renewable energy connection for rural

areas?• Provision of maintenance and building management

services for government buildings?


• Build and Transfer (BT)• Build, Lease and Transfer (BLT)• Build, Operate and Transfer (BOT)• Build, Own and Operate (BOO)• Build, Own, Operate and Transfer (BOOT)• Build, Transfer and Operate (BOT)• Contract, Add and Operate (CAO)


• Develop, Operate and Transfer (DOT)• Rehabilitate, Operate and Transfer (ROT)• Rehabilitate, Own and Operate (ROO)• Build, Own, Operate and Maintain (BOOM)• Lease management contract• Management contract• Service contract• Contract for services• Supply, operate and Transfer

Using PPP to secure community benefits and economic empowerment

• Interaction with economic empowerment laws?• Alternative approaches?

• Shareholding?• CSR and knowledge transfer?• Community trusts?

• Securing contractual protection for community benefits

Community engagement and dispute resolution

• What about community engagement?

• An aspect of feasibility studies?

• An element of evaluation/award criteria?

• Who pays, and who should be responsible?

• What can we learn from the Equator Principles?


• Community rights over land

• Non-judicial, no- or low-cost “dispute resolution” procedures

• In practice, community engagement and information

• Community planning processes

• More than a tick-box approach?


• Understanding investor concerns relating to community rights and the scope for disputes

• Designing an appropriate procedure

• Achieving low- or no-cost, accessible procedures

• Who pays?

Dealing with unsolicited project proposals


• World Bank Group/PPPIAF report, August 2014• Unsolicited Proposals – an exception to public initiation

of infrastructure PPPs• In light of all the issues and concerns outlined in this study with respect to

USPs, one might draw the simple conclusion that it is extremely difficult to manage USPs, and therefore, it is preferable not to allow USPs at all. However, USPs are a reality in many countries, and there are no indications that their use will completely fall out of favor anytime soon. The nature of the private sector is to be proactive in the face of challenges and opportunities, which is demonstrated by the multitude of USPs submitted to governments worldwide. One way or another, governments with poor capacity to develop and implement a public investment agenda pose an opportunity to proactive private-sector entities. Some of these private initiatives actually lead to the realization of public value.


• World Bank Group/PPPIAF report, August 2014• Despite the importance of innovation, USPs in less mature

PPP/infrastructure environments are not very innovative. The role of innovation, with respect to infrastructure development, is tenuous in countries that have less mature PPP/USP frameworks and a poor track record of modern public investment projects. At times, USPs brought to them could be considered relative and innovative in the context of the technology available in the country. For example, printing technology for personal identification documents as well as fare collection technology could be unavailable in certain countries, and could be considered innovative in those countries. In fact, these technologies have been known to be offered to governments as USPs in some developing countries. However, in developed countries, these technologies do not amount to real innovation and could be sourced by governments through regular procurement from international suppliers.


• World Bank Group/PPPIAF report, August 2014• Less formalized procedures can lead to high transactions costs. Experts

and survey respondents indicate that many USPs can be qualified as poorly prepared and structured, opportunistic (in the sense that they cater primarily to a private party’s interest) and not very detailed and committed. This requires detailed preparation at a later stage, which leads to slower implementation and larger transaction costs. A sophisticated set of minimum requirements (and the enforcement of them) can significantly reduce the unnecessary transaction costs.


Option Description Pros Cons

Swiss challenge Open tender in which USP has the right to match winning bid

Good where price is the single award criterion

Difficult to conduct where price and quality are relevant

Bonus system Fixed bonus points (5-10%) in evaluation

Simple approach avoiding subjectivity and manipulation

Bonus is essentially arbitrary. Difficult to apply in multi-criteria evaluation

Automatic shortlisting

USP proponent does not have to incur costs in qualifying but goes directly to BAFO

Transparent and open, requiring proponent to make final offer against competition

Little reward to the USP proponent


• World Bank Group/PPPIAF report, August 2014• The issue of public-sector capacity and miscalculation can be illustrated by

the Tanzanian experience with setting up and negotiating a Power Purchase Agreement.

• The arrangement was made under the General Procurement Act as an emergency procurement on the basis of pressing power shortage issues. The project was initiated by a private U.S. investor.

• During negotiations, the government accepted certain guaranteed payments to remunerate the proponent for capacity charges, which were guaranteed by the Ministry of Finance.

• However, the power production facility’s capacity was not fully used, because the national energy company was unable to adequately deliver power to the grid. This left the Tanzanian government making payments for capacity it did not use.


• Tanzania PPP Amendment Act 2014• The Amendment Act provides that all PPP projects (both solicited and

unsolicited) must be procured through an open and competitive bidding process.

• This contrasts with what was previously proposed in the Amendment Bill which exempted unsolicited bids from having to undergo a competitive bidding process.

• The Amendment Act further removes the ability of a procuring entity to give an ‘advantage’ to an unsolicited proposal. The PPP Act previously allowed for an advantage to be given to an unsolicited proposal during the tender process. This is no longer the case.

(Thanks to Peter Kasanda, Partner, Clyde & Co Tanzania for this update)


• Compensation for USP proponents?

• Intellectual property rights?

• Recovery of costs?

South Africa’s USP framework requires the proponent to be reimbursed for certain audited costs and for purchase of intellectual property rights, if any, by the public authority before procurement of the project


• Kenya PPP Act 2013, Part VIII: Privately initiated projects

• (a) there is an urgent need for continuity in the construction, development, maintenance or operation of a facility or provision of a service and engaging in the competitive procurement process would be impractical: Provided that the circumstances giving rise to the risk of disruption were not foreseeable by the contracting authority or the result of an unreasonable failure to act by the contracting authority;

• (b) the costs relating to the intellectual property in relation to the proposed design of the project is substantial;

• (c) there exists only one person or firm capable of undertaking the project, maintaining the facility or providing the 'service or such person or firm has exclusive rights over the use of the intellectual property, trade secrets or other exclusive rights necessary for the construction, operation or maintenance of the facility or provision of the service; or

• (d) there exists any of the circumstance as the Cabinet Secretary may prescribe.



• A contracting authority shall not consider a project for procurement under this section unless it is satisfied that- (a) the project shall provide value for money; (b) the project shall be affordable; and (c) the appropriate risks are transferred to the private

party. PPP Act 2013, section 61(3)



• A contracting authority shall not consider a project for procurement under this section unless it is satisfied that- (a) the project shall provide value for money; (b) the project shall be affordable; and (c) the appropriate risks are transferred to the private

party. PPP Act 2013, section 61(3)


• Joint Venture Bill, clause 12:• USP must be referred to the Unit• Unit must consult with the contracting authority and

carry out a preliminary assessment to determine whether the project is acceptable

• If the project is considered suitable then the Unit must seek approval from the Committee for the proponent to carry out a feasibility study

• If the project is considered unsuitable then the Unit must notify the contracting authority and the proponent


• Should contracting authorities restrict alienation of contracts awarded following an unsolicited proposal?

• Kenya’s experience?


Zambia’s approach:(1)A contracting authority may receive, consider, evaluate proposal and accept an unsolicited proposal for a public private partnership if the proposal —

(a) is independently originated and developed by the proposer; (b) shall be beneficial to the public; (c) has been prepared without the supervision of the Unit or a contracting authority; and (d) includes sufficient detail and information for a contracting authority to evaluate the proposal in an objective and timely manner.


Zambia’s approach:(4) A contracting authority shall, where an unsolicited

proposal does not comply with subsection (1), return the proposal without further action.

(5) A contracting authority may, if an unsolicited proposal complies with subsection (1), continue to evaluate the proposal in accordance with this section.

(6) A contracting authority shall, if an unsolicited proposal complies with subsection (1), advertise the unsolicited proposal for the purpose of receiving competitive proposals for the same project.

What makes a “fundable” or “bankable” project?

What makes a “bankable” project?

• Predictable and reliable processes? A matter of perception?

• Secure and predictable income stream?

• Security over assets?

• Comfort concerning legal, regulatory and judicial regime?

• Transferability?

What makes a “bankable” project?

• Reliable funding• A joint venture agreement must provide for the payment

to the counterparty for performing the contracted function or services by way of:

• compensation from funds appropriated by Parliament• funds obtained by way of loans by the contracting

authority• user levies, or• a combination of such funds and user levies

Government guarantees?

• Sovereign guarantees?

• External guarantees?

• Letters of comfort?

• Tax incentives?

3

Multiple Approvals?

Project

NEMAKFS

KR

KENHAKPLC

KPC

KWS

KURAWRMA

KCAA

Simplified/centralised process?

Project risks?

• Risk of litigation or significant protest/disruption?

• Risk of force majeure events?

• Due diligence?

• Labour issues?

• Governing law and dispute resolution?

Project risks?

South Africa: report on communityprotests.2011 Report by: Jelani Karamoko 2010 Report by: Hirsh Jain

Procurement and project life-cycle

Is PPP/Joint venture appropriate?

• Transaction advisor: role and responsibilities?• Risks?

• Assessing suitability for PPP

• Selecting a PPP model that fits with the project life cycle and risk profile

• Identifying the most appropriate solution and the most appropriate contractor(s)

Pre-commercial procurement or early market engagement

• Procuring innovation: how do you know what is available?

• EU: innovation partnerships

• What are the risks of early market engagement?

• Ensuring transparency and fairness

Procurement: selecting the appropriate procedures

• Is there an identified counterparty?• If so, how can key concepts such as value for money

be demonstrated?

• If there is no identified counterparty, how should procurement be conducted?

• Call for tenders• Pre-qualification/disqualification?• Negotiation?• Competitive dialogue?

Project scope

Be clear what this is

Use market soundings

Don’t go to market until

completely ready

Evaluation and scoring

Publish evaluation criteria and weightings

Do not change them once

procurement begins

Level one criteria Overall Weighting (%)

Financial 40

Technical 40

Contractual, employment and Partnership

20

Total 100

Debriefing unsuccessful bidders

Give detail of why a bid was unsuccessful

Be helpful

Encourage market

CONTRACTUAL COMPLIANCE SCORES

CRITERION WEIGHTING %

YOUR SCORE %

SCORE OF SUCCESSFUL

TENDERER - %

Operations 10.0 100 100

Payment Mechanism/ Performance

12.5 60 100

Change 12.5 100 100

Insurance, Indemnities and Liability

7.5 100 100

Financial/ Security Provisions

10.0 100 100

Default, Termination and Return

10.0 100 100

Other risk areas 7.5 100 100

Total 100.0 91 98

Where is the greatest risk of challenge or disengagement?

• Procedural challenge is always easier than challenge to a substantive decision

• Transparency in decision-making reduces the risk of challenge or disengagement

• Successful projects breed successful projects


• Separation of construction and operational phases may improve performance

• Separation of “hard” and “soft” FM may improve overall performance


• Who are the contractors with a credible track record in PPP?

• Is there a risk that contractors will field the “A-team” for bids and then spin out projects once the contract has been secured?

• If so, how can you address that risk?

Payment mechanisms and incentives


• “The most frequent reason for disputes between public sector clients and the private partner is over the interpretation of the contract”

• (UK National Audit Office 2001)


• For public sector authorities, a PPP project is considered successful if it delivers cost-effective, reliable services at the price and quality defined in the contract.

• Authorities also expect service outcomes to be auditable and transparent.

• Meeting these objectives requires effective interaction between the different components of the contract management regime.


• The public sector authority’s requirements should be framed as an output specification that the private partner must meet through the delivery of construction and asset-related services

• The quality of service delivery is measured and monitored through the performance management system, which determines the correct payments to a service provider from the authority


• Where the quality of service delivery falls short of that outlined in the output specification, the payment mechanism determines the appropriate scale of the deduction


• The payment mechanism must clearly set out the time required for repair and rectifications of failures before payment deductions are triggered

• It must also include ‘ratchet’ mechanisms so that recurring or widespread failures across key services in a project lead automatically to higher deductions


• Deductions must be sufficient to incentivise good performance, but not so high that they encourage excessive pricing by private partners, or threaten the availability of debt finance

• They need to be well-balanced across all areas of performance, so as not to introduce perverse incentives or unintended consequences


• Unsuccessful partnerships have been used the payment mechanism as a punitive, revenue-generating tool, rather than as a joint management tool to optimise performance, which is its intended purpose


When designing the payment mechanism, the authority should ask:

• How demanding should we make the definitions of availability and service performance standards?

• How quickly, in terms of response and rectification periods, do problems have to be solved?

• What scope should the private partner have to provide alternative services/locations instead of having deductions applied, in order to give them greater flexibility to avoid deductions, or for allowing ‘unavailable’ facilities to be used?

• What are the right levels/weightings of deductions for unavailability or poor performance?

• What are the appropriate ratchet mechanisms for repeated or widespread failures?

• At what level should performance deductions be capped?


FIVE BASIC PRINCIPLES FOR ACHIEVING A WELL-DESIGNED PAYMENT MECHANISM

•Make no payments until the specified facilities and services are available•Link the level of payment to the level of service - both the availability of assets and the quality of the service•Never pay the unitary charge in advance of the period to which it relates•Adjust the payment mechanism for sub-standard performance, with deductions reflecting the severity of any failure. Proportionality is key – minor failure leads to a minor deduction (except in the case of persistent or widespread failure), while major failures lead to a correspondingly substantial penalty.•Strike a balance among the variables in the payment mechanism, such as the initial weighting of deductions for failures, response periods and ratchets.

Risk identification, mitigation and allocation

UK experience: Vfm


Procurement Skills deficit in contracting authorities

Greater use of centralised procurement units

Risk allocation Inefficient risk transfer

Retain key risks within public sector to avoid private sector pricing inefficiently for those risks

Value for Money Inefficiency in the PFI model

HM Treasury to implement periodic reviews to drive continuous improvement

UK experience: financing


Equity finance Excessive or “windfall” gains by private sector equity providers

Funding competition for part of equity

Equity finance II Insufficient public-private collaboration

Government to take a (minority) equity stake in all projects

Debt finance Lack of competitive long-term finance

Measures to improve project credit rating

Transparency Lack of transparency and accountability

Stronger and more extensive reporting obligations, including levels of equity return

UK experience: risk allocation

Risk Allocation Control/impact

Change of law Public sector Avoids/reduces need for private sector to price for uncertainty

Due diligence and land titles

Public sector warranties

Reduce delay and costs of investigation

Insurance Greater use of public sector self-insurance (eg material damage and business interruption)

Reduce premium costs and delays

Site contamination by external source

Public sector Eliminate inefficient risk transfer and reduce overall cost

Joint ventures: key objectives

• A feasibility study shall:• demonstrate the advantages of implementing a project

under a joint venture agreement• demonstrate that the project will

• (i) be affordable to the contracting authority; and• (ii) provide value for money; and• (iii) optimally transfer technical, operational and

financial risk to the counterparty• Joint Venture Bill, clause 9

Risk allocation and key contract terms

• Political and regulatory risk• Demand risks (eg for rail projects)• Financial risks• Completion risks• Performance risks (eg during operational stages)• Force majeure events• Step-in rights• Termination• Rights and obligations required to survive termination?

• How do we draft to maximize the chances of success?

The JV/PPP Agreement

Required clauses

• The PPP agreement must:• Identify the responsibilities of the contracting authority

and the counterparty• Specify the relevant financial terms• Ensure management of the performance of the

counterparty• Provide for the sharing of risks between the

contracting authority and the counterparty• Provide for its duration• Provide for the respective shareholdings

Required clauses

• The PPP agreement may also:• Provide for the return of the assets, if any, to the

contracting authority at the termination or expiry of the agreement, in such manner as may be provided for in the agreement

Required clauses?

• Every joint venture agreement shall be governed by and construed in accordance with the laws of Zimbabwe

• Every joint venture agreement shall provide for disputes between the contracting authority and the counterparty to be settled by arbitration according to:

• (a) the Arbitration Act; or• (b) rules defined in the agreement

• Kenya’s PPP legislation requires the “project contract” to be governed by Kenyan law. A question of definition?

The JV/PPP Agreement: identifying and managing risk

1.Case

2.Condition

3.Legal Subject

4.Legal Action

Constructing a clause according to Coode

Except

If

Who

Does (or does not) do what?

When does the clause not apply

What is the trigger?

Who is obliged, empowered or restrained?

1.Case

2.Condition

3.Legal Subject

4.Legal Action

Constructing a clause according to Coode

Except

If

Who

Does (or does not) do what?

When does the clause not apply

What is the trigger?

Who is obliged, empowered or restrained?

And if not?

Dear RajivWe are selling several consignments of machine parts to a new customer, and we have agreed that the customer will pay the charges for transport, packaging and insurance if we have to deliver them anywhere but our own distribution centre. While that will be the normal position, they won’t have to pay if we have agreed otherwise in our written quotation for a consignment, or in any other written correspondence

• Except

• If

• Who

• Does

• What

• To Whom

• Where/By When

• AND IF NOT?

Except

If

Who

Does

What

To whom

Where/by when

AND IF NOT?

if the seller agrees to deliver the goods otherwise than at the seller’s own premise

the customer

must pay

the charges for transport, packaging and insurance

Except

If

Who

Does

What

To whom

Where/by when

AND IF NOT?

to the seller

by the date for payment stipulated in clause [ ]

Except where the seller has agreed otherwise in its written quotation for a consignment or in any other written correspondence

if the seller agrees to deliver the goods otherwise than at the seller’s own premise

the customer

must pay


Except

If

Who

Does

What

To whom

Where/by when

AND IF NOT?

to the seller



If the customer requires delivery anywhere other than to the Seller’s distribution centre e so deliver the goods otherwise than at the seller’s own premise

the customer

must pay


Except

If

Who

Does

What

To whom

Where/by when

AND IF NOT?

to the seller



If the customer requires delivery anywhere other than to the Seller’s distribution centre e so deliver the goods otherwise than at the seller’s own premise

the customer

must pay


Except

If

Who

Does

What

To whom

Where/by when

AND IF NOT?

To the Seller [?] the seller

On or before the date specified in clause [ ]date for payment stipulated in clause [ ]

Except where the Seller has agreed otherwise in its written quotation for a consignment or in any other written correspondence, if the Customer requires the Goods to be delivered anywhere other than to the Seller’s distribution centre, the Customer must on or before the date specified in clause [ ] pay [to the Seller] the charges for transport, packaging and insurance





And if not?

If the Customer fails to make full payment under clause [ ] by the due date, it must pay interest on the overdue amount at the rate of 12% per annum above the Bank of India’s base rate from time to time. Such interest will accrue on a daily basis from the due date until actual payment of the overdue amount, whether before or after judgment. The Customer must pay the interest together with the overdue amount.

And if not?

If the Customer fails to make full payment under clause [ ] by the due date, it must pay interest on the overdue amount at the rate of 12% per annum above the Bank of India’s base rate from time to time. Such interest will accrue on a daily basis from the due date until actual payment of the overdue amount, whether before or after judgment. The Customer must pay the interest together with the overdue amount.

And if not?

The agreement...

“shall continue in force for a period of five years from the date it is made, and thereafter for successive five year terms, unless and until terminated by one year prior notice in writing by either party.”

Does this clause create a minimum 5 year term?

This agreement shall continue in force for a period of five years from the date it is made, and thereafter for successive five year terms, unless and until terminated by one year prior notice in writing by either party.

This agreement shall continue in force for a period of five years from the date it is made [, and thereafter for successive five year terms,] unless and until terminated by one year prior notice in writing by either party.

This agreement shall continue in force for a period of five years from the date it is made, [and thereafter for successive five year terms,] unless and until terminated by one year prior notice in writing by either party.

This agreement shall continue in force for a period of five years from the date it is made, and thereafter for successive five year terms unless and until terminated by one year prior notice in writing by either party.

comma removed

This agreement shall continue in force

(1) for a period of five years from the date it is made, and (2) thereafter for successive five year terms, unless

and until terminated by one year prior notice in writing by either party.

This agreement shall continue in force

(1) for a period of five years from the date it is made, and (2) thereafter for successive five year terms,

unless and until terminated by one year prior notice in writing by either party.

Telecom Decision C.R.T.C. 2007-75, [2007] Reference: 8662-R28-200612326 (Aug. 20, 2007).

Either Party may give notice to the other requiring the Agreed Price to be determined by a third party, acting as expert (the “Expert”)

In determining the Agreed Price the Expert shall value the assets of the Business net of taxes, rebates and discounts


In determining the Agreed Price the Expert shall value the assets of the Business net of taxes, freight rebates and discounts


In determining the Agreed Price the Expert shall value the assets of the Business net of taxes, freight, rebates and discounts





Rectification?

AMJ Campbell Inc. v. Kord Products Inc., 2003 5840 (ON SC)

Defining obligations: design life or lifetime warranty?

MT Højgaard a/s v EON Climate and Renewables UK Robin Rigg East [2015] EWCA Civ 407

Independent classification and certification agency

University of Aalborg

International standard J101

remedial works in the sum of €26.25 million

DNV carried out an internal review during August/September 2009. They discovered that there was an error in the value given for δ to be used in the parametric equation

International standard

J101

δ "should be taken as 0.00037 Rp for rolled steel surfaces"

Remedial works in the sum of €26.25 million

remedial works in the sum of €26.25 million

DNV carried out an internal review during August/September 2009. They discovered that there was an error in the value given for δ to be used in the parametric equation. It was wrong by a factor of about 10.

International standard

J101

δ "should be taken as 0.00037 Rp for rolled steel surfaces"

Remedial works in the sum of €26.25 million

MTH duly prepared its tender in accordance with the Employer's Requirements and J101.

The task for the court

Jackson LJ:

"Ultimately the court must decide which party should pay the bill for repairing foundation defects in a situation where, (on the judge's findings) there has been no negligence or want of professional skill on either side. The problem arises because MTH was required to comply with J101, which contained a significant error.“

“The court is confronted in this case with contractual documents of multiple authorship, which contain much loose wording. The task of the court is to identify the precise extent of the obligations imposed upon MTH.”

Conditions of Contract, Clause 8

(iv) in a professional manner in accordance with modern commercial and engineering, design, project management and supervisory principles and practices and in accordance with internationally recognised standards and Good lndustry Practice;

(viii) so that the Works, when completed, comply with the requirements of this Agreement and shall comply with all Legal Requirements other than the consented construction noise limit ………..;

(x) so that each item of Plant and the Works as a whole shall be free from defective workmanship and materials and fit for its purpose as determined in accordance with the Specification using Good Industry Practice;…(xv) so that the design of the Works and the Works when Completed by the Contractor shall be wholly in accordance with this Agreement and shall satisfy any performance specifications or requirements of the Employer as set out in this Agreement; and…"

"Good Industry Practice“

"those standards, practices, methods and procedures conforming to all Legal Requirements to be performed with the exercise of skill, diligence, prudence and foresight that can ordinarily and reasonably be expected from a fully skilled contractor who is engaged in a similar type of undertaking or task in similar circumstances in a manner consistent with recognised international standards.”

J101 is a detailed standard, which is intended to lead to offshore structures with a design life of 20 years.

Technical Requirements.

TR section 1 contains a general description of the works.

Paragraph 1.6 states:

"The Wind Farms are to be designed, constructed and operated to provide the lowest lifetime cost option capable of meeting the full requirements of this Specification. Maximum output with minimum maintenance and maximum availability to generate are the prime requirements of the scheme. …The Works, together with the interfaces detailed in Section 8, shall be designed to withstand the full range of operational and environmental conditions with minimal maintenance.

The Works elements shall be designed for a minimum site specific 'design life' of twenty (20) years without major retrofits or refurbishments; all elements shall be designed to operate safely and reliably in the environmental conditions that exist on the site for at least this lifetime."

Paragraph 3.2.2.2 : "The design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement. The choice of structure, materials, corrosion protection system operation and inspection programme shall be made accordingly."

Paragraph 3.2.3.2 requires the contractor's design to accord with national and international rules, as listed. The first item in the list is stated only to be valid if formally published, which it never has been. The second item in the list, which therefore occupies the top place, is J101 (2004).

Paragraph 3.2.5 requires the contractor to design and construct grouted connections in accordance with J101.

Paragraph 3b.5.1 states: "The design of the structures addressed by this Design Basis shall ensure a lifetime of 20 years in every aspect without planned replacement. The choice of structure, materials, corrosion protection system operation and inspection programme shall be made accordingly.“

Paragraph 3b.5.6 states: "All parts of the Works, except wear parts and consumables shall be designed for a minimum service life 20 years."

Clause 5.3 - in the event of inconsistencies, the order of precedence of the contractual documents should be as follows:

(a) the form of agreement

(b) the conditions of contact and the List of Definitions

(c) the commercial schedules and the schedule of prices, payment profile and draft programme

(d) the Employer's Requirements

(e) the annexes to the Employer's Requirements

(f) volumes 2A, 2B and 3 of the contractor's tender return.

“If the contractor was really required to produce a guaranteed operational life of 20 years, the rest of the TR and J101 (even absent any error in respect of δ) would not be the right way to set about the task.”

Under clause 5.3 Contract conditions take precedence

Clause 8.1 of the contract conditionssets out the contractor's obligations

“………..if the contract required an absolute warranty of quality, one would expect to see it in clause 8.1, not tucked away in the Technical Requirements. The TR are a detailed document which comes fourth in the order of precedence.”

Clause 8

“In fact the obligations imposed by clause 8 are the opposite of requiring an absolute warranty of quality. What they require is due care, professional skill, adherence to good industry practice, compliance with the Employer's Requirements and so forth.”

(x) so that each item of Plant and the Works as a whole shall be free from defective workmanship and materials and fit for its purpose as determined in accordance with the Specification using Good Industry Practice;……"

fit for purpose

TR paragraphs 3.2.2.2 (2) and 3b.5.1 are inconsistent with the remainder of the TR and J101.

They are too slender a thread upon which to hang a finding that MTH gave a warranty of 20 years life for the foundations. If TR paragraph 3.2.2.2 (2) and paragraph 3b.5.1 do not have that effect, then without them clause 8.1 of the conditions cannot avail E.ON. Clause 8.1 does not contain any warranty that the foundations will have a 20 year life.

If the contractor was given such a guarantee or a warranty, he would need to make allowance for that in his tender. The need for such allowance should have been clearly flagged up in the contract documents.

Double obligation?

Did contract require contractor

(a) to comply with particular specifications and standards

and

(b) to achieve a particular result

Hudson's Building and Engineering Contracts (1959) 8th edition

"Sometimes, again, a contractor will expressly undertake to carry out work which will perform a certain duty or function in conformity with plans and specifications, and it turns out that the work constructed in accordance with the plans and specifications will not perform that duty or function.

It would appear that generally the express obligation to construct a work capable of carrying out the duty in question overrides the obligation to comply with the plans and specifications, and the contractor will be liable for the failure of the work notwithstanding that it is carried out in accordance with the plans and specification.”

The Steel Company of Canada Limited v Willand Management Limited [1966] SCR 746

Supreme Court of CanadaContractor agreed to carry out roof works in accordance with the

employer's specification and it also furnished a guarantee that the roof would be weathertight for five years

Roof failed during the five year period because one of the materials specified was unsuitable

Supreme Court held that the contractor was liable under the guarantee, even though it had fully complied with the specification.

Greater Vancouver Water District v North American Pipe & Steel Ltd and Moody International Ltd [2012] BCCA 337

Court of Appeal for British Columbia

Defendants agreed to supply water pipes to the plaintiffto comply with the specifications provided to them

They also warranted that the goods would be fit for purpose and free from any defects arising from faulty designThe specified coating was unsuitable and the pipes failed

HeldDefendants were liable even though they had complied with the specifications

Greater Vancouver Water District v North American Pipe & Steel Ltd and Moody International Ltd [2012] BCCA 337

Court approved the following statement of principle of the trial judge:

"The general rule is that defects caused by an owner's specification are not the responsibility of the contractor, unless the contractor expressly guarantees that the construction would be fit for a specific purpose,

or a warranty can be implied by the owner's actual reliance on the contractor's skill and judgment."

Fit for Purpose

Fit for purpose obligations

Strict obligation

But, "fit for what purpose?”

GCC 4.1 of FIDIC Yellow and the Silver Bookthe purposes for which the Works are intended as defined in

the Contract".

Design life

No one definition

“If a structure has a design life of 20 years, that does not mean that inevitably it will function for 20 years, although it probably will.”

Jackson LJ

Force majeure: suspending or excusing performance

DraftingForce

MajeureClauses

So perhaps it would be simpler to say at the outset that frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.

Lord Radcliffe in Davis Contractors v Fareham UDC [1956] AC 6969

Force majeure

Force majeure

“A boilerplate clause that suspends (and may end) performance of obligations where a party is prevented from performing by events outside its control.”

Practical Law Commercial

Force majeure

“Certain events, beyond the control of the parties, may inhibit the parties from fulfilling their duties and obligations under project agreements.To avoid the resultant breach of contract, parties may prefer to excuse contractual obligations to the extent that they have been so inhibited”

World Bank infrastructure and law website

Why do we include express provisions to deal with force majeure?

• Common law doctrine of frustration is difficult to apply:• Results in

• Immediate termination of the contract, and • release from obligations arising after the event of

frustration

• The potentially harsh effect of the common law doctrine of frustration is that loss lies where it falls. Only partly mitigated in English law by the House of Lords ruling in the Fibrosa [1943] AC 32 and Law Reform (Frustrated Contracts) Act 1943

Why do we include express provisions to deal with force majeure?

• Express force majeure provisions allow the parties to a contract to:

• Identify and provide for specific events, which may fall short of common law frustration, and

• Provide for the consequences of those specified events occurring

• An express force majeure clause may provide for:• Termination, and• Allocation of losses OR• Continuation of the contract, and• Allocation of losses

FIDIC (International Federation of Consulting Engineers)

'Force majeure' is an exceptional event or circumstance which meets the following criteria:

•it is beyond a party's control;

•the party could not reasonably have provided against it before entering into the contract;

•the party cannot reasonably overcome it; and

•it is not substantially attributable to the other party.

It includes:•war, hostilities or invasion;•rebellion, terrorism, revolution or civil war;•riot, commotion, disorder, strike or lockout by persons other than the employees of the contractor and sub-contractors;•munitions, explosives, ionising radiation or contamination by radio-activity, except as may be attributable to the contractor's use of them; and•natural catastrophes, for example, earthquakes, hurricanes, typhoons or volcanic activity.


• Subject to giving notices, a party who is prevented from performing any of its obligations by force majeure is excused performance for as long as the force majeure prevents it from performing.

• If the contractor is delayed by force majeure, he is entitled to an extension of time.

• If the force majeure (i) is any of the specified events with the exception of natural catastrophes, and (ii) with the exception of wars and hostilities, occurs in the country where the site is located, the contractor is also entitled to be reimbursed for any additional cost.


If execution of the works is prevented for a continuous period of more than 84 days, or for multiple periods which total more than 140 days, then either party may give notice terminating the contract. If the contract is terminated the contractor is entitled to be paid for:•the value of work done;•the cost of materials delivered;•the cost of removal of plant and equipment and the repatriation of staff; and •any other cost to which the contractor was committed in respect of the works.


“Force Majeure Event” means the occurrence after the date of Contract of:

• (a) war, civil war, armed conflict or terrorism; or • (b) nuclear, chemical or biological contamination

unless the source or the cause of the contamination is the result of the actions of or breach by the Contractor or its subcontractors; or

• (c) pressure waves caused by devices travelling at supersonic speeds, which directly causes either party (the “Affected Party”) to be unable to comply with all or a material part of its obligations under this Contract.

UK PFI

Force majeure

Force Majeure Event means any circumstance not within a party's reasonable control including, without limitation:(a) acts of God, flood, drought, earthquake or other natural disaster;(b) epidemic or pandemic;(c) terrorist attack, civil war, civil commotion or riots, war, threat of or preparation for war, armed conflict, imposition of sanctions, embargo, or breaking off of diplomatic relations;(d) nuclear, chemical or biological contamination or sonic boom;(e) any law or any action taken by a government or public authority, including without limitation imposing an export or import restriction, quota or prohibition, or failing to grant a necessary licence or consent;(f) collapse of buildings, fire, explosion or accident; (g) any labour or trade dispute, strikes, industrial action or lockouts (other than in each case by the party seeking to rely on this clause, or companies in the same group as that party;(h)non-performance by suppliers or subcontractors (other than by companies in the same group as the party seeking to rely on this clause); and(i) interruption or failure of utility service.

Force majeure

if a party is prevented from performing any of its obligations under this agreement by a Force Majeure Event (Affected Party), the Affected Party shall not be in breach of this agreement or otherwise liable for any such failure or delay in the performance of such obligations. The time for performance of such obligations shall be extended accordingly.

Force majeure

• Tsakiroglou v Noblee & Thorl [1961] 2 ALL ER 179

• Suez canal closed in 1956• Contract for shipment of Sudanese

groundnuts

• "In case of prohibition of import or export, blockade or war, epidemic or strike, and in all cases of force majeure preventing the shipment within the time fixed, or the delivery, the period allowed for shipment or delivery shall be extended by not exceeding two months. After that, if the case of force majeure be still operating, the contract shall be cancelled."

Force majeure

• Tsakiroglou v Noblee & Thorl [1961] 2 ALL ER 179

• Court held that shipping via Cape of Good Hope would not render contract commercially or fundamentally different

• The contract did not expressly provide by what route the groundnuts should be shipped.

Force majeure

if a party is prevented, hindered or delayed in or from performing any of its obligations under this agreement by a Force Majeure Event (Affected Party), the Affected Party shall not be in breach of this agreement or otherwise liable for any such failure or delay in the performance of such obligations. The time for performance of such obligations shall be extended accordingly.

Force majeure

if a party is prevented, hindered or delayed in or from performing any of its obligations under this agreement by a Force Majeure Event (Affected Party) [or if performance of an obligation under this agreement becomes materially more difficult or costly], the Affected Party shall not be in breach of this agreement or otherwise liable for any such failure or delay in the performance of such obligations. The time for performance of such obligations shall be extended accordingly.

Force majeure

Force Majeure Event means any circumstance not within a party's reasonable control including, without limitation:(a) acts of God, flood, drought, earthquake or other natural disaster;(b) epidemic or pandemic;(c) terrorist attack, civil war, civil commotion or riots, war, threat of or preparation for war, armed conflict, imposition of sanctions, embargo, or breaking off of diplomatic relations;(d) nuclear, chemical or biological contamination or sonic boom;(e) any law or any action taken by a government or public authority, including without limitation imposing an export or import restriction, quota or prohibition, or failing to grant a necessary licence or consent;(f) collapse of buildings, fire, explosion or accident; [and](g) [any labour or trade dispute, strikes, industrial action or lockouts [(other than in each case by the party seeking to rely on this clause, or companies in the same group as that party)];](h) [non-performance by suppliers or subcontractors [(other than by companies in the same group as the party seeking to rely on this clause)]; and](i) interruption or failure of utility service.

Force majeure

Force Majeure Event means any circumstance not within a party's reasonable control including, without limitation:(a) acts of God, flood, drought, earthquake or other natural disaster;(b) epidemic or pandemic;(c) terrorist attack, civil war, civil commotion or riots, war, threat of or preparation for war, armed conflict, imposition of sanctions, embargo, or breaking off of diplomatic relations;(d) nuclear, chemical or biological contamination or sonic boom;(e) any law or any action taken by a government or public authority, including without limitation imposing an export or import restriction, quota or prohibition[, or failing to grant a necessary licence or consent];(f) collapse of buildings, fire, explosion or accident; [and](g) [any labour or trade dispute, strikes, industrial action or lockouts [(other than in each case by the party seeking to rely on this clause, or companies in the same group as that party)];](h) [non-performance by suppliers or subcontractors [(other than by companies in the same group as the party seeking to rely on this clause)]; and](i) interruption or failure of utility service.

Force majeure

Force majeure

A change in economic or market circumstances, affecting the profitability of a contract or the ease with which the parties' obligations can be performed, is not regarded as being a force majeure event (Tandrin Aviation v Aero Toy Store [2010] EWHC 40 (Comm)). In Tandrin, collapse of the world financial markets meant a purchaser could not obtain financing. The High Court held this was not force majeure because none of the events preceding the “sweeper” phrase "any other cause beyond the seller's reasonable control" in the clause were connected to economic downturn; the phrase referred to causes beyond the seller's control (not the purchaser); and that there was no causal link between any inability by the seller to control the credit markets and the purchaser's inability to pay the purchase price.

Force majeure

In Coastal (Bermuda) Petroleum Ltd v VTT Vulcan Petroleum SA (No 2) (The Marine Star) [1996] 2 Lloyd's Rep 383, the Court of Appeal held that the proper approach is to interpret the words the parties had used, not their general intention.If a force majeure clause provides that the relevant triggering event must "prevent" performance, performance must be legally or physically impossible, not just difficult or unprofitable (Tennants (Lancashire) v G.S. Wilson [1917] AC 495). The words "hinder" and "delay" have a wider scope and will generally be satisfied if performance is substantially more onerous. A mere increase in the cost of performing the contract, however, would still be unlikely to be enough to trigger a clause with wording of this kind.

Force majeure

• What happens when the force majeure event is lifted?

Termination clauses

Termination

• Termination for cause• Contracting authority default• Private sector party default

• Termination for convenience• Political/reputational risks?

Termination for contracting authority default

Contracting authority defaults:

• expropriation or confiscation of assets or shares of the Private Partner

• non-payment of sums due to the Private Partner (e.g. availability fee)

• transfer by the Authority of its rights under the PPP contract in violation of the relevant provisions

• breach of a contractual obligation by the Authority in a manner or to a degree that frustrates the ability of the Private Partner to perform; and

• failure by the Authority to grant relevant project authorisations.

Termination for contracting authority default

• Materiality tests or thresholds are typically applied to the events in an itemised default list

• Also, Authorities are in most cases granted a cure period (the time available to the Authority to rectify the default, where possible, before contract termination)

Termination – compensation?

• Compensation for contracting authority default or voluntary termination?

• Book value compensation – In this case, the investment costs incurred for the PPP project are used as the basis for calculating the compensation. A distinction is typically drawn between termination during the construction phase and termination during the operational phase. During construction, the calculation is based on the investments effectively incurred at the date of termination by the Private Partner for the construction of the PPP assets. During operation, the value of the assets is reduced to take account of depreciation

• Financing-based compensation – In this case, compensation is defined by reference to the financing raised by the Private Partner for the project, typically senior debt, subordinated debt and equity.


• Principle of compensation – There is a need to compensate the Private Partner in the event of voluntary or Authority default termination in order to promote fairness and avoid any unjust enrichment for the Authority. The ‘no better and no worse’ principle should ultimately drive the level of compensation payable to the Private Partner

• Assessing unjust enrichment – The Authority should check the applicability of any unjust enrichment principle in its jurisdiction and assess how it may be interpreted when defining compensation provisions


• Meeting stakeholders’ needs – The Private Partner costs subject to compensation need to be carefully considered. Lenders, third party contractors and equity investors will face actual or opportunity costs as a result of early termination that may need to be compensated

• Simplicity – Simple and objective calculation methods will provide greater certainty for the private sector stakeholders (and therefore a better outcome) and will minimise the risk of disputes

• Dealing with cash balances – At the point of termination, the Private Partner will often have cash standing in a series of bank accounts (e.g. current account, debt service reserve account, maintenance reserve account). The Authority should consider how to treat these cash balances for the purposes of determining the compensation amount due (e.g. netting of monies in the debt service reserve account against the compensation owed to lenders)

Termination for private sector party default

• Where the PPP contract relies on an itemised default list it usually includes:

• insolvency/bankruptcy of the Private Partner• failure of the Private Partner to reach certain construction milestones or

project completion• failure of the Private Partner to deliver the services according to the

agreed specifications• penalty points (awarded for intermittent failures to deliver services) that

exceed specified thresholds• change of ownership of the Private Partner without the consent of the

Authority; and• failure to insure the PPP project assets/business as required.

Itemised default lists are often not ‘closed’ and contain 'catch-all’ provisions: effect?

Termination for private sector party default

• Where the PPP contract relies on an itemised default list it usually includes:

• insolvency/bankruptcy of the Private Partner• failure of the Private Partner to reach certain construction milestones or

project completion• failure of the Private Partner to deliver the services according to the

agreed specifications• penalty points (awarded for intermittent failures to deliver services) that

exceed specified thresholds• change of ownership of the Private Partner without the consent of the

Authority; and• failure to insure the PPP project assets/business as required.

Itemised default lists are often not ‘closed’ and contain 'catch-all’ provisions: effect?

Termination for private sector party default – formalities

• Notice to terminate• Obrascon Huarte Lain SA v HM AG for Gibraltar [2014] EWHC

1028 (TCC)

“Wherever these Conditions provide for the giving or issuing of consents, determinations, notices and requests, these communications shall be:

(a)In writing and delivered by hand, sent by mail or courier, or transmitted using any of the agreed systems of electronic transmission as stated in the Appendix to Tender; and

(b)Delivered, sent or transmitted to the address of the recipient’s communications as stated in Appendix A

Notice of termination was delivered by hand at the Site Office

Termination for private sector party default - formalities

• Notice to terminate• Obrascon Huarte Lain SA v HM AG for Gibraltar [2014] EWHC

1028 (TCC)

“Wherever these Conditions provide for the giving or issuing of consents, determinations, notices and requests, these communications shall be:

(a)In writing and delivered by hand, sent by mail or courier, or transmitted using any of the agreed systems of electronic transmission as stated in the Appendix to Tender; and

(b)Delivered, sent or transmitted to the address of the recipient’s communications as stated in Appendix A

Notice of termination was delivered by hand at the Site Office

Termination for private sector party default - formalities

• Notice was held effective

• “it is a matter of contractual interpretation, first, as to what the requirements for the notice are and, secondly, whether each and every specific requirement is an indispensable condition compliance without which the termination cannot be effective. That interpretation needs to be tempered by commercial common sense”• Aikenhead J

• Likely outcome in your jurisdiction?

Termination

• Should the private sector party be allowed a “cure” period?

• Who might have “step-in” rights? .

Step-in rights

Step-in rights

• Contracting authority’s or Lenders’ step-in rights are important provisions for the bankability of PPP projects

• They give the lenders the ability to rescue a project if the Private Partner has defaulted on one of its key obligations by taking remedial action before the Authority terminates the contract

• In doing so, lenders will aim to protect their loan • Step-in typically involves the appointment of a

suitable substitute Private Partner

Step-in rights

• When should a lender have step-in rights?

• How should the lender be notified that step-in rights have become exercisable?

• Is there a risk of waiver?

• What limits do you think should apply to step-in rights?

• How long should the lender have to remedy defaults?

• At what point should the lender “step-out”?

Step-in rights

• When should the contracting authority have step-in rights?

• Does the contracting authority require notification that step-in rights have become exercisable?

• Site control issues?

• What limits do you think should apply to step-in rights?

• At what point should the contracting authority “step-out”?

Liquidated damages

• Liquidated damages are valid unless struck down as a penalty clause

Liquidated damages

genuine attempt to pre-estimate loss

OrIs commercially

justifiable

Penalty

clause whose predominant purpose

is to deter a party from breach of contract

Drafting for remedies

• Genuine pre-estimate of loss

– Safest way

– Be able to show how you reached the figure

• Commercial justification

– Less safe– Clear in documents– Recitals to the

agreement? • Explaining

justification• Mere recital that

clause is a genuine pre-estimate unlikely to suffice

– In written negotiations– Keep note of oral

negotiations• Can you offer alternative?

Drafting for remedies

Penalty?

• Berg v Blackburn Rovers [2013] EWHC 1070• Football manager on a 5 year contract• Sacked after 57 days• Entitled to payment for the balance of the 5 year

term? (approximately £2.25 million)• Club argued

• Director had no authority to agree anything other than a liquidated damages clause, and

• £2.25 million was a penalty

Penalty?• The clause

– In the event that the Club shall at any time wish to terminate this Agreement with immediate effect, it shall be entitled to do so upon written notice to the Manager and provided that it shall pay to the Manager a compensation payment by way of liquidated damages in a sum equal to the Manager’s gross basic salary for the unexpired balance of the Fixed Period…”





Remedies

Remedies

• Damages?– Hadley v Baxendale “limb 2”

• Liquidated damages?– Penalty?

• Contractual liability cap?

• Specific performance?

Remedies

• “Warrant and represent”• What is the appropriate remedy?

Warranty = a contractual statement of fact

Representation = a statement of fact that induces a party to enter into the contract

Spice Girls

111

The effect of misrepresentation

• BskyB v HP Enterprise Services [2010] EWHC 86 (TCC)

• Contract value = £48 million• Contractual liability cap = £30 million• Claim = £700 million• Settlement = £318 million

Contract management, monitoring and evaluation

Negotiation and renegotiation

• Renegotiation of a PPP transaction involves a change to the original contractual terms and conditions, as distinct from an adjustment (in payments or tariffs) that takes place pursuant to a mechanism defined in the contract

• A very significant number of PPP infrastructure transactions have been renegotiated after the contracts have been signed

• Renegotiations frequently occur within a short period of time following financial close

• The problem is particularly acute in certain sectors, notably water and sanitation

• The majority of renegotiations are initiated by the private sector operators, but there are also instances of government-requested renegotiations

Contract management

Contract management

• Key risk areas:– Warranties and representations– Indemnities– Performance management and payment regimes– Liquidated damages for delay or non-performance– Liability caps or exclusions– Insurance requirements– Termination rights– Dispute escalation and resolution

Contract management

www.LAW2020.co.uk

Contract lifecycle

• When does the process begin?• When does it end?

• Business case Procurement Contract

• Contract Performance

• Contract Performance Renewal

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Contract management software: the complete answer?

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Key features of contract management software

• A central repository and an enterprise-wide, structured process to manage contract creation and execution

• Effective management of contract milestones via automated alerts

• Automated workflow for contract review and approvals

• Obligations management capabilities and key performance indicators to improve contract compliance and performance

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• Upload and organise contract documents• Link related contracts• Set alerts for renewal/extension deadlines• Identify responsible individuals• Set escalation/reporting milestones or events• Compare data across contracts (eg price, costs)• Notes about suppliers• Details of dispute escalation/resolution procedures

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www.LAW2020.co.uk

www.LAW2020.co.uk


• Cloud-based?• Controlled access/permission levels• Analytics and graphic output

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• Version control to track variations• How can a contract be varied?

• Australian case: GEC Marconi v BHP Information Technology (2003) 201 ALR 55– Contract varied by conduct (including waiver,

estoppel, oral representation)

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Additional features?

• Contract authoring/document automation• Contract negotiation guides and parameters• Content analytics

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Out of scope?

• Contract management software cannot interpret your contracts or determine the outcome of any enforcement action

• Key issues:– Interpretation of deadlines and notice provisions– Determining the available remedies– Determining the appropriate remedies– Determining whether a clause imposes an obligation– Determining how far a discretion is controlled or

limited

Variation and renegotiation


Source: Guasch (2010) updated


• Renegotiations arise:• in regulated markets, where prices cannot be adjusted, changes in

economic circumstances will frequently lead to a request for renegotiation, either by the operator or the government

• occasionally, economic conditions will change unexpectedly due to macroeconomic conditions beyond the control of the parties (e.g. global financial crises, currency fluctuations, etc.)

• more commonly, demands for renegotiation arise due to poorly drafted contracts, or poorly prepared bids

• another major cause of renegotiation is opportunistic behaviour on the part of governments or operators:• governments may decide to adjust tariffs, or unilaterally act to capture

‘windfall profits’;• operators may believe that the circumstances give them considerable

leverage over the host government


• A high incidence of renegotiation calls into question the credibility of the process for awarding PPP transactions

• Renegotiation distorts the bidding process, by rewarding operators who are not necessarily efficient but who are skilled (re)negotiators

• Renegotiations take place without the competitive pressure of the bidding process

• The results of renegotiations often favour operators, at the expense of either or both the government and end-users

Outcomes of renegotiation

Reducing the risk of renegotation

Realistic expectations and conditions when structuring the bidding process (doing

your homework)

Assessing the capability of the counterparts – Avoiding

"low-balling"

Assessing own (government's expectations)

Negotiate technical and commercial terms with a

long-term view

Involve technical experts at all stages

Prepare Contract Management Plan in tandem with the tender and contract

negotiations

Install a short term negotiation team and a long term project management

team

Manage the project and address issues early on

Pay attention to escalation and dispute resolution

mechanics

Contract management and enforcement

• Monitoring performance• Making effective use of contract and project

management software and systems (and understanding their limitations)

• Identifying and understanding the principal remedies• Enforcing obligations and securing delivery.

• How do we ensure successful delivery of PPP projects?

Thank you

Thank you

Documents

Public Private Partnership Strategic planning and drafting for success