Contracting for PublicPrivate Partnerships United Nations Development Programme
Contracting for Public-Private Partnerships United Nations Development Programme Special Unit for South-South Cooperation Training Course Wes Strickland, Esq. Hatch & Parent Arlington, VA September 18, 2006
Outline I. III. IV. Overview of contract types General contract terms Special contract terms for each structure Final observations 2
I. Overview of Contract Types • • Operation and maintenance (O&M) Design build operate maintain (DBOM) Design build finance operate (DBFO) Build own operate (BOO) Build own operate transfer (BOOT) Buy build operate (BBO) Privatization 3
Key Structural Questions • What is the partnership project? • In what jurisdictions will the project exist? • Under what legal authority does the public partner undertake the project? • What type of entity is the private partner? • Are there pre-existing assets being contributed? • Are new assets being constructed? • Who will own the assets? • What capital resources are available to the partners? • Who will provide any needed capital and how? 4
Key Structural Questions (2) • What will the private partner do? • What payment will the private partner receive? • How will the private partner’s success be measured and rewarded (or punished)? • How will taxes be impacted? (after tax analysis) • How long will the partnership last? • What types of outside permits/approvals will be required? • Who is the end user, the public partner or the public at large? – “Sponsored” (public at large) or “managed” (public partner) 5
Basic Structural Principles • PPPs are partnerships, and each partner should act in good faith to further the purposes of the partnership • Good partnerships are based on clear understandings of each partner’s role • Tasks should be assigned to each partner according to their ability • Compensation should be based on each partner’s tasks and assumption of risk 6
O&M Contracts • Utilized when public sector partner already owns an asset for which it needs management services • Public partner maintains ownership of initial assets • Private partner provides specific services for a fee 7
DBOM/DBFO Contracts • Utilized when a new asset needs to be designed, built and possibly financed • Like O&M contract, but adding capital component • Allows access to private capital markets • Higher risk for private partner than O&M • May avoid some public labor force issues 8
Concessions • Utilized when public partner desires to have private partner take total responsibility for delivering service directly to the public, subject to contractual or regulatory terms – Utilities – Transportation infrastructure, e. g. , toll roads, bridges, airports • BOO, BOOT or BBO • “Franchise” • Affermage contracts 9
Triangular Structures (2) Private Partner for O&M/Capital Components Public Partner 10
Triangular Structures Public Partner Public or Private Partner for Capital Component Private Partner for O&M Component 11
II. General Contract Terms • Contracting to meet basic structural principles • Basic terms of PPPs • Jurisdictional limitations 12
Contracting to Implement Basic Structural Principles • Include all potential tasks in contract • Define each task as specifically as possible, and the duties of each partner to accomplish that task • Define all conditions that must be met prior to each duty arising, or that might cause a duty to cease • Define success and what happens based on success or failure – Reward/punishment – New strategy 13
Outline of Basic PPP Contract • Recitals • Definitions • Agreement clauses – – – Project definition, duties of the partners Performance standards, covenants and monitoring Payments Risk allocation Security for performance 14
Outline of Basic PPP Contract (2) • Agreement clauses (cont. ) – Term and termination – Wrap-up upon termination – Delay and force majeure – Indemnification – Affiliate guarantees – Dispute resolution 15
Outline of Basic PPP Contract (3) • Agreement clauses (cont. ) – Environmental liability – Permitting responsibility • Acquisition • Violations and fines – Relations with public end users – Default 16
Outline of Basic PPP Contract (4) • Conditions – Occurrence of milestones in larger public planning efforts – Environmental studies – Economic studies – Cross-performance conditions 17
Outline of Basic PPP Contract (5) • General provisions – Representations and warranties – Insurance – Subcontracts – Confidentiality – Choice/conflict of laws – Notices 18
Not in PPP Contracts • Public partner ceding power to exercise eminent domain for compensation – “Just compensation” – Anti-expropriation rules in international law – Right to reclaim concession during term • Public partner transferring critical assets – Natural resources, e. g. , water, gas – Usufructuary rights – Agency theory 19
Jurisdictional Limitations • Each nation and subnational jurisdiction may impose legal constraints on PPP terms • Some countries have comprehensive PPP laws – Brazil 2004 – Mexico 2003 • Types of limitations – Term – Investment amounts or ratios 20
Organizational Laws • • Awareness and contract implications Enabling laws of public partner Franchises required by private partner Foreign company rules – – Local jurisdiction entity Parent guarantees Affiliate transaction rules Handling of nonregulated business 21
III. Special Contract Terms for Each Structure 22
O&M Contracts • Description of tasks to be performed by private partner • List of public assets available for use – Initial condition – Final condition – Capital improvements during term: either party by contract 23
O&M Contracts (2) • Expense for agency rather than debt • Payment by public partner – Scope of activities – Alternatives: cost plus, formula with cap, regulated rates (see concession) – Performance standards to adjust basic payments both up and down – Performance standards affect risk and therefore required compensation for a private partner 24
O&M Contracts (3) • Transition – Services – Labor force 25
DBOM Contracts • Define the asset to be built based on the public need – Public partner review and approval – Cost approval / financing • Payments – Service component like O&M – Additional payments for adequate return on capital component • Timeline for completion – Building for growth – Payment for insufficient demands 26
Concession Contracts • Define private partner duties by public service to be provided • Exclusive or nonexclusive • General design and service standards – More limited review than other types of PPPs – Commercially reasonable service • Water example: pressure, water quality • Power example: voltage variation, outages – Objective, generally accepted standards 27
Concession Contracts (2) • Compensation – Paid from members of the public – Public subsidies for necessary services • • • Minimum income guarantees (temporary or permanent) Public capital contributions (priority of financing) Tax credits or incentives Policy question for public partner re necessary services Cross-subsidies – Sufficiency and security will greatly affect availability of private capital 28
Concession Contracts (3) • Contract v. regulatory standards – Contract • Difficulty of predicting scenarios • Simple approaches create risk (and higher cost) • Complex approaches create voluminous contracts that increase chance of disputes – Regulation • Requires expert regulatory infrastructure • Generally accepted methods (? ) • Uncertainty and cost of regulation 29
Ratesetting • Revenue requirement – Reasonable expenses pass through – Capital costs • Debt: return equal to actual interest rate • Equity: return equal to that required to gain sufficient capital, based on investments of comparable risk – Concession payments to public partner • Rate design – From rate-payer: fixed and/or variable charges – From public partner • Implemented by expert, independent organization 30
Ratesetting (2) • Rates fair to rate-payers and private partner • Calculation of rates should be objective and predictable • Rates should be calculated on a full-cost basis – Ensures that investors are protected – Explicit subsidies – Transparency • Affordability – No discrimination among similar users – Subsidies may be appropriate for certain classes of user 31
Ratesetting (3) • Should allow adjustments for events outside parties’ control – – Credit markets Labor markets Construction costs Tax changes • Avoid price fluctuations – Limit amount by which rates can grow – Must obtain rate equilibrium 32
IV. Final Observations • Many areas for PPPs are socially sensitive because necessary public services, e. g. , water – Services should be affordable • Contracts should be fair and take public needs into account for this and later PPPs • Public partner should be the “face” of the PPP for the public 33
Implementation of Agreement • PPPs are partnerships, and you must live with your partner • Terms of contracts can be revisited and adjusted on a pre-agreed schedule or upon the occurrence of certain events 34
Wes Strickland Hatch & Parent 21 E. Carrillo Street Santa Barbara, CA 93101 (805) 963 -7000 WStrickland@Hatch. Parent. com
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