General Introduction into PPP Contracts Bernard Wilson 1
General Introduction into PPP - Contracts Bernard Wilson 1
PPP Contract Design • PPP Operating contracts, not finance contracts • Many different models for PPP contracts: concession agreements, DBOM, franchises, management contracts 2
What does the contract do? • Sorts out what the parties have agreed to do • Sorts out what will happen if one or other of the parties does not perform obligations • Should set out a mechanism for managing change 3
What does the contract not do? • The contract documentation cannot by itself create a viable PPP contract • There must be a real consensus between the parties • The parties must be able to deliver what they have promised 4
The Terms of the Agreement • • • What the parties do (contract specification) How risks are allocated What they are paid How performance is measured Other terms e. g. guarantees 5
What happens if things go wrong • Incentives/penalties: “tickle, hurt, kill” • Step in rights: e. g. for safety or essential services • Substitution rights/ termination: ultimate remedy • [Re-negotiation : Start again] 6
Dealing with Change • External challenges: change of law, regulatory action; physical threats • Internal change: revising specification, responding to changed economic circumstances 7
Case Study • London Underground PPP • London Underground, largest, busiest (and oldest) urban railway system • 600 km route miles, with 400 stations • 1 bn passenger journeys • £ 2 bn fare-box revenue 8
The Project • Modernise the system: renew and upgrade track, stations and trains • Train operation and revenue risk retained in the public sector 9
Why PPP? • Benefits of private sector project management expertise • PPP structure allows works to be carried out more quickly • Long term concession structure ensures stable funding 10
How was it done? • Existing business restructured • Train operations split from infrastructure and train maintenance – 3 SPVs created • SPVs transferred to private sector on 30 year concession agreement • All assets return to the public sector at the end of 30 years 11
The PPP contract • Output based specification: train miles, system availability, station condition: calibrated each day • Fixed charge; but with incentive payments and abatements • Planned enhancements built into specification • 30 year term; reviews after 71/2 years 12
Procurement • 3 SPVs allows for competitive procurement process • EU rules apply to competition • EU Commission ruled no State Aid • Contracts split 2/1 between successful consortia • Contracts let in early 2003 13
Financial Structure • System charge, initially £ 1. 4 bn per annum set at level to allow SPVs to borrow to fund enhancements • Financial return to investors through efficiency savings • Change mechanisms (Statutory Arbiter) to protect the parties at periodic reviews 14
Progress so far • Too early to see improvements • Second round financing achieved in 2003 and 2004 • Structure sufficiently robust to cope with financial problems with two members of the consortia 15
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