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
The purpose and scope of PPP
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 PPP
Government 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
‫ ـ‬Channel Tunnel 1985
‫ ـ‬Dartford Crossing 1987
‫ ـ‬Second 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
‫ ـ‬Often DBFO projects
‫ ـ‬Usually mixture of new build/refurbishment with continuing
service provisions
‫ ـ‬Public sector pays Unitary/Availability charge
➢ Concession Agreements
‫ ـ‬Charges from end-user
‫ ـ‬Hybrids 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:
‫ ـ‬Procuring authority
‫ ـ‬SPV/Project Co
‫ ـ‬Funder (debt, equity, subordinated, mezzanine, bond holders)
‫ ـ‬Subcontractors (building contractor, hard FM, soft FM)
The contractual framework
Equity
Lenders
Insurers
Loan
Agreements
Sub-contractors
(including design team)
Shareholders'
agreement
Direct Agreement
Public Sector
Authority
SPV/Project Company
Construction
Contract
Contractor
Concession Agreement
Land Transfer Agreement
Equipment suppliers
Supply Contracts
Interface Agreement
Input suppliers
Service Contracts
Interface Agreement
Operation and
Maintenance
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 profit
BUT
Over 750 signed and completed projects in all sectors
Over 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
Factor
Problem
Solution
Equity finance
Excessive or “windfall”
gains by private sector
equity providers
Funding competition for
part of equity
Equity finance II
Insufficient public-private Government to take a
collaboration
(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 PFI
‫ـ‬
"a New Approach to Public Private Partnerships" (PF2 Policy) –
Treasury 5 December 2012
‫ـ‬
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: ‫ ـ‬Competitive 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 proforma 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 Guidance
‫ـ‬
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 Guidance
‫ـ‬
reallocating risks to the public sector in respect of :
‫ ـ‬incurring capital costs resulting from (i) change of law, (ii) utilities
costs (iii) contamination and (iv) insurance
‫ ـ‬limiting PF2 projects to those requiring capital investment of
£50million or more
‫ ـ‬a competition to identify equity co-investors AFTER the
appointment of preferred bidder
‫ ـ‬delivering VFM
‫ ـ‬more 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% share
Over £3m, a 70% share
‫ ـ‬new interface arrangements due to the exclusion of soft service
from the PF2 Contract
‫ ـ‬new 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
‫ـ‬
‫ـ‬
‫ـ‬
‫ـ‬
‫ـ‬
‫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
The costs of acceleration or deferment of programmed
maintenance are borne by the authority
Lifecycle savings against budgeted costs are to be shared 50:50
reducing upside for an FM Contractor
Authorities to warrant title to land provided by them
Authorities to procure the authors of technical reports extend a
duty of care to bidders
Insurance premium risk sharing between the authority and PF2
Contractors
Authorities may step-in if an "Emergency" occurs
UK experience – PF2 highlights
BUT
‫ـ‬
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 ready
2.
No government policy changes which derail the process
3.
PF2 should be allowed to settle down without tinkering
4.
Deal flow
Key concepts
The purpose and scope of PPP
•
“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)
The purpose and scope of PPP
•
“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;
The purpose and scope of PPP
•
“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
The purpose and scope of PPP
•
•
“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
The purpose and scope of PPP
•
•
•
“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
The purpose and scope of PPP
•
“affordability” – end users
PPP Act
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;
County
Govt
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
The purpose and scope of PPP
•
•
“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)
The purpose and scope of PPP
•
•
“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
The purpose and scope of PPP
•
•
“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
The purpose and scope of PPP
•
•
“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
The purpose and scope of PPP
•
•
“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
The purpose and scope of PPP
•
•
•
“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
The purpose and scope of PPP
•
“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)
The purpose and scope of PPP
•
•
“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
The purpose and scope of PPP
•
“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
• Kenya PPP (County Governments) Regulations, reg
17
The purpose and scope of PPP
•
“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
• Kenya PPP (County Governments) Regulations, reg
17
The purpose and scope of PPP
•
“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
• Kenya PPP (County Governments) Regulations, reg
17
The purpose and scope of PPP
•
“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
•
•
The purpose and scope of PPP
•
“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.
The purpose and scope of PPP
•
“Most economically advantageous tender” in
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).
The purpose and scope of PPP
•
“Most economically advantageous tender” in
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?
Types of JV agreement
•
•
•
•
•
•
•
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)
Types of JV agreement
•
•
•
•
•
•
•
•
•
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 engagement and dispute
resolution
•
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?
Community engagement and dispute
resolution
•
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
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.
Dealing with unsolicited project
proposals
•
•
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.
Dealing with unsolicited project
proposals
•
•
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.
Dealing with unsolicited project
proposals
Option
Description
Pros
Cons
Swiss challenge
Open tender in
Good where price Difficult to conduct
which USP has the is the single award where price and
right to match
criterion
quality are relevant
winning bid
Bonus system
Fixed bonus points Simple approach
(5-10%) in
avoiding
evaluation
subjectivity and
manipulation
Automatic
shortlisting
USP proponent
does not have to
incur costs in
qualifying but goes
directly to BAFO
Bonus is essentially
arbitrary. Difficult to
apply in multi-criteria
evaluation
Transparent and
Little reward to the
open, requiring
USP proponent
proponent to make
final offer against
competition
Dealing with unsolicited project
proposals
•
•
•
•
•
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.
Dealing with unsolicited project
proposals
•
•
•
•
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)
Dealing with unsolicited project
proposals
•
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
Dealing with unsolicited project
proposals
•
•
•
•
•
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.
Dealing with unsolicited project
proposals
•
Kenya PPP Act 2013, Part VIII: Privately initiated
projects
• 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)
Dealing with unsolicited project
proposals
•
Kenya PPP Act 2013, Part VIII: Privately initiated
projects
• 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)
Dealing with unsolicited project
proposals
•
•
•
•
•
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
Dealing with unsolicited project
proposals
•
Should contracting authorities restrict alienation of
contracts awarded following an unsolicited proposal?
•
Kenya’s experience?
Dealing with unsolicited project
proposals
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.
Dealing with unsolicited project
proposals
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?
Multiple Approvals?
KFS
NEMA
KR
WRMA
KCAA
Project
KURA
KENHA
KWS
KPC
KPLC
Simplified/centralised process?
3
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
community
protests.
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
CONTRACTUAL COMPLIANCE SCORES
Give detail of
why a bid was
unsuccessful
Be helpful
Encourage
market
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
100.0
91
98
Total
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
Where is the greatest risk of
challenge or disengagement?
•
Separation of construction and operational phases may
improve performance
•
Separation of “hard” and “soft” FM may improve overall
performance
Where is the greatest risk of
challenge or disengagement?
•
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
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)
Payment mechanisms and incentives
•
•
•
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.
Payment mechanisms and incentives
•
•
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
Payment mechanisms and incentives
•
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
Payment mechanisms and incentives
•
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
Payment mechanisms and incentives
•
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
Payment mechanisms and incentives
•
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
Payment mechanisms and incentives
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?
Payment mechanisms and incentives
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
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
Factor
Problem
Solution
Equity finance
Excessive or “windfall”
gains by private sector
equity providers
Funding competition for
part of equity
Equity finance II
Insufficient public-private Government to take a
collaboration
(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
Constructing a clause
according to Coode
1.Case
2.Condition
Except
When does the clause not
apply
If
What is the trigger?
Who
Who is obliged,
empowered or
restrained?
3.Legal Subject
4.Legal Action
Does (or does not) do what?
Constructing a clause
according to Coode
1.Case
2.Condition
Except
When does the clause not
apply
If
What is the trigger?
Who
Who is obliged,
empowered or
restrained?
3.Legal Subject
4.Legal Action
Does (or does not) do what?
And if not?
Dear Rajiv
We 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?
Except
If
if the seller agrees to deliver the goods otherwise than at the
seller’s own premise
Who
the customer
Does
must pay
What
To whom
the charges for transport, packaging and insurance
to the seller
Where/by when by the date for payment stipulated in clause [ ]
AND IF NOT?
Except
Except where the seller has agreed otherwise in its written
quotation for a consignment or in any other written
correspondence
If
if the seller agrees to deliver the goods otherwise than at the
seller’s own premise
Who
the customer
Does
must pay
What
To whom
the charges for transport, packaging and insurance
to the seller
Where/by when by the date for payment stipulated in clause [ ]
AND IF NOT?
Except
Except where the seller has agreed otherwise in its written
quotation for a consignment or in any other written
correspondence
If
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
Who
the customer
Does
must pay
What
To whom
the charges for transport, packaging and insurance
to the seller
Where/by when by the date for payment stipulated in clause [ ]
AND IF NOT?
Except
Except where the seller has agreed otherwise in its written
quotation for a consignment or in any other written
correspondence
If
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
Who
the customer
Does
must pay
What
To whom
the charges for transport, packaging and insurance
To the Seller [?] the seller
Where/by when On or before the date specified in clause [ ]date for payment
stipulated in clause [
]
AND IF NOT?
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
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
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
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
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?
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.
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
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, freight rebates and
discounts
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, freight, rebates and
discounts
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, freight, rebates and
discounts
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, 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
University of Aalborg
Independent classification and
certification agency
International
standard J101
International
standard
J101
δ "should be taken as
0.00037 Rp for rolled
steel surfaces"
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
remedial works in the sum of €26.25 million
Remedial works in
the sum of €26.25 million
International
standard
J101
δ "should be taken as
0.00037 Rp for rolled
steel surfaces"
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
remedial works in the sum of €26.25 million
of about 10.
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 conditions
sets 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.”
fit for purpose
(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;
……"
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 Canada
Contractor 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 plaintiff
to 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 design
The specified coating was unsuitable and the pipes failed
Held
Defendants 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 Book
the 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
Drafting
Force
Majeure
Clauses
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.
FIDIC (International Federation of
Consulting Engineers)
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 subcontractors;
•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.
FIDIC (International Federation of
Consulting Engineers)
•
•
•
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.
FIDIC (International Federation of
Consulting Engineers)
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.
UK PFI
“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.
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.
Termination – compensation?
•
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
Termination – compensation?
•
•
•
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 “stepout”?
Liquidated damages
Drafting for remedies
• Liquidated damages are valid unless struck down as a penalty
clause
Penalty
clause whose
predominant purpose is
to deter a party from
breach of contract
Liquidated damages
genuine attempt to
pre-estimate loss
Or
Is commercially
justifiable
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 preestimate unlikely to
suffice
– In written negotiations
– Keep note of oral
negotiations
• Can you offer alternative?
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…”
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…”
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 governmentrequested 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
Contract lifecycle
• When does the process begin?
• When does it end?
• Business case
Procurement
• Contract
Performance
• Contract
Performance
Contract
Renewal
www.LAW2020.co.uk
Contract management software: the
complete answer?
www.LAW2020.co.uk
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
www.LAW2020.co.uk
Key features of contract
management software
•
•
•
•
•
•
•
•
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
www.LAW2020.co.uk
www.LAW2020.co.uk
www.LAW2020.co.uk
Key features of contract
management software
• Cloud-based?
• Controlled access/permission levels
• Analytics and graphic output
www.LAW2020.co.uk
Key features of contract
management software
• 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:
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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
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Variation and renegotiation
Negotiation and renegotiation
Source: Guasch (2010) updated
Negotiation and renegotiation
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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
Negotiation and renegotiation
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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)
Prepare Contract
Management Plan in tandem
with the tender and contract
negotiations
Involve technical experts at
all stages
Negotiate technical and
commercial terms with a
long-term view
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
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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