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Government of India Ministry of Finance Department of Economic Affairs

Government of India Ministry of Finance Department of Economic Affairs

This document has been prepared to record and disseminate the position papers and proceedings of the high-level policy workshop on criticality of legal issues and contracts for public private partnerships, which was organised by Department of Economic Affairs in collaboration with the Asian Development Bank on December 8-9 in 2008, new Delhi, India. no part of this document may be replicated, quoted or printed without written confirmation from Department of Economic Affairs, Ministry of Finance, Government of India.

Department of Economic Affairs All rights reserved

Designed and Published by PPP Cell Department of Economic Affairs Ministry of Finance Government of India new Delhi-110001 India www.pppinindia.com

Printed by Macro Graphics Pvt. Ltd. www.macrographics.com

Disclaimer
The information and opinions expressed in this document are those of the authors, and participants and do not reflect the views and policies of the Government of India and the Asian Development Bank (ADB). The Government and ADB do not guarantee the accuracy of the data included in this publication and accept no responsibility for any consequences of their use.

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Foreword
A sustained growth of the Indian economy is critical for equitable development in the country which can impact all strata of society. The requirement for sustainable infrastructure development is paramount both to provide the backbone for economic activities as well to ensure that resources are conserved and used most efficiently. Public private partnerships or PPPs are seen to have a significant role in bringing in much needed investments as well as efficiencies in utilisation and management of resources. Various estimates point to the fact that if the economy has to grow at 8 percent per annum, over $ 500 billion of investment is needed for the infrastructure sectors between 2007-2012. Given the limitations of public investment around 30 percent of this requirement is needed to come from private capital. The Government of India has, therefore, been following a considered approach to create the enabling environment for catalysing such private investment and operations into all infrastructure sectors. Supported by the Asian Development Bank, a PPP Initiative has been targeted on capacity building and institutionalisation of PPPs across the country. Under this Initiative, a number of capacity building workshops, to focus on key issues, have been conducted across the country. The legal environment-general country wide, state specific legislation for infrastructure and PPPs, and, project specific contracts-for PPPs is one of the most critical aspects which will govern attractiveness of infrastructure sectors and projects to the private sector. It is also fundamentally important that government project sponsor agencies, whether local governments or others, have sufficient awareness of key legal and contractual issues so that projects are well structured, contracted, implemented and monitored-the key role of government in PPPs. The workshop was, thus, developed to raise awareness on these issues for government officials, especially those responsible for developing PPP projects. Legal firms with a wealth of PPP legislative and project specific experience from both India and overseas were invited to disseminate their knowledge as well as engage in interactions with the government officials. Transaction advisory and private sector firms also participated to provide their perspectives on the key legal and contractual issues facing the PPP projects currently underway. The workshop was well attended with over 80 participants and witnessed intense deliberations amongst officials and speakers which is leading to continued interactions between state PPP cells, Department of Economic Affairs and the ADB to develop and enhance PPP programs. The ADB-Government of India PPP Initiative is being managed jointly by PPP focal points at the Department of Economic Affairs, Ministry of Finance and at ADB with numerous PPP cells undertaking considerable activities across the country. This report is part of a series of reports aimed at capturing these efforts of the cells and this Initiative. we hope

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that the knowledge thus disseminated will be of use to government officials across the country in developing PPPs in their States and sectors. we are confident that these efforts will lead to sustained improvement in the PPP climate for infrastructure development in the country and our endeavor is to continue these efforts.

Govind Mohan Joint Secretary Department of Economic Affairs Ministry of Finance Government of India

Anouj Mehta Senior Infrastructure Finance Specialist Focal Point for PPPs (India) Asian Development Bank

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Abbreviations
ADB ADR BLT Boo BooT BoT BPo BRoT BT BTo CAo CPI DBFo DEA DoT DRB EoI EPC FDI FM GDP GoI IIFCL IIPDF ITn ITT Asian Development Bank Alternative Dispute Resolution Build Lease and Transfer Build own operate Build own operate Transfer Build operate and Transfer Business Process outsourcing Build Rent operate Transfer Build and Transfer Build Transfer operate Contract Add operate Consumer Price Index Design Build Finance operate Department of Economic Affairs (India) Develop operate and Transfer Dispute Resolution Board Expression of Interest Engineering Procurement and Construction Foreign Direct Investment Facilities Management Gross Domestic Product Government of India India Infrastructure Financing Company Limited India Infrastructure Project Development Fund Invitation to negotiate Invitation to Tender

Criticality of Legal Issues & Contracts for Public Private Partnerships

MoF Moo MoT nGo o&M PFI PPP PPPAC PQ PQQ PSP Q&A R&M RFP RFQ RPI SC SPV Un UoI US VFM VGF wTo

Ministry of Finance Modernise own operate Modernise operate Transfer non Governmental organisation operation and Maintenance Private Finance Initiative Public Private Partnership Public Private Partnership Approval Committee Pre Qualification Pre Qualification Questionnaire Private Sector Participation Question and Answer Refurbishment and Maintenance Request for Proposal Request for Qualification Retail Price Index Supreme Court Special Purpose Vehicle United nations Union of India United States Value for Money Viability Gap Funding world Trade organisation

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Acknowledgement
Under the initiative of Mainstreaming PPPs in India, Department of Economic Affairs, Government of India, with support from the Asian Development Bank is spearheading capacity building and effective institutionalisation of PPP Cells to deliver their mandate at the Centre and State level. A number of sector initiatives have been developed, aimed at experience sharing and knowledge dissemination. A critical area of attention has been the contracts for PPPs. Contracts underline the arrangement between the public and the private entities in a PPP project, and form the basis of delivery of services to the users. Hence, Department of Economic Affairs in collaboration with Asian Development Bank organised a high level policy workshop on criticality of legal issues and contracts in December, 2008. national and international legal firms shared their experiences and perspectives on various facts of the subject. we are grateful to the experts from the legal firms, who shared their experiences and knowledge through the position papers and kept the deliberation of workshop incisive and informative. The teams from the five legal firms were led by: i. Amit Kapur, Senior Partner, J. Sagar Associates ii. Matthew Bubb, Partner, Ashurst iii. Isabel Evans and Colin Hall, Bird & Bird iv. Tony Holland, Head of Finance, DLA Piper v. K. Rattay, white and Case The deliberations and the outcome of the workshop were enriched by the insights provided by the government functionaries engaged in developing PPPs in their respective sectors, the representative of the transaction advisory firms and the private sector firms, who participated in the two-day workshop. The Asian Development Bank, particularly Mr Ashok Sharma, Director, SAFM and Mr Anouj Mehta, Senior Infrastructure Specialist and PPP nodal officer for India in ADB helped us conceptualise the programme and seamlessly integrate the various perspectives and position papers into a unified whole. we are grateful to them and their team for their continued support. The report has been edited and prepared by a team consisting of Mrs Aparna Bhatia, Director, PPP Cell and Mr Prashant Bhardwaj, MIS Expert PPP Cell from the Department of Economic Affairs and Mr Anouj Mehta, Senior Infrastructure Specialist, and Mr K. Purushottam, Consultant from Asian Development Bank. we hope that the report would lead to greater clarity and understanding of the core issues of legal contracts and enable development of robust PPP projects in the country.

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ConTEnTS onTEnTS
Foreword Abbreviations Acknowledgement Contents Report overview Position Papers 1. Contracts in Public Private Partnerships for Infrastructure Development: A Legal Perspective - by Amit Kapur, J. Sagar Associates 2. PPPs The Asian Content - by Harvey Heaven Council, Ashrust 3. Risk Perspective of a Government Sponsor - by Tony Holland and Gurmeet Kaur, DLA Piper 4. Achieving Consumer Protection in PPPs - by K. Rattay, white and Case Annexures 1. International PPPs: Case Studies and Lessons Learnt Bird & Bird 2. The Role of Contracts in PPPs: optimising Public Service in PPP Mode Setting the Tone by Amit Kapur, Partner, JSA 3. Structuring of Contracts: Concessions for PPPs: Vishnu P. Sudarshan, Partner, JSA 4. Procuring a PPP: Amitabh Sharma, Partner, JSA 5. Case Study on Delhi Privatisation and Judgements: Mansoor Ali Shoket, Partner, JSA 6. Case Study on nathpa Jhakri Hydro-electric Project: Dhirendra negi, Partner, JSA 7. Case Study on Singapore Institute of Technical Education: Ashurst iii v vii ix 1 5 7

77 91 115 119 121

127 131 138 147 153 160

Criticality of Legal Issues & Contracts for Public Private Partnerships

8. Risk Perspectives Private Sector Supplier and Financiers: Isabel Evans, Bird & Bird

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9. Contrasts Between Traditional and PPP/PFI Procurement Contracts: Colin Hall, Bird & Bird 172 10. Key Contacts Figures Figure 1: Evolution of the governing framework Figure 2: Governance-regulation compact Figure 3: Power project structure Figure 4: Telecom project structure Figure 5: Steps for allocating risks Figure 6: Typical project structure Tables Table 1: PPP projects in Indian infrastructure: Value of contracts Table 2: PPP projects in Indian infrastructure: Contracts awarded Table 3: Facets of efficacy of ADR Table 4: Some formats: Role allocation Table 5: Attributes necessary to succeed in PPP Table 6: Skill-set needed to effectively administer and implement PPP Table 7: Legislative powers of Center States Table 8: PPP laws in Andhra Pradesh, Gujarat and Punjab Table 9: Illustration of input and output based speech value 14 15 41 58 58 58 60 61 92 11 23 59 59 94 95 176

Table 10: Comparative analysis of key contractual issues in ppp projects 105  in England and Victoria, Australia Boxes Box 1: Recommendations in the Deepak Parekh Committee report Box 2: Factors to consider Case Studies Case Study 1: Clearly defined contracts Case Study 2: Regional water company Case Study 3: Understanding project risks Case Study 4:  Right commercial model for service/concession agreement Case Study 5:  Developing innovative solutions to meet project requirements 121 122 122 123 124 12 94

Report
Overview

Report Overview
The workshop on Criticality of Legal issues and Contracts for Public Private Partnerships (PPPs) aimed at disseminating legal aspects of PPPs both for PPP policy makers at government levels as well as for governmental project sponsors. Debating on international PPP experiences and lessons was regarded as critical. The workshop was, therefore, designed to be led by a leading domestic law firm with strong PPP experience and complemented by several international law firms, disseminating their experiences on different issues. The report is, therefore, a collation of these issues discussed and debated at the workshop. Each speaker or firm was asked to provide a position paper on the subject matter which is included in this report. Slides presented at the workshop have also been included in this report as they add substantially to the reports with case studies. J. Sagar Associates provided the main thrust of discussions with their presentations on legal perspectives on contracts in PPPs for infrastructure development. The topics included options and procurement in PPP, role and responsibilities of stakeholders, regulatory and policy framework, fundamental principles governing contracting in India, evolving jurisprudence regarding PPP in infrastructure projects and risk/reward issues in contract structuring and negotiation. State wise PPP legislations in India were also discussed. The J Sagar presentation and position paper notes described the differing models and approaches adopted by different countries for structuring, procuring and implementing PPP Projects and stresses on evolving a dynamic India-specific model based on its own experiences. Setting up an efficient, time bound, fair and credible dispute resolution mechanism has also been recommended. Presentations were made to emphasise certain issues with illustrations from projects case studies including: PPP procurement - the Tirupur water and wastewater Case Post closure aspects - Delhi Privatisation Case Dispute resolution aspects - nathpa Jhakri Hydro Electric Case The Ashurst presentation and position paper focused on Asian experiences with PPPs and also explored the Singapore ITE College west PPP case study. overviews of PPP, stages of PPP adoption and development, status of documentation/relevant legislation etc., in Singapore, South Korea, and Japan along with examples of recent/current PPP deals in Vietnam, Indonesia, Pakistan and Philippines were presented. The presentation outlined the key challenge for Asian countries being in finding a way of taking the successes and applying the key lessons learnt to their own jurisdiction. Private sector risk perspectives and the contrast between traditional and PPP or PFI procurement were presented by Bird and Bird which emphasised the necessity for recognising cultural differences between traditional and the PPP/PFI routes.

Criticality of Legal Issues & Contracts for Public Private Partnerships

The presentation on risk perspectives from a government sponsor point of view, led by DLA Piper, stressed upon the complexity of PPP projects which required government sponsors to establish dedicated teams for running procurement and PPP processes, and, develop a body of learning for use in future projects. white and Case law firm focused on achieving consumer protection in PPPs which brought out the need for ensuring adequate protection to consumers through legislation, involvement of independent regulators and contractual arrangements. These papers are collated in this report which is intended to become a reference material for all the government PPP cells whether at central or state levels and will assist in guiding development of PPP policies and processes at state, sector or project level. All information and opinion expressed in the position papers are only of the authors.

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Position

Papers

ConTEnTS
1. Contracts in Public Private Partnerships for Infrastructure Development: 7 A Legal Perspective - by Amit Kapur, J. Sagar Associates 2. PPPs The Asian Content - by Harvey Heaven Council, Ashrust 3. Risk Perspective of a Government Sponsor - by Tony Holland and Gurmeet Kaur, DLA Piper 4. Achieving Consumer Protection in PPPs - by K. Rattay, white and Case 77

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1
1. a. b. c. d. e. f. 2.

Contracts in Public Private Partnerships for Infrastructure Development:


A Legal Perspective

Executive Summary
The need for Public Private Partnership in the Indian infrastructure sector has been well recognised by the Government of India and the steps taken to encourage Public Private Partnerships are promising. Such steps include: standardising contractual documents as sector specific Model Contracts/ Concession Agreements; standardising bidding documents; establishing institutional mechanism like the Indian Infrastructure Finance Company Limited to facilitate infrastructure development and PPP; creating the India Infrastructure Development Fund; relaxing the restrictions on foreign direct investment in most infrastructure sectors; and fiscal Incentives including the Income Tax Act, 1961 and state laws to developers and lenders of Infrastructure Projects.

Such steps are particularly relevant in the context of given the Indias estimated investment need in the infrastructure sector. The Economic Survey of India (February 2008) estimates that over the next five years, the investment needs in physical infrastructure will be at US $ 500 billion, wherein the share of the private sector is projected at US $150.4 billion (30.07 percent). To the uninitiated the governing frameworks of the various infrastructure sectors might appear to be maze of institutional structures, arrangements, rights, obligations and duties. However, when we look beyond the formal structures a crucial point of note is that parties (both private and public) are free to enter into valid and enforceable commercial arrangements so long as their business arrangements are compliant with: a. b. the rules of entry (for example those regarding foreign direct investment), and the rules of the game for doing business in the industry concerned.

3.

This Paper has been developed by the Projects, Regulatory and Policy Practice of J. Sagar Associates and solicitors with contributions from Amit Kapur, Senior Partner: [amit@jsalaw.com]; Dhirendra negi, Partner: [dhirendra.negi@jsalaw.com]; Vishnu Sudarsan, Partner: [vishnu@jsalaw.com]; Amitabh Sharma, Partner: [amitabh@jsalaw.com], and Mansoor Ali Shoket, Partner: [mansoor@jsalaw.com].

Criticality of Legal Issues & Contracts for Public Private Partnerships

4.

Such commercial arrangements, include: a. Investment arrangements by private participants with the concerned governmental instrumentality as the Grantor of Concession or Joint Venture Partner or Principal; Arrangements for partnering or collaboration in ventures between 2 or more persons including incorporation of specific entities with the rules for their functioning; Contracts for all or any of the following components/elements-sale or supply of goods, services or intellectual property rights-including business process outsourcing (BPo), Engineering Procurement and Construction (EPC), operations and Maintenance (o&M), Refurbishment and Modernisation (R&M); Contracts permitting the use of certain assets, facilities and rights like leases, licences, concessions; and Contracts for financing arrangements which could vary in complexity and sophistication from a sale and purchase of milk or a newspaper every morning to a 30 year power purchase agreement or concession to build, operate and transfer an airport.

b.

c.

d. e.

5.

From the perspective of the national economy, the interplay between the formal regulatory structures and the residual contractual freedom is designed to: a. b. c. d. provide suitable incentives for such commercial activities and economic enterprise that best serve the national interest; provide a facilitative business environment for stakeholders to transact business, with suitable risk-allocation and safeguards; safeguard scarce resources and strategic national interests; and enable the welfare objectives of the state and economic objectives of private entrepreneurs to be successfully married.

6.

This paper is designed to explore the structuring of the relationship between the public sector and the private sector in infrastructure projects-both in terms of regulatory and contractual mechanisms. Some salient aspects can be summarised to be: A. The legal-regulatory-policy framework for PPPs: i. The framework should not be prescriptive or rigid but be flexible to accommodate diverse formats of PPP-as per the needs of the sector as also peculiarities/specifics of a project; The framework must provide for striking a sustainable balance between universal service or life-line supply, and commercial viability of the sector. Prime examples of this are: a. b. Tubig Para Sa Barangay program of the Manila water Company (Philippines); Rural telephony and electricity supply in Bangladesh: Gramin Telephones.

7.

ii.

These projects are characterised by their being inclusive for poorer sections of the community with large clusters of low income families and

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illegal connections. They have been successful in providing affordable and reliable supply through greater degree of community participation like the local residents welfare associations, resulting in significant efficiency gains and bolstering viability of the project. B. The choice of the format for PPP should be decided by the concerned governmental authority after evaluating factors such as: i. ii. iii. iv. C. felt need for a particular infrastructure facility which determines the output/performance parameters; felt need for private participation in the development and operation of that facility including the value for money proposition; most efficient way of developing and operating that facility; and balance between viability, welfare objectives and public policy needs.

A clear legislative and regulatory foundation enabling the public entities/utilities to enter into such contracts and arrangements is desirable, in particular to secure: i. A transparent and objective process for selection of infrastructure projects taking into consideration concessionaire concerns about value for money and welfare consideration. In doing so, the process design must be consistent with the governing framework for public procurement; A clearly defined approval, compliance and performance monitoring jurisdiction. This is especially relevant in relation to the rights of local and other authorities such as the Development Authorities, Municipal Authorities and Panchayats; A clear definition of the role, responsibility and rights of various parties in the governing instruments including the scope of public service, service standards, pricing, and scope of governmental intervention or assistance; The participation of private parties in ownership and/or management of public assets and/or delivery of public utility services; The vesting in such private party, the power to: a. collect, retain and appropriate revenue to meet reasonable expenses incurred in implementation of the PPP project including a pre-determined/agreed return on the funds employed; and seek revision of the charges and/or collection in terms of the concession agreement, in order to facilitate business planning and financing.

ii.

iii.

iv. v.

b.

vi.

The role of the Concessionaire in maintaining and managing the PPP asset/services and in controlling access to and usage of the infrastructure facility; and

vii. The scope of bankability and securitisation of the Concession, Project Assets and revenue (including assignability) so that the Concessionaire is in a position to avail affordable debt finance by securing lenders. D. when engaging with the private sector it must be borne in mind that: i. A private entrepreneur is interested in undertaking the project to run a successful business enterprise and earn profits. As such, the project must

Criticality of Legal Issues & Contracts for Public Private Partnerships

meet the threshold test of financial viability based on realistic assumptions. This is particularly vital for ensuring bankability of the project, i.e., ability of the developer to arrange for cost effective finance on the strength of the projects revenue stream and the project agreements; ii. A private entrepreneur brings in efficiency in operations, finance and technology commensurate to the rewards assured for risk taken. Should the project be perceived to be too risky, the project may fail to elicit interest from the private sector; A private entrepreneur has no funds to put in to support governments welfare schemes like free power unless the same constitutes a cashflow which can be funded in a sustainable manner from the projects revenue stream after meeting all reasonable expenditures incurred as also recovering a reasonable return on investment commensurate to the risk profile of the project; Improper or unfair risk allocation invariably enhances risk profile of the project and will: a. b. v. deter credible players who wish to deliver quality infrastructure facilities. attract those players who work on concession capture and short term profiteering business model.

iii.

iv.

An unviable public infrastructure project is not the problem of the private entrepreneur alone and can in fact emerge as a serious reputational risk and problem for the governmental authorities; Public procurement process for PPP must not be oriented to realise windfall gains for the governmental authority without front loading the project to become unviable or burdensome for consumers; and

vi.

vii. when designing a commercial structure for undertaking any infrastructure project in a Public Private Partnership format, it is essential to consider the interplay between the regulatory framework and the variety of options available to parties. For Public Private Partnerships to be effective in terms of attracting private sector investment and providing for the needs of citizens/users the Partnership must take into consideration the needs of all key stakeholders including: the citizen/user, the developer and the State. In doing so we can build on the past achievements and continue to develop a dynamic, India specific model of Public Private Partnership structuring, procurement and contracting.

1. Introduction
1.1 The roles played by state and by private enterprise respectively in economic activities and their inter-se relationship has varied over time-as a direct outcome of the prevalent macroeconomic policies of the Government. It is noteworthy that ostensibly the objectives have remained the same-economic growth, maximising allocative efficiencies of resources, and welfare-though the policy decision of how to structure the activity varies from time to time. The scenario in the 20th century India could be summarised as set out below: i. Pre-independence Indian States saw commerce, trade and enterprise flourish in the hands of private entrepreneurs (including the East India Co.). State functions

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were largely limited to defence, governance, utilities and related issues. The legal and policy framework supported such functions while state enjoyed the ability to levy and recover fees and taxes ii. Post independence, between 1947 till mid 1980s, the emerging focus on social and economic justice, as also nation building led to a planned-economy seeking to achieve allocative-efficiencies of our scarce resources as also building a strong foundation of core/basic industries for our economic rejuvenation is well known and understood. These were the main drivers of Indian economy as also the governing legal-policy-regulatory framework between 1947 and late 1980s iii. The economic (balance-of-payments) crisis forced a dramatic shift in focus to liberalisation, reform, delicensing and private-participation since late 1980s iv. The past couple of years and in particular last few months have globally brought forth certain market failures which highlight need for state intervention in forms of bail out packages and economic regulation, fuelling the age old de-regulation versus re-regulation debate once again. 1.2 The present paper examines the Indian legal framework (based on common law system) governing the varied formats of arrangements for public-private partnership (PPP) in context of the challenges being faced regarding infrastructure1 development in India while balancing the interests of various stakeholders which can be conflicting. It proceeds on the basis that the following are well understood and accepted in Indian economy/governance: i. need for PPP and related issues being limitations of public finance; ii. Role of the private enterprise (finance, management, focus on efficiency and viability, technology and risk taking); iii. Balancing viability/economics with welfare and national policy; and
EVOLUTION OF THE GOVERNING FRAMEWORK Figure1

Pre - Independence Laws: Private Capital

Constitution (1950); IDR Act (1951); IPR (1956) State Ownership, Reserved Lists & Licensing

Post 1991 Private Capital & PPP

Private Provision of Service Private Ownership Reasonable return on invest

Level playing field Single window approach FIPB, TRAI Act, Electricity Act, SEZ Act

1 Infrastructure here refers to basic services, facilities and installations necessary for functioning of a community or society like transportation and communication systems, water and power lines, and public institutions including schools, post offices et.al.

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iv. In this context, it is useful to briefly recount here the ground-realities in infrastructure sectors. 1.3 The Rakesh Mohan Committee Report projected that in 1995 India needed an investment of around US $ 330 to 345 billion in infrastructure over 10 years, i.e., 1997 to 2006. It was projected that the annual investment level was to be raised from US $ 17 billion (5.5 percent of GDP) to US $ 50 billion (8 percent of GDP) in this duration, with private sector share rising from US $ 3.45 billion (20 percent) to US $ 23 billion (46 percent). 1.4 It is noteworthy that the Economic Survey of India (February 2008) has estimated the investment needs in physical infrastructure at US $ 500 billion (at 2006-07 prices @ US $ 1 = InR 40), wherein the shares projected were: Central Government State Governments Private Sector 37.16% 32.76% 30.07% US $ 185.8 billion US $ 163.8 billion US $ 150.4 billion US $ 500.0 billion

out of the total projected investment, debt is expected to comprise about 49.78 percent.

Box 1 RECOMMENDATIONS IN THE DEEPAK PAREKH COMMITTEE REPORT

on the basis of the observations made on the constraints, the report makes, among other things, the following recommendations and suggestions for financing rapid development of infrastructure:

Improving intermediation of domestic financial savings so that they are channelled to meet the specific requirements of infrastructure investment such as those relating to risk, tenor and scale; Facilitating targeted access to foreign financial savings; Distributing financial risk more widely and efficiently across the domestic financial system and abroad, to avoid excessive concentration; Making infrastructure financing-especially in sectors where it has not been traditionally forthcoming-relatively more attractive for a wide spectrum of investors/financier classes by providing more liberal regulatory regimes for infrastructure vis--vis non-infrastructure sectors and in some cases, offering well defined fiscal incentives; and Achieving all the above through a facilitating (rather than directive) framework for each class of financing institution, while ensuring that accelerated investment in infrastructure does not jeopardise fiscal discipline, financial stability and external viability.

To advance these objectives, the Committee proposes several initiatives which are broadly classified as under: i. ii. iii. iv. v. vi. vii. Development of domestic debt capital market; Tapping the potential of insurance sector; Rationalising banks and nBFCs participation in infrastructure financing; Fiscal measures; Facilitating equity flows into infrastructure; Inducing foreign investments into infrastructure; and Utilising foreign exchange reserves.

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1.5 In view of the institutional and financing constraints identified in Deepak Parekh Committee Report (May 2007), the need for PPP for infrastructure development was well recognised by Government of India. The key observations and recommendations of the Deepak Parekh Committee Report (Box 1) are noteworthy: 1.6 To secure time bound creating of world class infrastructure, some recent Government initiatives are noteworthy, being: a. constitution of a Committee on Infrastructure (CoI), headed by the Prime Minister in August 2004-to initiate policies that ensure time-bound creation of infrastructure and delivery of services matching international standards while ensuring that the structures maximize the role of public-private partnerships (PPPs). The Planning Commission worked as the Secretariat to the CoI; constitution of a PPP Cell in the Department of Economic Affairs (DEA)-to provide greater focus to mainstreaming PPPs both in the Central and State sectors. The DEA has taken several major initiatives in the matters concerning PPPs including policy, schemes, programmes and capacity building. while encouraging PPPs, six constraints have been identified: i. ii. iii. iv. v. vi. c. Policy and regulatory gaps, specially relating to specific sector policies and regulations; Inadequate availability of long-term finance (10-year-plus tenor)-both equity and debt; Inadequate capacity in public institutions and public officials to manage PPP processes; Inadequate capacity in the private sector-both in the form of developer/ investor and technical manpower; Inadequate shelf of bankable infrastructure projects that can be bid out to the private sector; and Inadequate advocacy to create greater acceptance of PPPs by the public.

b.

Various State Governments have constituted PPP Cells to be the focal points for undertaking initiatives towards effectively attracting a pipeline of PPP projects and implementing them within the state as also undertaking capacity building for the same. These PPP Cells in some States have been very proactive and are working with GoI to successfully design and implement PPP projects. Steps have been initiated to create an enabling framework for PPPs by addressing issues relating to policy and regulatory environment. Progressively, additional sectors have been opened to private and foreign investment, levy of user charges is being promoted, regulatory institutions are being set up and strengthened, and fiscal incentives are given to infrastructure projects. Standardised contractual documents such as sector-specific Model Concession Agreements, which will lay down the standard terms relating to allocation of risk, contingent liabilities and guarantees as well as service quality and performance standards, and standardised bidding documents such as Model Request for Qualifications and Model Request for Proposals are being prepared and notified. Approval mechanism for PPPs in the Central sector has been streamlined through setting up of the Public-Private Partnership Appraisal Committee (PPPAC).

d.

e.

f.

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g.

To address the financing needs of these projects, various steps have been taken such as the setting up of the India Infrastructure Finance Company Limited (IIFCL) to provide long tenor debt to infrastructure projects. Launch of a Scheme for Financial support to PPPs in Infrastructure to provide Viability Gap Funding (VGF) to PPP projects. Multilateral agencies such as the Asian Development Bank have been permitted to raise rupee bonds and carry out currency swaps to provide long-term debt to PPP projects. Setting up of dedicated infrastructure funds is also being encouraged to increase the flow of equity investments. The India Infrastructure Finance Initiative, facilitated by Ministry of Finance, is one such collaborative effort to deploy approximately US $ 5 billion in capital for infrastructure projects in India. The fund is structured as a venture capital fund, with about US $ 2 billion in equity capital and US $ 3 billion in long-term debt financing with maturities exceeding 10 years. The Government of India now allows FDI in most infrastructure sectors to the extent of 100 per cent. The time is ripe for the foreign strategic investors to begin to taking greater interest in project development and management activity in India. The Guidelines for India Infrastructure Project Development Fund (IIPDF) Scheme have been notified. The IIPDF with an initial budgetary outlay of Rs 100 crore would be a revolving fund that would get replenished through success fee earned from successful bid projects, and, if need be, would be supplemented in subsequent years through budget support. The IIPDF would assist ordinarily up to 75 per cent of the project development expenses as interest free loan. In 2006, commitments to Indian infrastructure projects with private participation were around double that of Brazil and China, making India the leader amongst the middle and low-income countries.

h. i.

j.

k.

l.

m.

1.7 The status of PPP projects in infrastructure development, as set out in the Economic Survey of India (February 2008) is instructive, and set out in Tables 1 and 2.

2. Public Private Partnership Options and Procurement/Design


2.1 Public Private Partnership may be described as a mode of delivery of public goods and services through private enterprise and efficiency due to association of private
Table 1 PPP PROJECTS IN INDIAN INFRASTRUCTURE: VALUE OF CONTRACTS Sector Total Number of Projects Total Number of Projects based on value of contracts Less than 100 Cr. 3 74 3 Between Between More than 100 and 250 Cr. 251 and 500 Cr. 500 Cr. 1 4 5 6 24 1 2 20 51 25 1 1 Value of Contracts (Rs Crore)

Airport Ports Railways Roads Urban Development

5 38 3 170 5

19,111 60,487 1,007 47,091 1,879

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sector in the project. while private sector participation is necessary, by itself it is not sufficient to provide a sustainable solution to infrastructure problems. For success, certain other critical factors must exist including: a. b. optima2 legal-policy-regulatory framework3; Informed government action in structuring, bidding, selection, negotiation and implementation of projects through PPP taken by people with capacity; Stakeholder involvement in critical stages of decision-making to secure effective design and implementation; optimal allocation of roles, responsibilities and risks in project contracts with suitable VFM (value for money) outcomes; Viable functioning without undue or unreasonable interventions, including recovery of legitimate and reasonable expenditure with a reasonable return on investment commensurate with risk taken and competing investment opportunities; Targeting of welfare measures to ensure that the intended segments get the benefit; and Ensuring balance between viability and welfare measures, which secure public policy objectives like adherence to environmental protection, health, safety and quality standards.

c. d. e.

f. g.

2.2 Typically, public service constituted government monopolies since independence subject to specific exemptions like municipal services in Jamshedpur by Tata Groups utility or power supply in Calcutta or Mumbai. Consequently, provision of public service by any entity not being an instrumentality of state or public authority required specific authorisation under the applicable laws. Besides the policy changes, various statutes had to be amended or enacted to establish a level playing field and facilitate private participation like the national Highways Authority of India Act, 1988, the Electricity Laws (Amendment) Acts of 1991 and 1998, culminating in a re-enactment of 100 year old laws into a comprehensive Electricity Act, 2003 et. al. That evolution is depicted at paragraph 1.1.
PPP PROJECTS IN INDIAN INFRASTRUCTURE: CONTRACTS AWARDED Table 2 Total Number Total Number of Projects based on contract Value of of Projects award Method (Rs Crore) Domestic International negotiated MoU Competitive Bidding Competitive Bidding 4 28 3 164 2 4 1 123 1 4 12 36 1 12 2 5 18,808 57,433 1,007 45,737 525

Sector

Airport Ports Railways Roads Urban Development

Source: 1. Infrastructure Public-Private Partnership Financing in India, a study undertaken by PWC at the instance of DEA in collaboration with World Bank; 2. Online database on PPPs. [As set out in the Economic Survey of India, February 2008]

2 This term truly reflects striking a balance between the conflicting interest to induce investments and economic growth, without compromising the interest of the honest tax-payer and citizen (including welfare objectives of securing basic human needs and life with dignity independent of affordability by an individual). 3 Discussed in section 4 of this paper.

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2.3 The nature and extent of private sector participation in infrastructure projects can occur in varied levels and formats-ranging from publicly owned and operated infrastructure where private party may be a mere contractor for procurement of specific goods or services (like design, equipment, maintenance) to ownership participation in project special purpose vehicles. There are no limitations on the format of project structuring though some have been more in vogue than others and certain structures may qualify for specific schemes of fiscal incentives. Some of the more prevalent formats are described briefly in Appendix I. 2.4 The choice of format for PPP is a function of a decision by the concerned governmental authority on the role and risk-allocation amongst the various stakeholders based on the evaluation of factors like: a. b. c. d. felt need for a particular infrastructure facility; felt need for private participation in the development and operation of that facility; most efficient way of developing and operating that facility and balance between viability, welfare objectives and public policy needs of that infrastructure facility.

At times the investment climate and concerns may also influence project structuring. 2.5 Structuring the public-private partnerships in infrastructure could be examined amongst 3 generic options (within which the diverse formats fit in): a. Public Ownership and Public Operation. where the policy decision is to retain public ownership and control over the sector, direct private financing and/or operation under commercial principles may be achieved through vesting overall ownership and management of the project in a separate legal entity controlled by the Government, i.e. special purpose vehicle (SPV) which is managed as an independent commercial enterprise. In such formats, private sector role may comprise: i. ii. iii. Bonds or securities may be issued by the SPV to leverage private finance (like municipal bonds) - (Private Finance); Specific operation and maintenance (o&M) activity/ies may be contracted out to the private sector (Service Contract) and A package/range of o&M activities may be contracted to a private entity, acting as an agent of the contracting authority (Management Contract). The operators compensation may be linked to its performance on specified parameters where verification is practicable such that the fixed fees may be predicated on a minimum assured output/level of performance, with certain incentives for better levels of performance (virtually sharing the savings/up-side).

b.

Public Ownership but Private Operations. The complete o&M of the public infrastructure facility may be contracted to a private entity, like: i. Public works/Service Concessions: whereby a private entity is permitted for a defined period to use an infrastructure facility to supply the services to consumers and collect revenue for the same. At times when a new facility/asset is to be created, that work may be assigned to the same or another private party for the contracting authority; and

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ii.

Lease or Affermage: Another variant where the selected private entity is vested with the o&M of an infrastructure facility built by or on behalf of the Government, or financed by public funds. The private entity is entitled to charge for services provided and obliged to pay a portion of revenue to the contracting authority, which may be utilised by the authority to reply the constitution cost.

c.

Private Ownership and Operation. Here the private party owns the assets and operates the facility. There may be several variants like: i. ii. Divestiture (joint venture or 100 percent); Instances where contracting authority retains the right to reclaim title to the facility or take back its operation through mechanism like golden share; and Licensed activity-where private ownership of the physical assets (electricity or telecommunications network) is separable from the license permitting provision of public services (granted by an economic regulator as in electricity, or the government as in telecom licensees by the Department of Telecommunications of Government of India). In such cases, the license is normally for a defined timeframe, though renewable. Such license is also liable to suspension and/or termination by the concerned authority in defined circumstances. As such, continued ownership of the assets may not result automatically into a right to provide the service-which may have a bearing on structuring of exit options and valuation mechanism therefor.

iii.

2.6 Fundamental to a successful design, procurement and implementation of an infrastructure project in a PPP format is the ability of both partners-public and private-to: a. b. act in a fair, transparent manner and work with a long term view of shared objectives; and understand the need to balance the VFM and welfare objectives of public service with viability, bankability and earning a reasonable return on investments of private enterprise commensurate to risk involved.

2.7 A comparative assessment of some of the regularly seen formats of PPP on various attributes are set out in Appendix II hereto. 2.8 For effectively undertaking infrastructure development and/or management in PPP format, the structuring of the entire project development, procurement and implementation/monitoring phases (including the underlying contractual arrangements) must focus on: a. project identification, preparation and selection of PPP option/format with clarity of the value for money objectives (service, standards of performance, savings of public funds, etc.); soliciting private sector participation and selection of the participant, resulting in award of project and contract negotiation in this behalf; construction Phase culminating in capacity demonstration/completion tests; commercial operation and Implementation as per agreed standards to deliver good quality, affordable and reliable infrastructure service and

b. c. d.

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e.

handover and transfer of the infrastructure facility to the governmental authority concerned after completion of the term or in the event of takeover in terms of the project agreement (whether it is due to force majeure, termination or exit).

2.9 Any project involving creation/upgradation of infrastructure facilities and operation thereof involves a number of stakeholders engaged in diverse aspects as depicted for power projects and telecommunication projects depicted in Appendix III. Different stakeholders have inter-se relationships for diverse stages and aspects of the project, like: a. b. c. d. e. f. g. h. Designing; Engineering; Construction; Maintenance and repairs; operations; Financing; Fuel, raw material and input procurement and storage and Sale/Delivery.

Several of these underlying relationships and rules are not self evident from the endconsumer perspective, and must be understood to structure, procure and secure efficient, affordable and viable infrastructure facilities. Some key stakeholders and their diverse roles, responsibilities and interests are described below. 2.10 Evidently, the above relationships and functions have to work together in a cohesive and integrated manner to ensure that the infrastructure facility in question gets created, operated and maintained to deliver good quality, reliable, safe, efficient and affordable infrastructure service. This is pulled together based on a set of interdependent contractual arrangements. 2.11 Government: a. As the custodian of interests of the citizens/consumers, Government is concerned with securing: i. ii. iii. Quality infrastructure facilities at affordable prices; Public policy objectives of inclusive growth for remote areas and lifeline supplies and The environmental impact of implementing the infrastructure project is duly assessed and managed to avoid/prevent any undeserved adverse impact. The burden on public finances are reduced/eliminated with respect to viable infrastructure facilities so that they can be redirected to developmental and welfare schemes; The fiscal incentives offered to facilitate such PPP is reasonable and ensures beneficial results for the citizens and The concessions, permissions and facilities granted do not get abused, exploited or diverted from the Project to result in undeserved windfall profits for the private players and/or lenders.
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b.

As custodian of interest of tax-payers, Government seeks to ensure that: i.

ii. iii.

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2.12 Developers, as the investors in high cost, long gestation and prolonged pay back public assets/services, are interested in ensuring that: a. The project viability is ring-fenced from populist intervention of the Governments; b. The project contracts and the applicable legal framework ensures that it is legitimate and vests enforceable rights in his hands; c. He gets maximum flexibility in operation and management of the infrastructure assets and services-from the stage of procurement to delivery and d. He is vested with a bankable project with all attributes as set out in paragraph 3.8 below. That would address the lenders concerns as well. 2.13 Land owners: Invariably, large infrastructure projects require acquisition of large tracts of contiguous land which is suitable for use of the project (including the land use permissions, clearances from statutory authorities like State Pollution Control Board, Ministry of Environment and Forest, et.al.). The land owners whose land may need to be acquired for such projects are interested in securing the following: a. only such land is acquired as is required for the infrastructure facility without any arbitrage or windfall profits to the developer and b. A fair and reasonable rehabilitation and resettlement package (including compensation) is implemented expeditiously. 2.14 Suppliers (Fuel, EPC, o&M, Technology, etc.) of various facilities and services to the Project are interested in securing the following: a. b. Fair and transparent selection process and Timely payment of dues and safeguards against unfair rejections, costs and withholding of payments.

2.15 Employees of public corporations are significant stakeholders in the sector, whose concerns need to be examined and addressed to secure their buy-in for the restructuring and implementing PPP projects since: a. b. c. workmen4 are a different class from employees other than workmen; Employment under state5 is distinct from private employment; and Employees feel threatened by changes re. their retention and redeployment to secure their livelihood in the changed environment. delivery of good quality, affordable and reliable services; an efficient, consumer focused and responsive operator;

2.16 Consumers of the infrastructure are primarily interested in: a. b.

4 The workmen category consists of all blue-collared employees engaged in any manual, unskilled, technical, operational or clerical work-being entitled to various benefits/protections under various Indian labour laws including the Industrial Disputes Act, 1947. The decisive factor in determining whether an employee is a workman or not is his actual nature of duties (designation or remuneration is not the material factor). Employees other than workmen comprise of employees whose functions are predominantly managerial, administrative and supervisory do not enjoy any protections by laws, and their employment-related issues will be governed by the employment contract and the Indian Contract Act, 1872. 5 Another relevant consideration is that employees of an establishment owned by the State, are also entitled to certain legal safeguards as regards their employment, including protections in terms of security of service, equal pay for equal work, no discrimination of any kind, reservations for various backward sections of society. Article 16(1) of the Constitution, provides that there shall be equality of opportunity for all citizens in matters relation to employment or appointment to any office under the State. The matters referred to above in Article 16(1) cover (i) Initial appointment; (ii) Promotions; (iii) Termination of employment; (iv) Matters relating to salary, periodical increments, leave, gratuity, pension, age of superannuation, etc. Therefore an employee of the utility may continue to be entitled to the same even after any functional unbundling.

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2.17 Any commercial arrangement at the end of the day is a mix/bundle of jural relationships inter-se parties comprised of: a. b. c. d. Duties-how people ought or ought not to behave with regard to others (Correlate of Right of others); Liberties-freedom to act or not to act (but no duty); Power-to alter legal situations and Immunities-from having existing legal situations altered (i.e., Disability of others).

2.18 At the foundation of contract structuring is a Hohfields analysis of jural relations as depicted by Professor williams best represents the same as follows: a. In this linkage, there is a jural co-relationship/co-existence of: i. ii. iii. iv. b. i. ii. iii. iv. Right and Duty; Privilege and no right; Power and Liability and Immunity and Disability. Right and no right; Privilege and Duty; Power and Disability and Immunity and Liability.

on the other hand, the following are opposites (cannot coexist):

3. Role and Responsibilities of Stakeholders: Balancing Welfare with Viability


3.1 The inter-play of welfare objectives in operations of an economic activity has invariably led to the fiscal difficulties and issues of sustainability of various infrastructure sectors in India (and internationally). This invariably results in tariff distortions with significant subsidy burdens and budgetary constraints on Governments-which is increasingly being obliged to fund even the working capital and pay-roll needs of sectors. As a direct consequence, infrastructure facilities incrementally deteriorate with the passage of time (due to poor maintenance, repairs, replacement et al.). These aspects of state owned monopolies and the feeling of consumers as hostage led to restructuring and reforms. 3.2 The public element of infrastructure services makes it subject to the Tragedies of the Commons6. Achieving the greatest good for the greatest numbers requires the optimisation of related variables (population and resources) and gets exacerbated due to the following: a. b. c. The failure of the individuals to give precedence to and consider the interests of the larger social group within which they live; The population of this world is growing exponentially whereas the resources do not grow at all; If individuals do not value a free public good resource and use it economically as per his needs-its misuse and wastages is at the cost of the entire community,

6 Garret Hardin, 1968.

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d.

Free or unviable (at distorted and not viable cost reflective) supply of services and goods erodes chances of optimal utilisation of scarce resources eroding allocative efficiencies.

3.3 one of the crucial facets of reform and PPP in the infrastructure sector relates to governance of the sector encompassing: a. b. role of the governmental entity, state owned enterprises; distancing of the Government (invariably being the owner of the dominant incumbent) from i. ii. iii. selection of the concessionaire/PPP proponent; day-to-day management and regulation of the sector.

Structure and implementation of the regulatory mechanism is fundamental to this issue and must be determined up-front. It is noteworthy that the choice of the PPP options, the industry structure and design of the regulatory mechanism are closely inter-linked. An effective, fair and transparent structure would alleviate risk perception and mitigate cost of PPP transaction, by securing a level playing field and effective regulation. 3.4 In the globalising world, every investor (debt or equity) weighs diverse options to determine where to invest his money. Central to this investment decision is risk profile of the investment opportunity in question evaluated in contrast with competing investment opportunities. Risk in the context of investment reflects in the uncertainty of return and all investment decisions hinge on the competing opportunities available as also a judgment as to whether it is worthwhile to invest here. 3.5 The above risks become accentuated in the context of the unique risks associated with investments in and financing of infrastructure projects due to certain peculiar features which need to be ideally addressed upfront (before investment) through the governing framework, viz.: a. Infrastructure services (power, water, transport, and telecommunications) are widely consumed and usually considered essential for modern life. This increases political sensitivity to the quality and reliability of the service and its pricing, exposing their operations to risks of interventionist policies, populism and intrinsic supervision. Infrastructure projects involve typically large investments that require long gestation periods to bring the projects to revenue stream and thereafter very long payback periods. The sheer time scale introduces risk of uncertainty of shifting policies/priorities changes in circumstances and risk of becoming a stranded asset/sunk cost. Certain elements of the value chain in each infrastructure activity are intrinsically monopolistic in nature-due to economic, political and/or historical reasons. Invariably, in this respect, Governments and/or regulators play a prominent role in regulation of: i. ii. iii. iv. entry and exit; prices; quality of service and other aspects of performance.

b.

c.

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d.

often government-owned companies may be key suppliers to and/or purchasers from private infrastructure projects, making them prone to uneconomic interventions and scrutiny. Important parameters for the conduct of their operations depend upon the outcome of government and regulatory decisionmaking and implementation processes. Infrastructure projects are characterised by significant debt financing of the traditional balance sheet support. These projects are often financed through Special Purpose Vehicles (SPVs) and are structured on a limited/non-recourse basis towards the parent company, with focus of recourse on project revenue stream and assets. Crucial to such projects is proper identification and allocation of various projects amongst the entities participating. once made, such investments get locked in for prolonged periods (sunk-costs) which can pose significant challenges for bankability due to constrained fungibility-difficulty in exit, expropriation risk, and market/ revenue risk. Here, as investors are committed to projects, they can pull out only by taking a huge loss. If governments subsequently lower prices or do not raise them as originally agreed, investors run the risk of being victims of the obsolescent bargain or expropriation. Investors and lenders are typically unwilling to make investments without adequate and often complex contractual protections. Even though negotiation of such contracts is tedious and costly, the best of the contracts may not protect investors and lenders against the efforts of a determined government. Enforceability of these contracts is essential, but tough. Investors evaluate risks of the possibility of: i. ii. changing contractual agreements and its implementations; or failure by the government to implement such agreements due to extraneous considerations.

e.

f.

g.

h.

Arbitration and settlement of disputes tend to be very time consuming and add to project cost. Being highly capital-intensive projects, the perceived risks and costs of delay in resolution of disputes could be extremely high which may render the investment not desirable.

3.6 The functioning and governance of the utility as also procuring efficient, affordable services are at the very heart of the PPP. Accountability and efficiency are crucial to rehabilitating the sector, protecting the interests of shareholders and investors, and hence to attract private investment. The foundation for this should be provided for in the legal -regulatory-policy framework. In view of the nature of goods and services involved, the number of stakeholders is much larger for a public utility and it includes persons who may not have a direct commercial interest in the operations of the utility, e.g., allocation of water between different users, environmental and ecological impact of practices. The legal and regulatory framework should contain safeguards to protect the interests of specific stakeholder groups, and provide for consultation and open communication with them at the time of selecting and implementing PPP options in a transparent and competitive manner. 3.7 Distancing dominant incumbents (invariably state owned) and the government from the day-to-day operations and regulation (economic and performance) of the sector can be achieved through either an autonomous and capable regulatory authority, or by establishing a robust contractual framework (where regulation is by contracts).

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3.8 The cardinal rule of economic regulation is that the cost of providing efficient services has to be paid for. The payment can come from a combination of: a. b. The rate-payer/consumer of the service (through cost-reflective tariffs with intra-sectoral adjustments and cross subsidy); The tax-payer (through taxes, cess or other levy for the sector, as well as government grants, subsidies and subventions to the sector)-which must be targeted and delivered efficiently; An efficacious rationalisation of the tariffs so that while the system is insulated from tariff shocks in the early stages, with efficiency gains and efficacious regulation, the cross-subsidies are phased out in a well defined transition. Private entrepreneur cannot take the subsidy risk and the cash flow must be provided for.

c.

3.9 A fair balance has to be struck between competing issues such as prices, customer service, environment protection, ability to pay and need to use. Suitable provisions for extra-ordinary price adjustments must be provided for on specific pre-determined grounds like change in service obligations, change of law, breach of contract, increase of concession fee, the receipt of a grant, event of force majeure. 3.10 An important objective of contract design for PPP, as also regulation of implementation is to seek the baseline of performance parameters of the sector/utility and establish the output parameters to be attained over time where: a. b. c. The attaining of these targets must be linked to the tariff that the utility is entitled to charge for its services; Incentives and disincentives are built in to induce operators to surpass the stipulated parameters and improve services; For efficacious performance parameters in long tenure contracts, the general principles like efficient provision service wSS, cost-reflective tariffs, coverage must be built in as well;
GOVERNANCE-REGULATION COMPACT Figure 2

Government
Important to define role of players with a workable relationship

Policies Sector Strategy & marker definition Subsidy USO & coverage

Entities

Regulator

Creating/maintaining infrastructure Providing access & service Business Planning Operations

Economic regulation/Tariff Market & competition Rules for entry & exit: Licensing Performance (QoS) regulation Dispute resolution

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d.

The discretion to set the parameters particularly for differential quality and tariffs must be either left to the contract or regulator. Joint planning of performance parameters in partnership with the community of users (and potential users) is recommended.

3.11 If a fundamental structural change is being brought about in respect of a sector or an infrastructure facility, the governing framework must provide a suitable transition path over a finite period, during which the sector shall be monitored and regulated. By providing efficiency targets linked with the tariff path, the utilities and the other stakeholders will be focused on incremental improvement of the performance that any shortfall attracts penalties and the consumers get improved supply with passage of time. This effort would require significant investments focused on improving the infrastructure and the MIS of the utilities, as also getting the utilities focused on operational efficiencies and commercial processes including metering, billing, collections, disconnections, commercial arrangements, etc. 3.12 Invariably, any PPP has to be founded on a suitable sharing of risks amongst the public (Government) and private partners. It is normal to find that the grantor of the concession is obliged to perform certain functions, roles and tasks, which are under its control and/or best managed by State-and bear/share the risk of failure. This may be necessitated due to a combination of factors including: a. b. c. Legal and policy framework, like notification of levy/fees; Transition management/financing for a sector facing significant tariff distortions; Managing/coordinating consents of multiple governmental agencies to secure timely implementation.

4. The Governing Framework (Legal-RegulatoryPolicy Framework)


[Mr. Philandex Knox, the then Attorney General to the Govt. of United States of President Roosevelt, in context of acquisition of the Panama Canal is stated to have advised: Oh, Mr. President, do not let so great an achievement suffer from any faint of legality] 4.1 In a common law jurisdiction like India, the applicable legal-regulatory-policy framework (governing framework) plays a vital role in defining the rules of the game for various stakeholders in any economic activity. 4.2. The governing framework comprises the following: a. The Constitution of India characterised by: i. ii. Its twin goals of social and economic justice; Fundamental rights of citizen which act as a check on State action, including the freedom to do lawful business, trade and commerce (subject to reasonable restrictions imposed by law on specific grounds permissible); Right to Property; Separation of Powers amongst 3 wings of State-executive, legislative and judiciary with an inbuilt system of checks and balancing; Directive Principles of State Policy being the objectives that must always guide State action;

iii. iv. v.

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vi. vii. b.

Centre-State relations regarding allocation of legislative and executive powers; Access to Justice.

Diverse legislation applicable to a particular sector/activity (enacted by a legislature of competence), viz: i. Laws governing various sector like the Electricity Act, 2003; the Telecom Regulatory Authority of India Act, 1997; the national Highways Authority of India Act, 1988; Municipal laws of various States; Laws governing normal commercial transactions like the Contract Act, 1872; the Sale of Goods Act, 1930; the negotiable Instruments Act, 1881; the Companies Act, 1956; the Foreign Exchange Management Act, 1999; the Competition Act, 2002; Laws for recognition and enforcement of rights and obligations like the Specific Relief Act, 1963, the Code of Civil Procedure, 1908, the Arbitration and Conciliation Act, 1996.

ii.

iii.

c. d.

A body of delegated and sub-ordinate legislation (rules, regulations, bye-laws, notifications, schemes etc.) emanating from such enacted statutes. A body of Central and State level executive instruments (policy, orders, clarifications, locational incentive schemes etc.), which may have been issued in exercise of the constitutionally granted Executive Powers (which are a residue of all powers of State and its Eminent Domain), or executive power recognised/vested/defined by legislation; Binding rulings and instruments issued by a regulatory authority/agency created by statute to regulate specific sectors, activities and businesses within the framework of the applicable law and policy. This may include regulations, practice directions, licenses, quality of supply standards, tariff orders, performance standards, safety standards, environmental issues, and case-specific orders.

e.

4.3 Two significant elements which have a strong bearing on private participation are described below. a. Regulation of Entry and Exit for Private Enterprise. The framework defines: i. Sector/Industry wise clarity about the level of private participation permitted in diverse facets ranging from private ownership to varied formats of public private partnerships including where sector is reserved for small scale sector or public state ownership; The format of such private participation as also the terms and conditions applicable thereto; Rules governing procurement of goods, services, technology from private sector; Ease of exit, which often determines the zeal for entry.

ii. iii. iv. b.

Rules of the Game. Besides entry and exit, the framework also defines the framework within which the commercial enterprise can exist, operate and transact business, covering elements like: i. ii. Areas amenable to competitive procurement of goods and services; Areas reserved for monopolies created and/or protected and/or recognised;

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iii. iv.

Scope of freedom to negotiate commercial arrangements/transactions with safeguards and limitations; obligations and limitations imposed on the enterprise in a sector governing the supply of goods/services, pricing thereof and related operational matters; Recognition of enforceable rights and obligations arising in relation to or arising out of such commercial arrangements/transactions, with appropriate and efficacious enforcement mechanism.

v.

4.4 on a first blush the above seems to be maze of institutional structures, arrangements, rights, obligations and duties within which an economic enterprise is expected to take roots, transact business and generate wealth for itself and for the nation. when we look beyond the formal structures, so long as the rules of entry (FDI regime et. al.) and rules of the game are adhered to, the parties are left free to structure their business relationship and defines rules of business. From the perspective of the national economy, the framework is meant to: a. Provide suitable incentives to give impetus to such commercial activities and economic enterprise which best subserves the national interest, availing of the opportunities offered by globalisation and optimising its own resources; b. Provide a facilitative business environment for stakeholders to transact business, with suitable risk-allocation and safeguards; c. Safeguard scarce resources and strategic national interests; d. Establish a platform where the welfare objectives of state and economic objectives of private entrepreneurs can be successfully married to evolve and implement viable PPP models. 4.5 In light of the public nature of the service, depending on the format adopted, normally a PPP Project to be successful shall need a legislative foundation for public entities/ utilities to enter into PPP contracts and arrangements, in particular to secure: a. A transparent and objective process (which is matched by implementing capacity) for selection of infrastructure projects, as also of concessionaires/private participants with a value for money and welfare issues as being relevant factors. In doing so, the process design must be consistent with the governing framework for public procurement which is summarised in a Q&A Format in Appendix V; Clearly defined approval, compliance and oversight jurisdiction over a PPP project, especially the rights of local and other authorities from within the State, like the Development Authorities, Municipal Authorities, Panchayat and other authorities; Clear definition of the role, responsibility and rights of various parties in the governing instruments (Concession/Agreement, regulations etc.) including the scope of public service, service standards, pricing, scope of Govt. intervention and terms (like pre-payment of subsidy) etc; Participation of private parties in ownership and/or management of public assets and/or delivery of public utility services. This would include, inter alia, grant of concession, disinvestments et al; Vesting in such private party, the power to: i. Collect, retain and appropriate revenue, inter alia, to meet reasonable expenses incurred in implementation of the PPP project including a

b.

c.

d.

e.

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pre-determined/agreed return on the funds employed (profit on equity, finance and interest on debt finance); ii. Seek revision/revise the charges and/or collection in terms of the concession agreement, which revenue stream can facilitate business planning and financing;

f.

Power to maintain, upgrade/refurbish and manage the PPP asset/services and control access (as may be incorporated in the concession agreement) to and use thereof; Scope of bankability and securitisation of the Concession, Project Assets and revenue (including assignability) to avail affordable debt finance by securing lenders. This is critical since typically debt finance for infrastructure project is constrained by limited tenor of long term debt as also a lack of capital market instruments.

g.

4.6 within this framework, various stakeholders (including private participants) are free to enter into valid and enforceable contractual/commercial arrangements7 to actually transact business, including: a. Investment arrangements by private participants with the concerned instrumentality of state/statutory authority as the Grantor of Concession or Joint Venture Partner or Principal; Arrangements for partnering or collaboration in ventures between 2 or more persons including incorporation of specific entities with the rules for their functioning (like a company); Contracts for sale/supply of goods, services or intellectual property rightsincluding business process outsourcing (BPo), Engineering Procurement and Construction (EPC), operations and Maintenance (o&M), Refurbishment and Modernisation (R&M), et. al; Contracts for permitting use of certain assets, facilities and rights like leases, licences, concessions; Financing arrangements.

b.

c.

d. e.

These contracts could vary in complexity and sophistication from a sale and purchase of milk/newspaper every morning to a 30 year power purchase agreement or concession to build, operate and transfer an airport. Constitutional Distribution of Legislative Powers [Articles 245 to 254 read with the VIIth Schedule of the Constitution of India] 4.7 The Federal/Union Parliament is empowered to make laws for the whole or any part of the territory of India on subjects allocated to it and the State legislatures may make laws for the whole or any part of the State concerned on subjects allocated. The allocation of legislative powers between the Union Parliament and the state legislatures is set out in the three legislative lists set out in Schedule VII to the Constitution of India. It is noteworthy that: a. b. The Union Parliament has exclusive power to legislate with respect to subjects enumerated in the Union List (List I, containing 97 entries); The Union Parliament and the State Legislatures have concurrent power to legislate on items listed in List III i.e. the Concurrent List (List III, containing 47 entries);

7 As discussed in section 5 of this Paper.

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c.

The State Legislatures have the power, to legislate on items listed in the State List (List II, containing 66 entries), subject to the power of the Union Parliament to legislate in respect of matters enumerated in the Union and the Concurrent List; The residual power to legislate on aspects not specifically provided for belongs to the Union Parliament.

d.

4.8 To give a perspective of their respective role in infrastructure development and PPP, a snapshot of allocation of power between Union and States on some infrastructure subjects is set out in Appendix V. 4.9 In case of any overlap between the three lists, predominance has been given to the Union Parliaments right to legislate, in the following terms: a. If any law made by the State legislature is repugnant to: i. ii. Any provision of a law made by the Union Parliament on a matter on which the Union Parliament is competent to enact, or Repugnant to any provision of an existing law with respect to one of the matters in the Concurrent List i.e. List III, the law made by the Union Parliament (whether passed before or after the State law came into force) shall prevail.

b.

As such, if the matter is covered in the Concurrent List i.e. List III, the law made by the State legislature, shall be void, to the extent that it is repugnant to the law made by the Union Parliament; Further, in case the law made by the State legislature on a matter listed in the Concurrent List has received the assent of the President of India, then such State law shall prevail in that State and override any Parliamentary law for the time being in force; notwithstanding such Presidential assent, the Union Parliament may enact a law in respect of the same matter including a law adding to, amending, varying or repealing the law so made by the State legislature.

c.

d.

Constitutional Distribution of Executive Powers: Extent and Allocation [Articles 73 and 162 read with the VIIth Schedule of the Constitution of India] 4.10 The executive powers of the Union government and that of the State government correspond with the legislative power of the Union Parliament and the State legislatures, respectively8. It is noteworthy that: a. The functions of the executive are not confined to the execution of the laws made by the legislature, though the executive cannot act against the provisions of a law; The executive does not need a law to authorise the exercise of the powers vested in it by the Constitution (subject to any constitutional or legislative bars)9; The State Government may, without any prior legislative authority, make rules or issue executive orders/notifications/directions on matters within the

b.

c.

8 As held by the Supreme Court of India in the matter of Ram Jawaya Kapur, Rai Sahib versus State of Punjab, reported at AIR 1955 SC 549. 9 As held by the Supreme Court of India in nanjundappa, Rn versus Thimmiah T, reported at AIR 1972 SC 1767; and Ram Jawaya Kapur case (ibid).

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legislative competence of the State Government. The exceptions being where such rules or executive orders/notifications/directions etc.: i. ii. affect a fundamental right; or violate any provision of the Constitution.

Further, such rules or executive orders/notifications/directions etc. will become inoperative when any validly enacted law to the contrary occupies the field. d. The State Government has executive powers in respect of the matters listed in the Concurrent List, except where such powers are expressly vested in the Union Government by: i. ii. e. the Constitution of India itself; or a law made by the Union Parliament.

In the event that the Union Parliament passes a law in respect of any matter listed in the Concurrent List, the same will not deprive the State Government of its executive powers. Instead the executive power of the State Government in respect of the matter in question shall be subject to and limited by the executive power expressly conferred upon it by the Union Parliament or its authorities. Issuance of a policy decision in the absence of any statutory basis for the same may be susceptible to legal challenges on limited but well established grounds and may not work reduce regulatory uncertainty and build investor confidence in a short time frame; where the executive power is conferred or regulated by statute, the exercise of such power must be limited by the terms of that statute. on the one hand, the statutory foundation clothes the action with legitimacy, while on the other hand it offers a reference point for challenge to any action taken contrary to the objectives or express provisions of the statute.

4.11 Having said that, it is important to note that: a.

b.

4.12 In context of what has been discussed above, there is no one-size-fits-all approach to a suitable legal framework. Different countries and States in India have taken quite divergent approaches to both the institutional arrangements and the legal framework for PPP. on the one hand, most Indian States proceeded to implement PPP through policy framework and general commercial laws. Some Indian States like, Gujarat, Punjab, and Andhra Pradesh10, have enacted infrastructure development laws to facilitate investment by the private sector in infrastructure. Himachal Pradesh has also enacted an infrastructure enabling law. while Gujarat was the first Indian State to introduce such a law, the Andhra Pradesh and Punjab laws are more comprehensive. The laws of three States are analysed in Appendix VI hereto. It is noteworthy that: a. The various laws include a number of features in common, including: i. ii. The establishment of a single agency with responsibility for developing and supporting PPP projects; The creation of an infrastructure fund, to cover costs associated with developing PPP projects;

10 The Gujarat Infrastructure Development Act, 1999; the Punjab Infrastructure Development Act, 1998, replaced in 2002 by the Punjab Infrastructure Development and Regulation Act; and the Andhra Pradesh Infrastructure Development Enabling Act, 2001.

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iii. b.

Rules covering both competitive tendering and direct negotiation of PPP projects. Regulation of charges under PPP projects: The Punjab Infrastructure Law establishes the Punjab Infrastructure Regulatory Authority, which establishes rates for concessionaires and adjudicates disputes between concessionaires. The other acts do not establish any such entity; Dispute resolution between the concessionaire and the public entity granting the concession: The Gujarat Act does not make specific provision for this, the Punjab Act requires the use of arbitration and includes a model arbitration clause and the Andhra Pradesh Act establishes a Conciliation Board; Unsolicited proposals: The Gujarat Act does not provide for these, the Punjab Act permits them and the Andhra Pradesh Act permits them subject to a Swiss Challenge process.

However, there are significant variations amongst them, including: i.

ii.

iii.

4.13 In another Indian State, Madhya Pradesh: a. The legislature enacted two laws to finance infrastructure projects, being: i. ii. b. Madhya Pradesh Adhosanrachna Vinidhan nidhi Board Adhiniyam, 2000 to offer repayment guarantees for private sector investments; Madhya Pradesh Infrastructure Investment Fund Scheme Act, 2001.

The Madhya Pradesh Economic Development Board has general responsibilities for both publicly and privately funded infrastructure projects, while Madhya Pradesh Industrial and Infrastructure Development Corporation has the responsibility for implementing and facilitating PPPs; It is interesting to note that Madhya Pradesh does not have a general Infrastructure enabling law for PPP. A Report by Asian Development Bank on some Indian States (including Madhya Pradesh) stated that: i. An Infrastructure Privatisation Act was mentioned as a means to provide a better environment for private investments in infrastructure and to introduce a transparent process for project privatisation. However, such an act has not been drafted11; MP should review the draft MP PSP Enabling Act and amend as necessary for consideration of the state legislature; The Government of Madhya Pradesh is also stated to have agreed to do so in a one to three year time frame12.

c.

ii. iii.

4.14 Be that as it may, it appears that the following aspects are important considerations in arriving at an appropriate legal-regulatory-policy framework for PPP: a. b. The framework should not be prescriptive/rigid but be flexible to accommodate diverse formats of PPP-as per suitability of the sector and a project; The framework must provide for a balance between universal service/life-line supply, and viability of the sector. Prime examples of this are:

11 Report titled Private Sector Infrastructure Facility at State Level Project, February 2005, Volume II, Page 11 and 12, Section 2.5. 12 At Section 8.1.5 on Page 288 of Volume I of the Report titled Private Sector Infrastructure Facility at State Level Project.

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i. ii.

Tubig Para Sa Barangay program of the Manila water Company (Philippines); Rural telephony and electricity supply in Bangladesh.

These projects are characterised by focus on poorer sections of the community with large clusters of low income families and illegal connections. Yet they have been successful in providing affordable and reliable supply through greater degree of community participation like the local residents welfare associations, resulting in significant efficiency gains.

5. Fundamental Principles Governing Contracting in India


(As enshrined in the Indian Contract Act, 1872 and propounded in various judgements of the Supreme Court of India and High Courts). 5.1 Having examined the policy and economic imperatives; the governing legalregulatory-policy framework; the balance between welfare imperatives and viability; as also the PPP construct, the present Chapter seeks to lay out the broad principles and parameters governing entering into and enforcing contracts in India. This is a practitioners summary of the Indian Contract Act, 1872 as interpreted by the superior Indian courts-but is by no means meant to be a comprehensive or exhaustive commentary. 5.2 An agreement comprises a set of reciprocal promises by parties to do/abstain from doing something which is enforceable by law. 5.3 To be enforceable by law, an agreement must be: a. b. c. d. made by free consent of the parties to the agreement; for a lawful consideration; with a lawful object; the parties must have agreed upon the same set of reciprocal promises understood to be the same thing/set of activities by the parties (consensusad-idem); and the agreement MUST be certain and ascertainable (not vague). It must be signified by a person who is competent to Contract; Such person must be of the age of majority as per the applicable law; Such person being of sound mind at the time of entering Contract; Such person not being disqualified from contracting by any applicable law; The consent must not be caused by: i. ii. iii. coercion or threat; undue Influence by one who is in a position to dominate the free will of the other to obtain an unfair advantage/unconscionable; fraud or deceipt to induce the consent by misrepresentation or active concealment of material facts or a promise without intent to perform, or other act to deceive; misrepresentation, or mistake as to an essential matter of fact underlying the agreement, or any law in force in India.

e. a. b. c. d. e.

5.4 Free consent requires the following:

iv. v.

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5.5 The consideration and the objects of an agreement are not lawful in case: a. b. c. d. e. f. a. b. it is forbidden by law; it would defeat any provisions of applicable law; it is fraudulent; it involves or implies injury to the person or property of another; it is opposed to public policy; or it is regarded as immoral by court of law. where considerations and objects thereof are unlawful in part; where agreement is without consideration (though adequacy of consideration is noT an issue), except where i. ii. iii. c. i. ii. iii. d. e. it is in writing and registered, or it is a promise to compensate for something done, or it is a promise to pay a debt caused by the law of limitation. Restraint of marriage; Restraint of trade; Restraint of legal proceedings.

5.6 The following agreements are void and not enforceable by law:

If the agreement is in restraint of any of the following, the same shall be void:

If agreement is by way of wager or is an agreement contingent on an impossible event, it is void. An agreement to do an impossible or unlawful act, or where a contingent contract becomes impossible or unlawful (due to efflux of time or conduct) is void. A promise must be performed by the person who made the promise, unless the promisee accepts performance by a third person. In the case of joint promise by 2 or more persons, they are liable to perform while the promisee is free to call upon one or more of them to perform. Each party to a contract must either perform or offer to perform its promise/s unless the same has been dispensed with excused under the applicable law. Such offer to perform must be: i. ii. iii. unconditional, made at proper time and place, and made under circumstances giving the promisee a reasonable opportunity to ascertain promisors ability and willingness to perform or verify the goods being delivered.

5.7 Performance of an agreement: a.

b.

c.

where such offer has been made and the offer has not been accepted, the promisor is not responsible for non performance. Also such party does not lose any rights under the contract, including right to seek performance by the other party. normally, promises bind representatives/estate of the promisor in case of death of promisor before performance, unless a contrary intention appears from the contract like where performance is linked to a special talent or training of a promisor (e.g., surgeon, musician etc.).

d.

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e.

where a party to a contract has refused to perform or has disabled himself from performing his promise in its entirety, the promisee may terminate the contract or he may acquiesce in its continuance. where the agreement specifies a time and place for performance of a promise, it must be performed accordingly during normal business hours unless the parties agree to a change/variation. In cases where no time is specified for performance, it must be performed within reasonable time as per the facts and circumstances of that agreement. In case of ambiguity or silence re. place of performance/time, the promisor may offer to perform at a place and time of mutual convenience.

f.

5.8 Performance of Reciprocal Promises: a. A promisor is obliged to perform only if the reciprocal promisee is ready and willing to perform its part. b. If the agreement sets out a sequence of performance of reciprocal promises, that should be followed strictly. c. If the agreement does not stipulate a sequence of performance of reciprocal promises, they shall be performed in the sequence that the nature of the transaction requires. d. If a party prevents the other from performing his promise, the obstructor renders the agreement voidable at the option of the obstructed besides claiming compensation for any loss suffered due to such non performance. This is particularly so where due to stipulated sequence or inherent nature of the promises the obstructor fails/refuses to perform his promise thereby preventing performance by the other party. e. where a promisor obliged to perform a promise at or before a specified time fails to perform by that time, the agreement (to that extent of the unperformed party) becomes voidable at the option of the promisee in case time was of the essence of the contract. However, if time is not of the essence of the agreement, though the agreement is not voidable but the promisor is obliged to compensate the promisee for failure to perform as per stipulated time. f. In any voidable agreement, if the promisee accepts alternate performance then he is not entitled to claim compensation for loss caused due to non performance in a timely manner, unless at the time of such alternate acceptance he gives notice of intention to claim damages. Promisee dispenses with or remits performance of promise; The promisee fails, refuses or neglects to afford to the promisor reasonable facility to perform; The agreement has been rendered void. In such circumstances, the person who has received any advantage under such agreement is bound to restore it, or to compensate the person from whom he received it; The agreement has been terminated once it became voidable. The party rescinding agreement shall, if he received any benefit thereunder from another party, restore to the person from whom it was received.

5.9 Release from obligation to perform its promises under an agreement where: a. b. c.

d.

5.10 Privity of Contract: while the Indian law and enforceability is predicated upon privity of contract, an intended beneficiary under the agreement is normally permitted by

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courts of law to seek enforcement of his claims under the contract even when he might not be a party thereto. 5.11 Quasi-Contractual Relationships: Restitution: a. when any person lawfully does anything for another person, or delivers anything to him-not intending to do so gratuitously-such that the other person enjoys the benefit thereof, the latter is bound to compensate the former or to restore the thing/benefit; when a person furnishes necessities/supplies to another person suited to his condition in life, but the recipient is incapable of entering into a contract-the supplier is entitled to be reimbursed from the property of such incapable person; when money is paid or anything delivered to a person by mistake or under coercion, that person must pay or return it. The fundamental principle is that the party who suffers due to breach of a contract by another party is entitled to compensation (being restitutive and not a windfall) for any loss or damage caused to him which loss/damage: i. ii. b. c. is caused by such breach and arose naturally in usual course of things from such breach, or the parties knew when they entered into the agreement that it would be likely result of breach of the agreement.

b.

c.

5.12 Breach and Consequences: a.

ordinarily compensation is not paid for any remote or indirect loss/damage, unless specifically agreed to. In estimating loss/damage arising from breach, courts consider the means that existed of remedying the inconvenience caused by the non performance of contract. where the contract provides for a specified amount as the liquidated damages or penalty payable in the event of breach, the party complaining of breach shall be entitled to receive compensation: i. ii. iii. which is reasonable and restitutive in nature; which shall not exceed the liquidated damages/penalty so specified; and Being the liquidated damages so specified so long as the same can be established as a fair and reasonable mutually agreed compensation for such breach.

d.

e. f.

where a person gives any bond or other instrument for performance of a public duty, in the event of a breach be shall be liable to pay the amount specified. A person who rightfully rescinds a contract is entitled to receive restitutive compensation for any loss/damage sustained due to non-fulfilment of the agreement. normally, a dispute relating to validity, enforceability, interpretation or nonperformance of a contractual obligation would be a civil dispute adjudicated upon by a court of competent jurisdiction in its original side. The possible claims would be for:

5.13 Dispute Resolution Mechanism governing Contracts and Clauses: a.

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i. ii. iii. iv. b.

declaration of rights and obligations; injunctive relief preventing a party likely to breach from doing so and impairing the legal rights/status of the claimant under the contract; mandatory injunctions for enforcing/performing contractual obligation; or damages for compensation for loss suffered by a party due to breach/ non-performance by the other.

Due to the burden on courts and the time factor, as also the need for specialised knowledge for infrastructure disputes (re. finance, technology, economics, project management etc.), the trend has been to provide alternate dispute mechanism described below and exclude jurisdiction of courts of law. while the Indian Contract Act holds that any agreement in absolute restraint of legal proceedings is void, it carves out an exception to save agreements wherein it is agreed that: i. ii. any dispute arising inter-se parties in respect of any subject/s shall be referred to arbitration; and only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred.

c.

d.

Based on the UnCITRAL Model Arbitration Law, the Arbitration and Conciliation Act, 1996 provides for: i. non-binding conciliation and mediation which are recognised as Alternate Dispute Resolution mechanism under the Code of Civil Procedure, 1908; and Binding arbitration with restricted/limited grounds of challenge and time bound enforcement.

ii. e.

It is normally seen that project agreements for PPP in infrastructure development provide for: i. ii. iii. iv. on-going Consultation/Coordination Committee; Resolution of day-to-day issues through Independent Engineer and Independent Auditor; Time bound conciliation at senior management levels; Reference of disputes to an expert body being the Disputes Resolution Board (DRB) for time bound adjudication, whose decision upto a financial limit will be final and binding; Reference of dispute to arbitration in case of DRB decision involving claims exceeding the materiality threshold specified.

v. f.

Various High Courts have notified their Mediation Rules to try and resolve disputes that have a chance of quick resolution through court appointed mediation centres.

5.14 Emergence of Sectoral Regulators: Statutory expert with powers including dispute resolution: a. Various sectoral laws like the Electricity Act, 2003 have constituted independent multi-disciplinary expert economic regulators vested with powers to adjudicate upon disputes amongst regulated utilities, or refer some such disputes to arbitration;

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b.

The merit of this mechanism lies in the following factors: i. ii. Courts of law do not normally interfered with such expert adjudication; The regulator is comprised of sector focussed technical, financial, legal and other expertise, besides permanent secretariat which has extensive data related to the sector; Being specialised, they are mandated by law to decide most complex issues after public hearings in a time bound manner, e.g., in tariff setting the regulator has 120 days to decide after receiving a complete filing; Appeals against decisions of the regulator lies within 45 days before another multi-disciplinary expert appellate authority (with quorum comprising at a minimum, a judicial and a technical member) which again is required to decide all matters within 180 days of filing.

iii.

iv.

c.

To evolve consistency in approach on diverse issues faced by the sector, a statutory forum of regulators has been constituted. This along with the fact that all regulators in States and at Central level have one appellate tribunal has led to a very quick settling of jurisprudence on various issues. It is noteworthy that increasingly all regulators are deciding issues in a time bound manner, as is the appellate tribunal-due to which the ghost of 20 year track to dispute resolution has been exercised with most matters getting resolved upto the Supreme Court within 2 to 3 years of their initiation before the regulator.

d.

5.15 An illustrative/indicative outline of a concession for PPP in infrastructure project is set out in Appendix VI hereto. 5.16 An overview of some challenges being faced in a credible and time bound dispute resolution mechanism for PPP in infrastructure projects shall be shared through a couple of case studies during the workshop.

6. Evolving Jurisprudence Republic Private Partnership in Infrastructure Projects


6.1 while private participation in developing infrastructure facilities and rendering public utility/infrastructure services has been in vogue since time immemorial, post independence (1947) the resurgence of private participation/role in this space took place since 1990s. Even in the modern era, various standard manuals and procedures have been in vogue in India for procuring certain goods and services from private contractors for over a hundred years, like the Public works Department Code. In the above context certain fundamental pillars of jurisprudence evolved over time which are relevant to the present analysis are set out below. 6.2 Public Private Participation and its recognition by courts: Public Private Partnership has been given due recognition by the Courts in India inasmuch as the Honble Supreme Court has held that Today public private participation is a key element to develop infrastructure in our economy and the public private participation is the order of the day13.

13 (2007) 3 SCC 33-DERC versus BYPL; (2008) 9 SCC 552-Sooraram Pratap Reddy and others versus District Collector, Ranga Reddy and others; Judgement dated 03.11.2008 passed by a Division Bench of the Honble High Court of Delhi in wP(C) 566 of 2008 titled national Highways Builders Federation versus the nHAI and others.

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6.3 Judicial review on public policy qua divestiture and public procurement14: The Honble Supreme Court has laid down principles with regard to scope of judicial interference with Government Policy decisions (including disinvestment and public procurement) being: a. The courts in exercise of their jurisdiction will not transgress into the field of the policy decision. whether to have an infrastructural project or not and what is the type of project to be undertaken and how it has to be executed, are part of policy making process and the courts are ill-equipped to adjudicate on a policy decision so undertaken. It is not for the courts to examine whether the policy of disinvestment is desirable or not. It is neither within the domain of the courts not the scope of the jurisdiction, judicial review to embark upon an enquiry as to whether a particular public policy is wise or whether better public policy can be evolved. Process of disinvestment is a policy decision involving complex economic factors, courts must refrain from interfering with the economic decision unless: the economic position based on the economic expediencies is demonstrated to be so violative of constitutional or legal limit on power or so abhorrent to reason, that the courts would decline to interfere. In a democracy, it is the prerogative of each elected Government to follow its own policy. often a change in Government may result in the shift in focus or change in economic policies. Any such change may result in adversely affecting some vested interests. Unless any illegality is committed in the execution of the policy or the same is contrary to law or malafide, a decision bringing about change cannot per se be interfered with by the court. wisdom and advisability of economic policies are ordinarily not amenable to judicial review unless it can be demonstrated that the policy is contrary to any statutory provision or the Constitution. In other words, it is not for the courts to consider relative merits of different economic policies and consider whether a wiser or better one can be evolved. For testing the correctness of a policy, the appropriate forum is Parliament and not the courts. In the case of a policy decision on economic policy matters, the courts should be very circumspect in conducting any enquiry or investigation and must be most reluctant to impugn the judgment of the experts who may have arrived at a conclusion unless the court is satisfied that there is illegality in the decision itself. Belated petitions should not be entertained. Further, it is public interest to expedite disposal of cases involving challenge to economic policies and infrastructure projects-as any delay will be counter productive and contrary to public interest. The duty of the court is to confine itself to the question of legality. Its concern should be: i. ii. iii. whether a decision-making authority exceeded its powers; committed an error of law; committed a breach of the rules of natural justice,

b.

c.

d.

e.

f.

g.

h.

14 (2002) 2 SCC 333-Balco Employees Union versus Union of India and others; (2000) 2 SCC 617-Air India Ltd. Versus Cochin International Airport Ltd.

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iv. v. i.

reached a decision which no reasonable tribunal would have reached or, abused its powers.

A mega project (Bangalore-Mysore Infrastructure Corridor) is in larger public interest of the State and mere change of Government does not necessitate review of decisions taken by the previous Government15. It is not for the courts to determine whether a particular policy or particular decision taken in the fulfillment of that policy is fair. They are only concerned with the manner in which those decisions have been taken. The extent of the duty to act fairly will vary from case to case. Shortly put, the grounds upon which an administrative action is subject to control by judicial review can be classified as under: i. ii. Illegality: This means the decision-maker must understand correctly the law that regulates his decision-making power and must give effect to it. Irrationality, namely, Wednesbury unreasonableness: It applies to a decision which is so outrageous in its defiance of logic or of accepted moral standards that no sensible person who had applied his mind to the question to be decided could have arrived at. The decision is such that no authority properly directing itself on the relevant law and acting reasonably could have reached it. Procedural impropriety16 of a magnitude that shocks the conscience of a Court of law due to malafides, unreasonableness or arbitrariness.

j.

iii.

6.4 Balance between public interest in infrastructure and private claims re. Injunctive Relief: a. Ex-parte Injunctive Relief: It has also been settled by courts that as a rule they do not grant Uex parte relief by way of injunction or stay especially with respect to public projects and economic policies. It is only when the court is satisfied besides merits that the public interest in holding up the project far outweighs the public interest in carrying it out within reasonable time; and that there will be irreparable and irretrievable damage can an injunction be issued after hearing all the parties. Even then the petitioner should be put on appropriate terms such as providing an indemnity or an adequate undertaking to make good the loss or damage in the event the PIL filed is dismissed17providing for restitution. Ad-interim Injunctive relief: The courts have always maintained that the public interest outweighs the private interest and have laid down well defined parameters for/against grant of injective relief in the matters of award of contract in respect of an infrastructure project being: i. when a writ petition is filed in High Court challenging of an award of a contract by a public authority or the State, the court must be satisfied that there is some element of public interest involved in entertain such a petition; The court should always keep the larger public interest in mind to decide whether the intervention is called for or not. only when it comes to a

b.

ii.

15 (2006) 4 SCC 683-State of Karnataka versus All India Manufacturers organisation. 16 (2000) 8 SCC 606-Centre for Public Interest Litigation and Anr. Versus UoI and others. 17 (2002) 2 SCC 333-Balco Employees Union versus Union of India and others; (1995) 3 SCC 33-Mahadeo Sailaram Shelke versus Pune Municipal Corpn.; (1999) 1 SCC 492-Raunaq International Ltd. Versus IVR Construction; (2006) 4 SCC 683-State of Karnataka versus All India Manufacturers organisation.

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conclusion that overwhelming public interest requires interference, the court should intervene; iii. In granting an injunction of stay order against the award of a contract by the Government or a Government Agency, the court has to satisfy itself that the public interest in holding up the project far outweighs the public interest in carrying it out within a reasonable time. The court must also take into account the cost involved in staying the project and whether the public would stand to benefit by incurring such costs; when a stay order is obtained, at the instance of private party or even at the instance of a body litigating in public interest, any interim order which stops the project from proceeding further must provide for the reimbursement of costs to the public in case ultimately the litigation started by such an individual or body fails. The public must be compensated for the delay in implementation of the project and the cost escalation resulting from such delay18.

iv.

6.5 Bidding and award of Infrastructure Projects. a. Award of a contract by a public body or the State is essentially a commercial transaction wherein the commercial considerations are of paramount importance, including: i. ii. iii. iv. v. vi. b. Price; whether Goods/Services offered are of requisite specifications; Tenderers ability to deliver goods/services of requisite quality and specifications; Track record of tenderer; Timelines; Ability of tenderer to give post delivery services.

The requirements in a tender notice can be classified into two categories: those which lay down the essential conditions of eligibility and the others which are merely ancillary or subsidiary to the main object to be achieved by the condition. If there are essential tender conditions, the same must be adhered to. If a party fails and/or neglects to comply with the requisite conditions which were essential for consideration of its case by the employer, it cannot supply the details at a later stage or quote a lower rate upon ascertaining the rate quoted by others. If there is no power of general relaxation of tender conditions, ordinarily the same shall not be exercised and the principle of strict compliance would be applied where it is possible for all the parties to comply with all such conditions fully. whether an employer has power of relaxation must be found out not only from the terms of the notice inviting tender but also the general practice prevailing in India. For the said purpose, the court may consider the practice prevailing in the past. Keeping in view a particular object, if in effect and

c.

d.

18 AIR 1999 SC 393-Raunaq International Limited versus IVR Constructions Ltd. and others ; (2000) 2 SCC 617-Air India Ltd. Versus Cochin International Airport Ltd. and others; 82 (1999) DLT 445-Gujarat Gas Service and others. Versus Delhi Vidyut Board ; 2006 (11) SCC 548-B.S.n. Joshi and others versus nair Coal Services Ltd. and others ; (2006) 10 SCC 1-Reliance Airport Developers (P) Ltd. versus Airports Authority of India.

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substance it is found that the offer made by one of the bidders substantially satisfies the requirements of the conditions of notice inviting tender, the employer may be said to have a general power of relaxation in that behalf. once such a power is exercised, one of the questions which would arise for consideration by the superior courts would be as to whether exercise of such power was fair, reasonable and bona fide. If the answer thereto is not in the negative, save and except for sufficient and cogent reasons, the writ courts would be well advised to refrain themselves in exercise of their discretionary jurisdiction. e. If there is no general power of relaxation of tender conditions, and if, however, a deviation is made in relation to all the parties in regard to any of such tender conditions, ordinarily again a power of relaxation may be held to be existing. The parties who have taken the benefit of such relaxation should not ordinarily be allowed to take a different stand in relation to compliance with another part of tender contract, particularly when he was also not in a position to comply with all the conditions of tender fully, unless the court otherwise finds relaxation of a condition which being essential in nature could not be relaxed and thus the same was wholly illegal and without jurisdiction. when a decision is taken by the appropriate authority upon due consideration of the tender documents submitted by all the tenderers on their own merits and if it is ultimately found that successful bidders had in fact substantially complied with the purport and object for which essential conditions were laid down, the same may not ordinarily be interfered with. The bidding contractors cannot form a cartel. If despite the same, their bids are considered and they are given an offer to match the rates quoted by the lowest tenderer, public interest would be given priority. where a decision has been taken purely on public interest, the court ordinarily should exercise judicial restraint. As huge amounts of public money may be involved, a public sector undertaking in view of the principles of good corporate governance may accept such tenders which are economically beneficial to it. A contract need not be given to the lowest tenderer and the employer is the best judge therefor; the same ordinarily being within the employers domain, courts interference in such matter should be minimal. The High Courts jurisdiction in such matters being limited in a case of this nature, the Court should normally exercise judicial restraint unless illegality or arbitrariness on the part of the employer is apparent on the face of the record. The employer concededly is not bound to accept a bid only because it is the lowest. It must take into consideration not only the viability but also the fact that the contractor would be able to discharge its contractual obligations. It must not forget the ground realities. only when there is an overwhelming public interest in entertaining the petition, should the court intervene. It is not every wandering from the precise paths of best practice that lends fuel to a claim for judicial review-but only where a public law element is evident. Law operating in the field is no longer res integra. The application of law, however, would depend upon the facts and circumstances of each case. The terms contained in the notice inviting tender may have to be construed differently having regard to

f.

g.

h. i.

j.

k.

l.

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the fact situation obtaining in each case. no hard-and-fast rule can be laid down therefor19. m. A division bench of the Delhi High Court recently declined to interfere with the policy decision of Government in public procurement through competitive bidding to resort to short listing of the top five qualified bidders thereby restricting price bids to the top five, upholding Governments decision to do so since bidding for infrastructure projects is a costly and effect intensive process thereby getting only serious bidders20. In doing so it relied upon a catena of judgements of the Supreme Court on policy decisions and its flexibility, while repelling allegations of anti-competitive and exclusionary behaviour.

6.6 Expert adjudication: The Honble Supreme Court given the recognition to expert adjudication of the issues arising in the infrastructure projects and has laid emphasis that the adjudication must be by the multi disciplinary expert statutory regulatory bodies who are well equipped to deal with the issues arising in infrastructure project21. 6.7 Sustainable development principles: Environment and R&R Issues:22 a. The impact of intervention of the Supreme Court of India and the High Courts in large infrastructure projects can be seen with reference to cases on river valley projects, thermal power plants, mining projects, railway projects, tourism infrastructure and roads and highways. over the last two decades a very large number of public interest petitions got filed to challenge large infrastructure projects including primarily Dams, Power and Mining projects. The grounds of challenge had included adverse environmental impacts23, safety aspects24, inadequate Environment Impact Assessment and Environment Management Plan25, extraneous financial considerations26, forced displacement27, and inadequate resettlement and rehabilitation measures28 arising there from. It would be seen that most of the challenges to such projects have been mainly because all such projects require acquisition of substantial areas of land and consequential displacement of a large number of people and also involve substantial impact on the environment and ecology of
FACETS OF EFFICACY OF ADR Table 3 Expert Adjudication Mediation like ERC X (Statutory basis) X X (Statutory basis) (Statutory appeal to expert Appellate Tribunal)

Attributes order Binding ouster of Civil Court jurisdiction Court interference

Arbitration (Section 28, Contract Act) (Section 34 of A&C Act, 199622)

Conciliation X X X

19 (2006) 11 SCC 548-B.S.n. Joshi & Sons Ltd. versus nair Coal Services Ltd. and others. 20 Judgement dated 03.11.2008 passed by a Division Bench of Honble Delhi High Court in w.P.(C) no. 566 of 2008 titled national Highways Builders Federation versus nHAI and others. 21 (2001) 7 SCC-UPSEB versus Banaras Electric Light & Power Co. Ltd.; (2002) 8 SCC 715-wBERC versus CESC Ltd.; (2007) 8 SCC 197-Central Power Distribution Co. and others versus CERC and others; (2008) 4 SCC 755-Gujarat Urja Vikas nigam Ltd. Versus Essar Power Ltd. 22 onGC vs Saw Pipes (2003) 5 SCC 905 expanded scope of Courts interference to wider interpretation of public policy [beyond Renusagar 1994] contrary to law, national interest, justice or morality + added grounds of patent illegality! 23 The Society for Protection of Silent Valley versus Union of India (Unreported). 24 Tehri Bandh Virodhi Sangharsh Samiti versus State of U.P. 1992 Supp (1) SCC 44. 25 The Goa Foundation and Anr versus the Konkan Railway Corporation and others AIR 1992 BoM 471. 26 Centre for Public Interest Litigation versus Union of India, 78 (1999) DLT 389. 27 See for instance Tehri Bandh Virodhi Sangharsh Samiti versus State of U.P 1992 Supp (1) SCC 44. 28 See for instance Karan Jalasay Yojana Assorgrasth Shakhar Ane Sangharsh Samiti versus Gujarat (AIR 1987 SC 532).

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the regions. This is because large infrastructure projects will invariably have large impacts and due to the scale of grievances, these cases merit separate and special attention. b. In litigation against large infrastructure projects the courts have generally not ordered the scrapping of any project or any significant restructuring of a project in the face of such challenges. The Courts have tendered to take the view that considerations of environmental impacts of a project or economic and financial considerations raised technical issues and policy matters, which are best, left with the expert authorities of the executive. For example in a public interest petition where hydro power project and the proposed dam was challenged on safety aspects, amongst other grounds, the Supreme Court noted that a high level committee of the union executive had cleared the project and added that It is not possible to hold that the Union of India have not applied its mind to all possible ramifications of the project. The case brings forth intricate questions relating to science and engineering and the court does not possess the requisite expertise to deal with it. Invariably, in the cases of mega development projects, there has to be a fine balancing act of two apparently equally well grounded competing claims and the way the Court may respond in such a situation was shown in narmada Bachao Andolan where the Court observed: For any project which is approved after due deliberation, the court should refrain from being asked to review the decision just because a petitioner in filing a public interest litigation alleges that such a decision should not have been taken because an opposite view against the undertaking of the project, which may have been considered by the government is possible. when two or more options or views are possible and after considering them the government takes a policy decision, it is then not the function of the court to go into the matter afresh and in a way sit in appeal over such a policy decision29. f. when the challenge to a dam or a river valley project is on the ground of displacement of persons and lack of proper rehabilitation of the ousted, the courts have in several cases given various directions including ensuring that the displaced persons get a proper opportunity to establish and claim their rights30; In some cases, the Supreme Court issued directions to ensure that the oustees get an alternative land of equal quality or employment in lieu thereof; In other cases the Courts have stayed the involuntary displacement of the outstees and hence the construction of the project until the Courts directions regarding rehabilitation of the outstees is complied with; In a relatively lesser known case the Supreme Court issued directions to ensure that the displaced get an alternative land of equal quality or employment in lieu thereof 31; Large Transport Projects like intra state and interstate highways have also recently witnessed problems in land acquisition, right-of-way issues, resettlement

c.

d.

e.

g. h.

i.

j.

29 narmada Bachao Andolan versus Union of India AIR 2000 SC 3751 at Para 234. 30 narmada Bachao Andolan versus Union of India AIR 2000 SC 3751. 31 Karan Jalasay versus Gujarat AIR 1987 SC 532.

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and rehabilitation of affected people and in environmental clearances. In this context a sustainable development approach merits that developer, planning authorities and government agencies work towards resolving these issues together. If the projects comply with the Governments development plans and the plans of the local urban and rural authorities and bodies they may tide over the environmental and social issues; k. Best practices, nationally and internationally, can throw more light on these issues. The Highways agency of the UK Government for example is engaged in widespread consultation on their projects and work under a six fold criteria of effective consultation which is mandated by the code on Consultation of the UK Cabinet32; In a landmark environment case the Supreme Court held that Some of the salient principles of Sustainable Development, as culled out from Brundtland Report and other international documents, are Inter-Generational Equity, Use and Conservation of natural Resources, Environmental Protection, the Precautionary Principles, Polluter Pays Principle, obligation to Assist and Cooperate, Eradication of Poverty and Financial Assistance to the developing countries. The Court then added The Precautionary Principle and The Polluter Pays Principle are essential features of Sustainable Development and explained that The Precautionary Principle-in the context of the municipal law-means: i. Environmental measures-by the State Government and the statutory authorities-must anticipate, prevent and attack the causes of environmental degradation; where there are threats of serious and irreversible damage, lack of scientific certainty should not be used as a reason for postponing measures to prevent environmental degradation; The onus of proof is on the actor or the developer/industrialist to show that his action is environmentally benign; The Polluter Pays Principle has been held to be a sound principle by the Court and this has been explained as follows: ... once the activity carried on is hazardous or inherently dangerous, the person carrying on such activity is liable to make good the loss caused to any other person by his activity irrespective of the fact whether he took reasonable care while carrying on his activity. The rule is premised upon the very nature of the activity carried on... Consequently the polluting industries are absolutely liable to compensate for the harm caused by them to villagers in the affected area, to the soil and to the underground water and hence, they are bound to take all necessary measures to remove sludge and other pollutants lying in the affected areas. The Polluter Pays Principle as interpreted by this Court means that the absolute liability for harm to the environment extends not only to compensate the victims of pollution but also the cost of restoring the environmental

l.

ii.

iii. iv.

32 These six include-1. Consult widely throughout the process, allowing a minimum of 12 weeks for written consultation at least once during the development of the policy. 2. Be clear about what your proposals are, who may be affected, what questions are being asked and the timescale for responses. 3. Ensure that your consultation is clear, concise and widely accessible. 4. Give feedback regarding the responses received and how the consultation process influenced the policy. 5. Monitor your departments effectiveness at consultation, including through the use of a designated consultation coordinator. 6. Ensure your consultation follows better regulation best practice, including carrying out a Regulatory Impact Assessment if appropriate. The Code adds that These criteria must be reproduced within all consultation documents. See The Code of Practice on Consultation Cabinet office, government of U.K.

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degradation. Remediation of the damaged environment is part of the process of Sustainable Development and as such the polluter is liable to pay the cost to the individual sufferers as well as the cost of reversing the damaged ecology33; v. The Precautionary Principle and the Polluter Pays Principle have since been accepted by the Supreme Court as part of the law of the land in India.

7. Contract Structuring and Negotiation: Risk and Reward Issues


[Lord Evershed, who served as Master of the Rolls and later become a Law Lord in the British House of Lords, is reported to have once commented: This contract is so one-sided that I am astonished to find it written on both sides of the paper]. 7.1 In the above context, bearing in mind the diverse stakeholder groups involved in establishing, operating and maintaining an infrastructure facility as also in delivering public goods/services, and their often clashing interests-the project agreements are vital in: a. Defining the web of inter-se relationships (rights, compliances, duties, privileges and liabilities) of various stakeholders, allocating risk and reward to create a viable infrastructure facility; Identifying the format of PPP, the project structure, the deliverables, and the standards of performance which would appropriately secure vfm and safeguard consumer/public interest; Delineating phases of project-implementation as also phase-wise role changes/ transition; Striking an appropriate balance between diverse conflicting interests to secure: i. ii. iii. optimal utilisation of public resources; Quality, reliable and affordable infrastructure services/facilities; welfare/Policy objectives re. sustainable development, environmental compliances, health and safety compliances, R&R (rehabilitation and resettlement), et.al.

b.

c. d.

This can be best appreciated in context of the schematic set out in Appendix III hereto. 7.2 one of the main advantages of involving the private sector is not simply that it gets things done but also that it progressively transfers risk away from the public agencies. The extent to which risk is transferred is built within the project agreements and depends both on the role of the private sector and on the steps taken by the public agency to ensure that potential risk-transfers do take place. This can be difficult if the public agency is not experienced in this area. 7.3 Besides the risks, another vital consideration in structuring Project Agreements is the phases of the Project, viz: a. Preparatory stage which comprises of: i. Pre-feasibility/Detailed feasibility phase wherein technical feasibility, financial viability and market status are studied;

33 Indian Council for Enviro-Legal Action versus UoI-(1996) 3 SCC 212.

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ii. iii.

Detailed Project Report; and Bidding phase wherein expressions of interest are typically solicited with statement of qualifications to pre-qualify bidders. The shortlisted bidders are normally provided information and opportunity to conduct due diligence/site visits for a defined period where after they have to submit the bids.

b. c.

The award stage-wherein bids are evaluated and contract/project is awarded. Incorporation and financing phase wherein the Project SPV is incorporated by the promoters/successful bidders followed by capitalisation and financial closure of debt-financing for the project. This can be a very intensive phase where after a comprehensive lender due diligence, debt syndication and documentation is completed if the Project is found creditworthy followed by security creation and finalisation of key project agreements as also insurance package. Pre-construction stage, wherein the following aspects are covered: i. ii. iii. iv. Land acquisition with land use conversions/rights; Provision of utilities-roads, water, power, telecom; Appointment of EPC Contractors; and obtaining necessary permits and approvals to commence work. Issuance of notice to Proceed; Completion of design and engineering work; Completion of civil construction and erection of plant and machinery/ equipment on site; Capacity testing, start up and commissioning of the equipment in conjunction with the relevant network of which it forms a part; Completion Tests.

d.

e.

Construction stage, comprising of: i. ii. iii. iv. v.

f.

operation and Maintenance stage wherein the infrastructure facility is operated to deliver the infrastructure services as per agreed standards, including undertaking of routine/scheduled and major/periodic maintenance as also refurbishment and modernisation/upgradation thereof. The last phase could be the Transfer/Hand back of the infrastructure facility to be governmental authority concerned in terms of the Project agreements.

g.

7.4 Besides the above stages, certain cardinal rules which must be borne in mind in structuring, negotiating and implementation of infrastructure projects in a PPP format include: a. A private entrepreneur is interested in doing the project to earn profits. As such, the project must meet the threshold test of financial viability based on realistic assumptions. This is particularly vital for ensuring bankability of the project, i.e., ability of the developer to arrange for cost effective finance on the strength of the projects revenue stream and the project agreements. A private entrepreneur brings in efficiency in operations, finance and technology commensurate to the rewards assured for risk taken. Should the project be perceived to be too risky, the project may fail to elicit interest from the private sector.

b.

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c.

A private entrepreneur has no funds to put into support governments welfare schemes like free power unless the same constitutes a cash-flow which can be funded in a sustainable manner from the projects revenue stream after meeting all reasonable expenditures incurred as also recovering a reasonable return on investment commensurate to the risk profile of the project. Improper or unfair risk allocation invariably enhances risk profile of the project and will: i. ii. Deter credible players who wish to deliver quality infrastructure facilities; Attracts whose who work on concession capture and short term profiteering business model.

d.

e.

An unviable public infrastructure project is not the problem of the private entrepreneur alone and can in fact emerge as a serious reputational risk and problem for the governmental authorities. Public procurement process for PPP must not be oriented to realise windfall gains for the governmental authority without frontloading the project to become unviable or burdensome for consumers.

f.

7.5 The structuring of project agreements must provide for the following aspects in terms of the rights and corresponding obligations of the parties, viz.a. The objective of the infrastructure project being structured/implemented in a public private partnership format: i. ii. iii. iv. v. b. i. ii. c. Flexibility/innovative structures; output quality standards/performance standards; nature and quality of assets created as the infrastructure facilities to render the level of service required; User charge/tariff levels for consumers; Revenue share, royalty, license fees for governmental authority. optimal risk allocation: guarding against excessive risk transfer; Risk mitigation mechanism.

Mapping of risks to develop project agreements with:

The value for money proposition for the governmental authority to structure the project as PPP. This must be build as tangible/verifiable stage-wise outcomes/ deliverables in the project agreements. Build adequate mechanism to ensure proper project development re.i. ii. iii. iv. v. Project feasibility and approval; Grant/facilitation of project consents/approvals; Acquisition of adequate (size and quality) and appropriate (forest, environment, coastal regulation zone, user) land; Coordination with the governmental agencies, third parties; Ring fencing of project revenue.

d.

e.

Build suitable project implementation and stage-wise test/validation mechanism through:

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i. ii. f.

Independent Engineer; Coordination Committee.

Securing effective and timely project completion and commencement of operations by i. ii. iii. iv. v. Early stabilisation of scope, design and drawings-avoiding changes midcourse; Performance bonds with parent/sponsor support; Liquidated damages; Incentives for early completion; Termination with penalty and procurement through others in case of default.

g.

Securing effective delivery of promised quality/service levels of infrastructure services by: i. ii. iii. Performance standards, testing and cure; Benchmarking, tolerance and obligation to restore quality; Penalties for non-performance. Grants and Subsidy; Equity and debt-financing; Payment of shadow revenue in case.

h.

Ensuring timely payments in terms of project structuring: i. ii. iii.

i.

Establish suitable protection of project viability and fundamentals against material adverse effect arising out of: i. ii. iii. Force majeure; Change in law (including policy or regulatory regime); other unforeseen/supervening events.

7.6 Policy/Regulatory Risk. a. It is associated with the rules and conditions governing entry into and undertaking of specified activities, and unanticipated changes having an adverse effect on the Project. Some critical factors which can exacerbate the risk and must be provided for include: i. Change in entry conditions

b.

Entry of new Competitors (may come with lower cost structures or better technology solutions); Change in FDI norms and norms governing foreign debt; Changes in rules governing competitive behaviour.

ii.

Revision on compliance standards re. health, safety, environment protection, service levels-resulting in additional capital expenditure or operational expenditure; Delays in or denial of regulatory approvals, consents or noCs; Capturing/Sharing of windfall gains and unforeseen upside;

iii. iv.

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c.

The only suitable litigant, other than what exists in the applicable legal framework will form a part of the contractual arrangements. It is associated with the timely and effective culmination of the Construction Stage of the Project as envisaged in the project agreements. The time and cost overruns often pose the gravest challenges to public agencies/government authorities. Some critical factors which can exacerbate this risk and must be safeguarded against, include: i. Availability of suitable land without encumbrance, encroachment or other complications (like environment, forest, coastal zone, land use, scisemetogical, soil strength etc.); Availability of construction water, power supply; Construction Technology and Design risks; Project planning and scheduling; Appropriateness of suitable infrastructure (transport, storage, telecommunication links etc.); Government clearances, approvals and permits; Supplier/Contractor delays and defaults; Change to project scope; Increase in non-firm costs; Regular availability of construction material at budgeted prices. EPC Contract-price, time, performance security and liquidated damages; Completion Tests and Independent Engineer Supervision; Equity stake from Contractor and governmental agency; Sponsor support for completion; Insurance Cover.

7.7 Completion Risk. a.

b.

ii. iii. iv. v. vi. vii. ix. x. xi. c. i. ii. iii. iv. v. a.

viii. Latent defects;

Suitable mitigating factors/structures could be provided for in:

7.8 Revenue Risk. The risk is that the revenue stream actually realised from the Project is lower than the projections based on which the viability of the infrastructure facility was assessed and financed. This could be one or more of the following: i. ii. iii. b. Revenue is lower than estimated market; Revenue is lower than estimated output price; Revenue is lower than expected collections.

Some critical factors which could exacerbate this risk and must be guarded against, include: i. Market Risk arising out of:

Identification of the relevant user-group wise volumes; Assessment of current market size and the expected growth rates;

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Competitive facilities and risk; Price competitiveness-value for money assessment.

ii.

Price Risk which would arise due to situations which result in a failure to increase the price to a level which:

is along the contracted trajectory; is timely and efficient; offsets the actual inflation; and covers reasonable costs incurred towards providing infrastructure services along with reasonable return on investment. change in creditworthiness of users, offtaker(s); willful non-payment in the absence of legal/contractual powers to penalise.

iii.

Payment/Credit Risk which could arise due to:


c.

Suitable mitigating measures could be a selection of one or more of the following: i. ii. iii. iv. Securing equity stake from the off-taker; Take or pay obligations in Project agreements with suitable payment security mechanism; Business case must be based on prudent and conservative assumptions, sensitivity analysis and lower gearing; Government support for securing project viability, including:

Capital grant/subsidy; Supplemental revenue stream; Contractual mechanism to re-balance viability in the event of material adverse effect e.g., by extending tenure or adding some supplemental revenue stream; Securing against competition which can erode viability.

7.9 Input/Supply Risk. a. It is associated with the regular, adequate (both quality and quantity) and reasonably priced availability of key inputs for operating the infrastructure facility and/or providing infrastructure services; Some critical factors which can exacerbate the risk and must be guarded against include: i. ii. iii. iv. v. c. More attractive or overriding alternate demand for same resources; Lack of standards/consistency in quality of input, particularly where input is sourced from multiple sources; Limitations on procurement like canalised imports, few/overbooked suppliers, foreign exchange rate variations, etc; Transportation and storage issues, including regulatory compliances; Environmental, health and safety compliances.

b.

Suitable mitigation measures could be a selection of one or more of the following:

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i.

Suitable covenants in the Input Supply Contract:


Supplier to supply as per assured quantity of agreed quality or pay; Price hedge.

ii. iii. a.

Suitable floating towards contracts cover upto a certain amount/quantity of Input/s at reasonable prices; Strategic investments made in supplier/entities of scarce inputs.

7.10 Infrastructure Risk. Relates to timely availability of appropriate and adequate infrastructure (telecom links, road networks, water, power supply etc.) to enable the efficient operation of the Project. Some factors which may exacerbate this risk and must be guarded against include: i. Delays in completion of attendant infrastructure which is under control of governmental authorities or other developers, in particular where the availability of a specified quality was assured/assumed in the critical path for implementation of the Project; Poor maintenance or repairs of the attendant infrastructure resulting in prolonged and frequent break-downs impairing the milestones for project completion as also efficient functioning/delivery of infrastructure services from the Project; Erroneous and/or baseless assumptions re. availability of appropriate and adequate infrastructure for a particular price; Rigorous due diligence of attendant infrastructure. Robust contractual obligations being cast on the governmental authority to assure/ensure availability of appropriate and adequate attendant infrastructure (specified) at pricing (specified) during the term of the PPP Project, backed by:

b.

ii.

iii. c.

The mitigation of such risk would comprise of: i. ii.

Time and cost overrun compensation and extension of time with waiver of liquidated damage clauses during Construction Phase. Resetting the tenure of the commercialisation phase of the Project Agreement to offset any material adverse impact on the project economics;

iii.

Project Agreements to build in appropriate renegotiation and/or exit provisions to be exercised by the developer with valuation formulae in the event where such non-availability of adequate and appropriate attendant infrastructure frustrates the Project as awarded, or permanently changes the Projects parameters and economics.

7.11 Finance Risk. a. b. It relates to timely closure of adequate and cost-effective debt-finance for the effective implementation of the Project. Some factors which can exacerbate the risk and must be guarded against include: i. Inability of the selected private developer to tie-up and leverage adequate and cost efficient debt from credible lender/s due to lack of track-record or inadequate project structuring;

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ii.

Refusal/inflexibility of the governmental authorities to address the lender concerns suitably to build lender-confidence on the integrity of the project and its revenue stream; Limitations on ability of developer to securitise project assets and/or project revenue stream or absence of credit enhancements; Interest rate risk; Foreign exchange risk; Aggressive leverage which unravels during project implementation; Excessive reliance on third party equity/mezzanine financing by developers. suitable structuring of the Project from the perspective of viability and creditworthiness of its revenue stream; perhaps involvement of an experienced transaction advisor to conduct/validate the feasibility study; suitable evaluation of the financial credibility and standing of the private developer to ensure against voyeurism and short term strategies which erode creditworthiness of the Project; appropriate commitments in sponsor support to bridge the financing gap/leverage debt-finance to implement the project.

iii. iv. v. vi. vii. c.

The above elements of risk can be mitigated, inter alia, by: i.

ii.

iii.

7.12 operating Risk. a. It relates to the Project not operating as planned and designed, i.e,: i. ii. iii. iv. b. The availability of the infrastructure facility is below expected levels; The output of the infrastructure facility, i.e., the service/goods delivered is below the installed capacitys expected output; The operating costs are higher than budgeted operating costs; The budgeted maintenance costs are higher than the budgeted maintenance costs.

Some of the critical factors which could exacerbate this risk, and have to be guarded against, include: i. ii. iii. iv. v. Deficiencies in project completion which impair or compromise the operating characteristics of the infrastructure facility; Technology-whether the same is a tested and stable technology, or a new untried technology, or an obsolete technology; The nature of technology will have a direct bearing on availability of adequate supply of appropriate critical spares, or trained/skilled manpower; Cost of routine and of major maintenance, as also the frequency and downtime impact on the infrastructure facility; Cost of asset replacement, refurbishment and modernisation as also the frequency and downtime impact on infrastructure facility. Selecting known and proven technology; Quality assurances through suitable guarantees, representations and warranties;

c.

Suitable mitigating factors/structures which can be provided for, include: i. ii.

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iii. iv. v. vi. a.

Suitable o&M contracts; Annual Maintenance Contracts (AMCs) from equipment suppliers; Maintaining a suitable inventory of critical spares; organising professional and experienced management.

7.13 Project Developer Risk. It relates to the risk of selection of a developer who may not possess the necessary technical, financial and managerial capabilities and track-record to successfully implement and operate the infrastructure facility. Some factors which could exacerbate this risk and must be guarded against, include: i. Track-record of the developer having successfully financed, implemented and operated a comparable infrastructure facility of a comparable scale and scope; Poor financial health or a highly leveraged (committed projects and contingent liabilities) financial health of the developer due to which it is unable to:

b.

ii.

fund its own equity; garner lender comfort on limited recourse financing; provide a credible Sponsor Support Commitment to bridge financing gap.

c.

The above elements of risk can be mitigated, inter alia, by: i. Strong pre-qualification criterion (technical and financial) combined with a prudent and rigorous evaluation process to short list eligible bidders who have a reputation to lose. Strong credit history and references being sought before selection. Suitable safeguards being built into Project Award and Documentation, like

ii. iii.

Lender commitment to fund project; Sponsor support to bridge financing gap.

7.14 Force Majeure Risk. a. It relates to unforeseen changes in the environment paralysing or naturally impacting the project implementation and its viability. These are largely in the nature of unavoidable/supervening impossibility arising for no fault of the developers. This could arise due to three categories of reasons: i. ii. iii. c. i. acts of God like natural calamities; indirect Political Events like acts of war, terrorism, strike, public agitation or law and order problems; or political Events like change in law or expropriation. Contractual provisions to address each category of events:

b.

The mitigation mechanism/strategy could include: Definitional standards of when it be invoked and for how long;

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notice of occurrence with verifiable details-both force majeure and its cessation-with due expedition; Duty to act with care and prudence; Duty to mitigate and restore expeditiously; Condonation of resultant delays with waiver of liquidated damages; Independent verification rules; Exit option and termination payments.

ii. a. b.

Suitable Insurance cover.

7.15 Environmental, Rehabilitation and Resettlement (R&R) and related risks. These risks relate to the compliance with the applicable environmental norms; the rehabilitation and resettlement (R&R) policy/plan and related issues. The factors that could exacerbate this risk include: i. ii. iii. iv. v. c. i. Quality of Environmental Impact Assessment (EIA); Robustness of Environmental Management Plan (EMP); nature/effectiveness in implementation of EMP; Appropriateness of the R&R Scheme and the buy-in of the citizens/ evacuees as also the policy makers/governmental authority; Effectiveness in implementation of the R&R plan. Public consultation process conducted by governmental authorities on the project structuring as also its impact on the project site and its vicinity qua

The above elements of the risk can be mitigated, inter alia, by:

Environmental Impact (forest clearance, Coastal Region Zone (C.R.Z.) clearance, State Pollution Control Board (S.P.C.B.) clearance et.al.); Land Acquisition; Employment benefits; Economic Impact including its value for money proposition.

ii.

Finalisation of project structure as also elements of its indicative EIA and R&R issues which have to built into the project by the developer to secure effective implementation with the buy-in of the local community. This must be a part of the project offering put in public domain before the bidders prior to bid date. Developer ensuring that its EIA, EMP and R&R Scheme addresses all the above concerns besides complying with the applicable law and standards. Developer ensuring effectively, timely and proper implementation of the EMP and R&R Scheme.

iii.

iv.

7.16 In addition to providing for the issues as set out in Paragraphs 7.5 to 7.15 above, the project agreements for PPP in infrastructure projects would cover the following Grantors obligations (with the corresponding rights of the Concessionaire): a. b. Project site delivery; Environmental Clearance and Rehabilitation and Resettlement;

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c.

State Support re. facilitating/procuring consents, approvals and permissions from regulatory and statutory authorities, as also availability of adequate and appropriate supporting infrastructure (power, water, telecom, access roads etc.); Securing comprehensive rights to the Concessionaire to effectively undertake construction and operation of the infrastructure facility, including: i. ii. iii. iv. v. Vesting of the assets: ownership or right to use; Right to create (augment infrastructure facility and to operate and maintain it to deliver the infrastructure services); Right to enter into contract for infrastructure services; Right to charge appropriate user-charge, recover it and appropriate it from users, including mechanism to revise tariff schedule from time to time; Right to disconnect or regulate rise of infrastructure facilities. Grant, Subsidy, Equity, Revenue Shortfall loan; Annuity/shadow toll towards revenue subsidy for services; Termination Payments; Change of Scope Payments.

d.

e.

Payment obligations: i. ii. iii. iv.

7.17 Similarly the project agreements must provide the following Concessionaires obligations (with corresponding rights of the Grantor to enforce): a. b. c. Design of the infrastructure facility as per specifications stipulated or to achieve the performance parameters/output specified; Timely achievement of financial close to draw down debt finance for the project, after completion/satisfaction of specified conditions precedent; Timely completion of construction of infrastructure facilities as per project schedule/critical path, followed by testing and demonstration of capacity and output parameters; Specifications of output levels and service delivery levels to be assured throughout the commercial phase/operation and maintenance phase of the infrastructure facility, with periodic testing and capacity demonstration; Methodology/process for transfer back of the infrastructure facility to the grantor/governmental authority as per specific parameters/norms and with demonstrated capacity and condition of the facility; Insurance Cover; Performance Security.

d.

e.

f. g.

8. In Conclusion
8.1 Various developed economics have adopted divergent models and approaches to structure, procure and implement PPP Projects. Some experiences worthy of reference which will get discussed include: a. b. c. United Kingdom; Australia; Singapore.

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8.2 It is imperative that we should build upon the recent experiences in infrastructure development including the seminal and extensive work done by the Committee on Infrastructure as also Ministry of Finances PPPAC and the Planning Commission to keep evolving a dynamic India-specific model for PPP structuring, procurement, and contracting (negotiation and management) which addresses, inter alia, the following: a. b. Standard Bid Process management guidelines with model IM, DPR, RfQ, RfP and related documents; Standard Concession Agreements and Contracts with a detailed Risk Matrix and negotiation Guideline suited for: i. ii. c. i. Different Sectors; Different PPP formats. Decision-making for selecting a specific project for PPP (as opposed to public or private domain.) This evaluation must proceed on a considered value-for-money assessment and criterion to determine whether the project will achieve vfm in PPP format. The specific vfm proposition must be identified as evaluation criteria for selection of Bidders as also for setting performance outcomes expected of the project for laying out in the contracts/concession; Structuring of Projects with focus on role, responsibility and risk allocation amongst diverse stakeholders; negotiation of Contracts; Tariff revision; Mitigating Risk and Material Adverse Impact of unforeseen changes.

overall Evaluation Criterion with guidelines to facilitate the following:

ii. iii. iv. v. d.

An efficient, time bound, fair and credible dispute resolution mechanism which facilitates project development while minimising risk of forum shopping as also any stakeholder availing of perverse incentives.

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Appendix I
Types of project formats for PPP
The various types of project formats of PPP infrastructure projects are sometimes divided into several categories, according to the type of private participation or the ownership of the relevant infrastructure, some of which seem more regularly are: 1. Build-operate-transfer (BoT)-The contracting authority selects a concessionaire to finance and construct an infrastructure facility or system and gives the entity the right to operate it commercially for a certain period, at the end of which the facility is transferred to the contracting authority. Build-transfer-operate (BTo)-Have the infrastructure facility becomes the property of the contracting authority immediately upon completion of the construction and capacity testing, the concessionaire being awarded the right to operate the facility for a certain period. Build-rent-operate-transfer (BRoT) or build-lease-operate-transfer (BLoT)-These are variations of BoT or BTo projects where, in addition to the obligations and other terms usual to BoT projects, the concessionaire rents the physical assets on which the facility is located for the duration of the agreement. Build-own-operate-transfer (BooT)-A concessionaire is engaged for the financing, construction, operation and maintenance of a given infrastructure facility in exchange for the right to collect fees and other charges from its users. The private entity owns the facility and its assets until it is transferred to the contracting authority. Build-own-operate (Boo)-The concessionaire owns the facility permanently and is not under an obligation to transfer it back to the contracting authority. These acronyms may be used to emphasise one or more of the obligations of the concessionaire. In some projects, existing infrastructure facilities are turned over to private entities to be modernised or refurbished, operated and maintained, permanently or for a given period of time. Depending on whether the private sector will own such an infrastructure facility, those arrangements may be called either refurbish-operate-transfer (RoT) or modernise-operate-transfer (MoT), in the first case, or refurbish-own-operate (Roo) or modernise-own-operate (Moo), in the latter. The expression design-build-finance-operate (DBFo) is sometimes used to emphasise the concessionaires additional responsibility for designing the facility and financing its construction. Build-and-Transfer (BT)-A private entity undertakes the financing and construction of a given infrastructure facility and after its completion hands it over to the Government, Government Agency or the Local Authority. The Government Authority would reimburse the total Project investment on the basis of an agreed schedule and operate it.

2.

3.

4.

5. 6.

7.

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8.

Build-Lease-and-Transfer (BLT)-A private entity undertakes to finance and construct Infrastructure Project and upon its completion hands it over to the Government Local Authority concerned on a lease arrangement for a fixed period, after which ownership of the facility is automatically transferred to the Government Local Authority. Contract-Add-operate (CAo)-A private entity adds to an existing infrastructure facility which it rents from the Government Authority and operates the expanded Project and collects user levies, to recover the investment over an agreed franchise period. There may or may not be a transfer arrangement with regard to the added facility provided by the Developer.

9.

10. Develop-operate-and-Transfer (DoT)-A private entity builds an infrastructure facility is integrated into the BoT arrangement by giving that entity the right to develop adjoining property and thus, enjoy some of the benefits the investment creates such as higher property or rent values. 11. Rehabilitate-operate-and-Transfer (RoT)-An existing facility is handed over to the private entity to refurbish, operate (collect user levies in operation period to recover the investment) and maintain for a franchise period, at the expiry of which the facility is turned over to the Government Local Authority. This could cover the purchase of an existing facility from abroad, importing, refurbishing, erecting and consuming it within the host country. 12. Rehabilitate-own-and-operate (Roo)-An existing facility is handed over to the operator to refurbish and operate with no time limitation imposed on ownership. As along as the operator is not in violation of its franchise, it can continue to operate the facility and collect user levies in perpetuity.

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Appendix II
Table 4 SOME FORMATS: ROLE ALLOCATION Format Management/Service Contract Lease BoT BooT/Boo Ownership Public Public Public Private/ Public O&M Private Private Private Private Capex Public Public Private Private Commercial Risk Public Shared Private Private Contract Duration 3-5 years 8-15 years 25-30 years 20-30 years

Table 5 ATTRIBUTES NECESSARY TO SUCCEED IN PPP Format Service contract/ Management Contract Management Contract Performance Incentives Lease Stakeholder support; Political will not important User Charges: Costrecovery Information level required Level of capacity needed Minimal Relevance of Credit rating not critical

not critical in Can proceed short term with limited info.

Low to Preferred but Good info. moderate not necessary required to get levels needed in short term incentives Moderate to high levels needed Moderate to high levels needed High levels needed necessary Good system information required Good system information Good system information

Moderate

not critical

Strong

not critical

BoT

Preferred

Strong

Impacts Risk Premium in Cost of Capital Debt and Equity Impacts Risk Premium in Cost of Capital Debt and Equity

Concession

necessary

Strong

Table 6 SKILL-SET NEEDED TO EFFECTIVELY ADMINISTER AND IMPLEMENT PPP Technical Managing Operating Format Investment Expertise Expertise Efficiency In bulk in retail Service Contract Management/with Performance Incentives Lease Concession/BoT BooT/Boo X Limited X Limited Limited Limited X X X X X X X

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Appendix III

POWER PROJECT STRUCTURE Sponsors Shares Loans

POWER PROJECT STRUCTURE Figure 3

PPA Off-Taker EPC Contract Construction Contractor Operator Fuel Supplier Landowner Steam Purchaser (cogen) Host Government Fuel Supply Contract Lease of Site/ Sale of Land Steam Purchase Contract Concession & Approvals O&M Contract

Pledge of shares Project Lenders Pool / Market Sale Arrangements Inter-creditor Agreement Export Credit, Govt. Multilateral Agencies (World Bank, ADB, ADB, OPIC, IFC, US Exim, Jexim, MIGA)

Security

Power Generating Company Loans, Credit Support & Political Risk Insurance

Consents to Collateral Assignments

TELECOM PROJECT STRUCTURE

TELECOM PROJECT STRUCTURE Figure 4

Pledge of shares Sponsors Government Agency Equipment Supplier Operator Concession / Licence Shares EPC Contract O&M Contract Installation Contract Site Lease/s & Land Sales Loans, Credit Support & Political Risk Insurance Export Credit, Govt. Multilateral Agencies (World Bank, ADB, OPIC, IFC, US Exim, Jexim, MITI, MIGA) Consents to Collateral Assignments Security Loans Project Lenders Intercreditor Agreement Subscribers

Mobile Company

Tariffs

Installation Contractor Landowner Telecom Carriers

Interconnection Agreements Interconnection Payments

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Appendix IV

Table 7 LEGISLATIVE POWERS OF CENTER AND STATES Sector List I (Union List) List II (State List) Roads and Bridges Entry 23: national Entry 13: Communications not Highways covered in List I or III including roads, bridges and ferries, municipal tramways, inland waterways Entry 59: Tolls Entry 57: Taxes on vehicles Transport Entry 22: Railways Entry 13: Municipal tramways Entry 24: Shipping and navigation on national inland waterways Entry 30: Carriage of passengers and goods by railway, sea or by national waterways Entry 56: Regulation and development of inter-state rivers and river-valleys Ports Entry 27: Major Ports, not applicable including their delimitation and the constitution and powers of the port authorities Urban not applicable Entry 5: Local Infrastructure Government-constitution and powers of Municipal Corporations, other local authorities etc. Entry 6: Public health and sanitation Entry 17: water (including drainage) Power Entry 53: Taxes on the consumption or sale of electricity

List III (Concurrent List) not applicable

Entry 32: Shipping and navigation on inland waterways Entry 35: Mechanically propelled vehicles including principles on which taxes are levied on them

Entry 31: Ports other than Major Ports

not applicable

Entry 38: Electricity

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Appendix V

PPP LAWS IN ANDHRA PRADESH, GUJARAT AND PUNJAB Table 8 Attribute Gujarat Punjab Andhra Pradesh Ability to Grant Concessions/Enter into PPP Sectors identified Powers and limitations on structures Schedule II sets out the nature of the permissible concession agreements Government of Gujarat (GoG) may add to the schedule Schedule II sets out the nature of permissible concession agreements Punjab Infrastructure Development Board (PIDB) can refer projects to Government of Punjab (GoP) to be executed through SPV GoP has the power to amend the schedule Public bidding Unsolicited proposals State implemented projects Schedule I sets out the nature of permissible concession agreements (with variations and combinations)

Selection of projects: Process Selection of concessionaire

Competitive public bidding Direct negotiation

Competitive Bidding Swiss Challenge for unsolicited bid Direct negotiation Act provides for establishment, functions and powers of the Infrastructure Authority and clearly identifies the roles of its agencies. Authority to identify and conceptualise projects; approve suo-motu proposals or projects whereby Swiss Challenge

Governance and Regulation Authorities and their respective Act provides for establishment, jurisdiction functions and powers of the Gujarat Infrastructure Development Board (GIDB). It clearly identifies the roles of GoG and its agencies GIDB to promote private participation in financing, construction, maintenance and operation of a project; advise GoG on policies of participation; monitor and coordinate projects undertaken by the state. GoG to (on GIDB recommendation) carry out competitive bidding process; enter into concession agreement; provide state support.

Act provides for establishment, functions and powers of Punjab Infrastructure Regulatory Authority (PIRA) and PIDB PIRA to (i) determine tariff for concessions, (ii) regulate working of concessionaire, and (iii) adjudicate disputes between 2 concessionaires. PIDB to be the nodal agency, prepare project documentation; select and prioritise projects; recommendation of grant of concession to public infrastructure agency

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Attribute Autonomy/ Credibility; Transparency and Accountability of Authorities Fund Managed by nodal Agency

Gujarat GIDB to submit annual report to State Government. GoG shall get report auditedaudited accounts to be placed before State Legislature Funding sources GoG or body Fees for considering proposal no procedure stipulated for challenge of process of selection of project or concessionaire Alternative Dispute Resolution (ADR) mechanisms and courts may always be resorted to Concession Agreement to have arbitration clause-Model Arbitration clause provided

Punjab Authority to submit annual report to Legislative Assembly

Andhra Pradesh Provision for transparency in working and operation of Authority

Funding sources GoP Fees for considering proposal Cess levied for certain items Authority to adjudicate: Disputes between concessionaires or operators of infrastructure projects, State Government and PIDB Appeal preferred against PIDB order regarding approval of infrastructure project or award of concession Appeal from orders of Authority to High Court Concession agreement to lay down manner and procedure of dispute resolution including conciliation and arbitration

GoAP to contribute Rs 10 million to the fund Fees for considering proposal Conciliation Board set up, deemed to be a civil court Infrastructure Authoritys order-appeal to Government of Andhra Pradesh (GoAP) GoAPs order may always be challenged in court

Dispute resolution mechanism (in concession agreements and project/ concessionaire selection)

Expropriation, safeguards and compensation

Concession agreement may provide that if default specified therein GoG or its agencies may take over project without repaying equity investment amount and shall assume developers liabilities GoG may exempt payment or deferred payment of any of its tax on fees Sectoral sub committee under Board to formulate sectoral packages of financial incentives/ concessions. As per nature of concession agreement. As per nature of concession agreement. Collection and retention of appropriate tariff in terms of concession agreement.

In Schedule IV, land expropriation is mentioned as a risk during the construction period, which is to be provided for in the Concession Agreement.

Incentives

Rights and Duties of Concessionaire Right to own, operate, maintain, As per nature of concession repair, use assets agreement. to render services Right to regulate access to the assets As per nature of concession and use of services agreement. Power to determine charges, Developer to charge for levy them, collect providing goods and services them and retain by the project in terms of them concession agreement.

As per nature of concession agreement. As per nature of concession agreement. GoAP will forgo revenue schemes in case of Category II projects and in case of Category I projects if the sector policy stipulates for it.

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Attribute Power to enforce: theft; inspection, search and seizure; penalty; prosecution

Gujarat

Punjab

Andhra Pradesh Abuser Charges Polluter Charges Penalties for contravening any provision of the Act Certain offences listed out by the company Agency concerned or Infrastructure Authority to facilitate securitisation of project assets/receivables.

Right to securitise revenue stream/ Project finance

obligation to comply with applicable laws: single window/state support

PIDB shall assist concessionaire The Authority has the power in obtaining statutory/other to grant all permissions approvals and clearances for project, except GoAP sanction.

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Appendix VI
Outline of an Illustrative Concession
1. Opening Section 1.1 name, place and date of execution of the Concession. 1.2 Description of Parties to the Concession: name, legal status (company, society, trust, partnership etc.), address and name of authorised signatory. 1.3 Recitals setting out the background of the infrastructure facility being implemented in the PPP format, likea. need for the infrastructure facility. b. Structuring decision and format (including legal provisions and Cabinet/ Government approvals et.al. which form the basis of the project). c. Procurement process leading to award to the Concessionaire. d. Basic value for money proposition of the project. 2. Rules of Interpretation 2.1 Specific definitions and standards used in the Concession. 2.2 Rules of Interpretation, including priority and hierarchy of project agreements along with Schedules and Appendices. 3. 4. Definition of Project Scope and Format Explicit Vesting of Concession with all Attendant Rights and Privileges 4.1 Delineation of status of Grantor as also the underlying legal provisions and cabinet/government decision to procure the infrastructure facility to the Concessionaire being the winning bidder. 4.2 Explicit award of the Project and delineation of various rights and privileges vested in the hands of the concessionaire during the tenor of the concession. 5. Term and Phases of the Project Agreement 5.1 Term. 5.2 Construction Period. 5.3 Completion and Commercial operation. 5.4 Concession Period. 6. 7. Concession Fees and/or Revenue Share Financial Close

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8. 9.

Design Requirements Construction Requirements 10.1 output-based Specifications. 10.2 Routine/scheduled maintenance. 10.3 Periodic/major maintenance. 10.4 Refurbishment and Modernisation.

10. Operation and Maintenance Requirements

11. End of Term Transfer/handback Requirements 12. Non-complete/exclusivity 13. Tariff Structure 13.1 Base Tariff. 13.2 Revisions. 14. Lock-in Period and Shareholding Restrictions 15. Insurance Cover 15.1 Aspects to be secured. 15.2 Application of insurance proceeds. 16. Independent Verification 16.1 Independent Engineer and his role. 16.2 Independent Auditor and his role. 16.3 Periodicity of checking by Independent Engineer/Auditor. 16.4 Concessionaires obligation to cooperate/submit data/maintain records/ undertake testing. 17. Change of Project Scope 18. Change in Law and Consequences 19. Step-in Rights of Lenders 20. Substitution Rights 21. Force Majeure Events and Consequences 22. Termination Payments 22.1 In case of Force Majeure related termination. 22.2 In case of Default related termination. 23. Assignment and Charges 24. Direct Agreements 25. Waiver of Sovereign Immunity 26. Dispute Resolution Mechanism

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Appendix VII
Q&A : Indian Public Procurement Laws
1. Relevant Legislation
1.1 What is the relevant legislation and in outline what does each piece of legislation cover? At the apex of the Indian legal framework governing public procurement is Article 299 of the Constitution of India, which stipulates that all contracts made in the exercise of the executive power of the Union of India or by a State Government shall be expressed to be made by the President or by the Governor of the State, as the case may be and all such contracts made in exercise of such power shall be executed on behalf of the President or the Governor by such person as he may direct. The Indian Contract Act, 1872 and the Sale of Goods Act, 1930 are the major Legislations governing contracts of sale/purchase of goods in general. At the federal level, there is no law exclusively governing public procurement of goods in India, though at the state level certain state legislatures (like Tamil nadu) have enacted such laws. However, comprehensive rules and directives have been put in place at the federal level in terms of (i) the General Financial Rules (GFR), 2005, (ii) the Delegation of Financial Powers Rules (DFPR), (iii) the Manual on Policies and Procedures for Purchase of Goods issued by the Ministry of Finance (Manual), (iv) Government orders regarding price or purchase preference or other facilities to sellers in the Handloom Sector, Cottage and Small Scale Industries and to Central Public Sector Undertakings, etc. and (v) the guidelines issued by the Central Vigilance Commission to increase transparency and objectivity in public procurement. These provide the regulatory framework for public procurement by governmental instrumentalities. In addition there exist certain sectoral laws and their underlying sectoral policies like the Telecom Regulatory Authority Act, 2000, the Electricity Act, 2003, the Petroleum & natural Gas Board Act, 2006, et al which also guide the public procurement processes. within this framework various Governmental instrumentalities and agencies including ministries and departments (like the Public works Department, the national Highways Authority of India, et al) have evolved their own public procurement system-each of which cannot be covered here.

1.2 How does the regime relate to supra-national regimes including the GPA and/or EC rules? The General Financial Rules 1963 were amended with effect from July 1, 2005 to reflect the provisions of supra-national regimes like the GPA and the EC Rules. The preface to the General Financial Rules, 2005 provide that the review of the

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General Financial Rule was done to incorporate the developments that had taken place including a rapid growth of alternative service delivery systems, developments in information technology, outsourcing of services and liberalisation of the system of procurement, accounting and disposal of goods in line with the international practices. 1.3 What are the basic underlying principles of the regime (e.g value for money, equal treatment, transparency) and are these principles relevant to the interpretation of the legislation? Rule 137 of the General Financial Rules, 2005 lays down the basic underlying principles of the regime and provides that every authority delegated with the financial powers of procuring goods in public interest shall have the responsibility and accountability to bring efficiency, economy and transparency in matters relating to public procurement and for fair and equitable treatment of suppliers and promotion of competition in public procurement. In specific, Rule 137 of the General Financial Rules, 2005 provides that the procedure to be followed in making public procurement must conform to the following yardsticks: a. the specifications in terms of quality, type etc., as well as quantity of goods to be procured, should be clearly spelt out keeping in view the specific needs of the procuring organisations. The specifications so worked out should meet the basic needs of the organisation without including superfluous and non-essential features, which may result in unwarranted expenditure. Care should also be taken to avoid purchasing quantities in excess of requirement to avoid inventory carrying costs; b. offers should be invited following a fair, transparent and reasonable procedure; c. the procuring authority should be satisfied that the selected offer adequately meets the requirement in all respects; d. the procuring authority should satisfy itself that the price of the selected offer is reasonable and consistent with the quality required; and e. at each stage of procurement the concerned procuring authority must place on record, in precise terms, the considerations which weighed with it while taking the procurement decision. Also instructive to note in this context, is that the ruling of the Honble Supreme Court in the matter of nagar nigam, Meerut versus Al Faheem Meat Exports (P) Ltd. and ors (2006) 13 SCC 382, inter alia, observing as follows: a. The Government must have freedom of contract. Some fair play in the joints is a necessary concomitant for an administrative body functioning in an administrative sphere. b. All contracts by the Government or by an instrumentality of the State should be granted only by public auction or by inviting tenders, after advertising the same in well-known newspapers having wide circulation, so that all eligible persons will have an opportunity to bid in the auction, and there is total transparency. This is an essential requirement in a democracy, where the people are supreme, and all official acts must be actuated by the public interest, and should inspire public confidence. The State or its instrumentalities should not give contracts by private negotiation but by open public auction/tender after wide publicity.

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c. It is now a well-settled principle of law that having regard to the provisions of Article 14 of the Constitution, (which enshrines equality before law and equal protection by law) the State cannot distribute its largesse at its own sweet will. The court can ensure that the statutory functions are not carried out at the whims and caprices of the officers of the Government/local body in an arbitrary manner. But the court cannot itself take over these functions. d. Having regard to the nature of the trade or largesse or for some other good reason, a contract may have to be granted by private negotiation, but normally that should not be done as it shakes the public confidence. However, in rare and exceptional cases, for instance during natural calamities and emergencies declared by the Government; where the procurement is possible from a single source only; where the supplier or contractor has exclusive rights in respect of the goods or services and no reasonable alternative or substitute exists; where the auction was held on several dates but there were no bidders or the bids offered were too low, etc., this normal rule may be departed from and such contracts may be awarded through private negotiations.

1.4. Are there special rules in relation to military equipment? The Ministry of Defence has framed special rules and guidelines for defence procurement. The Defence Procurement Procedures, 2006 and the Defence Procurement Manual 2006 are currently in force and are applicable to all procurement activity undertaken by the Ministry of Defence. The updated 2008 version of the said Procedures and Manual are expected in the coming months.

2.
2.1

Application of the Law to Entities and Contracts


Which public entities are covered by the law and is it possible to obtain a ruling on this issue? The regulatory framework for the public procurement system is applicable to all Ministries or departments of the government regarding procurement of goods and services required for use in the public service. In the matter of K. Padmavathi, P. Sivaraj and S. Shanmugam Versus. The Corporation of Coimbatore, represented by its Commissioner and others. (2006(1)CTLJ7(Mad), (2005) 4MLJ11), the Supreme Court has held that contracts by the State, its Corporations, instrumentalities and agencies must be normally be granted through public-auction/public tender by inviting tenders from eligible persons; the notification of the public-auction or inviting tenders should be advertised in well-known dailies having wide circulation in the locality; the award of Corporation contracts through public auction is to ensure transparency in the public procurement and that this is done mainly to provide for fair, reasonable and equitable treatment of all tenderers, and to eliminate irregularities.

2.2 Which private entities are covered by the law and is it possible to obtain a ruling on this issue? Any private entity that is participating in the competitive bidding/public procurement process to supply goods or service, or for that matter being awarded a project or contract will get covered by the law in as much that their bidding, qualification and award/rejection is subject to judicial review on the well established common law principles of reasonableness (including principles like legitimate expectation, pacta sunt servanda, Wednesburys reasonableness and proportionality-

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as have been incorporated into Indian law by the Courts). Any private entity claiming a wrongful denial has a right to seek redress through the courts of law. 2.3 Which types of contracts are covered? The regulatory framework for the public procurement system is applicable to all Ministries or Departments of the Government regarding procurement of goods and services required for use in the public service. 2.4 Are there threshold values for determining individual contract coverage? The General Financial Rules are applicable to all instances of procurement of goods required for use in the public service regardless of the value of the goods.

2.5 Are there aggregation and/or anti-avoidance rules? The Indian Income Tax Act, 1961 contain rules for avoidance on tax on transfer of goods and services between associated and connected enterprises. These rules are all encompassing in nature and would also apply to contracts for public procurement. Further, certain Governmental instrumentalities and agencies including ministries and departments (like the Ministry of Defence, the Public works Department, the national Highways Authority of India, et al) have evolved their own public procurement system-wherein such rules are found.

2.6 Are there special rules for concession contracts? As stated above, various Governmental instrumentalities and agencies including ministries and departments, as also a few States have evolved their own public procurement system-each of which cannot be covered here. A few States have enacted their own specific laws based on which concessions will be awarded for implementing infrastructure projects on a PPP basis. on May 16, 2007, the Government of India, Ministry of Finance issued guidelines for pre-qualification of bidders for PPP Projects. The guidelines provide for a two stage bidding process and are applicable to all ministries and departments of Central Government and to all Central Public Sector Undertakings. Some States like Andhra Pradesh, Punjab and Gujarat have enacted Andhra Pradesh Infrastructure Development Act, 2005, Punjab Infrastructure (Development and Regulation) Act, 2002, and Gujarat Infrastructure Development Act, 1999 respectively. The above mentioned legislations, inter alia, set out the institutional framework and the manner in which infrastructure projects will be undertaken in a PPP mode. Various other State Governments have issued their general and/or sectoral public procurement/PPP policies.

3.

Procedures

3.1 What procedure can be followed, how do they operate and is there a free choice amongst them? General Financial Rule 2004 - Provides for the norms and principles governing contracts entered into by Government. Some of the key principles to be observed while entering into contracts, is as follows: i. The terms of contract must be precise, definite and without any ambiguities. The terms should not involve an uncertain or indefinite liability, except in the case of a cost plus contract or where there is a price variation clause in the contract.

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ii. Standard forms of contracts should be adopted wherever possible, with such modifications as considered necessary in respect of individual contracts. The modifications should be carried out only after obtaining financial and legal advice. iii. (a) A Ministry or Department may, at its discretion, make purchases of value up to Rupees one lakh by issuing purchase orders containing basic terms and conditions. (b) In respect of works Contracts, or Contracts for purchases valued between Rupees one lakh to Rupees ten lakh, where General Conditions of Contract (GCC), Special Conditions of Contract (SCC) and scope of work, the letter of acceptance will result in a binding contract. (c) In respect of contracts for works with estimated value of Rupees ten lakh or above or for purchase above Rupees ten lakh, a Contract document should be executed, with all necessary clauses to make it a self-contained contract. If however, these are preceded by Invitation to Tender, accompanied by GCC and SCC, with full details of scope and specifications, a simple one page contract can be entered into by attaching copies of the GCC and SCC, and details of scope and specifications, offer of the Tenderer and Letter of Acceptance. (d) Contract document should be invariably executed in cases of turnkey works or agreements for maintenance of equipment, provision of services etc. iv. Cost plus contracts should ordinarily be avoided. where such contracts become unavoidable, full justification should be recorded before entering into the contract. v. Price Variation Clause can be provided only in long-term contracts, where the delivery period extends beyond 18 months. In short-term contracts firm and fixed prices should be provided for. where a price variation clause is provided, the price agreed upon should specify the base level viz., the month and year to which the price is linked, to enable variations being calculated with reference to the price levels prevailing in that month and year. vi. Contracts should include provision for payment of all applicable taxes by the contractor or supplier. vii. Lumpsum contracts should not be entered into except in cases of absolute necessity. where lumpsum contracts become unavoidable, full justification should be recorded. The contracting authority should ensure that conditions in the lumpsum contract adequately safeguard and protect the interests of the Government. viii. The terms of a contract, including the scope and specification once entered into, should not be materially varied. ix. normally no extensions of the scheduled delivery or completion dates should be granted except where events constituting force majeure, as provided in the contract, have occurred or the terms and conditions include such a provision for other reasons. Extensions as provided in the contract may be allowed through formal amendments to the contract duly signed by parties to the contract. x. All contracts shall contain a provision for recovery of liquidated damages for defaults on the part of the contractor. xi. A warranty clause should be incorporated in every contract, requiring the supplier to, without charge, repair or rectify defective goods or to replace such goods with similar goods free from defect. Any goods repaired or replaced

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by the supplier shall be delivered at the buyers premises without costs to the buyer. xii. All contracts for supply of goods should reserve the right of Government to reject goods which do not conform to the specifications. Certain sectoral and State laws and policies have also nuanced these rules and procedures. 3.2 What are the rules on specifications? Some of the aspects to be duly considered by governmental instrumentalities whilst formulating the specifications and other technical particulars of the goods to be purchased are as follows: i. The specifications of the goods shall meet only the actual and essential needs of the user because over-specification will unnecessarily increase the cost and may stifle competition.

ii. Specifications should aim at procuring the latest technology and avoid procurement of obsolete goods. iii. Specifications should have emphasis on factors like efficiency, optimum fuel/ power consumption, use of environmental-friendly materials, reduced noise and emission levels, low maintenance cost etc. iv. The specifications should not be too restrictive as the aim should be to attract reasonable number of competitive tenders. The specifications should also take care of the mandatory and statutory regulations, if any, applicable for the goods to be purchased. v. wherever Indian Standards exists for the required goods, the same should be adopted. Preference should be given to procure the goods, which carry BIS (Bureau of Indian Standards) mark. For any deviations from Indian Standards or for any additional parameters for better performance, specific reasons for deviations/modifications should be duly recorded with the approval of the competent authority. vi. In cases where Indian Standards do not exist or, alternatively, a decision has been taken to source the foreign markets also, International Standards (like ISo etc.) may be adopted. where no widely known standards exist, the specifications shall be drawn in a generalised and broad-based manner to obtain competitive bids from different sources. vii. Except in case of proprietary purchase from a selected single source, the specifications must not contain any brand name, make or catalogue number of a particular manufacturer and if the same is unavoidable due to some compelling reasons, it should be followed by the words or equivalent. 3.3. What are the rules on excluding tenderers? There is no general rule on exclusion of tenderers. However, it has been seen in cases that from time to time due to sectoral policy considerations (like crossholding restrictions between print media and broadcasting) as also issues of national/ public interest (for defence and strategic procurements) specific qualifications rules for specific transactions may have exclusionary impact. It is instructive to note that governmental instrumentalities may exclude/blacklist a tenderer if a tenderer engages in illegal or corrupt practices or if a particular tenderer has failed to perform its obligations under a certain governmental contract. The Honble Apex Court in

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the matter of Raghunath Thankur Versus State of Bihar and others (1989) 1 SCC 229, inter alia observed that blacklisting any person in respect of business ventures has civil consequence for the future business of the person concerned. Therefore it is an elementary principle of natural justice that parties affected by any order of blacklisting should have right of being heard and making representations against such order. 3.4 What are the rules on short-listing tenderers? Each Ministry/Department of the Government that engages in public procurement formulates its own guidelines for determining eligibility of suppliers who are qualified in all respects to deliver the goods and services. These guidelines are formulated taking into account the credentials, manufacturing capabilities, quality control systems, past performance, facility for after-sales services, financial background and other parameters contained in General Financial Rules, 2005.

3.5 What are the rules on awarding the contract? The tender is usually awarded to the lowest evaluated tender. All aspects, which are to be taken into account for evaluating the tenders including the method to be adopted for evaluation of tenders and the techniques for determining the lowest evaluated responsive tender for placement of contract are to be incorporated in the tender enquiry document in clear and comprehensive manner without any ambiguity and/or confusing stipulations. In addition to the above, all the tenders are to be evaluated strictly on the basis of the terms and conditions incorporated in the tender enquiry document (based on which offers have been received) and the terms, conditions etc. stipulated by the tenderers in their tenders. no new condition should be brought in while evaluating the tenders. Similarly, no tender enquiry condition (specially the significant/essential ones) should be over looked while evaluating the tenders. After completing the entire evaluation process for the responsive tenders on equitable basis, the bids are to be entered into a ranking statement in ascending order of the evaluated prices (like L1, L2, L3etc.) along with other relevant details, so that a clear picture of their standing as well as comparative financial impact is available at a glance. Before placing the contract on the lowest evaluated responsive tender (L1), the purchase organisation is to ensure that the price to be paid is reasonable. The broad guidelines for judging the reasonableness of price are as under: i. last purchase price of same (or, in its absence, similar) goods; ii. current market price of same (or, in its absence, similar) goods; iii. price of raw materials, which go into the production of the goods; iv. receipt of competitive offers from different sources; v. quantity involved; vi. terms of delivery; vii. period of delivery; and viii. cost analysis (material cost, production cost, over-heads, profit margin). 3.6 What methods are available for joint procurements? In the case of projects jointly executed by several Governments, where the expenditure is to be shared by the participating Governments in agreed proportions, and the expenditure is ab-initio incurred by one Government and shares of other participating Governments recovered subsequently; such recoveries from other

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Governments shall be exhibited as abatement of charges under the relevant expenditure Head of Account in the books of the Governments incurring the expenditure initially. 3.7 What are the rules on alternative bids? The General Financial Rules, 2005 are silent on this issue.

4.

Exclusions and Exemptions (including in-house arrangements)

4.1 What are the principal exclusive/exemptions and who determines their applications? The principle exclusion from the ambit of these guidelines is the procurement for the defence sector for which separate guidelines have been prescribed. Some infrastructure sectors have their specific laws and policies that govern public procurement (including entry, exit and performance regulation). Similarly, provisions regulating advances to government servants have been excluded from General Financial Rules as these are distinct from direct government expenditure. 4.2 How does the law apply to in-house arrangements, including contracts awarded within a single entity, within groups and between public bodies? There is no specific regulation that applies to in-house arrangements. Contracts entered into between groups must be executed on an arms length basis and should not lead to any antiavoidance situations. Also transfer pricing rules come into play.

5.

Remedies and Enforcement

5.1 Does the legislation provide for remedies/enforcement and if so what is the general outline of this, including as to locus standi? normally, the conditions governing the contract contain suitable provision for settlement of such disputes/differences binding on both the parties. If a dispute/ difference arises, both the purchaser and the supplier shall first try to resolve the same amicably by mutual consultation. If the parties fail to resolve the dispute by such mutual consultation within twenty-one days, then, either the purchaser or the supplier may give notice to the other party of its intention to commence arbitration. If the contract is with domestic supplier, the applicable arbitration procedure will be as per Indian Arbitration and Conciliation Act, 1996 and if the contract is with foreign supplier, the supplier has the option to chose either Indian Arbitration and Conciliation Act, 1996 or Arbitration in accordance with the provision of UnCITRAL (United nations Commission on International Trade Law) Arbitration Rules. The venue of arbitration shall generally be the place from where the contract has been issued except when foreign supplier opts for arbitration, in accordance with the provision of UnCITRAL, Arbitration Rules, the venue can be a neutral country. The governing law of the contract will be the laws of India.

5.2 Can remedies/enforcement be sought in other types of proceedings or applications outside the legislation? Remedies/enforcement of public procurement contracts can also be sought under the provisions contained in the Indian Contract Act, 1872, the Specific Relief Act, 1963 and the Sale of Goods Act, 1930. In addition to the above, a tendering process can be subject to judicial review before a High Court in India inter alia on the ground

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of arbitrariness, fairness in action, malafide or violation of a fundamental or legal right as enshrined in the Constitution of India. 5.3 Before which body or bodies can remedies/enforcement be sought? The conditions governing the contract shall contain suitable provision for settlement of such disputes/differences binding on both the parties. If a dispute/difference arises, both the purchaser and the supplier shall first try to resolve the same amicably by mutual consultation. If the parties fail to resolve the dispute by such mutual consultation within twenty-one days, then, either the purchaser or the supplier may give notice to the other party of its intention to commence arbitration. In addition, for violation of the reasonableness-doctrine state action is amenable to judicial review by the competent High Court in exercise of the constitutional writ jurisdiction. 5.4 What are the legal and practical timing issues raised if a party wishes to make an application for remedies/enforcement? For arbitration and ADR process the contracts read with the governing procedural law/rules would normally stipulate the time lines and the process. For invoking the court jurisdiction through a civil suit, the Limitation Act, 1963 prescribes the limitation period for filing an application in the appropriate judicial forum for the redressal of the grievance. In most civil cases, the prescribed limitation period is three years from the date of occurrence of cause of action. For invoking the writ jurisdiction though no specific time limits are prescribed, the courts have evolved the doctrine of laches where expedition in seeking relief is warranted and those guilty of inexplicable or unreasonable delays find themselves non-suited. 5.5 What remedies are available after contract signature? In case a contract has been signed, the following remedies are available against the defaulting party: i. Damages for breach of the contract. ii. Specific performance of the contract, including through injunctive and declaratory reliefs. 5.6 What is the likely timescale if an application for remedies/enforcement is made? Judicial proceedings in India may take a few months to several years for it to finally conclude. The duration depends on the complexity of the action, the forum and other relevant parameters. what is noteworthy is the development of statutorily mandates expert regulatory institutions with time bound decision making processes like the Electricity Regulatory Commissions and the Telecom Regulatory Authority of India with an expert appellate tribunal (expert with judicial officers and technical/ sectoral experts as members). These mechanisms have been significant in getting quick, expert decisions-cutting down the time and costs of adjudication since their decision is appealable to the Supreme Court and all other courts normally do not interfere with their decision making. 5.7 Is there a culture of enforcement either by public or private bodies? Yes. There is a culture of enforcement. Both public and private bodies take recourse to the legal rights and remedies as provided by law to enforce their rights.

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5.8 What are leading examples of cases in which remedies/enforcement measures have been obtained? The Supreme Courts decision in the matter of Ramana Dayaram Shetty versus International Authority of India (1979) 3 SCC 489 is a locus-classicus/landmark on the issue of administrative action, which is applicable to public procurement also. In the abovementioned matter, the Honble Apex Court observed as follows: i. Every action of the executive Government must be informed with reason and should be free from arbitrariness. That is the very essence of the rule of law and its bare minimal requirement.

ii. Government action must be based on standards that are not arbitrary or unauthorised. The Government is still the Government when it acts in the matter of granting largesse and it cannot act arbitrarily. It does not stand in the same position as a private individual. iii. The State need not enter into any contract with anyone, but if it does so, it must do so fairly without discrimination and without unfair procedure. iv. It must, therefore, be taken to be the law that where the Government is dealing with the public, whether by way of giving jobs or entering into contracts or issuing quotas or licences or granting other forms of largesse, the Government cannot act arbitrarily at its sweet will and, like a private individual, deal with any person it pleases, but its action must be in conformity with standard or norm which is not arbitrary, irrational or irrelevant, and if the Government departs from such standard or norm in any particular case or cases, the action of the Government would be liable to be struck down, unless it can be shown by the Government that the departure was not arbitrary, but was based on some valid principle which in itself was not irrational, unreasonable or discriminatory. The said precedent has since been followed repeatedly. Further, an important facet of Indian jurisprudence has been the judicious weighing of public interests with private interests in interfering with public bidding and procurement processes, as also in fashioning relief.

6.

Changes During a Procedure and After a Procedure

6.1 Does the legislation govern changes to contract specification, changes to the timetable, changes to contract conditions (including extensions) or changes to contracts term post-signature? If not, what are the underlying principles governing these issues? There exists no legislation specifically governing contract specifications, changes to the timetable, changes to contract conditions (including extensions) or changes to contract terms postsignature-other than the Indian Contract Act, 1872-i.e., the same is left to the contract between the parties. In addition, the procurer in public procurement contracts being an instrumentality of state is expected to act in a fair and reasonable manner. Unless explicitly reserved by contract, there cannot be any unilateral amendments to executed contracts. Any amendment to contract terms requested by the supplier may have, inter alia, financial impact and/ or technical impact and/or legal impact. Therefore, before agreeing to the request of the supplier, the purchase organisation usually scrutinise the issue on its merits to ensure that the requested amendment does not have any adverse effect on the purchase organisation. Financial concurrence should be obtained before issuing any

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amendment having financial implications/repercussions. Further, there may be an occasion where consultation with Law Ministry will be necessary before issuing the proposed amendment. The Ministry/Department should process such issues, as deemed fit, depending on the merit of the case. 6.2. In practice, how do purchasers and providers deal with this issue? Amendment to contract terms are dealt with transparently by the suppliers and the concerned Governmental Instrumentality, and are negotiated mutually within the applicable contractual framework.

7.

Privatisations and PPPs

7.1 Are there special rules in the relation to privatisation and what are the principal issue that arise in relation to them? The stated objective of disinvestment is to put national resources and assets to optimal use and in particular to unleash the productive potential inherent in the public sector enterprises. The policy of disinvestment specifically aims at: (i) modernisation and upgradation of Public Sector Enterprises with greater service delivery focus; (ii) creation of new assets; (iii) generating of employment; (iv) retiring of public debt; (v) freeing public finances for developmental work-and minimising subsidy burden; and (vi) engaging private enterprise for financing, establishing, managing and operating public services/facilities. In this context, the Government would like to ensure that disinvestment does not result in asset stripping, erosion of quality of service, unregulated private monopolies, usurious pricing, et al. 7.2. Are three special rules in relation to PPPs and what are the principal issues that in relation to them? on May 16, 2007, the Government of India, Ministry of Finance issued guidelines for pre-qualification of bidders for PPP Projects. The guidelines provides for a two stage bidding process and are applicable to all Ministries and Departments of Central Government and to all Central Public Sector Undertakings.

8.

Other Relevant Rules of Law

8.1 Are there any related bodies of law of relevance to procurement by public and other bodies? At the apex of the legal framework governing public procurement is Article 299 of the constitution which stipulates that contracts legally binding on the Government have to be executed in writing by officers specifically authorised to do so. Further, the Indian Contract Act, 1872 and the Sale of Goods Act, 1930 are major legislations governing contracts of sale/purchase of goods in general.

9.

The Future

9.1 Are there any proposal to change the law and if any so what is the timescale for these and what is their likely impact? no. At present there is no bill pending in the parliament to bring about any change in the existing law.

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Public Private Partnership The Asian Context

1. Overview
The aim of this Paper is to give an overview of how PPP is being developed in certain jurisdictions in Asia as of December 2008, broadly dividing the examples into countries in Asia where PPP can loosely be said to be at a developed stage and those where it is still developing.

1.1 Categorisation
Categorisation in this way is of course relative. For example, while in the Asian context PPP in Singapore can be said to be at a developed stage when compared to most other jurisdictions in Asia, in comparison with, say, the United Kingdom (where the stream of PPP projects can be traced back to the mid to late 1990s) it is still relatively embryonic. It is important however, when considering the development and prospects for PPP in Asia not to get drawn too much into categories and terms. The PPP market in Asia as a whole is still very much at the developing stage despite notable successes in countries such as Singapore and India (in the latters case primarily in the roads and ports sector). The notion of PPP can mean many things to many people. while some would include the development of power projects within the notion of PPP, given the private sectors involvement in the development of power projects which previously were State dominated, in this Paper we look at PPP primarily in the context of transport (e.g. roads, ports, airports, light rail) and social infrastructure (e.g. education, healthcare). Private participation in the power sector in Asia has been around for some time in usually, the private sector investment in infrastructure first materialise in this sector, along with, perhapes, participate in the road projects.

1.2 Diverse Investment


while power is obviously a fundamental driver of economic growth, as witnessed by the increasing demand for power in India, there is also a pressing need throughout Asia for investment in roads, ports, rail, schools, other educational establishments and healthcare. All these sectors have already witnessed the involvement of PPPs to a greater or lesser degree in Asia. These are certainly sectors on which Governments and other institutions with responsibility for the development of what have traditionally been public services need to focus if they are to marry the increasing need for infrastructure investment with the appetite of private sector developers and funders to get involved with attractive and well structured projects. The public/

This Paper has been developed by the Projects, Regulatory and Policy Practice of Harvey Weaver Counsel, Ashurst December 2008.

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private sector relationship can offer significant benefits to both parties and, most importantly, the public who are generally the ultimate users of the facilities.

1.3 Questions to Consider


The following sections highlight the position PPP has reached in four countries where, in the Asian context at least, PPP can be said to be at a developed stage (Singapore, India (in relation to certain sectors), South Korea and Japan) with four countries where PPP is still developing (Vietnam, Indonesia, Pakistan and the Philippines). when considering how each of them has developed or is developing PPP it is important to consider: to what extent the development of PPP in that jurisdiction has looked to follow examples of successful PPP programmes in other countries in order to expedite the development of PPP; to what extent the particular jurisdiction has been successful in attracting both domestic and overseas investment in its PPP programme and to what extent it set out to do so; the common themes behind those countries that have been successful in implementing PPP programmes; and how the successes and failures of PPP development in certain jurisdictions can be replicated, or avoided, in the case of future development of PPP in India.

1.4 Key Issues


At the end of this Paper the key lessons learned from the comparison of PPPs implementation in the countries mentioned is examined. It is certainly the case that, given the development of PPPs in India to date, India has many of the building blocks in place to expand further the sectors in which PPP projects can be implemented. To do so successfully, however, means avoiding some of the common pitfalls and making sure that projects presented for private sector development and funding are well structured and thought through, so as to attract a healthy and competitive level of private sector involvement that will bring tangible benefits to the public.

2. Public Private Partnerships in Asia


PPPs at a developed stage 2.1 Singapore
Overview of PPP/Stage of PPP adoption and development
Singapore has a small but active PPP programme, which is beginning to diversify the way that the country finances and operates key infrastructure projects. while other Asian countries have executed larger PPPs, few have had Singapores recent success in sustaining a steady supply of new projects. Since 2003, Singapore has executed or begun the bidding process for a significant number of PPP project concessions in a variety of asset classes including water, solid waste, sport and education. Singapores PPP framework is administrative in nature and is not statutorily authorised, in contrast to some Asian countries. To date, the absence of a statutory authority has not been an impediment to the development of Singapores PPP programme,

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given its common law based legal system and use of international precedent as a catalyst for its PPP programme. Singapores PPP guidelines borrow heavily from UK and Australian precedents, and most of the framework is on a par with international standards. This has helped attract overseas investors, in particular, companies from those jurisdictions who are familiar with the kind of risk allocation and contract structures being put forward by the Singapore authorities. These companies in turn have attracted financial institutions to participate in projects who often have an existing relationship elsewhere with the companies concerned. The PPP environment in Singapore benefits from a stable regulatory framework, legal recourse, a clear procurement process, a move towards standard documentation and robust contracts that deal in a comprehensive way with risk allocation. As a rule, the Government only allows the application of PPP to projects whose capital value exceeds SGD 50 million (approximately US $ 34 million at December 2008 exchange rates). The Ministry of Finance (MoF) pre-selects the potential PPP sectors, then approaches the respective authorising ministries to seek their cooperation in the promotion and execution of PPP contracts.

Status of documentation/Relevant legislation


The MoF published a PPP Handbook in october 2004. This introduced the concepts, mechanics and types of PPP, detailed the procurement process and outlined the sharing of project risks and responsibilities between the public and private sector. As yet, there is no standard PPP contract in Singapore but, as stated above, this is under development.

Example recent/current PPP deals


Early transactions covered water and incineration projects; Singapore Sports Hub: a 55,000 seater multi-purpose facility to replace the national Stadium on which Ashurst is acting for the lenders. A preferred bidder has been announced; ITE College west: new campus of the Institute of Technical Education with a capacity for 7,200 full time students, 8,100 part time students and 630 staff. This project reached financial close in September 2008 with Ashurst acting for the lenders; Secondary schools: Upgrading 5 secondary schools under the PRIME Programme for Rebuilding and Improving Existing Schools to provide or improve IT, health and fitness and other facilities. This project is in its initial stages; and Development of new Singapore Management University student hostels through DBFo34 framework. This project is in its initial stages.

2.2 India
Successes to date
The intention of this Paper is not to dwell on the background and legislation in relation to PPP in India. Rather, the intention is to focus on the success of PPPs in India in certain sectors to date and consider how this success can assist the
34 Design-Build-Finance-operate.

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development of PPP in other sectors, in particular social infrastructure. To date, PPPs in India has witnessed: Successful programmes developed and implemented in the road, port and airport sectors promulgated by bodies such as the national Highways Authority of India, Ministry of Shipping, Road Transport and Highways, etc; The development of a clear procurement process applicable to bidders in these sectors which is capable of translation into other sectors with appropriate modifications; The development of standard documentation in the road, port and airport sectors which has helped to streamline the bidding process. In addition, the procuring authorities have shown a willingness to listen to private sector concerns with some aspects of the documentation and, where they believe these concern as justified, to amend the documentation; Both domestic and international players being attracted to investment opportunities; and Confidence in the common law based legal system in India (though the length of time litigation can take in India gives cause for concern).

Issues
This development has not taken place without issues. In common with infrastructure projects worldwide, the ability of the Government to take forward PPP programmes in these sectors at the pace it would like is being hampered by the issues affecting the global credit markets. In addition, in the roads sector certain of the rules introduced into the bidding process have caused an element of controversy, such as the rules restricting the number of projects that a bidder can take forward to the financial bidding stage. In some cases, these rules have led to bidders withdrawing from projects in favour of participation in others. However, as this is an evolving process, we should have confidence that both the public and private sectors will find acceptable solutions in order to maintain the momentum of the programme.

Expansion into new sectors


The key to expanding the PPP programme in India will be to take the successes from the above programmes and successfully adapt them to other sectors. This needs to be done bearing in mind the differences between, say, transport and social infrastructure projects and being realistic as to the risk allocation the private sector are likely to accept, in particular in sectors where PPP development is in its early stages. If the programmes and risk allocation are too aggressive at the outset then a lack of private sector interest may hamper the development of new sectors.

2.3 South Korea


Overview of PPP/Stage of PPP adoption and development
South Korea has had a broad and successful experience in the PPP arena, albeit with a largely domestic focus, involving: i. The development of a PPP framework which covers in detail all aspects relating to the procedures for examination and treatment of solicited and unsolicited proposals;

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ii. Embedding financial assistance through legislation with clear and transparent conditions to be met. The embedded financial support and incentives include the creation of an infrastructure fund to invest in joint companies to be set up with the private sector, allowing the infrastructure company to raise project finance through the issuance of infrastructure bonds with income tax benefits, the provision of construction subsidies and loans and the provision of tax benefits; and iii. Successfully attracting significant interest from private organisations for multisector investments including social infrastructure such as schools and cultural centers. Projects have also been successfully developed and closed in the road, port and rail sectors. Risk mitigation has been balanced during the project life cycle through certain features such as creation of an infrastructure credit guarantee fund, provision of a minimum revenue guarantee, defining provisions for termination payments (including buyout obligations on the Government under force majeure conditions), and protection against the reduction of tariffs or the concession period. These measures have all served to attract private sector developers and financiers. The private sector share in infrastructure investment in Korea increased from less than 4 percent in 1998 to more than 17 percent in 2006. The focus of Korean PPP is on social and economic infrastructure, with 44 types of infrastructure facilities having been developed in 15 categories. Using the BTo35 model and its variants, 143 projects in the infrastructure sectors have attracted investment of approx. US $ 42.8 billion to date, with roads, railways and ports accounting for 73 percent of the projects. Using the BTL36 model, 227 projects have attracted investment of approximately. US $ 12.3 billion, with schools and the environment accounting for 90 percent of the projects. while these statistics are impressive, it should be noted however that with the exception of certain projects in the roads sector and the projects mentioned below, the bulk of the projects implemented so far in Korea have involved domestic companies and won financing. International players, such as the likes of Macquarie, Bouygues and DP world have tended to focus mainly on the large scale transactions. Domestic financial institutions such as the Korea Development Bank have also played a significant role in developing and financing PPP projects in South Korea.

Status of documentation/Relevant legislation


The Private Capital Inducement Act of 1999 addressed the necessary institutional and regulatory reforms by stating the sectors that were open to private investment and the methods of promoting private investment projects, including procedures for facilitating the smooth conduct of projects. This was complimented by a well-defined and transparent financial assistance and risk mitigation framework that set down applicable rules under different PPP options.

Example recent/current PPP deals with an international element


Incheon Grand Bridge: 12.3 km, dual three-lane tolled bridge connecting the Incheon Free Economic Zone and Incheon International Airport. Upon
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completion, the longest bridge in Korea and the fifth-longest cable-stayed bridge in the world. Transaction value of US $ 1.6 billion; Daegu-Busan Expressway: 82.05 km highway with 104 bridges and 13 tunnels. Total budget of KRw 2547.3 billion; Busan new Port: In 2004, Dubai Ports world bought out CSX world Terminals and became the major shareholder of Pusan newport Corporation (PnC). Investment by PnC in the Pusan new Port Project was on a PPP basis and totalled over US $ 2 billion; and Busan new Port Container Terminal Phase 2-3: This project involves the building and operating of one of the four terminals of the new container port in Busan in south east South Korea (an earlier phase of the project is referred to above). The new port will replace the old one located in the central part of the city and the new facility will handle the significantly increased container traffic which will service the local and international markets.

2.4 Japan
Overview of PPP/Stage of PPP adoption and development
Since the PFI37 Law of 1999, more than 200 PFI projects have been launched in Japan. Since the PFI Law stated only the essential principles of the PFI techniques used in Japan, in 2000, the Government released detailed fundamental principles and three basic guidelines to clarify issues for local municipalities and private investors. The PFI Law legally entrusts the bulk of construction, maintenance, and management of public work to the private sector. The PFI Law attempts to get the private sector involved in the key public works sector, which had been the exclusive domain of the public sector. More than half the deals to date in Japan have used the BTo model. Unlike many jurisdictions with developed PPP programmes, ownership of the funded asset transfers back to the government after completion of construction. This is due partially to tax reasons, as the public sector is not liable for tax, and partially due to government prudence and unwillingness to transfer ownership to the private sector. The nature of the BTo model used in Japan limits the degree of risk transfer that can be achieved-there is less responsibility for whole life costs and lower equity returns for investors. Indeed, a mistake often made initially by those looking at the Japanese PFI market is to assume that the element of risk transfer and private sector responsibility will be on a par with that in other developed PPP jurisdictions. This is not the case and generally, commensurate with lower equity returns, the public sector retains a significant amount of risk. Finally, with the exception of the Haneda Airport transaction (see below) in which Macquarie are a shareholder, the Japanese PFI market is essentially a domestic one with contracts in Japanese and the participants being Japanese companies and financial institutions. while international players are definitely interested in Japan as a market, should it liberalise, at present there is little opportunity for international players in Japanese PFI.

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Status of documentation/Relevant legislation


no standard contract exists for Japanese PPP projects, with individual ministries and local authorities preparing their own contracts. Contractual arrangements for PPP projects in Japan are less detailed than is customary in UK, US or European regimes. Trust, rather than a strict contractual relationship, is relied on. This reflects the inherently domestic nature of the PPP regime in Japan.

Example recent/current PPP deals with an international element


Tokyo International (Haneda) Airport Expansion PFI-Passenger Terminal; The project is part of the larger Haneda Airport expansion, which is divided into three projects: the passenger terminal, a cargo terminal, and an airport ramp (apron) project (which reached financial close in 2006). These expansion projects are the first PFI concession templates used in Japan for an airport, and will coincide with the completion of a fourth runway (2,500m) in 2009/10.

PPPs at a developing stage


2.5 Vietnam
Overview of PPP/Stage of PPP adoption and development
The Vietnamese economy has been growing rapidly over the last decade benefiting from the Doi Moi (economic renovation) policy introduced in 1986. This rapid growth is however putting a significant strain on the countrys infrastructure. with economic development expected to continue at a significant pace notwithstanding the current economic slowdown, pressure on roads, ports and other infrastructure systems will increase. The poor state of Vietnamese infrastructure is now considered to be a serious obstacle to the countrys development but improving the infrastructure system will need huge capital investment. The Vietnamese Government projected that it requires a minimum annual investment of US $ 3 billion, or 12 percent of GDP in the coming years to meet the countrys overall infrastructure needs. Traditionally, infrastructure has been provided through public investment, partly with bilateral and multilateral donor support. In view of the huge projected requirements however, the funding sources of the Government will not be sufficient to meet the demand. Investment in infrastructure has been sourced primarily via state-owned enterprises (SoEs) with investment programs for infrastructure articulated in long term (10-20 years) investment plans. Infrastructure levels are improving; between 1990 and 2000, the road network increased by 104 percent and power/electricity generating capacity by 180 percent. The role the private sector has to play in infrastructure was only recognised legally in 2001 and to date privatisation has been limited with SoEs continuing to monopolise infrastructure. The Vietnamese PPP model has great potential due to the lack of core infrastructure systems and the potential difficulties for the Government acting alone to secure long-term, low cost funding for projects. The private sector can contribute, but faces difficulties in balancing affordability and project viability; balancing the infrastructure sectors need for investment, the governments desire to pass on affordable pricing to the public and the needs of the private sector for a reasonable return with acceptable levels of project risk.

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The opening up of the market to foreign trade and investment in the wake of the countrys accession to the wTo in early 2007 means that interest continues to grow apace as international corporations and investors eye the mid to long-term benefits despite the current difficulties.

Status of documentation/Relevant legislation


There is an obvious need for the development of energy projects in Vietnam, although many would say there is a greater need for implementation than strategy planning. Vietnam has strong central planning roots and on 27 December 2007, the Prime Minister signed Decision 1855 approving the national energy development strategy to 2020, with a vision to 2050. The strategy sets out development plans for specific energy sectors, including electricity, coal, oil and gas, and new energy sources. It also contains policies for national energy security and energy prices and priorities for the development of new energy sources and environmental protection. This allows for a great deal of more detailed planning. The same level of impetus is now required in the transport sector. In terms of documentation, transactions developed to date in Vietnam have been primarily in the port and power generation sectors and have tended to involve the grant of an Investment License to a company selected to develop a project and, in some cases, a BoT contract which imposes contractual obligations on a company as regards how and in what time frame it must develop the project. The Investment Licences granted to companies do not contain a lot of detail as to how a project should be developed but do contain minimum equity requirements etc. in relation to the company.

Examples of recent/current PPP deals


Thi Vai container terminal phase 1: A JV of PSA International, Saigon Port Company and Vinalines are to build the new US $ 227 million facility downstream of the existing Thi Vai general cargo terminal near the estuary of the Cai Mep-Thi Vai river. The first phase will comprise two 300 metre berths which will handle 2.2 metre TEUs annually; Saigon Container Ports Terminal: Construction of a US $ 200 million container port with a total annual capacity of 930,000 TEU, 500m of straight quay line, 5 main quay cranes and 20ha of container yard in Ho Chi Minh City in Vietnam. Main Sponsor DP world; Cai Mep Container Terminals: Container terminal developments sponsored by AMP Terminals and CMA-CGM respectively are underway, following on from those developed by PSA International and DP world mentioned above which have already reached financial close; and Hanoi Underground Railway Phase: 1; A 15.2 km railway, part of a 42 km urban railway project connecting noi Bai International Airport with Ha Dong city. The project is the Phase I of noi Bai Ha Dong urban railway, slated to start in the middle of 2009 and be completed by 2013. Estimated cost of the project is US $ 1.2 billion.

2.6 Indonesia
Overview of PPP/Stage of PPP adoption and development
The Cabinet Indonesia Bersatu (The Indonesia United Cabinet) through the Indonesia Infrastructure Summit 2005, stated that investing in decent roads, water supplies,

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energy, telecommunications and other basic infrastructure services is vital to sustain economic growth and improve peoples standards of living in Indonesia. In order to pursue this investment goal, the Government has built considerable momentum for infrastructure reform. It has established a sound regulatory framework for private sector participation in line with international practices. It has adopted a risk management framework; amended the regulation on land acquisition; drafted and submitted to parliament amendments to key transport laws, with provisions for greater public private partnerships; established separate regulatory bodies for toll roads, water and telecommunications. The national Medium Term Planning set out three main agenda for the period of 2005-2009. The third agenda, improving the welfare of the Indonesian people, sets out the Governments commitment to improve infrastructure. For the improvement of infrastructure, the Government has to provide at least US $80.1 billion for new infrastructure.

Status of documentation/Relevant legislation


In an effort to reform the Government of Indonesias PPP scheme, in november 2005, the Government of Indonesia passed Presidential Regulation no. 67/2005Cooperation Between The Government and Enterprises in Infrastructure Procurement (the new PPP Regulation). The new PPP Regulation sets out the general framework for the Government of Indonesias infrastructure development partnership with private industry. The new PPP Regulation was passed in view of the urgent need for infrastructure development and the need for the government to take comprehensive steps to create an investment climate to increase the participation of private enterprises in such infrastructure development. Procurement of the PPP concessionaire or business licensee must be done on a competitive basis, and unsolicited approaches are discouraged. one of the key provisions of the new PPP Regulation deals with risk management and government support for infrastructure projects. It sets out the general principle that project risks will be allocated between the government of Indonesia and investors based on which party is capable of best controlling such risk (a common mantra of those involved in PPP projects). The general amount of government support will be based on the governments fiscal budget. These provisions also contemplate that support may be given by the provincial governments. The new PPP Regulation also provides for the selection by the ministers or other government officials of infrastructure projects to be offered for tender, and the information and support to be provided by the government in connection with such tender (e.g., feasibility study, funding requirements); material matters to be agreed in the cooperation agreement between the government and private investors; and details of the tendering process. In addition to the general framework provided by the new PPP Regulation, the various industry sectors also have their own sets of laws and regulations. In recognition of the importance of land acquisition to the PPP scheme, the Government has passed a regulation providing for the mechanism for acquiring land and the compensation to be given to owners of land needed for infrastructure development (the Provision of Land for Realising the Development for Public Interests, Presidential Regulation no. 36/2005, as amended by Presidential Regulation no. 65/2006). This legislation provides the legal basis for the government to acquire

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infrastructure project land from the landowners by providing compensation in the form of money, substitute land and/or resettlement or other forms of compensation agreed by the parties. Compensation is to be based on the assessed fair market value of the land and buildings located on the land. The regulation also sets forth an appeal process for landowners who do not agree to the compensation offered by the Government of Indonesia.

Examples of recent/current PPP deals


Jakarta Mass Rapid Transit System: US $ 1.5 billion mass rapid transit system, completion expected in 2014. The 14.5 km long railway system will connect Lebak Bulus, a suburb in south Jakarta to the Hotel Indonesia Circle in the city centre. About 9 km of the track will be elevated with the remaining 5.5 km built underground. Java Railway Project: US $ 343 million term loan to fund the construction of a 35 km four-track railway from Manggarai in South Jakarta to the nearby town of Cikarang in west Java.

2.7 Pakistan
Overview of PPP/Stage of PPP adoption and development
Pakistans infrastructure is inadequate compared to world standards and has been identified as one of the critical reasons constraining rapid economic growth. The Government has embarked upon massive plans for infrastructure development. In its national budget of June 2004, the government announced US $ 3 billion per year of new investments in development projects and infrastructure for the next five years. However, it is estimated that the Government is only able to fund US $ 1.5 billion per year, or 50 percent of these required infrastructure investments. The rest must come from the private sector through direct investments or PPP structures. Large fiscal deficits have limited the Governments capacity to meet growing infrastructure requirements and deficits have emerged as a major constraint to the countrys efforts to improve its investment climate. To augment limited public resources for infrastructure, private sector participation needs to be encouraged by creating the enabling environment for increased private sector involvement.

Status of documentation/Relevant legislation


while Pakistan has demonstrated some pioneering experience with attracting private sector investment into the energy and telecommunications sectors, there has been very little progress in the key urban and municipal infrastructure sectors of water, wastewater, solid waste management, urban transportation, and roads. A 2004 study by ADB identified a number of important impediments which limit progress in PPPs in these sectors. The core impediments include: Lack of clear policies from the national to the local government levels to support PPPs as viable options for delivering services in urban and local services; Lack of clear legislation that allow provincial and local governments to contract out the development and operation of urban and local services to qualified private sector firms; and Lack of institutional capacity within provincial and local government officials to successfully identify, analyse, structure, tender, evaluate, contract, and regulate PPPs.

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Examples of recent/current PPP deals


Quality Education for All (Punjab): 2,400 schools managed by national Rural Support network, governed by management contract. Began with 48 schools as pilots in 2002; Sindh Cities Improvement Investment Programme; Lahore Rapid Mass Transit System-at initial development stage; Charsadda Solid waste Management: Integrated community based solid waste management system from collection to landfill development. Estimated US $ 7 million cost. Transaction advisors in place for structuring the project; Kalinger water Supply Project-22,000 inhabitants, water and supply system; Potential road projects from Hyderabad to other cities; feasibility study completed but no concession developed as yet.

2.8 Philippines
Overview of PPP/Stage of PPP adoption and development
From 1985 to 2005 the Philippines saw a boom-bust cycle of infrastructure investment, seeing highs of 8.5 percent infrastructure investment as a share of GDP in 1989 and 1998 and a low of 2 percent in 2005. Infrastructure investment needs to increase to at least 5 percent of GDP to ease infrastructure constraints. Currently, infrastructure deficiency is a significant impediment to the business environment and investment climate. Private sector investment in the Philippines under PPI38 schemes has declined since the Asian Financial Crisis of 1997. Most investments are greenfield projects with guaranteed off-take from public companies. Prerequisites to revitalise infrastructure investment in the Philippines include improving economic governance by strengthening the credibility of contract agreements, controlling corruption and reducing transaction costs and red tape. Given the past success of the Philippines in attracting private sector and overseas investment in its infrastructure, most notably in the power sector, its lack of progress in developing a coherent PPP policy is disappointing. while there have been some successes, such as the north Luzon Expressway Project, a US $ 371 million 83.7 km road that connects Metro Manila to Mabalacat in Central Luzon that signed in 2001, there have also been high profile failures, most notably the nAIA 3 Airport Project where overseas private sector investors lost significant sums. other projects have also been on the drawing board for a number of years, in particular in the light rail sector in Manila. However, while concessions for some projects have been signed there has not been significant progress towards their implementation. Light rail projects are challenging to implement as PPPs at the best of times, in particular where there has been little development of a stable PPP policy.

Status of documentation/Relevant legislation


The 1987 Constitution States that it is a policy of the Government to recognise the indispensable role of the private sector as the main engine of growth for national development. There are various elements in the legal framework.
38 Private Participation in Infrastructure.

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The Build-operate-Transfer (BoT) Law was the first of its kind in the region, passed in 1990 and amended in 1994. Investment in BoT power plants enabled by the BoT Law helped to address the power crisis in late 1980s and early 1990s. The national water Crisis Law of 1995 enabled private sector investment in the water sector via the contracting of private concessionaires to operate the two zones of the Metro Manila water supply network. Since those two responses to crises, private sector investment commitments in Philippine infrastructure has dwindled from a total of US $ 12 billion in 1997 to US $ 2 billion in 2006.

Examples of recent/current PPP deals


Little recent activity. A number of light rail concessions in Manila are in development but with a lack of significant progress to date.

3. Key Takeaways
From the preceding discussion, we can see that there has undoubtedly been a degree of success to date in developing PPP in certain markets. The challenge for Asian countries, generally, is to find a way of taking these successes and applying the key lessons learned to their own jurisdiction. How this is done will depend on a number of factors, such as the legal system in the relevant country, its financial stability, whether the intention is to attract both foreign and domestic players, the level of government support and whether the PPP projects are to be awarded at a national or state level or both. Common factors determing the success of PPP projects include: Projects that are well thought through and structured so as to be attractive to the private sector. Time spent on up front structuring and evaluating a protect often saves valuable time and cost later in the process and can even determine whether a PPP approach is suitable at all; A legal framework that clearly allows for the awarding of contracts to the private sector for the development and operation of services that have generally been the preserve of the public sector; A clear and transparent procurement process that gives potential participants confidence that they will be competing on a level playing field; Identification of key issues for the project at the outset and factoring these into the procurement process, in particular those aspects of the project that will require a high level of government involvement such as land acquisition and the potential environmental impact of the project; willingness on the part of the Government and/or the awarding body to recognise that the development and implementation of projects may not be smooth and that both the public and private sectors may need to compromise in order to successfully bring a project to a close; A realistic risk allocation that looks to place risk with the party best able to manage it. This is particularly the case in relation to the revenue the private sector will earn from the project, for example, is it realistic for the private sector to take end user risk for the particular project?; An understanding of what arrangements the private sector must put in place before it can finalise the project documentation and financing arrangements for the project. while the Government will want to close the project as quickly as

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possible after having agreed to the concession arrangements, it will need to be realistic and supportive; Encouraging the use of experienced advisers on all sides to maximise the level of PPP knowledge, so that the potential pitfalls can be identified and overcome at an early stage; and A realistic pipeline of projects that will encourage the private sector to make the necessary upfront investment to bid for projects. with the successful development of PPP projects in India in the roads, ports and airport sectors in particular, India has shown a willingness to embrace the concept of PPP. The challenge now is to translate this success into other PPP sectors, such as, education and healthcare, given the different risk profiles that these projects present.

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Risk Perspective of a Government Sponsor

1. Introduction
The key to successful PPP project delivery lies in the ability of the government sponsor to: fully scope the project; effectively manage the bid process; identify the potential risks affecting the project; and correctly allocate each risk identified to the project participant best placed to manage the risk. while this paper will touch on the first two bullets points above, the focus will be on the identification and allocation of risk in contract documentation. An important question for government sponsors is to ask at the earliest stage of the project whether or not a public private partnership (PPP) is the correct vehicle for their project. while there are numerous benefits of a PPP, namely that it offers value for money compared to traditional procurement, it is important for the government to consider the following questions: Is the project consistent with the Governments objectives? Have previous projects of a similar nature occurred in the region? Is there appetite in the market, from sponsors, contractors and banks, for a project of the type contemplated? Is there sufficient end user need for the project? Is there funding available in the market for the project? To be successful, a PPP program must provide an environment in which bidders and funders are confident that there is a realistic opportunity to win contracts and receive a return on their investment. To this end, it is advisable to conduct market consultations to assess bidder appetite, and in light of the current credit crunch, to assess the availability of funding for the private sector. Such consultation would also enable the government to introduce key features of the PPP programme, the pipeline of projects, the size, the timeline and procurement process to the private sector. This will enable bidders, and funders, to become familiar with what is proposed, and to mobilise and organise themselves as necessary. In the UK and Australia, there now exist in each sector several consortia who regularly bid for PPP projects.

This Paper has been developed by the Projects, Regulatory and Policy Practice of DLA Piper Middle East LLP, Tony Holland and Gurmeet Kaur.

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2. Scope of the Project


The government sponsor should carry out detailed scoping of the project before the project is offered to the market. This scoping exercise would normally be part of the process of establishing a business case for the project, and the government sponsor is well advised to appoint its project team, technical and legal advisers early, to assist in the exercise. The key aspect is to clearly identify the governments objectives for the project and engage relevant stakeholders early so issues can be identified and managed. Sufficient time should be allowed in this process to enable proper due diligence to be carried out by the government. It is relevant to note that in developed markets such as the UK and Australia, this scoping exercise may take more than 12 months before the project is offered to the market. An important element of PPPs is the shift by the government from being a purchaser of assets to a purchaser of services. The private operator is not paid during the construction period but only receives compensation once it has commenced services to the required level. The focus on service delivery requires a shift in thinking when setting out the governments technical requirements. The technical (design, construction, and service) requirements should be presented to the private sector in a way that sets out the outputs which the private sector must achieve, rather than detailing the inputs, the process or method of achieving those outputs. This is a skill which needs to be developed within the government sector, as traditionally most procurement departments are familiar with specifying the inputs in great detail. Having an output based specification enables the private sector to utilise the benefit from synergies arising from designing, building, financing, operating and maintaining the asset. Having input based specifications restricts the innovation of the private sector and exposes the government, as risk is not effectively transferred to the private sector since government retains control over the design. In scoping the project, the government should consider the revenue structure suitable for the project. Broadly speaking, PPP transactions have been structured in one of three ways. Services being sold directly to the public sector-the governments sponsor makes payment directly to the private sector normally based on the availability or capacity of the assets, rather than end user demand. This payment structure is common in schools, hospitals, and other social infrastructure projects; Financially free standing projects-the private sector recovers costs entirely through direct charges to the private users of the assets-for example in toll road projects or other economic infrastructure projects; and Hybrid of the first two structures-the costs of the project are met partly from charges to the end users and partly from government subsidies. The subsidy can take a number of forms, and normally the decision is politically driven-for
Table 9 ILLUSTRATION OF INPUT AND OUTPUT BASED SPEECH VALUE Input Based Specification The sound proofing in building 3 must be compliant with BS9701. Room 401 will be cleaned once a day at 4pm. Output Based Specification Building 3 must be sound proofed in a manner that complies with all applicable British Standards. All rooms shall be kept clean at all times.

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example, shadow tolls or a cap on end user tariffs are sometimes introduced because it is considered politically unacceptable for taxpayers to pay or pay beyond a predetermined price. where the government sponsor makes payments to the private party, the identity and credit rating of the government sponsor will be a key consideration for the private sector (both debt and equity). The identity of the government sponsor should be carefully considered when developing the project scope.

3. Bid Process
The government sponsor will need to design a suitable procurement timetable, process and documentation. If a staged process is to be adopted pre qualification/ short listing documentation will be required. The key document in any procurement is the request for proposals (RFP). Ideally, this should be a sophisticated document setting out full details of the project opportunity, what the project requirements are, and the deliverables. Experience shows that the more developed the RFP the better the quality of bids that are received in response. The RFP should include sections on legal, financial, design and technical award criteria and bidders should be asked to provide a response in relation to each. The procurement process should be fair and transparent. The process should comply with relevant government probity requirements and the evaluation conducted on the basis of published award criteria. Published award criteria would enable bidders to structure their bids to achieve the project objectives. It is therefore important for the government sponsor to devote sufficient time to develop award criteria that enables the achievement of the project objectives. The criteria themselves should be objective and be readily measurable to ensure the integrity of the evaluation process. Competitive tension between bidders is an important ingredient for achieving a value for money outcome. The procuring authority will need to consider how many bidders to shortlist and the timing of selection. For example, if the winning bidder is selected too early there is a risk that some of the competitive tension will be lost. However, if the winner is selected too late in the process, there is risk of escalating bidding costs, and leaving many disgruntled losing bidders which may jeopardise future procurement. An issue which the government sponsor should consider is whether any compensation should be made to the losing bidder. This is especially important where negotiations continue in parallel with two shorlisted bidders. To have a successful PPP programme, it is also essential to have a ready and willing market of financiers. Competition between funders is important to ensure the best funding terms can be obtained. when devising the PPP programme, if a funding competition is desired, this should be included in the overall timetable of the procuring authority. The timing of the competition is also important. If the competition is held too late, when most of the key contractual terms have been negotiated, there is a risk that the winning funder will insist that some of those settled terms are renegotiated. PPPs are complex and require skilled and experienced people to run the procurement process. The government sponsor should consider resourcing issues and ideally have a dedicated project team. A centralised PPP Unit should be established to lead training

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and continuity in the personnel involving in running PPP projects and standardisation of documentation as experience develops in each sector. This would ultimately lead to reduced bid cost and a body of learning which will be valuable for future projects.

4. Identification and Allocation of Risks


Typically risk is defined as being the chance of an event occurring which would cause actual project circumstances to differ from those assumed when forecasting project benefit and costs39. The key to risk allocation is to have an appropriate and commercially realistic approach to risk sharing and transfer. The government should allocate risk in project documents with an awareness of bidder, financier and equity issues as the private sector will strongly resist risks that it is unable to manage. Useful steps to consider when allocating risks are shown in Figure 5. whilst bidders and contractors will understand the types of project risk that they are able to accommodate, financiers will have their own views on risks, often labelled as bankability issues. Unless a financier can be satisfied that these risks are sufficiently mitigated a project is unlikely to be financed. The government sponsor will need to ensure that bankability issues have been properly considered and a commercial view taken on the risk allocation approach.

Figure 5

STEPS FOR ALLOCATING RISKS

Step 1 Identifying the project risk

Step 2 Assess the likelihood of identified risks materialising and the extent of the consequences

Step 3 Determine who is best placed to manage the risk, taking into account the level of control it exercises and the cost of assuming the risk.

Step 4 Allocate the risk accordingly to: the govern ment or the private sector; or share the risk.

Box 2 FACTORS TO CONSIDER


what is the current market practice regarding the risk? is there a project specific reason for a different allocation to market practice? is there a specific geographical or political feature of the project that could influence risk allocation? how much will the private sector charge in order to assume the risk? is the solvency of the private sector sufficient to assume and carry the risk? can the private sector in reality manage the risk or will allocating this risk to the private sector undermine the successful completion of the project?

39 Chris Furnell, Risk identification and risk allocation in project finance transactions, paper presented at the Faculty of Law, The University of Melbourne, May 2000, p 1.

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The needs of equity providers and the bond industry should also be considered. They, like debt financiers, will want to understand the risk profile insofar as it may impact on their investment, for example, their return on equity and manner of distribution, sharing of any refinancing gains, and sell down of sponsor equity. Government sponsor in new markets should bear in mind that equity financiers increasingly approach the negotiation of PPP projects with a view to selling their interest in the project at a later stage or perhaps together with investments on other projects on a portfolio basis. The attraction to potential purchasers, in particular superannuation funds, is a well structured and stable project that generates reliable and consistent returns for the equity investors over a long term. In order to attract first round equity funds to invest in local infrastructure transactions, the government should take a commercial approach when considering what restrictions should be placed on equity providers ability to sell down equity and should promote the development of a secondary market that provides exit opportunities for fist round investors. A useful tool that government sponsors can use to help identify and allocate risks is to create a risk register. An example of risk registers are attached at Appendix 1 to this position paper. This will be a working document that will change regularly as the project develops, but it will enable the government to keep a record of exactly where and how each risk has been allocated so that it can be managed appropriately.

5. Project Documents
The Key Documents in a PPP project include the following:

a. Project Deed
This is the key document which grants the rights to the private sector to develop the project and governs the risk allocation between the government sponsor and the project vehicle. Risk will be allocated to either the government sponsor
TYPICAL PROJECT STRUCTURE Figure 6

State

Banks

Project Co.

Insurer

Equity

Insurance

D&C

O+M

Insurance

Subcontractor

Consultants

Subcontractor

Insurance

Insurance

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or the project vehicle, or shared. The kinds of risks transferred to the project vehicle will depend very much on whether the project involves economic or social infrastructure. The project deed will set out the private sectors construction and operation responsibilities, particularly the delineation between core and non-core services (where applicable). The terms of this agreement must satisfy all participants, including financiers.

b. Construction Agreement
This agreement governs the relationship between the project vehicle and the construction contractor. Typically this will be a Design and Construct (D&C) or Turnkey/EPC contract. Financiers in particular who seek certainty from their exposure to construction risks will seek lump-sum prices and a set time for completion. The project vehicle will generally attempt to mitigate the design and construction risks allocated to it under the project deed by passing those risks to the construction contractor. From a government sponsors view, the experience and solvency of the construction contractor is an important consideration when selecting the winning bidder.

c. Operations and Maintenance Contract


This agreement governs the relationship between the project vehicle and the operator and sets out the non-core services of the asset and its whole of life maintenance. The project vehicle will seek to pass through its operation and maintenance obligations under the project deed to the operator under this agreement and will typically include abatements for the operators failure to perform in accordance with service delivery requirements specified under the project deed.

d. Facility Agreement and Security


This document sets out the terms and conditions pursuant to which the project vehicle borrows money from the financiers. Financiers will often have substantial influence on the drafting of project documents due to high debt-to-equity ratios in PPP projects. Financiers will generally take a charge or other security interest over the assets of the project vehicle to the extent that this is possible.

e. Direct Agreements
Direct agreements are entered into by the project vehicle, the financiers, the government sponsor and other parties to the project (for example, with the construction contractor or operator). The government sponsor will have its set off direct agreement with their contractors and the financiers, and financiers will have their own set. Direct Agreements exist to allow the government sponsor to have notice of defaults under sub-contracts and in the case of the financiers direct agreements, to allow the financiers to step in to the position of the project vehicle if it defaults under the project deed. Direct Agreements between financiers and the government sponsor will generally require provisions addressing issues such as: conditions attached to security enforcement and priority. governments right of step in during emergency or default. conditions attaching to the financiers cure entitlements or step in rights.

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f. Government Guarantee
It is possible that the private sector will require a government guarantee of the obligations of the government sponsor with which it contracts, especially in relation to social infrastructure projects. This sees central or state government taking the credit risk of the relevant government sponsor counterparty.

g. Other Agreements
In practice, the project sponsors will often include banks, construction companies and facilities management companies and different agreements may affect them. For example, the relationship between shareholders in the project vehicle will be governed by a subscription/shareholders agreement.

6. Key Risks Frequently Retained by the Government Sponsor


a. Site Risk
Generally, the site condition risk will be passed to the private sector. However, where the government selects the land where the project asset is to be built, there are some risks that the government would, typically, be expected to retain such as: i. any title defects; ii. providing suitable access and egress to the site; iii. historic contamination; and iv. latent defects (Government PPPs). Government sponsors should therefore, carefully, consider these issues when selecting the location for the project asset. Another factor to bear in mind is whether or not there are likely to be any challenges to the construction of the project asset by residents in surrounding areas. Generally the risk of obtaining authorisations, consents and planning permissions is passed over to the private sector, but if the government has selected land, for example, in a densely populated residential area to build a waste processing facility, then the Government should be prepared to potentially take back some of the authorisation risk as it may well be that certain planning decisions/consents could be challenged for prolonged periods of time and it is unlikely that the private sector will be prepared to take all of this risk. Alternatively, the private sector would accept the risk, but charge a premium to the Government sponsor which would undermine the value for money objectives of the PPP project. Government sponsors should also consider the historic contamination issue carefully and if they have selected land for the project that has been remediated or has other environmental issues, the private sector will be reluctant to take on the risk of aggravating historic contamination without first undertaking detailed surveys to identify the condition of the land prior to the commencement of construction. It is, therefore, advisable for Government sponsors to commission baseline contamination surveys of the land and make the findings available to the private sector at the earliest opportunity so the private sector can fully assess the risk and price accordingly. The private sector should also be given sufficient time to conduct due diligence of the site.

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b. Ination Risk
where the revenue stream is structured as fixed payment stream, it is generally accepted in all developed PPP markets that the Government will take inflation risk. This is reflected in the way the annual payment to the private sector is indexed. Typically, indexation is either calculated using RPI or, in certain circumstances where the nature of the project assets is varied, using a basket of indices (such as CPI, labour index, etc). Similar to inflation risk, it is common for Government sponsors to retain the risk of increases in electricity price. with the rising electricity prices throughout the course of 2007/2008 this is an important cost risk (in particular for projects involving processing facilities) that Government sponsors will need to account for in their initial and any revised project budget.

c.Variations and Changes in Service Specications


where the requirements of the Government sponsor change after the date of the contract, the Government sponsor will be required to pay for the additional costs to the project that the change or variation entails. Provisions relating to cost mitigation by the private sector will be incorporated in the contract and obligations on the private sector to obtain external funding for any capital expenditure required as part of the change or variation can also be incorporated, but if this is not obtainable, the Government will be responsible for all increased capital and operating costs. It is, therefore, important to get the project brief and service specifications right prior to issuing the documents to the market to minimise the risk of requiring variations or changes to scope.

d. Network Risk
where the revenue stream of the private sector is dependent upon existing government infrastructure, for example patronage of airports or toll roads may be reliant on government transport links to the airport, or closure of parallel roads, the government sponsor may need to accept some responsibility for maintaining the dependent infrastructure or providing policy support. Failure to do so may lead to relief of obligation on the private sector under the project deed and probably reimbursement of additional costs incurred by the private sector. This risk should be reviewed on a project specific basis, but the greater the interdependency between the project asset and surrounding government infrastructure, the greater the interface risk that will need to be assumed by the government sponsor.

e.Voluntary Termination Risk


The government sponsor would typically wish to have the flexibility to terminate for convenience, as government policy or objectives may change over a long term contract. This right must be balanced with adequate compensation to the private sector. The private sector and the financiers would generally require repayment of all debt and a return on investment.

f. Compensation on Termination
If the project is terminated for whatever reason the Government sponsor will be required to pay compensation to the private sector and its funders. This is an

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important feature of a PPPs that make them different to traditional procurement structures. The level of compensation will differ based on the reasons for which the project deed is terminated. For example, if the contract is terminated as a result of a private sector default the compensation that the Government should pay should be less than if the contract is terminated as result of Force Majeure or voluntary termination by the Government. As an example, where termination is due to private sector default, compensation would commonly be limited to repayment of senior debt and no return on equity is provided by the government sponsor. Government sponsors will need to be aware of the potential payout under different termination scenarios and factor this in their project budgets.

g. Private Sector Insolvency


Ultimately, if the private sector participants become insolvent, then the project will fail and the PPP contract may be terminated. This is not a common market occurrence, but it is something that the Government sponsors will need to consider when shortlising bidders. Contractual performance security mechanisms can be put in place to try and reduce the Government sponsors exposure to insolvency risk. For value for money reasons, it is not common for the Government sponsor to require performance security in the form of a bond or bank guarantee from the project vehicle. Rather, the Government will rely on a robust performance and deductions regime to incentivise proper performance. The financiers and the project company will generally require parent company guarantees, retention money or other forms of security from the subcontractors it employs, in particular the construction subcontractor. These securities might be issued for the benefit of the government sponsor, but the government sponsor will generally rank behind the financiers in relation to rights to this security. The subcontractors should also enter into direct agreements with the government sponsor in order to create a direct contractual relationship between the Government sponsor and the subcontractor and allow the Government sponsor to step-in to the role of the project company in certain circumstances, such as when there the project deed is terminated due to concession company insolvency.

7. Key Risks Frequently Transferred to the Private Sector


a. Design and Construction/Completion Risk
The risks of design, construction and completion should generally be transferred to the private sector. It is important that the Government clearly sets out its objectives as the private sector will be required to design and construct to meet those objectives. The risk of failure to meet the project objectives should rest with the private sector. However, risk or errors or inadequacies in setting out the objectives will lie with the government sponsor. Although the government sponsor should retain a monitoring and review role, it should refrain from having to administer or approve the design and construction process as this is best left to the construction contractor. Being overly involved can also lead to a greater possibility of risk being transferred back to the government sponsor. Instead the government sponsor should rely on its monitoring rights under the project deed, the reporting obligations of the contractor and regular meetings with the project team to administer the project.

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All risks of delay and completion and risk of increased costs of the design and construction process should rest with the private sector. The Government sponsor should consider whether to impose liquidated damages for delays or whether to rely on the incentives built in a PPP project structure to drive the right behaviour. Imposing liquidated damages will have an impact on price, and therefore the value for money objective of the project. There is an argument that the payment and deduction regime structure is sufficient incentive for the private sector to complete on time as the government sponsor will not be obliged to pay the private sector until the completion or commercial operation of the asset is achieved. In addition, there is often a right for the government sponsor to terminate the project deed where delays have occurred over an agreed period. Compensation on such termination is generally limited and in some low risk projects no compensation on termination is offered to further incentive and ensure the private sector completes on time.

b.Technology Risk
As with construction risk, technology risk is generally passed to the private sector. In toll road projects for example, though construction risks may be limited and physical completion of the road may occur on time the compensation structure should take into account completion of a fully functional tolling system.

c. Latent Defect Risk


Generally, where the project asset is being designed and constructed by the private sector on a green field site the risk of latent defects can be passed to the private sector. The private sector should, however, be given adequate opportunity to conduct due diligence on the site. If a brown field site is involved or where the private sector is required to take on responsibility for the operation and maintenance of pre-existing asset (such as is the case with roads maintenance PPP projects and accommodation based PPP projects), the private sector will be reluctant to take the risk of latent defects as it has not designed or constructed the existing assets and will either refuse to take the risk or price in a considerable risk premium into the price. The Government sponsor should consider the issue of latent defects in existing assets/facilities on a case-by-case basis always having regard to the nature of the asset in question, but this may well be a risk that should be retained wholly by the government or shared with the private sector if it is cost effective to do so. It is highly unlikely that this risk could be completely transferred to the private sector.

d. Operation and Maintenance Risk


From the date of completion of the project asset, the private sector will be responsible for providing the operation and maintenance service. In some projects, for example hospital projects, the government may retain responsibility for clinical services as is not possible for this to be transferred away from the state for policy reasons. The Government sponsors service delivery requirements should be output based and set out in the Service Specification. It is important for the Government sponsor to set out a deductions regime which is appropriately linked to service delivery requirements. Failure by the private sector to comply with the requirements of

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the Service Specification will lead to a reduction in the amount that the private sector is paid for the operations and maintenance service. This deduction regime operates as a significant incentive on the private sector to comply with the Service Specification. The application of the deductions regime is dependent on effective performance measurement and assessment, and the government sponsor should ensure the deductions regime incorporates clear, objective and measurable service delivery requirements.

e. Demand/Patronage Risk
The treatment of this risk differs depending on whether we are dealing with economic infrastructure assets or social infrastructure assets. Broadly speaking, when dealing with economic infrastructure debt servicing and equity return are made through access to an external revenue stream (e.g. direct user charges such as tolls). In this scenario, the private sector would generally take the market risk and upside opportunity with respect to demand. An example of market risk faced by the private sector on road projects is that traffic volumes will not be at the levels projected in the tender documents. This is a key risk as demand is often hard to quantify and there are wildcards associated with the ability to take other routes and avoid tolls. Sometimes this risk is ameliorated by shadow tolls or gross-up payments by the government sponsor in the project deed. In mature markets, such as in Australia, this is a risk that is wholly taken by the private sector. However, in less matured markets or where the private sector has little or no control over the usage level of the project asset it will not always be possible for the private sector to assume all of this risk. The Government sponsor will need to carefully consider how to allocate this risk and some form of government support may be required for at least an initial period until patronage levels are sufficient to transfer this risk wholly to the private sector.

f. Default Risk
There will be a number of events that can give rise to private sector events of default under the project deed. Primarily, the events that the private sector and the funders will be most concerned about will be the events of default for poor performance that give rise to an automatic right to the Government sponsor to terminate. It is, therefore, important when specifying and agreeing these levels of poor performance that can trigger termination that the government sponsor does not set levels that are considered by the private sector to be a hair trigger to termination. The level of poor performance should be sufficient to justify that the private sector should be entirely removed from the project.

g. Handback
The risk of maintaining the asset and establishing adequate life cycle and asset maintenance funds should lie with the private sector. The government sponsor should set appropriate conditions for handback, for example, while the government would not wish to inherit a run down facility it should not impose a requirement on the private sector to hand back a brand new facility as this will be priced in by the private sector and defeat the value for money objective of a PPP project.

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8. Key Risks Frequently Shared Between the Government Sponsor and the Private Sector
a. Change in Law Risk
As most PPP projects have a duration of 25 to 30 years, there is a real risk that legislation and government policy could change in a way which negatively impacts the project and alters the risk profile of the private sector. For example, when the Disability Discrimination Act was introduced in England, a number of completed facilities and facilities currently being constructed under PPP projects had to be altered at significant expense to the private sector in order to comply with the requirements of the new legislation. The private sector will not, in most circumstances accept all change in law risk, but equally this risk should not rest entirely with a government sponsor who in reality will have little involvement in the decisions of Central Government which result in legislative and policy changes that could directly affect the project. In developed PPP markets such as Australia and the UK, models have been developed where the risk of change in law is shared by the private sector and the Government sponsor. The sharing mechanisms differ between jurisdictions but the common threads are: If the change in law was not foreseeable on the date of the contract then this falls within the change in law regime; If the change in law results in increased capital expenditure on the project then the capital expenditure is shared between the private sector and the government sponsor; If the change in law solely affects the project and not other similar projects or the private sector contractor and not other contractors or only the PPP market then the government sponsor will be responsible for all capital expenditure incurred as a result of the change in law. However, even in developed PPP markets there are areas where this risk sharing mechanism is unsatisfactory to the private sector due to the rate at which legislation can change. In the waste sector in England, the unforseeability aspect of the change in law regime is not acceptable as the private sector knows that changes to waste regulations are occurring in advance, but they occur with such frequency that it is impossible for the private sector to accept the risk of the potential impact that these changes can have on the project. A model has been developed whereby specific changes in listed legislation and environmental regulations give rise to a change in law for which the contractor is compensated for a portion of the capital expenditure incurred as a result of the change in law. It is, therefore, not surprising that in DLA Pipers experience of emerging PPP projects, for example, in the Middle East, the private sector is particularly wary of sharing the risk of change in law with government sponsors and is arguing strongly for this risk to remain fully with the government sponsors. This is especially so in markets where legislative change can occur relatively quickly and without the level of consultation with the public as is common in more developed markets. This is something that Government sponsors need to consider thoroughly before presenting a position to potential bidders and financiers.

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b. Force Majeure Risk


Force Majeure risk is identified as being a risk of a catastrophic nature that arises from events that are outside of either the private sectors or the government sponsors control. These events traditionally refer to natural disasters, fire, industrial actions, strikes and any other acts of God that directly affect the ability of the private sector to deliver the project in accordance with its contractual requirements. The risk of Force Majeure is shared in that both parties will meet to discuss how best to proceed with the project whilst the Force Majeure is subsisting, but if suitable resolution does not occur after an agreed period following the commencement of the Force Majeure and the affected party is prevented from meeting its contractual obligations for the agreed period, then either party can terminate the contract on notice. The Government sponsor will have to pay compensation to the private sector if termination occurs, but the compensation is less than in the case of termination for government default or termination for convenience to reflect that the termination has arisen through no fault of either party. The Government sponsor should also consider how uninsurable force majeure risk should be allocated. Typically, where a risk is uninsurable through no fault of either party the government will act as insurer of last resort in the event the risk eventuates and have the right to either continue with the contract or to terminate the contract.

c. Benets-Renancing
During the life of the project the private sector may wish to replace, augment or change the structure, nature or terms of the financing solution that it puts in place at financial close for the purposes of financing the project. where such restructurings or changes will have the effect of increasing or accelerating distributions to investors or reducing their commitments to the project, these effects are referred to as Refinancing Gains, for example reduction in interest margins, reduction or release of reserve accounts, release of contingent junior capital, extension in the maturity of debt and increases in the amount of debt. one of the key principles in the approach to refinancing is that they can be of benefit to both the private sector and the government sponsor and so the government sponsor should welcome and positively consider the private sectors proposals for refinancing. A 50:50 sharing of refinancing gains between the Government sponsor and the private sector is considered a reasonable balance.

9. Key Takeaways
The key to successful PPP project delivery lies in the ability of the government sponsor to fully scope the project; effectively manage the bid process; identify the potential risks affecting the project; and correctly allocate each risk identified to the project participant best placed to manage the risk.

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An initial question for a Government sponsor is to consider if a public private partnership (PPP) is the correct vehicle for the project. In answering this question the government sponsor should consider if the PPP model is consistent with the governments objectives. It is important that the Government set clear project objectives and fully scope the project before it is offered to the market. This will involve setting output based specifications, rather than input based specifications, considering the appropriate revenue structure for the project and the identity of the government counterparty. The bidding process should be structured so that: it is clear and robust; and allow the tenderers an appropriate amount of time to fully understand the project risks, undertake their due diligence and properly structure their tender responses. It is important that the Government sponsor provide tenderers with as much information about the project at the earliest possible stage and provide fully developed project documentation, including the Governments construction requirements and service specifications. The award criteria and evaluation process should be structured to enable the government sponsor to select a shortlist of appropriate tenderers who are capable of delivering the project and have the required funding. The selection criteria should enable the government sponsor to select the tenderer which it considers is the best choice to deliver the project in a way that guarantees the government sponsor achieves best value for money. The bid documents should reflect a sensible and commercial allocation of risk. while there are no hard and fast rules to risk allocation, risks have to be considered on a project specific basis and allocated to the party best placed to manage them. The government should allocate risk with an awareness of financier and equity provider issues. Finally, PPP projects are complex and the Government sponsor should establish a dedicated project team to run the procurement and develop a body of learning that can be used in future projects.

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Appendix I
COMPARATIVE ANALYSIS OF KEY CONTRACTUAL ISSUES IN PPP PROJECTS IN ENGLAND AND Table 10 VICTORIA, AUSTRALIA England Victoria, Australia 1. Payment Structure 1.1 The substance of a PFI transaction is the provision 1.1 The payment structure is generally similar to the UK of a service. In a PFI context, projects are structured structure on the basis of the use that is made of the provided service on the one hand or the (un)availability of that service for those who are intended to make use of it. 1.2 Projects based on use (demand; volume) are very 1.2 The fee for the provision of the service may be made unusual in England. More usual is a transaction up of sub-elements reflecting particular categories of based on service use combined with a take or pay expenses incurred by the private party (both fixed or availability component as part of the payment and variable), but collectively these will comprise the process. In such scenario, the contractor receives service fee payable for each unit of service. partial payment provided availability of the service has been achieved irrespective of whether or not the service has actually been used to that particular extent. Further payment will in its turn depend upon actual use of the service. Aside from road projectswhich in the past have in some cases been based on use of the service-this combined structure is normally used on Ministry of Defence projects and England waste projects. 1.3 All other PFI transactions would generally follow an 1.3 no sub-element of the unitary service fee should be availability based process. The definition of availability such that it is always received by the private party should concentrate on the core functions of the regardless of its performance or that it is immune service and consist of objective and measurable from abatement for particular service failures, although criteria, so that it is clear to all parties whether or government may consider exempting the lifecycle/ not those criteria have been satisfied. The agreement maintenance component of the service fee depending should further specify which areas are most important, on the projects funding proposal-in particular the i.e. core to the service and allocate them a higher associated reserve costs. weighting. Also, the agreement should particularise when availability commences in order to allow parties to measure any permitted rectification period, within which the contractor has the opportunity to rectify the problem without triggering the start of a period of unavailability. 2. Payment Deduction Regime 2.1 The payment mechanism lies at the heart of the PFI 2.1 Each specification will have a corresponding transaction as it puts into financial effect the allocation performance parameter for determining whether of risk and responsibility between the authority and the specification is achieved. where a service is not the contractor. It determines the payments which are provided in accordance with a specification, a Service made to the contractor and establishes the incentives Failure will normally have occurred. Each Service for the contractor to deliver the service in a manner Failure will be categorised on: that achieves value for money. (i) whether the failure renders one or more available 2.2 Essentially, a PFI transaction payment mechanism will areas or units of the facility unavailable for use for involve two key determinants of payment: availability its intended function (Availability Failure); or of service [see Issue 1] and performance of service.

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England Victoria, Australia 2.3 The PFI contract will set out the consequences of any (ii) affects one or more functional areas or units of the failure by the contractor to perform to the standard facility but does not result in such functional area required by the output specification whereby or unit being unavailable for use in accordance the various types of performance shortcomings with its intended function (Incident Failure)are categorised and linked to a grid of monetary with Availability and Incident Failures collectively deductions with there being a clear link between the referred to as Failure Events; or seriousness of the performance failure, the number (iii) is not referable to a specific area or unit of the of failure points accrued during a specified period facility (Quality Failure). of time-normally a month-and the financial impact 2.2 Each Quality Failure will automatically incur Failure on the contractor. If performance deteriorates Points, the number of which will depend on the below a particular level then a range of non-financial severity of the failure. Failure Events will in turn be mechanisms can be implemented to encourage the categorised according to the severity of their impact contractor to improve performance. on core service provision. Depending on their severity, 2.4 Depending on the exact nature of the transaction, they will be allocated a Failure Event Level which will monetary deductions will be the result of failure have a corresponding response and rectification time. to comply with thresholds in relation to service 2.3 For any given period, the service fee should be calculated availability and/or service use on the one hand and in accordance with a formula commencing with the service performance on the other. pre-agreed amount payable for the full performance of 2.5 Although it is important for the authority to always services in the period less amounts for: preserve the principle of no-service no-fee or no(i) Quality Failure abatement; availability no-fee, the capping of monetary deductions (ii) the sum of abatement amounts for each Availability for poor performance of services may be acceptable Failure and Incident Failure; in a situation where the authority considers that there (iii) the repeated failure abatement amount and (iv) is little benefit from further performance deductions any utility volume amounts. which cannot be passed down to the contractors subcontractor or absorbed by the contractor himself 2.4 The amount abated for a Failure Event will depend on: on a value for money basis. (i) the affected unit or area; (ii) the Failure Event Level classification; and (iii) the time taken to rectify the failure following expiry of the rectification period. The level of abatement for a Quality Failure will depend on: (A) the severity of the failure; (B) how often it is repeated; and (C) how long it is sustained. 2.5 The maximum amount that can be deducted in any given payment period should be no more than the entire service fee for a payment period. If the operation of the payment mechanism results in a negative amount for that payment period, it will be deemed to be zero. 3. Site Conditions 3.1 The issue of who should bear latent defects risks 3.1 In summary, the private party must accept overall in assets transferred to the contractor should be responsibility for site conditions-very broadly defined to addressed on a project-specific basis as it strongly mean all circumstances and conditions on, in or around depends on the particular type of assets involved. It is and affecting the land, whether latent or otherwiseimportant to remember that, as English PFI projects including the adequacy of the site for delivering the often provide for new-built facilities, latent defects project, regardless of whether the site is selected risks transferred to the contractor will ultimately be by the government. An exception may be made for passed down to the contractors construction sublatent geotechnical conditions and unidentified soil or contractor and/or operating sub-contractor. groundwater contamination on a government selected high risk site where due diligence by the private party 3.2 In transferring latent defects risks in respect of existing is physically or commercially impractical, in which case buildings, particular issues will arise depending on the the risk for these conditions will be shared and relief size and complexity of the building or the existence will be provided to the private party. of doubt as to a buildings structural stability. 3.3 Transfer or not of the latent defects risks will 3.2 As part of the bid process, the private party must satisfy itself as to the commercial viability of delivering the essentially have a pricing impact. proposed services from the site in accordance with the 3.4 where land is concerned, English market practice site specifications. while government may select the will require the ground condition risks to be borne project site, it makes no express or implied warranty in principle by the contractor unless exceptional or representation with respect to the site, the site circumstances apply, e.g. the contractor is prevented conditions or the adequacy of the site for the project. from carrying out all relevant surveys or the fossils, antiquities or alike are discovered on site. 3.5 As to soil (water) contamination there does not seem to a set position.

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Victoria, Australia 3.3 Exceptions may be made for: (i) artefacts; and (ii) latent geotechnical conditions and unidentified soil and groundwater contamination at high risk sites. In that case, the risk for these conditions will be shared and relief provided to the private party. 4.1 where non-payment or abatement of the service fee is insufficient to compensate government for costs and losses incurred as a result of late or insufficient service delivery, government may require additional protections from the private party such as liquidated damages. 4.2 It is recognised that an entitlement to liquidated damages may result in higher bid costs. Accordingly, whether liquidated damages are payable and for what amount will depend on whether they offer the government value for money. As such, the rate of liquidated damages payable in any project must be a genuine pre-estimate of the costs and losses the government is likely to incur from the delay in service delivery.

4. Delay Liquidated Damages 4.1 The PFI agreement must ensure that the authority is protected against late service commencement by the contractor taking into account the type of loss that the authority may suffer and the need for and cost of any contingency plans that are put in place. 4.2 If the authority will not suffer any losses, liquidated damages are not appropriate. If the authority will suffer losses in the event of a contractors late service commencement, liquidated damages may be appropriate, taking into account however the effect of any other protections being required by the authority itself, the contractor and its financiers. 4.3 If liquidated damages are considered appropriate, the authority should consider specifying their exact level and agreeing on a cap. 4.4 Consequently, liquidated damages are not general in English PFI transactions although they are standard between the contractor and its construction subcontractor(s). English guidance does not prevent authorities from applying liquidated damages, but since they would tend to increase the usage charge and length of the construction period, most authorities prefer not to apply them. 5. Force Majeure/Relief Events 5.1 The contractor undertakes to ensure Service Commencement usually by a particular fixed date and to continue the service for the duration of the contract. There may however be circumstances in which the contractor should fairly be relieved from liability for failure to commence or provide the service. These circumstances include Force Majeure and Relief Events. Force Majeure 5.2 Force Majeure Events should only include events which, unlike Relief Events, are likely to have a catastrophic effect on either partys-usually the contractors-ability to fulfil its obligations under the PFI agreement. As neither party is likely to be in a better position than the other to manage either the occurrence or effects of Force Majeure and as the events may continue for a long period of time, such events are given a different treatment from Relief Events and the financial consequences are normally shared. 5.3 Currently, Force Majeure is defined as the occurrence after the date of the agreement of (i) war, civil war, armed conflict or terrorism; or (ii) 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 sub-contractors; or (iii) 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 parts of this obligations under this Contract.

5.1 As a matter of principle, for a limited category of events of exceptional severity which are outside the control of either party and prevent the private party from performing all or a material part of its nonfinancial obligations under the project agreement, the private party will be given relief from termination and any other liability for breach. Force Majeure 5.2 Force Majeure includes: (i) lightning, cyclones, earthquakes, landslides, tsunamis and mudslides; (ii) civil riots, rebellions, revolutions, terrorism, insurrections and military and usurped power, sabotage, ex public enemy and war (declared or undeclared); (iii) ionising radiation, contamination by radioactivity, nuclear, chemical or biological contamination unless caused by the private party or subcontractors; (iv) fire, flood or explosion caused by natural disasters or conflicts; and (v) during the operational phase only, one or more utility services required for the operation of the facility not being available for use at the main connection to the site, due to a major distribution or transmission system failure, where these events directly delay or prevent the private party performing all or a material part of its non-financial obligations under the project agreement.

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England Victoria, Australia 5.4 A Force Majeure event does not lead automatically 5.3 The private partys obligations will be suspended during a Force Majeure. The Force Majeure does however not to termination of the contract. The parties have to affect the governments right to abate the service fee. discuss and try and reach a solution. The contract will be terminated if they agree to terminate it or if 5.4 where a period of suspension arises as a result of a Force Majeure which is not: they fail to reach an agreement on how to provide (i) required to be insured against by the private party for the Force Majeure event and one party elects to and terminate the contract. (ii) an insurable risk customarily insured by similar 5.5 The authority should not be obliged to pay the operators or facilities, government will service contractor any amount simply to service the the lower of the actual senior debt commitments contractors debt obligations in whole or in part, but and the senior debt commitments forecast by the the parties should recognise that the contractor may base case financial model as being due and payable wish to include certain tolerances into the agreement during the period of suspension. no other financial to allow for this. If termination of a PFI agreement relief will be provided to the private party during occurs as a result of a Force Majeure Event, the the period of suspension. authority should in any event compensate the 5.5 If the Force Majeure or its consequences continue to contractor for outstanding Senior Debt [See Issue 8]. prevent the private party performing all or a material part If termination does not occur, then the parties will be of its non-financial obligations for a specified continuous discussing continuation of the agreement against the period (usually 6 to 12 months), either party may terminate backdrop of such a compensation payment. the project agreement by giving written notice. Relief Events Relief Events 5.6 Relief Events are events which prevent performance (i) Relief for Construction Delays by the contractor of its obligations at any time, in 5.6 no relief will be given to the private party for delays, the occurrence or effects of which are within the respect of which the contractor bears the financial private partys control. A delay which is not in the risk in terms of increased costs and reduced revenue private partys control, but is best managed by the but for which it is given relief from termination for private party, will also be allocated to the private party, failure to provide the full service. subject to limited relief. The government will generally 5.7 Currently, Relief Events include: only compensate the private party for losses incurred (i) fire, explosion, lightning, storm, tempest, flood, by the private party as a result of events which are bursting or overflowing of water tanks, apparatus within the governments control and should therefore or pipes, ionising radiation, earthquakes, riot be at governments risk. and civil commotion; (ii) Intervening Events during the operational Phase (ii) failure by any statutory undertaker, utility 5.7 The private party will be relieved from termination company, local authority or other like body to for failure to deliver the contracted services during carry out works or provide services; the operational phase where the event causing such (iii) any accidental loss or damage; failure is clearly within the governments control. Relief from termination may also be given for certain events (iv) any failure or shortage of power, fuel or outside the control of both parties provided the private transport; party could not have avoided or mitigated the effects (v) any blockade or embargo; and of such event on its performance. Compensation for (vi) any official or unofficial strike, lock-out, go-slow private party losses will generally be limited to those or other dispute generally affecting the industry attributable to events within the governments control. or a significant sector of it. 5.7 In most cases, termination should not follow a Relief 5.8 Relief Events include: (i) any government breach of a project document; Event, because any replacement contractor would (ii) an act or omission by the government or be similarly affected and so the authoritys position government-related parties at the facility; would not be improved by termination. (iii) any disruption or delay caused by a third party 5.8 The similar effects of delays caused by Relief Events engaged by the government to undertake are borne by the contractor, so no compensation additional capital works or service on the site; should be paid by the authority on the occurrence (iv) fire, flood or explosion; of such events. In most cases the only relief given (v) failure by a statutory authority to carry out works will be relief from termination. There should be no or provide services; extension to the agreement owing to a Relief Event. (vi) site specific blockade or embargo affecting The authority should not regard an extension of the specialised project equipment; agreement as a concession without significant cost. (vii) industrial action to the extent that it directly affects the project; (viii) an event or occurrence which causes lack of possession of or access to the project site; (ix) a government or court direction to suspend or cease all or any part of the works because of the discovery of an artefact. 5.9 If certain threshold requirements are met: (i) the private partys obligation to deliver the affected services or to comply with its affected contractual obligations will be suspended; (ii) the relevant service fee will not be abated for the service failures; and (iii) no default notice may be given in respect of such service failure.

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England 6. Change in Law 6.1 The issue of a Change in Law concerns who should be responsible for the costs arising from changes in law and how such costs should be funded. 6.2 Any costs arising out of discriminatory changes in law40 or specific changes in law41 should be at the authoritys risk, whether pre-or post-commencement. 6.3 Although the contractor is considered protected against general changes in law42 post-commencement through the combined effects of benchmarking, market testing and indexation, he may also gain the benefit of a risk sharing approach to unforeseeable general changes in law post-commencement, as such approach is considered the best way to ensure that the costs of implementing the general changes in law are minimised by way of incentivising the contractor to manage its implementation costs and of having the authority to agree to meet (part of) the contractors costs for complying with the general change in law. In that case, the risk sharing mechanism is structured so that as capital expenditure increases as a result of a general change in law, the contractors liability reduces from 100 percent to 0 percent and the authoritys increases from 0 percent to 100 percent on a sliding scale that is negotiated on a contract by contract basis. operational costs normally remain the contractors risk. 6.4 The rationale on which this approach is based is that, in England, a contractor will know at least three years in advance of changes of law that will or are likely to occur and a 3-year period normally suffices for the construction phase to be completed. After that time, in practice, change in law rarely results in capital expenditure in England unless the contractor is involved in manufacturing, i.e. an industry which PFI contracts do not relate to. Therefore, the change in law may have resulted in the contractor having to purchase equipment produced during the operational phase of the project to a standard different from the one applicable during the construction phase of the project, but that would amount to operational expenditure in the normal cause.

Victoria, Australia 6.1 The government will compensate for changes in law which exclusively affect the project and will also share the cost of changes in law which necessitate significant capital expenditure or operating cost effects not captured through indexation or benchmarking. The government expects thresholds to be realistic so the private party is incentivised to minimise the costs of implementing changes in law. Generally, changes in tax arrangements are to be borne by the private party. 6.2 A distinction is made between a general Change in Law (including: (i) the enactment of new laws; (ii) the amendment, repeal or change of any law; and (iii) any judgement of a relevant court of law which changes a binding precedent) and a projectspecific Change in Law, the latter being a change in law which expressly applies to the project, the project facility or site, the private party operating the facility or companies undertaking projects procured under PPP arrangements. General Change in Law 6.3 Relief for Change in Law is limited to: (i) changes which require significant capital expenditure; or (ii) have significant operating costs not captured through benchmarking or indexation. 6.4 The government will share the relevant capital expenditure cost effects arising from a change in law (per event) in accordance with a three tiered cost sharing mechanism: (i) the private party will bear 100 percent of the capital expenditure cost effect up to a specified threshold; (ii) the private party and the government will share the capital expenditure cost effect above the first threshold on a percentage share basis; and (iii) the government will bear 100 percent of the cost expenditure cost effect above the second threshold. 6.5 where a change in law is a project-specific Change in Law, the government will, subject to nominal threshold levels to be agreed on a project specific basis, take full risk of a project-specific change in law and compensate the private party for any increases in the private partys operating costs, as well as bearing any capital expenditure consequences.

7. Events of Default 7.1 whilst the parties intention should always be that the 7.1 Depending on its severity, a default is categorised as agreement will run its full course and terminate on the an Events of Default or a Default Termination Event. Expiry Date, PFI agreements deal comprehensively The type of event will determine the remedies available with Early Termination. to the government and the opportunity given to the private party to cure the default before the government can exercise its remedies.

40 Any Change in Law, the terms of which apply expressly to: the project and not to similar projects procured under the PFI; or the Contractor and not to other persons; or PFI Contractors and not to other persons. 41 Any Change in Law which specifically refers to the provisions of services the same as or similar to the services or to the holding of shares in companies whose main business is providing the services the same as or similar to the service. 42 Any Change in Law which is not a Discriminatory Change in Law or a Specific Change in Law.

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England Victoria, Australia Authority Default 7.2 Events of Default include: 7.2 The contractor should be allowed the right to (i) serious Service Failure; terminate the agreement where the authority or (ii) failure to achieve either Technical Completion government acts in a way which renders their or Commercial Acceptance by the due dates for contractual relationship untenable or completely Commercial Acceptance; frustrates the contractors ability to deliver the (iii) the works not being commenced within such service. Even a material breach by the authority is period after financial close as is likely to have a likely to be insufficient if it does not have this effect. material adverse effect on the ability of the private 7.3 Usually, the contractors right to terminate for party to achieve Commercial Acceptance by the authoritys default will be restricted to: Date for Commercial Acceptance; (i) expropriation, sequestration or requisition (iv) fraudulent, misleading or deceptive conduct of a material part of the assets or shares of by the private party or its subcontractor in the the contractor by the authority or any other performance of its obligations or otherwise in relevant authority; relation to the project documents; (ii) failure by the authority to make payment of any (v) false or misleading representation or warranty amount of money exceeding a sum-generally made by the private party in the project equal to a months payment by the authority to agreements which has a material adverse effect the contractor (indexed)-that is due and payable on the governments or private partys ability to by the authority under the contract within 30 perform its obligations; days of service of a formal written demand by (vi) private partys right to obtain finance or continue to the contractor, where that demand fell due and have available funds under the finance agreements payable two or more months prior to the date being materially restricted or cancelled; of service of a written demand; (vii) breach by the private party of its assignment (iii) breach by the authority of its obligations under obligations; the contract which substantially frustrates or (viii) the private party failing to take out and maintain renders it impossible for the contractor to required insurances; and perform its obligations under the contract for a (ix) failure by private party to comply with its continuous period of (often) 2 months; and obligations to reinstate damage or destruction. (iv) a breach by the authority of the restrictions on 7.3 A Default Termination Event includes: transfer that apply to it [see Issue 12]. (i) the private party wholly or substantially abandoning the works, the facility or the provision Contractor Default of the services, 7.4 PFI agreements deal comprehensively with the (ii) failure by the private party to cure an Event of possibility of early termination due to Contractor Default capable of cure within the relevant cure Default whereby the task is to achieve a fair balance period in accordance with the cure plan, between the authoritys desire to be able to terminate (iii) failure by the private party to prepare and comply for inadequate service provision, even if caused with a prevention plan in relation to an Event of by relatively minor defaults-be it that grounds for Default not capable of cure; termination should be objective, clear and provide (iv) the occurrence of an Insolvency Event; and for reasonable tolerances-and the contractors and (v) breach of Change in Control provisions. its financiers interests in restricting termination to 7.4 An Event of Default does not, of itself, give rise to an the severest of defaults, when all other reasonable automatic right of termination. where the Event of alternative options have been exhausted, including Default is capable of cure, the parties must consult with a reasonable rectification period procedure and a a view to agreeing on a cure plan proposing a program Direct Agreement. of rectification prepared by the private party. where 7.5 The standard provisions for Contractor Default are: the Event of Default is not capable of cure, it will not (i) breach by the contractor of any of his obligations automatically give the government a right to terminate under this contract which materially and the project agreement. In this situation, the private adversely affects the provision of the service; party must prepare a prevention plan for submission (ii) persistent breach; to government for endorsement which will overcome (iii) provisions in respect of the insolvency of the the consequences of or compensate the government contractor and, if there is one, its holding for the relevant Event of Default within an appropriate company; timeframe. (iv) breach by the contractor of the conditions in the 7.5 If a Default Termination Event occurs, the government contract in respect of the replacement of a subhas the right to terminate the project agreement contractor, suitability of contractor employees without any cure period being given to the private or change to project and financing documents; party. (iv) breach by the contractor of its obligations in respect of assignment of the contract; (v) breach of the change of ownership provisions in respect of the contractor; (vi) contract abandonment; (vii) failure to achieve the Service Commencement Date by the specified long stop date;

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England (viii) accumulation of failure points; and (ix) breach by the contractor of its insurance obligations. In addition to the standard events of default, other events may be added on a projectspecific basis.

Victoria, Australia

Corrupt Gifts and Fraud 7.6 The reason for the separation of the corrupt gifts and fraud termination provisions from the contractor default termination provisions is due to the different compensation on termination provisions that apply [See Issue 8]. The provisions outlaw payments made or gifts given by the contractor or any of its subcontractors to the authority and, generally, any other public body or to do anything that might be considered to be an attempt to corrupt or subvert a public body. The contractor does have some protection as, if it terminates the sub-contractor involved or the sub-contractor terminates the employment of the individual involved, the authority would not be entitled to terminate under this head. 8. Termination Payments 8.1 A PFI agreement will specify precisely what 8.1 on early termination of the project agreement, compensation is payable if the agreement is terminated government must pay a termination payment to early, whereby the amount of compensation payable the private party, calculated in accordance with the will depend on the reason for termination. following principles: 8.2 no compensation is generally payable upon normal expiry of the agreement, although there may be Default Termination Payment exceptions to this where the funding for the project 8.2 on termination of the project resulting from a Default Termination Event, the government will pay the private has been structured upon the contractor retaining party an amount equal to the fair market value of the assets after the expiry date and the authority decides it project as determined through a re-tendering process wishes to acquire those assets. In such circumstances, or, if there is no liquid market, the estimated fair market the authority would pay the contractor either: value of the project as between a willing buyer and a (i) the market value of such assets; willing seller as calculated by an independent valuer, (ii) an amount agreed at financial close; or less a series of deductions (e.g. any costs incurred (iii) a combination of (i) and (ii) which usually results by the government in determining the fair market in there being a fixed payment plus a sharing of value; any amounts owing by the private party to the any profit in the market value of the assets. government). Compensation on Termination for Authority Force Majeure Termination Payment Default43 8.3 The objective should be to ensure that the contractor 8.3 on termination of the project agreement for each type of Force Majeure Termination Event the government and its financiers are fully compensated, i.e. no must pay to the private party an amount equal to: worse off because of the authority default than if the (i) the lower of senior debt owing to financiers at the agreement had proceeded as expected. termination date and the amount forecast in the 8.4 The authority will normally pay the contractor: base case financial model to be owing to financiers (i) outstanding senior debt including outstanding as at the termination date; and interest, outstanding capital, breakage costs and (ii) any break costs payable by the private party to fees; the financiers under the finance documents as a (ii) redundancy payments for employees of the direct result of early termination, less a series of contractor and sub-contractor breakage costs; deductions (e.g. all credit balances on any bank and accounts held by or on behalf of the private party (iii) an amount that will compensate the equity and on the termination date; any insurance proceeds sub-debt providers for their investment. paid or payable to the private party). 8.4 where the Force Majeure Compensation Amount is less Compensation on Termination for Contractor than the Default Termination Compensation Amount Default which would have been payable had termination (and 8.5 Contrary to typical service contract market practice, the relevant loss or damage to the project) occurred compensation will normally be paid to a contractor as a result of a contractor default rather than a force who has failed to perform in accordance with the majeure event, then the government will pay the agreement. The amount of compensation payable on Default Termination Compensation Amount. contractor default termination is considered one of
43 The regime set out under this subsection also applies to Voluntary Termination by the authority and in the event the agreement is rendered void for unlawfulness.

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England Victoria, Australia the key commercial issues for all parties involved. It Payment for Voluntary Termination by will normally depend on the outcome of the market Government value approach or the retendering election and 8.5 on termination of the project agreement resulting liquid market approach, whereby the former is the from a government voluntary termination, government required approach for all PFI projects. must pay to the private party an amount, less a series of deductions, equal to the aggregate of: Compensation on Termination for Force Majeure (i) where the senior debt amount has been financed 8.6 If a PFI agreement terminates for Force Majeure, the by bank debt, the lower of senior debt owing to authority should pay compensation to the contractor financiers at the termination date and the amount reflecting the principle that Force Majeure is neither forecast in the base case financial model to be partys fault and the financial consequences should owing to financiers as at the termination date; to some extent be shared. There is however no (ii) where the senior debt amount has been financed equitable reason for full compensation, i.e. repayment by capital market instruments (bonds), the lower of debt plus equity service and equity with profits, of the present value of the future cash flows under as this would equate to the authority bearing all the the outstanding bonds and the future cash flows consequences. The agreement should in addition under the bonds forecast to be outstanding at provide the authority with the option to retain the the date of termination in the base case financial assets. model; and 8.7 The termination sum would normally include (iii) an amount which gives an equity return (on both (i) outstanding senior debt, including outstanding any share capital subscribed at financial close interest, outstanding capital, breakage costs and and any shareholder subordinated debt not fees; taken into account as debt; and from the date (ii) amounts outstanding under the subordinated of termination to the original expiry date of the finance documents less an amount equal the project agreement) of the greater of: aggregate of payments of interest made by the (A) the blended equity internal rate of return in contractor under the subordinated financing the base case financial model; and agreements; (B) the market rate of equity return, having (iii) amounts paid to the contractor by way of regard to market rates of return, for the subscription for shares and the capital of project cash flows taking into account an contractor less dividends and other distributions independent valuers reasonable assessment paid to the shareholders of contractor; and of forecast cash flows to equity from the (iv) redundancy payments from employees of the date of termination to expiry of the project contractor that have been or will be reasonably agreement, in each case assuming that: incurred by the contractor as a direct result (I) the services will be delivered in of termination of the contract and any subaccordance with the performance contractor breakage costs. standards set out in the project agreements and that (II) the service fee provisions will continue to apply as set out in the project agreement. 9. Security 9.1 It is not normally appropriate in PFI agreements for Parent Company Guarantees the authority to expect to obtain parent company 9.1 For value for money reasons, the government does not guarantees from the parent companies and or subusually seek performance guarantees from the parent contractors to support the contractors obligation to companies of the private party or of the key subdeliver the service44. contractors. However, this will depend on whether 9.2 Performance bonds are not required under the the commitment of a parent company is an important standard form between the authority and the element in the selection of a private party or a key contractor45. sub-contractor. Generally, the government prefers 9.3 More generally, standard practice assumes that an that performance bonds (whether bank guarantees or authority should be satisfied with direct agreements insurance bonds) be given by subcontractors as they from the immediate sub-contractors to the contractor can be called upon on clearly defined terms as their and collateral warranties from consultants and subpricing is more transparent. subcontractors. The sub-subcontractors giving collateral warranties to the authority are usually Performance Bonds 9.2 For value for money reasons, the government will limited to construction sub-subcontractors. generally not seek a direct performance bond from the private party for the construction phase and the defects liability period. Instead, it will normally require the private party to procure an unconditional and irrevocable performance bond, issued in the private
44 It is normal for there to be parent company guarantees of the sub-contractors obligations to the contractor and sometimes of the contractors payment obligations to the lenders, but these are not an issue for the authority. 45 Again, they are common downstream. See previous footnote.

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England

Victoria, Australia partys favour, from the construction subcontractor, guaranteeing the subcontractors construction obligations. The Government will identify its minimum bonding requirements as part of a project brief which will include the quantum, rating and duration of the bond and the basis upon which the bond can be drawn. The quantum of the bond will reflect the project features but will generally be a percentage of the design and construction contract price. The amount may be reduced by an amount which appropriately reflects the fact that the project has moved beyond the period with the greatest level of construction risk. 9.3 Although the government may consider obtaining operating bonds directly from the private part in certain circumstances, this is not normally appropriate in a Partnerships Victoria project agreement and will as a general rule not be requested by the government.

10. Step-in Rights Authority Step-in 10.1 Government may step-in and assume all or some of the service delivery obligations of the private party when: 10.1 In some circumstances, the Authority may wish to (i) there is an emergency, a serious risk to the step-in to take action itself in relation to the Service environment, the public or users of the facility or if there is a need to prevent or mitigate a serious risk a serious risk of material damage to the facility; of health, safety or the environment or to discharge (ii) step-in is necessary to discharge a statutory duty; a statutory duty. Such a right to step-in may arise or due to matters outside the scope of the work of the (iii) an Event of Default remains unremedied or a contractor (step-in without contractor breach) or termination event occurs. may arise due to the contractor being in breach of 10.2 while the government has stepped-in, it must continue certain of its obligations under the agreement (stepto pay the full service fee, reduced by the following in on contractor breach). amounts: 10.2 During a step-in without contractor breach, the (i) where the government has stepped in as a result of authority should pay for the service as if the service an Event of Default or a Default Termination Event; had been fully performed and should bear all its (A) the governments reasonable estimate of own costs incurred by stepping-in. Also where the the costs not incurred by the private party authority steps-in on contractor breach, it should as a result of it not providing the contracted continue to pay the contractor as if there were no services; and breach although it should be entitled to set off any (B) the costs incurred by the government in exercising the step-in right, including all costs it incurs in stepping-in in such circumstances. reasonable and proper costs incurred by the Direct Agreement government in delivering the affected services 10.3 The provisions on the lender step-in are contained (whether directly or through a replacement in a separate Direct Agreement and are fairly flexible contractor); or in order to encourage the lenders to attempt to (ii) where the government has stepped-in as a result of any other triggering event (e.g. threat of rescue the project either by resolving the default and serious risk to the environment or the government retaining the existing contractor or by novating the discharging a statutory duty), the operating or other project to a replacement contractor. costs which will not be incurred by the private party as a result of the exercise of the step-in rights. 11. Refinancing Gains 11.1 During the life of the project, the contractor may 11.1 A Refinancing Gain is the difference (greater than zero) wish to replace, augment or change the structure, between the net present value of: nature or terms of the financing solution that it (i) the distributions projected at the proposed put in place at Financial Close for the purposes of refinancing date using the updated financial model; financing the project. where such restructurings and or changes will have the effect of increasing or (ii) the distributions projected immediately prior accelerating distributions to investors or reducing to the proposed refinancing using the base case their commitments to the project, these effects financial model. are referred to as Refinancing Gains, e.g. reduction 11.2 All refinancing gains other than those contemplated in interest margins, reduction or release of reserve at financial close will require government consent accounts, release of contingent junior capital, and any refinancing gain is to be shared between the extension in the maturity of debt, increase in the government and the private part on a 50:50 basis amount of debt. provided the projected equity return at the time of the refinancing (taking into account any refinancing) is above that reflected in the original base case financial model.

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England Victoria, Australia 11.2 one of the key principles in the approach to 11.3 The Government may withhold its consent to a refinancing is that they can be of benefit to both the proposed refinancing, if: contractor and the authority so that the authority (i) refinancing would adversely affect government should welcome and positively consider contractor interests; proposals for refinancing. (ii) the terms and conditions of a proposed refinancing 11.3 A 50:50 sharing of refinancing gains between are materially more disadvantageous than the existing the authority and the contractor is considered a funding arrangements and the government considers reasonable balance. that the private party will be unable to service and repay financial indebtedness and that this will adversely impact the private partys ability to perform its obligations under the project documents; (iii) the terms and conditions are not in accordance with market price; and (iv) indebtedness will not be used solely for the project. 12. Change of Control, Transfers and Assignments46 12.1 over the course of a long-term contract such as a PFI 12.1 with the exception of transfers to related bodies agreement, the parties involved may change to some corporate and of listed shares and interests, the private extent. Therefore, a balance should be struck which party must obtain prior government consent to any allows some flexibility for change where appropriate but Change in Control of the private party or any member gives the parties sufficient comfort about the identity of the private partys group and to any change in the and/or creditworthiness of their counterparties. private partys group structure. 12.2 The government may withhold its consent to a Change (i) Transfers and Assignments in Control if any of the following conditions apply: (i) the private party has not provided full details of Restrictions on the authority the proposed change; 12.2 A PFI agreement should generally not allow the (ii) the change is to take effect prior to the second Authority to assign or transfer its rights or obligations anniversary of Commercial Acceptance; under the contract without the consent of the (iii) the proposed entity is not solvent and reputable, contractor, except where such transfer either takes does have a conflict of interest, and does not place under statute or is required to facilitate a public have a sufficient level of financial and technical sector reorganisation. capacity; 12.3 Also, provided the new authority has a similar (iv) the proposed change is against public interest; financial standing to the outgoing authority, approval (v) the proposed change would increase the level of should not be required. Therefore, if the project is risk or liabilities to the government; or assigned from one minister of the crown to another (vi) the proposed change would impact adversely on there will be no issue. Equally if one local authority the ability or capacity of the private party or its assigns a project to another local authority or to a subcontractors to perform its obligations under minister of the crown, there would be no issues. the agreement. Additionally, if the obligations of the entity to whom the contract is assigned are guaranteed by either the assigning authority or a minister of the crown, approval is not required provided the form of the guarantee is acceptable to the contractor. Restrictions on the contractor 12.4 The agreement should not allow the contractor to assign, novate or transfer its rights except as part of its Senior Lenders security package. Restrictions on the lenders 12.5 The authority should not attempt to put restrictions on the identity of the Senior Lenders unless exceptional circumstances apply. Additionally, restrictions against financiers should focus on objective categories or should adopt a list of acceptable transferees. (ii) Change of Control 12.6 As a general rule, it should not be necessary for the agreement to contain restrictions on the transferability of equity, other than a need to inform the authority, except perhaps where the authority would object to a particular class of shareholder being involved in the project for particular reasons. 12.7 In practice, the authority will generally only have a discretion over the change of control of the contractor for a fixed period, usually up to the end of the defect liability period, after which time the authority will not be able to prevent occurrence of a change of control.
46 Under English law, only the benefit of a contract can be assigned and not the burden. Therefore, it is standard practice to novate rather than assign a contract and, given that all parties have to sign a novation agreement, approval will need to be sought for such a process in any event.

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Achieving Consumer Protection in PPPs

1. Introduction
This paper discusses the consumers role in PPPs, some specific consumer interests in PPPs that need to be protected and ways of ensuring their protection including by legislation, independent regulators and contractual arrangements.

2. Consumers Role in PPPs


In most of the countries, the legislation, including the constitution, obliges the Government as the recipient of public monies, to provide public services such as water, electricity, other public utilities and infrastructure etc., to consumers within its jurisdiction. PPPs constitute a shift in that paradigm in that Government, usually by contract, entrusts this function to the private sector. However, the recipients or the beneficiaries continue to be the consumers, though not parties to the contract, and it is, therefore, essential that Government ensures/protects the interest of the consumers.

3. Specific Consumer interests that need to be protected


Some of the key consumer interests that need to be protected are:

a. Provision of Services
Consumers have an interest in receiving water, electricity, infrastructure, and other amenities which govt pursuant to legislation is obliged to supply.

b. Quality of Services
Consumers not only have an interest in provision of services but also in the quality of service provided. For e.g. water supplied needs to be purified to acceptable standards and Roads etc., ensure the safety of motorists and other road users and the pavements etc., meet agreed specifications.

c. Expansion of Services
In developing countries, the services usually get restricted to urban areas. Since PPPs are basically initiated to improve the delivery and bring in enhanced efficiency across all areas where service needs to be provided, and Government is obliged to provide
This Paper has been developed by the Projects, Regulatory and Policy Practice of K. Rattay, white and Case.

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services to all geographical areas under its jurisdiction, areas hitherto not included also need to be served by expanding services.

d. Affordability
while fixing tariffs, the affordability of the consumer needs to be balanced with making the project commercially bankable as too low a tariff also results in failure of debt service, etc., of service providers leading to failure of projects itself.

e. Protection from super prots


while it is essential for the success of any PPP project that the private sector receives an acceptable return on its investment, Government has to ensure that the rate of return is not excessive and that the interests and perceptions of the consumers are managed.

f. How these Consumer Interests can be protected


Some of the ways of protecting consumer interests are:

Legislation i. Public Sector Legislation


General legislation which includes the manner in which public funds are to be dealt with, provisions stipulating accountability, reporting requirements, audit requirements, approvals for incurring financial obligations etc.,

ii. PPP Specic Legislation


The aim is usually to protect consumer interests. They usually regulate the procurement process, adjudication, evaluation and award of PPPs in order to ensure that the services are provided and are at an acceptable quality and affordable level.

iii.The Sector Specic Legislation


This legislation deals with issues that are specific to the industry in question and provides an added layer of protection for consumers. Sectors in which such type of legislation is typical include electricity, water, roads, and health services.

iv. Independent Regulators


normally, such regulators are unrelated to the government department that is providing the services and are typically set up for sectors that are monopolistic in nature, so that lack of competition does not hurt the interests of consumers. The ambit of control or review of the independent controllers generally focus on two primary areas. First, setting up of performance standards and quality controls to protect the consumers interests. Second, having some say (in many countries the power of approval) in laying down tariff for the services.

Contract
In view of the limited protection offered by legislation and Governments role as custodian of public interest, the Government, in procuring any PPP, negotiates and includes provisions in PPP that will protect consumer interests. Some of the ways in which the consumer interests can be protected through contract are:

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i. Provision of Services
Clear definition of Services on performance standards to minimise disputes, and stipulation of penalties in case of deficiency/non-performance.

ii. Quality of Service Levels


Clear definition of output specifications/performance standards that has to be met by the private party while rendering the services. A performance monitoring mechanism also needs to be set up under the agreement itself clearly spelling out the financial penalties that could be imposed, so that failures in performance can be detected and stipulated penalties imposed quickly. Prior agreement on the calculation and rate of the penalties in the agreement itself would give specificity and avoid unnecessary legal hassles. A fine balance needs to be struck on the amount of penalty. A small penalty may be a disincentive for maintaining adequate performance standards and too major a penalty divorced from actual failure would impose unnecessary burden on the operating expenditure of the contracting party possibly leading to failure of the project, which again would not be in the interests of the consumer.

iii. Security
The private sector has several obligations to comply with under the terms of the contract. while imposition of some financial penalties for inadequate/nonperformance has been discussed, it had also been pointed out that they have to be reasonable as heavy penalties not commensurate with the degree of failure may jeopardise the project. It is therefore essential that Government obtains some security in case of the failure of the project. This should be liquid security like bank guarantee so that Government has access to the funds in order to continue with the provision of services, without waiting for the outcome of any disputes between Government and Private sector.

iv. Affordability
PPP agreements should clearly set out the formula or the mechanism for revision of tariffs. This could be linked to CPI or any other agreed inflation index. The mechanism for increasing the tariff must take into account the future capital expenditure needs of the project, the need for the private sector party to meet its debt service obligations and operating expenditure, while at the same time ensuring that consumers do not pay excessive tariff.

v. Protection from super prots


when, in terms of the agreement the demand risk has been passed on to the private party and the demand increases beyond projections, it is possible that the project starts earning super profits. It is not fair to deny such profits to the private party. However, it is also necessary that the public perceptions on super profits are taken into account. Probably a profit sharing mechanism to balance consumer perception and private sector interests is a good via media. For example, within bands, if the rate of return is between 0.1 percent and 20 percent of the projected return then the private sector is entitled to all the profits. If rate of return is between 20 percent and 40 percent then the super profits could be split 70/30 between private sector and Government. If it is above 40 percent there could be a 50-50 split and so forth.

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Public Participation
All of the above are tangible means of ensuring that consumer interests are protected. Equally important, however, is to whether their interests are being protected. The Public should therefore be engaged from the inception of the project by informing them of the implications, the effect it will have on the consumers. They must also be given an opportunity to raise their concerns. This will go a long way in ensuring public buy-in for the project and ultimately its success.

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se RITICA W Stu LITY OF a s d LEG te y: AL C wa Ti ONT te rup RACT r T u S FO r e r W R PPPs a t at m er en t &

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Contents
1. International PPPs: Case Studies and Lessons Learnt Bird & Bird 2. The Role of Contracts in Ppps: Optimising Public Service in Ppp Mode Setting the Tone by Amit Kapur, Partner, Jsa 3. Structuring of Contracts: Concessions for PPPs: Vishnu P. Sudarshan, Partner, JSA 4. Procuring a PPP: Amitabh Sharma, Partner, JSA 5. Case Study on Delhi Privatisation and Judgements: Mansoor Ali Shoket, Partner, jsa 6. Case Study on Nathpa Jhakri Hydro-electric Project: Dhirendra Negi, Partner, JSA 7. Case Study on Singapore Institute of Technical Education: Ashurst 8. Risk Perspectives Private Sector Supplier and Financiers: Isabel Evans, Bird & Bird 9. Contrasts Between Traditional and PPP/PFI Procurement Contracts: Colin Hall, Bird & Bird 10. Key Contacts 121 127 131 138 147 153 160

165 172 176

International PPPs

Case Studies and Lessons Learnt

HOSPITAL CASE STUDY: CLEARLY DEFINED CONTRACTS Case Study 1

West Kent Primary Care Trust


The west Kent Primary Care Trust is a national Health Service organisation with responsibility for providing hospital accommodation and services in an area west of London with a densely populated catchment area of approximately 657,000. The hospital services range from minor out-patient treatments to the most complex surgery in all major medical disciplines. The members of the Authority comprise a combination of lay-people and professionals with varying degrees of familiarity with procurement of major projects. The scope of the project comprised demolition of the old Hospital and the provision of a new one. Hospital services were maintained during the demolition and construction phase. overall, the capital expenditure was in the region of 30 million and the funding followed the fairly familiar pattern of less than 10 percent equity and mezzanine finance; and 90 percent senior debt. The Project Company comprised a single investor in PFI income streams. They subcontracted the construction to a major English contractor; and the management of the facility (which will last 30 years) to a competent Facilities Management company. The Authority was keen to follow the principles in HM Treasurys guidance document, Standardisation of PFI Contracts, as closely as possible. However, there was one slightly unusual feature in that the project comprised, not only the hospital facilities for the nHS Trust, but an additional service comprising care for the elderly. The latter services came under the responsibility of Kent County Council, an Authority which was separate from the nHS Trust. Under a separate arrangement, Kent County Council became sub-procurer, whilst leaving the nHS Trust as the lead procurer. At completion, it was important that the requirements of both Authorities should be met before hand-over. The construction phase proceeded smoothly, following which the Project Company sought price adjustments on two basic grounds: That the cost of building the off-site roadways exceeded the budget. That there were some variations requested by the nHS Trust.

with regard to the road works, the contract contained robust provisions which required the Project Company to build according to all the statutory requirements. It therefore took the risk of its budget being too low and the Trust did not pay any extra. with regard to the variations, a small additional payment was made by the Trust. This, however, arose because an employee within the Authority had failed to comply with the procedures for ordering changes, thereby creating uncertainty. This gave the Project Company an opportunity to argue that some works which were within the original scope amounted to a variation.

Key lessons learnt


A successful project, nevertheless, produces lessons. First, the Project Company, an investor in PFI income streams, sold the investment at the end of the lock-in period of two years from service commencement. Since then, the investment has been sold again. There should be nothing untoward in this change of ownership, but it demonstrates the need for clearly-defined contracts. In particular, the facilities management contract, between the Project Company and the facilities management company, was transferred to the replacement for the Project Company. Secondly, it was important for the Authority to have very clear lines of delegation to enable it to obtain the benefit of the tightly drawn price-adjustment provisions. Thirdly, the two separate Authorities had to work closely to ensure that their different service requirements were fully met before handover. This necessitated carefully defining the meaning of completion. Bird & Bird acted for the NHS Trust Prepared by Isabel Evans and Colin Hall, Bird & Bird.

Criticality of Legal Issues & Contracts for Public Private Partnerships

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Case Study 2 CASE STUDY: REGIONAL WATER COMPANY Major asset renewals have been ordered since privatisation of the UK water Industry, under a regulatory system which requires the Utility company to prepare a five year Asset Management Plan. During one such period there was a focus on the replacement of the mains pipe-work throughout the region, a project that was very labour intensive and was well suited to a partnering agreement with pain/gain arrangements for the parties to take the risk and benefits of departures from target costs. Despite the well-crafted contract documentation, particularly the commercial incentives to both parties to work harmoniously, it proved impossible to run the project without very substantial claims by the contractor against the water company for additional payments. Key lessons learnt Under the traditional procurement route, often with competitive tendering, a Contractor may take a short-term view:

Tender low. Improve the final price with financial claims. Improve profits even further by procurement at the cheaper end of the range of suitable options.

Under PPP/PFI, the Contractor lives with what has been built. Therefore, there is a good chance of obtaining value for money. Under UK PFI projects, HM Treasury now requires Contractors to have reference to some of the measurement tools for whole life costing, such as BREEAM (Building Research Establishment Environmental Assessment Methods).

Case Study 3 CASE STUDY: UNDERSTANDING PROJECT RISKS

Passport delays of summer 1999


The UK Passport Agency (Agency) introduced a new computerised system for processing passports by way of PPP arrangements with Siemens as contractor. The new system involved substantial changes to working methods which the Agency believed could be implemented over a few months. The Agency forecast that the new system would be required to process 5.1 million passports in 1999; in fact the actual number of passports processed was 5.6 million. Changes in the law requiring children to obtain their own passports, combined with delays in passport processing, triggered a rapid rise in demand for passports (demand increased by 29 percent higher than forecast). As a result of the crisis, there was a loss in production of 400,000 passports. Further the Agency incurred additional costs of 12.6 million, of which the contractor agreed to pay 2.45 million over a number of years, even though this was greater than the contractor considered it was liable for under the contract. Payment mechanism provided flexibility, but the sudden surge in demand overwhelmed Siemens ability to provide the service and lead to delays.

Key lessons learnt


The national Audit office in the UK found that the Agency did not understand the risks associated with implementing the new system and failed to prepare adequate contingency plans. The Agency failed to fully understand the residual risks which had not been transferred and had not ensured that these were properly managed. This case illustrates that political and reputational risk cannot be transferred. Since 1999, the Agency has introduced a number of measures that ensure an appropriate balance between customer service, quality and security, finance and efficiency and innovation. The passport PPP is now considered to be very successful and the contractor and the Agency are looking at gain sharing arrangements in relation to deployment of certain systems worldwide developed in relation to the processing of passports. Source material: national Audit offices Report by the Comptroller and Auditor General, The Passport Delays of Summer 1999, october 1999. Public Accounts Commission Report, Passport Delays, october 2000. Bird & Bird acted for the Passport Agency in relation to the project negotiations and the settlement arrangements.

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CASE STUDY: RIGHT COMMERCIAL MODEL FOR SERVICE/CONCESSION AGREEMENT Case Study 4

The Vehicle and Operator Services Agency Roller Brake Testing


The Vehicle and operator Services Agency (VoSA) is an executive agency of the UK Department for Transport. Among other things, VoSA is responsible for running the statutory testing of UK heavy trucks, buses and other similar vehicles. VoSA had previous experience of a major computerisation project under PFI but relatively little other experience of PFIs (and very little experience of PFI in a traditional construction and infrastructure context). As part of this, VoSA ran 92 heavy goods vehicle testing stations (HGVTSs) across the United Kingdom. HGVTSs are usually fairly typical garage environments, with test lanes for carrying out the inspections. The test lanes include inspection pits, standard garage mechanical equipment and roller brake testing equipment (complex mechanical tools to allow testing of vehicles loaded and unloaded braking distances). The test lanes across the estate were in a variety of conditions, but in almost all of the HGVTSs the roller brake testing equipment was coming to the end of its useful life. In common with general UK government practice at the time, VoSA sought to replace almost all roller brake testing equipment and include in the scope a range of works associated with this, which would depend on a site by site basis on the overall condition of the site, on a PFI basis. Although not officially stated, it is likely that concerns about affordability of a conventional solution may have been as much a factor as overall VfM (VoSA has stable annual revenues derived from statutory test fees, lending itself to flat expenditure rather than major one off capital outlay). There were a number of key complexities:

Implementation would have to be carefully planned and remain flexible, to ensure that HGVTS testing could continue across the country. The service provider would not take any land interest in HGVTSs, which would continue to be operated by VoSA. A number of premises were on old Ministry of Defence locations and similar locations, raising concerns about possible contamination and other environmental hazards.

VoSA ended up with three bidders, all non-UK, mainland European companies (some used UK subsidiaries, but the parent companies took a close role). All were traditional roller brake testing companies and each had a limited PFI track record. Given this, VoSA sought initially to use a simplified, more conventional contract model with amendments for PFI arrangements. Ultimately, this proved difficult for potential funders and the bidders various advisors and the project moved towards more standardised PFI contract models. VoSA terminated the procurement for various reasons, including concerns over the real value for money being offered and affordability. It started the procurement on a conventional basis and awarded a contract in 2006.

Key lessons learnt


The various complicating factors in the project (mix of construction and specialised equipment; large number of relatively small locations with a wide range of types of work and environment; nervousness about due diligence) were not inherently unmanageable, but in the context of a relatively small overall project cost made value for money and affordability real issues. Relatively few of the business personnel involved had previous experience of PFI models (usually at least one of the supply and the buy side have real experience). This led to:

Difficulties for some of the organisations in adjusting their expectations of what rights and approaches to see in the contract. Initial training would have helped here. Major reliance on external advisors. Given the relatively small size of the overall project value, the cost of this was considerable. Although it was not fully envisaged at the time of the PFI contract, VoSA then started to plan a HGVTS rationalisation programme. Had the project proceeded on a PFI basis, there would almost certainly have had to be considerable renegotiation and serious value for money issues.

Bird & Bird acted for VOSA on the Roller Brake Procurement.

Criticality of Legal Issues & Contracts for Public Private Partnerships

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Case Study 5 CASE STUDY: DEVELOPING INNOVATIVE SOLUTIONS TO MEET PROJECT REQUIREMENTS

London Underground PPP


PPP arrangements were put in place in 2002 and 2003 between London Underground Limited (LUL) and contractors Metronet Rail BVC Limited, Metronet Rail SSL Limited, and Tubelines Limited (Infracos) for the purposes of maintaining and upgrading the London Tube infrastructure. Since signing the arrangements, both Metronet companies have been placed in administrative receivership and PPP Transport for London have become responsible for service delivery. The arrangements seek to combine:

stability of funding; private sector project management of a major infrastructure project over 30 years; and continued public sector management of train operations.

The capital value of these arrangements is enormous, totalling over 17.594 billion over a 30 year period (of which 5.526 billion relates to the arrangements with Tubelines and 12.068 billion to those with Metronet).

The resulting PPPs:


are very complex output-based contracts; contain innovative arrangements to manage grey assets, the condition of which is largely unknown; permit price revisions only in circumstances where the Infraco meets tests of economy and efficiency; and contain provisions for periodic reviews after 7.5 years conducted by an independent arbiter.

Charging arrangements
The Infrastructure Service Charge (ISC) is a monthly charge to reflect maintenance, renewal and upgrade and is subject to adjustment: up and down. The ISC is calculated by reference to a number of measures:

capability-a target measure of passenger journey time; availability-availability of a station or train by reference to the lost customer hours per month; and ambience-a measure that assesses quality of the station and train environment; tests include:

Train ambience attributes Internal cleanliness of ceilings and surfaces Cleanliness of internal floors Level of litter Internal level of scratched graffiti Internal level of non-scratched graffiti Cleanliness of train seats Condition of arm rests Station ambience attributes Platform ambience attributes Cleanliness of platform walls and floors (excluding trackside walls) Cleanliness of trackside walls Condition of platform decor Level of platform graffiti (excluding track-side walls) Level of graffiti on track-side walls and platform edge doors Level of litter on platform Level of litter on track Condition of platform seating Condition of waiting room Condition of platform roofs/canopies (for exterior platforms) Cleanliness of platform edge doors

Condition of handrail/hangers Condition of train seats External cleanliness of train External scratched graffiti External non-scratched graffiti Cleanliness of windows

Routeway ambience attributes Cleanliness of routeway walls and floors (excluding lifts and escalators) Level of litter in routeway (excluding lifts and escalators) Level of routeway graffiti (excluding lifts and escalators) Condition of routeway dcor (excluding lifts and escalators) Appearance of lift Appearance of escalator Condition of routeway direction signs Condition of mirrors

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Ticket hall ambience attributes Cleanliness of ticket hall walls and floors Level of litter in ticket hall Level of ticket hall graffiti Condition of internal ticket hall decor Condition of exterior decor Condition of ticket office Cleanliness of subway glass roof Cleanliness of subway walls and floors Level of litter in subway Level of subway graffiti Condition of subway decor

other ambience attributes Condition of toilets Condition of cabling and conduits Condition of leaflet rack Condition of builders hoardings Condition of electronic whiteboards

service point regime-calculates deductions for equipment failure and rewards timely rectification in line with PFI standardisation.

Achievement of objectives
The nAo were of the view that the PPP broadly satisfied the Authoritys requirements by bringing private sector experience to manage and upgrade the London Underground. Assurance regarding value for money is limited, but there are mechanisms linking payment to services for passengers and ensuring that the public sector pays costs justified by economic and efficient Infracos. Deal drift was caused by deal complexity, estimating a cost of works and the controversy around the project.

Safeguards of public interest


LUL as the guardian of the public interest:

retains responsibility for the statutory safety regime; monitors Infracos maintenance of assets; has rights of access to information in relation to asset management renewals and upgrades; and has secured certain safeguards regarding employment contracts.

PPP terms
The PPP contracts although sharing common terms with standardised PFI contracts are of non-standard nature and include the following terms:

Infracos do not collect the fare box-the ISC is calculated independently of fares; LUL have no right of voluntary termination. LUL considered that reserving such a right would give rise to worse VfM as the private sector would add a premium to their pricing to reflect greater political certainty; letter of Comfort given from the Secretary of State providing an indemnity to lenders and investors in the event that the PPPs were overturned following a legal challenge; price changes can be justified by an efficient and economic Infraco; and the equity rate of return is set by the arbiter every 7.5 years with reference to the activities of the economic and efficient Infraco.

NAO recommendations
The nAo recommended that authorities should:

explore ways of sharing risk; insist on open book monitoring of both the SPV and private contractors; control the extent of reimbursement where they assume responsibility for bid costs; avoid asymmetry in relation to the right to termination; and negotiate commercial terms that are broadly neutral in respect of unforeseen risks-seeking to transfer too much risk is likely to over-compensate the private sector.

Following preparation of the nAo report in June 2004, both Metronet companies went into administrative receivership in July 2007 and a further report is in course of preparation in relation to these matters.

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Key lessons learnt


Very complex project. Concept of efficient and economic Infraco introduced to establish VfM.

Source materials: national Audit offices Report by the Comptroller and Auditor General, London Underground PPP: were they good deals?, June 2004. Bird & Bird are appointed to a panel of 5 legal advisers to advise on the LUL PPPs. Bird & Birds work involves advising on disputes and contract management.

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Presentation Slides

The Role of Contracts in PPPs


Optimising Public Service in PPP Mode: Setting the Tone

1. B) PRESENTATION SLIDES 1. B) PRESENTATION SLIDES

THE ROLE OF CONTRACTS IN PPPS BY MR. AMIT KAPUR, PARTNER, JSA THE ROLE OF CONTRACTS IN PPPS BY MR. AMIT KAPUR, PARTNER, JSA OPTIMISING PUBLIC SERVICE IN PPP MODE: SETTING THE TONE OPTIMISING PUBLIC SERVICE IN PPP MODE: SETTING THE TONE
CRITICALITY OF LEGAL CONTRACTS FOR PPPs CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Whats Law Gotta Do With It Whats Law Gotta Do With It

Oh, Mr. President, Oh, Mr. President, do not let sodo not let so great an achievement suffer great an achievement suffer from taint from any taint of any legality of legality
Advice of the Mr.then Philandex Knox, the then Advice of Mr. Philandex Knox, Attorney General to Attorney General to the Govt. of United States of President the Govt. of United States of President Roosevelt, in context Roosevelt, in context of acquisition of acquisition of the Panama Canal of the Panama Canal

CRITICALITY OF LEGAL CRITICALITY OF LEGAL CONTRACTS FOR PPPs CONTRACTS FOR PPPs

Contracts epitomize Freedom Contracts epitomize Freedom


o the Freedom toarrangements design the inter-se arrangements so long as o Freedom to design inter-se so long as the by boundaries defined by the governing framework the boundaries defined the governing framework (law-policy-regulation) are adhered to (law-policy-regulation) are adhered to
Rules of entry

Rules of entry

Rules of doing business Rules of doing business

o The freedom to contract o The freedom to contract in complex web of in complex web of stakeholders, regarding their inter-se stakeholders, regarding their inter-se
Roles : responsibilities, and the PPP format of and the PPP format of rights, Roles :duties responsibilities, rights, duties ownership and operations ownership and operations Modalities of implementation Modalities of implementation Risk allocation and mitigation Risk allocation and mitigation Reward : both outcome incentives and disincentives linked Reward : both outcome linked incentives and disincentives

Presented by Mr. Amit Kapur, Partner, JSA.

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CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Distinctive PPP Issues


To PPP or not to PPP?
o Touch-stone for determining which project must be implemented in a PPP format and why
Can we procure public services in PPP format in a sustainable mode, marrying the welfare objectives and viability? Is it more beneficial to so implement than as public or private? Specifics of the vfm outcomes identified by the state agency must feed into
PROCUREMENT PROCESS : QUALS. & EVALUATION CRITERIA STRUCTURING CONTRACTS : OBLIGATIONS, RISKS & INCENTIVES CONTRACT MANAGEMENT PROCESS INCLUDING RESET AND REBID DECISIONS

Knowledge Series Legal

|4

Roles & Stakeholders in a Power Plant


Off -Taker Construction Contractor Operator Fuel Supplier Fuel Supply Contract Lease of Site/ Sale of Land Steam Purchase Contract Concession & Approvals PPA EPC Contract O&M Contract

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

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|4

Sponsors Shares

Loans

of shares Roles &Pledge Stakeholders in a Power Plant Project Lenders

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Security

Off -Taker

PPA

Power Generating EPC Contract Sale Arragements Construction Company


Contractor
Loans, Credit Operator Support & Political Risk Fuel Supplier Insurance

Pool/ Market

Sponsors Shares
Loans Pledge of shares Project Lenders Pool/ Market Sale Arragements Inter-creditor Agreement Export Credit, Govt. Multilateral Agencies (World Bank, ADB, ADB, OPIC, IFC, US Exim,Jexim , MIGA)

Landowner

O&M Inter-creditor Agreement Contract


Export Credit, Govt. Fuel Supply Multilateral Agencies Contract (World Bank, ADB, ADB, OPIC, IFC, US Exim,Jexim , MIGA) Lease of Site/

Security

Steam Purchaser (cogen ) Host Government

Power Generating Company


Loans, Credit Support & Political Risk Insurance

Landowner

Sale of Land Steam Purchase Contract


2

Consents to Collateral Assignments

CRITICALITY OF LEGAL

Steam Purchaser CONTRACTS (cogen )FOR

o In public goods, State involvement is in perpetuity

Host Unlike trade, a long term commitment Government

Concession & Distinctive PPP Issues Approvals

PPPs

Consents to Collateral Assignments

o If the private services proponent collapses for any reason, the CRITICALITY OF LEGAL CONTRACTS FOR PPPs state agency shall have to ensure continuity of service Distinctive PPP o Moral hazard of public goods
Affordability and right to life with human dignity Unlike

trade, a long term commitment

Issues

ocoping In public goods, State involvement is in perpetuity Price elasticity of demand and cost burden o If the private services proponent collapses for any reason, the Target the delivery of subsidies
o Hence it is critical that

state agency shall have to ensure continuity of service

Moral hazard of public goods The Project is structured witho optimal role, risk & incentive allocation Affordability and right to life with human dignity Selection ensures the most appropriate proponent in optimal Price elasticity of demand and coping cost burden formal
Target the delivery ofof subsidies Mid-course corrections to ensure sustainability with sharing unanticipated windfall gains o Hence it is critical that

The Project is structured with optimal role, risk & incentive allocation ` Selection ensures the most appropriate proponent in optimal formal Mid-course corrections to ensure sustainability with sharing of unanticipated windfall gains

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Knowledge Series Legal


CRITICALITY OF LEGAL CONTRACTS FOR PPPs

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CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Expectations of Infrastructure Users

o Coverage : availability of facilities & services for the Expectations of Infrastructure Users asking, on fair terms

o Coverage : availability facilities & servicesLevels for the o of Performance/Service Acceptable levels of asking, on fair terms Tariffs / taxes / tolls o Performance/Service Levels Acceptable Quality of supplylevels of
Tariffs / taxes / tolls Quality of supply
Continuity of the supply

Continuity of the supply appropriate mechanism for Efficient fault rectification Consumer facing and efficient operations, with
Grievance Redressal appropriate mechanism for

o Consumer facing and efficient operations, with

Efficient fault rectification Grievance Redressal

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

India at a cus p of opportunity CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Unc erta in Time s

India at Thatcher a cus p of opportunity o Maggie and Alan Greenspans Deregulation and o Expropriation is no longer a bad word Bail outs free market is out and theare debate is back on Reregulation coveted / effective regulation
o Maggie Thatcher and Alan Deregulation and are few economies that o In Greenspans the global financial crisis there free market is out and the debate is back Reregulation can offer even theon slowed growth of the Indian economy / effective regulation o There is an emerging window of opportunity for India as a growth engine for the global economy depends on us o In the global financial crisis there are few economies that can offer even the slowed growth of the Indian economy To lend its 7% growth rate with a suitable investment climate for o There is an emerging window of opportunity for India as a with long term horizons growth engine for the global economy depends on us
To lend its 7% growth rate with a suitable investment climate for the lack of investible opportunities for pension funds, other funds with long term horizons
the lack of investible opportunities for pension funds, other funds

o Expropriation is no longer a bad word Bail outs are coveted Unc erta in Time s

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CRITICALITY OF LEGAL CONTRACTS FOR PPPs

o Political commitment to the project o Adequate preparatory / project development work to create sustainable and bankable projects
Provide information required to take informed decision Reduce risks and uncertainty Technical, environmental, social, financial, legal aspects Fair and bearable risk allocation and mitigation

Success of PPP

o Administrative framework and readiness to tackle unanticipated & extraordinary changes over the project life
Force Majeure Material Adverse Impact Supervening Impossibility

o The Fourth P : People is most critical for success

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Presentation Slides

Structuring of Contracts
Concessions for PPPs

Knowledge Series Legal


Knowledge Series Legal |9
CRITICALITY OF CONTRACTS FOR P.P.P.
CRITICALITY OF CONTRACTS FOR P.P.P.

|9

PPP Design Innovation vs Standardization


Importance of Standardization

PPP Design Innovation vs Standardization


Importance of Standardization

Accountability Base line Predictability & Best practices Accountability Transparency Base line Predictability & Best practices Transparency The issue is whether all projects in all sectors for all services in all formats can emerge out of a Model Procurement format and model Concession Agreement ? The issue is whether all projects in all sectors for all services in all formats can emerge out of a Model Procurement format and model Concession Agreement ?

CRITICALITY OF CONTRACTS FOR P.P.P.


CRITICALITY OF CONTRACTS FOR P.P.P.

PPP Contract Design . IMPERATIVES PPP Contract Design . IMPERATIVES

o Delivery of affordable and quality service o Delivery of affordable and quality service o The reasons for choosing a PPP format (value proposition) must define the o The reasons for choosing a PPP format (value proposition) must parameters define the baseline of performance/output baseline of performance/output parameters o Raison detre` of involvement of private sector : capital, O&M practices, o Raison detre` of involvement technology, of private sector et al : capital, O&M practices, technology, et al o Infra Projects are characterized by significant amount of debt crucial to o Infra Projects are characterized by significant amount debt crucial toallocation amongst participating success is proper risk of identification and success is proper risk identification and allocation amongst participating stakeholders stakeholders o Long term perspective in contract design : to secure a predictable tenure o Long term perspective in contract design : to secure a service predictable tenure of robust infrastructure delivery (QoS, price, revenue stream) of robust infrastructure service delivery (QoS, price, revenue stream)
Imperatives of public goods/services Imperatives of public goods/services If the PPP proponent collapsed or walked out the procuring state entity shall be If the PPP proponent collapsed or walked out the procuring state entity shall be left with the service obligation left with the service obligation

Presented by Mr. Vishnu P. Sudarshan, Partner, JSA.

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PPP Contract Design . Macro Variants PPP Contract Design . Macro Variants

CRITICALITY OF CONTRACTS FOR P.P.P. CRITICALITY OF CONTRACTS FOR P.P.P.

PPP Models

PPP Models

Public Ownership & Public Operation

Public Ownership Public Ownership & &Operation Public Private Operations

Public Ownership & Private PrivateOwnership Operations & Private Operations

Private Ownership & Private Operations

CRITICALITY OF CONTRACTS FOR P.P.P.

CRITICALITY OF CONTRACTS FOR P.P.P.

PPP Contract Design PPP Contract Design


Public Ownership & Public Operation

Bonds/ Securities.. AMC Hyderabad.. Operation Management None core activities

Public Ownership & Public Operation Bonds/ Securities.. AMC Hyderabad.. Management Contracts

Management Contracts

Supply Contracts Operation Railways.. Locomotives Maintenance Management ManagementUrban Transport None core activities Maintenance ManagementUrban Transport

Supply Contracts Railways.. Locomotives

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CRITICALITY OF CONTRACTS FOR P.P.P.

PPP Contract Design . Models


Fixed Pay Off State Govt. Part of Variable payoff Revenue Capital Investments Vendor (SPV) Run Business Business

o Capital Investment of the Government & Operations run by the Private Operator o Useful to increase efficiency in the provision of services o Risk Allocation Financial Risk is with the Government but incurs the credibility risk of operation of the Project with the Pvt. Operator receiving a revenue share o Facilities like Hospitals, MRTS can be considered.

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CRITICALITY OF CONTRACTS FOR P.P.P.

PPP Contract Design . Models

Private Operation

Concessions

Divesture

Franchise

BOT/ BTO/BLT/BOO BOOT/BOOST

CRITICALITY OF CONTRACTS FOR P.P.P.

PPP Contract Design . Models


Fixed Pay Off State Govt. Part of Variable payoff Vendor (SPV) Revenue Run Business Business

Administrative Control

Capital Investments

o Model relies on SPVs ability to fund the Project o Financial risk borne by the SPV whilst the government shares the risk of loss of administrative control o Business is run under strong service level arrangements

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PPP Contract Design : Governance framework PPP Contract Design : Governance framework
Need to define role of players with a workable relationship
Need to define role of players Government with a workable relationship

CRITICALITY OF CONTRACTS FOR P.P.P.

Government
POLICIES Sector Strategy Subsidy USO & coverage Market design

POLICIES Sector Strategy Subsidy USO & coverage Market design

SPV

Regulator

SPV

Regulator
Service delivery Regulatory compliances Restructure organization Economic regulation/Tariff Market Business plan Operations & competition Rules for entry & exit/Licensing Performance regulation Dispute resolution Economic regulation/Tariff Market & competition Rules for entry & exit/Licensing Performance regulation Dispute resolution

Service delivery Regulatory compliances Restructure organization Business plan Operations

CRITICALITY OF CONTRACTS FOR P.P.P.

CRITICALITY OF CONTRACTS FOR P.P.P.

Government/State/ Concessioning Authority

Government/State/ Concessioning Authority o Clarity on baseline performance parameters


o Balance between value for money & welfare measures on the one hand o Quality Infra at affordable prices and viability/bankability on the other hand o Clarity on baseline performance parameters o Incentivize early completion/ efficient operation of project facilities o Balance between value for money & welfare measures on the one hand o Identifying the Project feasibility & facilitating approvals and viability/bankability on the other hand o Co-ordination with governmental agencies & third parties o Incentivize early completion/ efficient operation of project facilities o Permit innovative structuring o Identifying the Project feasibility & facilitating approvals

o Quality Infra at affordable prices

o Optimal utilization of scarce public resources


o Ring-fencing project revenue

o Co-ordination with governmental agencies & third parties o Penalties/LDs for non-performance o Permit innovative structuring o Ring-fencing project revenue

o Optimal utilization of scarce public resources

o Early stabilization of scope, design, & drawings to avoid mid-stream o Penalties/LDs for non-performance change

o Early stabilization of scope, design, & drawings to avoid mid-stream change

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CRITICALITY OF CONTRACTS FOR P.P.P.

Government/State/ Concessioning Authority


o Social commitments Consumer Interest
o Promote operating efficiency o Regularly monitor service standards o Prevent unfair trade practices monopoly o Protect consumer interest -Ombudsman o Robust regulatory framework & dispute resolution mechanism

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Project Developers
o Implementing a commercially viable project
o Timely flow of grants/subsidy o Permit innovative financing & equity structure

o Completion Risk
o o o o o o o o o Suitable EPC Contract with appropriate LDs Equity support by the Government & Contractors IE Supervision Suitable availability of infra utilities & other misc amenities Assistance in government clearances : Stability to clauses to protect against delay in regulatory approvals. Availability of utilities & suitable infra Co- ordinated project planning & scheduling Availability of land & related data Incentivizing early completion

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CRITICALITY OF CONTRACTSCRITICALITY FOR P.P.P. OF CONTRACTS FOR P.P.P.

Project Developers Project Developers


o Input/Supply Risk
o Input/Supply Risk

o Credit Risk (Non-Payment)/Off Take Risk o Credit Risk (Non-Payment)/Off Take Risk

o Suitable covenants in the Input Supply Contract o Suitable covenants in the Input Supply Contract o Strategic investment in the supplier o Strategic investment in the supplier o Suitable ToP obligations and Viability Rebalancing by the Govt. in o Suitable ToP obligations andcases Viability Rebalancing Govt. in supplemental revenue). of MaC ( extensionby of the Term or adding cases of MaC ( extension of Term or adding supplemental revenue). o Securing competition o Securing competition o Securing Equity stake in the off taker o Securing Equity stake in the off taker o Assistance by the government o Assistance by the government o Equitable distribution of sharing any unexpected windfall gain o Equitable distribution of sharing any unexpected windfall gain

CRITICALITY OF CONTRACTS FOR P.P.P. CRITICALITY OF CONTRACTS FOR P.P.P.

o Operating Risk Project Developers

Project Developers

o Operating Risk

o Use of established & proven technology

o technology Suitable O&M Contracts o Use of established & proven o Suitable O&M Contracts o IE Supervision

o IE Supervision

o Earn Outs based on baseline performance parameters

o performance Liability under torts suitable insurance cover, indemnity & pass o Earn Outs based on baseline parameters through of obligations o Liability under torts suitable insurance cover, indemnity & pass through of obligations o Termination Risks

o Termination Risks
o Cure Period

o Cure Period o Substitution Rights to make project documents bankable

o Non Recourse Financing --- payment of debt due o Substitution Rights to make project documents bankable

o Non Recourse Financing --- payment of debt due

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Project Developers

Project Developers

o Political Intervention in the SPV Operation


o Political Intervention in the SPV Operation
o Robust legal & regulatory framework o State Support Agreement & Notifications

o Robust legal & regulatory framework o State Support Agreement & Notifications o Continuous support by the appropriate government o Adequate compensation during a FM event

obyForce Majeure o Continuous support the appropriate government


o Force Majeure
FM a in Off Taker or Supplier or Contract to be an FM in the Concession o Adequate compensationo during FM event o ToP not to be o FM in Off Taker or Supplier or Contract toenforced be an FM in the Concession
o ToP not to be enforced o Support by the appropriate govt to provide essential services o Support by the appropriate govt to provide essential services

CRITICALITY OF CONTRACTS FOR P.P.P.

CRITICALITY OF CONTRACTS FOR P.P.P.

Project Financiers/Lenders Project Financiers/Lenders

o Financial viability o Financial viability


o Acceptable legal regulatory legal framework... o& Acceptable & regulatory framework... o Promoters: successful track record o Promoters: successful track record o Freedom to exercise Step-In & Cure Rights o Freedom to exercise Step-In & Cure Rights o Protection against change in management, o Protection against change in management, project cost, etc o Creation of Adequate Security o Project Rating
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o Creation of Adequate Security o Project Rating


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CRITICALITY OF CONTRACTS FOR P.P.P.

Consumers/Users
o Availability of facilities & services o Acceptable levels of tariff, toll and/or levy o Assured levels of Quality/Standards of service
o Availability of CA/PSP document in public domain o Regular publication of data o Transparency in operation o Appropriate grievance redressal mechanisms

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Initial & Final Risk Allocation

Lenders Arrangement Risks

Taxpayers

Government

Operator
Sponsors

Customers

Key:

Potential risk transfer Definitive risk transfer

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CRITICALITY OF CONTRACTS FOR P.P.P. OF CONTRACTS FOR P.P.P. CRITICALITY

Case. Jaipur Ring Road Corridor Project Case. Jaipur Ring Road Corridor Project
o Project proposed to be on a to Swiss Challenge o implemented Project proposed be implemented on a Swiss Challenge basis basis o Project Implementation delay Implementation delay o Project o Land Acquisition Litigation o Land Acquisition Litigation o Absence of a robust contact design o Absence of a robust contact design o Uncertain risk allocation of Development Premium o Uncertain risk allocation of Development Premium o Uncertainty re. Price Discovery o Uncertainty re. Price Discovery o Sharp Dip realty sector Impacting.. o Sharp Dip realty sector Impacting.. o Viability of Financial Model o Viability of Financial Model o Lenders Sentiment o Lenders Sentiment

CRITICALITY OF CONTRACTS FOR P.P.P. OF CONTRACTS FOR P.P.P. CRITICALITY

Watch out for perverse incentives Watch out for perverse incentives

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Procuring a PPP
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Presentation Slides

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From a trap to an opportunity From a trap to an opportunity Transition 1998-2008


CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Transition 1998-2008
IG TR ER G

Opportunities galore - Infrastructure Projects

Go out to private sector - Need of the Hour Huge investment needs 500 Billion Dollars in physical Address concerns of stakeholders infrastructure space in 5 years!
Attract investment

Must come together all Stakeholders Address concerns of stakeholders


Government / State Developer / Investor Project Financier / Lender Consumer / User Regulator

IG TR

Infrastructure Provision & Service Delivery

Infrastructure Provision & Service Delivery Willingness to Pay

Private investments Cost Recovery

Presented by Mr. Amitabh Sharma, Partner, JSA.

ER G

Private Willingness investments to Pay Cost Need for Recovery Capacity Building

Need for Capacity Building

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

PPPs in Infrastructure Sector

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

PPPs in Infrastructure Sector


Huge investment needs 500 Billion Dollars in physical infrastructure space in 5 years!

Opportunities galore - Infrastructure Projects Go out to private sector - Need of the Hour
Attract investment Government / State Developer / Investor Project Financier / Lender Consumer / User Regulator

Must come together all Stakeholders

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The Six Roadblocks for PPPs:


1. 2. 3. 4. 5. 6.

Whats stopping the PPPs CRITICALITY OF LEGAL CONTRACTS FOR PPPs Whats stopping the PPPs

Policy and legal gaps inability of legal and The Six Roadblocks for PPPs: regulatory frameworks to adopt innovative PPP models, specially the legislations. 1. sectoral Policy and legal gaps inability of legal and Long gestation periodsregulatory leading to frameworks inadequate to adopt innovative PPP models, specially the sectoral legislations. availability of long-term financing. 2. support Long gestation periods leading to inadequate Lack of institutional and institutional availability of long-term financing. building in managing PPP processes. Lack of institutional Bankability of the 3. project and inadequate support and institutional government support. building in managing PPP processes. 4.bankable Bankability of the project and inadequate Inadequate shelf of infrastructure government projects that can be bid out to the support. private sector. 5. Inadequate shelf of bankable infrastructure Often lackadaisical communication strategy to projects that can be bid out to the private sector. inculcate a sense of acceptance of PPPs. 6. Often lackadaisical communication strategy to inculcate a sense of acceptance of PPPs.

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

PPP Enablers CRITICALITY OF LEGAL CONTRACTS FOR PPPs PPP Policy PPP Enablers
Defines institutional responsibilities, PPP proc esses and proc edures

PPP Policy PPP laws E nabling Rules & Regulations


Establishes legal framework implementing PPP polic y PPP

Defines institutional responsibilities, PPP proc esses and proc edures

laws

Issues for PPP Project Development

VFM Analysis Bidding & selection procedures Mode of project development & implementation R isk allocation, contract design P roject/Contract management Unit

Issues for PPP Project Development

E conomic and Performance Regulation Strategy

Provides more detailed guidanc e on spec ific aspec ts of E PPP conomic polic y

E nabling Rules & Regulations

Establishes legal framework implementing PPP polic y

VFM Analysis Bidding & selection procedures Mode of project development & implementation R isk allocation, contract design P roject/Contract management Unit

and Performance Regulation Strategy

Provides more detailed guidanc e on spec ific aspec ts of PPP polic y

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EFFECTIVENESS OF LEGAL & POLICY FRAMEWORK OBJECTIVES Encourage private sector investors Promote & protect wider public interest (incl. users of infrastructure services)
Provide a foundation for economically efficient provision of infrastructure FORM & SUBSTANCE Are the laws clear, transparent and comprehensive? Appropriate regulations & enforcement mechanism Do the rules & procedures for awarding infrastructure projects and for conduct of authorities reflect best practice?

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Governing Framework Constitution of India

practice?

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CRITICALITY OF LEGAL CONTRACTS FOR PPPs

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Governing Framework Constitution of India

CONSTITUTION OF INDIA The Constitution of India characterised by Its twin DISTRIBUTIONgoals OF LEGISLATIVE POWERS of social and economic justice. Extent of laws
Parliament may enactexecutive, laws for whole or part ofand India legislative judiciary with an inbuilt State legislature may system enact laws whole or part of State of for checks and balancing.

Separation of Powers amongst 3 wings of State

Scheme

Centre-State relations regarding allocation of legislative and executive powers. Union List State List Concurrent List DISTRIBUTION OF LEGISLATIVE POWERS: Articles 245 to Residual power to legislate : Union Parliament 254 read with the Schedule VII Overlap between 3 Lists: Predominance to Parliament EXTENT OF EXECUTIVE POWERS : Articles 73 and 162 Repugnancy: Conflict read between State Law and with Schedule VIICentral Law
Schedule VII lists latter prevails, except under certain circumstances
Where State law on a matter listed in the Concurrent List has received the assent of the President of India

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EXECUTIVE POWERS DISTRIBUTION OF LEGISLATIVE POWERS CONSTITUTION OF INDIA Executive powers of Union government and State government Extent of laws DISTRIBUTION OF LEGISLATIVE POWERS

Constitution of India CONSTITUTION OF INDIA

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

legislative Parliament may enact laws Extent of whole laws or part of India powers are carved outfor

Is the residue of all powers of the state : after the judicial and

Can State may enact laws for whole or part State belegislature exercised directly and freely within the limitations placed Parliament may enact laws of for whole or part of India listed Schedule VII lists ListScheme in Concurrent where States having the Executive power except where it is expressly vested Union Union List State List in the VII Concurrent List Schedule lists Government Functions of Executive not confin ed to implementation laws Residual power to legislate Union Parliament : Union List State List of Concurrent List Overlap between 3 Lists: Predominance to legislate Parliament Residual power to : Union Parliament
made by the Legislature. Is co-extensive with their Legislative powers, except for matters

by the Constitution and existing legislation Scheme State legislature may enact laws for whole or part of State

(Policy, Repugnancy: State Lawin and Law between Overlap between 3 Lists: Predominance to Parliament Orders, Conflict Clarifications, etc.) exists all Central infrastructure latter which prevails, except sectors, may haveunder been certain issued circumstances in exercise of the Repugnancy: Conflict between State Law and Central Law constitutionally granted Executive Powers. Where State law on a matter listed in the Concurrent List latter prevails, except under certain circumstances
has received the assent of the President of India Where State law on a matter listed in the Concurrent List has received the assent of the President of India

THUS, a body of Central and State level executive instruments

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Constitution of India Constitution of India EXECUTIVE POWERS

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Executive powers of Union government and State EXECUTIVE government POWERS Executive powers of Union government and State government Is the residue of all powers of the state : after the judicial and legislative powers are carved out Is the residue of all powers of the state : after the judicial and legislative powers are carved out Can be exercised directly and freely within the limitations placed by the Constitution and existing Can legislation be exercised directly and freely within the limitations placed by Legislative the Constitution and except existingfor legislation Is co-extensive with their powers, matters listed in Concurrent List where States having Executive power Is co-extensive withthe their Legislative powers, except for matters except where it is expressly vested the Union List Government listed in in Concurrent where States having the Executive power where it is expressly vested in the Union Government Functions of Executive except not confin ed to implementation of laws

made by the Legislature. Functions of Executive not confined to implementation of laws made by the Legislature. THUS, a body of Central and State level executive instruments (Policy, Orders, Clarifications, exists in all and infrastructure THUS,etc.) a body of Central State level executive instruments (Policy, Orders, exists in all infrastructure sectors, which may have been issuedClarifications, in exercise etc.) of the sectors, Powers. which may have been issued in exercise of the constitutionally granted Executive constitutionally granted Executive Powers.

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Do we need a PPP Law?


Existing laws: oriented to public ownership
CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Lack of suitable legal-regulatory-policy framework: leads to uncertainties and dwindling confidence of Existing laws: oriented to public ownership investors, and are open to controversy.
investors, and are open to controversy. leading to difficulties in financing

Do we need a PPP Law?

Lack of suitable legal-regulatory-policy framework: Absence of clear guidelines enhances project risk, leads to uncertainties and dwindling confidence of leading to difficulties in financing

Ad-hoc amendments were made to specific laws to Absence of clear guidelines enhances project risk, facilitate PPP:
Not comprehensive being specific to a case Inadequate to address concerns & meet all requirements

Ad-hoc amendments were made to specific laws to facilitate PPP:


Not comprehensive being specific to a case Inadequate to address concerns & meet all requirements

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

7 Steps for a Successful PPP


PPP approval Funding approval Approval Approval to to invite invite EOIs EOIs// issue issue RFP RFP Approval Approval of of preferred preferred bidder bidder Approval Approval of of final final contract contract

The The service service need need

Identify required service needs Define outputs

CRITICALITY OF LEGAL CONTRACTS FOR PPPs


Option Option appraisal appraisal

7 Steps for a Successful Business Business case case PPP


PPP approval Funding approval

The service Review project development options The service need need Evaluate impacts and risks of PPP Option appraisal Confirm PPP offers highest VFM relative
to other options

Identify required service needs Define outputs

Option appraisal

Review project development options Evaluate impacts and risks of PPP

Project Project development development

Develop commercial principles Prepare project brief and draft contract

Business Business case case

Confirm PPP offers highest VFM relative


to other options

Invite EOIs and shortlist Issue RFPs and evaluate bids Bidding Approval Bidding process process Approval to to invite invite Select preferred bidder EOIs / issue RFP

Project Project development development

Develop commercial principles Prepare project brief and draft contract

EOIs / issue RFP

Negotiation and Negotiate and sign contract NegotiationApproval and of Approval of Financial close signature signature preferred preferred bidder bidder

Bidding Bidding process process

Invite EOIs and shortlist Issue RFPs and evaluate bids Select preferred bidder

Monitor and enforce delivery and outputs Approval Contract Approval of of final final Contract Manage contract variations contract management contract Resolve disputes management

Negotiation Negotiation and and signature signature Contract Contract management management

Negotiate and sign contract Financial close

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Monitor and enforce delivery and outputs Manage contract variations Resolve disputes

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Significance of Contract Management

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How to create a Conducive and Facilitative environment for PPPs?


PPP conducive/enabling legal-policy-regulatory framework Proactive measures in structuring, bidding, selection, negotiation and implementation of projects through PPP taken by people with capacity. Stakeholder involvement in critical stages of decision-making to secure effective design and implementation. Optimal allocation of roles, responsibilities and risk in project contracts with suitable vfm (value for money) outcomes.
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Procuring the PPP Procuring the PPP


Pre-feasibility and Feasibility studies Pre-feasibility and Feasibility studies Economic, social, environmental assessments

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

role in ensuring an efficient and Start with a robust standard contract (Besttransparent Practice adapted for selection India) by the contracting authority plays a significant Customized to find service issued and project-specific solutions procedure. Cautions against role in ensuring an efficient and transparent selection The Evolution Paradigm Untrammeled discretion procedure.

Economic, social, environmental assessments - project Preparation of project documentation outline, of pre-selection the RFPs/RFQs, documents, Pre-feasibility and Feasibility studies Preparation project documentation - project instructions to Bidders, draft of the project/concession Economic, social, environmental assessments outline, pre-selection documents, RFPs/RFQs, agreement. The quality and clarity ofthe the documents instructions tothe Bidders, of the project/concession draft Preparation of issued by contracting authority plays a project significant documentation - project role in The ensuring an efficient transparent selection outline, pre-selection documents, the RFPs/RFQs, agreement. quality and and clarity of the documents procedure. instructions to Bidders, draft of the project/concession issued by the contracting authority plays a significant The Evolution Paradigm agreement. The quality and clarity of the documents

Procuring the PPP

Inflexible Start witha robustprescriptive/doctrinaire standard contractcontracts (Best Practice adapted for India) and The Evolution Paradigm Customized to find service project-specific solutions Start with a robust standard contract (Best Practice adapted for India) Cautions against Untrammeled discretion Customized to find service and project-specific solutions Cautions against Inflexible prescriptive/doctrinaire contracts

Inflexible prescriptive/doctrinaire contracts Designing a PPP Project Some Important yet often neglected issues

CRITICALITY OF LEGAL CONTRACTS FOR PPPs Untrammeled discretion

Designing a PPP Project Some Important yet often neglected issues

Rehabilitation andresettlement issues Rehabilitation and resettlement issues Lender Concerns tackled project tackled in project Lender in Concerns agreements agreements Coordination withother state departments Coordination with other state departments Post award - Balance of power between Post award - Balance of power between government and PPP Operator and PPP Operator government Project Agreements Project must address thesemust at the Agreements address these at the outset outset

Land rights/ security creation issues Land tenure OF on LEGAL ForestCONTRACTS land CRITICALITY FOR PPPs Local law permissions and approvals CRITICALITY OF LEGAL CONTRACTS FOR PPPs Rehabilitation and resettlement issues Designing a PPP Project Lender Concerns tackled in project agreements Some Important yet often neglected issues Coordination with other state departments Land rights/ security creation issues Post award - Balance of power between Land rights/ security creation issues government PPP Operator Land tenure onand Forest land Land tenure on at Forest Agreements must address these the land LocalProject law permissions and approvals outset Local law permissions and approvals

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CRITICALITY for OF LEGAL CONTRACTS FOR PPPs Selection Process PPPs Selection Process for PPPs The 2 Es: Economy & Efficiency

Economy: How do you procure the Works/Services at the most advantageous price? select The a2proponent Es: Economy & Efficiency Efficiency: How do you within reasonable Economy: Howmaximizing do you procure the Works/Services at the most time, minimum admin. hurdles, low costs, welfare? advantageous price? Procurement Processes Efficiency: How do you select a proponent within reasonable Competition: Through competition time, minimum admin. hurdles, low costs, maximizing welfare? Rules of game: Competition through fair play and Procurement streamlined/structured procurement processProcesses the Rules of Competition: Through competition Game Rules of game: through fair play and Quality versus Quantity: Not necessarily to Competition generate streamlined/structured procurement process the Rules of numbers but numbers that are manageable - UMPP Game examples Quality versusprocess Quantity: necessarily to generate Integrity: Promoting integrity of selection inNot turn numbers that are manageable - UMPP promoting the communitiesnumbers (the 4th P) but confidence in selection process and public agencies examples Integrity: Promoting integrity of selection process in turn promoting the communities (the 4th P) confidence in selection process and public agencies

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

CRITICALITY OF LEGAL Economy and Efficiencies ofCONTRACTS PPP FOR PPPs Economy and Efficiencies of PPP Achieving the 2Es for Public-Private-People

Participation (4Ps) Procurement Processes Achieving the 2Es for Public-Private-People Corrupt practices: Penal provisions for corruption and conflict Participation of interest in people managing the selection (4Ps) process Procurement Processes
Corrupt practices:information Penal provisions for corruption and conflict Confidentiality: Confidentiality of proprietary of interest in people managing the selection process governing Transparency: Transparency of laws and procedures record Confidentiality: the procurement process keeping Confidentiality of proprietary information Transparency of laws and procedures governing Transparency: Review: To ensure economy, efficiency, integrity and the procurement process record keeping transparency efficient and bipartisan administrative and judicial review of selection is vital decisions Review: To ensure economy, efficiency, integrity and transparency efficient and bipartisan administrative and judicial review of selection decisions is vital

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CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Scaling-up PPPs
Greener pastures for entrepreneurs
Amenability of State/ULBs to engage in commercial dialogues

From concentrated areas to other sectors


Creating level playing field/commercial prudence for other sectors

Alternative funding sources


To augment cost recovery methods

Disputes are costly


Promoting Contract Management Units/Processes As regulatory risk are high, and lengthy court cases

Larger Project Shelf and More Private Investment in PPPs

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Investment in PPPs

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

PPP Case Studies


Tirupur Water Supply Option Analysis: Alandur Drainage Project Service Needs: Karur Toll Bridge Procurement Process: UMPP

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Case Study: Tirupur Water & Case Study: Tirupur Water & Wastewater Treatment Wastewater Treatment

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Available water supplies for many of Indias poorest are often very badly contaminated. For the poorest are often very badly contaminated. For the first time, Tirupur Project enabled local residents to first time, Tirupur Project enabledbenefit local residents to the regional industrys need directly from benefit directly from the regional industrys need for reliable water services. for reliable water services.

Available water supplies for many of Indias

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

In Tamil Nadu state and is Indias largest producer of cotton knitwear accounts for over 75% of Indias knitwear exports. In Tamil Nadu state and is Indias largest producer of cotton Over 2,500 textile business units in a 25-mile radius, earning US knitwear accounts for over 75% of Indias knitwear exports. $1 billion Over 2,500 textile businessunits in a 25-mile radius, earning US Need

Tirupur Water & Wastewater 1

Tirupur Water & Wastewater 1

$1 billion Need

organised Part of the Tirupur Area Development Project. The municipal area lacked an system of drainage, sewage Water treatment plant capacity: 185 million litres/day collection or treatment Wastewater treatment plant capacity: 15 million litres/day Part of the Tirupur Area Development Project. (expandable to 30mld) Water treatment plant capacity: 185 million Plant Area : 5.2 litres/day hectares Wastewater treatment plant 15 million capacity: Estimated cost: $220litres/day million

Heavy Water pollution and acute water scarcity in 1990 The municipal area lacked an organised system of drainage, sewage collection or treatment Heavy Water pollution and acute water scarcity in 1990

(expandable to 30mld) Plant Area : 5.2 hectares Estimated cost: $220 million

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CRITICALITY OF LEGAL CONTRACTS FOR PPPs Tirupur Water & Wastewater2 Tirupur Water & Wastewater2 Project Timeline: Tirupur Area Development Project announced : 1991 Special Purpose Vehicle (SPV) formation in 1995 Tirupur Area Development Project announced : 1991 Tender/contract in 1999 Special Purpose Vehicle (SPV) formation in 1995 Financial closure in March 2002 Tender/contract in 1999 Construction began in October 2002 Financial closure in March 2002 Main civil /mechanical work completed in Dec, 2004 Construction began in October 2002 Water treatment plant commissioned in April, 2005 Main civil /mechanical work completed in Dec, 2004 Tirupur Municipality receives water in August 2005 Water treatment plant commissioned in April, 2005 Wastewater treatment plant completed in Feb, 2006 Tirupur Municipality receives water in August 2005 Wastewater treatment plant completed in Feb, 2006

Project Timeline:

CRITICALITY OF LEGAL CONTRACTS FOR PPPs CRITICALITY OF LEGAL CONTRACTS Tirupur Water & Wastewater 3 FOR PPPs Key Stakeholders: SPV and sponsor Tirupur Water & Wastewater 3

New Tirupur Area Development Corporation Limited (NTADCL) Key Stakeholders: SPV and sponsor Partner institutions NewExporters Tirupur Area Development Tirupur Municipality, Tirupur Association (TEA),Corporation Limited (NTADCL) Infrastructure Leasing and Financial Services (IL&FS), The Tamil Partner institutions Nadu Corporation for Industrial Infrastructure Tirupur Municipality,Development Tirupur Exporters Association (TEA), (TACID), Indo-US Financial Institutions Reform and Expansion Infrastructure Leasing and Financial Services (IL&FS), The Tamil (FIRE) Nadu Corporation for Industrial Infrastructure Development EPC 1 contractor: Hindustan Construction (TACID), Indo-USCo. Financial Institutions Reform and Expansion (FIRE) EPC 2 contractor: Mahindra & Mahindra and Larsen & Toubro (JVC) EPC 1 contractor: Hindustan Construction Co. Operation and maintenance contractor: Mahindra Water Utilities and Larsen & Toubro EPC 2 contractor: Mahindra & Mahindra Ltd - a Mahindra and United Utilities JVC (JVC)

Operation and maintenance contractor: Mahindra Water Utilities Ltd - a Mahindra and United Utilities JVC

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CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Tirupur Water & Wastewater 4


Elements
2006, the Tirupur water system first project in Indias water sector awarded a PPP distinction in the industrial category of the Global Water Awards. Involved the construction of two new treatment works, providing the area with a daily supply of 185 million litres of potable water and the capacity to treat 30 million litres of domestic sewage. Construction of an intake structure downstream of the Bhavani-Cauvery river confluence, 55km of transmission pipeline, a system of 25 reservoirs, a master balancing reservoir and a distribution and sewer network.

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Tirupur Water & Wastewater 5 Funding Structure


A mixture of debt and equity diverse sources including public money, commercial interests, financial institutions and international funding agencies. Assistance came from the Infrastructure Leasing and Financial Services (IL&FS) and from the US Agency for International Development (USAID) with loan guarantees over 30 years for $25 million (US). The project came in on its $220 million budget.
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Service nearly 1,000 textile units BENEFITS OF WATER SUPPLY SYSTEM: Service Over 1.6 million residents in Tirupur and its surrounding areas. Service nearly 1,000 textileunits Daily around 125 million litres of water to the knitwear dyeing and Service Over 1.6 million residents in supply Tirupur and its surrounding areas. industry Daily supply around 125 millionbleaching litres of water to the knitwear dyeing and Daily supply 25 million litres to the Tirupur municipality, which includes bleaching industry slum dwellers Daily supply 25 million litres to60,000 the Tirupur municipality, which includes Daily supply 35 million litres to be shared between the regions remaining 60,000 slum dwellers rural towns, villages and regions settlements. Daily supply 35 million litres to be shared between the remaining BENEFITS OF WASTEWATER TREATMENT SYSTEM: rural towns, villages and settlements. Sanitation scheme includes 88 of the citys designated slum areas. BENEFITS OF WASTEWATER TREATMENT SYSTEM: takes domestic Sanitation scheme includes 88 Wastewater of the citys facility designated slum areas. sewage only and uses an activated sludge system to achieve secondary treatment standards. Wastewater facility takes domestic sewage only and uses an activated Wastewater discharges into Noyyal river. sludge system to achieve secondary treatment standards. Initially built with a capacity of 15 million litres per day, its design allows Wastewater discharges intoNoyyal river. eventual expansion today, double when sewer Initially built with a capacity of 15 million litres per its design allowsprovision is extended to the remaining 15 of the towns 52 wards. eventual expansion to double when sewer provision is extended to the (Source: Water Technology.net) remaining 15 of the towns 52 wards. (Source: Water Technology.net)

Tirupur Water & Wastewater 6 Tirupur Water & Wastewater 6 BENEFITS OF WATER SUPPLY SYSTEM:

CRITICALITY OF LEGAL CONTRACTS FOR PPPs CRITICALITY OF LEGAL CONTRACTS FOR PPPs

VIABILITY in PPP requires VIABILITY in PPP requires Robust service need & options analysis before Robust service need & options analysis before structuring structuring VFM study before structuring VFM study before structuring Innovative project structuring Innovative project structuring Private sector participation is commercially and Private sector participation is commercially and socially prudent socially prudent There is willingness to pay for efficient services There is willingness pay for efficient services to Identify objectives clearly suitability and benefits of Identify objectives clearly suitability and benefits of particular PPP format particular PPP format Do not ignore softer issues (land/environment/forest Do not ignore softer issues et al) (land/environment/forest they are getting harder to crack! et al) they are getting harder to crack!

Tirupur Water & Wastewater 7 Tirupur Water & Wastewater 7

CRITICALITY OF LEGAL CONTRACTS FOR PPPs CRITICALITY OF LEGAL CONTRACTS FOR PPPs

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Case Study on Delhi Privatisation and Judgements 1. ) P S

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E RESENTATION LIDES CASE STUDY ON DELHI PRIVATIZATION & JUDGEMENTS BY MR. MANSOOR ALI SHOKET, PARTNER,JSA POST CLOSURE ASPECTS OF PUBLIC PRIVATE PARTNERSHIP PROJECTS

CRITICALITY OF CONTRACTS FOR P.P.P.

Overview
o PPP Contracts in Infrastructure services : the long term perspective o Case studies to focus on facets of structuring and implementation mechanism :

Delhi Power Sector Reforms (This session) Nathpa Jhakri HEP (Next session)
o Need for an alternate mechanism for contract management and fast track dispute resolution
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CRITICALITY OF CONTRACTS FOR P.P.P.

Long term Perspective


o Award of contract and financial closure of a project is the beginning and not the end in itself
Actual project implementation in PPP mode begins thereafter Parties must perform their contractual roles to ensure effective project implementation Which must result in delivery of efficient and affordable infrastructure services with the vfm as envisaged in a viable and sustainable manner

o The present session and the next presentation is focussed on challenges of contract monitoring and management during project implementation
Construction Phase Operations phase Exit and hand-over phase

CRITICALITY OF CONTRACTS FOR P.P.P.

Presented by Mr. Mansoor Ali Shoket, Partner, JSA.

Long term Perspective

..2

o Each of the phases of project implementation have specific allocation of roles, responsibilities, rights, duties, risk-allocation and incentive structures Criticality of Legal Issues & Contracts for Public Private Partnerships

147

Construction phase leading to completion, testing and commencement of commercial operation : EPC, Technology etc

Commercial operation phase commencing from the capacity

Operations phase Exit and hand-over phase

CRITICALITY OF CONTRACTS FOR P.P.P.

Long term Perspective


o Each of the phases of project implementation have specific allocation of roles, responsibilities, rights, duties, risk-allocation and incentive structures

..2

Construction phase leading to completion, testing and commencement of commercial operation : EPC, Technology etc Commercial operation phase commencing from the capacity testing and service delivery : O&M phase Exit & Hand over phase commencing with termination of the contract/ concession With completion of the term without renewal for the incumbent (including rebidding won by another party) For default Prolonged force majeure exit Other reasons

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CRITICALITY OF CONTRACTS FOR P.P.P. CRITICALITY OF CONTRACTS FOR P.P.P.

o With the long gestation & public o With the long gestation & public goods involved, it is goods involved, it is critical that for each phase the critical that for each phase the following are defined following are defined

Long term Perspective Long term Perspective ..3

..3

The inter-se stakeholder roles, relationships, rights, duties, risks The inter-se stakeholder roles, rights, duties, risks and relationships, incentives and incentives On-going or periodic review of various elements for adjustments On-going or periodic review of various elements for of adjustments or renegotiation or reset the contractual elements like or renegotiation or reset of the contractual elements like
PRICES PRICES SERVICE OBLIGATIONS SERVICE OBLIGATIONS INVESTMENTS INVESTMENTS

In case such periodic or on-going reviews may not be feasible, In case such periodic or on-going reviews mayto not be feasible, periodic re-bidding allow the contractors to adjust to changes periodic re-bidding to allowin the contractors to the adjust to changes the economy or operating environment in the economy or the operating environment Processes for tackling any of the contemplated events as also Processes for tackling any stages of the contemplated of the project events as also stages of the project

CRITICALITY OF CONTRACTS FOR P.P.P. CRITICALITY OF CONTRACTS FOR P.P.P.

Long term Perspective Long term Perspective ..4

..4

o With the long gestation & public o With the long gestation & public goods involved, it is goods involved, it is critical that for each phase the critical that for each phase the following are defined following are defined
Mechanism and fundamental principles governing the handling Mechanism and fundamental principles governing the handling of of
DISPUTES ARISING OUT OF OR IN COONECTION WITH THE DISPUTES ARISING OUT OF OR IN COONECTION WITH THE CONTRACT OR HAVING A DIRECT BEARING ON THE PROJECT CONTRACT OR HAVING A DIRECT BEARING ON THE PROJECT FORCE MAJEURE EVENTS FORCE MAJEURE EVENTS EVENTS CONSTITUTING SUPERVENING IMPOSSIBILITIES EVENTS CONSTITUTING SUPERVENING IMPOSSIBILITIES ANY UNANTICIPATED EVENTS ANY UNANTICIPATED EVENTS ANY UNDERSERVED MATERIAL ADVERSE EFFECT ON THE PROJECT ANY UNDERSERVED MATERIAL ADVERSE EFFECT ON THE PROJECT FUNDAMENTALS FUNDAMENTALS

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CRITICALITY OF CONTRACTS FOR P.P.P.

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Delhi Power Reforms 1


o 1999 : Delhi Vidyut Board was an unviable vertically integrated utility business with CRITICALITY OF CONTRACTS FOR P.P.P.
High losses Poor service Annual funding of over Rs.2400 crore from the public finances

Delhi Power Reforms 1

o 1999 : Delhi Vidyut Board was an unviable vertically o 1999-2001: GoNCTD undertook reform of power sector integrated utility business with

Constituted the Delhi Electricity Regulatory High losses Commission Restructured the power sector to Poor service FUNCTIONALLY UN-BUNDLE D.V.B. INTO A HOLDING CO. Rs.2400 WITH 6 crore from the public finances Annual funding of over
OPERATING COMPANIES (2 GENCOS, 1 TRANSCO AND 3 DISCOMS) 1999-2001 : GoNCTD undertook CONVERT THE DISCOMSo INTO JOINT VENTURES WITH SALE AT PAR reform of power sector 51% SHAREHOLDING AND MANAGEMENT CONTROL CEDED TO THE Regulatory Commission Constituted the Delhi Electricity SELECTED BIDDER

Restructured the power sector to The Delhi Electricity Reform Act, 2000 was enacted

FUNCTIONALLY UN-BUNDLE D.V.B. INTO A HOLDING CO. WITH 6 OPERATING COMPANIES (2 GENCOS, 1 TRANSCO AND 3 DISCOMS) CONVERT THE DISCOMS INTO JOINT VENTURES WITH SALE AT PAR 51% SHAREHOLDING AND MANAGEMENT CONTROL CEDED TO THE CRITICALITY OF CONTRACTS FOR P.P.P. SELECTED BIDDER

Delhi Power Reforms 2

The Delhi Electricity Reform Act, 2000 was enacted

o GoNCTDs restructuring plan for DVB envisaged


Bidding on AT&C loss reduction levels CRITICALITY OF CONTRACTS FOR P.P.P. There was no revaluation of the assets of DVB or bidding on the basis of share transfer value sale was as a going concern 2 To rationalize tariff, it was proposed that the tariff hike over 5 years was to be around 44% (10%+10%+10%+5%+3%) o GoNCTDs restructuring plan for DVB envisaged Transition support of Rs.3450 crores was given to Transco as Bidding on AT&C loss reduction levels deferred soft loan over 5 years tariff There no revaluation of the assets of DVB or bidding on the There would be uniform retail inwas Delhi basis of share transfer value sale was as a going concern Bidders were assured of ROE of 16% over 5 years To rationalize tariff, it was proposed that the tariff hike over 5 years was to be around 44% (10%+10%+10%+5%+3%) To facilitate restructuring & privatization Transition support of Rs.3450 crores was given to Transco as GoNCTD notified proposed statutory transfer scheme & deferred soft loan over 5 years statutory Policy Direction Normative There would be uniform tariff in Delhi DERC issued the Bulk Supply & Tariff Order toretail give a full idea of the elements of tariff during the 5 year transition, Bidders were assured of ROE of 16% over 5 years including opening AT&C loss levels

Delhi Power Reforms

o To facilitate restructuring & privatization

GoNCTD notified proposed statutory transfer scheme & statutory Policy Direction DERC issued the Bulk Supply & Normative Tariff Order to give a full idea of the elements of tariff during the 5 year transition, including opening AT&C loss levels

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CRITICALITY OF CONTRACTS FOR P.P.P.

o As on 01.07.2002, DVB restructured in terms of


Statutory Transfer Scheme which came into effect thereby immediately unbundling DVB Simultaneously the international competitive bidding which had been conducted earlier resulted in 51% equity & management control of 3 Discoms (deemed licensees) transferred to the successful private bidder Discoms got clean opening balance sheets Residuary/contingent liabilities were vested with GoNCTD owned Holding Co DVB employees were given continued service with minimum protection of the pre-existing service conditions / benefits Performance Based Regulatory regime was introduced at Discom level qua AT&C loss reduction target: To get 50% incentive for over-achievement beyond target To fund revenue shortfall due to unachieved AT&C loss reduction
CRITICALITY OF CONTRACTS FOR P.P.P.

Delhi Power Reforms 3

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Delhi Power Reforms

149

o In 6 years, NDPLs AT&C Losses now stand at 17% (32% reduction over 6 years) with targets being over-

To get 50% incentive for over-achievement beyond target To fund revenue shortfall due to unachieved AT&C loss reduction
CRITICALITY OF CONTRACTS FOR P.P.P.

Delhi Power Reforms

o In 6 years, NDPLs AT&C Losses now stand at 17% (32% reduction over 6 years) with targets being overachieved by all 3 Discoms
NDPL brought losses down by around 25% in 5 years against target of 17% : 50% of efficiency gains went back to reduce tariff Since 1% annual loss in Delhi ~ Rs.90 crores, this overachievement helped keep tariff hike below levels planned in FRP ~ 2002 to 2006: only 23% hike vs. 39.6% hike in 4 years only Capping of drain on public finances
From Rs.2400 cr in 2001 ($533 mn) to Rs.700 cr ($156 mn) p.a. Phase-out in 2007: except direct subsidy u/Sec. 65 of Electricity Act

In 2007 Delhi migrated to data-intensive PBR and MYT from 2002 scenario of un-audited accounts since 1992 and no FAR Rationalized Tariff : by reducing cross subsidy Performance accountability and bench-marking inter-se utilities

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Delhi5 Power Reforms 5 Delhi Power Reforms


o Yet there is consumer dis-satisfaction re. tariff hike o Yet there is consumer dis-satisfaction re. tariff hike
FRP not publicized by GoNCTD/DERC before privatization FRP not publicized by GoNCTD/DERC before privatization Good work of cutting back target hike by 40% (23% hike in 4 Good work of cutting back target hike by 40% (23% hike in 4 years in stead of projected hike of 39.4%) went unrecognized years in stead of projected hike of 39.4%) went unrecognized GoNCTD did not enact anti-theft law or deploy dedicated force GoNCTD did not enact anti-theft law or deploy dedicated force leading to tariff/subsidy burden on paying consumers/tax-payers leading to tariff/subsidy burden on paying consumers/tax-payers ~ 50% loss @ Rs.90 crores = Rs.Rs.4500 cr ($1 bn) annually ~ 50% loss @ Rs.90 crores = Rs.Rs.4500 cr ($1 bn) annually National peak-load shortage (14%) & base-load shortage (9%) National peak-load shortage (14%) & base-load shortage (9%) No new capacities added by Govt nor permitted to be added by No new capacities added by Govt nor permitted to be added by private investors (Tata Power 1000 mw Bawana) private investors (Tata Power 1000 mw Bawana)

CRITICALITY OF CONTRACTS FOR P.P.P. CRITICALITY OF CONTRACTS FOR P.P.P.

o Consumer dis-satisfaction re. power-cuts in Delhi o Consumer dis-satisfaction re. power-cuts in Delhi

Delhi7 Power Reforms Delhi Power Reforms


o

CRITICALITY OF CONTRACTS FOR P.P.P. CRITICALITY OF CONTRACTS FOR P.P.P.

o o

EXPERT DISPUTE RESOLUTION EXPERT DISPUTE RESOLUTION o In the very first year of the transition, the regulator DERC ruled In the very first year of the transition, the regulator DERC ruled that the depreciation rate applicable to Discoms would be 3.75% that the depreciation rate applicable to Discoms would be 3.75% p.a. (order dated 26.06.2003) p.a. (order dated 26.06.2003) o Aggrieved by the order, NDPL went to DERC for review of the order Aggrieved by the order, NDPL went to DERC for review of the order since it had been assured before bidding stage that the since it had been assured before bidding stage that the depreciation rate applicable to Discoms would be 6.69% p.a. depreciation rate applicable to Discoms would be 6.69% p.a. o DERC rejected the Review Petition by an order dated 25.11.2003 DERC rejected the Review Petition by an order dated 25.11.2003 o Appeal filed before the Appellate Tribunal for Electricity after it Appeal filed before the Appellate Tribunal for Electricity after it became operational in September 2005 invoking became operational in September 2005 invoking
Doctrine of pacta sunt servanda Doctrine of pacta sunt servanda Doctrine of legitimate expectation and vested rights Doctrine of legitimate expectation and vested rights

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CRITICALITY OF CONTRACTS FOR P.P.P.

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Delhi Power Reforms

Delhi Power 8 o Appellate Tribunal upheld the challenge and ruled Reforms that DERC had wrongfully denied the Discoms the assured EXPERT DISPUTE RESOLUTION depreciation rate of 6.69% p.a. causing unlawful loss o Appellate Tribunal upheld the challenge and ruled that o DERC challenged the order of had Tribunal in Second Appeal DERC wrongfully denied the Discoms the assured to the Supreme Court depreciation rate of 6.69% p.a. causing unlawful loss o The Supreme Court referred matter to the Tribunal o DERCthe challenged the order of Tribunal in Second Appeal for a more detailed reasoning for rejecting the to the Supreme Court contentions of DERC o The Supreme Court referred the matter to the Tribunal o Tribunal held fresh hearings passed detailed orders for a and more detailed reasoning for rejecting the which were placed backcontentions before Supreme Court and of DERC matter heard on merits o Tribunal held fresh hearings and passed detailed orders which were placed back before Supreme Court and matter heard on merits
CRITICALITY OF CONTRACTS FOR P.P.P.

EXPERT DISPUTE RESOLUTION

CRITICALITY OF CONTRACTS FOR P.P.P.

Delhi Power Reforms

DelhiSupreme Power Reforms 9 o While upholding the Discom challenge Court held that: EXPERT DISPUTE RESOLUTION
DERC had wrongly denied the Discoms the assured depreciation o While upholding the Discom challenge rate Today, public-private participation is a key element to develop DERC had wrongly denied the Discoms the assured depreciation infrastructure in our economy rate The object behind fixing the transition of 5 years (including Today, participation ROE of 16% and depreciation rate ofpublic-private 6.69% p.a.) was to impart is a key element to develop in our economy certainty and consistency to infrastructure investors before bidding. deal The object behind fixing the transition of 5 years (including Such transition is a package which must not be interfered ROE of 16% and depreciation rate of 6.69% p.a.) was to impart with as that would violate legitimate expectation and and consistency to investors before bidding. unlawfully deny assured ROEcertainty to the investors Such transition is a package deal which must not be interfered with as that would violate legitimate expectation and unlawfully deny assured ROE to the investors

EXPERT DISPUTE RESOLUTION

CRITICALITY OF CONTRACTS FOR P.P.P.

held that:

Supreme Court

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CRITICALITY OF CONTRACTS FOR P.P.P.

Delhi Power Reforms

10

EXPERT DISPUTE RESOLUTION o 20 year timeline is now changed to 2 years, as was seen in the present case
26.06.2003 : Tariff Order (DERC) 25.11.2003 : Review Petition disposed of by DERC September 2005 : Appeal filed once Appellate Tribunal for Electricity was functional (delay of 21 months due to law) 24.05.2006 : Appellate Tribunal for Electricity disposed of Appeal 15.02.2007 : Supreme Court disposed of DERC Appeal

Thus excluding the 21 months delay in constitution of Appellate Tribunal, time taken for adjudication was a mere 23 months

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Delhi Power Reforms

11

LESSON EXPERT DISPUTE RESOLUTION

for adjudication was a mere 23 months

CRITICALITY OF CONTRACTS FOR P.P.P.

Delhi Power Reforms

11

LESSON EXPERT DISPUTE RESOLUTION o Complex policy, financial and regulatory issues now being resolved expeditiously
Adjudication by statutory multi-disciplinary expert regulators With appeals to similar multi-disciplinary expert appellate body

Such that only substantial questions of law go to the Supreme Court Civil courts and even High Courts normally do not interfere with such expert adjudication
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CRITICALITY OF CONTRACTS FOR P.P.P.

Appellate Tribunal of Electricity The Indian Experience


Appellate Tribunal for Electricity (ATE) constituted
- 2 Judicial and 2 Technical members: each bench to have at least one member from each wing - Time bound decision-making (180 days) prescribed by law - Additional power to issue general directions and orders to all regulators for proper exercise of statutory powers - Established: August 2005; Commenced hearings: October 2005 - Decided appx 570 cases (appeals, petitions, review petition) in 19 months, virtually all within stipulated timeframe - Significant reduction in new cases: 205 in 5 months (~492:2005), 276(2006), 192(2007) & 29 in 3 months (~116:2008) {figures as in April 2008} - Very few decisions (perhaps 40) challenged in Supreme Court of which most not interefered with.

ATE also Hydrocarbon appellate tribunal since 2007

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Case Study on Nathpa Jhakri Hydro-electric Project 1. ) P S


F RESENTATION LIDES

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CASE STUDY II : NATHPA JHAKRI HYDRO-ELECTRIC PROJECT (NATHPA JHAKARI HYDRO ELECTRIC PROJECT (1500 MW) KINNAUR, HIMACHAL PRADESH, INDIA BY MR. DHIRENDRA NEGI, PARTNER, JSA

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Project
Construction of 1500 MW hydro-electric dam across river Satluj Project divided into four packages 1.0, 2.1, 2.2 & 3.0 The Case Study pertains to Contract for the package 1.0 Focus of the Case Study is on Delay and Dispute Resolution
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CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Scope of work - Contract 1.0


River Diversion Construction of 60.5m high, 170.20 m long at the top Dam Four Intake Structures Construction of four underground Desilting Chambers each 525m long, 16.31m wide at centre and 227.5m deep Construction of Silt Flushing Tunnel Bid price : Rs. 439.38 crore

Presented by Mr. Dhirendra Negi, Partner, JSA.


CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Criticality of Legal Issues & Contracts for Public Private Partnerships

Key Milestones

153

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Key Milestones
Acceptance of bid Contract Agreement Scheduled time for completion Scheduled date of completion
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: 26 May 1993 : 05 August 1993 : 56 months

: 04 April 1998

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CRITICALITY OF LEGAL CONTRACTS FOR PPPs

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Status on Completion Status on Completion


Date of completion : completion 20 June 2004 Date of : 20 June 2004
Time for Time for completion : completion 131 months: 131 months

Time Overrun Time Overrun : 75 months : 75 months


Price on completion : Rs.635.80 crore Price on completion : Rs.635.80 crore

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Execution of Works

Execution of Works

Two major areas / paths (i) Dam (ii) Desilting Chambers Delay along both the paths

Two major areas / paths (i) Dam (ii) Desilting Chambers

Causes of delay which generally affected the works : Delay along both the paths (i) generally roads Causes of delay which affected the works : (ii) power (iii) geological conditions : unstable slopes & underground rocks

(i) roads (ii) power

(iii) geological conditions : unstable &of instructions / drawings (iv) delay / changeslopes in issue underground rocks (iv) delay / change in issue of instructions / drawings

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Delay - CRITICALITY Dam OF LEGAL CONTRACTS FOR PPPs Delay - Dam


The first planned activity after mobilization was excavation on the first riverplanned banks activity after mobilization The was excavation on the river banks Excavation was to scheduled to commence from 01 November 1993 Excavation was to scheduled to commence

from 01 November 1993 Actual commencement on the left bank commenced on 01 October 1997 (on critical Actual commencement on the left bank path) i.e. after 47 commenced months on 01 October 1997 (on critical path) i.e. after 47 months

CRITICALITY OF LEGAL CONTRACTS FOR PPPs CRITICALITY OF LEGAL CONTRACTS FOR PPPs Delay - Dam Delay - Dam

Left bank

Left bank Highly unstable slope taken Highly unstable slope In 1995, decision to install cable anchors on the area above Dam. In 1995, decision taken to install cable anchors on the area above Dam. To achieve stabilization, following required:
Stabilization of overburden slope To achieve stabilization, following required: Approach road to the top of Dam Stabilization of overburden slope Construction of benches Approach road to the top of Dam Installation of cable anchors Construction of benches Installation of cable anchors
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CRITICALITY OF LEGAL CONTRACTS FOR PPPs


FLOW CHART OF ACTIVITIES ON LEFT BANK OF DAM UPTO START OF EXCAVATION
24.5

Overburden Stabilization
10.2 Mo

24.5 Mo

34.7

15.11.95

22.09.96

Instruction for Slope stabilization

0.0

26.0 26.0 Mo

Const of Road

32.0

01.11.93 Baseline Date

30.12.95
6.0 Mo

30.06.96 Completed to 105m d/s of Dam axis

1st bench
2.0 Mo

34.7 Cable Anchors

Installation of

45.5

Complete Installation
47.0

22.9.96
10.8 Mo

17.08.97
1.5 Mo

30.09.97 Start of Dam Excavation

Assembling
32.4

27.0

Selection of equipment

28.5

Transportation to Site

29.01.96 Issue of Cable Anchor V.O


1.5 Mo

16.03.96 Purchase Order


3.9 Mo

15.07.96 Arrived at 1.2 Mo Indian Port

24.08.96 Arrival at Site

Time Lost = 47 Months

1.0 Mo 33.6

Instructions for the approach road

Criticality of Legal Issues & Contracts for Public Private Partnerships CRITICALITY OF LEGAL CONTRACTS FOR PPPs

155

Delay - Dam

Time Lost = 47 Months

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Delay - Dam
Increase in Dam height After the original works were complete, Contractor was asked to raise the height of the dam by 5 metres Delay in instructions Contractor had to remove and rebuild some of the work already completed Total 10 months were spent for increasing the dam height
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CRITICALITY OF LEGAL CONTRACTS FOR PPPs CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Dispute Resolution Dispute Resolution


DRB proceedings DRB proceedings Dispute A special Additional Dispute Resolution Board A special Additional Resolution Board (ADRB) constituted in (ADRB) constituted in December 2001 to December 2001 to examine contractors EOT claims examine the contractors EOTthe claims Recommendations Recommendations issued by ADRB in issued by ADRB in December 2004 December 2004 Both the parties sought review and the Both the parties sought review and the decision in review2005 passed in February 2005 decision in review passed in February

CRITICALITY OF LEGAL CONTRACTS FOR PPPs CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Dispute Resolution Dispute Resolution


Arbitration proceedings Arbitration proceedings
Both the parties Both the parties did not accept the ADRBdid not accept the ADRB recommendations in fullrecommendations in full Arbitral tribunal constituted in April 2005 Arbitral tribunal constituted in April 2005 Award passed in May 2008 Award passed in May 2008 Contractor awarded extension of time and costs on Contractor awarded extension of time and costs on account of delay account of delay Settlement between the parties payment made to Settlement between the parties payment made to the Contractor in November 2008 the Contractor in November 2008

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CRITICALITY OF LEGAL CONTRACTS FOR PPPs

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Allocation of CRITICALITY DelayOF LEGAL CONTRACTS FOR PPPs Allocation of Delay


Delay on the critical path can be (loosely) apportioned as follows : on the critical path can be (loosely) Delay apportioned Total delay : 75 months as follows : Total delay : 75 months Natural : 18 months Natural : 18 months Manmade* : 57 months Manmade* : 57 months

*The expression is used to suggest that events were controllable or avoidable with human interference and does not *The expression is used tosignify suggest that events were controllable
responsibility or accountability or avoidable with human interference and does not signify responsibility or accountability

CRITICALITY OF LEGAL CONTRACTS FOR PPPs CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Principal Delay Event Delay Event Principal

Unstable slope on the left bank Unstable slope on the left bank Contract documents included geological survey Contract documents included geological survey report report Tender documents stipulated inspection of stipulated site by inspection of site by Tender documents the bidders the bidders But contractor held entitled for extension of time for extension of time But contractor held entitled plus associated costs. plus associated costs. The risk sought to be transferred came back the The risk sought to be to transferred came back to the Owners doorstep Owners doorstep
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CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Risk Allocation
Competing interests :
Contractor - More payment for as little risk Owner - Less payment and transfer of as much risk

Signing of the contract cannot ensure that all the risk of failure is transferred to the Contractor Contractors perspective
reduce overall bidding costs insufficient means for survey financial capability blind reliance upon the inspection report intent to claim extra works in litigation

Transfer of a risk it does not end it.

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CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Reducing the Risk

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Reducing the Risk


From transferring to reducing the risk Balancing of interests Realization that public interest is at stake Approach the last P of PPP

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Contract Documents for PPPs Contract Documents for PPPs


Contract documents should imbibe and Contract documents should imbibe reflect the spirit and of partnership reflect the spirit of partnership PPP a joint venture and not a competition of PPP a joint venture and not a competition of interests interests Confidence building measures Confidence building measures Avoiding skewed safety mechanisms to meet Avoiding skewed safety mechanisms to meet the uncertainty the uncertainty Recognition of interests of both the parties Recognition of interests of both the parties

CRITICALITY OF LEGAL CONTRACTS FOR PPPs CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Dispute Resolution Process Dispute Resolution Process


Case Study - large number of small claims Case Study - large number of small claims were settled as per DRB recommendations were settled as per DRB recommendations But for EOT claims three years were spent But for EOT claims before three years DRB were spent before DRB Arbitration claims took another three years Arbitration claims took another three years It took more than 10 years (from the date of It took more than 10 years (from the date for of the Contractor to scheduled completion) scheduled completion) forits the Contractor to realize money realize its money
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CRITICALITY OF LEGAL CRITICALITY CONTRACTS FOR PPPs OF LEGAL CONTRACTS FOR PPPs

Different Approach Required? Different Approach Required?

Dispute Resolution Dispute Resolution


DRB

DRB

DRB (or DAB) now well effective recognized but claims largely for small largely effective for small claims Parties contest like before a judicial Parties contest like before a judicial authority authority Tendency decision rather than solution Tendency decision rather than solution Time consuming Recommendations not binding Time consuming Recommendations not binding

DRB (or DAB) now well recognized but

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Dispute Resolution

Different Approach Required? Arbitration

Dispute Resolution Arbitration

Different Approach Required?

Often retired judges or practicing lawyers constituting tribunals

General tolawyers apply laws of procedure Often retired judges or approach practicing constituting tribunals Intermediate interference through court process General approach to apply laws of procedure Award susceptible to challenge before court
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interference through court

Award susceptible to challenge before court


CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Dispute Resolution A New Approach


Risks are inherent in PPP and infrastructure projects disputes are likely and must be provided for Expeditious and efficient dispute resolution is vital for preserving the value of money and for realizing new opportunities Existing reconciliatory or adjudicatory mechanism has limited efficacy Specialized tribunal for claims above a minimum value, while excluding civil court jurisdiction Statutory obligation upon tribunal for time bound disposal of claims Appeal to Supreme Court

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Presentation Slides
Knowledge Series Legal

2. B) PRESENTATION SLIDES 2. B) PRESENTATION SLIDES CASE STUDY ON SINGAPORE PPPS AND SINGAPORE INSTITUTE OF CASE STUDY ON SINGAPORE PPPS AND SINGAPORE INSTITUTEPPP OF CASE TECHNICAL EDUCATION TECHNICAL EDUCATION PPP CASE
CRITICALITY OF LEGAL CONTRACTS FOR PPPs CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Case Study on Singapore Institute of Technical Education


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New campus for Institute of Technical Education New campus for Institute Technical Education 3 of schools Business and Services; Info3 schools Business and Services; Info- Technology; and Engineering Communications Communications Technology; and Engineering 10 hectare vacant site 10 hectare vacant site Facilities for 7,200 full-time students, 8,100 part-time Facilities for 7,200 full-time students, part-time students and 8,100 630 staff students and 630 staff Facilities include training rooms, workshops, laboratories, Facilities include training rooms, workshops, laboratories, lecture theatres and sports facilities lecture theatres and sports facilities

The Project (1)

The Project (1)

CRITICALITY OF LEGAL CONTRACTS FOR PPPs CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Procuring authority Institute of Technical Education (a Procuring authority Institute of Technical Education (a body corporate) body corporate) Concessionaire Gammon Capital Concessionaire Gammon Capital 27 year concession 27 year concession Capital cost approximately S$300 million Capital cost approximately S$300 million Construction contractor Gammon Construction Construction contractor Gammon Construction Facilities manager United Premas Facilities manager United Premas Target completion date mid-2010 Target completion date mid-2010

The Project (2)

The Project (2)

Presented by Methew Bubb, Ashurst.

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CRITICALITYFOR OF LEGAL CRITICALITY OF LEGAL CONTRACTS PPPs CONTRACTS FOR PPPs

Singapore Singapore PPP Market PPP Market


Early adopter of PPP model in South-East Asia Policy framework Ministry of Finance PPP Handbook Policy framework Ministry (2004)of Finance PPP Handbook (2004) PPP to be considered for projects over S$50 million PPP to be considered for projects S$50 million First wave of over projects Desalination Plant, NEWater Plant and Incineration First wave of projects Desalination Plant,Plant NEWater Plant and Incineration Plant wave ITE College West, Sports Hub, MoE Second Prime, SMU Sports Hub, MoE Second wave ITE College West, Prime, SMU
Early adopter of PPP model in South-East Asia

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Procurement Process (1)

Procurement Process (1) markets

Followed process typically used in well-established PPP 2-stage tender process (1) Pre-qualification (PQ); (2)

Followed process typically used in well-established PPP Invitation to Tender (ITT) markets PQ (July 2006) purpose was to shortlist bidders on 2-stage tender process (1) (PQ); (2) basis ofPre-qualification experience, capability and proposed approach Invitation to Tender (ITT) to the project ITT (October 2006) - pre-qualified PQ (July 2006) purpose was to shortlist bidders on bidders submitted detailed bids, design, financing plan, service basis of experience, capability and including proposed approach provider methodologies and mark-up of draft Project to the project Agreement ITT (October 2006) - pre-qualified bidders submitted Knowledge Series Legal |55 detailed bids, including design, financing plan, service provider methodologies and mark-up of draft Project Agreement CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Procurement Process (2)


3 pre-qualified bidders Gammon Capital; Babcock & Brown Consortium; VisionOne Consortium (led by United Engineers) Preferred bidder (Gammon Capital) announced in November 2007 Further negotiations between Gammon Capital and ITE Finalisation of sub-contracts with Gammon Construction and United Premas Arrangement of financing from 5 banks HSBC, SMBC, Dexia, DZ and BTMU Financial close in August 2008

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Project Structure (1)


Design, build, finance and operate (DBFO) concession Follows typical social infrastructure PPP model Project Agreement between ITE and new project company (PPP Contractor) established by Gammon Capital PPP Contractor provides the facilities and services in return for a monthly (unitary) payment availability not demand based Unitary payment commences after completion of construction and is subject to deductions based on availability and performance Site leased to PPP Contractor by ITE for nominal rent

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CRITICALITY OF LEGAL CONTRACTS FOR PPPs CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Project Structure (2) Project Structure (2)

Construction obligations under passed downProject by PPP Agreement Contractor to Gammon passed down by PPP Contractor to Gammon Construction under Design and Build (D&B) Contract Construction under Design and Build (D&B) Contract Operational obligations passed down by PPP Contractor to United Premas under long term facilities Operational obligations passed down by PPP Management (FM) Contract Contractor to United Premas under long term facilities Financing provided to PPP Contractor from Gammon Management (FM) Contract Capital (equity) and lenders (senior debt) Financing provided to PPP Contractor from Gammon Capital (equity) and lenders (senior debt)

Construction obligations under Project Agreement

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

CRITICALITY OF LEGAL CONTRACTS FOR PPPs


ITE Contractual Matrix

Contractual Matrix
Dir ect Ag r ee me nt

Project Agreement

ITE Gammon Capital


D

Shareholder finance

PPP Contractor
Dir ect Ag r ee me nt

Loan Facilities Agreement Security Documents

Lenders
Direct Agreements from sub-contractors

Project ntrac Co Agreement &B

Guarantees

Gammon Capital
B D&

Shareholder finance

PPP Contractor
Gammon Construction
Guarantees

Loan Facilities Agreement Security Documents Parent Companies

Ma na ge Faci me liti nt es Co nt ra ct

Lenders
United Premas
Direct Agreements from sub-contractors

ntr Co

act

Ma na ge Faci me liti nt es Co nt ra ct

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Gammon Construction

Parent Companies

United Premas

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CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Project Agreement Key Issues

Based upon UK PPP model project agreement Status ofand ITE PPP Contractor Risk allocation between ITE Payment and deductions Based upon UK PPP model project agreement Delay events and liquidated damages Status of ITE Termination events Payment and deductions Compensation on termination Delay events and liquidated damages Termination events Compensation on termination

Risk allocation ITE and PPP Contractor Project Agreement between Key Issues

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Sub-contracts Key Issues

Knowledge Series Legal Caps on liabilities Lifecycle maintenance Termination events

Risk allocation between PPP Contractor and key subcontractors Sub-contracts Key Issues Structured as pass-down of PPP Contractors obligations under Project Agreement Risk allocation between PPP Contractor and key sub Liquidated damages under D&B Contract contractors Performance and parent guarantees Structured as pass-down of PPP bonds Contractors obligations under Project Agreement Caps on liabilities Lifecycle maintenance Liquidated damages under D&B Contract Termination events Performance bonds and parent guarantees
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CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Finance Documents Key Issues


Conditions to drawdown Cover ratios Repayment and pre-payment Representations, warranties and covenants Events of default Restrictions on shareholder distributions Singapore security issues Direct Agreements with ITE and key sub-contractors

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Key Takeaways
Clear procurement process with realistic timeframe Scope of project and tender documentation incentivises competitive and deliverable bids from private sector Risk allocation between public and private sector is fair and appropriate helps project bankability Balancing the interests of all parties procuring authority (and its stakeholders), sponsors, lenders and subcontractors Flexible approach by all parties to changing market conditions, e.g. construction market and credit market Long-term partnership
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Ashurst an international law firm

Ashurst an international law firm

Over 1000 lawyers including 220 partners Over 1000 lawyers including 220 partners Recognition of our success has included the following awards:has included the following awards: Recognition of our success Law Firm of the Year 2007 The Legal Awards LawBusiness Firm of the Year 2007 The Legal Business Awards Infrastructure Team of the Year 2006 The Lawyer Awards Infrastructure Team of the Year 2006 The Lawyer Awards PPP Law Firm of the Year Infrastructure PPP Law Firm of the Year Infrastructure Journal Awards 2006 and 2005 Journal Awards 2006 and 2005 Project Finance2008 Law Firm of Finance the Year (Singapore) Project Finance Law Firm of the Year (Singapore) - ACQ Magazine 2008 - ACQ Finance Magazine

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Ashurst in India

Ashurst in India
Licensed liaison office in New Delhi since 1994.

Licensed liaison office in New Delhi since A dedicated India1994. team across Asia, Europe and the Middle East comprising over 40 and English Indian qualified lawyers. A dedicated India team across Asia, Europe the and Middle East comprising over 40 English and Indian A strong trackqualified record oflawyers. successfully concluded deals in India. A strong track record of concluded deals in India. successfully Lawyers who understand the legal, regulatory and cultural issues involved in doing business in India.issues Lawyers who understand the legal, regulatory and cultural Advice on strategy and policy in India, based on the extensive involved in doing business in India. knowledge and experience members of the group. Advice on strategy and policy in India, based on theof extensive A liaison office in New Delhi that provides up-to-date information, and knowledge and experience of members of the group. research and analysis on the legal, business and political scene in India. A liaison office in New Delhi that provides up-to-date information, and research and analysis on the legal, business and political scene in India.
Peers note Ashursts huge commitment to India and good transactional base. Chambers Asia Pacific 2009

Peers note Ashursts huge commitment to India and good transactional base. Chambers Asia Pacific 2009

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Presentation Slides

Risk Perspectives Private Sector Supplier and Financiers


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3 B). PRESENTATION SLIDES RISK PERSPECTIVES PRIVATE SECTOR SUPPLIERS ISABEL EVANS, BIRD & BIRD
AND

FINANCIERS BY

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Organisation of the bid process


Is there a clear and achievable procurement timetable?
Timetable too ambitious Delay/deal drift
NPfIT: 1.2 bn procurement in 6 months FSTA: 10 years in procurement LUL: estimated 2 years actual 3 years Bid costs can be significant: LUL actual bid costs 134 - 116m per bidder (estimated 12 -15m per bidder) Authority advisers costs 109m

Does the bid process involve multiple preferred bidders? Bid costs ramp up after preferred bidder stage Will costs be reimbursed?

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CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Organisation of the bid process


Understanding Authority requirements Are the requirements well developed? Have all project risks been clearly identified? Is the proposed risk allocation transparent? Are there affordability constraints?
Authority requirements May change due to affordability constraints May change due to revisions in scope

Presented by Mr. Isabel Evans, Bird & Bird.


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Organisation of the bid process

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Organisation of the bid process


Availability of DD regarding the proposed site, planning consents and legacy equipment Can all "risks" be quantified? Completeness of DD information Problem: LUL acknowledged that it would be difficult to determine the residual life and maintenance costs of certain fixed assets. Solution: contingencies allocated and reviewed at the periodic review (7 years) "risk sharing" between the Authority and contractor. Certainty regarding the level of service charges during the term of the project Charging mechanism "availability" or "demand" based Benchmarking, market testing and indexation

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OrganisationOrganisation of the bid process of the bid process


Key issues Key issues
Certainty regarding Opex and Capex during Certainty regarding Opex and Capex during the term of the project the term of the project Clarity as to what is in "scope" Clarity as to what is in "scope" Certainty regarding the period over which the Certainty regarding the period over which the unitary charge is payable unitary charge is payable When does the payment of the unitary FSTAof 27 years When does the payment the unitary charge commence? - 30 years charge commence?LUL Is the project term adequate to facilitate NPfIT - to facilitate 10 years Is the project term adequate repayment of the Capex facility? repayment of the Capex facility?

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FSTA LUL NPfIT -

27 years 30 years 10 years

OrganisationOrganisation of the bid process of the bid process


Certainty regarding dispute resolution procedures Certainty regarding dispute resolution procedures Are there adequate procedures to resolve disputes? Are there adequate procedures to resolve disputes? Step-in: can the Authority/funder step-in? Step-in: can the Authority/funder step-in? Step-up: are subcontractors required to step-up? Step-up: are subcontractors required to step-up? Certainty regarding the vires of the public Authority Certainty regarding the vires of the public Authority Court challenges can add to time and money delays Court challenges can add to time and money delays
Challenges to the LUL PPP raised bidder fears Challenges the LUL PPP raised bidder fears about the Government's commitment to theto PPP about the Government's commitment to the PPP Uncertainty regarding the level of Opex, Capex and/or service charge will increase costs and reduce VfMUncertainty regarding the level of Opex, Capex and/or service charge will increase costs and reduce VfM

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Alignment of contractor/funder risks


CRITICALITY OF LEGAL CONTRACTS FOR PPPs

PFI project finance is usually split between:


Senior debt funding Equity Debt to equity ratio

Alignment of contractor/funder risks

Provided on a limited recourse basis through bank or bond market PFI project finance is usually split between: Equity/shareholder loans
Senior debt funding Typically 90:10 Equity Debt to equity ratio Provided on a limited recourse basis through bank or bond market Equity/shareholder loans Typically 90:10

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Payment mechanisms - key features


Authority objective to ensure VfM and effective incentivisation

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Payment mechanisms - key features

Contractor objective to ensure payment mechanism is objective with reasonable rectification Authority periods objective to ensure VfM and effective incentivisation

Contractor objective to ensure payment mechanism is objective No service no payment with reasonable rectification periods Payment is linked to level of service Payment is made in arrears be No service no payment Payment adjustments should proportional Payment is linked to level of service Payment should not be fixed Payment is made Payment should not guarantee the senior debt in arrears Payment adjustments should be proportional Payment should not be fixed Payment should not guarantee the senior debt

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CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Payment mechanisms - structure


Availability based on place/unit availability and incorporates provision of ongoing service Accommodation projects Full provision of the overall requirement deductions made depending on what areas are unavailable Accommodation projects/transport Availability and usage with minimum "take or pay" Training related projects Volume/demand payment mechanism Shadow tolls/tolls Third party revenue arrangements Light rail, schools, waste housing projects M6 Toll road

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Payment mechanisms - calibration

Light rail, schools, waste housing projects

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Payment mechanisms - calibration


Calibration methodology Are deductions proportional? What level of service is required to achieve 100% payment? Standards Do standards incentivise performance? Time periods for rectification Are rectification periods achievable? "Unavailable" but used If a facility is "unavailable" but nevertheless used (eg; a prison cell or classroom) deductions should reflect the degradation in service. Weightings Are deductions capped? Ratchets Are they effective to incentivise rectification?

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CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Payment mechanisms - flexibility

Payment mechanisms - flexibility


Is the contractor exposed to Authority imposed changes? Does the project agreement provide for volume/value thresholds? Does the project agreement provide for annual reviews? Is the contractor exposed to Authority imposed changes? Does the project agreement provide for volume/value thresholds? Does the project agreement provide for annual reviews?

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Payment mechanisms - requirements


Are all performance criteria clear and objective? To what extent are criteria qualitative? Are appropriate safeguards in place to test qualitative criteria?

Payment mechanisms - requirements


Are all performance criteria clear and objective? To what extent are criteria qualitative? Are appropriate safeguards in place to test qualitative criteria?

LUL: ambience - quality of environment for the passenger surveys undertaken by the "mystery shopper" and survey weighed by station and line

LUL: ambience - quality of environment for the passenger surveys undertaken by the "mystery shopper" and survey weighed by station and line

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Payment mechanisms - availability


CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Payment is triggered by "availability" therefore the definitions must be objective, measurable and reasonable

Payment mechanisms - availability

Accommodation/equipment considered unavailable where Payment is triggered by "availability" therefore the definitions Specified level of access is not available must be objective, measurable and reasonable Failure of power, gas, electricity Failure of ICT Accommodation/equipment considered unavailable where Threats to health Specified level of access is not available Failure of power, gas, electricity Deductions for non-availability weighted by reference to critical Failure of ICT services Threats to health Deductions for non-availability weighted by reference to critical services

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Payment mechanisms - performance CRITICALITY OF LEGAL CONTRACTS FOR PPPs requirements Payment - performance Is the performance criteria reasonablemechanisms and objectively measurable? requirements
100% standard is appropriate for hospitals and prisons but may not be achievable in all cases. Is the performance criteria reasonable and objectively Can funders be satisfied that, other than in measurable? circumstances that are unlikely occur, the unitary 100%to standard is appropriate for hospitals and prisons charge will be adequate to cover the debt structure? but may not be achievable in all cases. Can the contractor be satisfied that the unitary charge is Can funders be satisfied that, other than in sufficient to allow for the expected equity return? circumstances that are unlikely to occur, the unitary charge will be adequate to cover the debt structure? Can the contractor be satisfied that the unitary charge is sufficient to allow for the expected equity return?

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CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Service commencement
Certainty regarding acceptance testing/ services commencement Grace periods for rectification Long stop dates Compensation regime in relation to delays to service commencement Compensation events (time and money) Relief event (time) Force majeure

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CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Changes to project and law


Changes in project scope Mechanisms for managing project change Pricing change Changes in law Financier/Authority concerns Allocation of risk Sharing risk Force majeure

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Earlydefault termination default Early termination


Authority default Contractor default Force majeure Corrupt gifts/fraud

CRITICALITY OF LEGAL CONTRACTS FOR PPPs CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Authority default Contractor default Force majeure Corrupt gifts/fraud

Authority voluntary termination Authority voluntary termination

CRITICALITY OF LEGAL CONTRACTS FOROF PPPs CRITICALITY LEGAL CONTRACTS FOR PPPs

Early termination Earlydefault termination default


Compensation on early termination Compensation on early termination
Authority default/voluntary termination Force majeure Corrupt gifts/fraud Contractor default Full recovery Authority default/voluntary Full recovery termination Repayment of debt and equity at par Force majeure Repayment of debt and equity at par Repayment of debt Corrupt gifts/fraud

Repayment of debt

Market value assessed through Contractor default Market value assessed through retendering retendering

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Contractor default Contractor default

Dispute resolution procedures Dispute resolution procedures Authority step-in Bank step-in Sub-contractor step-up Authority step-in Bank step-in Sub-contractor step-up

CRITICALITY OF LEGAL CONTRACTS FOR PPPs CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Points to take away Points to take away

Negotiate a robust contract Negotiate a robust contract Ensure that the circumstances in which project revenues are Ensure that the circumstances in which project revenues are payable are clear and can be tested objectively payable are clear and can be tested objectively To the extent that the Authority can make service deductions To the extent that theand Authority can ensure that all relevant mechanisms are clear capable of make service deductions ensure that all relevant mechanisms are clear and capable of objective testing objective testing

D. About the firm

D. About the firm


Recognised as a "firm to watch" for India related work India Business Law Journal 2008

Recognised as a "fir to watch" for Ind related wo

India Business La Journal 20

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Contrasts Between Traditional and PPP/PFI Contrasts between traditional Procurement Contracts procurement contracts and PPP or PFI
procurement contracts
Colin Hall

Presentation Slides
Mainstreaming PublicPublic-Private Partnerships

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Introduction
The search for VFM Early detailed planning Breaking the traditional connections:
Funders and Contractors' interests more aligned Procurer and Funder's interests no longer confused

Whole life costing: a new tool

Knowledge Series Legal

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Contract overview
Familiarity with traditional routes Standard construction contracts e.g: FIDIC red book EPC / turnkey projects e.g: FIDIC silver book

Presented by Colin Hall, Bird & Bird.

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CRITICALITY OF LEGAL CONTRACTS FOR PPPs

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Price adjustment provisions

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Price adjustment provisions


Price adjustments Standard FIDIC - limited grounds Amended FIDIC - grounds often widened PPP / PFI contracts - grounds often restricted Final account effectively negotiated at the outset under PPP/PFI unlike traditional route where final account is negotiated after completion.

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CRITICALITY OF LEGAL CONTRACTS FOR PPPs

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Claims culture
Traditional contracting Price adjustments negotiated after the event Contractor controls the information

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Claims culture

PPP / PFI route Price adjustment risks identified before contract Both parties have equal knowledge PPP / PFI route

Traditional contracting Price adjustments negotiated after the event Contractor controls the information

General effect Both parties have equal knowledge PPP / PFI price certainty; maybe not lower price

Price adjustment risks identified before contract

General effect PPP / PFI price certainty; maybe not lower price

CRITICALITY OF LEGAL CONTRACTS FOR PPPs


CRITICALITY OF LEGAL CONTRACTS FOR PPPs The paymaster / contractor matrix

The paymaster / contractor matrix

Traditional route Funder and contractor have different route interests Traditional PPP / PFI Contractor may be more aligned with Funder PPP / PFI The construction sub-contractor possibly part consortium Contractor may beof more aligned with Funder The construction sub-contractor possibly part of consortium All "delivering" parties possibly part of consortium
All "delivering" parties possibly part of consortium Funder and contractor have different interests

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The paymaster / procurer matrix

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

The paymaster / procurer matrix

Appetite for risk Appetite for risk Traditional route procurer funds his own project Traditional route procurer funds his own project PPP / PFI procurer must persuade separate funder of financial viability PPP / PFI procurer must persuade separate funder of financial Early identification of risks Procurers think carefully about their needs of risks Early identification Movement towards outcome-based specifications Procurers think carefully about their needs

viability

Movement towards outcome-based specifications

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

CRITICALITY OF LEGAL CONTRACTS FOR PPPs Progress and delay

Progress and delay

In the UK 70% compares with 24% Traditional route Damages

In the UK 70% compares with 24% Traditional route

PPP / PFI: Damages Deferred payments Reduced payments PPP / PFI: Damages

Deferred payments Knowledge Seriespayments Legal Reduced Damages


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Pause for reality check


PPP / PFI Reduces delays Reduces financial claims Creates more certainty Not all improvements are a result of PPP / PFI Other new contracting routes Partnerships and framework contracts Technology has played its part

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CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Quality
Different attitudes Contractor's interest ends with the final account PPP / PFI - contractor lives with what he has built Likelihood of better value for money (VfM) Some authorities require reference to standard whole life cost measuring tools

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"Completion"

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

"Completion"

Traditional route: meaning and effect of completion PPP / PFI: meaning and effect of handover / cutover / service commencement Traditional route: meaning and effect of completion More fundamental effects PPP / PFI: meaning and effect of handover / cutover / service Payment and therefore Contractors profit stream does not run commencement until handover work PPP/PFI. Fundamental financial More effects consequences, as compared to fundamental the traditional route.

Payment and therefore Contractors profit stream does not run until handover work PPP/PFI. Fundamental financial consequences, as compared to the traditional route.

CRITICALITY OF LEGAL CONTRACTS FOR PPPs

Contrasts
CRITICALITY OF LEGAL CONTRACTS FOR PPPs
Key messages
Relationships different Funder / contractor Procurer / funder Time from inception to service commencement

Contrasts
Key messages

Relationships different Need for careful early preparation Funder / contractor


Opportunity for good quality projects / funder Procurer

Time from inception to service commencement Need for careful early preparation Criticality of Legal Issues & Contracts for Public Private Partnerships Opportunity for good quality projects

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Key Contacts
Government of India Govind Mohan Joint Secretary Department of Economic Affairs Ministry of Finance Tel: + 91 11 2309 3881 Email: govind.mohan@nic.in Asian Development Bank Ashok Sharma Director, Financial Sector, Public Management and Trade Division South Asia Department, Asian Development Bank, Tel: + 632 632 6755 Email: asharma@adb.org J. Sagar Associates Amit Kapur, Senior (Partner) amit@jsalaw.com Mob: +91 98993 81000 Vishnu Sudarsan (Partner) vishnu@jsalaw.com Mob: +91 98107 99290 Mansoor Ali Shoket (Partner) mansoor@jsalaw.com Mob: +91 98102 00686 Ashurst Matthew Bubb (Partner) Singapore, ashurst T: +65 6221 2214 E: matthew.bubb@ashurst.com Bird & Bird Isabel Evans, Bird & Bird Direct: +44 (0)20 7415 6040 isabel.evans@twobirds.com DLA Piper Damian Mcnair Head of Projects, Finance and Projects DLA Piper Middle East LLP, Dubai Mobile: +971 50 550 8449 Email: damian.mcnair@dlapiper.com Gurmeet Kaur Partner, Finance and Projects Group DLA Piper Middle East LLP, Dubai Mobile: +971 50 459 8664 Email: gurmeet.kaur@dlapiper.com White & Case K. Rattay Tony Holland Head of Finance, Finance & Projects DLA Piper Middle East LLP, Dubai Mobile: +971 50 625 6917 Email: tony.holland@dlapiper.com Sharon Fitzgerald Partner, Finance and Projects Group DLA Piper UK LLP, Edinburgh Mobile: +44 7968 559 160 Email: sharon.fitzgerald@dlapiper.com Colin Hall, Bird & Bird Direct: +44 (0)20 7415 6633 colin.hall@twobirds.com Harvey weaver (Counsel) Tokyo,ashurst T: +81 3 5405 6200 E: harvey.weaver@ashurst.com Dhirendra negi (Partner) dhirendra.negi@jsalaw.com Mob: +91-91810706495 Amitabh Sharma (Partner) amitabh@jsalaw.com Mob: +91 98184 77640] Anouj Mehta Senior Infrastructure Finance Specialist and Focal Point for PPPs (India) 4, San Martin Marg, Chanyakapuri, new Delhi Tel: 91 11 2410 7200 Email: anoujmehta@adb.org Aparna Bhatia Director, PPP Cell Department of Economic Affairs Ministry of Finance, new Delhi Tel: + 91 11 2309 4443 Email: aparna.bhatia@nic.in

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Knowledge Series