How to accelerate the process and reduce costs for public-private partnerships? Recommended PPP contractual provisions

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All of the parties involved in public-private partnership (PPP) transactions – including both governments and project developers – frequently express concern over the time and expense involved in creating the legal agreements that are at the center of every PPP project. Everyone recognizes the importance of PPP contracts, since they are the documents that set out how the partnership will work – but there are constant calls for making the contractual drafting process quicker and less expensive.

In response, World Bank Group (WBG)’s PPP Group has launched the Recommended PPP Contractual Provisions Initiative, with the aim of developing recommended language on certain key provisions found in virtually every PPP contract. Under this initiative, the WBG’s PPP Group has produced the Report on Recommended PPP Contractual Provisions, 2015 Edition (the 2015 Report).  The 2015 Report was recently submitted to, and endorsed by, the G20 Infrastructure and Investment Working Group – the committee established by the G20 Group of major economies that focuses on the financing of infrastructure projects.

Key Contractual Provisions
The 2015 Report deals with eight critical topic areas that appear in almost every PPP contract, whether it is a report concession agreement, a highway build-operate-transfer (BOT) contract, or a generation facility power purchase agreement:

  • Force Majeure (how to deal with events, such as earthquakes and floods, beyond the control of the parties);
  • Material Adverse Government Action (what happens if a change in government policy adversely affects the project);
  • Change in Law (what happens if a change in the legal framework alters the rights and responsibilities of the contracting parties);
  • Termination Payments (what compensation should be provided if one of the parties unexpectedly terminates a PPP agreement prematurely);
  • Refinancing (if a project is refinanced after it has begun operations, how are the benefits of that refinancing shared between the parties);
  • Lender’s Step-in Rights (what rights does the lender have to ‘step-in’ and replace a project developer in order to save a failing project);
  • Confidentiality and Transparency (how much of the information in a PPP agreement can and should be disclosed to the public); and
  • Dispute Resolution (how do the parties to a PPP contract resolve the disputes which will inevitably arise during the life of a long-term project).
National and International Approaches
Many countries (such as India, South Africa, and the United Kingdom) have had considerable success in developing standardized PPP contracts for use in their own countries, with different types of contracts for each sector. However, there are considerable problems in trying to do this on an international basis, given the variety of PPP transactions globally; the different legal, regulatory, financial and institutional frameworks which exist in various countries; and the need to have tailor-made provisions to deal with the individual characteristics of complex PPP projects.

At the same time, though, the WBG believes that there are certain provisions in almost all PPP agreements on which there is a strong consensus of opinion as to what constitutes internationally-accepted good practice. The 2015 Report is an attempt to capture that consensus, and reflect it, in the form of recommended contractual language, accompanied by explanatory notes.

Recommended – Not Mandatory
It should be stressed that the language set out in the 2015 Report is not meant to be prescriptive. In other words, the recommended provisions are not mandatory clauses which must be used whenever a project is being supported by the WBG or any other organization. Instead, the recommended provisions are just that – they are recommendations on contractual language that has been found to be appropriate in many PPP transactions in a number of countries.

An Evolving Consensus, and an Invitation to Comment
The 2015 Report is based on an initial draft prepared by the Paris-based international law firm of Gide, which was commissioned by the WBG using a grant provided by the multi-donor Public-Private Infrastructure Advisory Facility (PPIAF). That initial draft was discussed at the PPP Days event which was held in London on June 16-17, 2015, and the draft subsequently benefited from a number of contributions by law firms, expert commentators, and by members of the G20. The draft report was also extensively reviewed by lawyers within the WBG.

The 2015 Report is meant to be a first step in an ongoing process, with further editions being published as consensus continues to develop around the provisions described in the document and other provisions commonly found in PPP agreements. As part of that process of consensus-building, the WBG is working with the Monetary Authority of Singapore and with the G20’s Global Infrastructure Hub to encourage the dissemination and discussion of the 2015 Report among PPP stakeholders.

On October 19, 2015, the Government of Singapore and the WBG co-sponsored an Infrastructure Finance Industry Roundtable event in Singapore, at which government officials, project developers, lenders and advisors considered the 2015 Report.  Similar events are now being planned in other regions.

The 2015 Report is available for public comments on the website of the Public-Private Partnerships in Infrastructure Resource Center (PPPIRC). All comments, suggestions, and other feedback on this initiative would be most welcome.
 
 

Authors

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Predrag Cvetkovic
December 21, 2015

Dr Predrag Cvetkovic,
Full professor for Interantional Trade and Business Law,
Faculty of Law, University of Nis
Republic of Serbia
[email protected]
00381 64 833 0 276
Remarks as regard to the “Report on the Recommended Contract Provisions”
REMARK 1.
It could be useful to include the reference to the subsidiary application of internationally recognized rules of contract law, such as UNIDROIT Contract Principles of International Commercial Contracts (http://www.unidroit.org/publications/513-unidroit-principles-of-interna…, versions 1994, 2004, 2014; hereinafter UNIDROIT Contract Principles). By this way the relevant “international” environment for the PPP agreement could be formed. This contributes to the more flexible framework for the interpretation of terms and standards provided in the recommended Contract Provision.
REMARK 2.
In the part “DEFINITIONS” MAGA is defined as “adverse government action”. The proposal is to illustrate the application of the “adverse government action standard” by referring exempli causa to the definition of political risks contained in the MIGA Convention (Convention establishing the Multilateral Investment Guarantee Agency; see Article 11 which lists the Currency Transfer, Expropriation and similar Measures, Breach of Contract and War and Civil Disturbance as the examples of risk covered by MIGA guarantee scheme).
REMARK 3:
Regarding the hardship clauses which is mentioned only one time in Article 1. 1 (“Force Majeure provisions should be distinguished from hardship clauses 4 , which deal with unexpected circumstances under which performance becomes more onerous without being impossible.”
The suggestion is the following one: there is the reason to include hardship clauses in the recommended contract provision. The justification for the previous remarks comes from the features of PPP agreements: those agreements are relational. The theory of relational contracts was developed as a result of recognizing the existence of the so-called ‘incomplete” contracts. As compared to the “complete” contracts, the parties to “incomplete” contracts define only the key elements of the contract; the other elements are subject to silent/tacit agreement on future adjustments. The parties of incomplete contract may not predict the changes which might stem from altering the context of the contractual relation. Incomplete agreements define the transaction in which both parties agree that it is impossible or economically inefficient (to an extent which makes the contract meaningless) to ex ante define future difficulties and circumstances of the contract. The key to reading a relational contract is an attitude that a contractual relation changes alongside with altering the context of the contractual relationship. The relation-driven nature of a contract is the subject matter of analysis of the theory of relational contracts. The author of this remarks considers PPP agreement as the typical example of relational contract. Namely, as typical relational contract, PPP agreement is is based on the expectations that the revision of the agreement is will be needed.
Therefore:
-the recommended provisions should incorporate the definition of hardship institute
-the hardship clauses should be interpreted narrowly.
REMARK 4
In “Definition”, PPP Contract is defined as
“the long-term agreement between the Contracting Authority and the Private Partner, for providing a public asset or service, in which the Private Partner bears significant risk and management responsibility, and remuneration is linked to performance”.
Further, on page 12 second paragraph it is stated that
“In those PPP Contracts, where the Private Partner takes commercial risk on private users (such as toll roads), the occurrence of a Force Majeure Event which makes it impossible to perform will result in loss of revenues to the Private Partner. In other PPP Contracts, where the Contracting Authority has payment obligations to the Private Partner for services provided or infrastructure made available, the occurrence of a Force Majeure Event will not give the Contracting Authority relief from its payment obligation, even if the Private Partner is relieved from performance. However, to reflect the risk sharing principle set out above, the Contracting Authority may consider reducing the amount of such payments to an amount equal to the debt service and an amount sufficient to cover fixed operating costs of the Project (but not variable cost or profit)”.
If the starting point is that PPP contract has among its main characteristics the remuneration based on the performance (as defined in “Definition”), then it is hard to justify the different treatment of
a) PPPs where Private partner takes commercial risks and collects the taxes and revenues (and where he losses the whole revenue which includes not only profit but also “fixed operation costs and the debt service”), and
b) PPPs where the Contracting Authority has payment obligation directly to the private partner.
In the case a) the Contracting authority does not share risk with Private partner; in the case b) it does.
The recommendation is that contractual provisions should provide for the mechanism of risk sharing between the parties which provides equal treatment for private partner in both types of PPPs (as distinguished under a and b of the previous paragraphs): namely the definition of PPP contract is unique and “remuneration is linked to the performance”, without concerns of the type of PPP. This principle should be also reflected in the case of risk sharing for the case of Force Majeure”.
REMARK 5
As the standard of “reasonability” takes place in numerous terms of recommended provisions, the suggestion is to establish the path for the interpretation of “reasonability” as the interpretative tool. The useful example in this sense is the definition of “reasonability” presented in Convention on International Sale of Goods”(CISG). See:
a) CISG: “Article 8 (1) For the purposes of this Convention statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was. (2) If the preceding paragraph is not applicable, statements made by and other conduct of a party are to be interpreted according to the ¬understanding that a reasonable person of the same kind as the other party would have had in the same circumstances. 4 United Nations Convention on Contracts for the International Sale of Goods (3) In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties”.
b) UNIDROIT Contract Principles of International Commercial Contracts: “The commercial contract should be used in broadest possible sense including concession agreements” (See comment on Preamble, point 2. paragraph 2). In the Preamble of UNIDROIT 1994 edition (paragraph 11), it is stated that Principles are “imposing standards of reasonable behavior”. See also Art. 1. 8. of UNIDROIT Contract Principles.
REMARK 6
In the part “Definition of Applicable Law” on page 20 (second paragraph) there is the dilemma if the applicable law should be depended on the changes in international conventions should be included. It is stated that this issue is relevant where
“the PPP Project is heavily regulated by international treaties (such as is the case with airports – that are subject to a considerable number of international regulations). In this context, the Contracting Authority could take the view that it has no control over international regulations and might, therefore, not be willing to accept the risk associated with a change in such regulations”.
The suggestion is to establish the nexus between the Applicable law and the so called “better of treatment clause”. The example of this clause is presented in
a) German Model of Bilateral Investment Treatiy:
“Article 7 Other provisions
(1) If the legislation of either Contracting State or international obligations existing at present or established hereafter between the Contracting States in addition to this Treaty contain any provisions, whether general or specific, entitling investments by investors of the other Contracting State to a treatment more favourable than is provided for by this Treaty, such provisions shall prevail over this Treaty to the extent that they are more favourable.
b) Article 16 of USA Model of Bilateral Investment Treaty
“Article 16: Non-Derogation
This Treaty shall not derogate from any of the following that entitle an investor of a Party or a covered investment to treatment more favorable than that accorded by this Treaty: 1. laws or regulations, administrative practices or procedures, or administrative or adjudicatory decisions of a Party; 2. international legal obligations of a Party; or 3. obligations assumed by a Party, including those contained in an investment authorization or an investment agreement”.
REMARK 7
In the part “Inclusion of Changes of Interpretation or Application of the Applicable Law” it is stated that
“In many jurisdictions, a change in interpretation of Applicable Law could have a major impact on the PPP Project and investors will demand protection not only against adverse modifications of the legal framework but also against changes in the application of a legal framework that has not otherwise been modified. Therefore the definition of "Change in Law" should include any modification in the interpretation or application of any Applicable Law, including a modification of the interpretation by local courts.
The suggestion is the following: the possibility of including the modification in the interpretation and application of applicable Law should be interpreted restrictively: otherwise the burden of possible interpretative changes is imposed on contracting authority, even in the case when the change in interpretation is justified by the evolution of legal approaches (this evolution is even more probable by PPP agreement as the relational contracts with long-term nature: see Remark No. 3 in this document).