CLAIMS IN PPP CONTRACTS

PIAC – RAMALLAH, PALESTINE

Dr. Mohammad T. Alsayyed
15/5/2017
 Public – Private Partnership (PPP) or P3

PPP is a government or public service or private business venture funded and operated
through a partnership of the government and one or more private sector companies.
It involves a contract between the public authority and a private company.

Authority ensures the:

Fair competition and transparency

Private company or party assumes the

Financial, technical and operational risks in the project
PPP helps make the most of scarce public funding and introduce private sector technology
and innovation to provide better quality public services through improved operational
efficiency.
PPP also allows for the better allocation of risks between the public and private entities
taking into account their capacity to manage those risks.
Both parties should have the will for a
sustainable and trustful partnership
Use of the strength of both – the public
and the private sector
Share of investment risks,
responsibilities and reward between
the partners on the basis of a clear
defined and specified contract
A law is needed by the Government (Council of Ministers) to:
Set out the tendering and bidding process applicable to
PPPs including the way tenders are to be issued, the process
of submitting and accepting bids and the rules and
regulations of PPPs.
Set out conditions related to the management of these
projects.
Allow private sector to suggest to the authority some
projects according to specific procedures, but not
necessary that the project/s will be awarded to who
suggested them.
Limit the maximum period of time allowed for such
projects.
Main characteristics of PPPs
Allocation of risk between the partners as key consideration
1. Examination of all relevant factors and issues
2. Chance of the application of PPP to various types of government services and duties
3. To whom the risks generally borne by the public sector are transferred.
4. PPP does not necessarily mean that the private partner assumes all the risks, or even
the major share of the risks linked to the project.
5. The precise distribution of risk is determined case by case, according to the respective
ability of the parties concerned to assess, control and cope with this risk.
Strong support of all involved parties
Qualified civil servants familiar with the new approach of PPP
Qualified permanent and reliable contact person
 1.DBFO (Design, Build, Finance, Operate)
2.BOT (Build, Operate, Transfer) (ownership back to public
sector)

3.BOO (Build, Operate, Own) (ownership stays with private

investor)

When is PPP appropriate?

When major projects are being planned, consideration is to be given
to whether public-private partnership (PPP) would produce better
results than traditional procurement.
From problem to PPP project
The potential contracting out of PPP projects starts with a ‘competitive dialogue’,
designed to devise a response to a problem for which no long-term solution is
currently available. For example, solid waste service.
The procurement guidelines contain detailed information on the project. This allows
market participants to decide if they are interested in the project.
The government and market participants eventually decide on one of the solutions
proposed by the private sector. A good dialogue leads to an efficient solution to the
problem at a reasonable price. For the company, such a project is an attractive
prospect that supplies work and income in the long term (20 to 30 years).
Once the dialogue is complete, a number of parties are asked to submit a tender.
Then it is decided who is to be awarded the contract, based on predetermined
criteria.
The firm that implements the project is responsible for the design, implementation
and prefinancing of the project.
Advantages of PPP
PPP projects have a number of advantages:
 In the case of PPP, all parties do what they are good at. The
government and the companies involved together ensure the best
possible allocation of tasks and risk.
 PPP projects are more commonly completed on schedule than
projects contracted out in the traditional way.
 In the case of PPP, the government gives companies the freedom to
invest in new technologies and innovative solutions. The total costs
over the lifetime of the project are thus lower.
 The government knows exactly how much it will have to pay, and
when. This is useful for financial planning.
Potential advantages to the host government of using the BOT
approach
Use of private sector financing to provide new sources of capital, which reduces
public borrowing and direct spending.
Ability to accelerate the development of projects.
Use of private sector capital, initiative and know-how to reduce project
construction costs, shorten schedules and improve operating efficiency.
Allocation to the private sector of project risk and burden that would otherwise
have to be borne by the public sector.
The involvement of private sponsors and experienced commercial lenders, which
ensures an in-depth review and is an additional sign of project feasibility.
Technology transfer, the training of local personnel and the development of
national capital markets.
In contrast to privatization, government retention of strategic control over the
project, which is transferred to the public at the end of the contract period.
MANAGING RISKS
What problems may arise in the course of a contract?
Well prepared and implemented projects will have a higher chance of avoiding
and/or dealing with problems that may arise.
Experience demonstrates that for both conventional and PPP procurements poor
drafting of the contract/performance requirements and/or poor contract
management can lead to problems downstream.
Many countries were fortunate in being able to learn from the years of PPP
experience elsewhere in order to minimize the likelihood of suffering such
problems.
The key in entering into contracts of all kinds is to be aware of such possibilities,
take expert advice, and manage the contract negotiation processes accordingly.
As with any project involving investments, the due diligence, risk allocation, and
negotiation processes inherent in a PPP contract give the opportunity for many
potential problems to be identified and resolved prior to contract finalization.
Some potential problems and the means of addressing them are:

Benefits not being shared with the Government

Rigorous negotiation by the Government for terms to protect the Government’s interests
and adequate supervision
Bottom line considerations assuming disproportionate importance
Avoidance of underbidding by consortia, equitable variation conditions
Business culture co-existing uncomfortably with public service
Identification of consortia with a clear commitment to public service
Buy-out costs of replacing a poorly performing operator
Rigorous selection of consortia, early identification and rectification of poor performance
Disruption to service, and costs incurred, when exercising step-in rights
Rigorous selection of consortia, maintenance of an appropriate level of market
competition, adequate contingency arrangements
 High financing costs
Appropriate allocation of risk and innovative financing arrangements
Inadequate accountability
- Rigorous selection of consortia and adequate supervision
Lack of competition
Encouragement of the market through market testing/development and
well managed contracting processes
Lack of flexibility, especially over the longer term
Appropriate contractual change management/variations procedures
Liquidation and use of company structure to avoid liability
Rigorous selection of consortia, strong step-in rights, linking payment to
performance, requirement for parent company guarantees, additional
security etc.
Lock-in to an unsatisfactory contract - leading to costs of exercising a break
clause
Rigorous output/outcome based definition of requirements and contractor
selection
Loss of control
Clear service definition, effective contract management, early identification and
rectification of poor performance
Unavailability of experienced/qualified PPP contractors
Encouragement of the market through well managed contracting processes and a
continuing deal flow
Unmitigated risks due to inappropriate allocation
Management of risk allocation, drawing on expert advice
Unreliable levels of service
Rigorous selection of consortia and adequate supervision.
How does the PPP approach address the management of risks?
一 Risks relate to the occurrence of events whose consequences will
have an effect on the outcome, either positive or negative, of a
project. Exposure to risks arises in all projects, whatever the
approach. PPPs provide opportunities for the better management of
such risks by allocating and sharing them appropriately between
the public and the private sectors. It is important that the allocation
of risks is defined in a clear, unambiguous contract that sets out the
risks, who takes them, and what are the consequences of and
actions to be taken when the risk event actually occurs.
Generically the key types of risk may be classified as follows:
• Demand risks: the risk that the projected numbers of users of a service will not
materialize with consequent impact on revenues; or that the number of users may be
excessive with consequent impact on costs
• Design and construction risks: the risk that there will be failure to meet performance
specifications; and/or there will be cost and/or time overruns
• Operating and maintenance risk: the risk that operational failures or costs and/or
maintenance costs are greater than anticipated
• Technology/obsolescence risk: the risk that the assets employed in the project will
cease to be the best way of delivering the required service
• Finance risk: risk associated with the cost and availability of funds for the project
• Legislative risk: the risk that changes in legislation will affect the costs/viability of the
project
• Approval risks: the risk that necessary approvals are difficult to obtain or are not
forthcoming
• Hazard risks: the risk of accidents or natural disasters.
Which party should carry the risks associated with the project?
The theoretical golden rule is that the party best able to manage each
risk should carry that risk. In practice, the allocation of risks is always
subject to what could be achieved in competitive deal-making. In most
projects this will mean that the client department retains some risks,
the private company carries other risks, and some risks are shared.
Generally the client department would be expected to bear any risk
arising from variations required by the Government, or discriminatory
or specific changes in the law. The private company would be expected
to carry or share all other risks including general business risks. The
willingness of a bidder to accept risks and the proposals for mitigating
them can be an element in assessing and ranking bids.
Can all the risks be passed to the private company?
Appropriate allocation of risk between the public and private sectors is a key
requirement for the achievement of value for money. Experience elsewhere
indicates that risk transfer should be optimal, not maximum (see Figure 6). If
the government seeks to impose excessive risk transfer on the private
company this will result in the private company charging an excessively high
premium; simply refusing to accept the risk altogether (i.e. it will not put in a
bid); or failing to meet contract obligations. Some risks are exceptionally
unmanageable or unpredictable; the Government cannot simply expect to
pass off such risks to the private sector without having to pay an exceptional
and probably unacceptable price. It is important to identify these latter risks
and to make clear to bidders that the Government will at least share them so
that bid prices are not over-inflated to cover them. The Government should
take into account the political risk of failure in allocating risk between the
public and private sectors.
What common risk allocation mistakes are made?
A common mistake is for a department to allocate a risk to a private company,
and then take back the risk by excessive interference in the private sector’s
management of that risk.
It is legitimate and necessary for the department to monitor a private company’s
performance, and to satisfy itself that the agreed outcomes/outputs are
delivered, and to take necessary remedial measures (see Chapter 8). It must be
remembered that in allocating a risk to a private company, Government is paying
the private company to perform the task. There is no merit in paying someone
else to do a job whilst still doing it oneself.
How can a monetary value be placed on risk?
Risk is a possibility, not a certainty, which makes it difficult to clearly identify and estimate
its costs. Conventionally, departments have not identified or managed risks in a
sophisticated way. In contrast, the private sector has long included risk considerations and
costing in project work.
The appropriate method for quantifying risks will depend on the availability of relevant
information. The best approach is to use empirical evidence. Analytical procedures based on
expertise and experience may also be used. When neither is available, common sense
estimates may be used. Some risks will be difficult to quantify. They should not, however, be
ignored, but reconsidered and refined over time. The general methodological principles are:
• Assess the likelihood of a risk crystallizing
• Assess the cost if it does occur
• Assess the range of cost impacts (in the form of a frequency distribution, if possible)
• Assess the expected value of the risk.
• External advisors can advise departments on financial evaluation of risk.
Can insurance be used to manage risk?
Generally, risk is best managed by a party able to influence relevant events. As
mentioned above, in practice the allocation of risks is always subject to what
could be achieved in competitive deal-making. Insurance may be used to
mitigate a particular risk, e.g. the risk of disruption to services caused by
natural events. However, the risk remains to be borne by one party or the other
irrespective of insurance cover, either through the cost of the event or the cost
of insurance. The difference in treatment of insurance may be one of the
adjustments to be made in ensuring competitive neutrality
What if the project asset is destroyed due to an insurable event?
The private company must reinstate the project facility and any insurance proceeds
must be used for this purpose. However, there will be inevitable tension that arises
between the external financiers and the Government in determining the extent of
application of insurance proceeds for repair or reinstatement purposes.
In traditional projects, if a project is damaged, the private company and its financiers
will determine the commercial viability of reinstating the project.

There is usually no compulsion on them to reinstate if they elect not to do so. However, in the
case of a PPP project, the position will generally be different if an insured event occurs and the
project assets require replacement or reinstatement. The Government will normally have
insisted that insurance cover be taken out to permit full reinstatement in the event of damage.
Furthermore, the Government may wish to oblige the private company to negotiate
insurance to reflect the fact that the Government’s requirements may change after
an insurance event occurs and it is possible that there will be a requirement for
something other than full or exact reinstatement.
In most PPP projects, the Government will have a genuine interest to ensure that any
insurance proceeds received by the private company under the physical damage
policies are applied in reinstatement of the project. The Government will also want to
ensure that, upon termination of the project contracts (either by effluxion of time or
early termination), it receives the benefit of any insurance proceeds so that it can
continue with the reinstatement of the project.