Development of Policy, Legal, and Insitutional Framework for - ppiaf

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Development of Policy, Legal, & Institutional Framework for the PPP Program in Malawi Final Report Model Clauses for Concession Contracts The contract must specify its duration, along with the Commencement Date that may or may not be the date of contract signing. The Commencement date is normally before the Service Period and the duration of the contract must be long enough to cover all of the Service Period. The choice of duration should be made in consideration of the following: The service requirements of the Contracting Authority, in conjunction with the consumer expectations identified in the demand and willingness to pay survey; Anticipated uses of assets that will remain with the Contracting Authority after the end of the Service Period, and the impact that contract duration will have on their condition when the Contracting Authority takes control of the assets; The amount of time it will take the private investor to achieve its targeted return on investment. This is the most important factor in setting the Service Period, and a good reason for not defining Service Periods in enabling legislation because it is impossible for legislators to anticipate how long each PPP project’s concession period should be. They may elect, however, to set a maximum Service Period; The affordability of the Service for the Contracting Authority, taking into account the expected useful life of the assets. A longer Service Period could enable the Authority to cover its share of the cost of such assets over a longer period, thereby lowering the level of periodic payments and related strain on budgetary resources; The cost of periodic asset refurbishment and related increases in such costs if the Service Period is relatively long; The terms of the project’s debt financing. While the term of the Service period may need to be extended in order to enable targeted returns on equity investing, it should not be extended beyond the time limits of available debt financing; and Certain components of the contract may have a different duration than the duration of the contract as a whole, for example a 20-year concession may have a monopoly provision that lasts only 5 years. In determining the Service Period, Contracting Agencies should also evaluate the profile of assets that will be used in providing services required by the contract. If there are assets that have useful lives in excess of the contemplated Service Period, alternative uses for those assets should be identified so that the Agency is not pressured into extending the Service Period to fully recover the cost of those assets, or pressured into increasing its payments over the contemplated Service Period in order to fully recover the cost of those assets before their useful lives have been expended. THE INSTITUTE FOR PUBLIC-PRIVATE PARTNERSHIPS 204
Development of Policy, Legal, & Institutional Framework for the PPP Program in Malawi Final Report Commencement of Service Delivery After signing of the PPP contract, there will usually be a period of construction or project development to put in place all the service delivery mechanisms. There is considerable risk associated with this period, in particular the risk of delays and/or cost over-runs for the construction effort. The contract must include provisions that specify how the public sector partner will be compensated in the event that the private sector operator fails to complete construction within the agreed timeframe. On the contractor’s side, they will need provisions in the contract that assure them the Contracting Agency will accept the constructed facilities if they meet certain specifications. A key issue in this area of contracting is to what extent the Contracting Authority will be involved in activities conducted during the construction or development phase. There must be clearly defined parameters of such involvement in the contract. The design, construction, maintenance, and performance of any asset procured or developed for the purpose of meeting output specifications of the contract are all the Contractor’s risks. In most cases, the Authority should not accept any role before Service Commencement other than the following: Review of the Contractor’s designs, maintenance, and operation procedures; Observation and testing of the plant and equipment being developed; Observing periodic testing of the equipment being installed; Discussing with the Contractor any proposed changes to agreed specifications; Auditing the Contractor’s activities to enforce agreed quality standards; and Verifying the existence of all agreed factors at Service Commencement. In performing the audit function referenced above, it is essential that the Authority keep close track of any drawdowns on loan facilities that the Contractor may have for funding the construction or development period. It is unfortunately common practice for firms to submit very low cost proposals with the intent to draw down on loan facilities faster than attaining the percentage completion targets specified in the loan agreement. The auditing will prevent a Contractor from representing that percentage completion targets have been met before they have actually been met, thereby causing the loan to be drawn down faster than it should. Fraudulent practice in this area is common, and the methodology is the Contractor draws down a large portion of the loan while having only attained a relatively small percentage of construction completion. When the fraudulent practice is noticed, the Contractor files for bankruptcy protection and leaves the country with inflated profits. In other words, the Contractor had never intended to complete construction within the low budget that it provided in its Cost Proposal and at the end of the process the Contracting Authority is left with construction that has not been completed. Because of this practice, Cost Proposals must be reviewed for reasonableness, rather than simply selecting the bidder who submits the lowest cost proposal. Usually, problems of this sort can be sorted out in the BAFO process. In providing contract terms that allow the Contracting Authority to check the percentage of completion claimed by the Contractor at various stages during construction period, it THE INSTITUTE FOR PUBLIC-PRIVATE PARTNERSHIPS 205
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31 March 2007 Mr. Constantine Chiko
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