Development of Policy, Legal, and Insitutional Framework for - ppiaf
Development of Policy, Legal, and Insitutional Framework for - ppiaf
Development of Policy, Legal, and Insitutional Framework for - ppiaf
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<strong>Development</strong> <strong>of</strong> <strong>Policy</strong>, <strong>Legal</strong>, & Institutional <strong>Framework</strong> <strong>for</strong> the PPP Program in Malawi<br />
Final Report<br />
Commencement <strong>of</strong> Service Delivery<br />
After signing <strong>of</strong> the PPP contract, there will usually be a period <strong>of</strong> construction or project<br />
development to put in place all the service delivery mechanisms. There is considerable<br />
risk associated with this period, in particular the risk <strong>of</strong> delays <strong>and</strong>/or cost over-runs <strong>for</strong><br />
the construction ef<strong>for</strong>t. The contract must include provisions that specify how the public<br />
sector partner will be compensated in the event that the private sector operator fails to<br />
complete construction within the agreed timeframe. On the contractor’s side, they will<br />
need provisions in the contract that assure them the Contracting Agency will accept the<br />
constructed facilities if they meet certain specifications.<br />
A key issue in this area <strong>of</strong> contracting is to what extent the Contracting Authority will be<br />
involved in activities conducted during the construction or development phase. There<br />
must be clearly defined parameters <strong>of</strong> such involvement in the contract. The design,<br />
construction, maintenance, <strong>and</strong> per<strong>for</strong>mance <strong>of</strong> any asset procured or developed <strong>for</strong> the<br />
purpose <strong>of</strong> meeting output specifications <strong>of</strong> the contract are all the Contractor’s risks. In<br />
most cases, the Authority should not accept any role be<strong>for</strong>e Service Commencement<br />
other than the following:<br />
Review <strong>of</strong> the Contractor’s designs, maintenance, <strong>and</strong> operation procedures;<br />
Observation <strong>and</strong> testing <strong>of</strong> the plant <strong>and</strong> equipment being developed;<br />
Observing periodic testing <strong>of</strong> the equipment being installed;<br />
Discussing with the Contractor any proposed changes to agreed specifications;<br />
Auditing the Contractor’s activities to en<strong>for</strong>ce agreed quality st<strong>and</strong>ards; <strong>and</strong><br />
Verifying the existence <strong>of</strong> all agreed factors at Service Commencement.<br />
In per<strong>for</strong>ming the audit function referenced above, it is essential that the Authority keep<br />
close track <strong>of</strong> any drawdowns on loan facilities that the Contractor may have <strong>for</strong> funding<br />
the construction or development period. It is un<strong>for</strong>tunately common practice <strong>for</strong> firms<br />
to submit very low cost proposals with the intent to draw down on loan facilities faster<br />
than attaining the percentage completion targets specified in the loan agreement. The<br />
auditing will prevent a Contractor from representing that percentage completion targets<br />
have been met be<strong>for</strong>e they have actually been met, thereby causing the loan to be drawn<br />
down faster than it should. Fraudulent practice in this area is common, <strong>and</strong> the<br />
methodology is the Contractor draws down a large portion <strong>of</strong> the loan while having<br />
only attained a relatively small percentage <strong>of</strong> construction completion.<br />
When the fraudulent practice is noticed, the Contractor files <strong>for</strong> bankruptcy protection<br />
<strong>and</strong> leaves the country with inflated pr<strong>of</strong>its. In other words, the Contractor had never<br />
intended to complete construction within the low budget that it provided in its Cost<br />
Proposal <strong>and</strong> at the end <strong>of</strong> the process the Contracting Authority is left with construction<br />
that has not been completed. Because <strong>of</strong> this practice, Cost Proposals must be reviewed<br />
<strong>for</strong> reasonableness, rather than simply selecting the bidder who submits the lowest cost<br />
proposal. Usually, problems <strong>of</strong> this sort can be sorted out in the BAFO process.<br />
In providing contract terms that allow the Contracting Authority to check the percentage<br />
<strong>of</strong> completion claimed by the Contractor at various stages during construction period, it<br />
THE INSTITUTE FOR PUBLIC-PRIVATE PARTNERSHIPS 205