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 information, or if the Authority will obtain better value for money if it accepts liability for statements made in the tender and bid documents and their related contract. Service Requirements & Availability The focus of PPP is service delivery, so unavailability of the service should result in a reduction or elimination of payment by the Authority to the Contactor. The issue in PPP contracts is what constitutes service availability. This is a key issue because contracts for PPP projects usually require the Contracting Authority to pay the Contractor for service made available, rather than service actually used. For example in a water concession, in which the Contractor is to build and operate a new water treatment plant, the Contracting Authority (in this case a water utility) is obligated to pay the Contractor for the quantity of treated water made available, not the quantity of water actually consumed by the Authority. Another example would be a light rail transit system. In such a system, the Authority would be obligated to pay the Contractor for the availability of service, provided that the Contractor meets specified quantity (number of trains per route per time period) and quality standards provided in the contract, regardless of the actual number of passengers using the service. Another example would be hospital services. Generally, the Authority is obligated to pay the Contractor for making services available, regardless of the number of patients. Unfortunately, the availability (or capacity) principle of PPP contracting has the effect of putting most of the commercial risk onto Government. To mitigate this an international trend has emerged in which commercial risk is transferred to the private operator by giving the Contractor access to the revenues derived from the service provision. For water projects, the trend is to have private operators provide not only the water treatment facility but also the distribution network, thereby giving them access to consumers and the responsibility of collecting on receivables. In a light rail transit system, the private operator is given the right to collect tolls. In a hospital, the provider of the hospital and its service delivery systems is given the right to access consumers through the provision of health care services to patients who can afford to pay. The definition of unavailability is more straightforward in some sectors than in others. Payment for availability will vary according to the type of service made available. In the case of accommodation availability is normally expressed in terms of the number of units available, e.g. office places, student places, prisoner places. Where service is divided into areas, the contract must specify which areas are most important, i.e. define which are “core” services. In hospitals, accommodation “units” are normally divided into three categories: (1) emergency, operating, and intensive care facilities; (2) waiting areas and clinical support areas; and (3) office and education facilities. The conditions under which service will be deemed to have commenced must be clearly defined in the contract. Also, if service is made available before the required date, there must be a provision that specifies the reward owed to the Contractor for early delivery. In the same manner, conditions in which service will be deemed to not have commenced must be clearly defined in the contract. When “unavailability” occurs must also be very THE INSTITUTE FOR PUBLIC-PRIVATE PARTNERSHIPS 208
Development of Policy, Legal, & Institutional Framework for the PPP Program in Malawi Final Report clearly defined, because this is an area in which disputes can easily arise and the resulting financial penalties for service unavailability can create animosity between the parties. Maintenance of Assets & Service Delivery When the Contractor submits its financial proposal, it will include the cost of ordinary repairs and maintenance. The risk associated with determining what needs to be replaced and the cost of making such replacements is entirely upon the Contractor. This transfer of risk to the Operator is best achieved by expressing the service requirements in terms of output specifications. Bidders should be allowed to propose their own methods of repair and maintenance, within the parameters set by the output specifications. This encourages private sector innovation, a key objective of PPP contracting. The contract clauses that ensure adequate repairs and maintenance of assets should specify that: (1) the service is continuously available; (2) the assets are maintained in a manner that will enable them to reach their full working life; and (3) assets provided by the Authority for use by the Contractor will be returned to the Authority at the end of the contract period in a condition complying with the requirements of this clause. The contract must include provisions for the transfer of assets at the end of the contract, or upon early termination of service. In projects where the assets are unlikely to revert to the Authority on termination, and the Contractor is taking the risk of their residual value, it is in the best interests of the Contractor to properly maintain those assets. In contrast, if the assets are likely to revert to the Authority at termination, then the Authority will have to ensure that the price it is paying for the service includes coverage for maintenance. Performance Monitoring & Compliance The contract should clearly specify: (a) the level of performance required; (b) the means by which the Authority will measure the Contractor’s performance; and (c) consequences to the Contractor in event of a failure to meet the required level of performance. In setting the required level of performance, the contract should clearly specify the output requirements rather than specifying how the services will be delivered. The negotiated performance regime will become a key element of the risk transfer mechanism. When setting the output specifications, if a benchmark (e.g. another PPP service provider that is already performing satisfactorily) is available that can be used as a reference point in the specification of output requirements. The contract should also specify the mechanism for monitoring performance. It is best practice to disclose such monitoring mechanisms in the tender and bid documents. Such monitoring generally includes the collection of data by the Authority or its designee for performance monitoring, and the contract should indicate what kinds of data is to be THE INSTITUTE FOR PUBLIC-PRIVATE PARTNERSHIPS 209
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