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 collected, in what manner, in what time intervals, and what the methodology will be for evaluation of the data that is collected. Contractors are responsible for the performance of their sub-contractors, so the contract should include provisions in which the Authority can require the Contractor to replace one or more of its sub-contractors. Normally, the Authority retains the right to accept or not accept a proposed replacement sub-contractor. Monitoring normally takes place at three levels: (1) systematic monitoring by Contractor through a quality management system that measures performance; (2) periodic review of the quality management system by the Authority; and (3) users reporting performance problems via a system that should be in place for customer satisfaction tracking. Price and Payment Mechanisms Price and payment mechanisms are key tools with which PPP contracts allocate risks and responsibilities between the parties to the contact. Price and payment is also the means by which performance is rewarded, with bonuses for superior performance and penalties for inferior performance. The principle features of a contract payment mechanism are: No payments are made until the Service is available; There is a single Unitary Charge for the Service, rather than separate independent charges relating to availability or performance; The single Unitary Charge should only be paid to the extent that the Service is available, i.e. proportionate to the number of units; and Deductions should reflect the severity of the failure, e.g. no service will result in no payment, while a minor failure will result in only a minor deduction unless the minor failure is repetitive in which case the deduction will increase. The payment mechanism will usually include provisions relating to changes in the level of price or tariff, e.g. indexed to inflation. Delays in adjusting the Unitary Charge for the price changes provided in the contract will result in financial damages to the Contractor and commensurate exposure on the part of the Authority to potential claims. Many such claims arise when tariff adjustments provided for in the contract are delayed, despite the good faith efforts of the Authority. Accordingly, Contracting Authorities must take care that they will actually be able to make tariff adjustments in a timely manner. This creates the need to confirm political arrangements with other government institutions involved in tariff regulation, e.g. municipalities, sector ministries, and sector regulators. Payment mechanisms generally fall into two categories: The Unitary Charge (the fee that the Authority pays the Contractor for making the service available) is based on the number of available units. Such units can be spaces, THE INSTITUTE FOR PUBLIC-PRIVATE PARTNERSHIPS 210
Development of Policy, Legal, & Institutional Framework for the PPP Program in Malawi Final Report rooms, railway cars, passenger seats, airplanes, ships docked, or any other unit that can be used as a component of the service provided; or The Unitary Charge is based on the full provision of the overall service. The payment mechanism starts with an assumption of full payment, and in the event of superior or inferior performance the payment is adjusted upward or downward through the use of performance points. The payment mechanism should not guarantee payment of the Contractor’s debt service. The full risk of project finance must rest on the Contractor. However, payments from the Authority can be earmarked to cover debt service before the remaining balance is made available for other uses by the Contractor. This can give some comfort to lenders without transferring the project financing risk to the Authority. The contract should provide that the Authority may deduct liquidated amounts due to it when making the Unitary Payments. This is called a set-off provision. Standard contract language for such set-offs is as follows: The Contractor shall not be entitled to retain or set off any amount due to the Authority, but the Authority may retain or set off any amount owed to it by the Contractor under this Contract that has fallen due and payable against any amount due to the Contractor under this Contract; and If the payment or deduction of any amount referred to in paragraph (a) above is disputed, then any undisputed element of that amount shall be paid and the disputed element shall be dealt with in accordance with the dispute resolution provisions of this Contract. Change in Service by Authority or Contractor Changes to the service requirements may be necessary if such changes fall outside of the changes anticipated at the time of contract formation. It is not unusual for advances in technology to motivate a Contractor to modify the technology it uses in service delivery. Normally, such changes are accepted by the Authority because they are improvements, but consultation with the Authority before making the change is a prudent requirement. A proposed change may involve construction or operational charges. Depending on the nature of the change, costs may be incurred that may not have been anticipated. Changes to the service requirements that involve additional capital expenditure or operating costs may not be easily accommodated within the contract if the additional costs cannot be covered by the contingency reserves put in place by the contractor. Because of this, the financial projections submitted by the Contractor should be checked by the Authority to ensure that they include contingency reserves. In particular, capital expenditures during construction phase should always show reserves to cover 10-15 percent overages in construction costs and/or construction period. The contract should be flexible enough to enable the Authority to make minor changes in capital or operating costs without requiring contract amendments. In cases where it is the Authority that requests the change, such cases should be limited to specified types of THE INSTITUTE FOR PUBLIC-PRIVATE PARTNERSHIPS 211
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Development of Policy, Legal, and I
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31 March 2007 Mr. Constantine Chiko
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