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

Development of Policy, Legal, & Institutional Framework for the PPP Program in Malawi
Final Report
such changes in the contract. Changes that will not be allowed need to be specified also,
such as asking the Contractor to reduce the length of a runway to an unsafe level. Care
must be taken to not phrase service delivery requirements in a manner that could result
in unanticipated, major increases in service delivery requirements. An example what to
avoid would be a contract that requires the Contractor to provide all of the street
lighting needs for a particular community. If the community experiences a growth in
population that is far greater than expected, this service requirement would become
unreasonable. In all PPP contracts there is a delicate balance between cost and
flexibility.
Authority changes during the construction period should be kept to a minimum. For
the Contractor, the construction period represents one of the most significant areas of
risk, so any changes of a material nature could have a profound impact on the
profitability of the project for the Contractor. Further, the project’s financiers are not
likely to allow the Contractor to accept any changes that would significantly increase
finance risk and the projects financial rates of return.
If the change by the Authority requires additional capital expenditure during
construction phase, then generally the Authority should meet such costs by payment of
reasonable and customary costs to the Contractor, unless the Contractor is able to fund
the changes and amortize them over a long enough period to keep targeted financial
returns within the boundaries that are acceptable to the project’s financiers. If such is
the case, the Unitary Charge can be adjusted to compensate the Contractor, rather than
having the Authority pay for the changes directly. An increase in operating costs, rather
than capital costs, can generally be compensated by an upward adjustment in the
Unitary Charge.
Price Variations & Adjustments
Every PPP contract should have a provision whereby the prices charged for the services
will be automatically adjusted at regular intervals in accordance with a specified index.
In the bidding documents, this index should be identified so that bidders do not submit
proposals that use different indices, thereby compromising the comparability of the bids
submitted. The Authority should take into account its affordability constraints when it
selects the index to be used. It should also consider that the Contractor will charge a
higher price if the index is not likely to provide cover for its costs.
Price variations and adjustments that cannot be covered by indexing can be determined
by using either benchmarking or market testing. Benchmarking involves reference to
the prices of an existing provider of the same type of service. Market testing involves
review of the prices charged by other providers of the same type of service.
Sub-Contractors & Employees
Authorities tend to view the selection and performance of Sub-Contractors as something
it needs to control, whereas Contractors tend to view the selection and performance of
its Sub-Contractors as an area under which it should have exclusive control. In general,
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