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 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, THE INSTITUTE FOR PUBLIC-PRIVATE PARTNERSHIPS 212
Development of Policy, Legal, & Institutional Framework for the PPP Program in Malawi Final Report any attempt by an Authority to control Sub-Contractors is not advised and is in most cases also unnecessary. In certain limited cases, there may be overriding reasons why an Authority should have a degree of control over sub-contractors, for example projects in which there are national security or public interest concerns. As is the case with sub-contractors, Authorities generally should not seek control over the employees of the Contractor or its Sub-Contractors. Exceptions can be appropriate in defense projects, prison projects, school projects, and other projects in which there is an overriding public concern regarding what kinds of people are involved in service delivery. In projects requiring a security clearance for persons providing services, the Contractor should consider that such clearances may be outside the Authority’s control. Assignment & Change of Ownership As many PPP projects involve the construction and operation of infrastructure, contract periods can be very long, commonly 15-20 years and in some cases as long as 40 years. In view of this, some changes in ownership on the part of the Contractor are possible, even likely and the Authority should take care to anticipate such changes in drafting the wording for the contract. Similarly, over such a long period of time the business profile of the Contractor may change, making assignment of certain service delivery tasks to other entities a necessity. The contract should, therefore include provisions that will allow for assignment of tasks under certain specified conditions. Certain restrictions will be in the contract, such as the Contractor may not assign, novate, or transfer its rights except as provided in the lenders’ security agreement. If the lenders appoint a new Contractor, the rights of the original Contractor should be transferred. In the Contract there will also be restrictions on the Authority’s right to transfer its rights or obligations without the consent of the Contractor. Any attempt to provide restrictions on the lenders in the Contract should be met with concern. It is very difficult to restrict the identity of lenders or their assigns, especially when bond financing is involved. Changes of ownership can be of considerable concern to Authorities when the ownership profile of the Contractor is changed. Any attempt to restrict the transfer of ownership in the Contractor is likely to be met with considerable resistance, so the best an Authority can expect to achieve is a requirement to be notified of such changes. Treatment of Assets at End of Service Period There are essentially two options for treatment of assets as the end of the service period: The Authority takes control of the assets on expiration of the Contract. This includes assets for which the long-term public sector demand is clear, and for which there is no practical alternative use of the assets; and The residual value of the assets is transferred to the Contractor. These kinds of assets are usually generic and have alternative use outside the public sector. THE INSTITUTE FOR PUBLIC-PRIVATE PARTNERSHIPS 213
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31 March 2007 Mr. Constantine Chiko
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Development of Policy, Legal, and Insitutional Framework for - ppiaf

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