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

Development of Policy, Legal, & Institutional Framework for the PPP Program in Malawi
Final Report
In most PPP projects, the Authority’s long-term objectives are best served by having the
assets transfer to the Authority at the end of the service period. This is one reason why
so many PPP infrastructure projects are structured at Build-Operate-Transfer (BOT).
There are many examples, such as highways. The Contractor cannot be a highways
authority, so the highways that it builds and operates must be transferred to the
Authority at the end of the service period. Care must be exercised, however, in the
transfer of assets to the Authority at the end of the service period because international
experience has shown that such transfers can bring back the same problems that existed
when such assets were under government control and management, i.e. the
inefficiencies that caused PPP to be developed for a solution. An example is the power
generating facilities in the Philippines that were developed using BOT. Many of those
facilities have reached the ends of their concession periods and have reverted to
government ownership and operation. The same inefficiencies that existed prior to the
PPP program are re-emerging. Governments need to view the asset transfer at the end
of a concession contract to be an opportunity to have a new round of bidding to secure a
new private operator rather than an opportunity for government to re-take control of
service delivery.
In cases where the assets are transferred to the Authority at the end of the service period,
the contract should specify what conditions the assets must be in at the time of transfer,
and should provide for recourse in the event that the assets are not in the condition that
is specified in the contract. This applies to assets that will still have useful life at the time
of transfer. For assets that will have expended their useful life by the time of transfer, it
is not necessary to provide for compensation if they were not properly maintained.
Most equipment will have expended its useful life by the time of transfer to the
Authority. The Authority should focus on value for money rather than capturing
residual asset value.
In most cases, it is advantageous to provide an incentive to the Contractor to maintain
the assets in good condition. Such incentive can be provided by a provision in the
contract whereby the Contractor will be paid for the assets at time of transfer, at a price
that is a function of the condition of the assets. Another method is to provide for an
optional renewal of the contract if the assets are in good condition. If the assets have an
alternative use at the end of the contract period, there are two main options for
determining amounts payable to the Contractor at the end of the service period: (1) the
market value of the assets; or (2) an amount bid by the Contractor when negotiating the
original contract.
Early Termination & Payment for Early Termination
The Contractor should be allowed the right to terminate the contract if the Authority
acts in a way that renders the contractual relationship untenable or completely frustrates
the Contractor’s ability to deliver the service. In determining the compensation to be
paid in event of default or breach by the Authority, the objective should be to ensure
that the Contractor and the financiers are no worse off than they would have been had
the default not occurred. The contract must provide a formula for such early
THE INSTITUTE FOR PUBLIC-PRIVATE PARTNERSHIPS 214