PUBLIC PRIVATE PARTNERSHIP MANAGEMENT-Module.pptx

PUBLIC PRIVATE
PARTNERSHIP
MANAGEMENT
By: Walter Koech

Overview
 The framework should provide guidance of a PPP project:
• From initially identifying candidate projects; and
• To managing PPP contracts throughout the project
lifecycle.
 The Framework should yield ‘good’ PPP projects:
• PPPs should be cost-benefit justified,
• Provide better value for money than traditional public
procurement,
• Be financially viable and fiscally responsible, and
• Be attractive to the market;

Overview’
 Project Identification and Screening
• It follows a similar process as for originating other
public sector investment projects
• Projects are screened for their suitability as PPPs; and
• Screening at this stage is limited to the information
available at relatively low cost.
 Decision criteria (Project Identification )
• The project be within a broader plan for the sector
• The project should meet PPP program objectives
• The project should be economically viable and fiscally
responsible

Overview’
 Procedures and institutional responsibility
 The framework should identify PPP projects proponents:
• Can only government entities submit a proposal?
• Can private proponents also put forward proposals?
 The framework should identify who approves further
development of PPP projects. The key players are:
• The line agency,
• The finance ministry; and
• Other central authorities.
 The framework should identify the level of documentation
required

Project Management - Model
Customer Focus
Time Cost
Objectives
Quality
Best Resource Use

Overview’
 PPPs cannot be a solution for every challenge that public sector
faces with regard to service delivery & infrastructure
development
 PPPs play a small but important role in the overall objective of
delivering modernised public services, and asset creation
 Even in a mature market for PPP like UK, it represents 10-15% of
total investment in public services

Differential procurement process
Capital and operating costs are paid for by the public
sector, who take the risk of cost overruns and late
delivery..
The public sector only pays over the long term as
services are delivered. The private sector funds itself
using a large portion of debt plus shareholder equity.
The returns on their equity will depend on the quality
of services.

The PPP Process Cycle
 There is no universal consensus on what should be
included in each phase or where each should start or end.
 The standard PPP process cycle

Project Cycle
ADB
The World Bank
Project Development
Identification
Preparation
Appraisal
Negotiation and
Board Approval
Implementatio
n and
Supervision
Evaluatio
n
The project cycle
considers the
logical sequence
of events from
project
identification to
ex post
monitoring and
evaluation

PPP and Traditional Procurement
Contract
management and
review
PPP
Assessment
Initial appraisal
Approvals – PPP
procurement
assessment
Planning and
implementation
Post project
review
Establish
output
specification
Procurement
VFM assessment
Contract
award
PPP procurement
Traditional procurement

PROJECT APPRAISAL
 Project appraisal and project selection are key functions
in the planning and allocation stages of public investment.
 PPP projects demand a very sound preparation if they are
to deliver timely, effective, and cost-efficient
infrastructure.
 Appraising a PPP project means conducting a series of
exercises in order to approve, cancel, or revisit the
project before the structuring of the contract that
consumes scarce public resources.
 Moreover, good appraisal and selection methods increase
the probability of maximizing net benefits to society

PROJECT APPRAISAL’
 Inaccurate and unrealistic appraisal may lead to cost
overruns or even to incomplete projects.
 Effective contribution of appraisal to project success
depends on an experienced team with the required
multidisciplinary expertise
 A project team should achieve a satisfactory conclusion to
the project appraisal, covering the following areas of
expertise i.e. Technical, environmental, economic,
financial, legal.
 The appraisal report, or (Business Case or Full Feasibility
Study), is typically the basis for approval to proceed with
the PPP transaction.

Appraisal’
 Technical questions: Is the dam soundly designed and
engineered? Does it meet acceptable standards? Will it displace
local people? Will it affect the environment in any adverse way?
 Institutional questions: is the organization, the management, the
staff, the policies available to build a railroad and maintain it? If
not, what changes are required
 Economic questions: Will the benefits of a water supply system
outweigh the costs? What will its impact be on family incomes?
Will it provide job opportunities for local people? What is the
estimated rate of return on the investment?
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Appraisal’
 Financial questions: Is the borrower's financial plan
sound? Is the electrical distribution system financially
viable? Is the proposed accounting system adequate?
 Commercial Viability : To ascertain the extent of
profitability of the project and its sufficiency in relation
to the repayment obligations pertaining to term finance
(eg. Toll Roads).
 Legal Aspects – the value of an investment may enable an
organization to meet current or future legislation;

Project Appraisal – Decision Factors
 Managerial Competency : To ascertain that competent HRs
are behind the project to ensure its successful
implementation and efficient management after
commencement of commercial production.
 Environmental Aspects– the impact of the work on the
environment is increasingly a decision factor when
considering an investment;
 Social Safeguards – return on investment could be measured
in terms of ‘quality of life’ or even ‘lives saved’;
 Operational – benefits may be expressed in terms of
‘increased customer satisfaction’, ‘higher staff morale’ or
‘competitive advantage’;

Objectives of the Appraising Phase
 Appraising a project means answering a fundamental set
of questions:
• Is it sensible, from an economic perspective, to
implement the project?
• Is it practical to procure the project as a PPP?
• How much will it cost? Is it affordable from the
government’s perspective?
• Is there adequate market interest and capability to
deliver this project? and
• What are the main obstacles for the project’s
implementation?

Types of Evaluations for Project Appraisal
 1. Cost-Benefit Analysis
 This technique is used to compare the total costs of a
project with its total benefits
 Alternatives are compared to select one that yields the
most benefits relative to the costs.
 It is based on principles of applied welfare economics,
which provide a clear and rigorous framework for
assessing the “social” (or economic) value of projects.
 However, it requires capacity in advanced economics, and
some variables (such as more intangible benefits or costs)
can be difficult to estimate.

Types of Evaluations for Project Appraisal’
 2. Cost-Effectiveness Analysis
 This is an alternative to cost-benefit analysis that
compares the relative costs of two or more courses of
action with their related outcomes.
 Cost-effectiveness analysis is more commonly used when
it is not possible to carry out cost-benefit analysis,
• i.e. in instances when quantifying the benefits is
difficult or when outputs are standardized.
 The benefit of cost-effectiveness analysis is its simpler
methodology

 3. Multi-criteria Analysis
 This uses weighting and scoring of the most important
project impacts.
 It is often used when quantification of costs and benefits
is not pursued.
 it can be used to compare alternative actions based on
the aggregation of criteria, which can be qualitative or
quantitative.
 The approach relies on decision makers having a high
degree of discretion and creates the risk of preferences
driving the analysis.

 4. Simplified Methodologies
 Simplified methodologies attempt to evaluate a project
using techniques that are simpler in scope.
 These are used for back-of-the-envelope analysis of low-
cost investments and could include simplified templates
for cost-benefit analysis or cost-effectiveness analysis, or
simplified multi-criteria analysis (using a few weights with
a basic rating scale)
 These approaches can be used when more rigorous
methods are infeasible or too costly

Appraising project economic viability
 A project is economically viable if the economic benefits
exceed its economic costs, for society as a whole.
 The economic costs of the project differs with financial
costs (it includes externalities and environmental impacts)
 The economic benefits are a measure of the value the
project will deliver to society as a whole.
 For example, the benefits from improved transportation,
for drivers, can far exceed the tolls paid on a highway—
faster connections, reduced vehicle maintenance, lower
accident rates, may be significant factors.

Cost-Benefit Analysis
 When costs and benefits have been identified, quantified
and priced (valued), the analyst is trying to determine
which among various projects to accept, which to reject.
 There are two methods for measuring the worthiness of
projects: undiscounted & discounted methods.
 Non-discounting Criteria
 These include urgency, payback period and average rate
of return

Non-discounting Criteria
1. Urgency
 According to this criterion, projects that are deemed
more urgent get priority over other projects
 However, urgency is objective and may depend on how
persuasive the project advocates are in convincing donors
to finance one project and not another. irrespective of the
investment outlays
 2. Payback period
 Refers to the length of time required to recover the initial
cash outlay on the project.
 According to the criterion; the shorter the payback
period, the more desirable the project is prepared.

Non-discounting Criteria’
iii. AVERAGE RATE OF RETURN
 This method measures the net return each year as a percentage of the initial
cost of the investment.
 ARR=
𝑁𝑒𝑡 𝑟𝑒𝑡𝑢𝑟𝑛 𝑝𝑟𝑜𝑓𝑖𝑡 𝑝𝑒𝑟 𝐴𝑛𝑛𝑢𝑚
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑂𝑢𝑡𝑙𝑎𝑦 (𝑐𝑜𝑠𝑡)
 A Project unit is considering 1 of the 2 investment projects outlined below
29

Discounting Criteria
 1. Net Present Worth or Net Present Value
 The NPW of a an investment proposal is the present value
of expected future benefit, discounted at the costs of
capital, less discounted cost.
 NPW is given by:-
 𝑁𝑃𝑊 = 𝑖=0
𝑛 𝐵𝑖−𝐶𝑖
1+𝑟 𝑛
 Where r= discount rate, n= number of years, i= ith year, B=
benefits, C= costs,
 Selection principle: Select the investment if and only if
the net present value is positive

Net Present Value’
 Example: Compute the NPW for the following projects
and indicate which project is more viable given that
interest rate is 10%.
31

Benefit/ cost ratio (B/C)
 The B/C is determined by dividing discounted benefits by
discounted costs:
 𝐵 − 𝐶 𝑅𝑎𝑡𝑖𝑜 =
𝑖=0
𝑛 𝐵𝑖
1+𝑟 𝑛
𝑖=0
𝑛 𝐶𝑖
1+𝑟 𝑛
 Selection criteria: Select a project only if the ratio is
greater than one.
 Example: Using the example above(NPV)
 𝐵𝐶𝑅 𝐴 =
𝑁𝑃𝑉 𝐵𝑒𝑛𝑒𝑓𝑖𝑡𝑠
𝑁𝑃𝑉 𝐶𝑜𝑠𝑡𝑠
=
1,118,912.64
1,000,000
= 1.119,
 𝐵𝐶𝑅(𝐵) =
𝑁𝑃𝑉 𝐵𝑒𝑛𝑒𝑓𝑖𝑡𝑠
𝑁𝑃𝑉 𝐶𝑜𝑠𝑡𝑠
=
1,346,517.56
1,000,000
= 1.347
 Therefore project B is more viable than A 32

Internal Rate of Return
 It is the annual percentage return achieved by a project,
of which the sum of discounted cash inflow over the life
of the project is equal to the sum of discounted cash
outflows.
 If the IRR is used to determine the NPV of a project, the
NPV will be zero. The organization will accept this project
only if the IRR is equal to or higher than the minimum
rate of return or the cost of capital
 Calculation Procedure
1. By trial and error, find out the discount rate that will give
a zero NPV
 NPV =
𝐵1
(1+𝑟)1 +
𝐵2
(1+𝑟)2 +
𝐵3
(1+𝑟)3 +
𝐵4
(1+𝑟)4 -
𝐶0
(1+𝑟)0 = 0 33

Internal Rate of Return’
2. If the NPV is positive, try a higher discount rate in order
to give a negative NPV and vice versa
3. IRR = L +
𝑃
𝑃−𝑁
(H-L)
 Example
 A project costs Ksh 400 and produces a regular cash inflow
of Ksh 200 at the end of each of the next three years.
Calculate the IRR. If the minimum rate of return is 15 %,
suggest with reason whether you should accept the
project or not.
 NPV =
200
(1+𝑟)1 +
200
(1+𝑟)2 +
200
(1+𝑟)3 -
400
(1+𝑟)0 = 0
34

Internal Rate of Return’
o Assuming the discount rate is 22%
 NPV=
200
(1.22)1 +
200
(1.22)2 +
200
(1.22)3 - 400 = 8.4
o Assuming the discount rate is 24%
 NPV=
200
(1.24)1 +
200
(1.24)2 +
200
(1.24)3 - 400 = -3.4
 IRR = 22% +
8.4
8.4−(−3.4)
(24-22) %
 IRR= 23.38%
 Since the IRR (23.38%) is higher than the minimum rate of
return (15%), the project should be accepted
35

Sensitivity analysis
 Sensitivity analysis assesses how sensitive the NPV of a
project is to changes in the various inputs to the NPV
model. Inputs include:
• The value of the initial investment.
• The estimated life of the project.
• The sales volume forecast.
• The forecast price used.
• The forecast sales mix used.
• The cost forecasts.
• The disposal value of the investment assets.
• The discount rate used.

Exercise 1
 Compute the Payback Period, IRR and if the discounting
rate is 10% compute NPV, BCR,
Year Cost Benefit
0 100 0
1 30
2 40
3 50
4 50

APPRAISAL’
 Project Appraisal should also contain the following:
1) Particulars of the project and Project Feasibility Report
furnishing details of technology, construction process,
availability of materials and labour etc.
2) Estimates of Cost of the project with the detail of
component wise costs
3) Details of the proposed means of financing indicating the
extent of GON, beneficiaries and DP’s contribution etc. for
the construction and O&M of the facility.
4) Working Capital requirements at the peak level during the

APPRAISAL’
5) Project Implementation Schedule review in the light of
actual implementation; Main stages in the project
implementation and whether the time schedule for
construction, installation, start-up/trial run, commencement
of operation is reasonable &acceptable
6) Quality Assurance – testing /monitoring mechanism to
ensure quality of works
7) Grievance Redressed Mechanism – institutional
arrangements to strengthen project governance

Market sounding
 It is conducted by organizing a procurement briefing/
conference open to any interested private parties.
 It provides initial feedback from the market on the feasibility
of the proposed PPP project.
 Basic information on the project is provided including:
o the type of services to be procured and their demand
o type of PPP deal,
o likely tenure of contract,
o obligations of the parties in broad terms,
o revenue sharing arrangement,
o financing,
o exit arrangements, etc.

Market sounding’
 Market sounding is likely to offer real benefits for those
projects having the following characteristics:
 There is uncertainty on private sector’s interest in the
project
 The in-house knowledge of the market is superficial,
incomplete or absent
 There is uncertainty about which will be the right
business scheme
 There is a need to manage expectations of a project
 Meeting the requirement likely to involve a consortium

Market sounding’
 Market sounding involves gathering knowledge which is
focused in these key areas:
o Viability: whether the proposed business scheme is
actually viable, or has it ever been done
o Capability: will the private sector (individual or in
consortium) be able to achieve the requirement
o Capacity: whether the market have the capacity to
achieve what is required quickly enough and with large
enough scale
o Maturity: whether there is an established market

Benefits of Market sounding
 1. For The Contracting Authority
 Establishing that there is a market for the requirements
 Confirming, through market reaction, that the scope and
objective of PPP scheme are sound and achievable
 Finding out about new, innovative or alternative solutions
 Identifying potential issues or problems with the project
 Gaining first hand knowledge of what private sector can
and cannot do
 Laying useful foundation for contract and relationship
management
 Managing stakeholders expectation of what will be
achieved by the PPP project.

Benefits of Market sounding’
 2. For Private Sector
 The chance to assess whether the opportunity will be
suitable
 The chance to raise issues and queries about the
opportunity, and about the procurement process
 The chance to gain valuable insight into public sector
working practices, requirement and priorities

The risks of Market sounding
 1. Contracting Authority
 The risk of gravitating solutions toward ideas suggested by
dominant and/or experienced player
 The risk of giving particular private party “inside
information” which gives unfair advantage during the
following procurement process
 The risk of misdirecting the project based on incomplete
information or misleading information obtained during
market sounding
 2. For Private Sector
 The risks include proprietary ideas and solutions may be
compromised if spending valuable time without guarantee
of any business

Risk Management
 Project risk management is the art and science of
identifying, analyzing, and responding to risk throughout
the life of a project and in the best interests of meeting
project objectives
 Risk management is often overlooked in projects, but it
can help improve project success by helping select good
projects, determining project scope, and developing
realistic estimates

50
Risk Management’
 The goal of project risk management is to minimize
potential risks while maximizing potential opportunities.
 Unlike crisis management, good project risk management
often goes unnoticed
 Well-run projects appear to be almost effortless, but a lot
of work goes into running a project well
 Project managers should strive to make their jobs look
easy to reflect the results of well-run projects

Risk management’
 Good risk management requires:
 Clearly understanding on what is to be achieved
 Focus equally on 'what could be achieved with a fair
wind?' rather than just 'what might stop the project'- it
helps ensure opportunities are not missed!
51

52
The Risk Management Process

The risk management process
1. Risk identification
 Risks should be directly related to the project objectives and
agreed by the whole project management team and its key
stakeholders.
 Risk management means identifying and managing risks to
delivery of objectives, not managing issues that might be
constant.
 Enter details into a risk log/risk register
53

The risk management process’
2. Risk evaluation
 what is the impact of each risk should it occur?
 What impact might they have on benefits, time, cost, quality,
reputation, people, etc.
 How likely is it that these risks will occur? e.g. using a
High/Medium/Low
 A Risk Profile could be used to show the overall pattern of
risk 54

Sample Probability/Impact Matrix
55

3. Risk prioritization
 Make a decision which ones are the most severe, so they
can be addressed first.
 Prioritization should be based on the likelihood of a risk
and the potential harm it poses to the project.
56

4. Risk management planning
 Do you have a strategy for mitigating the risks you have
identified and preventing the project from being
derailed?
 What actions and resources will you need to reduce the
impact and/or probability of the risk happening?
57

5. Risk monitoring
 Individual risks, and the project's overall exposure to
risk, must be reviewed throughout the life of a project
and
 Where necessary actions to mitigate risks must be
changed or revisions to the project business case or
assumptions must be considered, if circumstances alter 58

Assessing the Investment Risk of Renewable
Energy Projects
 Renewable energy projects involve risk for all parties
including project developer, the power purchaser, and
lenders.
 Generally, project developers take risks that are
foreseeable and manageable or for which they are
adequately rewarded
 The ability of all parties to understand the nature of the
risk and agree on how risks are to be shared is often the
key to developing a successful project.

Assessing the Investment Risk’
 The major types of risk
 1. Credit risk- Lenders will be interested in assessing the
creditworthiness of all of the parties associated with the
venture;
 2. Construction and development risk is the risk that the
contractors may not complete the project in time,
according to specifications, capable of delivering the
expected output within the programmed budget.

The major types of risk
 3. Operating/Commercial risk is the risk of the local or
international market, likely competition, access to market
both in terms of physical access (breakdowns in transport
and communication) and commercial access (without
interference from the central government).
 4. Operating/Commercial risk is the risk of the local or
international market, likely competition, access to market
both in terms of physical access (breakdowns in transport
and communication) and commercial access (without
interference from the central government).
 5. Political Risk: - Strictly speaking, political risk refers to
confiscation, expropriation or nationalization of project
assets.

The major types of risk’
 6. Regulatory/Legal Risk might involve differential access
to the legal system. For example, foreign parties may not
have equal access to the courts, or foreign judgements
may not be enforceable.
 7. Environmental Risk: projects nowadays require an
environmental impact statement that enumerates and
provides assurances regarding environmental standards
that will be complied with and/or the fines that will be
incurred if such standards are exceeded.
 8. Force Majeure refers to risk caused by natural
disasters or accidents such as fires, flood, storms and
earthquakes.

Good governance in PPP procurement
 Almost all countries follow a process that promotes
competition and a balance between the need to reduce
the length of time and cost of the whole procurement
process.
 The main objective of such a process is to acquire the
best proposal that serves the purpose of the government
and provides the value for money.

Good governance in PPP procurement’
 The main characteristics of such a procurement process
include:
1. Open and unbiased tendering process that provides equal
opportunity to all prospective bidders
2. Not a one-way process
3. Schedule of requirements is finalized through a two-way
communication and based on what the best possible solution
the market can offer

Good governance in PPP procurement’
4. Avoids costly retendering
5. Ensures wide participation of the private bidders by
eliminating costly design efforts before the contract is
finally awarded. The actual bidding is designed in such a way
as to establish reasonable limits on cost in tender
preparation; and
6. When applicable, a two-step tendering process is
considered to avoid costly design exercises in the first stage.

Principles for good governance in PPPs
 1. Participation: the degree of involvement of all
stakeholders;
 2. Decency: the degree to which the formation
and stewardship of the rules is undertaken
without harming or causing grievance to people;
 3. Transparency: the degree of clarity and
openness with which decisions are made;
 4. Accountability: the extent to which political
actors are responsible to society for what they say
and do

Principles for good governance in PPPs
 5. Fairness: the degree to which rules apply
equally to everyone in society; and
 6. Efficiency: the extent to which limited human
and financial resources are applied without
waste, delay or corruption or without prejudicing
future generations.

PROCUREMENT PROCESS AND APPROVAL
 Kenya has a Public Procurement and Disposal Act, 2006,
that governs procurement by government and state
corporations.
 Competitive bidding is the normal method of
procurement.
 The Act provides for a review mechanism of appeals from
bidders who are dissatisfied with the
procurement/evaluation outcome.

PPP Procurement Assessment
 It addresses the following key issues:
 Is the project of sufficient scale and risk/operational
profile to justify a PPP approach, and to carry the high
transaction costs that will be involved?
 Does the project have the potential to deliver value for
money if procured as a PPP?
 Which form of Public Private Partnership would provide
the greatest potential to deliver value for money for the
Exchequer?
 Does the Sponsoring Agency have the statutory power or
vires to enter into a PPP arrangement –

PPP Procurement Assessment’
 Does it have the credit standing to enter into a PPP
arrangement?
 Is there potential for third party income which could
significantly reduce the level of Exchequer funding
required?
 Are all policy issues relevant to the project clear and fully
agreed?
 Has site ownership and ability to confer a licence on PPP
Co. been established?
 Are the technology and other aspects of the sector
stable, and not susceptible to fast-paced change?

Approval to Proceed
 Following appraisal of the proposed project, the
Sponsoring Agency should approach the Approving
Authority for approval to proceed with the procurement
of the project as a PPP. If the Approving Authority is
satisfied that:
 The project should be approved, on the basis of the
appraisal undertaken;
 All policy issues involved are clear and fully agreed, and
the project is suitable for procurement as a PPP;
 There is no conflict with public sector numbers or HR
policy or any other general policy;

Approval to Proceed’
 The scope / specifications is clear and agreed, and
conform with sectoral norms;
 The capital cost of the project (both PPP and non-ppp
elements) over the construction phase can be
accommodated within the approved multi-annual capital
allocations of the sponsoring agency; and
 A public sector benchmark (PSB) will be set before tenders
are issued

PROCUREMENT PROCESS AND APPROVAL’
 The Public Private Partnerships Regulations made under the
Act provide specialized procedures for procurement and
approvals of PPP projects and sets out a PPP Secretariat
under the Ministry of Finance.
 A PPP Bill is before parliament as a stand alone legislation for
PPPs.
 The negotiated PPAs are subject to approval by the sector
regulator, the Energy Regulatory Commission.

RISKS THAT KPLC AND GOK HAVE TAKEN
 KPLC has taken the market/demand risk -PPAs are on a
take or pay basis– this arrangement will be reviewed as
the market becomes competitive.
 The forex risk is borne by electricity consumers. Payments
are denominated in either dollars or Euros. The variations
are passed through to customers.
 Political risks are borne by GOK through a legally binding
letter of support issued to the projects.

CRITERIA FOR PROJECT DEVELOPMENT
ON A PPP BASIS
 Some projects have been awarded for development as
PPPs following unsolicited proposals.
 Mostly in technologies like geothermal and wind which are
difficult to subject to competitive bidding without
investing first to ascertain the natural resource potential.

FACTORS THAT HAVE CONTRIBUTED TO
SUCCESSFUL PPPS IN POWER SECTOR
 An enabling environment -National Energy Policy and
Energy Act, 2006.
 Both recognise need for cost reflective retail tariffs and
IPP charges that should, among others, enable the investors
to attract capital and compensate them for the risks
assumed.

FACTORS THAT HAVE CONTRIBUTED TO
SUCCESSFUL PPPS IN POWER SECTOR’
 Financial stability of KPLC as the off-taker.
 Sound governance of KPLC and energy sector
leadership.
 Structured competitive procurement process of
PPPs.

THE BENEFITS OF A STRONG PPP UNIT
 1. Operational gains - These can be achieved by focusing on outputs
rather than processes:
 by generating economies from integrating design, building, financing
and operating phases through a more inventive use of assets.
 2. Strategic clarity - Partnership contracts enhance accountability by
clarifying responsibilities and focusing on the key deliverables of a
service.
 The managerial efficiency of a Ministry can benefit significantly as
existing financial, human and management resources can be
refocused on more strategic functions.

THE BENEFITS OF A STRONG PPP UNIT’
 3. Certainty over construction costs
Private partners have a strong incentive to build assets on time
and on budget because they bear the risk of cost and time
overruns.
 4.Improved operational efficiency
Private partners have a strong incentive to manage operating and
capital costs over the life of a project, thereby improving their
return on investment.
 5. Higher quality and well-maintained assets
Typically, a PPP Contract requires infrastructure assets to be
maintained over the life of the PPP Contract (often 20-30 years or
more).
This leads to longer asset lives and greater benefits to users.

THE BENEFITS OF A STRONG PPP UNIT’
 6. Allocation of key construction and operating risks to the
private sector
Allocation of risks is the key structural feature of a PPP.
 7. Proper risk allocation may support limited recourse project
finance loan funding
A well-structured PPP, with proper risk allocation and
sufficient credit support, may permit a large percentage of
project costs to be funded with project finance loans.
Reduces upfront cost to government.
Permits private partner to leverage its investment to
maximize returns.
 8. PPPs may be the only option available to a contracting
government agency
Contracting agencies are often constrained by limited
budget and human resources.

Criteria for a Good PPP Project
 The project must have clear boundaries and measurable
performance in output terms;
 The project must be of a scale and value to be of interest to
private sector contractors;
 The project must have a significant element of service or
operating content;

Criteria for a Good PPP Project’
 There must be scope for cost effective allocation of risk
to the private sector;
 There must be scope for innovation;
 There must be scope for the generation of additional third
party revenue.

Key elements of PPPs
 1. Duration. Contracts between public and private sector
partners are usually medium- to long-term, often covering
the lifetime of the asset being produced under the PPP
contract.
 2. Financing, responsibilities, and ownership:
 Asset financing can involve revenues obtained from the
operation of the asset over a designated period.
 Responsibility for constructing, operating, and maintaining
the asset can often be included in the responsibilities of
the private partner.
 Ownership of the asset varies by PPP arrangement.

Key elements of PPPs’
 3. Performance-based returns. PPPs develop assets or
projects for the purpose of delivering ongoing services to
the public, rather than the asset being the deliverable of
the contract, with payment being contingent on the
operator of the asset meeting performance standards. The
public sector partner is usually responsible for monitoring
performance over the life of the contract.
 4. Output and quality specification. The private sector
partner participates in stages of the project defined by
the public sector partner (e.g., design, construction,
operation, maintenance, and financing).

Assessing and Managing demand risks
• Demand Risk: This is a major risk which is usually shared by both parties
to the contract.
 Since these are contracts for long periods and demands for services would also
depend on the state of the economy among other factors, it may happen that
there are variations between the projections and actuals.
 The contracts will provide for readjustments of the concessions/ period of
concessions to take care of such eventualities.
 It must be especially noted that if financial support through Viability Gap
Funding (VGF) is provided, the question of increasing the tariff / user
charges or the concession period so as to reduce the viability gap does not
arise, and is prohibited

Assessing and Managing demand risks’
• Revenue Risk: Shortfall in demand and consequentially the
revenue has the potential of destabilizing the PPP arrangement
because the private sector partner may be forced at some stage to
opt out.
 Shortfall in revenue generation will hurt both parties. While
the public authority loses the prospect of providing better and
early service to the public, the private sector partner will stand to
lose potential income.
 Shortfall in demand and revenue can result from unrealistically
higher level of user charges allowed and fixed under the PPP
arrangement.
 It has, therefore, to be seen whether the formula for tariff
fixation or user charges is worked out correctly and takes into
account the best interest of the user community as well as the
investors.

Community and Stakeholder Engagement
 Principles of Community Engagement in PPPs

Steps to effective community engagement
 Step 1: Define the Purpose of Engagement
The CA needs to be clear about the purpose of engagement
and the key issues to address, as this will set the context for
community interactions and managing expectations of those
participating in the process.
 Step 2: Decide which Community Citizens and Groups to
Engage
The CA needs to create a list of who to engage, with all the
community citizens, groups and organizations that could
have an interest in the PPP or have some influence over the
success of the PPP.

Steps to effective community engagement’
 Step 3: Conduct a Community Engagement Mapping
To complete a community engagement mapping, the CA and
private partner will need to consider both the interest and
influence different community groups, citizens and organizations
may have in the project.
 Step 4: Select Methods for Implementing the Engagement
Plan
Different methods can be used by the CA and the private partner
to engage communities. They should develop a project specific
community engagement plan that describes proposed engagement
strategies, tools, responsibilities and schedule for engagement.
The plan should evolve over the different phases of a PPP.

Steps to effective community engagement’
 Step 5: Issues Tracking and Complaints Management
An issue tracking table should be created to document ideas,
concerns or questions about the PPP. The CA and private
partner need a systematic way of managing and responding
to complaints and grievances.
 Step 6: Reporting and Monitoring
Accurately recording community feedback, sharing it
transparently within government and with the community is
a critical step in building trust and support among the
community.

Engagement Through the Project Cycle
 As the PPP Project advances, the level of effort needed to
complete the six steps will increase. For example:
 1. During the identification phase of the PPP project
cycle, community engagement may rely more on the
knowledge of CA staff to identify key community members
and groups;
 2. As the PPP moves into the preparation and procurement
phases, more intensive engagement will be required. A
broader set of engagement methods will be employed.
The community will not be involved in procurement, but
needs to be well informed about it; and


Engagement Through the Project Cycle’
 3. The private partner will begin to share responsibilities
for community engagement during the implementation
phase. The private partner begins to take on much of the
day-to- day responsibility for engagement with the CA to
maintain an over-arching, monitoring role. The
requirements on the private partner will be set out in the
PPP agreement based on a community engagement plan
previously prepared by the CA with the community.

A Sample of Concerns Communities
 Concerns about construction, and how it disrupts daily
activities for citizens (for example related dust, noise,
traffic patterns, utility services etc.).
 Concerns about employment and contracting. There will
be expectations for jobs from the local community or, in
the case of an existing service, fears about losing
employment or being transferred from the public to
private sector.
 Concerns about in-migration, as people come to the
project area in search of work. This can place additional
demand on local services and infrastructure and create
issues with the local population.

A Sample of Concerns Communities’
 Concerns about the social impact of migration/temporary
workers, particularly of the potential for gender-based
violence.
 Concerns about relocation or resettlement impacts on
households and on small businesses.
 Concerned the project will not be designed with
community input, and therefore will not meet the needs
of the community that will use the PPP.
 Concerned the construction or operation of a PPP project
will affect their ability to access local services or
infrastructure. A new road may have a toll charge that
local residents can’t afford to pay.

A Sample of Concerns Communities’
 Concerns about the environmental impact of the PPP.
 Concerns in user charges, or the taxes required to pay for
a PPP.
 Concerns in changes in the availability or nature of public
services. Some services may be discontinued to make way
for the PPP.
 Concerned to understand how the project will be gender
friendly, responsive to climate change and pro-poor
 Concerns about cultural heritage that the project may
affect or would incorporate

The Benefits of Community Engagement
 Deliver services valued by the community;
 Keep charges to a reasonable level;
 Involve communities in solutions to any problems that
emerge;
 Attain and sustain support from communities,
 Manage expectations so they are realistic and achievable,
 Manage risks and avoid the potential for disagreements;
and
 Reduce the prospect of delay and disruption.

The result of PPPs with good community
engagement
 More responsive to users;
 More sustainable;
 More resilient to change; and
 More likely to attract good private partners and
affordable financing.

The consequences of poor engagement
 The low up-take of project services;
 Reduced sustainability of benefits;
 Poor maintenance of the PPP and;
 Limited cost recovery of projects.
 Lack of participation can also lead to:

The consequences of poor engagement’
 A sense of indifference in the community towards
the PPP;
 Resentment towards the PPP;
 Deliberate obstruction on the part of intended
community beneficiaries; and
 Complications that create cost overruns and
schedule delays

Principles of Good PPP Procurement
 1. Value for Money: PPP projects should deliver better
Value for Money than conventional delivery. Value for
Money is the combination of the cost, price, quality,
quantity, timeliness and risk of the PPP project as
compared to public delivery.
 2. Affordability: PPP projects should only be awarded if
the government can meet the payments or liabilities
required for the duration of the contract, and/ or if users
are able to pay the required tariffs or user fees.
Affordability, however, is also a criterion for public
delivery of projects. Some projects may not be affordable
if publicly delivered.

Principles of Good PPP Procurement’
 3. Commercial Viability: PPP projects should not be
implemented if they are not commercially viable or
financeable for the private sector. The concessionaires in
PPPs need to remain profitable if the project is to succeed
and deliver value.
 4. Manageability: A PPP project must be manageable for
both the contracting authority and for the concessionaire.
The contracting authority should make sure the
contractual agreement and related monitoring and
management procedures are clear and workable. The
contracting authority must also ensure that capacity is in
place to manage the contract, and for the contracting
authority to meet its obligations under the contract.

 5.Acceptability: One of the government’s central
responsibilities is to ensure fairness and protection of the
public interest. For each project, the contracting
authority needs to consider whether it will be acceptable
and in the public interest to deliver the public
infrastructure or service via a PPP. This may require
careful communication to educate and prepare both users
and the public.

Unsolicited Proposals (USPs)
 An unsolicited proposal is a written proposal that is
submitted to a contracting authority on the initiative of
the submitter
 Some countries have banned USPs outright, primarily
because they present the following challenges:
 1. Achieving Value for Money is difficult: Achieving Value
for Money is challenging enough in a publicly initiated
approach in which the government has the capacity to
identify, prioritize, prepare, and procure an infrastructure
project. However, it is even more challenging to generate
Value for Money from a USP project.

Unsolicited Proposals (USPs)’
 2. It is extremely challenging to ensure competition
during procurement: Governments globally struggle to
ensure a competitive and equal playing field for projects
initiated as USPs. Typically, the USP proponent has
strategic advantages over competing bidders, including an
in-depth knowledge of the project. As a result, most
procurements for USP projects do not attract sufficient
competing bidders to ensure competitive pressure, and,
therefore, Value for Money.
 3. Guaranteeing transparency is problematic: USPs often
face allegations of corruption and fraud levelled by
stakeholders and civil society – especially after a change
in political administration.

Unsolicited Proposals (USPs)’
 4. They encourage public sector corruption and
opportunistic behaviour by private sector components.
 5. In many cases it has been difficult to handle unsolicited
bids because of their inherent risks. The public sector
often finds itself in a vulnerable position at the proposal
stage itself, particularly in terms of evaluation of the
proposed project.
 6. The private sector proposer is also vulnerable in terms
of security and confidentiality of proprietary ideas,
technologies and systems.

The critical stages of a PPP
 The stages by which a PPP is born and becomes fully
operational are as follows:
 1. Initial feasibility: This is the period during which the
Authority considers whether direct public-sector
procurement or indirect procurement through a PPP is the
appropriate route, and decides in principle to proceed
with the project on a PPP basis.
 2. Procurement phase: The period during which: bids are
requested and received, and a bidder is chosen. - An SPV
is formed, in whose name the PPP Contract and the
various Subcontracts for construction, service
delivery/operation, etc. are negotiated.

The critical stages of a PPP
 3. Construction phase: During the construction phase the
project’s debt and equity investment are drawn down,
and these funds are used to build the facility- the end of
this process, when the facility is formally accepted as
being available for use as specified in the PPP Contract, is
known as the Service Availability Date (or the Service
Commencement Date).
 4. Operation phase: The period during which the facility
provides the services required by the PPP Contract and
produces cash flow to pay the lenders’ debt service, and
the investors’ equity return.

PROCUREMENT’
 Following the approval of the project by the Authority, the
Government then typically tends to procure the PPP using
a method of competitive tendering often prescribed in
legislation or in internal government practice manuals.
 The precise procedure used will depend largely on the
applicable legal system but will generally include the
following stages.
 1. Advertising the project
 The Authority advertises the contract by publicizing
details of the project in some form of mass media such as
a journal or newspaper. The advertisement should set out
the basic details of the project and invite expressions of
interest.

PROCUREMENT’
 2. Expressions of interest
 Private sector contractors register their interest in bidding
for the project with the Authority.
 3. Pre-qualification
 The Authority sends out a pre-qualification questionnaire
to those private sector contractors who expressed an
interest in the project.
 The pre-qualification questionnaire is designed to assess
whether the bidders have sufficient technical ability,
capacity, financial standing and experience to carry out
the project.

PROCUREMENT’
 The pre-qualification questionnaire should set out the
criteria and methodology used to evaluate bidders.
 The Authority applies its pre-qualification criteria to the
responses received and selects those bidders it wishes to
submit bids.
 Typically at least four but no more than five bidders are
selected so as to ensure meaningful competition without
overburdening the Authority.

PROCUREMENT’
 4. Invitation to tender
 The selected bidders are then invited to submit tenders.
Bidders are usually given a period of two to three months
to prepare their tenders. During this period the bidders
may seek clarification about the project from the
Authority.
 5. Evaluation and selection of the preferred bidder
 The Authority evaluates the tenders on the basis of the
predetermined criteria and selects one preferred bidder
and one reserve bidder.

PROCUREMENT’
 6. Potential BAFO (Best and Final Offer)
 If the Authority is unable to choose a preferred bidder
from the tenders received because two or more of the
tenders are of equal quality, the Authority may request
that those bidders submit a best and final offer.
 7. Award
 The Authority may request the preferred bidder to clarify
certain issues but the terms of the deal should be
essentially fixed at preferred bidder stage. The authority
then makes the decision to award the contract.

DAY SIX:
CONTRACT MANAGEMENT TO
ENSURE LONG-TERM SUCCESS

Components of contract
management

Why Contract Management?
 A great contract at signing can be the worst six
months later, unless someone is carefully managing
its operation
 There is strong evidence to suggest that the
existence of a dedicated team and frequent
meetings between the two sides to review
performance levels helps improve service levels
 The government will not achieve value for money
from its contracts until it pays much more attention
to contract management

PPP Contract Management
 Many PPP contracts grant forms of “exclusivity” or
“monopoly rights” to a private partner.
Full Natural Monopolies: Water Distribution,
electricity distribution
Limited Natural Monopolies: Bus Terminals,
Marketplaces, Abattoirs
Sectors with “Competition-in-the-Market”:
Commercial real estate & commercial
complexes, hotels, shopping centers, etc.

PPP Contract Management’
 Private monopolies typically to seek to reduce
the quantities of services offered and raise their
prices to maximize profits (at the expense of
public economic welfare benefits)
 Because they face no, or limited, competition-
in-the-market, private monopolists will often
seek to reduce their spending on operations,
maintenance, and Renewal & Replacements
(R&R) in an attempt to increase profits. This
comes at the expense of quality of service and
service reliability.

Economic/Market Context:
Monopoly vs. Competition
 Private investors always find it more attractive to be
given Monopoly status, instead of having to compete with
other service providers in a Competitive Market.
 However, consumers benefit greatly from competition
and choice in the market, and the performance &
competitiveness of the whole local economy is enhanced
by real competition (prices, quality of services, types of
services, etc.)
 The Dilemma: Do you create a Monopoly in order to
attract more private interest in your PPP (&
Revenue/Profit-Sharing for the public contracting body)
or do you promote an open competitive market?

Common Requests for PPP Monopoly
Rights & Challenges
 Airports: Do not allow another airport within 150 kms to offer competing
air services during the life of the concession – or until average annual
passengers is more than ___ million/year.
 Toll Roads: Do not make improvements competing free roads during the life
of the concession.
 Bus Terminals: Do not build another competing bus terminal within the
Municipality for 20 years. Require all inter-city buses to use this new PPP
Bus terminal
 Slaughterhouses: Shut down all existing, non-hygienic
abattoirs/slaughtering shops operating within the Municipality. Fine those
who continue to use traditional/non-hygienic slaughtering techniques
within the Municipal jurisdiction
 Marketplaces: Shut-down trading & hawkers who operate outside the
boundaries of the new marketplace
 Solid Waste: Do not allow informal recyclers from collecting and sorting
municipal solid wastes

The PPP “Competition vs.
Monopoly” Dilemma
Full Monopoly
(NO Competition)
Open
Competitive
Market
MARKET STRUCTURE:
Investment
Attractiveness
to
Private
Sector
HIGH
LOW

Private Monopoly Behavior
QUANTITY of Goods & Services
PRICES
Supply
Demand
Q
(Comp)
Q (Mon)
Consumer
Welfare (Mon)
Consumer
Welfare (Comp)

Using the Incentives of
Competition
 In general, the incentives of competition are much more
effective than regulation (ie the legal requirements of a
Regulator or a PPP Contract Management Unit) at
ensuring effective & sustainable PPP performance.
 If a Marketplace PPP faces some competition from other
markets in the region (or in neighboring towns & other
cities in the country) it will strive to keep its
prices/rents and fees lower, to offer high quality
services, and maintain its facility well to attract more
traders and more business.
 Similar for bus terminals, abattoirs, with some exposure
to competition, etc.

PPP Payment-in-Exchange-for-
Performance
 How to enforce the payment-for-performance
principle?
 In PPPs where a public contracting authority is the
Single Off-Taker paying the private partner for
capacity/availability - if the private partner fails
to perform fully, it is possible to deduct from the
payments.
 In concession-type PPPs where all revenues come
from commercial sources & end-users, if the
private partner fails to perform, the public
contracting body will need to fine or penalize the
private partner – which can be more difficult to
accomplish.

PPP Performance Bonds
 A Letter of Credit (LoC) from a commercial bank
made available by the private partner to the public
authority throughout the life of the PPP contract.
 The public authority may “draw-down” on the LoC
at a given rate (per day, per month, etc.) if the
triggering conditions are met (ie failure of the
private partner to perform as contracted during
the term of the PPP contract)
 Performance Bonds ADD to the total cost of the PPP
project, meaning higher prices & tariffs. Private
investors will usually try to avoid them.

PPP Performance Bonds’
 Not all local banks may readily offer these
LoCs
 It can take a long time to negotiate &
agree on all of the triggering events &
procedures governing the LoC
 Private Partners will request equal
commitments & guarantees from public
authorities (i.e. financial penalties paid by
the public authority for any failures or
delays in their PPP contractual conditions)

Benefits of Long Term Contracts
 Security of supply / service provision / asset availability
 Security of cash flow / asset allocation / utilisation
 Amortisation of asset capital cost over economic life – ease
authority affordability
 Price certainty for Authority
 Revenue reliability for finance
 Raising term debt finance (maximise gearing)
 Investor confidence to commit with capital and resources
 Aids off balance sheet treatment
129

UNDERSTANDING WHERE DISPUTES
ARE MOST LIKELY TO ARISE
 Lack of understanding about PPP/PFI principles and
risk transfer.
 Lack of knowledge of the contract its clauses and
obligations.
 Over-reliance on self-monitoring provisions.
 Lack of understanding of private sector commercial
drivers.
 Poorly applied value testing.
 Lack of senior management support.

Understanding where Disputes’
 Poorly resourced teams (capacity and capability).
 Lack of access to specialist skills.
 A poor understanding of the payment mechanism.
 Poorly drafted change mechanisms and poorly
drafted contract clauses.
 A lack of awareness of central support and
guidance.
 Lack of investment and engagement by SPVs

Potential Solutions
 Improve the core skills of public sector managers by
the provision of targeted specialist operational PPP
training.
 Provide targeted specific operational PPP training to
senior managers (CFO’s, CE, Op’s Directors etc) to
ensure whole life VfM and risk transfer is understood
by senior managers.
 Explore in detail different operational contract
models such as consolidation of teams, regional
centres of excellence etc
 Improve support and guidance from central
government.

Potential Solutions’
 Encourage departments, regionally collocated projects, or
sector specific projects to have regular networking events
and lessons learned seminars.
 Gain wide acknowledgement that operational contract
management of PPP projects is a ‘specialism’ and adjust
recruitment and payment policies accordingly.
 Develop a ‘specialist’ PPP operational contract
management community across government with a ‘Head
of’ post that has day to day responsibility for operational
improvement.
 Regularly formally engage with private sector stakeholders
to encourage best practice across the PPP industry.

MONITORING PERFORMANCE AND
ENSURING ACTIONABLE DATA
 Effective contract management depends, in the first
place, on getting the PPP contract right. This implies
setting out the procedures that guarantee close
monitoring of the PPP Company’s performance and
general compliance with the agreed contract.
 Effective contract management will help to identify and
monitor the PPP Company’s construction and operational
performance.
 It will enable the Authority to manage the project risks
over the life of the PPP contract.

PPP Project Management Cycle:
 The Pre-Transaction Phases (1 – 4) require about 5-
10% of the duration of the PPP project management
cycle, but they tend to attract about 90% of the attention
& effort invested in PPPs.
 “Signing of the PPP Contract & reaching Financial
Closure is not the end of the PPP transaction, it is the
just beginning of the partnership”

Regular monitoring
 The contract management team will, for
example, need to:
 Monitor the attainment of key performance
indicators;
 Review quality control and quality assurance
procedures to ensure that these systems are in
place and effective;
 Establish and manage the day-to-day relationship
with the PPP company; and
 Report regularly to the stakeholders.

Risk management
 The risks that the contract management team will
need to manage can be classified as follows:
 Project risks contractually allocated between the
parties;
 Intrinsic risks borne by the authority;
 Project risks not contractually allocated; and
 Risks associated with changes to the PPP
contract.

Ensuring PPPs Perform as Planned
 PPPs are “Performance-Based” – If the private
partner does not perform fully, then they should
not be fully paid.
 This “Payment-in-exchange-for-performance”
principle incentives the private partner to manage
all of its risks properly (ie its “INPUTS”), so that
they WILL perform, as expected, and will receive
their full payments and profits.
 PPPs deliver better quality, reliability, and “Value
for Money” by placing the private partner’s capital
at risk.

 VfM Analysis is still needed AFTER the PPP contract
is signed to ensure that the actual performance
delivered does not drop below planned &
contracted output levels
Planned
Actual
Service
Level
Time
PPP Performance Monitoring &
Contract Management

Price Review Period: Trade-offs
 The shorter the review period, the more the price
cap will resemble an RoR regime
 Shorter review periods provide less incentives to
reduce costs
 The longer the review period the greater the
incentives to reduce costs
 Periodic reviews can be done to ensure that
consumers share in greater than expected
efficiencies or to protect the utility from
unexpected losses

Regulated Firm Review Period
British Telcom Initially 5 years, then 4 years
Water Companies 5 years
British Gas 5 years
Electricity:
Transmission Initially 3 years, then 4 years
Distribution 5 years
Supply Initially 4 years, then not regulated
Price Cap Review Periodsin the UK

In Practice…
 Most PPP investors for long-term PPP contracts insist
on “price caps” adjustment formulae for the entire
term (20 years) of their contract (no new
discretionary efficiency factors set by local
regulators/Public Client CMUs and the ability to pass-
on inflation-related costs like electricity, wages, &
other inputs to the public off-taker & end-users, etc.)
 However, if PPP project conditions change (increased
scope, new environmental laws & Regs., etc.) and new
investments are required, PPP contractors want
minimum “Rate of Return” commitments where they
are assured to continue the current (ie “high”) RoR on
the new capital investments they must now provide.

UNDERSTANDING DATES, DEADLINES
AND CONTRACTUAL FORMALITIES
 Are all of the PPP contracts terms and conditions,
including the obligations of both the public
authority and the Private Partner, clearly
understood?
 Is the public authority prepared the enforce the
terms of the contract?
 Is the public authority prepared to follow the
contract’s conditions on dispute resolution, should a
dispute arise in the future?

UNDERSTANDING DATES….’
 PPP contract monitoring units Should have
dedicated staff responsibility (even if the
Officer oversees more than one contract)
 Costs of Performance Monitoring should be
planned, budgeted for & recovered through the
cost of the PPP contract itself (“license fee”,
etc.)
 Specialized services (such as legal & very
specific technical skills) can be outsourced, but
core capacity should be maintained within
Govt.

UNDERSTANDING DATES….’
 Contractual disputes are common in PPPs for a
number of reasons. For example:
 Because the PPP contract is long-term and
unexpected circumstances are bound to arise; or
 Because PPP arrangements tend to be complex.

Dispute Resolution Techniques
 The typical dispute resolution mechanisms are:
 the national court system (litigation);
 arbitration (national or international);
 expert determination of some kind. This is often used for
specific issues (e.g. a technical or financial matter)
 mediation or conciliation (where the third party does not
give a binding decision but enables the parties to reach
an agreement); and
 a decision by a specialized regulatory body

UNDERSTANDING AND AVOIDING THE RISK
OF WRONGFUL TERMINATION
 A PPP contract should include detailed provisions dealing with its
termination. The main issues to be addressed are:
 The circumstances in which the contract may be terminated by a
party ahead of its scheduled expiry;
 The payment (if any) that must be made by the authority to the
PPP company upon termination (depending on the
circumstances); and
 The condition of the assets when they are “handed over” to the
authority following termination

UNDERSTANDING AND AVOIDING’
 The typical grounds for termination are:
 Expiry of the PPP contract term;
 Default by the PPP company;
 Default by the authority;
 A voluntary decision by the authority; and
 Termination in the event of prolonged force majeure

MANAGING CONTRACTUAL CHANGE
MECHANISMS, VARIATION AND RENEGOTIATION
 Regular review of projects is a significantly important exercise
for Contract Management.
 It helps in keeping both the project information and the issue
management activities up-to date.
 At all points of time, new and more complex challenges
surround project managers and hence these new problems
might cause severe delays in the project execution and
management.
 Thus, reassessing the risks involved is a necessary foundation
for ongoing review of the project’s contract management
framework.

MANAGING CONTRACTUAL CHANGE
MECHANISMS…’
 Unlike traditional public procurements for one-time
delivery of materials & commodities, PPPs are for
delivery of services over long terms (2–20+yrs.)
 Conditions are bound to change during these periods, and
it is not possible for long-term PPP contracts to deal with
all these changes in advance.
 Thus, to some degree, PPPs contracts are “inherently
incomplete”

Managing changes permitted in the PPP
contract
 The PPP contract will set out the triggers and methodologies for
agreeing and implementing changes to the PPP contract.
 The contract administration manual should specify logistical
and administrative details such as:
 The person to whom a request for a change must be sent;
 The person who will assess the impact of the proposed change;
 The persons authorized to agree a change on behalf of the
Authority and the PPP Company; and
 The person responsible for overseeing and verifying
implementation of the change

Managing changes not provided for in
the PPP contract
 Given the long life of PPP contracts, unforeseen changes
in contractual specifications are not unusual.
 The contract management team needs to address these
issues and strike a satisfactory balance between:
 Encouraging the PPP Company to manage its risks; and
 Preventing poor performance by the PPP Company from
endangering the viability of the PPP contract.

Renegotiation of PPP Agreements
 A number of such projects around the world have become
distressed in terms of the emergence of risks that may not
have been contemplated at the time of signing. The forms
of distress may include:
 Lower than expected revenue;
 Higher than expected costs;
 Delays;
 Variations in contractual specifications and;
 Disagreements between the parties as to cause and effect
of actions/inactions.

Examples of unplanned-for changes with
long-term PPPs:
 Changes in:
Scope: such as expansions in the size/area of
the PPP project at the request of the client
(Govt.)
Input Costs: electricity & fuel, inflation,
interest rates and other key inputs
Laws & Regulations: New environmental Regs.,
new tax laws, new labour laws, etc. that
require new costs to be met by the private
partner
Demand: When the volume of service
required differs from what was planned

Examples of unplanned-for changes’
 Service Delivery Standards: Client may request
changes to the technical quality standards
 Thus, PPP contracts should be VERY CLEAR up-
front how the prices/tariffs may (or may not) be
changed & adjusted.
 Both sides must agree up-front so that they can
trust the other partner that such adjustment
procedures are fair and acceptable

PPP Contract Management Skills
 There are four major areas of PPP Contract Compliance &
Performance Monitoring:
1. Institutional: Designing & managing the PPP Contract
Monitoring Unit (CMU)
2. Technical Performance & Quality of Service Delivery
Monitoring
3. PPP Price and Economic Regulation
4. Legal Management of PPP Contract Terms & Conditions

1. Institutional: PPP Contract
Monitoring Units
 Powers, authorities, functions, duties & funding for PPP
Contract Management Units (CMUs)
 Organizational Design Options for PPP Monitoring:
Regulation-by-Contract vs. Regulation-by-Commission
 Staffing and resources for PPP CMUs: Financial, human, IT,
logistical & other resources. Costs of Monitoring &
enforcement should be paid for through the PPP contract
itself (“annual license/concession fee” paid by private
partner, etc.)
 Standardized procedures for PPP CMU Operations

2. Technical Performance & Quality of
Service Delivery Monitoring
 Based upon the PPP’s Quality of Service Output Performance
Standards (designed & drafted as part of the PPP Feasibility
Study)
 Drafting and reviewing clear, measurable, verifiable, cost-able,
and enforceable PPP performance output performance
indicators
 Resources (powers, human, IT, logistical, etc.) and procedures
for gathering and verifying technical performance data &
information
 Linking PPP payments & revenues to PPP technical & legal
performance

3. PPP Price and Economic
Regulation
 Understanding the need for PPPs to achieve and to
maintain long-term cost-recovery & financial
sustainability
 Changes in economic & contractual conditions that
require changes in PPP prices & tariffs
 Options for adjusting & setting PPP prices and tariffs:
Rate-of-Return Regulation
Price-Capping Regulation

4. Legal Management of PPP
Contract Terms & Conditions
 Provides for how fiscal commitments under PPPs are
controlled, reported, and budgeted for, to ensure PPPs
provide value for money, without placing undue burden on
future generations, and to manage the associated fiscal
risk.
 Ideally, procurement laws and regulations should be clear,
consistent, comprehensive, and flexible.
 it is important that there is enough revenue not only for
operating expenses but also for the capital costs of the
business (i.e. service on the debt and dividends on the
stock)

Return on Capital
Asset Rate Base
Rate of
Return (%)
Revenue
1. O & M
Costs
2. Debt
Service
3. Taxes
(Income Taxes)
4. Profit
Return on the Utility’s
Capital
= -----------------

Examples of PPP Contract Management
 An LGA has awarded a PPP contract for the
design, financing, construction, and
management of a new municipal Bus
Station. The private partner’s revenues
come primarily from commercial rents paid
by tenant retail shops.
 To make the project more attractive, the
Govt gave the private partner a monopoly
on commercial & retail space development
for a 1-block radius zone.
 Shops that are renting space at the new bus
terminal are complaining that the rents are
too high and that the bus terminal building
is not being regularly maintained, cleaned
and secured by the private partner.
 What should the LGA do?

Examples of PPP Contract Mgt’
 An LGA has awarded a PPP contract to design,
finance, construct, and manage of a new
marketplace. The municipality has contributed
the land in exchange for 20% equity ownership.
 The private partner has announced that because
of increases in inflation, electricity prices, water
prices, and wage increases, the rents it charges
will need to be increased next year 25%.
 The municipality has not established a PPP
Monitoring Unit, because no funds have been
provided for it.
 Tenants at the market complain that the level of
service at the marketplace has not improved,
and threaten to leave if rents are increased by
25%

Examples of PPP Contract Mgt’
 An LGA has awarded a PPP contract to
design, construct, finance, operate, and
maintain of a modern hygienic
slaughterhouse. Revenues for the
private partner will come from service
charges per animal processed.
 The LGA is contributing the land and
building the approach roads to the new
facility, in exchange for a 20% share of
gross-revenues earned.
 The private partner has completed the
construction of the abattoir on-time,
but complains that it cannot operate
because the new approach roads have
not yet been built by the LGA.

DAY SEVEN: MANAGING CRITICAL
EVENTS IN PPP

Termination Provisions
 The contract typically sets out the contract termination
date and arrangements for contract close and asset
handover.
 The PPP contract, or in some cases the relevant PPP Law,
should also specify circumstances in which the contract
may be terminated early, and the consequences of
termination in each case.

Material Adverse Government Action
 1. For the purposes of PPP Contract, “Material Adverse
Government Action” means any act or omission by the
Contracting Authority or any relevant public authority or
event set out in Clause (2) below, which occurs during the
term of this PPP Contract and which
 directly causes the Private Partner to be unable to comply
with all or some of its obligations under the PPP Contract
and/or
 has a [Material] Adverse Effect] on its [costs or revenues]
[insert defined terms].

Cont…’
 2. For the purposes of Clause (1) above any act or
omission shall mean and be limited to the following
circumstances:
 i. failure of any relevant public authority to grant to the
Private Partner or renew any permit or approval that is
required for the purposes of the Private Partner’s proper
performance of its obligations and/or enforcement of its
rights under this PPP Contract, in each case
 ii. within the required timeframe under [Applicable Law],
except where such failure results from the Private
Partner’s non-compliance with [Applicable Law];

Cont…’
 iii. any act of war (whether declared or
undeclared), invasion, armed conflict or act of
foreign enemy, blockade, embargo or revolution,
occurring inside a country
• iv. radioactive contamination or ionizing
radiation, [originating from a source in a country
• V. any riot, insurrection, civil commotion, act or
campaign of terrorism occurring inside a country

Cont’
• Vi. any strike, work-to-rule, or go-slow which is not
primarily motivated by a desire to influence the actions of
the Affected Party so as to preserve or improve conditions
of employment by the Affected Party, occurring inside a
country
• Vii. expropriation, compulsory acquisition or
nationalization by any relevant authority of any asset or
right of the Private Partner, including any of the shares in
the Private Partner;
 Viii. any act or omission of any relevant authority
adversely affecting the legality, validity, binding nature or
enforceability of this PPP Contract.

Termination for convenience or national
interest
 The government will always reserve the right to
terminate the contract early, on the basis of
public interest.
 The contract should grant to the private partner
the right to be compensated in full.
a. It should recover all funds invested (outstanding
equity which is the invested equity minus all
distributions received to the date of termination),

Cont..’
b. Be covered against the costs of breaking its
contracts with third parties (that is, the amount
should compensate for outstanding debt, financial
debt breakage costs, other contract and sub-
contract breakage costs, and demobilization costs).
c. It should also include a sum to compensate for
the opportunity costs of the equity investment.

COMPENSATION AND ORDERLY TERMINATION
 Termination payments
i. PPP contracts usually require the Authority to make
payments to the PPP Company if and when the contract is
terminated. These provisions are generally complex and
need to be carefully drafted with the assistance of
advisers, taking into account a number of factors, such
as:
ii. Fairness;
iii. Incentives for the PPP company and its lenders; and
iv. Bankability

RESCUING A PPP: EXERCISING STEP-IN
OR SUBSTITUTION RIGHTS
 A Step-In Right as Part of Security System Transferring
control over the project to a lender under a contract
constitutes the step-in right mechanism.
 "Step-in right" is one of the standard protection
arrangements in project financed transactions. In general
terms, "step-in" means a right of the lender to step into
the shoes of the project company as a service provider.

Cont..’
 The following standard provisions of the direct agreement
are the most important:
 The lender is given a 'cure period' (i.e., extra time to take
action to remedy the Project Company's default in
addition to that given to the Project Company) before the
[project company's] contract is terminated. These cure
periods are limited in length (it is usually sufficient
enough for the lender to take active steps to find a
solution to the problem)

Cont..’
 The lender has the right to 'Step-In' to the contract during
the cure period. This means that it can appoint a nominee
to undertake the Project Company's rights in parallel with
the Project Company or substitute the project company.
 The lender will [normally] not assume any additional
liability as a result of Step-In or substitution, unless the
lender exercises the step-in right itself.
 The Project Company undertakes not to obstruct the
lender’s exercise of [its] Step-In and substitution rights.

FORCE MAJEURE OR RELIEF EVENTS -
KEEPING YOUR PPP ON TRACK
 PPP contracts normally provide for the possibility
for either party to terminate where a force
majeure event precludes performance of the
obligations for a prolonged period of time.
 In this case, the general principle adopted is that
since neither party is at fault, the burden of
termination should be shared.

Variations of the Step-In Right
 The lender usually wants to ensure that the project
company will continue with the project after step-in.
 Based on this, there are "three different levels of lender
intervention in the project:
 1. Cure Right
 The cure right allows the lender to cure a breach of an
obligation of the project company under one of the
project documents. 'For example, a need for using the
cure right may arise when the project company
constructing a pipeline is in arrears on its payments to its
contractor for the pipeline construction services.

Variations of the Step-In Right’
 ii. Step-In Right (In the Strict Sense)
 Taking the same pipeline project example as described
above, the possibility of exercising this kind of step-in
right may come along when the project company is not
simply behind on its payments, but also experiences other
difficulties posing substantial risk of its default on the key
project contracts, e.g., excessive expenses, serious
technical shortcomings of the project, or low
management potential.
 Once the lender steps-in and, after improving the
situation, steps-out, the project company again becomes
solely responsible for the project.

Variations of the Step-In Right’
iii. Novation
 The final variation of step-in right implies transfer of all
of the project company's rights and obligations to a
substitute entity and removal of the project company
from the project. This type of step-in right may require
consent of "various project participants [e.g. contractors,
sub-contractors, or customers].
 when the project company experiences severe difficulties,
the lender instead of keeping the project company liable
for the project can novate the whole project to another
company which is more capable or fulfilling the project.

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