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Planning and Negotiating PPPs:
An International Legal Perspective
Day Two, Thursday 12th May 2011
Jean-Paul Gauthier
Dep. Sec. General, WEPZA; MD, Locus Economica LLC
AFZA Convention 2011, Dar es Salaam
2
Confused as to what a PPP is?
BOT Build-Operate-Transfer
BBO Buy-Build-Operate
BLT Build-Lease-Transfer
BOO Build-Own-Operate
BOOM Build-Own-Operate-Maintain
BOOT Build-Own-Operate-Transfer
BT Build-Transfer
BTO Build-Transfer-Operate
DB Design-Build
DBB Design-Bid-Build
DBFO Design-Build-Finance-Operate
DBOM Design-Build-Operate-Maintain
DBOT Design-Build-Operate-Transfer
DBM Design-Build-Maintain
DBFM Design-Build-Finance-Maintain
DBFOM Design-Build-Finance-Operate-Maintain
DOO Design-Own-Operate
DOT Develop-Operate-Transfer
LDO Lease-Develop-Operate
ROO Rehabilitate-Own-Operate
ROT Rehabilitate-Operate-Transfer
TOT Transfer-Own-Transfer
EOT Equip-Operate-Transfer
Asset Capitalization
Developer Finance
Divestiture
Lease
Maintenance Agreement
Management Contract
Service Contract
Turnkey Delivery
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PPP: A Definition
A PPP is a contractual agreement between a public agency and a private sector entity, through which the assets and skills of each party are shared in delivering a facility or service to the general public, as well as in the risks and rewards of the delivery of this facility or service.
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PPPs: The Basic Construct
Customers
Regulator
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PPP Partnering Principles
Two or more parties share assets, skills, risks, and rewards associated with project development and operation
Private sector seeks to make a return commensurate with risk taken on
Public sector seeks to achieve public policy objectives
Public partner needs to monitor private sector partners
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4 Basic Types of PPP
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DBFO / Concession Structure (SEZ)
Direct Agreement
Financial Institutions
Project Agreement
Gov. Authority
Land Lease
Shareholders
Sub Developers
Developer/Operator
(SPV)
Construction Company
Subcontractors e.g. design engineers, architects,
builders
Subcontractors e.g. maintenance
firm, facilities services
ShareholdersAgreementFinancing Agreement
Tenants
Tenant Leases
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Typical JV Legal Instrumentation
Development Corp.(Public SOE, Crown Corp.
EPIC/EPAC)
Ministry / Dept. / Agency of “tutelle”
State Shareholder M.D.A.s
Private Shareholders
Shareholders’ Agreement
Articles / Bylaws
Zone Operator
Management Contract
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Legal Agreements Made Simple
Project Instrumentation
Master Project / Concession / Developer Agreement
Financing Agreement / Loan/s
Security Instrument/s
Subcontracts (Construction, Operation, Maintenance, Services…)
[Feed stock Contract/s]
End-User Contract/s (Tenant Leases, Off-take Contracts...)
SPV Instrumentation
Articles / Bylaws
Shareholder Agreement
Risk Mitigation
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Complex Financial Flows
12
5 Stages of a PPP Infrastructure Project
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Illustrative Risks & Solutions at the Operation Stage
Risks Solutions
Raw Material Supply Feedstock contracts
Market Market StudyOff Take Agreements
Performance / Technical Proven TechPerformance Guarantees
Operations / Maintenance Experienced Operator
Foreign Exchange Flexible Tariff FormulaForeign Exchage GuaranteeEscrow Accounts
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Mitigating Risk Through PPP “Contract Networks”
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Risk Management in Project Contracts
Clear definition of assets
Clear definitions of roles and responsibilities of parties
Periodic testing/benchmarking and re-pricing mechanisms or Phased Development Options
Liability caps
Insurance / Bond / Contingency Fund requirements
Step-in rights
Subrogation rights
Legal Stability Clause
Contract and Legal Primacy
Choice and Language of Law & Jurisdiction
Fast-Track Dispute Resolution Mechanism
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UP-STREAM FINANCIAL AND ECONOMIC MODELING
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Modeling required before to decide on the PPP structure
• Summary Market Study and 10-year Land Uptake Forecast, specifying the sources of the investment and resulting cumulative land uptake. Investment and land uptake should be based both on an annual incremental and annual cumulative projections of the number of firms expected with sector-based assumptions regarding necessary space in square meters for each firm’s investment. Construction years should be separated from the operational years, and clearly indicate options projections. The study and forecast should be developed under three scenarios: i) optimistic; ii) pessimistic; and, iii) conservative.
• Summary economic analysis of the zone’s expected long term contribution to the national economy
• Financial feasibility study, demonstrating anticipated sources of finance and an acceptable Internal Rate of Return, calculated from the beginning of year 1 of the acquisition of the land lease, encompassing the construction years, and 10 years from operational start-up.
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Legal Due Diligence: Take your time, Do it Once, Do it Right!
Market Risk
Secure/Disposable Assets (Sureties)
Equity Caps
Environmental and Social Impact Assessments
Transaction Risk
Considered/Transparent Procurement
Developer Track Record Verification
Suitable legal Transaction Advisors
Operating Risk
Performance Guarantees
Don’t overly focus on the transaction!
Case Study: Abu Dhabi HCSEZ
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Background
HCSEZ is the apex organization in Abu Dhabi charged with development, operation and regulation of SEZs and related infrastructure.
ICAD was publicly developed and operated. Although fully leased, there were no cost-recovery objectives or delivery; development was heavily subsidized and its operation consumed considerable resources. Recognition that HCSEZ cannot and should not replicate the ICAD model
BearingPoint hired to restructure HCSEZ operations, enhance its capabilities, refocus it on the promotion of private zones, and assist in the prioritization, development and implementation of priority projects. Under a management contract, we are providing a world-class management team to manage HCSEZ for a period of five years.
HCSEZ is the apex organization in Abu Dhabi charged with development, operation and regulation of SEZs and related infrastructure.
ICAD was publicly developed and operated. Although fully leased, there were no cost-recovery objectives or delivery; development was heavily subsidized and its operation consumed considerable resources. Recognition that HCSEZ cannot and should not replicate the ICAD model
BearingPoint hired to restructure HCSEZ operations, enhance its capabilities, refocus it on the promotion of private zones, and assist in the prioritization, development and implementation of priority projects. Under a management contract, we are providing a world-class management team to manage HCSEZ for a period of five years.
21
Abu Dhabi HCSEZ Development initiatives
Petrochemical Zone
Industrial City Al Ain
Industrial City Abu Dhabi(ICAD Phase I)
O&G Services Complex Automotive Cluster
ICAD Phase II
Airport Logistics Hub
ICAD Other Phases
Basic Material Zone
Medical CityScience & Technology Complex
(Laboratories)
Industrial City Close to Dubai (Al Maha)
Pharmaceutical Cluster
Food & Beverage Cluster
Free Zone & Financial Services Business Park
Military Industrial City
Special Tourism Zone
Agro-Industrial & Agro Research Zone
Military Training Zone Others
HCSEZ
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HCSEZ Approach to PPP
1. HCSEZ builds backbone infrastructure
2. HCSEZ builds-out its infrastructure responsibilities in phases, linked to market up-take
3. HCSEZ goes to market to determine interest of private zone developers as sub- or master developers.
4. Based on market feedback, HCSEZ structures modified DBFO PPP as follows:
transfers to developer responsibility for backbone infrastructure continues build-out of on-site infrastructure, and then transfers responsibility continues with limited built-to-spec buildings, and then transfers responsibility
5. HCSEZ & Developer negotiate final PPP contract
HCSEZ needed to act quickly to realize its
program implementation
objectives
The Project Agreement
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Standard PPP Project Contract Clauses
Services to be provided / Performance Standards
Duration (Commencement, Critical Dates, Expiry/ Termination/ Release)
Contributions (Assets, Capital, Payments)
Performance Monitoring (Events, Acceptances, Measurement Methods)
Liability & Limitations
Warrantees (Due Diligence, Latent Defects…) & Exclusions
Delivery Protections (Performance Bonds, Parent Company Guarantees, Security, Insurance, Long-Stop Date, Access, Step-in Rights)
Assignment / Change of Ownership / Subcontracting
Early Termination/ Suspension (Events, Force Majeure, Compensation/ Relief/ Prorating & Valuation)
Breach, Rectification, Damages & Indemnities
Disclosure, Information, Confidentiality, IPR
Dispute Resolution (Law, Language, Jurisdiction, Forum)
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Key Elements in SEZ Concession Agreement (Suleimaniya SCA, Iraq)
Objectives, Summary Description of Proposed Development & Project: What is the Deal?
Relevant Economic Development Plans, Context, and Legal & Regulatory Structure in place
Government Commitments
Role of the Developer
Property, Site and Surrounding Areas, with Description
Agreement to Lease (Payment of Rental Price and Charges, Transfer of the Land / Delivery of Possession, Land Use)
Duration
Limitations and Restrictions (Amalgamation, Activities Pursuant to Approved Plans, Restrictions on Use, Multiple Developers, Alienation of Developer Interests and Rights)
Covenants of Concessionaire (Access, Liability for Damage and Indemnity for Events on Site, Insurance, Constitution of the Concessionaire and Other Conditions Precedent)
Expiry, Extension or Renewal of Contract, and Survival of Obligations
Termination (Default Events, Cause, Rescission, Consequences, Whole Rights and Remedies Upon Rescission, Survival of Obligations, Force Majeure)
Breach (Consequences, Payments, Forfeiture of Performance Bond/Security)
General Provisions (Notices, Authorized Representatives, Time of the Essence, Cumulative Rights and Remedies, Agreement Binding on Successors, Permitted Assigns, Agreement Supersedes Previous Agreements)
Dispute Resolution, Governing Law, Arbitration
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Additional SEZ Concession Terms and Conditions
Fixed
– Land ownership and residual rights to all buildings
– Site planning requirements and standards
– Minimum land lease rate
– Minimum land absorption rate
– Minimum level of developer equity investment
– Regulatory regime and monitoring/control procedures
Variable (subject to negotiation with the Private Partner)
– Land lease rate above minimum
– Land absorption rate above minimum
– Level of developer equity above minimum
– Cost to end-users (tenants)
– Expected returns
Recap
28
PPP Legal “Rules of Thumb”
Fundamental RulesPPPs require sound legal underpinnings
Begin with preparation of adequate documentation and a clear understanding of developers/users requirements
Private sector can enter at different stages depending on strategic goals/objectives
Models and transaction structures are nearly unlimited
Specifications, Specifications, Specifications (the Public Interest!)
Key Factors in deciding on specific PPP approachMarket (Developers, Users)
Asset Capitalization / Expected Returns
Terms and Schedules for RoI
Public Interest
Level of Certainty (Long-term Trends)
Capacity to Contract / Supervise
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Final Thought: Sound PPP Frameworks are not enough…
You also need:
An underlying market capable of paying for the infrastructure services
Skills and capacity to develop and monitor PPPs
Soft enablers for infrastructure developers
Open investment framework
Development planning flexibility
Incentives
Long-term development horizon
30
Acknowledgements
• Adrian Rouse, Deloitte Consulting LLP
• David Spira, Deloitte Consulting LLP
• Kishore Rao, Deloitte Consulting LLP
• Julien Galant, IFC
• Jim O’Gara, AECOM International