Presentation on theme: "Planning and Negotiating PPPs: An International Legal Perspective"— Presentation transcript:
1 Planning and Negotiating PPPs: An International Legal Perspective Day Two, Thursday 12th May 2011Jean-Paul Gauthier,Dep. Sec. General, WEPZA; MD, Locus Economica LLCAFZA Convention 2011Mlimani City Conference Centre, Dar es Salaam
2 Confused as to what a PPP is? BOT Build-Operate-TransferBBO Buy-Build-OperateBLT Build-Lease-TransferBOO Build-Own-OperateBOOM Build-Own-Operate-MaintainBOOT Build-Own-Operate-TransferBT Build-TransferBTO Build-Transfer-OperateDB Design-BuildDBB Design-Bid-BuildDBFO Design-Build-Finance-OperateDBOM Design-Build-Operate-MaintainDBOT Design-Build-Operate-TransferDBM Design-Build-MaintainDBFM Design-Build-Finance-MaintainDBFOM Design-Build-Finance-Operate-MaintainDOO Design-Own-OperateDOT Develop-Operate-TransferLDO Lease-Develop-OperateROO Rehabilitate-Own-OperateROT Rehabilitate-Operate-TransferTOT Transfer-Own-TransferEOT Equip-Operate-TransferAsset CapitalizationDeveloper FinanceDivestitureLeaseMaintenance AgreementManagement ContractService ContractTurnkey Delivery
3 PPP: A DefinitionA 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.
5 PPP Partnering Principles Two or more parties share assets, skills, risks, and rewards associated with project development and operationPrivate sector seeks to make a return commensurate with risk taken onPublic sector seeks to achieve public policy objectivesPublic partner needs to monitor private sector partners
6 4 Basic Types of PPPWe are going to focus on three types of PPP - BOT, DBFO, BOO - differentiated by the extent of private sector involvement - and this must be true because I borrowed the diagram from the European Commission! Compare with traditional procurement on the left where the Public Sector is Owner and Operator
7 DBFO / Concession Structure (SEZ) Gov. AuthorityDirect AgreementProject AgreementLand LeaseShareholdersShareholdersAgreementFinancial InstitutionsFinancing AgreementDeveloper/Operator(SPV)Tenant LeasesIntention is not to overwhelm but rather to show the inherent complexity within property development that the public sector needs to appreciate.Construction CompanySub DevelopersTenantsSubcontractors e.g. design engineers, architects, buildersSubcontractors e.g. maintenance firm, facilities services
8 Typical JV Legal Instrumentation Key questions:Respective contributions (valuation)Board composition (as privately-oriented as possible)Proper (broad) objectivesProper insulation from Government interference / division of responsibilities [Management Contract]
13 Illustrative Risks & Solutions at Operation Stage
14 Mitigating Risk Through PPP “Contract Networks”
15 Risk Management in Project Contracts Clear definition of assetsClear definitions of roles and responsibilities of partiesPeriodic testing/benchmarking and re-pricing mechanisms or Phased Development OptionsLiability capsInsurance / Bond / Contingency Fund requirementsStep-in rightsSubrogation rightsLegal Stability ClauseContract and Legal PrimacyChoice and Language of Law & JurisdictionFast-Track Dispute Resolution Mechanism
17 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 economyFinancial 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.The financial study should clearly set out all capital, operational and maintenance costs over the lifetime of the projects. The same should be done for all revenues. Revenue projections should be derived from the demand forecast. All costs and revenues should be projected on net annual and incremental bases. Phases of development should be clearly set out, and correspond to the Master-Plan. Sources of capital should be clearly identified, with the appropriate risk ratings and interests. Notably, the financial study should clearly specify: investment that is expected to be funded by the promoter/developer on their own, indicate what of this is self-funded and what is debt-funded, and when this funding has been secured or is to become available; investment that is expected to be funded by third parties, which third parties, the amounts and when these have been made or will be made; investment that has been made by Government or is expected to be made by Government. Standard project finance calculations should be provided: income statements, depreciation, discounted cash flows, and IRRs. Projections should be made on the basis of the above demand scenarios.
18 Legal Due Diligence: Take your time, Do it Once, Do it Right! Market RiskSecure/Disposable Assets (Sureties)Equity CapsEnvironmental and Social Impact AssessmentsTransaction RiskConsidered/Transparent ProcurementDeveloper Track Record VerificationSuitable legal Transaction AdvisorsOperating RiskPerformance GuaranteesDon’t overly focus on the transaction!
20 BackgroundHCSEZ 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 modelBearingPoint 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 ZoneIndustrial City Al AinIndustrial City Abu Dhabi(ICAD Phase I)O&G Services ComplexAutomotive ClusterICAD Phase IIAirport Logistics HubICAD Other PhasesBasic Material ZoneMedical CityScience & Technology Complex (Laboratories)Industrial City Close to Dubai (Al Maha)Pharmaceutical ClusterFood & Beverage ClusterFree Zone & Financial Services Business ParkMilitary Industrial CitySpecial Tourism ZoneAgro-Industrial & Agro Research ZoneMilitary Training ZoneOthersHCSEZHCSEZ needs to be prepared to meet private zone developers and operators ‘half-way’ which will differ from project to project: For those projects for which the economic fundamentals are quite attractive, HCSEZ can transfer responsibility to the private sector developer earlier; for those more challenging projects, a greater upfront investment by HCSEZ will be required.
22 HCSEZ Approach to PPPHCSEZ needed to act quickly to realize its program implementation objectives1. HCSEZ builds backbone infrastructure2. HCSEZ builds-out its infrastructure responsibilities in phases, linked to market up-take3. 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 infrastructurecontinues build-out of on-site infrastructure, and then transfers responsibilitycontinues with limited built-to-spec buildings, and then transfers responsibility5. HCSEZ & Developer negotiate final PPP contract
25 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 placeGovernment CommitmentsRole of the DeveloperProperty, Site and Surrounding Areas, with DescriptionAgreement to Lease (Payment of Rental Price and Charges, Transfer of the Land / Delivery of Possession, Land Use)DurationLimitations 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 ObligationsTermination (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
26 Additional Concession Terms and Conditions (SEZ Project) FixedLand ownership and residual rights to all buildingsSite planning requirements and standardsMinimum land lease rateMinimum land absorption rateMinimum level of developer equity investmentRegulatory regime and monitoring/control proceduresVariable (subject to negotiation with the Private Partner)Land lease rate above minimumLand absorption rate above minimumLevel of developer equity above minimumCost to end-users (tenants)Expected returns
28 PPP Legal “Rules of Thumb” Fundamental RulesPPPs require sound legal underpinningsBegin with preparation of adequate documentation and a clear understanding of developers/users requirementsPrivate sector can enter at different stages depending on strategic goals/objectivesModels and transaction structures are nearly unlimitedSpecifications, Specifications, Specifications (the Public Interest!)Key Factors in deciding on specific PPP approachMarket (Developers, Users)Asset Capitalization / Expected ReturnsTerms and Schedules for RoIPublic InterestLevel of Certainty (Long-term Trends)Capacity to Contract / Supervise
29 Final Thought: Sound PPP Frameworks are not enough… You also need:An underlying market capable of paying for the infrastructure servicesSkills and capacity to develop and monitor PPPsSoft enablers for infrastructure developersOpen investment frameworkDevelopment planning flexibilityIncentivesLong-term development horizon