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Planning and Negotiating PPPs: An International Legal Perspective

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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 2011 Jean-Paul Gauthier, Dep. Sec. General, WEPZA; MD, Locus Economica LLC AFZA Convention 2011 Mlimani City Conference Centre, 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

3 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.

4 PPPs: The Basic Construct
Regulator Customers

5 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

6 4 Basic Types of PPP We 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. Authority Direct Agreement Project Agreement Land Lease Shareholders Shareholders Agreement Financial Institutions Financing Agreement Developer/ Operator (SPV) Tenant Leases Intention is not to overwhelm but rather to show the inherent complexity within property development that the public sector needs to appreciate. Construction Company Sub Developers Tenants Subcontractors e.g. design engineers, architects, builders Subcontractors 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) objectives Proper insulation from Government interference / division of responsibilities [Management Contract]

9 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

10 Risk Mitigation

11 Complex Financial Flows

12 5 Stages of a PPP Infrastructre Project

13 Illustrative Risks & Solutions at
Operation Stage

14 Mitigating Risk Through PPP “Contract Networks”

15 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

16 Up-stream financial and economic modeling

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 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. 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 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!

19 Case Study: Abu Dhabi HCSEZ

20 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.

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 City Science & 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 HCSEZ 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 PPP HCSEZ needed to act quickly to realize its program implementation objectives 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

23 The Project Agreement

24 Standard PFI 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)

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 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

26 Additional Concession Terms and Conditions (SEZ Project)
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

27 Recap

28 PPP Legal “Rules of Thumb”
Fundamental Rules PPPs 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 approach Market (Developers, Users) Asset Capitalization / Expected Returns Terms and Schedules for RoI Public Interest Level 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 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 Adrian Rouse, Deloitte Consulting LLP
Acknowledgements Adrian Rouse, Deloitte Consulting LLP David Spira, Deloitte Consulting LLP Kishore Rao, Deloitte Consulting LLP Julien Galant, IFC Jim O’Gara, AECOM International

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