Transcript Who Owns the Ocean? Property Rules and Use of Oceanwater

Contracting for
Public-Private Partnerships
United Nations Development Programme
Special Unit for South-South Cooperation
Training Course
Wes Strickland, Esq.
Hatch & Parent
Arlington, VA
September 18, 2006
Outline
I.
II.
III.
IV.
Overview of contract types
General contract terms
Special contract terms for each structure
Final observations
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I. Overview of Contract Types
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Operation and maintenance (O&M)
Design build operate maintain (DBOM)
Design build finance operate (DBFO)
Build own operate (BOO)
Build own operate transfer (BOOT)
Buy build operate (BBO)
Privatization
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Key Structural Questions
• What is the partnership project?
• In what jurisdictions will the project exist?
• Under what legal authority does the public partner
undertake the project?
• What type of entity is the private partner?
• Are there pre-existing assets being contributed?
• Are new assets being constructed?
• Who will own the assets?
• What capital resources are available to the partners?
• Who will provide any needed capital and how?
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Key Structural Questions (2)
• What will the private partner do?
• What payment will the private partner receive?
• How will the private partner’s success be measured and
rewarded (or punished)?
• How will taxes be impacted? (after tax analysis)
• How long will the partnership last?
• What types of outside permits/approvals will be required?
• Who is the end user, the public partner or the public at
large?
– “Sponsored” (public at large) or “managed” (public partner)
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Basic Structural Principles
• PPPs are partnerships, and each partner should
act in good faith to further the purposes of the
partnership
• Good partnerships are based on clear
understandings of each partner’s role
• Tasks should be assigned to each partner
according to their ability
• Compensation should be based on each partner’s
tasks and assumption of risk
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O&M Contracts
• Utilized when public sector partner already
owns an asset for which it needs
management services
• Public partner maintains ownership of
initial assets
• Private partner provides specific services
for a fee
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DBOM/DBFO Contracts
• Utilized when a new asset needs to be designed,
built and possibly financed
• Like O&M contract, but adding capital
component
• Allows access to private capital markets
• Higher risk for private partner than O&M
• May avoid some public labor force issues
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Concessions
• Utilized when public partner desires to have private
partner take total responsibility for delivering service
directly to the public, subject to contractual or regulatory
terms
– Utilities
– Transportation infrastructure, e.g., toll roads, bridges, airports
• BOO, BOOT or BBO
• “Franchise”
• Affermage contracts
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Triangular Structures (2)
Private Partner for
O&M/Capital
Components
Public Partner
Public Partner
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Triangular Structures
Public Partner
Public or
Private Partner for
Capital Component
Private Partner for
O&M Component
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II. General Contract Terms
• Contracting to meet basic structural
principles
• Basic terms of PPPs
• Jurisdictional limitations
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Contracting to Implement
Basic Structural Principles
• Include all potential tasks in contract
• Define each task as specifically as possible, and the
duties of each partner to accomplish that task
• Define all conditions that must be met prior to each
duty arising, or that might cause a duty to cease
• Define success and what happens based on success
or failure
– Reward/punishment
– New strategy
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Outline of Basic PPP Contract
• Recitals
• Definitions
• Agreement clauses
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Project definition, duties of the partners
Performance standards, covenants and monitoring
Payments
Risk allocation
Security for performance
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Outline of Basic PPP Contract (2)
• Agreement clauses (cont.)
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Term and termination
Wrap-up upon termination
Delay and force majeure
Indemnification
Affiliate guarantees
Dispute resolution
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Outline of Basic PPP Contract (3)
• Agreement clauses (cont.)
– Environmental liability
– Permitting responsibility
• Acquisition
• Violations and fines
– Relations with public end users
– Default
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Outline of Basic PPP Contract (4)
• Conditions
– Occurrence of milestones in larger public
planning efforts
– Environmental studies
– Economic studies
– Cross-performance conditions
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Outline of Basic PPP Contract (5)
• General provisions
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Representations and warranties
Insurance
Subcontracts
Confidentiality
Choice/conflict of laws
Notices
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Not in PPP Contracts
• Public partner ceding power to exercise eminent
domain for compensation
– “Just compensation”
– Anti-expropriation rules in international law
– Right to reclaim concession during term
• Public partner transferring critical assets
– Natural resources, e.g., water, gas
– Usufructuary rights
– Agency theory
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Jurisdictional Limitations
• Each nation and subnational jurisdiction may
impose legal constraints on PPP terms
• Some countries have comprehensive PPP laws
– Brazil 2004
– Mexico 2003
• Types of limitations
– Term
– Investment amounts or ratios
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Organizational Laws
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Awareness and contract implications
Enabling laws of public partner
Franchises required by private partner
Foreign company rules
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Local jurisdiction entity
Parent guarantees
Affiliate transaction rules
Handling of nonregulated business
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III. Special Contract Terms
for Each Structure
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O&M Contracts
• Description of tasks to be performed by
private partner
• List of public assets available for use
– Initial condition
– Final condition
– Capital improvements during term: either
party by contract
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O&M Contracts (2)
• Expense for agency rather than debt
• Payment by public partner
– Scope of activities
– Alternatives: cost plus, formula, formula with cap,
regulated rates (see concession)
– Performance standards to adjust basic payments both
up and down
– Performance standards affect risk and therefore
required compensation for a private partner
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O&M Contracts (3)
• Transition
– Services
– Labor force
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DBOM Contracts
• Define the asset to be built based on the public need
– Public partner review and approval
– Cost approval / financing
• Payments
– Service component like O&M
– Additional payments for adequate return on capital component
• Timeline for completion
– Building for growth
– Payment for insufficient demands
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Concession Contracts
• Define private partner duties by public service to
be provided
• Exclusive or nonexclusive
• General design and service standards
– More limited review than other types of PPPs
– Commercially reasonable service
• Water example: pressure, water quality
• Power example: voltage variation, outages
– Objective, generally accepted standards
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Concession Contracts (2)
• Compensation
– Paid from members of the public
– Public subsidies for necessary services
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Minimum income guarantees (temporary or permanent)
Public capital contributions (priority of financing)
Tax credits or incentives
Policy question for public partner re necessary services
Cross-subsidies
– Sufficiency and security will greatly affect availability
of private capital
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Concession Contracts (3)
• Contract v. regulatory standards
– Contract
• Difficulty of predicting scenarios
• Simple approaches create risk (and higher cost)
• Complex approaches create voluminous contracts that
increase chance of disputes
– Regulation
• Requires expert regulatory infrastructure
• Generally accepted methods (?)
• Uncertainty and cost of regulation
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Ratesetting
• Revenue requirement
– Reasonable expenses pass through
– Capital costs
• Debt: return equal to actual interest rate
• Equity: return equal to that required to gain sufficient capital,
based on investments of comparable risk
– Concession payments to public partner
• Rate design
– From rate-payer: fixed and/or variable charges
– From public partner
• Implemented by expert, independent organization
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Ratesetting (2)
• Rates fair to rate-payers and private partner
• Calculation of rates should be objective and
predictable
• Rates should be calculated on a full-cost basis
– Ensures that investors are protected
– Explicit subsidies
– Transparency
• Affordability
– No discrimination among similar users
– Subsidies may be appropriate for certain classes of user
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Ratesetting (3)
• Should allow adjustments for events outside
parties’ control
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Credit markets
Labor markets
Construction costs
Tax changes
• Avoid price fluctuations
– Limit amount by which rates can grow
– Must obtain rate equilibrium
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IV. Final Observations
• Many areas for PPPs are socially sensitive
because necessary public services, e.g., water
– Services should be affordable
• Contracts should be fair and take public needs
into account for this and later PPPs
• Public partner should be the “face” of the PPP for
the public
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Implementation of Agreement
• PPPs are partnerships, and you must live
with your partner
• Terms of contracts can be revisited and
adjusted on a pre-agreed schedule or upon
the occurrence of certain events
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Wes Strickland
Hatch & Parent
21 E. Carrillo Street
Santa Barbara, CA 93101
(805) 963-7000
[email protected]