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International Bar Association
Annual Conference
INTERNATIONAL CONSTRUCTION PROJECT
Old-fashioned or new-fangled?
Which procurement routes copes best when the going gets
tough?
The Magic of a well designed PPP
Marc FRILET, Avocat - Paris
Secretary General of the French Institute of International Legal Experts (IFEJI)
Visiting Professor, University Paris V-René Descartes
Deputy General Secretary International Bar Association (IBA)
Fellow American College of Construction Lawyers (ACCL)
Head of the PPP working Group - Paris Bar
Prague, CZECH REPUBLIC
September 29th 2005
FRILET
Société d’Avocats
The Magic of a well designed PPP
I am very much interested by your query on the best procurement
route for an hospital and an highway Project since I come from a
country where a lot of debate has taken place for decades on the
optimised use of public resources for designing and operating
public service infrastructures specially for highways and hospitals
I also have the chance to travel from time to time and know that
those concerns are widely shared internationally
Before advising you on a procurement route, I would like to show
you on Outlook which summarise my perception of the options at
your disposal and the main issues at stake
OUTLOOK OF THE PPI FAMILY
FRILET
Société d’Avocats
MINIMUM PRIVATE RISKS
AND BENEFITS
MAXIMUM PRIVATE RISKS
AND BENEFITS
PPI
Contracting
(Short term contract)
PUBLIC ASSETS
FOR PUBLIC
ACCOUNTING
PURPOSES

Public financing
Immediate
payment (full
direct impact on
current tax
budget)
PPP
(Long term venture)
Privatisation
Simple
Contracting
Design
Build
Turnkey

Dividing line
between Public
and Private
assets
PRIVATE
ASSETS FOR
PUBLIC
ACCOUNTING
PURPOSES

Private financing
then direct
payment by
Public Authority
based on output
or quality of
service (full direct
impact on future
tax budget)
Leases, BOT,
PFI, French
Partnership
Contract
Private financing
then no or limited
payment by
Public Authority:
main cost
recovery from the
users of the
service (no or
limited impact on
current or future
tax budget)
Public Service Concession
and assimilated schemes
(ROT, Affermage)
Traditional Procurement
(competitive award based mostly on
physical specifications and price of the
physical infrastructure)
Special Procurement (competitive award
based mostly on functional specifications,
capacity to adapt to changes and quality
and price of service in the long term)
The Magic of a well designed PPP
Two projects: several common features
•
Construction to be completed and related hospital and highways
services to be operational before next election : time is of the
essence
•
Funding sources from Public money unknown for several
months
•
Specifications and design remain to be prepared
•
Additional conditions and service specifications likely to come
later
•
You seem open to ideas on best technical solutions and
optimised quality of service
The Magic of a well designed PPP
Preliminary considerations
• Traditional procurement and remeasurement
appropriate (lack of sufficient specifications)
contract
not
• Design and Build or Turnkey: not advisable (since the funding is
not secured before several months at least and since you are not
sure to have the necessary operational resources)
• Privately Financed Investment followed by repayments from the
tax budget over the years based on a price for the service to be
paid to the private builder/operator (service lease, PFI,
“Partnership contract”): prima-facie not advisable due to the
contingent liability on future tax budget and to the difficulty to
establish criteria for the optimised nature of services and their
price for twenty to thirty more years (risk of obsolete service or
price in medium and long term)
The Magic of a well designed PPP
Additional considerations
• Readiness to outsource project management and operation
• Both projects are designed for the same purpose : to deliver a
particular service to the public: a service that the citizens are not
obliged to purchase and for which they can be ready to pay a
price up to a certain level directly through a toll for the highway
and directly or indirectly (but not from the tax budget) for the
hospital
The way forward
• You are a lucky man because both the highway and the hospital
project may benefit from the magic of real PPP i.e. Concession
and assimilated schemes located in the South East of my chart
The Magic of a well designed PPP
The potential magic of concession and assimilated scheme
The magic may only operate if you take the following steps :
• You should prepare with a small team of people close to you including
economists, planners, politicians, and NGO, a long term view of the
nature of the services which should be rendered both by the hospital and
the highway infrastructure, taking into account the socio-economic
externalities of those infrastructure in the long run
• Based on the above, you will prepare a rough economical model and
various scenarios by reference to internationally accepted standards
• Assuming that your model shows a potential of full (or main) recovery of
the investment and operation costs from the price to be paid for the
services over the amortisation time of the infrastructure, you are an
extremely lucky man since all indicators are green to follow the
Concession route
The Magic of a well designed PPP
Developing the magic
• Prepare simple physical specifications (no more than general outlay)
• Prepare detailed functional specifications i.e. in relation to the nature
and the quality of the services to be rendered: do not limit yourself to
the service to be rendered by comparison to existing situations but
foresee as much as possible technological, economical, cultural and
other changes
• Assess and outline the main conditions for a satisfactory public service
operation. Put yourself in the shoes of thousand of end users who are
likely to benchmark and request the best value for money at any time
during the Concession period (which for greenfield hospital and Highway
is likely to be somewhere between twenty to forty years)
The Magic of a well designed PPP
Appraise the main features of a public service Concession
before considering selection of the Concessionaire :
• Concession is not a privatisation, the service being an essential public
service (unlike for instance cellular phone services) you should always retain the
right to monitor very closely each step in construction maintenance and
adaptation of the infrastructure and of the nature and quality of the service
• The main rights and obligations of the Concessionaire:
- Design, finance, build and operate the highway of the hospital, for a time
period permitting him to recover his investment and make a reasonable profit
on the basis of and economical and financial scenario contractually agreed
upon (the baseline economic scenario together with the related financial
equation is the corner stone of any public service concession)
- Adapt the service as requested if justified by public interest
- Obligation to hand over the infrastructure in good condition for the continuity
of the service and for no consideration at the end of the concession period.
The Magic of a well designed PPP
Understand the Concession dilemma
How to design a concession contract with an acceptable
equilibrium between :
• The common interest of many citizens (represented themselves
by yourself as public authority) eager to benefit from the best
public service always adapted to their contributing possibilities
and,
• The interest of a private company having obtained the right to
render such services and which must appraise and control
numerous risks and keep the opportunity to make reasonable
profit
?
The Magic of a well designed PPP
Overcome the Concession dilemma
• Understand that concession is very different from a construction
contract even if construction is a part of it at the origin
• Limit the contract documentation in terms of detail of service to be
rendered, but focus most of your attention to various sets of clauses
permitting to adapt easily the nature, the quality or the scope of the
service including tariffs and prices
• Accept that the concessionaire company may have the right of
indemnification or compensation of some sort in case of change of the
economic circumstances or risks that it cannot control by reference to
the baseline economic scenario and related financial equation above a
certain threshold
• If you have no administrative law tradition, summarize in the contract or
in an annex some universal principles of public service obligations by
reference to international experience of numerous public service
Concessions for more than a century
The Magic of a well designed PPP
Overcome the Concession dilemma (continuing)
• Build in the contract a true “public partnership venture” by using
partnering techniques, rendez-vous clauses, review board, and
include regular and transparent exchanges of information, including
economic and accounting data, which will easily guide the parties
towards agreeable changes when necessary, always by reference to
the base line scenario and related financial equation.
• Consider an ad’hoc adjudication board of very high caliber ruling in
equity and referring preferably to the most common equitable
principles applicable to public service concession in civil law countries
with an administrative law framework (well known case law easy to
implement)
• Avoid referring to a regulatory body not truly independent and not
guided by clear and equitable principles, based on the best of
international experience.
The Magic of a well designed PPP
Proposals for the selection of the Concessionaire
Ask yourself : which Concessionaire do I want (or more to the point which
service will acceptable in ten, twenty or thirty years for the users?)
Some considerations :
• track record : how many successful concession ventures completed (remember
that the real success in only judged at the end of the concession period). Assess
thoroughly the Pro and cons of SPV and Project Finance techniques
•
Is price an important factor for selecting a Concessionaire?
- Cost of the infrastructure: not decisive, since in order to reach the same
concession results in terms of nature, quality, and compliance with public service
obligation, several options and combinations are possible: example : higher initial
cost, less maintenance cost, etc …
- Price of the service and value for money, not decisive either in many situations
since it does not take into account capacity to adapt to changes and to provide
future best value for money
The Magic of a well designed PPP
Prepare the most appropriate competitive bidding based
on the cutting edge of the international experience
• Prepare a well designed but simple request for proposal including a
list of carefully drafted objectives indicating that you reserve the right
to accept or reject the RFP if in your opinion it does not meet the
objectives. The appropriate definition of the objective (not too vague
and not too detailed) is the secret of this procurement technique
• Thereafter, choose a few bidders only (at most three or four) and
develop with each of them a “competitive negotiation” which must
clearly remain within the boundaries of the template document
including the objectives outlined in the RFP. This will include the
negotiation of the detailed terms of Concession Agreement
• At the end of the process, you should be in a position to make a
choice of a private Concessionaire with good track record and able to
be a real partner for many years and working closely with you for the
best interest of thousands of end users for decades
The Magic of a well designed PPP
CONCLUSION : THE REAL MAGIC
With my proposal :
1. You have all chances to have the hospital and highway services ready to
operate on time at no cost for you with fair chance of a smooth venture
in the long term
2. You have set a simple and a well tested methodology for agreeing
changes of all nature at any time
3. You keep the right to impose changes in the benefit of public interest
4. You have good chances to have an happy Concessionaire
5. However, I advise you to set aside a part of some of your initial funds in
order to participate to various “hardship situations” or in case where for
sovereign reasons you want to impose different service and/or limit on
tariffs or prices of service affecting the financial equation (remember it is
a real PPP)
Last but not least, you could use most of your initial public funds for
other projects and have the best chances to be re-elected
THANK YOU
Marc Frilet
Frilet - Société d’Avocats
94, boulevard Flandrin
75016 Paris, France
Tel : 00 33 1 56 26 00 40
Fax : 00 33 1 56 26 50 21
e-mail : [email protected]