Transcript Public/Private Partnership

Public/Private Partnerships
Anticipating Success – Dealing
With Disappointment
Stikeman Elliott LLP
Barristers & Solicitors
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Focus of Presentation
Focus will be on establishing, when entering into
Public/Private Partnership Arrangements, an
effective termination strategy to be available if the
Public/Private Partnership Arrangements turn out to
be a disappointment.
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“Public Private Partnership” – Covers a Wide
Range of Public/Private Commercial Relationships:
• Outsourcing Arrangements – Private Partner retained to provide
Services the Public Entity requires, at agreed upon prices
• Design/Build Projects – construction and other risks undertaken by the
Private Partner
• Classic PPP: - Design/Finance/Build/Lease/Own/Operate/Transfer
– all those functions, and most of the risks inherent in them, are
transferred to a Private Partner
• True Partnership or Joint Venture – Public Entity and Private Partner
combine skills and assets to jointly accomplish a Service goal
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Planning Strategies
in the Event of Disappointment
• Public Entity must identify, on a going-in basis:
• The benefits it expects to receive from PPP
Arrangements, including the timing of those benefits
• What could happen to prevent the timely delivery of
those Services
• What should the Public Entity’s effective remedies be if
the Private Partner fails to perform
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Look at Three of the
More Typical Public/Private Arrangements First
• Outsourcing
• Design/Build
• Design/Build/Finance/Lease or Own/Operate/Transfer
Then: Look at the True Public/Private “Partnership”
or “Joint Venture”
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Outsourcing: Going-In Preparation
The Public Entity should, at the time of entering into the PPP
Outsourcing Arrangements, ensure it has:
• Clearly defined the level and quality of services and other
specifications
• Specified the method by which the Services are to be
delivered
• Specified a Performance Monitoring System, including
Deficiency Points
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Outsourcing: Remedies
On default in providing Outsourcing Services, the Public
Entity should be in a position to require:
• The Private Partner to provide a corrective plan
• An abatement/reduction in payment, depending on
seriousness of non-performance
• The replacement of one or more subcontractors
• The termination of the Outsourcing Arrangements
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Outsourcing: Effective Termination Rights
• There must be a seamless, uninterrupted delivery of Services,
even in case of termination of the Outsourcing Arrangements:
– may be as simple as calling for tenders for replacement
Service providers
– may need employees, equipment and leased premises of
the current Service provider to provide the Services
– must be able to access those – by purchase, lease, hiring or
otherwise
– must have that contractual right going-in
• If contracted with credit-worthy Service provider in first place,
would be able to maintain an action for loss of bargain (as the
costs of replacing the Services are likely to be higher than was
payable under the Outsourcing Arrangements)
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Design/Build – Going In Preparation
The Public Entity should ensure, at the time of entering into the
Design/Build Arrangements, that it has:
• Fully developed standards for:
– design quality
– construction quality
• Clearly defined construction completion milestones
• Apportioned the risk of the occurrence of certain events
(the so called force majeure events) between the Public Entity
and the Private Partner
Critical that the Private Partner have sufficient financial strength and
underlying contractual support so that the risk of non-completion is
virtually nil
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Design/Build: Risk Sharing
• Intent of the Public Entity is to achieve a fixed price contract with
all external risks born by the Private Partner
• Ideally there will be no excuse for the Private Partner performance
not being on time/on budget
• Specifying no risk to Public Entity may drive up the cost of the
delivery of Services
• More practical to have Public Entity retain some risks
• So-called force majeure provisions are hotly negotiated. Examples are:
– building on Crown lands – who bears soil and environmental risks?
– who bears risk if development permits cannot be obtained?
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Design/Build: Remedies
• Liquidated damages, particularly for failure to achieve time
milestones
• Step-in rights:
– Public Entity completes, or substitutes contractor to
complete
– Steps-in to subcontracts which it has pre-approved
– Public Entity retains action for damages against Private
Partner for cost overruns and other issues
• Financial strength of Private Partner is critical
• Termination rights: only effective if the Public Entity can
substitute another Private Partner and carry on without any
serious disruption or delay
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Classic Public/Private Partnership Project
• Design/Finance/Build/Lease or Own/Operate/Transfer
• Public Entity looking for:
– accommodation
– Services
– “fixed” price, to the extent reasonable 30 years out
– ownership of the Facility at the end
• Termination only effective if can:
– step-in and have another Private Partner complete
– maintain an action for damages for loss of benefit of the contract
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True Partnership or Joint Venture
• Often referred to as a Partnership or Joint Venture, though
usually, in law, neither a Partnership nor a Joint Venture
• Public Entity and Private Partner combine assets and skills
to achieve a goal
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Typical Rationale:
True Partnership or Joint Venture
• Typically occurs where Public Entity:
– owns surplus lands
– lacks capital and (perhaps) in-house skill-set to proceed
through the development process
– wants a share of development profits
– secondary goal – often – to exercise more control over land
than could through land use regulation
• Therefore looking to Private Partner for:
– capital
– skills
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Pre-Agreement Planning by Public Entity
Public Entity must identify:
• What it expects to receive from this relationship
• What circumstances would make it want to terminate the
relationship
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Pre-planning Exit Strategies
Caution - some potential remedies, if utilized:
– could result in the Public Entity holding no further
interest in the lands – the interest which it wanted to
keep in first place
– could result in the Public Entity having to buy-out the
Private Partner – this requires a capital expenditure, and
the Public Entity is left without a skilled Private Partner
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Common “Joint Venture”/Termination Remedies
1. Right of First Offer
•
Public Entity no longer own lands
•
depresses price
2. Right of First Refusal
•
Public Entity no longer own lands
•
depresses price
3. Shotgun Buy/Sell
•
Public Entity may lose lands
•
Public Entity may be forced to buy out Private Partner
requires capital
lose Private Partner’s skills
•
not Public Entity style
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4. Private Auction
•
variation of shotgun buy/sell
•
minimizes risk of losing lands
5. Matching Bid
•
no partial-interest discount
•
still depresses value due to right to match
•
Public Entity will no longer have lands
6. Joint Sale of Project
•
Public Entity does not retain lands
•
maximizes price
7. Option of Public Entity to Acquire Project
•
perhaps only exercisable in case of default
•
no risk of Public Entity loss of lands
•
ideal from Public Entity view point
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