guidance on ppp contractual provisions - world bank · guidance on ppp contractual provisions...

Guidance onPPP Contractual Provisions2017 EDITION

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© 2017 International Bank for Reconstruction and Development/The World Bank

1818 H Street NW • Washington DC, 20433Telephone: +1-202-473-1000www.worldbank.org

This work is a product of the staff of The World Bank based on external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent.

Rights and PermissionsThe material in this work is subject to copyright. As The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for non-commercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to the Publishing and Knowledge Division, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: [email protected].

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Guidance onPPP Contractual Provisions2017 EDITION

TABLE OF CONTENTS

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ACKNOWLEDGEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iv

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v

DEFINED .TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

PPP .CONTRACTS .IN .CONTEXT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

1 . . FORCE .MAJEURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

1.1 Keyaspects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

1.2 KeyconsiderationsfortheContractingAuthority. . . . . . . . . . . . . . . . . . . . . . . . . . 18

1.3 Uninsurability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

1.4 SampleDrafting1 (Open-endedcatch-alldefinition,includingconceptofforeseeability) . . . . . .28

1.5 SampleDrafting1A (Exhaustivelistofspecificevents,noconceptofforeseeability) . . . . . . . . . . . . 31

2 . . MATERIAL .ADVERSE .GOVERNMENT .ACTION . . . . . . . . . . . . . . . . . . . . . 35

2.1 Keyaspects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35


2.3 SampleDrafting2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

3 . . CHANGE .IN .LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

3.1 Keyaspects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45

3.2 KeyconsiderationsfortheContractingAuthority. . . . . . . . . . . . . . . . . . . . . . . . . .47

3.3 SampleDrafting3.......................................................54

3.4 SampleDrafting3A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57

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4 . . TERMINATION .PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

4.1 Keyaspects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61

4.2 KeyconsiderationsfortheContractingAuthority. . . . . . . . . . . . . . . . . . . . . . . . . 63

4.3 CompensationonContractingAuthorityDefault,MAGA, ChangeinLaworVoluntaryTermination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

4.4 CompensationonPrivatePartnerDefaultTermination . . . . . . . . . . . . . . . . . . . 68

4.5 CompensationonForceMajeureTermination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

4.6 Methodandtimingofpayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

4.7 SampleDrafting4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

5 . . REFINANCING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

5.1 Keyaspects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79


5.3 SampleDrafting5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

6 . . LENDERS’ .STEP-IN .RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

6.1 Keyaspects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89


6.3 Summaryofmainprovisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

6.4 SampleDrafting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

7 . . CONFIDENTIALITY .AND .TRANSPARENCY . . . . . . . . . . . . . . . . . . . . . . . . . 95

7.1 Keyaspects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95


7.3 SampleDrafting7......................................................99

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8 . . GOVERNING .LAW .AND .DISPUTE .RESOLUTION . . . . . . . . . . . . . . . . . . . 105

8.1 Keyaspects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105

8.2 KeyconsiderationsfortheContractingAuthority. . . . . . . . . . . . . . . . . . . . . . . . 108

8.3 SampleDrafting8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

9 . . BOND .FINANCING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .127

9.1 Keyaspects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

9.2 UnderstandingProjectBondfinancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .129


9.4 TerminationPaymentcalculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139

9.5 Creditenhancement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140

10 . . CORPORATE .FINANCING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

10.1 Keyaspects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

10.2 KeyconsiderationsfortheContractingAuthority. . . . . . . . . . . . . . . . . . . . . . . . .146

10.3 TerminationPaymentcalculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .150

APPENDIX: .ADDITIONAL .PPP .RESOURCES . . . . . . . . . . . . . . . . . . . . . . . . . . .153

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This current edition of the Guidance on PPP Contractual Provisions, 2017 Edition(“Guidance”)islargelybaseduponworkdonebytheinternationallawfirmofAllen&OveryLLP,underateamledbyDollyMirchandani,withtheparticipationofTimScales,DavidLee,HelgaVanPeer,TimConduit,FleurClegg,SarahGarveyandValentijndeBoe.ItbuildsontheGuidance’spreviousedition(theReportonRecommendedPPPContractualProvisions,2015Edition)asdevelopedbyaParis-basedteamoftheinternationallawfirm of Gide Loyrette Nouel, led by John Crothers, with the participation of VictorGrandguillaume and Barthélemy Littot. Funding for both publications was providedbythePublicPrivateInfrastructureAdvisoryFacility(PPIAF).PPIAF,amulti-donortrustfundhousedintheWorldBankGroup,providestechnicalassistancetogovernmentsindevelopingcountries.PPIAF’smaingoalistocreateenablingenvironmentsthroughhigh-impactpartnershipsthatfacilitateprivateinvestmentininfrastructure.Formoreinformation,visitwww.ppiaf.org.

TheGuidancereceivedexperttechnicalsupportfromvariousWorldBankGroupstaff,includingfromtheInternationalFinanceCorporation(IFC),theMultilateralInvestmentGuaranteeAgency(MIGA),theInternationalCentreforSettlementofInvestorDisputes(ICSID),theGlobalInfrastructureFacility(GIF),aswellastheWorldBank’sPublic-PrivatePartnershipsGroup.Inaddition,specialthanksisduetotheGlobalInfrastructureHub(GIH), the African Legal Support Facility (ALSF), the Inter-American Development Bank(IDB)aswellasallthoseorganizations,entitiesandfirmsthatparticipatedinthepublicconsultationsconductedonthecontentsoftheGuidance.

With thesupportofAllen&OveryLLP, thevariouscommentsandsuggestionsfromalloftheabovesourceswereeditedbyChristinaPaulandSusanneFoerster, lawyerswithintheWorldBank’sPublic-PrivatePartnershipsGroup.

ACKNOWLEDGEMENTS

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Public-Private Partnerships (PPPs) are now being used in many countries to developinfrastructureprojects.WhilePPPtransactionsinthiscontexttypicallyarebasedonanetworkofcomplexlegalagreements,thereisnormallyaPPPContractatthecenterofeachsuchtransaction,intheformofaconcessionagreementorsimilardocument,betweenapublicauthority(the“ContractingAuthority”)andaprivatecompany(the“PrivatePartner”).

The complexity and sophistication of PPP transactions, and the fact that they areoftenheavilynegotiatedtoreflectthecharacteristicsofagiveninfrastructureproject,frequently means that considerable time and expense is involved in preparing andfinalizingPPPContracts.Thishasledmanycommentatorstoaskifitispossibletoreducecosts,andshortenthetimeinvolvedinsuchprocesses,bystandardizingtheprovisionsfound in concession agreements or other PPP Contracts between the ContractingAuthority and the Private Partner. In a number of countries efforts have been madetodevelopcompletestandardizedPPPContractsfordifferent typesof infrastructureprojects,suchasroads,railways,portsorpowergeneration.Todate,however,thereisnouniversallyacceptedlanguageforsuchagreementsonaninternationalbasis.

GiventhevarietyofPPPtransactionscarriedoutglobally;thedifferentlegalsystemsexisting in various countries; and the need to have ‘tailor-made’ provisions to dealwith the individualcharacteristicsofspecificprojects, thedevelopmentofcompletePPPContractsonaninternationalbasisislikelyanunrealisticgoal.Nevertheless,theremaybemeritinfocusingoncertaincontractualprovisionsdealingwithparticularlegalissuesencounteredinvirtuallyeveryPPPContract/structure,suchas,forexample,theissuesofforcemajeure,terminationrightsordisputeresolution.

Againstthisbackground,theWorldBankGroupdevelopedtheReportonRecommendedPPP Contractual Provisions, 2015 Edition (the “2015 Report”) which presented thefirst attempt by a Multilateral Development Bank to prepare a compilation of“recommended” language in respect of a selection of these typically encounteredprovisions.Followinginternalandexternalconsultationsonthecontentsofthe2015Report, it is in response to the industry feedback received during those discussionsthatthisneweditionhasbeendeveloped.Inthisrespect, itsobjectiveistoassistitstargetaudience,namelyContractingAuthorities–andparticularlythoseinemergingPPPmarkets–,withobtainingabetterandmorecomprehensiveunderstandingofthecontractualprovisionsasoutlinedinthe2015Report.Accordingly,thiscurrenteditionincludes, inter alia, detailed commentaries in regard to key considerations relevantforContractingAuthoritiesduetodifferent levelsofPPPtransactionalexperience inagivencountryorduetothecharacteristicsofdifferentlegalsystemsinordertohelpthemtocarefullyassesstheissuesspecifictotheirownPPPprojectandjurisdictionindevelopingcontractualprovisions.WiththesupportoftheGlobalInfrastructureFacility(GIF), this edition also comprises two additional chapters that address contractualconsiderations related specifically to bond financed and corporately financed PPPtransactions.

INTRODUCTION

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Inregardtothesampledraftingcontainedinthisdocument,theauthorswouldliketoemphasizethat it isneither intendedtobeexhaustivenorprescriptive–specifically,itisnotmeanttobemandatoryforuseinallPPPtransactionswhichtheWorldBankGroup financially supports. Instead, the objective of the Guidance is to set out andanalysecontractuallanguagethathasformedthebasisofmanysuccessfullyprocuredPPP transactions, and to describe the rationale for these provisions. In doing so, theauthors of the Guidance hope to foster discussion and consensus-building aroundtheseprovisionsandofappropriatecontractuallanguageinPPPtransactionsgenerally,with a view to helping to reduce the aforementioned time and expense associatedwithPPPContractdevelopment.

As in any document of this type, some cautionary notes should be emphasized. Asindicated, PPP transactions are usually very complex, and extensive due diligence –with the assistance of qualified legal, financial and technical specialists – needs tobeundertakenbybothContractingAuthoritiesandprivatepartiesbeforeconcludingaPPPContractandrelatedagreements. Inthisregard,thecontentsofthisGuidanceshouldsimplyberegardedasasuggestedstartingpointandoneofmanyinputsforthecontractingpartiestoconsider.

Also,manyoftheprovisionssetoutintheGuidancewillaffecttheallocationofrisksinaPPP transaction– and the fairnessof theoverall riskallocation ina transactioncanonlybeassessedbyconsiderationoftheentiretyofthePPPContractandrelatedagreements.Where appropriate, suggested contractual language has been linked tothesamplematricesshowingtheallocationofrisksbetweenpublicandprivatesectorsin typical PPP transactions as contained in the Report on Allocating Risks in Public-PrivatePartnershipContracts,2016edition,developedbytheGlobalInfrastructureHub.ItshouldlikewisebenotedthatthisGuidanceprimarilyfocusesonPPPtransactionsonaprojectfinancebasis,asreflectedbytheattentiongiventotheprotectionoflenders’rightsandthesharingofthebenefitsofrefinancing.

This being the second edition, the authors would finally like to stress that thispublicationisseenasanevolvingprocess.TheintentionistodevelopfurtheriterationsoftheGuidanceoncefurtherindustryfeedbackhasbeencollectedandasandwhennew consensus develops around the provisions considered in the document or inconnection with an analysis of other contractual language typical of successful PPPtransactions.

Christina PaulWashington,DC

June2017

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1

Capitalized terms in thisGuidancehave themeaningssetoutbelowandadditionalcapitalizedtermsusedintheSampleDraftingsectionsaredefinedinthosesections.

Base Case Equity IRR hasthemeaningsetoutinSection 5, Refinancing.Contracting Authority means the public authority that enters into the PPP

ContractwiththePrivatePartner.Dutch Model means Version 4.3 of the Netherlands Standard PPP

Contract published in April (accommodation) and June(infrastructure)2016.See links in Appendix, Additional PPP Resources.

Equity Investors means,atanytime,theShareholdersand/ortheirparentcompanies,asthecontextrequires.

Estimated Change in Project Costs

hasthemeaningsetoutinSection 3, Change in Law.

Infra Australia PPP Guidelines

meanstheNationalPublicPrivatePartnershipGuidelines,Volume 3: National Commercial Principles for SocialInfrastructure (December 2008) and/or the NationalPublicPrivatePartnershipGuidelines,Volume7:NationalCommercial Principles for Economic Infrastructure(February2011)publishedbytheAustralianGovernmentDepartmentofInfrastructureandRegionalDevelopment.See links in Appendix, Additional PPP Resources.

Lenders means the finance parties under the Senior FinanceDocumentsprovidingseniordebttothePrivatePartner[and/ortheIssuer–see Section 9, Bond Financing]forthepurposeof thePPPProject (excludingtheShareholdersandtheiraffiliates,asprovidersofequityorsubordinateddebt).

MAGA means Material Adverse Government Action as furtherdescribed in Section 2, Material Adverse GovernmentAction.

Original Base Case has the meaning set out in Section 4, Termination Payments.

Party or Parties means the Contracting Authority and/or the PrivatePartner,asthecontextrequires.

PPP means Public-Private Partnership. See also definition of "PPP Contract".

DEFINED TERMS

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PPP Contract meansthelong-termagreementbetweentheContractingAuthorityandthePrivatePartner,forprovidingapublicasset or service, in which the Private Partner bearssignificant risk and management responsibility, andremunerationislinkedtoperformance.1

PPP Project meanstheunderlyingprojectwhichisthesubjectofthePPPContract.

Private Partner means the private company that enters into the PPPContract with the Contracting Authority. The PrivatePartner often takes the form of a special purposecompany.

Project Agreements means the [any offtake agreement, constructioncontract,theoperatingandmaintenanceagreement,thelandleaseagreement]2.

Senior Finance Documents has the meaning set out in Section 4, Termination Payments.

Shareholders means, at any time, any person holding share capitalin the Private Partner [adapt as appropriate to reflect financing and holding structure].

South Africa PPP Guidelines

means South Africa's National Treasury StandardisedPPPProvisions:FirstIssue,published11March2004. See link in Appendix, Additional PPP Resources.

UK PF2 Guidance means the Standardisation of PF2 Contracts (Draft)guidanceissuedbyHMTreasuryintheUnitedKingdom,launched on 5 December 2012. See link in Appendix, Additional PPP Resources.

1 Thereisnosingle,internationallyaccepted,definitionofPublic-PrivatePartnership.ThisdefinitionisthedefinitionprovidedinthePPPReferenceGuideVersion3.0,datedApril2017.See link in Appendix, Additional PPP Resources.

2 Tobetailoredonaproject-by-projectbasistorefertothematerialcontractsenteredintobythePrivatePartnerinconnectionwithandrelevantforthePPPProject.

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AIM .OF .GUIDANCE

ThisGuidanceisintendedtoprovideContractingAuthoritieswithananalysisof,anddraftingguidancefor,specificprovisionsthataretypicallyincludedinaPPPContractand/oritsrelatedagreementsinordertoachieveasuccessfullyfinancedPPPProjectthatwilldelivertheserviceorassetdesiredbytheContractingAuthority.TheGuidancedraws on over 20 years’ PPP market practice internationally, including guidancepublishedbygovernmentalbodiesforContractingAuthorities,aswellastheextensiveexperienceoflegaladviserssupportingContractingAuthorities,PrivatePartnersanddifferenttypesoffundersonPPPProjects, inbothdevelopedandemergingmarkets.Thisuniqueandcomprehensiveperspectiveenables theGuidance topresenta real-worldviewofcontractualissuesandoutcomestohelpContractingAuthoritiesmanagetheprivatesector’sexpectations,aswellastheirown,whentheyhaveselectedPPPasamethodofinfrastructureprocurement.3

Prior to reviewing the detailed analysis and contractual provisions provided in thisGuidance,itiskeyforContractingAuthoritiestofirstunderstandtheoverallcontextinwhichaPPPProject isbeingdeveloped.This isbecausethecircumstancesofeachindividualPPPProjectwillshapeanddeterminethedraftingof itsPPPContractandrelatedagreements.

To that end, set out below is a brief overview of why governments establish PPPprogrammes,whataPPP involves,keyaspectsof riskallocationbetween thePartiesand approaches to ensure “bankability”, as well as an overview of variations inapproach thatmaybeencountered indifferent legalsystems,sectorsandcountries.ItisimportanttotakethesefactorsintoaccountinformulatingandnegotiatingthetermsofaPPPContract.

Also included in this Guidance are links to more detailed sources of information onthese areas, all of which will inform the Contracting Authority’s approach towardsdeveloping the specific terms of a PPP Contract for its particular PPP project. See Appendix, Additional PPP Resources.

A. Overview of infrastructure development utilizing PPPs

Increasingly,PPPprogrammesarebeingestablishedbygovernmentsacrosstheworldasameanstodeliverandmaintaininfrastructure,aswellastodeliverotherassetsandservices.Commonthemesencounteredinclude:

• theneedforthepublicsectortoreducethecostofbuildingandmaintaininginfrastructureassetswithoutnegativelyimpactingonthequalityofpublicsectorservices;

3 AtoolaimedatassessingfiscalcostsandrisksassociatedwithanenvisionedPPPProject,andthereforedesignedtohelpgovernmentstomakeinformeddecisionsastowhethertoprocureaprojectasaPPPornot,isthePPP-FiscalRisksAssessmentModel(PFRAM)asdevelopedbytheInternationalMonetaryFundandtheWorldBankin2016.See link in Appendix, Additional PPP Resources.

PPP CONTRACTS IN CONTEXT

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• theneedtoacceleratedeliveryofbothgreenfieldandrehabilitationinfrastructureandtheexpansionofbrownfieldinfrastructure;and

• theabilitytobenefitfromprivatesectorexpertiseindeliveringinnovativetechnologiesandservices.

B. What does a PPP involve?

Whilethereisnosingle,internationallyaccepted,definitionofPPP,theessentialsofaPPParrangementwhichareencapsulatedinaPPPContractare:

• along-termcontractbetweenaprivateparty(thePrivatePartner)andagovernmententity(theContractingAuthority);

• forprovidinganeworexistingpublicassetorservice;

• under which the Private Partner bears significant risk and managementresponsibility;and

• wherepaymentsreceivedbythePrivatePartnerarelinkedtoperformance.4

The PPP Project functions transferred to the Private Partner – such as design,construction,financing,operationandmaintenance–mayvaryfromPPPContracttoPPPContract5buttheinclusionofprivatelyraisedfinanceiskeytoensuringthatthePrivatePartnerisfinanciallyexposedandthereforeincentivisedtoperform.

C. Finance structures for PPPs

ThePrivatePartnerinmostPPPContractsisaprojectcompanyspecificallyformedforthatpurpose–oftencalleda“specialpurposecompany”or“specialpurposevehicle”(abbreviatedto“SPV”).TheSPVcommonlyfinancesthecostofaPPPProjectthroughacombinationofequity–providedbyitsShareholders–andthirdpartydebtprovidedbyitsLenders(whomaybecommercialbanks,bondinvestorsorotherfinanceproviders).ThechoiceofthirdpartyfunderandthecostofsuchfundswillbecarefullyconsideredbythePrivatePartnerinitsbidpreparation.

AnyPPPProjectlossessufferedbythePrivatePartnerarebornefirstbyitsShareholders,and Lenders are adversely affected only if the equity investment is lost.This meansEquityInvestorsacceptahigherriskthandebtprovidersandrequireahigherreturnon their investment. As s equity is typically more expensive than debt, the aim in

4 See“PPPContract”definitioninDefined Terms Section andassociatedfootnote.5 Inthisreport,forexample,aPPPContractforahospitalmayinvolvethePrivatePartnerdesigning,building,financing

andmaintainingthehospital,butonlyprovidingcertainoperationalservices(suchascleaning,cateringetc)andnotclinicalserviceswhichmaycontinuetobeprovidedbytheContractingAuthority.OthertypesofPPPContract(e.g.thedesign,construction,managementandfinancingofauniversityaccommodationblockoratolledhighway)mayinvolvemorecomprehensiveoperationalservices.

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reducingtheoverallweightedaveragecostofcapitalofaPPPProjectistouseashighaproportionofdebtaspossibletofinancethePPPProject(typically70to95percentoftotalprojectcost),whichinturnshouldresultinalowerpricedfacilityandservicefortheContractingAuthority.Thelevelofexpectedequityreturnwilldependontheparticular PPP Project’s circumstances, but one of the advantages of a competitivebiddingprocessisthatbidderswillbeaimingtofindafundingsolutionwhichdeliversthebestvalueformoneyfortheContractingAuthority.

FromtheEquityInvestors’perspective,limitingtheirexposuretoasinglePPPProjectinthiswaymakesitpossibletoundertakemuchlarger(andpotentiallymore)projectsthanwouldotherwisebethecase.

PPPProjectfinancingsaretypicallystructuredas“nonrecourse”or“limitedrecourse”financings. In non recourse PPP Projects6, Lenders can be paid only from the PrivatePartner’srevenues,withoutrecoursetotheEquityInvestors.InthecontextoflimitedrecoursePPPProjects,LendersrelyprimarilyonthePrivatePartner’srevenuestorepaytheirloansbuthavecertainadditionallimitedrecoursetotheEquityInvestors.

Therehavebeenexamplesofstate/procuringentitiestakingequitystakesinprojectvehicles, forexample, theBuildingSchools for theFutureprogramme in theUK, theNon-Profit Distributing programme in Scotland and certain Belgian PPPs. Equityinterestsheldbypublicandprivatesectorscanservetoalignincentivesandpromoteco-operationatanoperationallevel,whilealsogivingthepublicsectoradirectstakein the financial success of the PPP Project. However, it is important to design theframework to avoid conflicts of interest and to ensure that decisions necessary forthe implementationof thePPPProjectcanbe takeneffectivelyandquicklyandfreefrompoliticalinfluence.Apublic-privateequitystructureisthereforelikelytobelesssuitable for PPP Projects in emerging PPP markets, particularly where there is a lessstablelegalandpoliticalenvironment,asEquityInvestorsmayfeelthestructureholdstoomuchuncertaintyforthem.

D. Structure diagram

ThisdiagramshowsthekeypartiesandcontractsinvolvedinatypicalPPPProject.TheContractingAuthoritycontractswiththePrivatePartnerthroughthePPPContractandalsoentersintoaseparate“DirectAgreement”withtheLenders(see Section 6, Lenders’ Step-in Rights).The Lenders provide funding to the Private Partner and take securityoverthePrivatePartner’sassetsfortherepaymentofsuchfunding.TheLendersalsoenter into Direct Agreements with the Construction Contractor and Operating andMaintenanceContractortypicallyretainedbythePrivatePartnertobuildandoperatetheprojectasrequiredunderthePPPContract.TheShareholders/EquityInvestorsownthePrivatePartner,providingfundingtoitbymeansofequityandshareholderloans(therepaymentofwhichissubordinatedtotheLenders’funding).

6 SeeSections 9 and 10foralternativemodesoffinancingforaPPPProjectbymeansofbondorcorporatefinancingandtheirimplicationsfortheconsiderationsforContractingAuthoritiesasdetailedinSections 1 to 8ofthisGuidance.

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TYPICAL PPP STRUCTURE

E. “Bankability” considerations for Contracting Authorities

Due to the high proportion of debt and the limited recourse available outside thePPPProjectfordebtrepayment,thirdpartyLendersundertakerigorousduediligenceupfront,priortofunding,toassesswhetheraPPPProjectis“bankable”.ForaPPPProjecttobebankable,LendersneedtobeconfidentthatthePrivatePartnercanservicethedebtraisedtocarryoutthePPPProject.

Inpractice,thismeansthatthePrivatePartner’soperatingcashflowsneedtobehighenoughtocoverdebtserviceplusanacceptablemargintocovertheriskofvariationtothecashflows.Lenderswillthereforefocusonthepaymentmechanicandanyriskswhichcouldadverselyaffecttheexpectedrevenuestream.Indoingso,theywillassessthetechnicalandfinancialviabilityofthePPPProject,takingintoaccountallmaterialprojectrisksandhowtheseareallocatedbetween,andmanagedby,theParties.

These matters are also key to Equity Investors who are looking to protect theirinvestment and ensure the Private Partner will be able to generate high enoughrevenuesnotonlytoservicedebtbutalsotomeettheirexpectedequityreturn.

Funding

Equity/SubordinatedLoans

SecurityPPP Contract

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Authority

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DirectAgreement

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From the Contracting Authority’s perspective, the bankability of a PPP Project is key towhetherornotitcansucceedwithitsambitionstoprocureinfrastructurethroughPPP.7As risk allocation is so crucial to bankability, the Contracting Authority undertakes adifficultbalancingactinstructuringaPPPProject–ensuringitisbankable,whileresistingpressuretoacceptmoreriskthanisnecessaryorappropriate.Thisisthekeyconsiderationunderpinning thedraftingandnegotiationofPPPContractprovisions.The involvementofLendersfromanearlystageoftheprocurementprocess,particularlywhilecompetitivetensionbetweenbiddersexists,willenabletheContractingAuthoritytoinformitselfof,andtakeintoaccount,bankabilityissuesbeforethePPPContractissigned.

F. Risk allocation

TheunderlyingprincipleofaPPParrangementisthattherisksassociatedwithcarryingoutaPPPProjectareallocatedtothePartybestabletomanage–ormostincentivizedtobear–them.ThisinvolvesidentifyingwhichPartyisbestabletomanagethelikelihoodthatsuchriskswilloccur,aswellastomanagetheimpactiftheydoactuallyoccur.Inassessingthelikelycostimpact,thePartieswilllookateachother’sabilitytobearsuchcostandtherelatedimpactonprice,aswellaswhetherandhowthecostimpactcouldbeoffsetorpassedon(e.g.viainsurance,increasingthepriceoftheservicetotheenduser(e.g.inatollroad)and/orbyspreadingthecostacrosstaxpayers).8AsmentionedinSection E.aboveLenderswillbecloselyinvolvedinthisanalysisandtheprocurementprocess should be designed so that Lenders’ bankability issues are required to bereflectedinbidproposals(potentiallyresultinginmodificationoftheterms),sothatthesecanbeevaluatedby theContractingAuthorityduringthecompetitiveprocessandpriortosigningthePPPContract.

If risks are carefully assessed and transferred to the Party best able to control ormitigatethem,thisshouldresultinareductionofoverallPPPProjectcostandtherebyimprovevalueformoneyfortheContractingAuthority.ContractingAuthoritiesshouldthereforeconsiderretainingthoserisksthatarenotconducivetopricingorassessmentbyaPrivatePartnerandwhichtheContractingAuthorityisbestplacedtomanage.Bydoingso,theContractingAuthorityavoidshavingtopaytheriskpremiumthatwillbechargedbythePrivatePartnerifitisrequiredtoassumesuchrisks.

Mostimportantly,thePartiesshouldstrivetoachieveabalancedandreasonableriskallocationinthePPParrangementsthatwillprovideanappropriatebasisforalongtermpartnership.Thisiskeybecauseinordertodelivervalue-for-money,mostPPPContractsneedtorunforasignificantperiodoftime,typicallybetween15and30years.Becauseoftheirlong-termandusuallycomplexnature,PPPContractscannotspecificallyprovidefor the entire range of events that might potentially arise during their lifetime. All

7 Seefootnote3.8 For further insight intohowandwhyrisksareallocated toparticularParties, see theRiskMatrices in theGlobal

InfrastructureHubReport:AllocatingRisksinPublic-PrivatePartnershipContracts,2016edition.See link in Appendix, Additional PPP Resources.

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stakeholdersinaPPPProjectwillneedcomfortthatsituationswhicharebeyondtheirimmediatecontrolandwhichaffectcontractualperformancewillbedealtwith inawaythatallowsthemtoarriveatamutuallyacceptablesolution.Reducinguncertaintyshouldalsoensuregreatervalue-for-moneyisachievedasuncertaintytypicallyattractsariskpremium(i.e.thePrivatePartnerwillexpectahigherprice/return).Asaresult,PPPContractsneedtohaveflexibilitybuiltintoenablechangingcircumstancestobedealtwithasfaraspossiblewithinanagreedcontractualframework.

Asriskallocationisachievedprimarilythroughthecontractualstructure,itisessentialforaContractingAuthoritytounderstandnotonlyhowthePPPContractworks,butalsoitsrelationshipwiththerelatedProjectAgreementsandanyotherdocumentstowhichtheContractingAuthorityisparty(suchastheLenders’DirectAgreement-see Section 6, Lenders’ Step-in Rights),orwhichaffectitsobligationsandliabilities(suchasthePrivatePartner’s debt and equity finance documents). As regards the PPP Contract itself, theinterplaybetweenthecontractualprovisionsissocarefullybalancedthattheycannotbeconsideredinisolationofeachother–thePPPContractmustbelookedatinitsentirety.

Itisimportanttonotethatriskallocationisinfluencedbyvariousfactors,includingthematurityofthemarket,theexperienceoftheparticipantsandthelevelofcompetitionbetween bidders. Emerging market governments and Contracting Authorities maythereforebeabletotransfermorerisktoPrivatePartnersoncetheyestablishsuccessfultrackrecordsinnational/sectoralPPPmarkets,asthesemarketsbecomeincreasinglyattractivetoEquityInvestorsandLenders,andthereforemorecompetitive.

G. Alternative PPP payment mechanisms and risk allocation

Asmentioned inSection E above, thepaymentmechanismandhowpaymentsunderit may be affected is key to bankability.The model adopted may also influence howcertain risks are agreed by the Parties to be managed. There are three main waysthePrivatePartnercanbepaid-bycollectingfeesfromserviceusers,bybeingpaidby theContractingAuthority,orbyacombinationof the two.Thecommondefiningcharacteristicbetweentheseapproachesisthatpaymentiscontingentonperformance.

“User pays” model –InPPPProjectsusingthispaymentmechanism,thePrivatePartnerprovidesaservicetousersandgeneratesrevenuebychargingusersforthatservice(e.g.sometollroads).Thesefees(ortariffsortolls)canbesupplementedbysubsidiespaidbytheContractingAuthority,whichmaybeperformance-based(forexample,conditionalontheavailabilityoftheserviceataparticularqualitystandard),oroutput-based(forexample,paymentsperuser).9Underthisapproach,thePrivatePartneranditsLendersbearthe“demandrisk”associatedwiththePPPProject,namely,howmanyuserswillpaytousetheasset.TheremayalsobesomescopeforthePartiestoagreethatcostsassociatedwiththeoccurrenceofcertainrisksmaybemanagedbyincreasingtheuserfeecommensuratelyand/orextendingthetermofthePPPContract.

9 Insomejurisdictions,fees(ortariffsortolls)undera“userpays”modelmayalsobesupplementedbyaminimumrevenueguaranteeprovidedbytheContractingAuthoritytomaketheprojectcommerciallyviableandbankable.

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“Government pays” model – In PPP Projects using this payment mechanism, theContracting Authority is the sole source of revenue for the Private Partner. This ismore usual in PPP Projects where the Private Partner has no influence over userdemand (e.g. in the case of a hospital or prison) or where user demand will be toolow or uncertain to generate sufficient revenue for the PPP Project to be bankable.ContractingAuthoritypaymentsareusuallyconditionalontheassetorservicebeingavailableatacontractually-definedqualityregardlessofthelevelofuse,andareoftentermed“availabilitypayments”.Inthisapproach,thePrivatePartneranditsLendersareexposedtotheContractingAuthority’screditriskandwillassessitcarefully.

H. Accounting treatment considerations

AnadditionalfactorforgovernmentsprocuringPPPContractshasbeentheavailabilityofadvantageousaccountingtreatment,inparticulartheperceivedabilitytotreatsuchinvestmentsas“offbalancesheet”.However,thishasattractedincreasingscrutinyfromaccountingbodiesaroundtheglobeduetoaconcernthatgovernmentsmayusePPPstobypassspendingcontrols(bytakingpublicinvestmentoutofthebudgetanddebtoffthebalancesheet),althoughtheyarestillbearingsubstantialriskandsignificantcontingentliabilities.ThishasresultedinbodiessuchasEurostat,theInternationalMonetaryFundandnationalaccountingboards(e.g.inAustralia)embarkingonmeasuresfocusingonthe overall risk/reward balance under PPP Contracts for the purposes of determiningwhethertheyshouldbeclassifiedasonoroffgovernmentbalancesheets.

IntheEU,forexample,EurostatcurrentlyrequiresEUgovernmentstofollowcertainaccountingrulesforthedebtanddeficittreatmentofPPPProjects(ESA10).Thesefocusonhowconstructionrisk,availabilityriskanddemandriskareallocatedbetweentheContractingAuthorityandthePrivatePartnertodeterminetheaccountingtreatmentthat must be applied. Under these rules (which themselves have given rise to somedebate),“user pays” PPP Contracts are by default off balance sheet due to the risk/reward balance, whereas “government pays” PPP Contracts may not be, dependingontheriskallocation.Whileaccountingtreatmentisnotafactorwhichshoulddrivenegotiatingapproach,itissomethingContractingAuthoritiesshouldbeawareof.

I. Country and sector-specific differences

Astheabovehighlights,thePPPmodelisbecominganincreasinglyglobalcontractingapproachforgovernments.Itisimportanttoremember,however,thatPPPProjectrisksvarydependingonthecountrywherethePPPProjectislocated,thenatureofthePPPProjectandtheassetsandservicesinvolved.10

10 Forexample,environmentalandsocialrisks(suchastheriskofdamagetotheenvironmentand/orlocalcommunitiesduetoexistinglatentenvironmentalconditions)willvarydependingonthespecificnatureofthePPPProjectaswellastheassetsandservicesitinvolves.Accordingly,suchrisksandtheirimpactsmayneedtobeparticularlyidentifiedandassessedaspartoftheParties’duediligence.Forspecificexamplesofriskallocation,seetheGlobalInfrastructureHubReport:AllocatingRisksinPublic-PrivatePartnershipContracts,2016edition,e.g.theEnvironmentalandSocialriskentriesinRiskMatrix1:TollRoad(DBFO)andRiskMatrix2:Airport(DBFO).See link in Appendix, Additional PPP Resources.

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AroadPPPProject,forexample,isverydifferentfromahospitalPPPProjectwhichinturnhassomeverydifferentfeaturestoanairportPPPProject.Similarly,adefensePPPProjectislikelytoinvolveissuesofnationalsecuritywhichdonotaffectothersectorsinthesameway.ThekeyistounderstandwherethesedifferenceslieandtoapplythesameprincipleofallocatingeachrisktothePartybestabletomanageitconsistentlywithaviewtomaximisingthevaluereceivedbytheContractingAuthority(measuredbyoverallcostaswellasqualityofserviceprovidedbythePPPProject).

Manyresourcesprovide“standard”riskmatricesandsampleriskallocations,insomecases for specific project types. These can be useful when identifying project risksfor a particular PPP Project. However, PPP Projects usually have unique features orcircumstances – for example, the particular geological conditions on the route of aproposedroad.Moreover,thetypicalriskallocationpositioninadevelopedPPPmarketinanestablishedjurisdictionmaynotbeappropriateinanemergingPPPmarket.ThismeansthatContractingAuthoritiesshouldensurethatexperiencedadvisorsidentifya comprehensive list of project risks and analyse carefully how such risks should beallocatedinthecontextofeachindividualPPPProject.11

J. PPP Contracts in different legal systems

Common law and civil law are the two main types of legal systems adopted bycountriesnowadaysandsomecountrieshaveadoptedfeatures fromboth into theirlegalsystems.While theapproach toallocatingriskunderaPPPContractshouldbefundamentallythesameinbothcivillawandcommonlawjurisdictions,howsuchriskallocationisdraftedandtheextenttowhichitisnegotiablemaydifferaccordingtotheleveloffreedomthePartieshavetoenterintobespokecontractualarrangements.

AnoverarchingconsiderationinrelationtofreedomtonegotiateunderbothsystemsiswhethertheapplicableprocurementprocessesandruleslimittheabilityofthePartiestonegotiateandamendthetermsofaPPPContractissuedaspartofatenderprocess,andwhetheranychangesmightgiverisetoprocurementchallengesorallegationsofcorruption.TheContractingAuthorityshouldtakethisintoaccountwhenformulatingthe terms of the PPP Contract which will form part of its tender documentation toavoidtenderinganunnegotiable,unbankable,PPPContract.

Aside from potential procurement law restrictions, underlying general laws may affector apply to PPP contractual relationships without express inclusion in the relevant PPPContract.Injurisdictionswherethisisthecase,thePartieswillneedtoverifywhetherandtowhatextentitislegallypossibletoamendorwaiverightsandobligationsundersuchlaws(takingintoaccounthowthismayalsoaffectthirdparties,suchasusers).Dependingontheresultofsuchanalysis,thePartiesmaywanttoexpresslyspellouttheunderlyinglegalpositioninthePPPContractforthesakeofcertainty.Howsuchissuesareaddressed

11 Forsectorspecificriskmatrices,seetheGlobalInfrastructureHubReport:AllocatingRisksinPublic-PrivatePartnershipContracts,2016edition.See link in Appendix, Additional PPP Resources.

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willdependentirelyonthejurisdictionandPartiesconcernedandprofessionallegaladvicemustbesought.Lenderswillbeequallyconcernedwiththisaspect.

Common Law System – In a common law system parties typically enjoy extensivefreedom of contract and few provisions are implied into a contract by law. Judicialdecisions set precedents which will be followed in the determination of contractualdisputesandthereforeinfluencecontractualdrafting.Aconsequenceofthisfreedomis that the terms of any contractual arrangements should be expressly set out inthe relevant contract. In a PPP context, all arrangements governing the relationshipbetweenthePartiesthereforeneedtobeexpresslysetoutinthePPPContractitself.

Generally speaking, everything is permitted that is not expressly prohibited by laworby contract. If a government is embarkingonaPPPprogramme, it may thereforewishtoensurethatcertainprotectionsareenshrinedinapplicablelegislationand/orbuiltintoPPPContractsforpublicpolicyreasons.Forexample,itmaywishtoexpresslyprohibit the service provider from cutting off the water or electricity supply ofdelinquentpayers,orlimitthetollortariffaPrivatePartnercanchargeusers,toreflectgovernmental obligations under relevant international treaties. It may also wish toexpresslyrequirethatcertaindocumentsrelatedtothetransactionbedisclosedunderfreedomofinformationlegislation.

Civil Law System – A civil law system is a codified system of law which is generallymoreprescriptive thanacommonlawsystem.Basic rightsanddutiesareenshrinedin an overarching constitution under which specific legal codes are promulgated(such as administrative and commercial legal codes). In addition, in many civil lawjurisdictions,underlyingprinciplesofgoodgovernanceandotheradministrativelawrulesaffectpublicsectorparties,andbroadobligationssuchas“goodfaith”haveanimportantimpactoncontractperformance.Broadlyspeaking,legislativeenactmentsare considered binding for all, as opposed to judicial decisions as in common lawjurisdictions(althoughcaselawmayberelevant,forexamplewithregardtofinancialhardship concepts and force majeure). Codified provisions and underlying principlesmaybeimpliedintocivillawcontractswithoutbeingexpresslyincluded.Asaresult,less importance isgenerallyplacedonexpresslysettingoutall the termsgoverningcontractual parties’ relationships because gaps or ambiguities can be remedied orresolvedbyoperationoflaw.Accordingly,acivillawcontractisoftenlessdetailedthananequivalentcommonlawcontract.

As in any jurisdiction, it is key for all Parties to understand how the underlying civillaw operates and how it potentially affects the Parties’ risk allocation negotiations.PPP Contracts typically fall under the administrative law umbrella and the Partieswill have to take into account underlying administrative law principles which applyto contractual relationships (e.g. in the context of force majeure rights or rights oftheContractingAuthority tovoluntarily terminateacontractor rights to“economicrebalancing” or compensation for a Private Partner suffering financial hardship as aresultofcertainchangesincircumstance).

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Changingoroverridinganadministrativelawprinciplebycontractmayormaynotbelegallypossibleandthiswillneedtobeconfirmedonacasebycasebasis.Somecivillawjurisdictionsenjoyextensivefreedomtocontract(e.g.theNetherlands).However,in other jurisdictions, it may not be possible to derogate from certain principles ortocompletelywaivecertainrights,so thePartieswillneed to take this intoaccountin their negotiations. A related issue for the Parties is what to include in the PPPContractifunderlyinglegalprinciplesapply.Generallyspeaking,thereisanincreasingpreference incivil law jurisdictions toexpresslysetout thepositionso that thePPPContractisclearonitsfaceandisnotrelyingonimpliedtermsfromunderlyinglaw.Thisispartlybecausethisapproachwillbemorefamiliartopartiesfromcommonlawjurisdictions, but also because relying on underlying law can be problematic as themeaningofcertaintermsandrulesmaynotbeclear.Analternative,whichmayalsobeeffective,istosetoutexpresslyinthePPPContracthowanunderlyingadministrativelawprincipleitistobeapplied.

K. Foundations for a successful PPP Contract

Theexistenceofa legalandadministrativeregimewhichpermitsPPPsandprovidesfor a clear and transparent procurement process is essential. Without this, privatesectorpartiesareunlikelytoinvesttimeandresources(bothfinancialandpersonnel),in participating in a PPP Project procurement process which may be lengthy andultimately fail. Before any procurement process begins, governments in both civiland common law jurisdictions need to consider what additional legislation may berequiredinordertofacilitateandpermitPPParrangements–thiswillincludeensuringContracting Authorities have the legal capacity and authority to enter into PPPContracts(i.e.thattheywillnotbeacting“ultravires”-beyondtheirpowers)andthatPPParrangementsintheirdesiredformarelegallypermitted.GovernmentswillalsoneedtoconsiderwhetherspecificlegislationisrequiredtofacilitatePPPProjectsinaparticularsectoror(particularlyinthecaseofcivillawjurisdictions)isneededtolimitthescopeofanunderlyinglawrestrictionwhichmaybepreventingorimpedingthesuccessful procurement of a PPP Project.This includes assessing any implications asregardspotentialfinancing,taxandsecurityarrangements.12

Astablepolitical,economicandlegalregimeandenvironmentisalsodesirable.Whilecertain associated risks can be managed under the PPP Contract, ultimately the riskofinvestinginandlendingtoaPPPProjectwheretheseconditionsdonotexistmaybe too high for some private parties, particularly when compared with alternativeinvestment or lending opportunities.The involvementofexport credit agenciesandmultilateral and development finance institutions can give Equity Investors andLendersgreaterconfidenceincertainjurisdictions.Thisisduenotonlytotheirability

12 ForanoverviewofaswellasspecificsonPPPlegalframeworks,seethePPPReferenceGuideVersion3.0,datedApril2017.See link in Appendix, Additional PPP Resources.

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tooffermorefavourablefinancingtermsorproductssuchaspoliticalrisk insuranceinrespectofcommercialloansandequity,butalsobecauseoftherelationshipstheyenjoy at government level. Similarly, the existence of bilateral investment treatiesbetween governments may play a part in the private sector’s decision to invest insomejurisdictions.Theseelementsareadditionalfactorsinthenegotiationofawell-balancedPPPContractinsuchjurisdictions,butarenotasubstituteforaPPPContract.

L. Conclusion: the importance of a project-specific approach

As highlighted at the outset, understanding the whole context of a PPP Project iscritical for Contracting Authorities when devising and negotiating the terms of aPPP Contract. Risk allocation has a direct impact on bankability and pricing, whichdetermines whether a PPP Project will be affordable for a Contracting Authority orusers and financeable by a Private Partner – and ultimately whether the asset and/orservicewillbeprovidedatallbymeansofaPPP.Thereisno“onesizefitsall”PPPContractandcontractualprovisionscannotbelookedatinisolationduetotheircloseinterplay.

ThisGuidanceisintendedtohelpContractingAuthoritiescarefullyassesstheissuesspecifictotheirownPPPProjectandjurisdictionindevelopingcontractualprovisions.It explains the rationale for the drafting of certain material provisions that haveformed the basis of many successfully procured PPP transactions around the globeand which have been developed through detailed risk allocation assessment andnegotiation between Contracting Authorities, Private Partners and Lenders. Its goalis to help Contracting Authorities negotiate key aspects of PPP Projects confidentlyandefficientlyandtoreducethetimeandmoneybeingspentnegotiatingcontractualtermswhichmayultimatelyresultinanunaffordableorunbankablePPPContract.

FORCE MAJEURE1

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1 .1 . .KEY .ASPECTS

1.1.1 The concept of Force Majeure

“ForceMajeure”wasoriginallyacivillawconcept,butitisnowwidelyusedincommercialcontracts,includingthosegovernedbythelawsofcommonlawjurisdictions.

ForceMajeureessentiallyreferstoeventsorcircumstanceswhich:

(a) arebeyondthecontrolofthecontractingParties;and

(b) make it impossible foroneParty tofulfilalloramaterialpartof itscontractualobligations(i.e.theyareprohibitiveinnatureasfarascontractualperformanceisconcerned).

1.1.2 Why do PPP Contracts contain Force Majeure provisions?

TheaimofForceMajeureprovisionsinaPPPContractistoallocatethefinancialandtimingconsequencesofForceMajeureeventsbetweentheContractingAuthorityanditsPrivatePartner13.ThestartingassumptionforbothPartiesshouldbethattheriskofaForceMajeureeventoccurringissharedbecauseitisoutsidebothParties’controlandneitherisbetterplacedthantheothertomanagetheriskofsuchoccurrenceoritsconsequences.

While the provisions are typically drafted mutually, the affected party is most likelyto be the Private Partner and this raises some important issues for the ContractingAuthoritywhicharethefocusofthisSection 1:

(1) whateventsqualifyasForceMajeureevents;

(2) whetherandhowthePrivatePartnershouldbecompensatedasaresultofaForceMajeureevent(e.g.forincreasedcostsand/orlossofrevenue);

(3) whether and for how long key milestones under the PPP Contract should bedeferredasaresultofaForceMajeureevent;

(4) whetherthePrivatePartnerortheContractingAuthorityshouldberelievedfromitsobligationstoperformunderthePPPContractandfromtherelatedconsequences(e.g.theriskofterminationduetodefault);and

(5) whetherthePPPContractshouldbeterminatedifaForceMajeureeventpersistsfor a significant period of time and what termination compensation should bepaid,ifany.

13 SeetheGlobalInfrastructureHubReport:AllocatingRisksinPublic-PrivatePartnershipContracts,2016edition,e.g.theForceMajeureriskentriesinRiskMatrix1:TollRoad(DBFO)andRiskMatrix2:Airport(DBFO)).See link in Appendix, Additional PPP Resources.

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CIVIL .AND .COMMON .LAW .DIFFERENCES

ManyjurisdictionshaveaconceptofForceMajeureundergenerallaw12. Insomecases,this can limit the freedom of the Parties to agree alternatives in a PPP Contract as itmaynotbepossibletoderogatefromthescopeofthelegalconcept.Thisisparticularlythe case in civil law jurisdictions. However, most PPP contracts include specific ForceMajeureprovisions,whethertheyarecivillaworcommonlawgoverned,asthisprovidescontractualcertaintyforthePartiesandavoidsdelayinaddressingtheconsequencesifForceMajeureoccurs.ThisisessentialtomakethePPPProjectbankableforLendersandEquityInvestorsalikeandistherecommendedapproachforallContractingAuthorities.

1.1.3 Relationship to other types of event

Inatraditionalcommercialcontract,forexamplebetweentwoprivatesectorentities,shared Force Majeure risk would typically include “acts of God” such as naturaldisasters and epidemics (often referred to as “natural Force Majeure”), as well as“political”eventssuchasgeneralstrikes,nationalisationandapublicsectorrefusaltograntlicenses(oftenreferredtoas“politicalForceMajeure”).

Inalong-termPPPContract,whereoneofthepartiesisapublicsectorentity,thereisclosescrutinyofthetypeofpoliticalforcemajeureeventswhichmayariseduringthelifeofthePPPContractandhoweachriskshouldbeallocated.DecidingwhethertheriskshouldbebornebytheContractingAuthorityalone,sharedbytheParties,orbornebythePrivatePartnerasacommercialriskmayinpracticebedifficult.Itwillinevitablydependonthesituationintherelevantjurisdiction,thetypeofeventbeingconsideredandthelevelofcontingencythatthePrivatePartnerwouldpriceintoitsbidtocovertheriskifallocatedtoit.Forexample,whileitisusuallyacceptedthatthetypeofpoliticalriskwhichshouldliewhollywiththeContractingAuthorityincludesdeliberateactsofstatesuchasoutrightnationalisationofthePPPProject,thepositionasregardswareventswilldependon the jurisdictionconcerned. Ifanykindofcivilorexternalwarevent is highly unlikely, the Private Partner may be comfortable with the risk beingtreatedasasharedForceMajeureriskandanycontingency itprices into itsbidwillberelativelylow.Inmorevolatilejurisdictionswherethewarriskishigh,however,thePrivatePartnermaynotbepreparedtobearanyriskatall(oralternativelywouldpricesuchahighcontingencyintoitsbidthatthePPPContractmayproveveryexpensiveorevenunaffordable).Inthisinstance,sucheventsmaybemoreappropriatelytreatedasContractingAuthorityrisk,orlookedatmoreindividuallysothat,forexample,civilwarmaybeclassedasContractingAuthorityrisk,butexternalwareventsclassedassharedForceMajeurerisk.

IftherearepoliticalriskeventstobeallocatedsolelytotheContractingAuthority,itislikelythattheseeventswillrequireseparatetreatmentinbespokeprovisions.InthisGuidance,events in this category are treated as“Material Adverse Government Action” (“MAGA”)events.TheyaregivenseparatetreatmentintheirowncontractualprovisionandareindiscussedinmoredetailinSection 2, Material Adverse Government Action.Thesametypeofapproachisseen,forexample,inrecentPPPContractsinthePhilippinesandalsoincertain

14 In France, for example, the affected party is relieved from its obligations if Force Majeure prevents performance.FrenchjurisprudencehasdefinedthecharacteristicsofaForceMajeureeventas(i)beyondthecontroloftheparties,(ii)unforeseeableand(iii)impossibletoovercome.

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African power projects (such as the International Finance Corporation’s Zambia ScalingSolarProgramme).See Section 2, Material Adverse Government Action.

In some jurisdictions (such as Australia and the UK), there is no need for a specificMAGAprovisionasPrivatePartnersacceptthatthetypeofpoliticalriskslikelytoariseare limitedandcanbedealtwith through theForceMajeuresharedriskprovisions,together with separate provisions dealing with specific events for which risk isallocated either to the Contracting Authority (such as Contracting Authority breachofcontractandChangeinLaw)ortothePrivatePartner.15See also Section 2.1.3, Material Adverse Government Action and Section 3.1.3, Change in Law.

Thereisnorightorwrongapproachandthefundamentalprincipleremainsthesame–risksshouldbeallocatedtothepartybestabletocontroland/ormanagethemandthePPPContractshouldaddressthemintheclearestwaypossible.


ContractingAuthoritiesshould,however,distinguishForceMajeureprovisionsfromso-called“hardshipclauses”whichdealwithunexpectedcircumstanceswhereperformancebecomesmoreonerousforaPartywithoutbeingimpossible.Thesestemfromunderlyingstatutorylegalconceptsincertainjurisdictions(e.g.France14)andarenotusuallyfoundincommonlawcontracts.

Notably, PPP Contracts in civil law countries often derogate from underlying statutorylegal hardship provisions in favour of an agreed contractual risk allocation where thisis legallyeffective.This is toprovidecertaintyfor thePartiesand is therecommendedapproachforContractingAuthoritieswherepossibleundertheapplicablegoverninglaw.SeeSectionJ,PPPContractsinContext.

1.1.4 Force Majeure and related Project Agreements

ThePrivatePartneranditsLenderswillreviewForceMajeureprovisionsindetailandwillwanttoensurethattheForceMajeureprovisionsintheProjectAgreementsmirrorthoseunderthePPPContract(bothintermsofdefinitionandconsequences).TheProjectAgreementsshouldprovidethesub-contractorswithnogreaterprotectionagainsttheriskofForceMajeurethanthePrivatePartnerenjoysunderthePPPContract(sothatthereis“equivalentprojectrelief”).ThisistoensurethatthePrivatePartnerdoesnotfinditselfinapositionwhereitisobligedtogiveasub-contractorForceMajeurerelieftowhichitisnotitselfentitledunderthePPPContract.

15 Thisispartofanapproachwhichtypicallydistinguishesbetween(a)eventswhichentitlethePrivatePartnertothesametypeoffullrelief(namelybothcostreimbursementandextensionsoftime)andsometimestermed“CompensationEvents”;(b)eventswhichonlyentitlethePrivatePartnertoextensionsoftime(knownas“ReliefEvents”);and(c)“ForceMajeureEvents”(whichareasharedriskbutusuallyhaveanarrowscopeassomepoliticalandnaturalforcemajeurerisks are instead treated as Relief or Compensation Events). See the Infra Australia PPP Guidelines and the UK PF2Guidance.

16 InFrance,administrativecourtswillenforcethedoctrineofhardship(imprévision),whichallowsapartytoclaimcom-pensationthroughanincreaseinthecontractpricewherethecircumstancesofthecontracthavechangedinamannerwhichcouldnothavebeenforeseenbytheparties(i.e.byeventsthatareunforeseeable,beyondthecontrolofthepar-tiesandhaveafundamentalimpactontheeconomicbalanceofthecontract).UnlikeForceMajeure,however,perfor-manceisnotimpossible.FrenchPPPContractsmayprovidethatimprévisioncanbeinvokedinaccordancewithcaselawormaydefineexpresslythefinancialthresholddeemedtotriggerthePrivatePartner’srighttoclaimcompensation.

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Similarly,whenthePPPContractsetsoutconditionsprecedenttothePrivatePartner’sentitlement to any Force Majeure protection (e.g. notice requirements and theobligationtosupplysupportinginformation),theseconditionsneedtobereflectedintheProjectAgreements.WhilethisisprimarilyanissueforthePrivatePartneranditsLenders, it is in theContractingAuthority’s intereststoensurerequirementsfor thisflowdownareinplacetoensurethereisnonegativeimpactonthePPPContract.See also Section 2.1.4, Material Adverse Government Action and Section 3.1.4, Change in Law.

While following the Force Majeure approach in internationally recognized forms ofconstructioncontract17maybeappropriateforsomePPPContracts,thestartingpointfor a Contracting Authority should always be to consider what the appropriate riskallocationpositionisforitsPPPContractandforthispositiontothenflowdowninto(as opposed to up from) the Project Agreements.This may well result in a differentapproach to construction industry standard forms and mean that the constructionsub-contractwillbeaformofcontractthatreflectstheapproachinthePPPContractandisthereforespecifictotherelevantproject.ThisisusuallytherightapproachinPPPProjectswherefinancingisonalimitedrecoursebasisandtheSPVneedstotransferthe risks assumed under the PPP Contract to its subcontractors under the ProjectAgreements resulting in a construction contract and operation and maintenanceagreementthatare“back-to-back”withthePPPContract.SuchflowdownstructuresarelikelytobecriticaltothebankabilityofthePPPProject.

1 .2 . .KEY .CONSIDERATIONS .FOR .THE .CONTRACTING .AUTHORITY

1.2.1 Defining the events or circumstances that qualify as “Force Majeure”

1.2.1.1 Freedom to contract–BeforedraftingandnegotiatingForceMajeureprovisions,the Contracting Authority needs advice from its legal advisers about how muchcontractualfreedomthePartieshaveunderthePPPContract’sgoverninglawto(i)definetheconceptofForceMajeureinthePPPContractand(ii)specifyitsconsequences.


In jurisdictions which have an underlying legal concept of Force Majeure (typicallycivil lawjurisdictions),theParties’abilitytoderogatefromthelegaldefinitionofForceMajeureandamendorcreatetheirowndefinitionofForceMajeureanditseffectsmaybe limited and must be verified on a case-by-case basis. In France, for example, ForceMajeureisdefinedbyFrenchjurisprudenceasaneventbeyondthecontroloftheparties,unforeseeableandimpossibletoovercome.

In other jurisdictions (typically common law jurisdictions, but also, for example, theNetherlands16),thePartieswillhavenorestrictionontheirabilitytomutuallyagreeonthescopeofForceMajeureandtheconsequencesofaneventoccurring.

17 For example, the forms of construction contract produced by FIDIC (The International Federation of ConsultingEngineers).

18 IntheNetherlands,thePPPContractmaytypicallyincludewordingwaivingstatutoryrightsinrespectof“unforeseenevents”–thistypeofexpressapproachmaybepersuasiveifsuchderogationweretobetestedincourt.

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1.2.1.2 Different approaches

TherearebroadlytwomainapproachestodefiningForceMajeure:

(a) Approach 1: an open-ended catch-all definition including all events beyond thereasonable control of the affected party which satisfy certain criteria such asforeseeability and avoidability and prevent the affected party performing. Despitesuchageneralapproach,itisalsocommontolistspecificeventsconsideredtobeForceMajeureunderthisdefinition,recognisingthatanysuchlistisonlyillustrativeandisnotexhaustive.19ThiscanbeadvisableinjurisdictionswherethecourtsareunlikelytoexpanduponthecontractualdefinitiongivenbytheParties,toensuresucheventsareincluded.See Section 1.2.1.3 and Section 1.4, Sample Drafting 1, Clause (1).

EMERGING .AND .DEVELOPED .MARKET .DIFFERENCES

Thiscatch-allapproach isoftenseen incivil lawgovernedcontractsandmaybemoreappropriateinemergingandlessstablePPPmarketswhereitmaybemorechallengingtoexpectaPrivatePartnertomanagetheconsequencesofthetypeofeventswhichmeetthedefinitioncriteria.Forexample,iftherearelimitedavailableresourcesinthecountryitself, more dependence may have to be placed on an external supply chain than in aresource-richcountry.

(b) Approach 2: an exhaustive list of specific events or circumstances which are(expressly or inherently) beyond the control of the affected party and preventit from performing. These typically include political events (e.g. wars, acts ofterrorism, strikes and protests) to the extent treating them as a shared risk isagreedappropriate,naturaldisasterevents(e.g.earthquakes,landslides,floods)20andeventssuchasnuclearexplosions.AnexampleofthisistheDutchModelwhichsets out a very limited list of Force Majeure events, as do the UK PF2 Guidance(underwhichtheeventslistedareessentiallyuninsurable)andtheInfraAustraliaPPPGuidelines.See Section 1.5, Sample Drafting 1A, Definition of “Force Majeure Event”.

19 Forexample, thePartiesmaywanttospecifycertaintypesofsevereandextremeweatherconditionsinordertoaddressrisksrelatingtoclimatechange(astheyrelatetotheirspecificproject),recognizingthat,whiletheimpactsofclimatechangemayhavebecomeincreasinglyforeseeable,itwouldlikelynotbeintheAffectedParty’spowertoprevent,avoidorovercomethoseonitsowninmostcases.Nonetheless,itshouldbenotedthattherecurrentlyisnostandardizedapproachforallocatingresponsibilityinPPPProjectstomanageForceMajeureversussevereandextremeweatherrisks.Equally,thePartiesshouldcarefullyassesswhetherthelegalsysteminthecountry,inwhichtheirPPPProjectislocated,allowsforinclusionofsucheventsunderForceMajeure,and,ifnot,whetherthesemaybecoveredbythePrivatePartnerbytakingoutrespectiveinsurance. See also Section 1.2.1.4.

20 Thismayalsoincludeothertypesofsevereandextremeweatherconditions.Inspecifyingsuchfurtherevents,thePartiesmaywant toparticularlyaddressrisksrelating toclimatechange(as theyrelate to theirspecificproject).Nonetheless,seethecaveatasnotedinfootnote19.

21 ThisispartoftheapproachdescribedinthefootnotetoSection 1.1.3 Force Majeure.

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SometypesofeventwhichmightbetreatedasForceMajeureinemergingmarketsmaybetreatedindevelopedmarketsas“ReliefEvents”whichareatthePrivatePartner’sriskandiftheyoccuronlyentitlethePrivatePartnertorelieffrombreachofcontracttotheextenttheycauseittomissakeyperformancedateunderthePPPContract(i.e.“time”relief).ThePrivatePartnerhasbeenpreparedtotakeaviewonsuchrisksandhowbesttomanagethemwheremarketsaredevelopedandpredictable.17

(c) Exclusions and qualifications:inrelationtobothApproach1andApproach2,itisnotuncommontospecifyeventswhicharespecificallyexcludedfromthedefinitionofForceMajeureorwhichonlyqualifyiftheyareoccurtoasufficientdegree.Inthis case, the drafting focus will shift to what is not Force Majeure as opposedtowhatis.Forexample,incountrieswherecertainnaturaleventsregularlyoccur(such as seasonal rains resulting in floods) and which should have formed partof the Private Partner’s due diligence when formulating its proposed price, thedegreeofsucheventsshouldbespecifiedsothatonly“exceptional”occurrencesqualifyasForceMajeure(e.g.floodsofascalethatoccurnotmorefrequentlythanonceinevery[100]years).Itmaybehelpfulincertainciviljurisdictionstosetoutthe rationale for excluding certain events, as the courts may have the power toconsiderthemasForceMajeureeventhoughexpresslyexcludedbytheParties.

Particular sectors may have specific requirements as well – for example, defense PPPProjectsmightexcludecertainevents if thePPPContract is intended tooperateduringtimesofwar;andenvironmentalPPPProjectsorPPPProjectsinvolvingchemicaltreatmentmayalsoneedtohaveanarrowerdefinitionifthePrivatePartnerisintendedtodealwithacertaindegreeofchemicalcontamination(suchasahospitalordefenseproject).

Whichever drafting approach is selected, above all, the Contracting Authority anditsadvisersmustcarefullyconsider thespecificnatureandindividualcircumstancesof the PPP Project in question to ensure that the definition is appropriate for thatPPP Project (and not simply adopted from a previous PPP Project or another sectoror jurisdiction).This is particularly the case bearing in mind the consequences of aForceMajeureeventandtheContractingAuthority’spotentialliability(e.g.ifongoingpaymentsarerequiredorterminationresults).

1.2.1.3 Foreseeability and avoidability – To qualify as a Force Majeure event, thedefinitionmayalsorequirethataneventwasnotforeseeable,orifitwasforeseeablethatitcouldnotreasonablyhavebeenavoided.PracticevariesbetweenjurisdictionsandmaydependonunderlyinglegalconceptsorthenatureandextentoftheagreedlistofForceMajeureevents.

22 Forexample,seetheInfraAustraliaPPPGuidelines.

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Inmanycivillawjurisdictions,thelegaldefinitionofForceMajeurerequiresthattheeventisunforeseeableandunavoidablefromthepointofviewofthepartywhoseobligationsare affected. Contracting Authorities in these jurisdictions therefore often want toincludetheserequirementsinthecontractualForceMajeuredefinition,coupledwithareasonablenesstestasregardsaparty’sinabilitytocontroland/orpreventanevent,evenifitisinfactforeseeable.SeeSection1.4,SampleDrafting1,Clause(1)(b).

WhileSection1.4,SampleDrafting1illustratesthiscivillawapproach,PPPContractsincommonlawjurisdictionswouldnottypicallyincludethisconceptofforeseeability,norwouldtheyinsomecivillawjurisdictions(e.g.theNetherlands).SeeSection1.5,SampleDrafting1A.However,insomecasestheextenttowhichtheimpactoftheForceMajeureEvent could have been reasonably prevented/mitigated may be key in determiningentitlementtorelieffrombreachofcontract18.

1.2.1.4 Insurance –ContractingAuthoritiestypicallyrequirethePrivatePartnertoinsurematerialprojectrisks(e.g.accidentaldamage,thirdpartyliabilities).IntheearlydaysofPPPs,thedefinitionofForceMajeurewasoftenbasedonwhetheraparticulareventcouldbeinsuredagainst.Iftherewasinsuranceforaspecificpoliticalornaturalevent,itcouldnotberegardedasForceMajeure.Conversely,“uninsurable”eventstendedtobetreatedasForceMajeure.Currently,therelationshipbetweeninsurabilityandForceMajeureislessstraightforward,althoughtheabilityofthePartiesto insureagainstcertainrisks,andtobeartherelevantinsurancepremiumcosts,mustbeconsideredwhendefiningForce Majeure events and related compensation provisions. It may be appropriate toexcludecertaininsurableeventsfromtheForceMajeuredefinitionasthePrivatePartnerisabletomanagetheriskthoroughinsurance(andwillhavefactoredthepremiumcostinto its pricing). Equally, if the insurable event is agreed to be a Force Majeure event,thiswillinfluenceanyadditionalreliefthatmaybeagreedbytheContractingAuthority.Insuranceproceedspaid23(otherthantocompensatethirdparties)mayalsobedeductedfrom any termination amount payable.The Contracting Authority should also expectthatthecostsofinsurancewillbereflectedinpricing–eitherultimatelybeingpassedontothirdpartyusersviatheapprovedtarifforfee(underthe“userpays”model)ortotheContractingAuthorityitself(underthe“governmentpays”model).

Generally, uninsurability is addressed in separate provisions, although somejurisdictions may not recognize the concept of uninsurability or may not typicallyaddressitcontractuallyduetotheexistenceofgenerallawprovisions.For further detail see Section 1.3 and definition of “Uninsurability”.

1.2.2 Relief for Private Partner non-performance

ContractingAuthoritiesarelikelytobeaskedtoconsiderwhetherthePrivatePartnershould be entitled to any relief if a Force Majeure event occurs preventing it fromperforming.Apartfrombeingunabletomeetitscontractualobligations,thePrivatePartnermayincuradditionalcostsandsufferlossofrevenuetotheextentitisunableto commence or continue to provide the service. In the construction phase, a delay

23 Or,dependingonthejurisdiction,andtimingofactualpaymentbytheinsurers,payable.

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tocompletionmayalsocausethePrivatePartnerto incuradditionalfinancingcosts(e.g.additional interestduringconstruction)or if ithastoreschedule itsrepaymentobligations). In the operating period it is likely to still be incurring fixed costs (inparticulardebtservicecosts),whichitmaybeunabletomeetanditsfinancialpositionmaybemateriallyaffected.Thisapplieswhetherthe“userpays”or“governmentpays”paymentmodelisbeingused(see Section G, PPP Contracts in Context).

WhiletheunderlyingprincipleofForceMajeureisthatlossesliewheretheyfallandPartiesshouldbeartheirowncostsanddamages,differentapproachescanbetaken.The Contracting Authority should assess the extent to which it is prepared to paycompensationtothePrivatePartnertopreventapaymentdefaultunderitsprojectorfinancingagreementswhileaForceMajeureeventsubsists(e.g.bycontinuingtopayanavailabilitypaymentorothercompensation)and/or toenable it tomakeup lostrevenuesandcostsincurredifthePPPContractistoresume(e.g.viaanextensionoftheoperatingperiodorincreasedtariff).

Although it is typical for a PPP Contract to expressly include some additional relief(particularly in respect of Force Majeure events occurring during the constructionphase),itisimpossibletoknowinadvancewhatwillbeappropriatefollowingeveryForceMajeure occurrence as the effectsmayvarygreatly (some mayhaveagreateror longer term impact than others). In practice, if a Force Majeure event occurs, thePartieswillbediscussinghowtofacilitatecontinuedperformanceofthePPPContract(includingagreeingat thetimeonanyadditionalrelief)andacontractualprovisionreflectingthisisoftenincluded.See Section 1.5, Sample Drafting 1A, Clause (4).

Theavailabilityofinsurancewillberelevanttothedeterminationofrelief(see Section 1.2.1.4 and Section 1.3),aswilltheperiodoftimethataForceMajeureeventmustsubsistbeforeeitherPartymaybeentitledtoterminatethePPPContract.Notsurprisingly,theperiod of time that must elapse before termination rights arise tends to be shorterinPPPContractswherenofinancialcompensation isexpressedtobepayabletothePrivatePartnerduringthesubsistenceofaForceMajeureevent.

Itisworthnotinginthiscontextthatifterminationultimatelyoccurs,theContractingAuthoritywillmostlikelypaycompensationtothePrivatePartner(e.g.ataminimuminanamountequaltoofoutstandingseniordebt).See Section 4, Termination Payments.

Typically, the Party claiming relief for a Force Majeure event will be obliged to takereasonableactiontomitigateitseffectsandprovideamitigationstrategytotheotherParty.Failuretodosomayaffectitsrightstorelief.Insomecases,thePartiesmayagreetoexcludecertainmeasuresfromthemitigationrequirement.

Typesofreliefarediscussedin Sections 1.2.2.1 – 1.2.2.8.

1.2.2.1 Relief from breach of contract –The occurrence of a Force Majeure eventaffectingthePrivatePartner’sabilitytofulfilitscontractualobligationswillgenerallyallowitrelieffromitsobligationsunderthePPPContractsothatitisnotinbreachofcontract,buttheContractingAuthorityshouldensurethatreliefisgivenonlytotheextentthatthePrivatePartner’sinabilitytoperformitsobligationsisdirectlycausedby the Force Majeure event. See Section 1.4, Sample Drafting 1, Clauses (3) and (5) and Section 1.5, Sample Drafting 1A, Clause (1).

ItisalsotypicallyacceptedthatthePrivatePartnerisexcusedfromfurtherperformanceof its affected obligations under the PPP Contract while the Force Majeure Event is

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continuing. See Section 1.4, Sample Drafting 1, Clauses (3) and (5) and Section 1.5, Sample Drafting 1A, Clause (1).

1.2.2.2 Liquidated damages relief – If the Private Partner is liable to pay liquidateddamages to the Contracting Authority if it fails to meet certain construction phasemilestones (such as the scheduled date for commencing operations), itwill typicallywanttobeexpresslyrelievedfromsuchrequirementtotheextenttheserelatetotheobligationsitisunabletofulfilduetotheForceMajeureevent.MarketpracticeistoexpresslyprovideforsuchreliefupfrontinthePPPContract.

1.2.2.3 Extension of time for performance–TheContractingAuthorityusuallyexpresslygrantsthePrivatePartneranextensionoftimeinrespectofdelaystothecommencementof operations that are attributable to Force Majeure events during the constructionphase.ThiswillincludepostponingthedateonwhichtheconstructionofthePPPProjectshouldhavebeencompletedbythePrivatePartner(themechanicfordoingthismaybesetoutinanotherclausedealingmoregenerallywithextensionsoftime).

1.2.2.4 Increased finance costs pre-completion –IfForceMajeuredelayscompletionof the PPP Project asset, the Private Partner will not be able to commence serviceoperationsandstartearningrevenuetomeetitsdebtserviceobligations.Itmayincuradditional interest and commitment fees and costs of rescheduling its repaymentobligations.IfthePrivatePartneraddsinsomecontingencypricingagainstthisrisk,thiswillhavevalueformoneyimplicationsfortheContractingAuthority.Inrecentyears,PPPContractsinsomejurisdictions(e.g.theNetherlands)haveexpresslyprovidedforcertaincompensationinthisregard,withmechanicsdistinguishingbetweendifferenttypesofdebtandlengthsofdelay.

1.2.2.5 Continued availability payment – Under the“government pays” model (see Section G, PPP Contracts in Context), itmaybeappropriaterisksharingfor thePrivatePartnerto(a)continuetobepaidasifitisperforminginfull,(b)tobepaidanadjustedamounttocoverdebtservicecosts(butnottheoperationandmaintenancecostsavingsthatmayarisefromnotperformingorlostprofit),or(c)nottobepaidatall.Thiswillinpartdependontheavailabilityofinsurance(suchasbusinessinterruptioninsurance).Anotherpossibilityistoadjusttheperformanceregimeinrespectofanypartoftheservicethatisabletobeprovidedinordertoreduceanypaymentdeductions.


Theextenttowhichcompensationispaid(orrelieffromdeductionsunderthepaymentmechanismisgranted)duringthecontinuationofaForceMajeureeventcanvaryaccordingtojurisdiction.ItislesscommoninsomeemergingmarketsforaContractingAuthoritytomakeadditionalpaymentsduringaForceMajeureEventunlessitisapoliticalriskeventconsideredwithinitscontrol(i.e.atypeofMAGAeventasdescribedinSection 2.2.1).

Indevelopedmarkets(particularlysomecivil lawjurisdictions),ContractingAuthoritiesmaybemorewillingtomakepaymentsHowever,insomejurisdictions,suchastheUK,itismorecommonforthePPPContracttoidentifyspecificrisksthatthePrivatePartnercannotbear (suchasavolatile rawmaterialsprice)andprovideexpressly forfinancialreliefontheiroccurrence.

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1.2.2.6 Tariff increases–WherethePPPContracthasa“userpays”model (see Section G, PPP Contracts in Context), theContractingAuthoritymayallow thePrivatePartnerto be compensated for increased costs and lost revenues by increasing the relevanttollpaymentsor tariffs (forexamplethetariffs inaconcessionforawaterorwastewater network) if the PPP Contract resumes. The Contracting Authority will needto consider any social and political ramifications of this approach in particular inemergingmarketswheretheeconomicsituationmaynotbestable,aswellasifitislegally possible to increase the relevant toll payments or tariffs.24The PPP Contractmay provide upfront that any restrictions on the Private Partner’s ability to set therelevanttollsortariffsaretobeliftedasnecessarytotakeaccountofrelevantcostsarisingfromForceMajeureevents.However,wheretariff increasesaresubjecttoanoverarchingregulatoryregimeorwheresuchmeasureswould implyahighpoliticalrisk, it may not always be possible to achieve an increase even if justifiable underthePPPContract.InthisinstancetheContractingAuthoritywouldhavetoeffectthecompensation due by some other means. It should also be noted that Lenders mayconsider any compensation mechanism involving increased tariffs as increasing theoverallriskprofile(e.g.ifuserdemandmaythendecrease)andmayaccordinglypreferupfrontpaymentbytheContractingAuthority.

1.2.2.7 Extension to the operating period–TheContractingAuthoritymayalsograntanextensiontotheoperatingperiodifitconsidersitappropriatetocompensatethePrivatePartnerinthiswayinrespectoflostrevenues(orcostsincurred)duetoForceMajeure.

1.2.2.8 Interim costs compensation – Despite compensationbeing granted throughone or more of the above means (such as by way of an extension to the operatingperiodorincreasedtariffs),additionalcosts(e.g.forcapitalworks),mayneverthelessneedtobeincurredbythePrivatePartnerbeforeanyactualcompensationfromtheContractingAuthorityisreceived.OnewayforContractingAuthoritiestoaddressthis,which isnotuncommon incertaindeveloped jurisdictions, is for thePrivatePartnertohaveanobligationtoseekfinancingforsuchadditionalcostsonthebestpossibleterms.IfsuchfinancingisnotavailableortheContractingAuthorityrejectstheterms,the Contracting Authority either becomes the lender of last resort or is required tomakeanupfrontpayment.

1.2.3 Termination

InmanyPPPContracts,aprolongedForceMajeureevent(typicallyinexcessofsixtotwelveconsecutivemonths)willtriggerarightforeitherPartytoterminatethePPPContractifitisunlikelythatcircumstanceswillreturntonormalandthePartiescannotagreeasolutionwithinthespecifiedperiod.

AsmentionedinSection 1.2.2,wherenofinancialcompensationispayabletothePrivatePartnerduringthesubsistenceofaForceMajeureevent,theterminationrighttendsto arise sooner - typically when the Force Majeure event has subsisted for 180 days(sixmonths)ormore. See Section 1.4, Sample Drafting 1, Clause (8) and Section 1.5, Sample Drafting 1A, Clause (5).

24 Higher user fees may be commercially viable, but discriminatory under international agreements to which theContracting Authority/government is party (e.g. International Covenant on Economic, Social and Cultural Rights,ConventionontheEliminationofDiscriminationAgainstWomen,andtheConventionontheRightsoftheChild).

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SomejurisdictionsmaydistinguishbetweentypesofForceMajeureeventindeterminingrightstoterminate.Forexample,undertheInfraAustraliaPPPGuidelinestheContractingAuthoritymayterminateatanytimefollowingtheoccurrenceofan“UninsurableForceMajeure”event(forwhichitisinsureroflastresort).See Section 1.3.4.


IfthePrivatePartnerhastheabilitytoterminatethePPPContractonthebasisofaprolongedForceMajeureevent,theContractingAuthoritymaywanttoincludeanoptiontorequirethePPPContracttocontinue,providedthatthePrivatePartnerisadequatelycompensated.Under the Infra Australia PPP Guidelines and the UK PF2 Guidance, for example, theContractingAuthorityhastherighttopreventterminationbythePrivatePartneraftertheendofthespecifiedperiodbypayingthePrivatePartnerasiftheservicewasbeingfullyprovided(subjecttoapplicablemitigationobligations).ThisapproachismorelikelytobeencounteredinamoreestablishedPPPmarket.See Section 1.5, Sample Drafting 1A, Clause (7).

1.2.4 Determining the amount of a Force Majeure termination payment

If the PPP Contract allows for termination for prolonged Force Majeure, it typicallyprovides that the Contracting Authority pays compensation to the Private Partnerreflecting the principle that Force Majeure is neither Party’s fault and the financialconsequences should be shared.This does not mean that the Contracting Authorityshouldpay“full”compensation(i.e.repaymentofalldebt,equityandbreakcosts)asthiswouldresultintheContractingAuthoritybearingallthefinancialpain.TheusualpaymentamountresultsinthePrivatePartnerlosingallitsforecastequityreturn(i.e.itsprofit)butbeingabletorepayallofitsoutstandingseniordebtwhichissufficientto address bankability concerns. See Section 4.5, Termination Payments and Section 4.7, Sample Drafting 4, Schedule, Clause (3).


Wherecertainnaturalrisksareinsurable(andwouldreasonablybeexpectedtobeinsuredagainstasgoodoperatingpractice),theContractingAuthoritymaysucceedinnegotiatingpaying no termination compensation in respect of such events (or a reduced amountreflecting insurance payments received (or receivable – see Section 1.2.1.4) by the PrivatePartner).ThistosomeextentreflectsthepracticeinmoredevelopedmarketsmentionedinSection 1.2.1.2(b)wherethesetypeofeventsmayinsteadbeclassifiedas“ReliefEvents”whichareatthePrivatePartner’sriskandentitleittotimereliefonly(butnoultimaterightoftermination).ThiswillofcoursedependontheriskassessmentbythePrivatePartneranditsLenders.AnydifferingtreatmentagreedupfrontfordifferenttypesofForceMajeureeventshouldbeclearlyexpressedinthePPPContract.

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1 .3 . .UNINSURABILITY

1.3.1 Why do PPP Contracts contain uninsurability provisions?

As mentioned in Section 1.2.1.4, the Contracting Authority should consider whatinsurances the Private Partner is required to have under the PPP Contract. Theavailability and cost of, and the obligation to take out, relevant insurances will berelevanttohowtheriskofcertaineventsisallocated(suchasForceMajeureevents),aswellastowhatdeductionsmaybeappliedtoterminationpaymentsinrespectofinsuranceproceedsreceivable.

EquityInvestorsandLendersmayseekprotectioninthePPPContractforthePrivatePartnerincaserequiredinsurancecoverbecomesunavailable,lessextensiveormorecostly. Without express contractual protection, uninsurability risk will typically liewith the Private Partner (who will also be in breach of its obligations to maintainthe unavailable insurance).This is likely to attract a pricing premium (if indeed it isbankable),dependingonthecircumstancesofthePPPProjectandtheriskassessmentconducted by the Private Partner and its Lenders. Some jurisdictions may addressuninsurability though general law provisions, or may not recognize the concept ofuninsurability25.TheContractingAuthorityshouldthereforetakespecialistadviceonhowrelevantcontractualprovisionsmayinterplaywithgenerallaw.

WherethereisaknownriskofuninsurabilityinrespectofaparticularrequiredinsuranceatthetimethePPPContractisbeingnegotiated(forexample,insuranceagainstterrorismorvandalism),thismaybeaddressedthroughbespokecontractualprovisions.

1.3.2 Definition of “Uninsurability”

Uninsurabilityisthereforeasomewhatmisleadingtermasittypicallydoesnotmeanthatinsuranceisnotavailableatall.Theusualdefinitionofuninsurabilityinrespectofaparticularriskcovers:

(a) theunavailabilityofinsuranceontheinternationalinsurancemarketbyinsurersofanadequatecreditrating/reputableinsurersofgoodstanding;and

(b) whereinsurancepremiumsareprohibitivelyhigh(notmerelymoreexpensive)–for example, at such a level that the risk is not generally being insured againstin theworldwide insurancemarketwithreputable insurersofgoodstandingbycontractorsintherelevantcountry.


Widerreferencecriteriamayberequiredincertainemergingmarketsinrespectoflimb(b)ofthedefinitionabove–forexample,ifthereisnotasufficientpoolofcontractorsintherelevantcountrytodrawameaningfulmarketpracticecomparison.

25 SeereferencetoBulgariainTerminationandForceMajeureProvisionsinPPPContracts-ReviewofcurrentEuropeanpracticeandguidance(March2013)-EPEC/Allen&OveryLLP.See link in Appendix, Additional PPP Resources.

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1.3.3 Consequences of uninsurability

Negotiating a solution –The effect of uninsurability provisions are typically that, ifa particular risk becomes uninsurable in accordance with the agreed contractualdefinition(andnotasaresultofthePrivatePartner’sactions),thePartieswillnegotiateamutuallysatisfactorysolutionformanagingtherisk,failingwhichtheContractingAuthoritywillbecometheinsureroflastresort.AnyavailabilitypaymentwillthenbereducedaccordinglytoreflectthepremiumnolongerbeingpaidbythePrivatePartner.ThepositionasregardsthirdpartyliabilityinsuranceisslightlydifferentbecauseclearresponsibilityisneededinorderforthePrivatePartneranditsemployeestocontinuetooperate-theContractingAuthorityshouldhavetheoptiontoaccepttheriskitselfortoterminatethePPPContract(onaForceMajeureterminationcompensationbasis).

Relieffrombreach–TheContractingAuthorityusuallygrantsrelieftothePrivatePartnerfromtheobligationtoinsure,butonlytotheextentthePrivatePartner’sownactsoromissionhavenotcausedtheinsurancetobecomeunavailable.Ifithascausedtheunavailability,thePrivatePartnerwillbeinbreachofthePPPContractwhichislikelytogivetheContractingAuthorityarighttoterminateforPrivatePartnerdefault(see Section 4, Termination Payments).

Insurer of last resort–IftheContractingAuthorityacceptsbecominginsureroflastresort,itwillbeliablefortheconsequencesoftheoccurrenceoftheuninsurablerisk.ItisthereforeimportantthattheContractingAuthorityisabletomanagetherisktransferredtoit(forexample by taking out insurance policies itself or being otherwise able to manage thepotentialcostimpact).ThePrivatePartnershouldalsoberequiredtoperiodicallyapproachtheinsurancemarket(e.g.onceeverythreemonths)toseeiftheriskcanbeinsuredagain.


In negotiating an insurer of last resort option, the Private Partner and its Lenders willcarefullyassessthecreditoftheContractingAuthority.Thistypeofprovisionisthereforelikely to be seen more in established jurisdictions. In less established jurisdictions theremay be more negotiation over whether taking out a particular insurance should be anobligationinthefirstplace,and/ortheriskoftheeventoccurringmayinsteadbemanagedthroughtheForceMajeureprovisions.

1.3.4 Termination

IftheContractingAuthorityisinsureroflastresortandtheuninsurableriskoccurs,thePPPContractshouldprovidethattheContractingAuthoritymayeitherterminate(onaForceMajeureterminationcompensationbasisplus,ifapplicable,theamountofanythirdpartyliabilityclaims)orpaythePrivatePartneranamountequivalenttotheinsuranceproceedsthatwouldhavebeenpayableandcontinuethePPPContract.UndertheInfraAustraliaPPPGuidelines,theContractingAuthority’srighttoterminateonlyarisesiftheuninsurableriskoccursandisalsoaForceMajeureevent(butitcanthenbeexercisedatanytime).

GiventhatuninsurabilityisbeyondbothParties’control,itisgenerallyacceptedthatifterminationoccurstheContractingAuthorityshouldpaythePrivatePartnersomelevelofterminationcompensation,usuallycalculatedonthesamebasisasForceMajeureterminationcompensation.26

26 For more detail on Uninsurability in a developed market and sample drafting, please see the Infra Australia PPPGuidelines,SouthAfricaPPPGuidelinesandtheUKPF2Guidance.

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1 .4 . SAMPLE .DRAFTING .1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (open-ended catch-all definition, including concept of foreseeability)

Definition of Force Majeure Event

(1) InthisPPPContract,a“Force Majeure Event”meansanyeventorcircumstanceorcombinationofeventsorcircumstances:

(a) beyondthereasonablecontrolofthePartyaffectedbysuchevent,circumstanceorcombinationofeventsorcircumstances(the“Affected Party”);

(b) whichwasnotforeseeableor, if foreseeable,couldnothavebeenpreventedor avoided or overcome by the Affected Party having taken all reasonableprecautionsandduecare;

(c) whichdirectlycausestheAffectedPartytobeunabletocomplywithalloramaterialpartofitsobligationsunderthisPPPContract;and

(d) whichisnotthedirectresultofabreachbytheAffectedPartyofitsobligationsunderthisPPPContractor, inrespectofthePrivatePartner,underanyotherProject Agreement. [obligations should include compliance with Applicable Law]

(2) ForceMajeureEventsincludebutarenotlimitedtothefollowingcircumstances,providedthattheymeetthecriteriasetforthinClause(1)above:

(a) plague, epidemic and natural disaster, such as but not limited to, storm,cyclone, typhoon, hurricane, tornado, blizzard, earthquake, volcanic activity,landslide,tsunami,flood,lightning,anddrought;

(b) fire, explosion, or nuclear, biological or chemical contamination (otherthan caused by the negligence of the Private Partner, its contractors, or anysubcontractor,supplierorvendor);

(c) war (whether declared or not), armed conflict (including but not limited tohostileattack,blockade,militaryembargo),hostilities,invasion,actofaforeignenemy,actofterrorism,sabotageorpiracy[,ineachcaseoccurringoutsidetheCountry];

(d) civilwar,riotrebellionandrevolution,militaryorusurpedpower,insurrection,civilcommotionordisorder,mobviolence,actofcivildisobedience[, ineachcaseoccurringoutsidetheCountry];

(e) radioactive contamination or ionising radiation[, occurring outside theCountry];or

(f) generallabordisturbancesuchasboycotts,strikesandlock-out,go-slow,occupationof factories and premises, excluding similar events which are unique to the PPPProjectandspecifictothePrivatePartnerortoitssub-contractors[,andoccurringoutsidetheCountry].

Listofeventstobenegotiated

forthespecificProject

circumstances,takinginto

accountalsowhether

certainpoliticalrisksshould

betreatedseparately

asMaterialAdverse

GovernmentActionornot.

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Consequences of Force Majeure Event

(3) IfaForceMajeureEventhasoccurred,theAffectedPartyshallbeentitledtorelieffromitsobligationsunderthePPPContractifitmeetstherequirementsofClause(4)below.

(4) ToobtainreliefunderClause(3)above,theAffectedPartymust:

(a) assoonaspracticable,andinanyeventwithin[](l)business]daysafteritbecameawarethattheForceMajeureEventhascausedorislikelytocausebreachofanobligationunderthisPPPContract,givetotheotherPartyanoticeof its claim for relief from its obligations under the PPP Contract, including(i) satisfactory evidence of the existence of the Force Majeure Event, (ii) fulldetailsofthenatureoftheForceMajeureEvent,(iii)thedateofoccurrence;(iv)itslikelyduration;and(v)detailsofthemeasurestakentomitigatetheeffectoftheForceMajeureEvent.

(b) within[](l)business]daysofreceiptofthenoticereferredtoinclause(a)above,givetotheotherPartyfulldetailsofthereliefclaimed,aswellasinformationonallactionsbeingtakenbytheAffectedPartytomitigatetheconsequencesoftheForceMajeureEvent;

(c) demonstratetotheotherPartythat:

(i) theAffectedParty,anditscontractors,couldnothaveavoidedsuchoccurrenceorconsequencesbystepswhichtheymightreasonablybeexpectedtohavetaken,withoutincurringmaterialcost;

(ii) the Force Majeure Event directly caused the need for the reliefclaimed;

(iii) the relief claimed could not reasonably be expected to be mitigated bythe Affected Party, including recourse to alternate sources of services,equipmentandmaterialsandconstructionequipment,withoutincurringmaterialcost;and

(iv) theAffectedPartyisusingallreasonableendeavorstoperformitsaffectedobligationsunderthisPPPContract.

(5) IftheAffectedPartyhascompliedwithitsobligationsunderClause(4)above,thenitshallbeexcusedfromtheperformanceofitsobligationsunderthisPPPContracttotheextentitisprevented,hinderedordelayedinsuchperformancebyreasonoftheForceMajeureEvent.

(6) [IfinformationrequiredunderClause(4)aboveisprovidedafterthedatesreferredtointhatclause,thentheAffectedPartyshallnotbeentitledtoanyreliefduringtheperiodforwhichtheinformationisdelayed].

(7) The Affected Party shall notify the other Party as soon as practicable after theForceMajeureEventceasesorno longercauses theAffectedParty tobeunabletocomplywiththeapplicableobligationsunderthisPPPContract.FollowingsuchnotificationthisPPPContractshallcontinuetobeperformedonthetermsexistingimmediatelypriortotheoccurrenceoftheForceMajeureEvent.

Thisperiodoftimeneedscareful

consideration–noticeshouldbetimelybutallow

theaffectedpartyareasonabletime

tofullydevelopamitigation

strategy.

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Termination due to Prolonged Force Majeure

If a Force Majeure Event subsists for a continuous period of more than [180-360 calendar]days,eitherPartymayinitsdiscretionterminatethisPPPContractbyissuinga written termination notice to the other Party which shall take effect [thirty (30) calendar] daysafteritsreceipt.If,attheendofthis[thirty (30)]-dayperiod,theForceMajeure Event continues, the PPP Contract shall be terminated pursuant to clause [insert reference to the clause governing termination] andthePrivatePartnershallbeentitledtothecompensationsetoutunderclause[insert reference to Compensation on Termination for Force Majeure clause].

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1 .5 . SAMPLE .DRAFTING .1 .A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Exhaustive list of specific events, no concept of foreseeability)

Required Definition

“Force Majeure Event”meanstheoccurrenceafterthedateofthePPPContractof:

(a) war,civilwar,invasion,armedconflict,terrorismorsabotage;or

(b) nuclear,chemicalorbiologicalcontaminationunlessthesourceorthecauseofthecontaminationistheresultoftheactionsoforbreachbythePrivatePartneroritssub-contractors;or

(c) pressurewavescausedbydevicestravellingatsupersonicspeeds,

whichdirectlycauseseitherParty(the“AffectedParty”)tobeunabletocomplywithalloramaterialpartofitsobligationsunderthisPPPContract.

Consequences of Force Majeure

(1) NoPartyshallbeentitledtobringaclaimforabreachofobligationsunderthePPPContractbytheotherPartyorincuranyliabilitytotheotherPartyforanylossesordamagesincurredbythatotherPartytotheextentthataForceMajeureEventoccurs and it is prevented from carrying out obligations by that Force MajeureEvent.Fortheavoidanceofdoubt(butwithoutprejudicetoClauses(5)or(7))below,theContractingAuthorityshallnotbeentitledtoterminatethisPPPContractfora[insert defined term for Private Partner Default]ifsuch[Private Partner Default]arisesfromaForceMajeureEvent.

(2) Nothing in Clause (1) above shall affect any entitlement to make deductions oranydeductionsmadeasaresultof[insert reference to clauses addressing pricing and payment mechanism] intheperiodduringwhichtheForceMajeureEventissubsisting.

(3) On the occurrence of a Force Majeure Event, the Affected Party shall notify theotherpartyassoonaspracticable.ThenotificationshallincludedetailsoftheForceMajeureEvent,includingevidenceofitseffectontheobligationsoftheAffectedPartyandanyactionproposedtomitigateitseffect.

(4) Assoonaspracticablefollowingsuchnotification,thePartiesshallconsultwitheachotheringoodfaithanduseallreasonableendeavorstoagreeappropriatetermstomitigatetheeffectsoftheForceMajeureEventandfacilitatethecontinuedperformanceofthePPPContract.

(5) Ifnosuchtermsareagreedonorbeforethedatefalling[120]daysafterthe date of the commencement of the Force Majeure Event and suchForceMajeureEvent iscontinuingor itsconsequenceremainssuch thattheAffectedPartyisunabletocomplywithitsobligationsunderthisPPPContractforaperiodofmorethan[180]days,then,subjecttoClause(6)below, either Party may terminate the PPP Contract by giving [30] days’writtennoticetotheotherParty.

Forexample,iftheForceMajeureEvent

occursduringtheconstructionphase,

thePartiescouldagreethatrelevant

milestonedatesarepostponedbysuch

timeasisreasonable,takingintoaccount

thelikelyeffectofthedelay.

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32

(6) IfthePPPContractisterminatedunderClause(5)aboveorClause(7)below:

(a) compensation shall be payable by the Contracting Authority in accordancewith [insert reference to Compensation on Termination for Force Majeure clause];and

(b) theContractingAuthoritymayrequirethePrivatePartnertotransferitstitle,interestandrightsinandtoany[insert defined term of relevant Project assets]totheContractingAuthority.

(7) If the Private Partner gives notice to the Contracting Authority under Clause (5)abovethatitwishestoterminatethePPPContract,thentheContractingAuthorityhastheoptioneithertoacceptsuchnoticeortorespondinwritingonorbeforethedatefalling[10]daysafterthedateofitsreceiptstatingthatitrequiresthePPPContract tocontinue. If theContractingAuthoritygives thePrivatePartnersuchnotice,then:

(a) theContractingAuthorityshallpaytothePrivatePartnerthe[insert defined term for availability payment] fromthedayafter thedateonwhichthePPPContract would have terminated under Clause (5) above as if the [insertdefinedtermfortheservice]wasbeingfullyprovided;and

(b) thePPPContractwillnotterminateuntilexpiryofwrittennotice(ofatleast[30]days)fromtheContractingAuthoritytothePrivatePartnerthatitwishesthePPPContracttoterminate.

(8) ThePartiesshallatalltimesfollowingtheoccurrenceofaForceMajeureEventuseallreasonableendeavorstopreventandmitigatetheeffectsofanydelayandtheAffectedPartyshallatalltimesduringwhichaForceMajeureEventissubsistingtakeallstepsinaccordancewithindustrygoodpracticetoovercomeorminimizetheconsequencesoftheForceMajeureEvent.

(9) The Affected Party shall notify the other Party as soon as practicable after theForceMajeureEventceasesorno longercauses theAffectedParty tobeunabletocomplywiththeapplicableobligationsunderthisPPPContract.Followingsuchnotification,thePPPContractshallcontinuetobeperformedonthetermsexistingimmediatelypriortotheoccurrenceoftheForceMajeureEvent.

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MATERIAL ADVERSE GOVERNMENT ACTION2

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2.1.1 The concept of MAGA

The concept of“Material Adverse Government Action” (or“MAGA”), is applicable tocontracts,suchasPPPContracts,whereoneofthepartiesisapublicsectorentity,orgovernment.MAGAeventstypically:

(a) delay or prevent the private sector party from performing its contractualobligations;and/or

(b) haveamaterialadversefinancialimpactontheprivatesectorparty;and

(c) arewithinthepublicsectorentity/government’scontrolorarebestmanagedbythepublicsectorentity/governmentascomparedtotheprivateparty,

andthereforetherisksassociatedwithsucheventsareallocatedtothepublicsectorentity/government.

MAGA events are also referred to as “political risk” or “political force majeure”. AsdescribedinSection 1, Force Majeure,dependingonthespecificPPPProjectcircumstances,some forms of political force majeure may be treated as shared Force Majeure risk(or insomecasesevenaPrivatePartnerrisk). In thisGuidance,MAGAeventscanbeclearlycontrastedwithForceMajeureeventsastheriskoftheiroccurrenceisallocatedentirely to theContractingAuthorityand theyaregivenseparate treatment in theirowncontractualprovision.

2.1.2 Why do PPP Contracts contain MAGA provisions?

MAGA risks are not within the Private Partner’s control but the Private Partner canbeadverselyaffectedby theiroccurrence.Becauseof thepotential impactofMAGAevents on the Private Partner’s ability to perform its contractual obligations and bepaid, the Private Partner and its Lenders will carefully assess the risk of such eventsoccurringandwillexpectanysignificantMAGAriskstobeidentifiedandallocatedtotheContractingAuthorityunderthePPPContract.See Section 2.2.1.

TransferringanyMAGAriskstothePrivatePartnerislikelytohavetwoconsequencesbecauseofthePrivatePartner’slackofcontrolovertheoccurrenceormanagementofsuchevents:(i)ataminimum,toattractahighpricingpremium(whichcouldrenderthePPPProjectunaffordable),or(ii)simplytomaketheProjectunbankable.

ThepurposeofaMAGAclauseisthereforetoallocatecertainagreedtypesofpoliticalrisktotheContractingAuthority,addresstheconsequencesofsuchrisksoccurringandprovidethePrivatePartnerwithappropriatereliefandcompensation.

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All PPP Contracts will contain provisions addressing circumstances for which theContracting Authority is responsible, but these provisions vary depending on thespecificPPPContractandjurisdiction.


Insomeestablished,stable,markets,thereistypicallynoneedforaspecificMAGAprovisionasPrivatePartnersacceptthatthetypeofMAGAriskslikelytoarisearelimitedandcanbedealtwiththroughtheForceMajeuresharedriskprovisions,togetherwithseparateprovisionsdealingwithspecificeventsforwhichriskisallocatedtotheContractingAuthority(suchasContractingAuthoritybreachofcontractandChangeinLaw)23.InAustralia,however,theContractingAuthorityacceptscertainrisksinrelationtoenvironmental/indigenousrightsthroughaMAGA-styleregime.

Contracting Authorities in other, typically less established, PPP jurisdictions may find itexpedientifthePPPContractincludesMAGAprovisionsaswellasForceMajeureprovisionstoensurethePPPProjectisviableforthePrivatePartner(thishasbeenthecaseinrecentPPPProjectsinthePhilippines).TheinclusionofspecificMAGAprovisionsinsuchjurisdictionsmaybebecauseofanactualorperceivedincreasedlikelihoodofcertainMAGAevents,orbeduetoalackoftrackrecordinadministeringsuccessfulPPPContractsoververylongperiodsoftimeandacrosspoliticalcyclesfreefrompoliticalinterference.

Evenwhereincluded,MAGAprovisionsmaybestructureddifferentlyaspoliticalriskswill vary between jurisdictions. Some Contracting Authorities will also choose toaddresseventssuchasChangeinLawandContractingAuthoritydefaultinseparateprovisions, while others will include them in the MAGA provisions.The South AfricaPPP Guidelines, for example, have a MAGA-type provision entitled “UnforeseeableConduct” which addresses a material effect on the Private Partner’s finances of anyunforeseeablediscriminatoryContractingAuthorityaction, includingChangeinLaw.(ContractingAuthoritydefaultismoreusuallydealtwithinaseparateprovisionandthisGuidancetreatsChangeinLawseparately).

As a result, while not all PPP Contracts will include MAGA provisions in the preciseformsetoutinSection 2.3, Sample Drafting 2,thekeyistoensurethattheconceptsareincluded,therisksallocatedandtheconsequencesmadeclearinthePPPContracttoensureclarityandbankability.See also Section 1.1.3, Force Majeure and Section 3.1.3, Change in Law.

2.1.4 MAGA and related Project Agreements

As with Force Majeure, the Parties will need to consider how MAGA provisionsflow down to other Project Agreements so that the Private Partner is not left withmismatchingcontractualpositions.See also Section 1.1.4, Force Majeure and Section 3.1.4, Change in Law.

27 Thisispartoftheapproachdescribedinthefootnoteto Section 1.1.3, Force Majeure.

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2.2.1 Defining the events or circumstances that qualify as MAGA

2.2.1.1 Defined List – The consequences of a MAGA event occurring are borneby the Contracting Authority, so it is vital that the Contracting Authority considerscarefullywhateventsqualifyandhowitcanminimize theriskofanyoccurrence. Itisrecommendedthatanexhaustivelistofclearlydefinedeventsisagreed,withthecommonfactorbeingthattheiroccurrencehasamaterialadverseeffectonthePrivatePartner’sabilitytoperformitsobligations,oronitsrightsunderthePPPContract,oronitsfinancialstatus28.However,asfaraspossiblesuchmaterialityshouldbeclearlydefined to avoid the risk of disputes. See further Section 2.2.1.3 and Section 2.3, Sample Drafting 2, Clauses (1) and (2).

2.2.1.2 Events – As mentioned in Section 1, Force Majeure, the dividing line betweenpoliticalrisk(whichisallocatedtotheContractingAuthority)andcertaincommercialrisks(whichthePrivatePartnerisexpectedtotakeorshare)is,inpractice,likelytobea difficult one to draw. It is usually accepted that MAGA events include war relatedeventswithintherelevantcountry,aswellasdeliberateactsofstatesuchasoutrightnationalisationorexpropriationofthePPPProject(includingcreepingexpropriation,whichisoftencarriedoutindirectlyandoveraperiodoftime)andadeclarationofamoratoriumoninternationalpaymentsandrestrictionsoncurrencyconversionsintoforeign exchange. MAGA may also include failures by the Contracting Authority orotherpublicentitytograntlicensesorcomplywithcertainobligations.29

Apart from these more obviously political events, there may be certain risks whichresultinincreasedcostsandareoutsidethecontrolofthePrivatePartnerandcouldhaveapoliticalaspecttothem.Forinstance,therecouldbeapoliticallyinspiredstrike,whichcouldforceupthepriceofkeyrawmaterialswhichareobligedtobepurchasedlocallyoradockstrikecouldpreventtheimportationofmaterials.

ItisworthnotingthatsomeMAGAriskswillseemmoreclearlywithintheContractingAuthority’scontrolthanothers(e.g.wheretheeventiscontrolledbyitoroccursasaclearresultofitsactions,asopposedtohappeningthroughahigherormoredistantarmofgovernment).However,asthenatureoftheserisksissuchthattheycannotorwillnotbebornebythePrivatePartner(orwillresultinunaffordablepricing),marketpractice is that these risks are typically accepted by the Contracting Authority. OneapproachwhichtheContractingAuthoritymayfindhelpfulistosub-categoriseMAGAeventsinto“fault”and“nofault”events,eventhoughtheyarebothstillatitsrisk.

TheindividualcircumstancesofthePPPProjectandjurisdictionwillneedtobetakeninto account, e.g. the risk of upstream water pollution in a water sector PPP Projector thebuildingofacompetingroad(especiallya freeroad),portorairportwithinacertaindistancefromthetolledhighway,portorairporttobeoperatedunderthePPPContractconcerned.

28 Areciprocalpositionissometimesseen–forexample,the“UnforeseeableConduct”provisionsintheSouthAfricaPPPGuidelinesalsoaddresscaseswherethereisabeneficialeffectonthePrivatePartner’sfinances.

29 MAGAshouldnotincludefailurebytheContractingAuthority/governmenttoenactlawscrucialfortheimplementa-tionoftherelevantPPPProject.Ifthelegalframeworkisnotinplace,thePPPProjectisunlikelytobebankableandtheprivatesectorwillbereluctanttospendtimeandresourcesbidding.Ifnecessary,thistypeofissueshouldbedealtwithasaconditionprecedenttobesatisfiedbeforethePPPContractiseffective.

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Somejurisdictionsaremorepoliticallyvolatilethanothers.Ifapoliticalevent(suchaswar)ishighlyunlikely,thePrivatePartnermaybecomfortablewiththeriskbeingtreatedasasharedForceMajeurerisk.Inmorevolatilejurisdictions,however,certaineventsmaybemoreappropriatelytreatedasContractingAuthorityriskunderMAGAprovisions.Alternatively,itmaybeappropriatetodifferentiatebetweencertainpoliticalriskssothattheyareclassifiedasForceMajeureEventsiftheyoccuroutsidetherelevantcountryandasMAGAeventsiftheyoccurwithintherelevantcountry.TheContractingAuthoritymustconsidercarefullywhatdistinctions,ifany,areappropriateforitsjurisdictionandPPPProject.See Section 2.3, Sample Drafting 2, Clause (2).

2.2.1.3 Materiality – In defining MAGA events, the Contracting Authority must alsoconsiderwhetherornotalloccurrencesoftherelevanttypeofeventsshouldqualifyas MAGA and trigger the contractual consequences.The Contracting Authority maybeabletoagreecertaincriteriawhichaneventhastosatisfyinorderforthePrivatePartnertobeentitledtorelief–thiscould,forexample,includea“materiality”thresholdrelated to the effect of the event on the Private Partner. However, the ContractingAuthority is strongly advised to define, to the extent possible, any threshold clearly(e.g. by reference to a specific monetary value established by reference to the PPPProject financial model), as any undefined reference to materiality will immediatelygiverisetoadebateoveritsmeaning.ThesameapplieswhereveranysimilartermisusedinthePPPContract.See Section 2.3, Sample Drafting 2, Clause (1).

2.2.2 Relief for Private Partner non-performance

AswithForceMajeure, thePrivatePartnerwillbeconcernedaboutbothits inabilitytomeetitscontractualobligationsasaresultofaMAGAeventanditsresultinglossof revenue. The factors mentioned in Section 1.2.2, Force Majeure will be relevant indeterminingthePrivatePartner’sentitlementtorelief.However,becauseMAGAriskis allocated to the Contracting Authority, market practice is that the Private PartnershouldbekeptinthepositionitwouldhavebeeninhadtheMAGAeventnotoccurred.

The PPP Contract typically provides that the Private Partner is granted relief frombreachofcontractandfromitsobligationstoperformunderthePPPContracttotheextentitisaffectedbytheMAGAevent(includingfromtherequirementtopaydelayliquidateddamages).Iftheeventoccursintheconstructionphase,thePrivatePartnerwill usually be contractually entitled to an extension of time for meeting key datessuchasthescheduleddateforcommencingoperations.See Section 2.3, Sample Drafting 2, Clauses (3)-(5).

ThePPPContractalsooftenexpresslyprovidesthatthePrivatePartnerwillcontinueto receive payment from the Contracting Authority under the PPP Contract as if itwerestillperforming,andrelateddeductionsunderthepaymentmechanismwillbesuspended.

TheContractingAuthoritywilltypicallyacceptanobligationtocompensatethePrivatePartner for losses and additional costs incurred as a result of a MAGA event.ThesewillincludeanylossofrevenuetotheextenttheContractingAuthoritymaynothavecontinued payment since the MAGA event (and financing costs incurred due to any

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inabilitytomeetpaymentsasaconsequence),aswellascoststomitigateandrectifythe effects of the MAGA event (i.e. increased PPP Project costs).The Private Partnershouldstillbeobligedtomitigateitslossand,aswithForceMajeure,itsrighttoreliefwillbesubjecttoitscompliancewithitsnoticeandmitigationobligations.See Section 2.3, Sample Drafting 2, Clauses (5) and (6).

If the PPP Contract is able to continue, the Contracting Authority may be able tonegotiate compensating the Private Partner through tariff increases and/or anextensionoftheoperatingperiod.See Section 2.3, Sample Drafting 2, Clause (5).

The procedures to be followed when a MAGA event occurs are similar to a ForceMajeuresituation. See Section 2.3, Sample Drafting 2, Clause (4).

2.2.3 Termination

SimilartotheprolongedForceMajeureposition,bothPartiestypicallyhavetherighttoterminatethePPPContractifaMAGAeventlastslongerthanacertainperiodoftime(generallybetween6to12months).See Section 2.3, Sample Drafting 2, Clause (8). HowthisisexpressedinthePPPContractmayvarybetweenjurisdictions.InrecentPPPContractsin the Philippines, termination rights are achieved by defining protracted MAGA asa Contracting Authority default. In some jurisdictions, the Contracting Authoritymay only be entitled to terminate following MAGA-style events by implementing avoluntarytermination.

2.2.4 Determining the amount of a MAGA termination payment

ConsistentwiththeallocationofriskforMAGAeventstotheContractingAuthority,theamountpayabletothePrivatePartneronaMAGAterminationistypicallysimilartotheterminationpaymentforContractingAuthoritydefault.See Section 4.3, Termination Payments and Section 4.7, Sample Drafting 4, Schedule, Clause (1).

It may be possible for the Contracting Authority to negotiate differing levels ofcompensationaccordingtotheparticularMAGAevent.Forexample,itmaybepossibleto agree to pay the Contracting Authority Default termination amount for eventswherethereisclearfault(suchasoutrightexpropriationorfailuretograntapermit),whileagreeingonalesseramount(forexample,stillcoveringatleastoutstandingdebtandcontributedequity)foreventslessobviouslywithinitsdirectsphereofcontrolandinfluence.ThiswilldependentirelyonthecircumstancesapplicabletotheindividualPPPProject.

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2 .3 . .SAMPLE .DRAFTING .2

Definition of Material Adverse Government Action

(1) For the purposes of this PPP Contract, “Material Adverse Government Action” means any act or omission by the Contracting Authority or any relevant publicauthority [define if necessary]oreventsetout inClause (2)below,whichoccursduring the term of this PPP Contract and which (i) directly causes the PrivatePartnertobeunabletocomplywithallorsomeofitsobligationsunderthePPPContractand/or(ii)hasa[Material] AdverseEffect]onits[costsorrevenues][insert defined terms].

(2) ForthepurposesofClause(1)aboveanyactoromissionshallmeanandbelimitedtothefollowingcircumstances:

(a) failureofanyrelevantpublicauthoritytogranttothePrivatePartnerorrenewanypermitorapprovalthatisrequiredforthepurposesofthePrivatePartner’sproper performance of its obligations and/or enforcement of its rightsunder this PPP Contract, in each case within the required timeframe under[ApplicableLaw],exceptwheresuchfailureresultsfromthePrivatePartner’snon-compliancewith[ApplicableLaw];

(b) anyactofwar (whetherdeclaredorundeclared), invasion,armedconflictoractofforeignenemy,blockade,embargoorrevolution,[occurringinside[name of country]];

(c) radioactivecontaminationorionisingradiation,[originatingfromasourcein[name of country]];

(d) anyriot,insurrection,civilcommotion,actorcampaignofterrorism,[occurring inside [name of country]];

(e) anystrike,work-to-rule,orgo-slowwhichisnotprimarilymotivatedbyadesireto influence the actions of the Affected Party so as to preserve or improveconditions of employment by the Affected Party, [occurring inside [name of country]];

(f) expropriation, compulsory acquisition or nationalization by any relevantauthority of any asset or right of the Private Partner, including any of thesharesinthePrivatePartner;

(g) anyactoromissionofanyrelevantauthorityadverselyaffectingthelegality,validity,bindingnatureorenforceabilityofthisPPPContract;and

(h) [add any event specific to the PPP Project such as the construction of certain competing infrastructure (e.g. a free road adjacent to the PPP tolled road) or a pollution event].

Draftingsubjecttothepositionadoptedinthis

respectintheForceMajeure

provisions.SeeSections1.4

and1.5.

Wherepossible,undefined

materialityqualifications

shouldbeavoidedtominimizetherisk

ofdispute.

If“materialadverseeffect”draftingis

useditisadvisabletodefineitbyreferencetoa

specifiedmonetaryimpact.

DefineApplicableLawwithcareif

alsousedinothercontextssuchas

ChangeinLaw–seeSection3.3.

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Consequences of Material Adverse Government Action

(3) If a Material Adverse Government Action occurs, the Private Partner (i) shall beexcused from the performance of its obligations under the PPP Contract to theextentthatitisprevented,hinderedordelayedinsuchperformancebyreasonoftheMaterialAdverseGovernmentActionand(ii)shallbeentitledtocompensationunder this PPP Contract, in each case subject to and in accordance with theprovisionsofthisClause[whole clause].

(4) ToobtainreliefpursuanttoClause(5)below,thePrivatePartnermust:

(a) as soon as practicable [and in any event within [l] business days]after the Private Partner becomes aware that the Material AdverseGovernment Action has occurred, give to the Contracting Authorityanoticeofitsclaimforpaymentofcompensationand/orrelieffromits obligations under the PPP Contract, following which the PartiesshallconsideringoodfaithanyoptiontomitigatetheimpactoftheMaterialAdverseGovernmentAction;

(b) within[l] business daysofreceiptbytheContractingAuthorityofthenoticereferredinClause(4)(a)above,givefulldetailsof(i)theMaterialAdverseGovernmentActionand(ii)anyEstimatedChangeinProjectCostsand/orlossofrevenueclaimedand/ordelayand/oranybreachofthePrivatePartner’sobligationsunderthisPPPContract,

(c) demonstratetotheContractingAuthoritythat:

(i) thePrivatePartnercouldnotavoidsuchoccurrence orconsequencesbyactions which it might reasonably be expected to have taken withoutincurring[material]costs;

(ii) the Material Adverse Government Action was the direct cause of theEstimated Change in Project Costs and/or loss of revenue and/or delayand/orbreachofthePrivatePartner’sobligationsunderthisPPPContract;

(iii) time lost and/or relief from the obligations under the PPP Contractclaimed,couldnotbemitigatedorrecoveredbythePrivatePartner;and

(iv) thePrivatePartnerisusingreasonableendeavorstoperformitsaffectedobligationsunderthePPPContract.

(5) If the Private Partner has complied with its obligations under Clause (4) above,thentheContractingAuthorityshall:

(a) compensate thePrivatePartner for theEstimatedChange inProjectCostsasadjustedtoreflecttheactualcostsreasonablyincurred[and loss of revenue];

(b) give the Private Partner such relief from its obligations under thisPPPContractasisreasonableforsuchMaterialAdverseGovernmentAction;and

DraftingtoreflectwhethertheContracting

Authorityhascontinuedpaying

thePrivatePartnerthroughthis

process.

Insertreasonabletimeperiodgiventhelevelofdetail

requiredtobespecifiedinfull.

Insertreasonabletimeperiod,e.g.

sevenbusinessdays.

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(c) if theMaterialAdverseGovernmentActionoccursduringthe[insert defined term for Construction Period]andcausesadelayinachievingthe[insert defined term for scheduled services commencement date],suchdateshallbepostponedbysuchtimeasisreasonable.

(6) [In the event that information is provided after the dates referred to in Clause(4)above,thenthePrivatePartnershallnotbeentitledtoanyextensionoftime,compensationorrelieffromitsobligationsunderthisPPPContractinrespectoftheperiodforwhichtheinformationisdelayed].

(7) IftheContractingAuthorityandthePrivatePartnercannotagreeontheextentofanycompensation,delayincurred,orrelieffromthePrivatePartner’sobligationsunderthisPPPContract,asapplicable,ortheContractingAuthoritydisagreesthataMaterialAdverseGovernmentActionhasoccurred,thePartiesshallresolvethematterinaccordancewithClause [insert reference to dispute resolution clause].

Termination due to Prolonged Material Adverse Government Action

(8) IfaMaterialAdverseGovernmentActionsubsistsforacontinuousperiodofmorethan [180-360 calendar] days, a Party may in its discretion terminate this PPPContract by issuing a written termination notice to the other Party which shalltakeeffect[thirty(30)calendar]daysafteritsreceipt.[If,attheendofthis[thirty(30) calendar]-day period, the Material Adverse Government Action continues,]the PPP Contract shall be terminated pursuant to Clause [insert reference toclause governing termination] and the Private Partner shall be entitled to thecompensationsetoutunderclause [insert reference toCompensation on MAGA termination clause].

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CHANGE IN LAW3

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3.1.1The concept of change in law

Allcontractingpartiesmustoperatewithinthelawandsomustfactorthecost,timeand any other implications of complying with applicable law into the performanceof their contractual obligations. Over a long term contract changes in law may beintroducedwhichwereunanticipatedattheoutsetofthecontract.Thesechangesmaytakedifferentforms,suchastheimplementationofneworamendedstatutesortheintroduction of mandatory codes of practice or new binding case law, and will varyacrossjurisdictionsaccordingtotheapplicablelegislativeframework.

3.1.2 Why do PPP Contracts contain change in law provisions?

ThePrivatePartnerwilltypicallybeexpresslyobligedunderthePPPContracttocomplywithallapplicablelaw.Itassesseshowitwillcarryoutitsobligationsandwhatpriceitwillchargebasedondetailedduediligenceofthecircumstancesknowntoitatthetimeofbidding, including theexisting legalenvironment.Anyrisksoruncertaintieswillattractanappropriatelevelofcontingencypricing.

An unexpected change in law may make the Private Partner’s performance of itscontractual obligations wholly or partially impossible, delayed or more expensive.Throughnofaultof itsownitmayfind itself inbreachofcontract,aswellasbeingunable to earn its expected income and also required to incur additional costs tocomply with the change. Some changes in law could, for example, entail significantexpenditure if additional capital works are required (e.g. to meet new safety orenvironmental standards or to provide mandatory disabled access) and may alsoreducefullperformanceoftheservicewhileimplemented.Similarly,additionaltaxesmaybelevied.


Withoutspecificcontractualprovisions,incommonlawjurisdictionschangeinlawriskwouldlieentirelywiththePrivatePartnerbecauseithascontractedtoprovideaspecifiedserviceataspecifiedprice,andthescopeof itsobligationsand itspricingcanonlybechangedinaccordancewiththePPPContract.

Incivillawjurisdictions,PrivatePartnersmaysometimesrelyonunderlyinglegalprinciplessuch as hardship provisions which give relief from adverse financial consequences ofcertain circumstances (see Section 1.1.3, Force Majeure). However, widespread marketpracticeacrosscivilandcommonlawjurisdictionshasshownthattheprivatesectorisunwillingtoenterintoPPPContractsonsuchabasisasbothLendersandEquityInvestorsrequireexpresscontractualcertaintyinrelationtothepotentiallysignificantimpactofchangesinlaw.

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It ismarketpracticeforPPPContracts inbothcivilandcommonlawjurisdictionstocontainprovisionsexpresslyallocatingtheriskofcertainchangesinlawwhichoccurafter a specified date (typically linked to when the Private Partner’s pricing is set)andwhichsatisfycertaincriteriaasregardsforeseeability.Theyalsoaddresshowtheconsequencesofchangesinlawaretobemanaged.Theydonot(andcannot)preventchanges in law, enactment of which is the prerogative of the relevant governingentity.ChangeinlawprovisionsgenerallyprovidethePrivatePartnerwithrelieffromcontractual breach to the extent compliance with the new law affects the PrivatePartner’s ability to perform its obligations and also set out how any resulting costsofcomplianceornecessarychangestothePPPContractscopearetreated.TreatmentmayvarydependingonthetypeofchangeinlawandthePPPProjectcircumstances.



As mentioned in Section 2.1.3, Material Adverse Government Action, some PPP Contractsinclude change in law as a MAGA event (as is the case in recent PPP Contracts in thePhilippines).ThismaybeappropriateifthetreatmentagreedforthisformofpoliticalriskisthesameasforotherMAGAevents,asmaybemorecommoninlessestablishedmarketswherelegislativechangemaybearealriskfactor.However,itisgenerallyrecommendedthatchangeinlawisaddressedinaseparateprovision,particularlyinjurisdictionswherethe consequences are unlikely to lead to termination or where the provisions involve adetailedapproachtoriskallocation(e.g.inestablishedmarkets).Inanyevent,thereshouldbenoduplicationoftreatmentunderdifferentclausesforthesametypeofevent.

Anotherapproachistohaveaseparatechangeinlawclause,buttohavetheassociatedcompensation/relief provisions in another clause which provides a single mechanicapplicable to various risks for which the Contracting Authority is responsible. Thisapproach is seen, for example, in Australia, the Netherlands and in certain UnitedStates markets where change in law and certain other defined events (sometimescalled“CompensationEvents”)typicallyentitlethePrivatePartnertothesametypeofrelief(namelybothcostreimbursementandextensionsoftime)30.See also Section 1.1.3, Force Majeure and Section 2.1.3, Material Adverse Government Action.

Aschangeinlawmayalsoaffectthescopeoftheserviceprovided,itisadvisableforthePPP Contract to contain a mechanism by which the Parties can discuss and negotiatesuchmattersandimplementsuchvariationsasarenecessary.Toavoidduplication,thisistypicallyachievedbyusingthevariationprocedureusuallyincludedtocaterforchangesinscopewhichmaybeproposedbythePartiesduringtheordinarycourseofthePPPContract.

3.1.4 Change in law and related Project Agreements

As with other provisions in the PPP Contract, the treatment of change in law underthe Project Agreements should ensure the Private Partner is not obliged to give itssub-contractorsmoreprotectionthanthePrivatePartnerisentitledtounderthePPPContract.See Sections 1.1.4, Force Majeure and 2.1.4, Material Adverse Government Action.

30 Thisispartoftheapproachdescribedinthefootnoteto Section 1.1.3, Force Majeure.

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There are a number of factors to take into account for any Contracting Authoritynegotiatingchangeinlawprovisions:

3.2.1 Understanding market practice

ContractingAuthoritiesmayatfirstresisttheideaofgrantingchangeinlawprotectiontoPrivatePartnerswhichisunavailabletootherbusinessesandinvestorsinthesamecountryonthebasisthatitseemspreferentialandthoseotherpartiesappeartoacceptandmanagetherisk.However,asdescribedaboveandsetoutinmoredetailbelow,thereareanumberofreasonswhysuchprotectionisjustifiableinPPPprocurementwherethekeyaimistoprocurelongtermprivatesectorfinancingforinfrastructure,includingfrominternationalparticipants.

3.2.1.1 Lack of pricing flexibility–Unlikeotherbusinesseswhichcanpassonincreasedcoststotheircustomersorcantakeaviewontheriskbecausetheircontractsareusuallymuchshorterterm,thePrivatePartnerwillnottypicallyhavethesameflexibility.ItwillhavepriceditsproposaltoperformthePPPContractonthebasisofthelegalframeworkin effect at the time of pricing and the PPP Contract will typically contain an agreedpricing formula in both the“user pays” and“government pays” payment models (see Section G, PPP Contracts in Context) which will limit the ability to increase pricing.Althoughtheseformulaewilltypicallyincorporatesomeformofindexationwhichwillreflectgeneralcostinflation,indexationwillnotcompensateforsignificantcosts(suchascapitalexpenditure)arisingfromchangesinlaw.ThePrivatePartnerwillthereforebeunabletorecovertheseunlesstheyareexpresslyaddressedunderthePPPContract.

Even if the payment mechanism is a“user pays” toll or tariff where arguably costscouldbepassedontotheusersofthefacility,ashighlightedinSection 1, Force Majeure,theContractingAuthorityislikelytowanttoplacecontractualconstraintsonanypriceincreasesforpublicpolicy(andcustomerprotection)reasons.Anotherfactoragainstsimplyincreasingthetollortariffisthatsignificantpriceincreasescouldundermineusers’desirefortheserviceandresultinlowerPPPProjectrevenuesthanforecastbythePrivatePartnerinitsOriginalBaseCase.

3.2.1.2 Bankability–ThestartingpointforthePrivatePartneranditsLenderswillbethatchangeinlawisaformofpoliticalriskthatitcannotcontrolormanageandshouldthereforebeexpresslyallocatedtotheContractingAuthorityunderthePPPContract.EveniftheContractingAuthorityisnotdirectlyresponsibleforthechangeinlaw,thePrivatePartnerwillargue(withsomejustification)thatasanarmofgovernmentitisfairandmoreappropriatefortheContractingAuthoritytobeartherisk31.

31 SeetheGlobalInfrastructureHubReport:AllocatingRisksinPublic/PrivatePartnershipContracts,2016edition–e.g.theRegulatory/ChangeinLawentriesinRiskMatrix2:Airport(DBFO)andRiskMatrix3:LightRail(DBFOM).See link in Appendix, Additional PPP Resources.

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The allocation of change in law risk is a key bankability point and will be particularlyrelevant in jurisdictionswherechanges in laware lesspredictableormore likelydue tounderdevelopedorlessstablelegalorregulatoryframeworks.

3.2.1.3 Cost to the Contracting Authority–EvenifthePrivatePartneranditsLendersarewillingtoaccepttheriskofadversechangesin lawoverthelonglifeofthePPPContract,thisriskwillneedtobepricedintothecontractualprice(ortariff).Notonlyis pricing this risk likely to be a difficult exercise, but the Contracting Authority (orusers)maythenendupwithanunnecessarilyexpensivePPPContractiftherisknevermaterializes.

From the Contracting Authority’s perspective, it should be able to obtain a lowerpricedservicefromthePrivatePartnerthemorechangeinlawriskitacceptsasthePrivatePartnerinturnshouldbeabletoreduceitscontingencypricing.Thisneedstobe weighed against any perceived benefit of transferring change in law risk to thePrivatePartner–whichshouldincludeassessingtheriskthatadrasticchangeinlawmay leave the PrivatePartnerfinancially unable tocontinue toprovide the relevantinfrastructureinaccordancewiththePPPContractorevenunabletoobtainfinancingandsignthePPPContractatall.

TheContractingAuthorityshouldalsobearinmindthatchangeinlawprovisionsmayalsoaddresscircumstanceswhereachangeinlawhasabeneficialeffectonthePrivatePartner’sabilitytoperformand/or itscosts, inwhichcasetheContractingAuthorityshould also benefit (for example, if a costly health and safety legal requirement isreducedorlifted).

3.2.2 Defining what qualifies as “Change in Law”

Although a degree of change in law protection will almost always be required,ContractingAuthoritiesshouldcarefullyconsiderthescopeofchangeinlawprovisions.The starting point is to define“Change in Law” by agreeing (a) what is law (oftentermed“ApplicableLaw”),(b)whatconstitutesachangeinthatlaw,(c)thequalifyingdateafterwhichsuchchangemusthaveoccurred,and(d)foreseeabilitycriteriabeforethatdate(i.e.ifitwas“inthepublicdomain”).Theseelementsarediscussedbelow.

3.2.2.1 Applicable Law –The Contracting Authority and its legal advisers will needtocarefullyconsiderthedefinitionof“ApplicableLaw” andhowitties inwithotherdefinitionsinwhichitisincorporated(inparticularthedefinitionof“ChangeinLaw”).Thedefinitionwilldependontherelevantcountryasthewaylawsareimplementedvariesacrossjurisdictions.ThekeyprincipleisthatitshouldbelimitedtoobligationswithwhichthePrivatePartnermustlegallycomply,including:

• legislation(whichmustitselfbeclearlydefined);

• caselawtotheextentthatitconstitutesbindingprecedent(forexampleinsomecommonlawjurisdictions);

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• bindingjudicialoradministrativeordersordecrees;

• internationalhumanrightsorenvironmentaltreatiesthataredirectlyapplicableintherespectivejurisdictionorhavebeenincorporatedintoitsnationallaw;32

• mandatoryindustryguidelineswithwhichthePrivatePartnerisboundtocomplyunderthePPPContract;and

• internationalconventions(forexample,insectorsheavilyregulatedbyinternationaltreaties,suchasairports).TheContractingAuthoritywillneedtoconsiderwhetheritisappropriateforthesetoqualify,aswellasthelikelyimpactofchangeonthePrivate Partner. See Section 3.3, Sample Drafting 3, Required Definitions, “Applicable Law” definition.

The definition of Applicable Law typically encompasses tax law although this issometimes included as a separate limb in its own right. The definition should notincludegovernmentalapprovalsorpermitswhichshouldbetreatedseparatelyinthePPPContract.See Section 2.2.1.2.

3.2.2.2 Change in Applicable Law – Changes will be defined by reference to thequalifyingelementsofApplicableLaw.Insomejurisdictions,achangeininterpretationof Applicable Law could also have a major impact on the Private Partner’s abilityto deliver and operate a PPP Project even though the Applicable Law itself has notchanged,sothedefinitionofachangeshouldtakethisintoaccount.


Dependingonthejurisdiction,itmaybeappropriateforthedefinitionofchangeinlawalso to include any modification in the interpretation or application of any ApplicableLaw.Thisisparticularlylikelyincommonlawjurisdictions.See Section 3.3, Sample Drafting 3, Required Definitions, “Change in Law” definition.

3.2.2.3 Qualifying Date–ThePrivatePartnerisexpectedtohaveconductedthoroughduediligenceofthelegalframeworkindeterminingitspricingandabilitytoperformitsobligationsunderthePPPContract.Accordingly,changeinlawshouldonlyincludechangeswhichwerenot“inthepublicdomain”duringtheperiodwhenthepricingwasdevelopedandthensubmitted.Thisdateiskeyandwillusuallybenolaterthanthebidsubmissiondate.However,alaterdatemaybeappropriateifthePrivatePartnerhashadtheopportunitytoamenditspricingbeforesigningthePPPContracttotakeintoaccountanychangesinlawintheinterimperiod.Thiswillbeparticularlyrelevantwhere there isa longperiodbetweenbidsubmissionandcontractsignature. In theabsenceofabiddingprocess,anappropriatedatewillsimilarlyneedtobeidentified(and may be the date final pricing is submitted or the date of contract signature).As pricing is not developed overnight, it is customary in some jurisdictions for thisdate tobesetatsixweeksprior tosubmissionofpricingsoas topermitpricing tobedeterminedonaclearbasis.See Section 3.3, Sample Drafting 3, Required Definitions, “Change in Law” definition, reference to “Setting Date”.

32 IfthePartiesagreethePrivatePartnershouldcomplywithinstitutionalorindustrystandardsorprincipleswhicharenotlegallybinding,thePPPContractwouldtypicallyspecifytherelevantversiontobecompliedwith,e.g.theversionineffectatthebidsubmission(orcontractsignature)date.AnychangeswouldnotusuallyfallunderChangeinLaworberequiredtobecompliedwith.

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3.2.2.4 Awareness of change – Classifying what changes in law are“in the publicdomain”attherelevanttimewillneedtobelookedatonacasebycasebasisbecausethe legislativeprocessvaries fromone jurisdiction toanother.Thebasicprincipleasregards legislation is that anything enacted in draft form as at the relevant pricingdatequalifiesasbeinginthepublicdomain,sowouldnotconstituteachangeinlawunder the PPP Contract once enacted. It may in some circumstances be appropriatetouseother“foreseeability”criteria–theseshouldbeasobjectivelyascertainableaspossible. If there is a particular concern or uncertainty in relation to the effect of aproposed change in law on the PrivatePartner’sobligationsunder thePPP Contract(e.g. in relation to its timing of enactment or actual scope), this can be addressedspecifically in thePPPContract.See Section 3.3, Sample Drafting 3, Required Definitions, “Change in Law” definition, limb (b).

3.2.3 Different risk allocation approaches

There are several approaches to allocating change in law risk but the ability for aContractingAuthoritytosharechangeinlawriskwiththePrivatePartnerwilldependontheriskoflegislativeorregulatoryvolatilityinthejurisdictionandsectorconcerned,as well as the maturity of the market.The extent to which any resulting increasedcostscanbepassedontothirdpartyuserswillalsoberelevant.See Section 3.2.3.4.


Insomeemergingmarkets, thePrivatePartnermayexpecttheContractingAuthoritytobearallformsofchangeinlawrisk,whileinothersthePrivatePartnermayacceptacertainmonetarythresholduptowhichitacceptsanychangeinlawrisk.

Inmorematuremarkets, thePrivatePartner isable toacceptgreatergeneralchange inlawriskbutislikelytoexpecttheContractingAuthoritytobeartheriskofgeneralchangesrequiringcapitalexpenditureoncetheassetisbuiltandoperational,aswellastheriskofchangeswhicharediscriminatoryagainstthePrivatePartnerorthePPPProjectorthetypeofservicesbeingprovided.ContractingAuthoritieswillneed toconsiderwhatapproachwillprovidetheoptimumbalancebetweenaffordability,bankabilityandrisktransfer.

3.2.3.1 Approach (a): All risk borne by the Contracting Authority – Insomemarketsthe Contracting Authority typically bears all the risk of change in law and providesfullrelieftothePrivatePartner.Thismaybetheonlywaythatprivatefinancecanberaisedinitsjurisdictionforthebankabilityreasonsmentionedabove.AsmentionedinSection 3.2.1.3,thisriskallocationshouldalsoenablethePrivatePartnertoofferamorecompetitivepricewithouttheneedforcontingencypricing.


Although a Contracting Authority may bear all change in law risk at the start of a PPPprogramme,onceatrackrecordand/orlegalenvironmentisestablishedinitsjurisdictionwhichgivestheprivatesectorgreaterconfidenceinthestabilityandpredictabilityoftheregime,ContractingAuthoritiesprocuringnewPPPProjectsmaybeabletoexploresomerisktransfertothePrivatePartner.See Section 3.3, Sample Drafting 3.

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3.2.3.2 Approach (b): Basic risk sharing by the Private Partner – One way in whichchangeinlawriskcanbeallocatedbetweenthePrivatePartnerandtheContractingAuthority isbysettingaminimumcostthreshold,generallyonayearlybasis,belowwhichthePrivatePartnerwillnotbecompensated.Inotherwords,thePrivatePartnerwillonlybeentitledtocompensationtotheextentthatitisabletodemonstratethattheaggregatecostsincurredasaresultofachangeinlawexceedtheagreedthresholdduring a specified period in time, e.g. per calendar year. Subject to an appropriatethresholdbeingset,thisapproachwillgenerallybeacceptabletoLendersasitmakesthe risk quantifiable. Unlike Approach (c) below, there is no distinction betweengeneralanddiscriminatorychanges(althoughchangesintaxlegislationmayhavetobediscriminatorytoqualify).ThisapproachhasbeenseeninrecentPPPContractsinthePhilippinesandanexampleissetoutinSection 3.3, Sample Drafting 3.


ContractingAuthoritieswillneedtoconsiderwhether,dependingontheirjurisdiction,thisbasicrisk-sharingapproachconstitutesgoodvalueformoneyasitislikelytoattractsomecontingencypricing.

Setting a clear monetary threshold is preferable to the approach seen in some PPPContractswhere“materiality”criteriaareincludedindefiningaqualifyingchangeinlawbutnoclearmonetarythreshold.ThisdoesnotprovideanycertaintyfortheParties(or the Lenders) and disputes are likely unless it is clearly defined. A sample of thisapproach isgiven in Section 3.3, Sample Drafting 3, Clause (3)(c) and Section 3.4, Sample Drafting 3A, Clause (3)(c).

3.2.3.3 Approach (c): More developed risk sharing –Overthelasttwodecades,amoredevelopedapproachtosharingchangeinlawriskhasbeenseeninsomejurisdictionsandhasbecomepartofstandardisedcontracttemplates33.AversionofthisapproachissetoutinSection 3.3, Sample Drafting 3A,andisbasedonthefollowingriskallocation:

• Discriminatory Changes in Law–thesearechangesinlawwhicharediscriminatorybecausetheyapplytothePPPProjectandnottosimilarprojects,ortothePrivatePartnerandnottootherpersons,ortoPPPoperatorsandnottootherparties.

• Specific Changes in Law – these are changes in law specifically impacting theprovision of services the same as or similar to the PPP Project services or theshareholdersofbusinessesprovidingsuchservices(theContractingAuthoritywillwanttoclearlydefinethenatureoftheservices).

Discriminatory and Specific Change in Law risk is allocated to the ContractingAuthoritytoaddressthePrivatePartner’sconcernthatlawsmaybepassedthathave the effect of singling out itself or private operators of infrastructure in amannerthathasanadverseimpactonexpectedequityreturn.Forexample,thiscouldbetheintroductionofataxorsurchargewhichonlyappliestoitsProjectorthatisonlyapplicabletoitsbusinessbecauseitisbeingoperatedbytheprivatesector,ortheimplementationofmoresignificantenvironmentalregulationsthatarenotbeingimposedonpublicsectoroperatorsofsimilarassets.

33 SeetheInfraAustraliaPPPGuidelinesandtheUKPF2Guidanceandthedefinitionof“RelevantChangeinLaw”intheDutchModel.

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• General Changes in Law requiring capital expenditure in operating period –these are general changes in law (i.e. excluding Discriminatory Changes in Lawand Specific Changes in Law) which require the Private Partner to incur capitalexpenditureafterconstructioncompletionduringtheoperatingperiod.TheriskofthesechangesisalsoallocatedtotheContractingAuthorityasthePrivatePartnerhas no means of absorbing potentially significant costs once the PPP Project isoperationalandtherelevantassetbuilt.

• Any other Changes in Law – these are all other changes in law including thosewhich triggercapitalexpenditureduring theconstructionperiod (butexcludingthecategoriesabove).TheriskofthesechangesisallocatedtothePrivatePartnerthroughoutthedurationofthePPPContractonthebasisthatthePrivatePartnerisable tomanageandabsorbanyprice implications.Theability topass theriskofchangesrequiringcapitalexpenditureintheconstructionphasewill,however,depend on the length of the construction period and the predictability of thelegalregime.Aparticularlylongperiodand/orlessstableregimemaymakethisunbankableandadifferentriskallocationmightbeneeded.


UnderthismoredevelopedrisksharingapproachthePrivatePartnerwillbearsomeofthegeneralbusinessriskthatappliestoallbusinesses.ItisconsideredgenerallymorebeneficialtotheContractingAuthority,butthisapproachmaynotbebankableineveryjurisdictionandshouldbecontemplatedonacasebycasebasis.

EveninmarketsusingthisapproachtherewillbeinstanceswherethisriskallocationisnotfullyachievableduetothenatureofthePPPProjectandtheextenttowhichtheapplicablelegalandregulatoryregimeissettled.

3.2.3.4 Approach (d): All risk borne by the Private Partner – This is highly unusualandlikelytobeachievableonlyinveryestablishedlegallystablemarketswherethePrivatePartnerislegallyabletopassonanyincreasedcoststothirdpartyusersviaatollortariff(i.e.underthe“userpays”model–see Section G, PPP Contracts in Context and Section 1.2.2.6) and without adverse impact on user demand. Even so, certaineventswithachangeinlaweffectarenonethelesslikelytobedealtwithspecificallyelsewhereinthePPPContract(e.g.discriminatoryactionssuchasexpropriationandotherMAGAtypesofevent).

If thePPPProjectdoesallowthePrivatePartnertotransferthecostsofachangeinlawtoitsend-users,theprotectionwhichtheContractingAuthoritygivesthePrivatePartnershouldbemorelimited.

3.2.4 Relief and Compensation

Relief from breach–ThePrivatePartnershouldbeprotectedfrombreachofcontracttotheextent(a)itsperformanceispreventedordelayedbyachangeinlawitdoesnotbeartheriskofand(b)avariationinPPPProjectscopeisrequiredinordertocomplywith a change in law (in which case the PPP Contract should include a mechanism

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for implementing such variation, for example by means of a Contracting Authorityrequestedvariation)34.See Section 3.3, Sample Drafting 3, Clauses (1), (2) and (3).

Cost compensation–ThePPPContractwillneedtosetouthowanycompensationtowhichthePrivatePartnerisentitledisimplemented.Thiswilldependonthepaymentmodel,butcouldinclude:

(a) anincreaseintheavailabilitypaymentpaidbytheContractingAuthority;

(b) apermittedincreaseinthetollortariffpaidbytheendusers;

(c) reducinganyfeespayablebythePrivatePartner(asapplicable);

(d) alumpsumpaymentbytheContractingAuthoritytothePrivatePartner;or

(e) anextensiontothetermofthePPPContract.

Extension of time for performance – If the event occurs in the construction phase,thePrivatePartnerwillusuallybecontractuallyentitled toanextensionof timeformeeting key dates such as the scheduled date for commencing operations, to theextentanydelayisattributabletothechangeinlaw.

Forbackgroundtotheabovesee Section 1.2.2, Force Majeure and Section 3.3, Sample Drafting 3, Clause (3) and Section 3.3, Sample Drafting 3A, Clause (3).Asmentionedabove,changeinlawreliefandcompensationmayalsobeaddressedunderseparateCompensationEventclauses(withtheirownapplicablethresholdsandcaps).

Mitigation–ThePrivatePartnershouldberequiredtomitigateanycostsordelaysitincursassociatedwiththechangeinlaw.See Section 3.3, Sample Drafting 3, Clauses (2) and (3).

3.2.5 Termination

ThePartiesshoulddeterminewhether,andinwhichcircumstances,theoccurrenceofachangeinlawcouldallowtheaffectedPartytoterminatethePPPContract.


In civil law jurisdictions it is common to have a specific termination event whereperformanceofthePPPContractwouldentailabreachoflawthatcannotberemediedbyaContractingAuthorityvariation.

ThisisnotusuallyseenincommonlawjurisdictionswithestablishedlegalframeworksasthePrivatePartneranditslendersareabletotakeaviewthatitishighlyunlikelythatachangeinlawwouldresultinsuchdrasticconsequenceswithoutmeansofholdingthegovernmentaccountable.

If termination provisions are considered necessary, similar reasoning applies as forContractingAuthoritydefaultandMAGA,resultinginthesamecompensationscheme.See Section 3.3, Sample Drafting 3, Clause (5) and Section 3.4, Sample Drafting 3A, Clause (5) and Section 4, Termination Payments and Section 4.7, Sample Drafting 4, Schedule, Clause (1).

34 Insomejurisdictions,duetothetypeofserviceinvolved,thePrivatePartnermaybesubjectto“publicserviceobliga-tions”undergenerallawwhichrequirecontinuityofservice(e.g.inFrance).Whereapplicable,thePartiesshouldbearthisinmindwhendrafting/negotiatingreliefprovisions.

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OPTION1:ProtectionAgainstAllChangesinLaw

Required Definitions

"Applicable Law" means any [decree, resolution, law, statute, act, decision, ordinance, rule,directive(totheextenthavingtheforceoflaw),order,treaty,codeorregulationoranyinterpretationoftheforegoingbyarelevantauthorityhavingjurisdictionoverthematterinquestion,asenacted,issuedorpromulgatedbyanyrelevantauthority,ineachcaseapplicablein[insertjurisdictioninwhichthePPPProjectislocated];[Draftingtobeadaptedfortherelevantjurisdiction–anyreferenceto amendments, modifications, extensions, replacements or re-enactmentsmustnotcutacrossChangeinLawdefinition].

"Change in Law" means,afterthe[SettingDate,]anyofthefollowingevents:(a) theenactmentofanynewApplicableLaw;

(b) therepeal,modificationorre-enactmentofanyexistingApplicableLaw;and/or

(c) achangeintheinterpretationorapplicationofanyApplicableLaw,

which(i) adverselyaffects(i)theabilityofaPartytocomplywith

itsobligationsunderthePPPContractor(ii)[theBaseCaseEquityIRR];and

(ii) wasnot[publishedasadraftlaw]inthe[insertapplicablepublicationsourceforlegislation]orineffectattheSettingDate.[Adaptasappropriatefor“inthepublicdomain”].

"Estimated Change in Project Costs"

means the aggregate of any estimated increase in construction costs,operating costs and financing costs less the aggregate of any estimatedreductioninconstructioncosts,operatingcostsandfinancingcosts.

Occurrence of a Change in Law

(1) IfaChangeinLawoccursorisshortlytooccur,thenanyPartymay,within[thirty (30) business] days starting from the day it was aware (or shouldhavebeenaware)oftheChangeinLaw,notifytheotherPartytoexpressanopiniononitslikelyeffects,givingdetailsofitsopinionof:

(a) any necessary change to the terms of this PPP Contract including anynecessaryContractingAuthorityvariation;

(b) whetherrelieffromcompliancewithobligationsisrequired;

(c) whetheranydeadlineunderthePPPContractshouldbepostponed;

(d) any(positiveornegative)estimatedchangeofrevenuethatwilldirectlyresultfromtherelevantChangeinLaw;

(e) any(positiveornegative)estimatedchangeinthecostsofthePPPProjectthatwilldirectlyresultfromtheChangeinLaw;or

Thevariationsprocesswillbe

dealtwithunderadifferentclause.

Thisdatecouldbeaperiodoftimebeforebidsubmissionsbut

isusuallynolaterthanthebiddate.

SeediscussionunderSection3.2.2.3.

Definitionandlimbs(i)–(iii)and(b)willneedtotie

inwiththedefinitionofApplicableLawtoavoid

argumentorcircularityandwillalsoneedtoreflectthelawmakingprocessinthe

relevantjurisdiction.

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(f) anycapitalexpenditurethatisrequiredornolongerrequiredasaresultofaChangeinLaw.

(2) As soon as practicable and in any event within [thirty (30) business] days afterreceiptofanynotice from theaffectedParty, theContractingAuthorityand thePrivatePartnershalldiscussandagreethemattersreferredtoinClause(1)aboveand any ways in which either Party can, if applicable, mitigate the effect of theChangeinLaw,including,inrelationtothePrivatePartner:

(a) providing evidence that the Private Partner has used reasonable endeavors(including(wherepracticable)theuseofcompetitivequotes)toobligeitssub-contractorstominimizeanyincreaseincostsandmaximiseanyreductionincosts;

(b) demonstratinghowanycapitalexpendituretobeincurredoravoidedisbeingmeasured in a cost effective manner, including showing that when suchexpenditureisincurredorwouldhavebeenincurred,foreseeableChangesinLawatthattimehavebeentakenintoaccountbythePrivatePartner;

(c) givingevidenceastohowtheChangeinLawhasaffectedpriceschargedbyanysimilarbusinessestothePPPProject;and

(d) demonstratingthatanyexpenditurethathasbeenavoidedonaccountoftheChangeinLawhasbeentakenintoaccountintheamountwhichinitsopinionhasresultedorisrequiredunderClauses(1)(e)or(1)(f)above,providedthatifthePartiescannotagreeontheeffectsoftheChangeinLaw,themattershallbereferredfordeterminationinaccordancewithclause[insert reference to the dispute resolution clause].

Consequences of a Change in Law

(3) IfthePartieshavefollowedtheproceduresetoutunderClauses(1)and(2)above,then:

(a) the affected Party shall be excused from the performance of its obligationsunder thePPPContract to theextent it isprevented,hinderedordelayed insuchperformancebyreasonoftheChangeinLaw;

(b) if theChange inLawhasoccurredbefore theservicescommencementdate,thescheduledservicescommencementdateshallbepostponedtotakeintoaccounttheeffectofsuchChangeinLaw;and

(c) thePartiesshallagreeontheamountandpaymentofanycompensationtoreflecttheEstimatedChangeinProjectCostsasadjustedtotakeintoaccounttheactualincreaseorreductionincostsreasonablyincurredasaresultoftheChangeinLaw,[providedthatnocompensationshallbemadeinrelationtoaChangeinLawunderthisclauseunlesstheclaimingPartycandemonstratethattheaggregateimpactofallChangesinLawthathaveoccurred during [insert relevant period in time, e.g. calendar year] exceeds [insert amount]].

Deleteprovisoifnomateriality

thresholdistobeincluded.

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(4) Ifthenoticeandrelevantinformation arenotprovidedwithintheperiodreferredtounderClause(1)above,theaffectedPartyshallnotbeentitledtoanycompensationor relief fromitsobligationsunder thePPPContract inrespectof theperiodforwhichtheinformationisdelayed.

Termination due to a Change in Law

(5) IfaChangeinLaw:

(a) resultsinthePrivatePartnernotbeingabletoachievethe[insert defined term for services commencement date]within[l]monthsafterthe[insert defined term for scheduled services commencement date];or

(b) prevents a Party from performing its material obligations under this PPPContractforaperiodof[l]consecutivedays;or

(c) results in performance of the PPP Contract being illegal and such illegalitycannotberemediedbyaContractingAuthorityvariation,

eitherPartymayinitsdiscretionterminatethisPPPContractbyissuingawrittenterminationnoticewhichshalltakeeffect[thirty (30) calendar]daysafterreceiptofsuchterminationnotice.If,attheendofthis[thirty (30)]dayperiod,theChangeinLawcontinues,thePPPContractshallbeterminatedpursuanttoclause[insert reference to the clause governing termination] and the Private Partner shall beentitledtothecompensationsetoutunderclause[insert reference to Change in Law termination payments clause].

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3 .3 . .SAMPLE .DRAFTING .3A

OPTION2:ProtectionagainstDiscriminatoryandSpecificChangesinLawandChangesinLawintheoperatingperiodrequiringcapitalexpenditure

Required Definitions (see also definitions in Section 3.3, Sample Drafting 3)

"Capital Expenditure" meansanyexpenditurewhich is treatedascapitalexpenditure inaccordancewithgenerallyacceptedaccountingprinciplesin[insert Country]fromtimetotime.

" D i s c r i m i n a t o r y Change in Law"

meansaChangeinLaw,thetermsofwhichexpressly[affect][applyto]:(a) thePPPProjectandnottosimilarprojects;and/or

(b) the Private Partner [or its sub-contractors in their capacity assuch]andnottootherpersons;and/or

(c) partiesundertakingPPPProjectsandnototherpersons."General Change in Law"

means a Change in Law which is not a Discriminatory Change inLaworaSpecificChangeinLaw..

"Qualifying Change in Law"

means:(a) aDiscriminatoryChangeinLaw;

(b) aSpecificChangeinLaw;or

(c) a General Change in Law which comes into effect during the[insert defined term for operating period] and which involvesadditionalcapitalexpenditureforthePPPProject.

"Specific Change in Law" meansanyChangeinLawwhichspecificallyrefersto(i)theprovisionof[services the same as or similar to the services provided under the PPP Contract - define]and/or(ii)theholdingofsharesincompanieswhosemainbusinessisproviding[services the same as or similar to those provided under the PPP Contract - define].

Qualifying Change in Law

(1) IfaQualifyingChangeinLawoccursorisshortlytooccur,theneitherPartymay,within[thirty (30) business]daysstartingfromthedayitwasaware(orshouldhavebeenaware)oftheQualifyingChangeinLaw,notifytheotherPartytoexpressanopiniononitslikelyeffects,givingdetailsofitsopinionof:

(a) anynecessarychangeintheobligationsofthePrivatePartner;

(b) whetheranychangesarerequired to the termsof thisPPPContractto deal with the Qualifying Change in Law including any necessaryContractingAuthorityvariation;

(c) whetherrelieffromcompliancewithobligationsisrequired,includingthe obligation of the Private Partner to achieve any contractualdeadline and/or meet any contractual performance requirement during theimplementationofanyrelevantQualifyingChangeinLaw;

Thevariationsprocesswillbe

dealtwithunderadifferentclause.

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(d) any(positiveornegative)changeofrevenuethatwilldirectlyresultfromtherelevantQualifyingChangeinLaw;

(e) any(positiveornegative)estimatedchangeinthecostsofthePPPProjectthatwilldirectlyresultfromtheQualifyingChangeinLaw;or

(f) anycapitalexpenditurethatisrequiredornolongerrequiredasaresultofaQualifyingChangeinLawtakingeffectduringtheoperationperiodofthisPPPContract.

(2) As soon as practicable and in any event within [thirty (30) business] days afterreceiptofanynotice from theaffectedParty, theContractingAuthorityand thePrivatePartnershalldiscussandagree the issues referred to inClause (1)aboveand any ways in which either Party can, if applicable, mitigate the effect of theQualifyingChangeinLaw,including,inrelationtothePrivatePartner:

(a) providing evidence that the Private Partner has used reasonable endeavors(including(wherepracticable)theuseofcompetitivequotes)toobligeitssub-contractorstominimizeanyincreaseincostsandmaximiseanyreductionincosts;

(b) demonstratinghowanycapitalexpendituretobeincurredoravoidedisbeingmeasured in a cost effective manner, including showing that when suchexpenditureisincurredorwouldhavebeenincurred,ChangesinLawatthattimehavebeentakenintoaccountbythePrivatePartner;

(c) givingevidenceas tohowtheQualifyingChangeinLawhasaffectedpriceschargedbyanysimilarbusinessestothePPPProject;and

(d) demonstratingthatanyexpenditurethathasbeenavoidedonaccountoftheQualifyingChangeinLawhasbeentakenintoaccountintheamountwhichin its opinion has resulted or is required under Clauses (1)(e) or (1)(f) above,provided that if the Parties cannot agree on the effects of the QualifyingChangeinLaw,themattershallbereferredfordeterminationinaccordancewithclause[insert reference to the dispute resolution clause].

Consequences of a Qualifying Change in Law

(3) IfthePartieshavefollowedtheproceduresetoutunderClauses(1)and(2)above,then:

(a) theaffectedParty[i.e. the Private Partner]shallbeexcusedfromtheperformanceofitsobligationsunderthePPPContracttotheextentitisprevented,hinderedordelayedinsuchperformancebyreasonoftheQualifyingChangeinLaw;

(b) iftheQualifyingChangeinLawhasoccurredbeforetheservicescommencementdate,thescheduledservicescommencementdateshallbepostponedtotakeintoaccounttheeffectofsuchQualifyingChangeinLaw;and

(c) the Parties shall agree on the amount and payment of any compensationto reflect the Estimated Change in Project Costs as adjusted to take into

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accounttheactualincreaseorreductionincostsreasonablyincurredorobtainedasaresultoftheQualifyingChangeinLaw,[provided that no compensation shall be made in relation to a Qualifying Change in Law under this clause unless the claiming Party can demonstrate that the aggregate impact of all Qualifying Changes in Law that have occurred during [ insert relevant period in time, e.g., calendar year] exceeds [insert amount].

(4) IntheeventthatthenoticeandrelevantinformationarenotprovidedwithintheperiodsreferredtounderClause(1)above,theaffectedPartyshallnotbeentitledtoanycompensationorrelieffromitsobligationsunderthePPPContractinrespectoftheperiodforwhichtheinformationisdelayed.

Termination due to a Qualifying Change in Law

(1) IfaQualifyingChangeinLaw:

(a) resultsinthePrivatePartnernotbeingabletoachievethe[insertdefinedtermforservicescommencementdate]within[l]monthsafterthe[insertdefinedtermforscheduledservicescommencementdate];or

(b) prevents a Party from performing its material obligations under this PPPContractforaperiodof[l]consecutivedays;

(c) results in performance of the PPP Contract being illegal and such illegalitycannotberemediedby[aContractingAuthority]variation,

eitherPartymayinitsdiscretionterminatethisPPPContractbyissuingawrittenterminationnoticewhichshalltakeeffect[thirty (30) calendar]daysafterreceiptofsuchterminationnotice.If,attheendofthis[thirty (30)]dayperiod,theQualifyingChangeinLawcontinues,thePPPContractshallbeterminatedpursuanttoclause[insert reference to the clause governing termination]andthePrivatePartnershallbeentitledtothecompensationsetoutunderclause[insert reference to Change in Law termination payments clause].

Deleteprovisoifnomateriality

thresholdistobeincluded.

TERMINATION PAYMENTS4

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4.1.1 The concept of a termination payment

Incommercialcontractswherecompensationonterminationforspecificreasonsisnotaddressedspecifically,thepartieswillrelyonthechosendisputeresolutionmethodfordeterminingtheamountofanydamagesshouldterminationoccur.Thismayinvolvebringingacourtaction.Generallyspeaking,wherethereisaninnocentparty,theywillbe thepartyseekingdamages.However,evenadefaultingpartymaybeentitled tocompensationundergenerallawtofairlyreflectthevalueofanyworksorservicesithascarriedout.Incertaincontracts,ratherthanrelyingongenerallaw,theremaybeaneedtoagreeupfrontthelevelofcompensationpayableifterminationeventsoccurforspecificreasons.

4.1.2 Why do PPP Contracts contain termination payment provisions?

Market practice has shown that Lenders are not prepared to lend to PPP Projectswithoutreasonableassurancethattheywillberepaid. Incarryingouttheirdetaileddue diligence, Lenders are keen to ensure that their debt is protected on any earlytermination of the PPP Contract, regardless of fault and without having to relyon lengthy and potentially uncertain legal proceedings to determine the level ofcompensation. Equity Investors, similarly, will want to expressly protect their equityinvestmentincircumstanceswhereterminationoccursthroughnofaultoftheirownorofthePrivatePartner.

Althoughlegalproceedingsmayultimatelyresultinterminationcompensationbeingpayableby theContractingAuthority, it is the levelofcertaintyprovidedbyexpresscontractualprovisionswhichiskeyforLendersinagreeingtocommitfundingtothePPPProject.TerminationpaymentsarethereforeakeyelementoftheriskallocationinaPPPContractandareessential inachievingabankablePPPProject.Thisappliesacross both established and less established PPP markets in both common and civillawjurisdictions,althoughtheprecisetermswillvaryaccordingtotheparticularPPPProjectcircumstances.35

Thegroundsforterminationandtheconsequentpaymentscanbecomplex.Theyareincluded in thePPP Contract togiveboth Parties certainty as to the mechanicsandeffectsoftermination.ThisinturnenablestheLenderstopricetheirdebtbasedonalowerriskprofileasregardsrepaymentrisk,whichinturnfeedsthoughintothepricebidbythePrivatePartnerforthePPPContract.

35 SeetheGlobalInfrastructureHubReport:AllocatingRisksinPublic/PrivatePartnershipContracts,2016edition–e.g.theEarlyTermination(includinganycompensation)entriesinRiskMatrix4:HeavyRail(ROT)andRiskMatrix5:Port(DBFO). See link in Appendix, Additional PPP Resources.

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UnderlyingtheLenders’analysisoftheirlikelydebtrepaymentwillbeanassessmentofthestrengthoftheContractingAuthority’scovenanttopay(i.e.itsabilitytopayanyterminationpayment). In cases of weak or uncertain Contracting Authority credit, additional creditsupportmaybesoughtbythePrivatePartneranditsLenders.Thismaybethecase,forexample,inlessstableregimesoremergingmarketsorwheretheContractingAuthorityisnotpartofcentralgovernment.Supportmaybeavailableviamultilateralorexportcreditagenciesorcentralgovernment.

4.1.3 Types of termination event

The list of events which can lead to termination will vary from one PPP Contract toanother and should be tailored to take account of the specific risks and obligationsinvolvedintherelevantPPPProject.


Each Party should make sure it understands how underlying law may affect certainterminationscenariosunderthePPPContract.Forinstance,insomejurisdictions(moretypically civil law) the Contracting Authority may be entitled to terminate the PPPContractforconvenienceoronthegroundsofpublicinterestevenwithoutanexpresscontractualright.Similarly, thePrivatePartnermaybeexpectedtorelyonitsrightsatgenerallawtoterminateforContractingAuthoritydefaultinsteadofhavinganexpressright(ashasbeenthecaseinsomePPPProjectsincivillawFrance32andisalsousualincommonlawAustralia).

Earlyterminationeventswhichmaybeexpectedtoleadtoterminationcompensationinclude:36

(a) Private Partner default termination – by the Contracting Authority where thePrivatePartnerfailstocomplywithitsmaterialobligations;

(b) Voluntary termination – by the Contracting Authority at its discretion forconvenience or for public policy reasons (also known as termination for publicpolicy);

(c) Contracting Authority default termination – by the Private Partner where theContracting Authority fails to comply with its material obligations (which areprimarilypaymentobligationsifundertheavailabilitypaymentmodel);and

(d) Prolonged Force Majeure, MAGA or Change in Law – by either Party where nosolution has been agreed to continue with the PPP Contract. See Section 1, Force Majeure, Section 2, Material Adverse Government Action and Section 3, Change in Law.

36 InFrance,wherethePPPContractissilent,thePrivatePartnerwouldtypicallybeexpectedtoapplytocourtfortherighttoterminatethePPPContract.

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4.2.1 Certainty

SimpleandobjectivecalculationmethodswillprovidegreatercertaintyforallParties,minimisingtheriskofdisputesandenablinglessriskpremiumtobecostedintothePrivatePartner’sprice.Equityanddebtelementstobecompensatedmustbeclearlydefined and understood by all Parties, including any financing breakage costs (e.g.under interest rate hedging arrangements), any “make-whole” payments (e.g. inrespectoffixedrateloans37orbonds)andanydefaultinterest.Asmentionedabove,theinclusionofanexpressterminationpaymentprovisionwillnotnecessarilyresultinanygreaterliabilityontheContractingAuthoritythanwouldbethecaseatgenerallaw,butthecertaintyprovidediskeytobankability.

4.2.2 Understanding relevant agreements

Where termination compensation provisions are defined by reference to Lenders’financing agreements (including any hedging arrangements), equity agreements (e.g.subordinatedloandocuments)ortheProjectAgreements,theContractingAuthorityanditsadvisersmustreviewandapprovetheagreementsinvolved.TheContractingAuthorityshouldalsorequireapprovalrightsinrelationtochangestosuchagreementswhichcouldaffectitsliability(orthePPPContractmustbeclearthatanyunapprovedadversechangeswillnotbetakenintoaccountincalculatingtheContractingAuthority’sliability).

4.2.3 Deductions

ThePrivatePartnermayhavecashstandingincertainbankaccounts(e.g.itscurrentaccount,debtservicereserveaccount,maintenancereserveaccountoranycollateralaccountintowhiche.g.bondproceedsaredrawn).TheContractingAuthorityshouldconsiderhowthesecashbalancesshouldbetreatedandwhethertheyshouldbesetoffagainstanycompensationdue to thepartywhichultimately receivessuchcash.Considerationalsoneedstobegiventohowtotreatinsuranceproceeds(see Section 1.2.1.4)andanynetpaymentsthePrivatePartnermightreceiveasaresultofclosinghedgingarrangementsearly, aswellasanyoutstandingclaims against, or amountsowedtoitby,itscounterpartiesundertheProjectAgreements.See Section 4.7, Sample Drafting 4, Schedule, definition of “Outstanding Senior Debt”.

4.2.4 Framework for negotiation

Itisimportanttonotethat,inpractice,terminationprovisionsprovideabackdropfortheParties(andtheLenders)toinitiatediscussionsabouthowtocontinuethePPPContractwhere there isariskof termination. It isusually inallparties’ interests tofindaway tocontinue the PPP Project and avoid termination and from the Contracting Authority’sperspective,althoughitneedstoprotecttheuseofpublicfunds,italsohasadutytoprovidepublicservices.NegotiatingawaytocontinuethePPPContractwhichworksforallpartiesmaybethebestwaytoachievethisandavoidstriggeringaterminationpaymentliability.

37 Fixedratedebtprovidedbyinstitutionalandnon-institutionallendershasbecomeincreasinglycommonoverthepastfiveyearsindevelopedPPPmarketssuchastheNetherlands.

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4.2.5 Other termination consequences

Inadditiontotheterminationpaymentitself,theContractingAuthoritywillwanttoensurethePPPContractcontainsadequateprovisionsaddressingotherconsequencesof termination, such as transfer by the Private Partner of the PPP Project asset,handoverarrangementsandaccesstoinformationnecessaryforcontinuingtooperateorconstructthePPPProject.38

4.2.6 Principles for the calculation of termination payments

TheamountpayabletothePrivatePartneruponearlyterminationofthePPPContractwilldependonthegroundsonwhichthePPPContractisterminated,soitisimportantfortheContractingAuthoritytounderstandthedifferentrationaleineachcase.Section 4.7, Sample Drafting 4isbasedontheprinciplessetoutbelowinSections 4.3–4.6.

4 .3 . .COMPENSATION .ON .CONTRACTING .AUTHORITY .DEFAULT, .MAGA, .CHANGE .IN .LAW .OR .VOLUNTARY .TERMINATION

4.3.1 Market practice

If the PPP Contract is terminated on the grounds of Contracting Authority Default,MAGA, Change in Law orVoluntaryTermination, market practice is that the PrivatePartnershouldbefullycompensatedbytheContractingAuthorityasifthePPPContracthadrunitsfullcourse.ThisreflectstheprinciplethatthesecategoriesofterminationeventareconsideredaContractingAuthorityriskandresponsibility.Italsoreflectsthelikely position should the Private Partner instead have to sue for damages on thesegroundsundergenerallaw.

In thesecircumstances, thePrivatePartnerwillexpectanamountwhich repays thesums used to finance the Project (equity and debt), as well as compensates for theequityreturnithadforecast(foraspecifiednumberofyearstobenegotiatedbetweenthePartiesbuttypicallyfor(andlimitedto)theremainingtermofthePPPContract).InordertobeleftinthesamepositionasifthePPPContracthadnotbeenterminated,the Private Partner will also expect the amount to include compensation for costspayable as a result of the early termination of specified financing agreements andProject Agreements, as well as related employee redundancy payments incurred. IfthePPPProjecthasbeenfundedinthebondmarketsorbyfixedrateloans,a“make-whole”paymentmaybepayabletothebondholdersorrelevantfixedratelendersinthesecircumstancestocompensatethemfortheearlyrepaymentoftheirinvestment.See Section 9.4.2, Bond Financing.

As mentioned in Section 2, Material Adverse Government Action, there may be scopefor the Contracting Authority to negotiate a slightly reduced level of terminationcompensationforMAGAeventswhicharelessdirectlywithinitscontrol(thispaymentwouldstillcoveratleastoutstandingdebtandcontributedequity).

38 TheseaspectsarenotcoveredinthisReport.Forfurtherinformation,seetheInfraAustraliaPPPGuidelinesandtheUKPF2Guidance.

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The Contracting Authority should not be“unjustly enriched” by receiving an asset forwhich ithasnotpaid theexpectedcontractualprice.Some jurisdictions (typicallycivillaw) have an underlying unjust enrichment principle and the Contracting AuthorityshouldmakesureitunderstandshowthismightaffectthedraftingofanyterminationprovisionsinitsPPPContract.

4.3.2 Compensation approach

Therearetwo“full”compensationmethodswhichtheContractingAuthoritywillneedtoconsider:

(a) Book value compensation:thisisbasedontheinvestmentcoststhePrivatePartnerincurs inbuildingthePPPProject.Thirdpartycostswouldbeaddedontop.Thismethodisnotascommonlyusedandalthoughitisrelativelyclearandsimple,itisgenerallynotrecommendedasitisnotguaranteedtocompensatethePrivatePartner fairly. There is a risk of underpayment (which would create bankabilityissues for Lenders) or overpayment (which may wrongly incentivise the PrivatePartner).TheremayalsobeproblemsifaccountingruleschangeduringthelifeofthePPPContract.ItshouldbenotedthatthebookvalueofthePPPProjectassetsisunlikelytotakeintoaccounttheirphysicalstate.39

(b) Financing-based compensation:thisisbasedonthefinancingforthePPPProject(e.g.seniordebt(whetherintheformofbankorbondfinance),subordinateddebtandequity),againwiththirdpartycostsontop.Thisapproachismorecommonacross the PPP market and is the recommended approach in this Guidance. See further detail in Section 4.3.3 and Section 4.7, Sample Drafting 4, Schedule, Clause (1).

4.3.3 Components of financing-based compensation

As mentioned in Section 4.3.2, this type of termination payment is made up ofcompensationinrespectofseniordebt(see Section 4.3.3.1),equity(see Section 4.3.3.2) andthirdpartycosts(see Section 4.3.3.3).Thesecomponentsareexplainedmorefullybelow.

4.3.3.1 Compensation in respect of outstanding senior debt

Thispaymentwilltypicallyconsistof:

(i) principaloutstandingundertheseniorfinancedocuments(whetherbankorbondfinancing)(whichmaybecappedbyreferencetoforecastamountsintheOriginalBaseCase);plus

(ii) interest,penaltiesandfees(andmake-wholepaymentsonanybondorfixedrateloan);plus

(iii) breakagecostsarisingunderapplicablehedgingagreementsorfloatingrateloans.

39 ThisapproachisnotinSection 4.7, Sample Drafting 4.

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LESScertainamounts,suchas:

(a) amountscreditedtothebankaccountsofthePrivatePartner(whicharesecuredtothebenefitoftheLenders);

(b) netpaymentsreceivedasaresultoftheterminationofthehedgingagreementsand,insomecases,profitsfrompre-payingfixedrateloans;

(c) insuranceproceedsreceivedorduetobereceivedbeforetheterminationpaymentdate;and

(d) generallyanyothersumsrecoveredbytheLendersbeforetheterminationpaymentdate.

See Section 4.7, Sample Drafting 4, Schedule, Clause (1)(a) and relevant definitions.

4.3.3.2 Compensation in respect of equity

ThereareessentiallythreedifferentoptionstheContractingAuthorityshouldconsiderinrespectofequitycompensation.ThesearealllikelytoleadtodifferentoutcomessotheContractingAuthority shouldbeguided by thekey considerations in Section 4.2, aswellasby thecircumstancesof thePPPProject.See Section 4.7, Sample Drafting 4, Schedule, Clause (1)(d).

(a) Original Base Case Approach (Option 1(a)): in thisapproach,theamountpayableisdeterminedbyreferencetotheOriginalBaseCase.TheContractingAuthoritypaysa sum which, when taken together with all amounts already paid to the EquityInvestorsbeforethedateonwhichthePPPContractisterminated,willensurethattheEquityInvestorsrecoverBaseCaseEquityIRR.

Thekeybenefitofthisapproachliesinitseasyimplementationandcertaintyandthefactthatitleaveslessroomfordisputethanotherapproaches.

Amaterialdrawback,however,isthatthisoptionassumesthatthePrivatePartnerhasbeenperformingasplannedintheOriginalBaseCase-itdoesnottakeintoaccount the actual performance of the Private Partner under the PPP Contract.From the Contracting Authority’s perspective, this may over-compensate thePrivatePartnerifithasbeenperformingworsethanexpectedintheOriginalBaseCase and arguably there may be a stronger incentive on the Private Partner toensure thePPPProject is terminated.Conversely, if thePrivatePartnerhasbeenperformingbetterthanexpecteditwillbeundercompensatedandarguablymaybe concerned that this might incentivise, or result in political pressure on, theContractingAuthoritytoterminatethePPPContractearly.See Section 4.7, Sample Drafting 4, Schedule, Clause (1)(d), Option 1(a).

(b) Market Value Approach (Option 1(b)): in this approach, the amount payable isdetermined by assessing the price which third party investors would be willingtopayfor(i)thesharesinthePrivatePartnerand(ii)thereceivablesarisingundersubordinateddebt,subjecttocertainassumptions(includingthattheeventgivingrisetotheearlyterminationhadnotoccurred).

ComparedtotheOriginalBaseCaseApproach(Option1(a)),thisoptiontakesfullaccountoftheactualperformanceofthePrivatePartnerunderthePPPContractsoisfaireronthatfront.

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However, this method is complex to implement in practice and the result couldbe undesirable on both sides - the Contracting Authority could pay more thanexpectedundertheOriginalBaseCaseandthePrivatePartner’sEquityInvestorsmay feel their interests are not sufficiently protected in circumstances thatare largely beyond their control. It may be difficult to establish a market value(particularly if no market exists) and this could lead to disputes. See Section 4.7, Sample Drafting 4, Schedule, Clause (1)(d), Option 1(b).

(c) Adjusted Base Case Approach (Option 1(c)): under thisapproach,theamountpayableisdeterminedbyreferencetothedistributionswhichEquityInvestorswouldhaveexpectedtoreceiveundertheOriginalBaseCase,butonlyfromtheterminationdate.TheamountpayablewillbetheaggregateamountofdistributionsforecastintheOriginalBaseCasetobemadeaftertheterminationdate,discountedusingtheBaseCaseEquityIRR.

This approach takes into account the performance of the Private Partner underthePPPContractuptotheterminationdate.Italsoprovidesgreatercertaintyasitdoesnotrequireamarketvaluationmechanismandiseasiertoimplement.

However, it does not take into account likely actual performance in respect oftheperiodaftertheterminationdate,so(ashighlightedundertheOriginalBaseCase Approach (Option 1(a)) the Contracting Authority may be over or under-compensatingthePrivatePartnerforthatperiod.Thiswillhaveagreaterimpacttheearlierterminationoccurs.See Section 4.7, Sample Drafting 4, Schedule, Clause (1)(d), Option 1(c).

4.3.3.3 Compensation in respect of third party costs

ThePrivatePartnerislikelytoincurcertainothercostsasaresultofearlyterminationof the PPP Contract, including employee redundancy costs, as well as other costspayable to its sub-contractors in accordance with the terms of the relevant ProjectAgreements.ThegeneralprincipleisthatthePrivatePartneranditssub-contractorsshouldbenoworsenorbetteroffasaresultoftheearlytermination.Whilemarketpracticeisforthesecoststobeincludedinthecompensationpaymentforthiscategoryoftermination,thescopemayvarydependingonthejurisdiction.KeypointsfortheContractingAuthoritytobearinmindinclude:

• Reviewing the Project Agreements–aswiththefinancingagreements,beforePPPContractsignature theContractingAuthorityand itsadvisersshouldreview theProjectAgreementstoassessanyearlyterminationprovisionswhichmaygiverisetothirdpartycostcompensation.Inparticular,theContractingAuthoritywillwanttoensuretherearenoexcessiveterminationpaymentsincludedincontractswithpartieswhoholdsharesinthePrivatePartnerandaresub-contractedtoit.

• Defining and capping liabilities–asfaraspossiblethePPPContractshouldsetouttheprecisescopeofcompensationforthirdpartycosts.Asthirdpartycostscanbesignificantandfluctuateovertime,theContractingAuthoritymaywishtoseektocapitsliabilityinthisrespect,althoughtypicallythisisachievedbydefiningtheeligible items as opposed to setting a monetary cap.The Contracting Authorityshould also oblige the Private Partner to mitigate costs. Both liability caps andmitigationobligationsshouldbereflectedintheProjectAgreementsthemselves.

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• Compensating for loss of profit–oneofthekeycommercialissuestheContractingAuthoritywillalsoneed toaddress is theextent towhichcompensationshouldcoverthelossoffutureprofitsforthesub-contractors–thismaybeachievedbylimitingthenumberofyears.

• Redundancy costs – careful consideration needs to be given to compensation forredundancy of staff employed by the Private Partner and/or its sub-contractors.Suchcompensationwilllikelydependonapplicablelawandtheabilitytoredeployaffectedstaff.

See Section 4.7, Sample Drafting 4, Schedule, Clauses (1)(b) and (c).

4 .4 . .COMPENSATION .ON .PRIVATE .PARTNER .DEFAULT .TERMINATION

4.4.1 Market Practice

In the case of termination by the Contracting Authority on the grounds of PrivatePartnerdefault,marketpracticeisthatthePPPContractshouldexpresslyprovideforsomeamountofcompensation.Whilethismayatfirstseematoddswiththereasonfortermination,thereisinfactsomestrongjustification:

(a) theContractingAuthoritycouldotherwisebenefitfromaPrivatePartnerdefaultbyunjustenrichment(e.g.takingabuiltassetwithouthavingpaidforit)andcouldintheorybeincentivisedtoterminatethePPPContract.ThiscouldresultinlegalproceedingsbeingbroughtbythePrivatePartnerwhichmayultimatelyresultintheContractingAuthoritybeingliabletopaycompensation,aswellaslegalcostsincurred;

(b) withoutthecertaintyofanexpressprovision,thePrivatePartnerwilllikelyhavetopricemoreriskintoitsbidandthereforetheContractingAuthoritywillbepayingmoreintheordinarycourseofthePPPContracteventhoughterminationonthesegroundsmayneverhappen;

(c) marketpracticeshowsthatLendersaretypicallyreluctanttoagreetofinanceaPPPProject constructed and operated by an SPV where no compensation is expresslypayable to themin thesecircumstances (i.e. thePPPProjectwillnotbebankable).WhilethereisanargumentthattheriskofnocompensationwillencourageLenderstostepinandrescueatroubledPPPProject(andtherehavebeensomeexamplesofthiscontractualapproachinsomeearlyPPPContracts intheUK,forexample), themarkethasingeneralmovedawayfromthisforthereasonsabove;and

(d) thePrivatePartnerstillusually loses itsequity investmentandthereturnon itsequitywhichisitsmaindriverforundertakingthePPPProjectinthefirstplace.See Section 4.7, Sample Drafting 4, Schedule, Clause (2).

The Contracting Authority will want to weigh up the likelihood of the terminationpayment arising against the benefit of procuring private finance. In doing so, thefollowingfactorsarerelevant:

(i) the Contracting Authority has control over serving the termination notice thattriggerssuchpayment-thiswillalsobeafactorinitsfavourinbringingallpartiestothenegotiatingtableinapotentialterminationscenario;and

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(ii) the Contracting Authority has the ability to mitigate against the risk of PrivatePartner default even before the PPP Contract is signed, by selecting the PrivatePartner after a thorough and fair procurement process and evaluation of thesoundnessofallelementsofitsbid.

4.4.2 Compensation approach

AlthoughmarketpracticeistopaycompensationonPrivatePartnerdefaulttermination,theContractingAuthorityneedstochooseamethodwhichdoesnotresultinoverlygenerous compensation. This would not properly incentivise the Private Partner toperform(noritsLenderstoduediligencethePPPProjectthoroughlyorexercisetheirrightstomonitorandstepintothePPPProject); itwouldalsoraisevalue-for-moneyconcerns.Theoptionsareoutlinedbelow.

(a) Debt-based compensation:underthisapproach,thePrivatePartner(orinrealitythe Lenders) is compensated based on the amounts payable under the seniorfinance documents bank or bond (i.e. an amount based on the formula underSection 4.3.3.1). The PPP Contract must clearly define the debt elements to becompensated and also applicable deductions of amounts available to Lenders(suchasproceedsreceivedonclose-outofthehedgingarrangements, insuranceproceeds and amounts in bank accounts which may include e.g. bond proceedsheldinacollateralaccount).


Thisdebt-basedcompensationmethodisthemostcommonapproachinemergingmarketsand“governmentpays”PPPProjectsinFranceandisalsoseeninGermany.

As the main or only beneficiary of compensation upon termination for PrivatePartner default, Lenders will tend to look for the highest possible recovery ratefortheirloanandthesimplest/mostobjectivesolutionpossible.Asaresult,debt-drivenapproachesarelikelytobemoresatisfactorytothem.WhethertheamountreflectsthevalueofthePPPProjectislessclearandtheContractingAuthoritywillneedtoconsiderthisinitsvalue-for-moneyanalysis.

One major drawback of this method is that Lenders have limited incentive toensurethattheProjectperformsortostepintosaveit.Tocounterthisriskandensure Lenders have an incentive to conduct proper due diligence and exercisetheirmonitoringandstepinrights,inadditiontotherelevantdeductions,thelevelofcompensationusually isapercentageof the totaloutstandingdebt (andnotthefullamount).Thisiscommonlyreferredtoasa“haircut”,thoughitshouldbenoted that taking the risk of a haircut may not be acceptable to Lenders in allcircumstancesandwilldependonavarietyoffactors(suchasthespecificcountryandsector,inwhichthePPPProjectisconducted).Theexactpercentageofahaircut(ifany)shouldbeassessedonaproject-by-projectbasis.Inaddition,inthecontextof a bond financing, consideration should be given as to whether make-wholepaymentsshouldbeincluded. See Section 4.7, Sample Drafting 4, Schedule, Clause (2).

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Analternative(oraddition)couldbetorefertoanamountofoutstandingseniordebtminusunfundedequitycontributionsifthesearerequiredundertherelevantfinancingdocuments–theLenderswouldthenlooktorecoverthatamountfromthePrivatePartner/EquityInvestors.

(b) Market value:wherethePPPmarketissufficientlyliquidandthereisareasonableprospectofthePPPContractbeingretendered,thefairestapproachistocalculatethecompensationpayabletothePrivatePartnerbyreferencetothemarketvalueof the PPP Contract, as determined by a tendering procedure. This ensures, intheory,thattheContractingAuthoritywillnotpaythePrivatePartnermorethantheremainingvalueofthePPPContract.Asaresult,thiscalculationprotectstheContracting Authority’s interests while ensuring that the Contracting AuthoritydoesnotunfairlybenefitfromthePrivatePartner’sdefault.

The fall-back position if there is no liquid market, or if the Authority choosesnot to go down this route for any reason, is that the compensation payment iscalculated on the basis of the estimated value that would have been obtainedin a retendering, as determined by an independent, third-party appraiser.Whileseemingly straightforward to implement, setting the parameters may requiresomenegotiation,anditmaynotreflectthetruemarketvalueofthePPPContract.This approach is seen in countries with mature PPP markets (such as Belgium,Australia40,theNetherlandsandalsoSouthAfrica).


ThemarketvalueapproachislikelytobemoresuitableforadevelopedlessvolatilePPPmarketwheretherearelikelytobeanumberofpotentiallyinterestedpurchasersintherelevantsector.LenderstoPPPProjectsincertainjurisdictionsorinrelationtocertainassetsmaybereluctanttorelyonamarket-basedvaluationmethodforfearofundervaluationor underpayment. This is particularly likely to be the case in emerging markets wherethereisalimitedPPPtrackrecordandalimitedmarket.TheSouthAfricaPPPGuidelinesacknowledgethisandprovideforanadditionalpaymenttobemadebytheContractingAuthoritytotheextentthemarketvalueapproachdoesnotyieldacertainpercentageofoutstandingdebt.

ContractingAuthoritiesshouldtakeaviewastowhethermarket-basedterminationcompensationisaviableoptiononaproject-by-projectbasis.41

(c) Book Value: although seen in some European jurisdictions, the calculation ofcompensationpaymentsbasedonbookvalueisnottherecommendedapproachin thisGuidanceas theresultmaynotaccuratelyreflect therealityof thesumsowed.42See discussion under Section 4.3.2(a).

40 SeetheInfraAustraliaPPPGuidelines(forSocialInfrastructure).41 This option is not in Section 4.7, Sample Drafting 4 – for more detail see the South Africa PPP Guidelines, Infra

AustraliaPPPGuidelines(forSocialInfrastructure)andtheUKPF2Guidance.42 A“hybrid”approachmayalsobeconsideredinsomecasese.g.whereterminationcompensationisequaltothelesser

oftheappraisedmarketvalueandoutstandingseniordebt.ThisapproachhasbeentakenbysomeStateauthoritiesintheUnitedStates.

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4 .5 . .COMPENSATION .ON .FORCE .MAJEURE .TERMINATION

AsdiscussedinSection 1, Force Majeure,eachPartyshouldhavetherighttoterminatethePPPContractasaresultofprolongedForceMajeureandcompensationiscalculatedtoreflecttheprinciplethatForceMajeureisconsideredasharedrisk.Inthiscase,therisk is shared by virtue of the Contracting Authority being liable for a less than fullcompensationpaymentandhavingtherighttotakeovertherelevantasset,whilethePrivatePartnerlosesanyreturnonitsequityinvestment(i.e.theprofitelementwhichwillhavebeenattheheartofitsdecisiontobidforandundertakethePPPProjectinthefirstplace)andpossiblysomeof its investedequity.Thepotentialconsequenceswill incentivise both Parties to find a solution to a prolonged Force Majeure beforeterminationoccurs.

Subjecttoadjustmentsonacasebycasebasis,theprincipleisthatthePrivatePartnerispaidanamountrepresenting:

(i) theamountofoutstandingseniordebt(basedontheformulainSection 4.3.3.1butprobablynotincludingamake-wholepaymentonanybonds);plus

(ii) theamountofequityinvested(takingintoaccountanydistributionsalreadypaid),butnotlossofprofit(insomecases,forexampleinAustralia,ahaircutmayalsobeappliedtofurtherreflectthesharedriskprinciple);plus

(iii) anamountinrespectofredundancyandsub-contractorbreakcosts(basedontheprinciplessetoutin Section 4.3.3.3)

Asimilarapproachisusuallyfollowedinanyterminationforuninsurability.See Section 4.7, Sample Drafting 4, Schedule, Clause (3). Itmayalsobepossiblefor theContractingAuthority to negotiate no or reduced compensation in specific circumstances. See Section 1.2.4, Force Majeure.

WhileitmayseemthattheLenders’exposureismorelimited,thiscomesbacktotheissueofbankability,andthedecisionfacingLendersastowheretoputtheirfundstobestadvantage.TheContractingAuthoritywillwant toweighuptheriskofaForceMajeure terminationoccurring (againwhycloseattention to thedefinitionofForceMajeureissoimportant)againstthebenefitofachievingtheprivatefinanceitwants,atareasonableprice,havingchosenPPPasitsprocurementmethod.

4 .6 . .METHOD .AND .TIMING .OF .PAYMENT

The method of payment of the termination compensation will also need to beconsidered by the Contracting Authority. Generally speaking, providing for paymentbylumpsuminthePPPContractseemsmoretypicalmarketpractice,butthereareanumberoffactorstotakeintoaccount,includingthegroundsfortermination:43

• Payment capacity–theContractingAuthoritywillneedtoassesswhetheritwillbeable topaya lumpsumifsucha largepaymentmaynotbebudgetedfororhavebackingfromitsgovernmenttreasurydepartment.Paymentovertimemaybepreferable.

43 TheseelementsarenotincludedinSection 4.7, Sample Drafting 4.

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• Private Partner/Lender perspective – it is likely that the Private Partner andits Lenders will favour a lump sum payment. This is particularly the case onContractingAuthoritydefaultterminationasthemostlikelycauseisfailuretopay.ThePrivatePartneranditsLenderswilltypicallywanttocloseofftheirexposureto a terminated PPP Project and avoid Contracting Authority credit risk as soonas possible. The Contracting Authority should in any event try to negotiate areasonableperiodofgracelongenoughtoraisethenecessaryfunds.

OnPrivatePartnerdefaultterminationLendersareagainlikelytoresistpaymentsover time (and are likely to be the only party receiving compensation).They arealsolikelytoresistpaymentsoveraperiodlongerthantheremaininglifeoftheloanorbond,especially if toreceivesuchpaymentsona longerschedulewouldcauseadditionalbreakcosts(asitmighttonon-bankfunders).

• Interest–paymentovertimewillincurinterestcostsfortheContractingAuthority,usuallyfromthedatethepaymentisrecognizedasdueuntilthefinalpayment.If theContractingAuthoritydoesselect thismethod, itwillneed toconsideranappropriateinterestrate.

• Asset transfer – Lenders may be reluctant to release their security interests onPPPProjectassetsuntilcompensationpaymentshavebeenmadeinfull.Thismaymake the transfer of relevant assets back to the Contracting Authority difficult.Incertaincircumstances, theContractingAuthoritymaybeabletonegotiateaninterimsolutionatthetimeofthetermination,suchasanarrangementpursuantto which the Contracting Authority has a right to access the PPP Project assetsduringtheperiodfromtheterminationdateuntilallterminationcompensationispaid,solongastheContractingAuthoritycomplieswiththepaymenttermswithrespecttosuchcompensation.Thisapproachisunlikelytobeagreedatcontractsignatureandcertainissueswillneedtobeclearlyaddressed(suchasliabilityfordamagetotheassetwhileintheContractingAuthority’suse).

• Set-off rights–theContractingAuthorityshouldtrytonegotiatetherighttosetoffanyamountsduetoitfromthePrivatePartnerunderthePPPContractagainstanycompensationitpays(unlessthesearealreadytakenintoaccountintherelevantformula). Lenders, however, will in general be reluctant to give the ContractingAuthorityanyset-offrights,particularlywherecompensationisdebt-based.

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Theprovisionsrelatingto thecalculationof terminationpaymentsaregenerallysetoutinaScheduletothePPPContract.

Schedule[insertnumber]–TerminationPayments


“Bonds” means the [l] bonds due [l] of the Issuer, issued at [FinancialClose],intheaggregateprincipalamountof[l].

"Distribution" means:(a) thepaymentofadistributionbythePrivatePartner(whether

directlyorindirectly)toitsShareholders;

(b) anydividend,charge,feeorotherdistribution(orinterestonanyunpaiddividend,charge,feeorotherdistribution)(whetherincashorinkind)declared,paidormadeonorinrespectofsharecapital(oranyclassofsharecapital)inthePrivatePartner;

(c) the redemption, repurchase, defeasance, retirement orrepaymentofanysharecapitalofthePrivatePartner,includingin connection with any merger or consolidation, or anyresolutiontodoso.

"Initial Equity" means, as at the Termination Date, the initial equity investmentdisbursed by the Shareholders plus any such other equitycontributions approved by the Contracting Authority, less theDistributionspaidbythe[PrivatePartner]toitsShareholdersasattheTerminationDate.

“Issuer” means [insert company name, registered number and country of registration].[assuming Issuer is different entity to Private Partner].

"IRR" meansinternalrateofreturn."Losses" means all damages, losses, liabilities, costs, expenses (including

legal and other professional charges and expenses), and chargeswhetherarisingunderstatute,contractorotherwise,internalcostsordemands.

“Make-Whole Payment” means:(a) in relation to termination of the PPP Contract under Clause

[l](TerminationonContractingAuthorityDefault)[ChangeinLaw][MAGA],theMake-WholePaymenttobemadepursuanttoandinaccordancewithCondition[l]oftheBonds;

(b) inrelationtoterminationofthePPPContractunderClause[l](VoluntaryTermination),themodifiedMake-WholePaymenttobemadepursuanttoandinaccordancewithCondition[l]oftheBonds;and

(c) in relation to termination of the PPP Contract in any othercircumstances,zero.

"NPV" meansnetpresentvalue.

NBseeSection9.4.2inrespectof

emergingmarkets

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“Original Base Case” meansthefinancialmodelagreedbetweenthePartiesdated[]forthepurposeofamongstotherthingscalculating[insert defined term of availability payment in a “user pays” model /Equity IRR etc][as attached at [Schedule [ ] ], as updated from time to time inaccordancewiththetermsofthisPPPContract.

"Outstanding Senior Debt"

meansthesumof:[See Section 4.4.3](a) the totalamountoutstandingat theTerminationDate to the

LendersunderanySeniorFinanceDocumentsandaccruedbutunpaidinterestandincludingdefaultinterest;plus

(b) any winding-up costs, prepayment charges [(including anyMake-Whole Payments)] [except on termination for ForceMajeure or Private Partner Default], costs of terminating anyhedgingarrangementsorotherbreakagecosts,payablebythePrivate Partner [or the Issuer] to the Lenders as a result of aprepaymentofsumsdueundertheSeniorFinanceDocuments,or, in the case of early termination of interest rate hedgingarrangement, as a result of termination of the PPP Contract,subject to the Private Partner[, the Issuer] and the Lendersmitigatingallsuchcosts[unlesstheamount,ortheformulafordeterminingtheamountofsuchcostsisfixedinadvanceunderthetermsoftherelevantSeniorFinanceDocuments];

less(withoutdoublecounting):

(i) all credit balances held on any bank accounts held by oron behalf of the Private Partner [and/or the Issuer] on theTerminationDate;

(ii) all amounts (including net hedge termination payments)payable by the Lenders to the Private Partner as a result of aprepaymentofamountsoutstandingundertheSeniorFinanceDocumentsorterminationofthePPPContract;and

(iii) allotheramountsreceivedorduetobereceivedbytheLendersonoraftertheTerminationDateandbeforethedateonwhichcompensationispayablebytheContractingAuthoritytothePrivatePartnerasaresultofenforcinganyotherrightsthattheymayhave.

“Senior Finance Documents”

means the finance documents entered into between the LendersandthePrivatePartnerforthepurposeoffinancingthePPPProject,including [insert defined terms for relevant [loan agreements][bond financing documents to include bond trust deed, subscription agreement (terms and conditions of the bond) and security documents].

Thismayinclude,interalia,insurance

proceedspledgedorassignedtothe

Lenders.

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“Sub-Contractor “Breakage Costs”

meansthevalueofLossesthathavebeenorwillbereasonablyandproperly incurred by the Private Partner as a direct result of theterminationofthePPPContract,butonlytotheextentthat:(a) theLossesareincurredinconnectionwiththePPPProjectand

in respect of the provision of services or the completion ofworks,including:

(i) anymaterialsorgoodsorderedorsub-contractsplacedthatcannotbecancelledwithoutsuchLossesbeingincurred;

(ii) anyexpenditureincurredinanticipationoftheprovisionofservicesorthecompletionofworksinthefuture;

(iii) the cost of demobilisation including the cost of anyrelocation of equipment used in connection with the PPPProject;and

(iv) redundancypayments;

(b) theLossesareincurredunderarrangementsand/oragreementsthatareconsistentwithtermsthathavebeenenteredintointheordinarycourseofbusinessandonreasonablecommercialterms,excludinglossofprofitscalculatedoveraperiodwhichislongerthan[one(1)year]aftertheTerminationDate;and

(c) thePrivatePartnerandtherelevantsub-contractorhaveeachusedtheirreasonableendeavorstomitigatetheLosses.

“Subordinated Finance Documents”

means any agreements under which the Shareholders makesubordinateddebtavailabletothePrivatePartner. [See Section 4.2.2]

“Termination Date” meansthedateonwhichthePPPContractterminatesinaccordancewithClause[insert relevant clause number].

Compensation on Contracting Authority Default, Material Adverse Government Action, Change in Law or Voluntary Termination

(1) If this PPP Contract is terminated for (i) Contracting Authority Default inaccordance with Clause [insert], (ii) Material Adverse Government Actionin accordance with Clause [insert], (iii) Change in Law in accordance withClause [insert] or (iv) Voluntary Termination in accordance with Clause[insert],theContractingAuthorityshallpaythePrivatePartneranamountequaltothesumof:

(a) OutstandingSeniorDebt;plus

(b) redundancy payments for employees of the Private Partner that have beenor will be reasonably incurred by the Private Partner as a direct result ofterminationofthisPPPContract;plus

(c) anySub-ContractorBreakageCosts;plus

Delete(iii)and(iv)ifnotcontemplatedin

thePPPContract.

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(d) [select from Option (1)(a), (1)(b), or (1)(c) below depending on the required valuation method for the payments due to the equity party]

• Option 1(a):anamountwhich,whentakentogetherwithanyDistributionspaid, interest paid and principal repaid under the Subordinated FinanceDocumentsonorbeforetheTerminationDate,takingaccountoftheactualtimingofsuchpayments,resultsinarealIRRonthesharecapitalsubscribedand amounts advanced to the Private Partner under the SubordinatedFinanceDocumentsequaltotheBaseCaseEquityIRR;or

• Option 1(b):theaggregateamountforwhichthesharecapitalofthePrivatePartnerandthereceivablesarisingunderSubordinatedFinanceDocumentscouldhavebeensoldonanopenmarketbasis,undertheassumptionthatthere isnodefaultby theContractingAuthority, thatnoMaterialAdverseGovernmentActionorQualifyingChangeinLawhasoccurred,thatthesaleisonagoingconcernbasisandthatnorestrictionsexistonthetransferofthesharecapital;or

• Option 1(c): the NPV of forecast Distributions and interest to be paid andprincipaltoberepaidundertheSubordinatedFinanceDocumentsasattheTerminationDate,basedontheOriginalBaseCase,eachamountdiscountedbackattheBaseCaseEquityIRRfromthedateonwhichitisshowntobepayableintheOriginalBaseCasetotheTerminationDate].

Compensation on Private Partner Default Termination

(2) If the Contracting Authority terminates this PPP Contract for Private PartnerDefault inaccordancewithClause[ ], theContractingAuthorityshallpaytothePrivatePartneracompensationamountequalto[ ]%ofOutstandingSeniorDebt.

Compensation on Force Majeure Termination

(3) IfthisPPPContractisterminatedforForceMajeureinaccordancewithClause[],theContractingAuthorityshallpaythePrivatePartneranamountequaltothesumof:

(a) OutstandingSeniorDebt,ifany;plus

(b) InitialEquityandanyoutstandingprincipalundertheSubordinatedFinanceDocumentsasattheTerminationDate[lessanyDistributionsorsubordinateddebtinterestpaymentsalreadymade];plus

(c) redundancy payments for employees of the Private Partner that have beenor will be reasonably incurred by the Private Partner as a direct result ofterminationofthisPPPContract,plus

(d) anySub-ContractorBreakageCosts.

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REFINANCING5

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KEY .ASPECTS

5.1.1 The concept of refinancing

Refinancingmeanschangingorreplacingtheexistingtermsonwhichdebtobligationshavebeenincurred.Borrowersmayrefinanceexistingdebtobligationsforanumberofreasonsandinavarietyofways.

5.1.2 Why do PPP Contracts contain refinancing provisions?

Financial terms are agreed between the Lenders, Equity Investors and the PrivatePartner prior to the PPP Contract becoming effective and will take into accountmarketconditionsatthetime,aswellastheriskprofileoftheProjectandapplicablejurisdiction.The cost of financing the PPP Project will be passed directly through tothepricingofferedtotheContractingAuthorityunderthePPPContractor theratescharged to users. Given the long term nature of PPP Contracts, over time there willbechangesinmarketconditions,aswellasdevelopmentsintheProjectitself,whichwillaffectitsriskprofile,andthePrivatePartnermaywanttochangethetermsoforreplaceitsfinancingaccordingly.InsomejurisdictionsitmaynotevenbefeasibletoputinplacelongtermfinancingattheoutsetandrefinancingisthereforeanecessityforthePrivatePartneraftertheinitialfundingperiod.

Theresultofarefinancingmaybethat thePrivatePartner’sdebtcostsarereduced,resultingingreaterrevenueandinturnahigherequityreturn–thisistypicallycalled“refinancinggain”.ThePPPmarkethasincreasinglyacknowledgedthatitwouldnotbe fair for the Private Partner to enjoy the entire benefit of refinancing gain whereit is not entirely responsible for the availability of the improved financing terms.ThisisparticularlyimportantfromtheContractingAuthority’sperspectivegiventheuseofpublic funds topayforPPPProjects.Anychange infinancing termsmayalsoimpactotherprovisionsinthePPPContractthatreferencethefinancingterms,suchasterminationpaymentsforwhichtheContractingAuthoritymaybeliable.

Without specific provisions in the PPP Contract, the Contracting Authority will havelimitedornoability toshare inanyrefinancinggainreceivedby thePrivatePartnerandthepositionasregardsothercontractualterms(suchasterminationpayments)maybeunclear.Notallrefinancingsleadtogainsthatshouldbeshared,however,andrefinancingprovisionsalsotypicallyclarifythecircumstanceswhichareexempt.

5.1.3 Refinancing grounds

The circumstances in which a refinancing of the PPP Project may be sought by thePrivatePartneraredescribedbelowandthedifferinggroundsarelikelytonecessitatedifferenttreatmentunderthePPPContract.

Rescue Refinancing–InadversecircumstancesarefinancingmaybesoughttorescuethePPPProjectfromdefault.ThePrivatePartnermaybeinadistressedsituationrequiring

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an increase and/or a rescheduling of their debt repayment obligations. Generally, itwillbeintheContractingAuthority’sandthePrivatePartner’sinterestsforthisformofrefinancingtobeimplementedsothatserviceprovisionunderthePPPContractcancontinue and default termination consequences avoided.The Contracting Authoritywill want to ensure any changes to the financing terms do not adversely affect itscontractualpositionbutitshouldnotanticipateanyimmediatefinancialbenefit.

Mini perm refinancing –Inmarketswhereitisnotpossible(ordesirable)toobtainlongtermfinancing, thePrivatePartnermayput inplacewhat issometimesknownasa“miniperm”financing.Theloanwillhaveashorttenor(e.g.fiveorsevenyears),andthereisanincentiveonthePrivatePartneranditsShareholderstorefinancebecausetheloantermsmayprovidethattheLenderswillsweepallavailablecash(afterreserveaccountfunding)ifnorefinancinghasoccurredbytherelevantmaturitydate(andtheLendersmayrequiregraduallyincreasingcostsweeps(e.g.25%,50%,75%)intheyearspriortomaturity),or(inthecaseofa“hard”miniperm)thattherewillbeaneventofdefault44.ThemarketstandardpositioninAustralia,forexample,istoputinplacefivetoseven-yeardebtfunding,withassumedrefinancingseveryfiveyearsthoroughthelifeofthePPPProject.GiventhenatureofthisfinancingandthatreplacementwillbeanecessityenvisagedatthestartofthePPPContract,itwillbeinbothParties’intereststofacilitatearefinancingonacceptabletermsanditisunlikelytobedrivenbyortodeliveranysignificantadditionalfinancialbenefit.

Bridge to bond financing – Where it is envisaged that initial bank debt financingwill be replaced by bond finance, normally after completion of the construction ordevelopmentphase,thisisknownas‘bridgetobond’financing.Generally,thebridgefinancing will contain incentives to refinance, such as progressive increases to themarginandarelativelyshorttenor.See Section 9 Bond Financing.

Realising Value Refinancing–Inothercircumstances(whicharethefocusofthisSection 5), the effect of changed market conditions and PPP Project developments may bepositiveandthePrivatePartnermayseektoobtainmorefavourablefinancingtermstorealisemoreequityreturnfor itsShareholders.Suchtermsmaybeavailableforanumberofreasons,suchas:

• the market may have greater liquidity and the price of debt may have declined(e.g.afteraperiodoffinancialcrisisorwherenewlenderswanttoenterthePPPmarket);

• assignificantrisksareconsideredtoariseduringtheconstructionperiod,oncetheincome-generating asset is built and the PPP Project is successfully operational,theriskprofile is reducedand thecorrespondingriskof inability toservicedebtrepaymentobligationisperceivedtobelower;

• generalmarketconditionshaveimproved(e.g.thejurisdictionconcernedmayhaveestablished a good track record in successful PPP Projects and/or the regulatoryandpoliticalframeworkmaybeconsideredmorestable);and

• for“userpays”PPPProjects (see Section G, PPP Contracts in Context),demandmaybe stronger than anticipated and revenues therefore higher, resulting in anopportunitytoincreaseleverage.

44 “Hard”minipermfinancingstructuresarenotpermittedbyContractingAuthoritiesintheNetherlandsonthebasisthattheyeffectivelyintroducerefinancingrisk.

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It is this type of refinancing which is more likely to yield a financial benefit for theContracting Authority if the PPP Contract is correctly drafted and the ContractingAuthoritywillalsowanttoensureanychangestothedocumentationdonotadverselyaffectitscontractualposition.45


RefinancingprovisionscanbecomplexandwilldifferbetweenPPPprojects,accordingto the different financing structures used. Some PPP Contracts will contain detaileddrafting (particularly indevelopedmarkets),whereasothers includeamuchshorterprovision designed to bring the Parties together to discuss the implications of arefinancing.Ineithercase,keypointstobearinmindaresetoutbelow.

5.2.1 Defining “Refinancing”

Establishing a definition which captures all types of potential refinancing can bedifficult and the Contracting Authority should aim for a definition which minimizesthepotentialforcircumventionthroughsophisticatedstructurings.Therecommendedapproachistobeasgenericaspossiblebyreferencetotheseniorfinancedocuments,withacatch-allprovision. See Section 5.3, Sample Drafting 5, Required Definitions, definition of “Refinancing”.

Adefinitionof“ExemptRefinancing”issometimesrequestedbythePrivatePartnertoclarifythatcertaindealingsarenotintendedtobecaughtbytherelevantrefinancingprovisions.Again,theContractingAuthorityshouldcarefullyconsiderwhatmightbeincludedonacasebycasebasis.Forexample,inthecaseofaminipermfinancingandabridgetobondfinancing,ContractingAuthoritiesshouldrecognizethatrefinancingisvirtuallyagivensothePPPContractshouldenvisagethisoccurrence.

5.2.2 Refinancing gain

ThequestionfortheContractingAuthority iswhatqualifiesasrefinancinggainandwhether all refinancing gain should be shared. As with defining“Refinancing”, careneeds to be taken in drafting gain calculation and sharing provisions to minimizethe Private Partner’s ability to circumvent the provisions. It is increasingly common,particularlyindevelopedPPPmarkets,foraPrivatePartnertofactorinthebenefitofafuturerefinancingintoitsOriginalBaseCasesothatitcanofferamorecompetitiveprice to the Contracting Authority in its bid. In this instance, the Private PartnerwouldarguethattheContractingAuthorityisalreadybenefitingfromanypotentialrefinancinggainandshouldthereforenotbeentitledtoafurthershareofsuchgainwhen the refinancing actually happens. While this argument has some merit, theprecise basis of any refinancing envisaged by the Original Base Case would need tobeclearlyagreedupfronttolimittheriskofdisputes.See Section 5.3, Sample Drafting 5, Required Definitions, definition of “Refinancing Gain”.

Similarly,inarescueorminipermrefinancingtheoveralleffectmaynotleadtoanyincreaseinequityreturncomparedtotheBaseCaseEquityIRR.

45 It isalsopossibletoincludeaprovisionentitlingtheContractingAuthoritytorequestthePrivatePartnertoseektermsforapotentialrefinancingifitfeelsbetterfinancingtermsareavailable(seetheInfraAustraliaGuidelines).

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In all cases it is generally considered to be fair for the Contracting Authority onlyto share in gain over and above the Original Base Case. The rationale in a rescuerefinancing is that due to the distressed scenario, Lenders are unlikely to agree toanyrefinancingdebtbeingpaidtotheContractingAuthority.However,thismaynotalwaysbejustifiablewheretheContractingAuthorityhasconcernsthattheBaseCaseEquityIRRmayhavebeenartificiallyinflated(e.g.duetoweakcompetitionduringthebiddingprocess).


Inemergingmarkets,particularlyfor“userpays”PPPProjects(see Section G, PPP Contracts in Context),theremaybelimitedscopefortheContractingAuthoritytonegotiaterefinancinggainsharingifsuchgainisakeyincentiveforpotentialbidders.Thisdynamiciscurrentlyevident in the Philippines, for example, where refinancing provisions are not typicallyincludedinthePPPContract.

5.2.3 Right to consent

TheContractingAuthority’srighttoconsentisimportantasitiswhatwillbringthePrivatePartnertothenegotiatingtable.Asmentionedabove,ifaparticularrefinancingis already factored into, or is as contemplated by, the Original Base Case, then it isreasonable for Contracting Authority consent not to be required or to be subject tofewer constraints than other refinancings.46 However, its right to consent should beexercisedreasonably.TheContractingAuthorityshouldbearinmindthatarefinancingresultingingainislikelytobenefititfinanciallyandevenarescuerefinancingwillhelpsavethePPPProject.Nevertheless,theContractingAuthorityshouldonlyconsentifitisconfidentthattherefinancingwillnothaveanegativeimpactonthePPPProjectoronitsownliabilitieswithoutprovidingitwithsufficientcommensuratebenefit.Thiswillincludeassessinganyincreaseinanyterminationpaymentsforwhichitisliableasdescribedin Section 4, Termination Payments. See Section 5.3, Sample Drafting 5, Clause (3).

5.2.4 Calculating refinancing gain

A full understanding and sight of existing and proposed financing structures anddocumentationisneededfortheContractingAuthoritytobeinapositiontocalculateanyrefinancinggainandenforceitsrightseffectively.Expertlegalandfinancialadviceshouldbeobtained(tomatchtheadvicethePrivatePartnerislikelytobereceiving)toensuretheContractingAuthorityisnotatanydisadvantageinanalysingtheeffectofanyrefinancingproposal.ExternalexpensesincurredbytheContractingAuthoritywhenconsideringarefinancingproposalshouldbebornebythePrivatePartnerandiftherefinancingisimplementedtheyshouldbedeductedfromthetotalrefinancinggainamountpriortosharing. See Section 5.3, Sample Drafting 5, Clause (7).

46 InsomemarketsintheUnitedStates,rescuerefinancingsthatdonotresultinanincreaseinthePrivatePartner’soutstandingdebtaboveacertainpercentagethresholdmaybepermittedwithouttheconsentoftheContractingAuthority,asmayrefinancingswherethePrivatePartnerprovidessatisfactoryevidencethatitsaggregatedebtisnolessthanaspecifiedpercentageofthefairmarketvalueofthePPPContract.

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5.2.5 Share of refinancing gain

TheContractingAuthorityshouldconsiderwhatanappropriatesharingmechanismis.Equalsharingisoneoption,orstagedsharingdependingontheamountofthegainand/orhowitarises.Thebasicpremiseunder the InfraAustraliaPPPGuidelines isa50% sharing (as it is in the South Africa PPP Guidelines), but recognising that moredetailedarrangementsandgreaterproportionsmaybeappropriate.47See Section 5.3, Sample Drafting 5, Clause (4).

5.2.6 Method of payment

The Contracting Authority should typically have the right to choose the method ofpayment of its share of the refinancing gain and this will depend on the nature oftherefinancinganddiscussionsatthetime.OptionsincludetheContractingAuthoritybeingpaid(a) ina lumpsumupontherefinancingtotheextentthePrivatePartnerreceivessuchamountsatthetimeoftherefinancing,(b)inalumpsumorperiodicallyatthetimeofreceiptoftherelevantpayments,orthereceiptoftheprojectedbenefit(inthecaseofthe“userpays”model),(c)viaareducedavailabilitypayment(inthecaseofthe“governmentpays”model)or(d)byacombinationoftheabove.See Section 5.3, Sample Drafting 5, Clause (6).

47 TheUKPF2Guidancedrawadistinctionbetweengainsarisingfromareductioninmarginundertheseniorfinancedocuments (where the Contracting Authority expects 90% of the gain) and other gains (where the ContractingAuthoritysharesonastagedbasisbetween50–70%accordingtothesizeofthegain).Astagedsharingpercentageof50–70%hasalsobecomethenormintheNetherlands.

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TheprincipleofsharingrefinancinggainhasdevelopedovertimeoutoftheexperienceofearlyPPPmarketssuchastheUK.ForadetailedapproachseetheUKPF2GuidanceandtheInfraAustraliaPPPGuidelines.SampleDrafting5isbroadlybasedonconceptstheydefine.


"Base Case Equity IRR" meanstheEquityIRRsetoutintheOriginalBaseCase."Distribution" meanswhetherincashorinkind,any:

(a) dividendorotherdistributioninrespectofsharecapital;

(b) reduction of capital, redemption or purchase of shares or anyotherreorganizationorvariationtosharecapital;

(c) paymentsunderanySubordinatedFinanceDocuments;and

(d) thereceiptofanypayment,contractualarrangement,transferofassetandotherbenefitwhichisnotreceivedintheordinarycourseofbusinessandonreasonablecommercialterms.

"Equity IRR" means the projected blended internal rate of return to theShareholdersandanyoftheiraffiliatesovertheentirePPPContractperiod, having regard to Distributions made and projected to bemade.

"Exempt Refinancing" (a) anyRefinancingfullycontemplatedintheOriginalBaseCase;

(b) achangeintaxationorinaccountingtreatment;

(c) the exercise of rights, waivers, consents and similar actionswhich relate to day to day administrative and supervisorymatters,andwhichareinrespectof:

(i) breachofrepresentationsandwarrantiesorundertakings;

(ii) movementofmoniesbetweentheprojectaccountsinaccordancewiththetermsoftheSeniorFinanceDocuments;

(iii) lateornon-provisionofinformation,consentsorlicenses;

(iv) approvalofrevisedtechnicalandeconomicassumptionsinrelationtotheFinancialModel;

(v) failurebythePrivatePartnertoobtainanyconsentbystatutorybodiesrequiredbytheSeniorFinanceDocuments;or

(vi) votingbytheLendersandthevotingarrangementsbetweentheLendersinrespectofthelevelsofapprovalrequiredbythemundertheSeniorFinanceDocuments;

(d) anysaleofsharesinthePrivatePartnerbytheShareholders.

(e) [anyordinarymarketdealingsinbonds.]"Financial Model" meansthefinancialmodel[provided by the Private Partner as part of

its bid/agreed between the Parties prior the date of the PPP Contract]andasamendedfromtimetotime.

ThePrivatePartnermaywishtoextend

thisdefinitiontoclarifythat

changestocertaindocumentsorothertypesof

circumstancewillbeexempt(e.g.amini

permrefinancingscenario).This

shouldbeconsideredona

case-by-casebasistoreflecttheparticularcircumstancesofthe

PPPProject.

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"Net Present Value" meanstheaggregateofthediscountedvalues,calculatedasoftheestimateddateoftheRefinancing,ofeachoftherelevantprojectedDistributions, in each case discounted using the Base Case EquityIRR.

"Pre-Refinancing Equity IRR"

means the Equity IRR calculated immediately prior to anyRefinancing, but without taking into account the effect of suchRefinancingandusingtheFinancialModelasupdated(includingastotheperformanceofthePPPProject).

"Qualifying Refinancing" means any Refinancing that will give rise to a Refinancing GaingreaterthanzerothatisnotanExemptRefinancing.

"Refinancing" means:(a) anyamendment,variation,novation,supplementorreplacement

ofanySeniorFinanceDocuments;

(b) thegrantofanywaiverorconsent,ortheexerciseofanysimilarrightunderanySeniorFinanceDocuments;

(c) thecreationoforgrantingofanyformofbenefitorinterestinthe Senior Finance Documents, or the creation or granting ofanyrightsorinterestinanycontracts,revenuesorassetsofthePrivatePartnerwhetherbywayofsecurityorotherwise;and

(d) anyotherarrangementhavingbeenputinplacebyanypersonwhichhasaneffectsimilartoanyof(a)to(c)aboveorwhichhas the effect of limiting the Private Partner’s ability to carryoutanyof(a)to(c)above.

"Refinancing Gain" meansapositiveamountequalto(A-B)-C,where:

A=theNetPresentValueofDistributions,asprojectedimmediatelypriortotheRefinancing(takingintoaccounttheeffectoftheRefinancingandusingtheFinancialModelasupdated(includingastotheactualpastperformanceofthePPPProject)soastobecurrentimmediatelypriortotheRefinancing)tobemadetoeachShareholderoraffiliateovertheremainingtermofthePPPContractfollowingtheRefinancing;

B=theNetPresentValueofDistributions,asprojectedimmediatelypriortotheRefinancing(butwithouttakingintoaccounttheeffectoftheRefinancingandusingtheFinancialModelasupdated(includingas to the actual past performance of the PPP Project) so as to becurrent immediately prior to the Refinancing) to be made to eachShareholderoraffiliateovertheremainingtermofthisPPPContractfollowingtheRefinancing;and

C=anyadjustmentrequiredtoraisethePre-RefinancingEquityIRRtotheBaseCaseEquityIRR.

"Subordinated Finance Documents"

means any agreements under which the Private Partner’sShareholders make subordinated debt available to the PrivatePartner.

Delete“C”iftherearereasonsnot

toagreethis-seeSection5.2.2.

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Refinancing

(1) The Private Partner shall promptly provide the Contracting Authority with fulldetails in relation to any contemplated Refinancing, which shall include theproposed changes to the Financial Model, a justification of the assumptionson which it is based, the proposed contractual documentation and any otherinformationthattheContractingAuthoritymayreasonablyrequestinrelationtothatRefinancing.

(2) TheContractingAuthorityshall,atalltime,haveunrestrictedrightstoaudittheFinancialModelused(orproposedtobeused)inrelationtoaRefinancing.

(3) ThePrivatePartnershallobtaintheContractingAuthority’spriorwrittenconsentinrelationtoanyQualifyingRefinancing.

(4) TheContractingAuthorityshallbeentitledtoreceivea[fiftypercent(50%)]shareof any Refinancing Gain in a Qualifying Refinancing. [Adapt in accordance with agreed sharing mechanism].

(5) [The Parties shall act in good faith in relation to any Refinancing or proposed Refinancing (including the manner of calculation of the Refinancing Gain and of payment of the Contracting Authority’s share of the Refinancing Gain in a Qualifying Refinancing)].

(6) TheContractingAuthorityshallhavetherighttoelecttoreceiveitsshareofanyRefinancingGaininaQualifyingRefinancingas:

(a) alump-sumpaymentwhichamountshallnotexceedtherelevantDistributionmadeonorabout thedateof theRefinancingandshallbedueonthedateimmediatelyafterthedateoftherelevantDistribution;

(b) [an increase of any fee payable by the Private Partner to the Contracting Authority over the remaining PPP Contract period / or a reduction of the availability payment to be paid by the Contracting Authority to the Private Partner over the remaining PPP Contract period;or

(c) a combination of both].

(7) ThePrivatePartnershallpay,onbehalfoftheContractingAuthority,allreasonablecosts of external advisors appointed by the Contracting Authority in relation toaRefinancingorpotential refinancingandthecalculationofaRefinancingGain[drafting also to reflect deduction of costs from any Refinancing Gain prior to calculating the amount to be shared if not already factored into the Refinancing Gain formula].

TheContractingAuthorityshould

approvetheseagreementsasa

conditionprecedenttotheentryintoeffectofthePPP

Contractandanysubsequent

amendmentand/oradditional

documentwhichwouldfallunderthis

definition.

Thiswillnotberequiredinmostcivil

lawgovernedPPPContractsasgood

faithobligationsareimplied.

Draftingtobeadjustedtofitthe

paymentstructure.SeealsoSection

5.2.6.

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LENDERS’ STEP-IN RIGHTS6

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6.1.1 The concept of step-in

Inacontractualcontext,“stepin”meanstheabilityofathirdpartywhoisnotpartytotherelevantcontracttostepintotheshoesofadefaultingpartyunderthecontract.Thisisusuallyforalimitedtimeframeandtheaimistogivethepartysteppingintheopportunitytorectifythedefaultandpreventterminationofthecontract.

6.1.2 Why do Lenders have step in rights in respect of PPP Contracts?

MostPPPProjectsarefinancedona“limitedrecourse”basis(see Section C, PPP Contracts in Context)underwhichthirdpartylendersloanfundstothePrivatePartnerbasedonananalysisoftheprojectedcashflowsgeneratedunderthePPPContract.

AsthePPPContractisusuallythesolesourceofrevenue(orbasisforrevenueinthecaseof“userpay”PPPContracts)fordebtrepayment,theprospectoftheContractingAuthorityterminatingforPrivatePartnerdefaultisofsignificantconcernforLenders,particularly if the termination occurs before the asset has been completed and theservicecommenced.ThisisbecauseevenwhereaterminationpaymentwillbemadebytheContractingAuthority,theamountmaynotcovertheentiredebtamountandsoLendersareincentivisedtogetthePPPContractbackontracksothatdebtcanberepaidasscheduledandinfull.

OnewayLendersseektoprotectthemselvesagainstterminationofthePPPContractfollowingPrivatePartnerdefaultistonegotiatestepinrights.Whiletheirvalidityandenforceability have rarely (if ever) been properly tested in court in any jurisdiction,the formal existence of step in rights gives Lenders comfort in terms of bankabilityandprovidesaframeworkwithinwhich thePartiescancome together tonegotiatesolutionsinadefault/terminationscenario,subjecttotheimpactofmandatorylaw(forexamplewith regard to receivership,bankruptcyandpublicprocurement rules).StepinrightsaretypicallyenshrinedinanagreementbetweentheLendersandtheContracting Authority, often called a“Direct Agreement” or, in some jurisdictions, a“ConsentAgreement.”TheDirectAgreementwillentitletheLenderstobealertedtoapotentialterminationandtotakestepstopreventitbyrectifyingtheproblem.FromtheContractingAuthority’sperspective, its interest incompleting the infrastructureand ensuring adequate service provision and the Lenders’ interests in achieving thesameoutcomearealigned.DirectAgreementsenableLenderstoengagedirectlytotrytosavethePPPContractbeforetheContractingAuthorityhastodealwithterminationanditsconsequences.

In a PPP context, direct agreements are executed not only in relation to the PPPContract but also in relation to the Project Agreements. In the latter case, both theLendersandtheContractingAuthoritymayhaveseparatedirectagreementswiththePrivate Partner’s Project Agreement counterparties (i.e. its main sub-contractors) toensure that the counterparties grant them similar opportunities to rectify defaults

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by the Private Partner under the Project Agreements before the counterparties mayterminateandalsotoensurethecounterparties’continuedperformance.48ThisSection 6focusesonLenders’stepinrightsinrespectofthePPPContract.


6.2.1 Authority to execute Direct Agreement

In certain jurisdictions, there may be mandatory laws preventing the granting orenforcementofLenderstep-inrights(inparticular,underpublicpolicyrulesapplicableto insolvency procedures and/or public procurement regulations applicable toContracting Authorities that have not been tailored to PPP Projects). Well-draftedPPPlawstypicallyauthoriseentrybyaContractingAuthorityintobothPPPContractsandtheDirectAgreementsthatusuallyaccompanythem.Accordingly,thisshouldbecarefullyanalysedandaddressedbyContractingAuthoritiesbeforecommencingtheprocurementofitsPPPContract.

6.2.2 Form of Direct Agreement

Somejurisdictionshavedevelopedstandardtemplateprovisionswhichmustbeusedby Contracting Authorities and Lenders (e.g. the Dutch Model, the South Africa PPPGuidelines and the UK PF2 Guidance).The Direct Agreement is usually executed onthesamedateasthePPPContract.Insomeinstances,itmaybesignedatalaterdateonfinancialclose(asisthecaseintheNetherlandsortheUnitedStates).Wherethisisthecase,theDirectAgreementwillhavebeenvirtuallyfinalisedatthetimethePPPContractwassignedandsuchagreedformwillbeattachedasanexhibittothePPPContract.Lenderstypicallywill requireanexecutedDirectAgreementasaconditionprecedenttodrawdownundertheSeniorFinanceDocuments.FromtheContractingAuthority’s perspective, it is preferable to have agreed on the form of the DirectAgreementinadvanceatthetimeofbidandundercompetitivetension,sothatitisnotintroducedorre-negotiatedpostawardofthePPPContract.

6.2.3 Scope of Direct Agreement/governing law

The Contracting Authority should recognize that the Direct Agreement may be usedas a vehicle for the Lenders to alter, clarify or add provisions which go beyond step-inarrangements.Whileitmayinlimitedcircumstancesbehelpfultoincludeotherprovisions,theContractingAuthorityshouldbewarethatthisdoesnotunderminetheunderlyingrisktransferpositionagreedinthePPPContractunlessthisisspecificallyagreed.

GiventhattheoperationoftheDirectAgreementcanaffectthePrivatePartner’srightsand obligations under the PPP Contract as well as the Contracting Authority’s, it isrecommendedthatthePrivatePartnershouldalsobepartytotheDirectAgreementtoacknowledgeandconsenttoitsterms.ItisalsoadvisableforthegoverninglawoftheDirectAgreementandthePPPContracttobeconsistent.

48 Intermsoforderofexercise,theLenders’rightsundertheirDirectAgreementwithasub-contractorwilltypicallytakepriorityovertheContractingAuthority’srightsunderitsDirectAgreementwiththesamesub-contractor.

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6.2.4 Main issues

Timing and duration of step-in–WhentheContractingAuthorityservesaterminationnoticeonthePrivatePartnerittypicallyagreestoservethesameontheLenderswhothenhaveacertainperiodtodecidewhetherornottostepin.Lenderswillalsorequestthis right when they have called a default under their financing agreements andacceleratedtheirdebt(inthiscircumstancethePrivatePartnerwillhavetobereplacedifthePPPContractistocontinue).Thestep-inperiodisusuallyagreedtobeareasonablelengthoftimefortheLenderstotrytorectifytheproblemorfindanewPrivatePartnerandwillendwhen theagreedstep-inperiodexpires, theLendersformallystepout,anewPrivatePartnerisappointedorterminationoccursduetonewdefaultevents.TheContractingAuthorityand itsadvisersshouldensure that the timeperiodsunder therelevantagreementsarecorrectlyalignedsothatthewholeprocesscanworkeffectively.

Assumption of liabilities – The Contracting Authority should consider the extent towhichitwillrequiretheLenderstoassumeanyliabilitieswhichthePrivatePartnerhasalreadyincurredorwillincurinreturnfortheirstep-inright.

It isgenerallyacceptedmarketpractice thatLendersarerequiredtopayanyknownliabilities outstanding at step-in, but the position as regards ongoing liabilities canvary.Where Lenders are required to agree to meet future liabilities in order to stepin, they will want a capped amount so that they can quantify their exposure. Thisapproachisseeninsomejurisdictions(particularly inearlierPPPProjects intheUK)buttherehasbeensomemovementawayfromthisrequirementinrecentyears(e.g.because the termination amount may in any event take account of liabilities owedto the Contracting Authority and if, conversely, the PPP Contract is not terminated,such liabilities will still be payable). One approach is that the Contracting AuthoritycannotifytheLendersofsubsequentliabilitiesandiftheLenderschoosenottomeetthemthentheContractingAuthoritycanproceedtoterminatethePPPContract(andtheliabilitieswillagainbetakenintoaccountintheterminationpayment).

Rectification rights – It is in the Contracting Authority’s interests for breaches to berectifiedbutitalsoneedstoprotectitselfagainstfailurestoremedyandnewbreachesbyensuringitstillhasarighttoterminateinrespectofthesenewfailuresthatariseduringthestep-inperiod.

Other protections–TheContractingAuthoritymaywanttotrytoincludecertainprovisionswhich restrict the Lenders’ exercise of certain rights under the financing documents(e.g.inrelationtosetoff)andtoregulatepriorityofsecurityenforcementbetweentheContractingAuthorityandtheLenders(thisisthecaseforexample,inAustralia).

6 .3 . .SUMMARY .OF .MAIN .PROVISIONS

A Direct Agreement should typically include the following main provisions (or theirequivalentunderthelawsoftherelevantjurisdiction):

• mutual obligations on the parties to notify each other, respectively, of (a) aPrivatePartnerdefaultunderthePPPContractwhichcouldallowtheContractingAuthoritytoterminatethePPPContractand(b)keyeventsundertheseniorfinancedocumentswhichcouldimpacttheContractingAuthority(e.g.suchasaneventofdefaultoraccelerationofdebt);

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• astandstillperiod,pursuanttowhichtheContractingAuthoritywillundertaketonotifytheLendersofitsintentiontoterminatethePPPContract,andwillcommitnottoterminatethePPPContractforagivenperiodoftime(nortoterminateanyrelatedagreements);

• appointmentoftheLenders’nomineeto“stepin”andbecomejointlyliablewiththePrivatePartnertoperformthePPPContractandcureanybreacheswhichgaverisetotheContractingAuthority’srighttoterminate(andto“stepout”);

• consent to the assignment of the PPP Contract and related receivables to theLenders, as well as consent to assignments to insurers and guarantors uponpaymentofclaims;and

• Lenders’righttonovatethePrivatePartner’srightsandobligationsunderthePPPContracttoasubstituteprivatepartneroftheirchoice(subjecttotheconsentoftheContractingAuthorityand/ortoanyreasonableandobjectivecriteria)andtheContractingAuthority’sobligationtoenterintoanewdirectagreementwiththeLenderstothenewPrivatePartneronsubstantiallyequivalentterms.

6 .4 . .SAMPLE .DRAFTING

Asindicatedabove,thetermsoftheDirectAgreementarenormallynotoutlinedinthePPPContract(althoughtheagreedformmaybeappendedtothePPPContract)whichiswhythisGuidancedoesnotincludeproposeddrafting.49

49 ForfurtherinformationandsampledraftingfromamoreestablishedPPPmarket,pleaseseetheSouthAfricaPPPGuidelinesandtheUKPF2Guidance.

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CONFIDENTIALITY AND TRANSPARENCY7

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7.1.1 The concepts of confidentiality and transparency

Mostcommercialcontractscontainprovisionsbywhichthepartiesagreetoprotecttheconfidentialityofthecontracttermsaswellaseachother’scommerciallysensitiveinformation(suchaspricingandintellectualproperty)receivedinconnectionwiththecontract.Whenoneofthepartiesisapublicsectorentitytheinterestofthepartiesinkeepingcertain informationconfidentialneeds tobeweighedagainst thenecessityfortransparencyanddisclosure.Whilebothprivateandpublicsectorpartiesmaywanttokeepcertaininformationconfidentialthepromotionoftransparencyanddisclosurehasincreasinglybeenacknowledgedbyinternational50andnationallawandbecomeakeyconsiderationforgovernments,non-governmentalorganizationsandinternationalorganizationsintheiractivities.Theunderlyingobjectivescanbemultiple, includingreducing the level of corruption (as well as complaints of corruption, secrecy orunfairness in procurement processes), reassuring the general public in regard toprobity,servicestandardsandcostsofpubliccontracts,encouragingcompetitionandfacilitatingabetterinformedmarket.

7.1.2 Why do PPP Contracts contain confidentiality and transparency provisions?

Transparency and disclosure is a high priority for PPP Projects as the ContractingAuthority is a public sector entity or agency. It has become increasingly commonfor Contracting Authorities51 to require a presumption in favor of transparency anddisclosureinPPPContractstoensurethatinformationonPPPProjects,PPPContractsandrelateddocumentscanbesharedbythem,tothefullestextentpossible,withthepublicatlarge.Multiplefactorshaveinfluencedthisdevelopment.ThemaindriversinthePPPcontextaretoreducetheriskofcorruption,increaseprivatesectorinvolvementin infrastructure investment, increase public confidence and awareness and achievevalueformoney.Aswithanyinfrastructureproject,PPPProjectsmayalsoinvolvesocialand environmental, public interest and human rights considerations, and these areadditionalfactorsinfavourofenhancedtransparencyanddisclosure.

Givencommercialsensitivitiesaswellaspublicinterest-relatedlimitations,however,transparency and disclosure obligations in a PPP Contract are typically subject toa number of exceptions in order to protect commercially or otherwise sensitiveinformationrelatingtotheParties,thePPPContractandthePPPProject.Inmostcasesit isthePrivatePartnerwhohasthemostinformationtoprotectasitwillnotwantits competitors to gain access to information which could give them a commercialadvantage. However, the Contracting Authority may also wish to keep certain

50 Therighttofreedomofinformationise.g.enshrinedinArticle19oftheInternationalCovenantonCivilandPoliticalRightsasinterpretedinparas18–19oftheGeneralCommentno.34oftheHumanRightsCommittee,CCPR/C/GC/34ofSept.12,2011.

51 SeeAFrameworkforDisclosureinPublic-PrivatePartnerships,WorldBank2016.See link in Appendix, Additional PPP Resources.

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informationconfidential, forexample if thePPPContract is in thedefensesector. Insome highly sensitive projects, the Contracting Authority may require the PrivatePartner and other parties and individuals directly involved in delivering the serviceto sign a written undertaking to be bound by national security legislation. In somejurisdictions(e.g.intheEU),therearealsodataprotectionobligationswhichapplytothePartiesandwhicharelikelytobeaddressedinaspecificclause.


Whilethematurityofajurisdiction’sPPPmarketmaybeafactorintheleveloftransparencyand disclosure sought under PPP Contracts, theWorld Bank’s Framework for Disclosurein Public-Private Partnerships 2016 (‘WB Disclosure Framework 2016”) also suggeststhat practice relating to PPP disclosure may have developed more rapidly in emergingmarkets,perhapsduetothepressingneedfornewinfrastructure.AnadditionalrelevantfactortosuchdevelopmentmaybeifthePPPContracthastosatisfythedisclosurepolicyrequirements of other relevant bodies (such as multilateral agencies) in order for thosebodiestosupportthePPPProject.


7.2.1 Duty of disclosure

Forpublicpolicyreasons,manyjurisdictionshavepolicies,lawsorregulationsimposingdisclosure obligations on Contracting Authorities and/or ensuring the public haveaccess to public procurement information. Mandated proactive disclosure can eitherbe incorporated into the country’s freedom of information (FOI) legislation52, PPPpolicies, lawsandregulations53,procurementlegislation,publicfinancialmanagement(PFM) legislation54, sector-specific legislation as well as legislation relating to budgettransparency. Some jurisdictions have even developed standard clauses related totransparencyandconfidentialityinPPPContracts.55 Acomprehensiveoverviewofexistingframeworks,goodpracticecasesandjurisdictionalstudiesisgivenbytheWBDisclosureFramework 2016 and the companion jurisdictional and case study volumes56. Clausesdealing with transparency, disclosure and confidentiality should always be draftedfollowing an analysis of the legal and policy framework, and it is for the ContractingAuthoritytodecidewhethercontractualobligationsshouldgobeyondwhat is legallyrequired.Itisusualtoincludespecificreferencetoanysuchlawsandregulations.

As mentioned above, there may also be international financial institutions andmultilateralagenciessupportingthePPPProjectwhich,asaconditionoftheirsupport,

52 Forexample,Chile’sAccesstoPublicInformationLaw(2008),India/Karnataka’sRighttoInformationAct(2005)andNewSouthWales’GovernmentInformation(PublicAccess)Act(2009).

53 Forexample,Kenya’sPPPAct(2013);Brazil,MinasGeraisPPPLaw(2003),IndiaDraftPPPPolicy(2012),UKPF2:fordetailsandfurtherinformationseeTable3PPPLegislationandTransparencyElementsin:WBDisclosureFramework2016.See link in Appendix, Additional PPP Resources.

54 For details seeTable 3 PPP Legislation andTransparency Elements in:WB Disclosure Framework 2016. See link in Appendix, Additional PPP Resources.

55 ExampleswithshortsummariesareprovidedinTable11oftheWBDisclosureFramework2016.See link in Appendix, Additional PPP Resources.

56 Disclosure in Public-Private Partnerships: Jurisdictional Studies,World Bank 2016 and Disclosure in Public-PrivatePartnerships:GoodPracticeCases,WorldBank2016.See link in Appendix, Additional PPP Resources.

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requireContractingAuthoritiestocomplywiththeirownpoliciesontransparency.Theinformation required to be disclosed under such policies does not, however, usuallyincludedisclosureofcommerciallysensitiveorproprietaryinformation.

7.2.2 Scope of the transparency and disclosure undertaking

AdisclosureandtransparencyprovisiontypicallydealswithhowallannouncementsrelatingtothePPPContractandthePPPProjectaretobemanaged.TheContractingAuthority will want to control how all information relating to the PPP Project ispubliclycommunicatedandwillrequirepriorapprovalofanymediaannouncementsandcommunications.See Section 7.3, Sample Drafting 7, Clauses (1) and (2).

Somejurisdictions(forexample,Belgium)maynotaddresspubliccommunicationsinthewayoutlinedinSection 7.3, Sample Drafting 7andmaysimplytreattheinformationasconfidentialandrequiretheContractingAuthority’spriorconsenttopressreleasesandotherpublicannouncementsbythePrivatePartner.

Injurisdictionswithdisclosureframeworksithasalsobecomebestpracticetorequirethepostingofimportantprojectandcontractinformationinthepublicdomain.TheContractingAuthoritymaythereforealsowanttoensurethatithastherightunderthe PPP Contract to make public the terms of the PPP Contract as well as relatedinformation(subjecttoapplicableconfidentialityrestrictions)byitspreferredmeans.Thismayincludepublishingontheinternet. ThelevelofinformationavailableforittodiscloseregardingtheprogressofthePPPProjectwillbedependentuponthePrivatePartner’scompliancewithreportingprovisionselsewhere in thePPPContractwhichobligethePrivatePartnertodisclosecertaininformation(suchasperformancedata)totheContractingAuthority. See Section 7.3, Sample Drafting 7, Clauses (3)-(5).

While some Contracting Authorities may not specifically be required to publish thePPP Contract by legislation, in both common and civil law jurisdictions the publicareincreasinglyusingFOIlegislationtogaininsightintothetermsofPPPContracts.Specific provision can be made in the PPP Contract in this regard although someContractingAuthoritiesuse lessextensiveclauses thanSection 7.3, Sample Drafting 7,and,forexample,mayrelyonthecarveoutunderSection 7.3, Sample Drafting 7, Clause (9)(d) so far as it relates to responding to requests under freedom of informationlegislationandotherstatutorydisclosureobligations.

7.2.3 Scope of the confidentiality undertaking

Theneedfortransparencyanddisclosureshouldbebalancedagainstthelegitimateinterests of the Private Partner and the Contracting Authority in keeping certaininformationrelatedtoaPPPProjectconfidential.

In the context of a PPP Project, confidential information is typically information thedisclosureofwhichwouldbelikelytoprejudiceaparty’scommercialinterests.Thiswillinclude information contained in the PPP Contract terms or supporting documents,such as trade secrets, commercially sensitive intellectual property rights and know-how and personal data. Key financial information, such as pricing elements andmethodologyandthePrivatePartner’sfinancialmodel,includingdetailsofthecostsof financing through debt and equity and other aspects, are also typically treatedas confidential information. See Section 7.3, Sample Drafting 7, Clause (6). From the

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ContractingAuthority’sperspective,confidentialinformationwillincludeinformationwhich it is not in the public or national interest to disclose (e.g. defense, nationalsecurityandcustodialmatters).

ConfidentialinformationinthecontextofaPPPProjectshouldbetheexceptionratherthan the rule and should be justified by reference to principles of confidentiality inapplicable underlying transparency and disclosure policies and legislation. Concernsrelating to particular information should be addressed specifically in the drafting.AnydisclosureofsuchinformationshouldbeclearlyjustifiedandmadeinaccordancewiththetermsoftheconfidentialityprovisionsinthePPPContract.Certaincategoriesof information are typically excluded from confidentiality undertakings, such asinformationalreadyinthepublicdomainorreceivedlegitimatelyfromanothersource.Confidentiality undertakings also do not usually apply where a Party is obliged todiscloseinformation,forexampleaspartofalegal,regulatoryorjudicialprocess.

7.2.4 Approach

Section 7.3, Sample Drafting 7, which is based on the UK PF2 Guidance model, can beviewed as representing a good balance between protecting the Private Partner’scommercially sensitive information and complying with the Contracting Authority’slegal obligations (and policy aspirations) as regards greater public transparency AsimilarapproachisfollowedintheInfraAustraliaPPPGuidelinesandtheSouthAfricaPPPGuidelines.


WhiletheapproachtodraftingtakeninthisGuidanceisrepresentativeofanestablishedmarket, it would also be appropriate for emerging market PPP Contracts, particularly injurisdictionswheregovernmentsmaywishtoimplementtransparencymeasuresduringthe lifeof thePPPContract (orhavealreadydoneso).The termswillalsobefamiliar tointernationalprivatesectorparties.

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Public Relations and Publicity

(1) The Private Partner shall not by its directors, officers, employees or agents, andshallprocurethatitssub-contractorsshallnot,communicatewithrepresentativesof the press, television, radio or other communications media on any matterconcerningthePPPContractwithoutthepriorwrittenapprovaloftheContractingAuthority.

(2) ThePrivatePartnermaynotrepresenttheviewsoftheContractingAuthorityonanymatter,orusethenameoftheContractingAuthorityinanywrittenmaterialprovided to third parties, without the prior written consent of the ContractingAuthority.

Publication of the PPP Contract in the public domain

(3) The Parties agree that the provisions of this PPP Contract [and insert any other relevant documents defined as the Project Agreements]shall,subjecttoClause(7)below,notbetreatedasConfidentialInformationandmaybedisclosedwithoutrestrictionandthePrivatePartneracknowledgesthattheContractingAuthority,subjecttoClause(7)below,isentitledto:

(a) publishthisPPPContract[and some of the Project Agreements]onawebsite;and

(b) publish (on the internet or otherwise) a summary of the PPP Contract [and the Project Agreements and any associated transaction document] whichshallinclude(i)thetermsandconditionsofthePPPContract[and the Project Agreements and any associated transaction document]and(ii)anydocumentor information arising out of or connected to the PPP Contract [and the Project Agreements and any associated transaction document],includingperformanceofthePPPContract[and the Project Agreements and any associated transaction document].

(4) ThePartiesagreethatBaseCaseEquityIRRinformationshallnotbetreatedasConfidentialInformationandthePrivatePartneracknowledgesthattheContractingAuthorityintendstopublishsuchinformationonawebsite.

(5) ThePartiesagreethat information inrespectofanydirector indirectchange inownership which has actually taken place shall not be treated as ConfidentialInformation.

Confidentiality

(6) ForpurposesofthisPPPContract,Confidential Informationmeans:

(a) information (however it is conveyed or on whatever media it is stored) thedisclosure of which would, or would be likely to, prejudice the commercialinterests of any person, trade secrets, commercially sensitive intellectualpropertyrightsandknow-howofeitherParty,includingallpersonaldataandsensitivepersonaldata;and

SeeSection7.2.2regardingthe

effectivenessoflimb(ii).

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(b) thesub-setofConfidentialInformationlistedinColumn1ofPartI-CommerciallySensitive Contractual Provisions and Column 1 of Part II - CommerciallySensitiveMaterialofSchedule[insert reference to the Commercially Sensitive Information Schedule]ineachcasefortheperiodspecifiedinColumn2ofPartsIandIIofsuchSchedule(“Commercially Sensitive Information”).

(7) Clause(3)aboveshallnotapplytoConfidentialInformationwhichshall,subjecttoClause(9)below,bekeptconfidentialfortheperiodsspecifiedinSchedule[insert reference to the Commercially Sensitive Information Schedule].

(8) ThePartiesshallkeepconfidentialallConfidentialInformationreceivedbyonePartyfromtheotherPartyrelatingtothisPPPContract[and any Project Agreements]orthePPPProjectandshalluseallreasonableendeavorstopreventtheiremployeesand agents from making any disclosure to any person of any such ConfidentialInformation.

(9) Clauses(7)and(8)aboveshallnotapplyto:

(a) any disclosure of information that is reasonably required by any personengaged in theperformanceof theirobligationsunder thePPPContract fortheperformanceofthoseobligations;

(b) any matter which a Party can demonstrate is already, or becomes, generallyavailableandinthepublicdomainotherwisethanasaresultofabreachofthisClause[Confidentiality];

(c) any disclosure to enable a determination to be made under Clause [insert reference to Dispute Resolution clause]orinconnectionwithadisputebetweenthePrivatePartnerandanyofitssub-contractors;

(d) any disclosure which is required pursuant to [insert reference to legislation containing public disclosure obligations] aswellas anyotherstatutory,legal(includinganyorderofacourtofcompetentjurisdiction)orParliamentaryobligationplaceduponthepartymakingthedisclosureortherulesofanystockexchangeorgovernmentalorregulatoryauthorityconcerned;

(e) anydisclosureofinformationwhichisalreadylawfullyinthepossessionofthereceivingParty,priortoitsdisclosurebythedisclosingParty;

(f) anyprovisionofinformationto:

(i) theParties’ownprofessionaladvisersorinsuranceadvisers;and/or

(ii) the Lenders or the Lenders’ professional advisers or insurance advisersor, where it is proposed that a person should or may provide funds(whetherdirectlyor indirectlyandwhetherby loan,equityparticipationorotherwise)tothePrivatePartnertoenableittocarryoutitsobligationsunderthePPPContract,ormaywishtoacquiresharesinthePrivatePartnerinaccordancewiththeprovisionsof thisPPPContract to thatpersonortheir respective professional advisers but only to the extent reasonablynecessarytoenableadecisiontobetakenontheproposal;and/or

(iii) internationalorbilateralfinancialinstitutionsinvolvedinthePPPProjectasLenders,politicalriskinsurersorguarantors.

Considerationshouldalsobe

giventohavingageneralprovisionforthedisclosure

ofinformationthatis‘requiredinthe

publicinterest’.SeealsoClause(9)(j)(ii).

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(iv) any rating agency which may be engaged to provide a rating or ratingassessmentinrelationtoanySeniorDebt.

(g) any disclosure by the Contracting Authority of information relating to thedesign,construction,operationandmaintenanceofthePPPProjectandsuchotherinformationasmaybereasonablyrequiredforthepurposeofconductingaduediligenceexercise,toanyproposednewprivatepartner,itsadvisersandLenders,shouldtheContractingAuthoritydecidetoretenderthePPPContractorundertakeanymarkettesting;

(h) anyregistrationorrecordingoftherequiredpermitsandpropertyregistrationrequired;

(i) any disclosure of information by the Contracting Authority to any otherrelevant authority or their respective advisers or to any person engaged inprovidingservicestotheContractingAuthorityforanypurposerelatedtoorancillarytothePPPContract;or

( j) anydisclosureforthepurposeof:

(i) theexaminationandcertificationof theContractingAuthority’sorthePrivatePartner’saccounts;

(ii) any examination pursuant to [insert reference to any auditing obligations for public contracts] of the economy, efficiency andeffectiveness with which the Contracting Authority has used itsresources;

(iii) complying with a proper request from either Party’s insuranceadviser,orinsureronplacingorrenewinganyinsurancepolicies;or

(iv) (without prejudice to the generality of Clause (d) above)compliancewith[insert reference to any laws requiring disclosure (e.g. environmental laws)]].

(10)WhendisclosureispermittedunderClause(9)above,otherthanClauses(9)(b), (d), (e), (h) and ( j), the Party providing the information shall ensure thatthe recipient of the information shall be subject to the same obligation ofconfidentiality as that contained in this PPP Contract. [The Private Partner shallexpressly inform any person to whom it discloses any information under thisClause [Confidentiality] of the confidentiality restrictions set out in this Clause[Confidentiality] and shall procure its compliance with the terms of this Clause[Confidentiality] as if it were party to this PPP Contract and the Private Partnershall be responsible for any breach by any such person of the provisions of thisClause[Confidentiality].]

(11) WherethePrivatePartner,incarryingoutitsobligationsunderthePPPContract,isprovidedwithinformationrelatingto[end users],thePrivatePartnershallnotdiscloseormakeuseofanysuchinformationotherwisethanforthepurposeforwhich itwasprovided,unlessthePrivatePartnerhasobtainedthepriorwrittenconsent of that [end user] and has obtained the prior written consent of theContractingAuthority.

Manyjurisdictionsrequireauditreportstobe

preparedinrespectoftransactionsto

whichaContractingAuthorityisaparty.

Whereapplicable,thisprovision

shouldalsoaddresstheissueofpublic

disclosureoftheseauditreports.SeealsoClause(9)(d).

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(12) Onorbeforetheexpirydate,thePrivatePartnershallensurethatalldocumentsorcomputerrecordsinitspossession,custodyorcontrol,whichcontaininformationrelating to [end users] including any documents in the possession, custody orcontrolofasub-contractor,aredelivereduptotheContractingAuthority.

(13) The provisions of this Clause [Confidentiality] are without prejudice to theapplicationof[insert any relevant law governing official secrets or national security information].

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SCHEDULE .[l]

CommerciallySensitiveInformation

Part I - Commercially Sensitive Contractual Provisions

COLUMN 1 COLUMN 2Commercially Sensitive Contractual Provisions For a period ending on date below

Part II - Commercially Sensitive Material

COLUMN 1 COLUMN 2Commercially Sensitive Material For a period ending on date below

GOVERNING LAW AND DISPUTE RESOLUTION8

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105

GOVERNING LAW AND DISPUTE RESOLUTION


8.1.1 Overview

This Section 8 discusses the importance of governing law and dispute resolutionconsiderationsandprovisionsinPPPContracts.Asexplainedfurtherbelow,thechoiceofgoverninglawdeterminesthesubstantivelawthatwillbeappliedtodeterminetherightsandobligationsofthePartiesunderthePPPContract.ThisincludesresolutionofdisputesarisingoutofthePPPContract.However,thechoiceofgoverninglawdoesnotdeterminethemeansbywhichanydisputewillberesolved;forexample,whetherthisisbyacourtofaparticularcountry,orbyarbitration.Thismustbespecifiedinthedispute resolution clause in the PPP Contract. For example, the Parties might selectEnglishlawasthegoverninglawofthePPPcontract,andinternationalarbitrationasthemeansofdisputeresolution.ThiswouldmeanthatanydisputearisingoutofthePPPContractwouldberesolvedbyanarbitraltribunalapplyingEnglishlaw.

This Section 8 first explains the concepts of governing law and dispute resolutionprovisions and then explains some key considerations for Contracting Authorities,including how Parties might select a dispute resolution provision, and what thekey elements of such a provision are. Particular guidance is given on importantconsiderations where arbitration is selected as the dispute resolution mechanism.Finally,someguidanceonalternativedisputeresolutionandtheuseofindependentexpertsfortechnicaldisputesisprovided.

8.1.2 The concept of a governing law provision

All PPP Contracts should contain an express choice of governing law.The system oflawspecifiedinthegoverninglawprovisiongovernsmostaspectsofthePPPContract,e.g.itsinterpretationandvalidity.Theobjectiveofagoverninglawclauseistoachievecertainty (insofar as it is possible to do so) between contracting parties as to thenatureandscopeoftheirrespectiverightsandobligations.Ifthegoverninglawisnotexpresslychosen,acourtwilldecideit,withconsequentpossibleunpredictability.

The Contracting Authority typically wishes to choose the domestic law of its ownjurisdictionasthegoverninglawofthePPPContract,butthePartiesshouldbeawareofthefactorswhichtypicallyinfluencechoiceofgoverninglaw,including:

• non-legalpreferences,suchasmarketacceptability57,familiarityandconvenience,relativecost;

• avoidanceofadetailedinvestigationintoanunfamiliarsystemoflaw;

• commercialorientation,stabilityandpredictabilityofthechosenlegalsystem;

57 ThismayincludewhethertherespectivechoiceofgoverninglawwouldaffecttheLenders’abilitytoobtainpoliticalriskinsurancefrommultilateralorbilateraldevelopmentagencies(orprivateinsurers),whichwouldbeparticularlyimportantforPPPProjectsreliantonthistypeofsupporttobebankable.

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• insulation of the contract from legal changes in a counterparty’s country (e.g.local legislation imposingamoratoriumonforeignobligations,reductionof theinterestratebylegislation,theimpositionofarequirementthatrepaymentmustbemadein localcurrencytoa localcustodianand/orexchangecontrols).This isoftenoneof themost important reasons for thechoiceofanexternal (foreign)system of law for investors. Investors in certain jurisdictions may be concernedthatifthegoverninglawisthelocallawofthecontractinggovernmententity,itmay subsequently pass legislation which adversely impacts the contract. In PPPContracts, however, this is typically addressed through change in law or MAGAprovisions;See Section 3, Change in Law and Section 2, Material Adverse Government Action.

• adesiretocoincidethegoverninglawwiththedisputeresolutionforum(i.e.thecourtswhichwillhearanydisputearisinginconnectionwiththecontract).Legalunpredictabilitymayresultifthecourtiscalledupontoapplyaforeignlawwithwhichitisnotfamiliar;

• the ability to use lawyers who have special experience in the type of contractconcerned;

• language;

• thedesireforasinglebodyof lawtoapply to thePPPContractandeachof theProjectAgreements(whichwillfacilitateconsolidationinasingleforum);and

• local law may prohibit or restrict a government entity from contracting underan external (foreign) law. Local law advice may need to be sought to clarify thepositionifaContractingAuthorityisconsideringthisapproach.

Governing law clauses are generally straightforward to draft. The selection shouldbe clearly specified in the PPP Contract, usually next to, or as part of, the DisputeResolutionprovision(seebelow).Thegoverninglawspecifiedshouldbethesystemoflawofacountry,nottoacollectionofprinciplesorgeneralconcepts.Splitgoverninglawclausesandconditionalgoverninglawprovisionsshouldbeavoided,astheyaddundesirablecomplexities.

Many PPP Contracts now also include a choice of governing law in respect of“non-contractualobligations”.Thisterm,foundinEUlegislation,isunderstoodtoincludetortssuchasnegligenceorpre-contractualmisrepresentations.IftheContractingAuthorityorPrivatePartnerweretobringatortiousclaimthattheywereinducedtoenterintothePPPContractbyamisrepresentationmadebytheotherParty,achoiceofnon-contractualgoverninglawshouldindicatetotherelevantcourtthatthisclaimshouldbedeterminedunder the chosen governing law. Such a provision in commercial contracts would begenerallyeffectiveinEUMemberStatecourtsunderEuropeanlegislation(EURegulation,RomeII)butthepositionmayvaryinotherjurisdictions.However,overthelastfiveyears,thetrendinmanyinternationalcommercialcontractsacrossglobalmarketsistoincludeagoverninglawchoicefornon-contractualobligationstoaddcertainty.Thereislittleornodownsideindoingso.ItmakessenseforallobligationsrelatingtothePPPContractto be governed by the same law. Any other approach would introduce unnecessarycomplexities.Accordingly, thechoiceofgoverninglawfornon-contractualobligationsshouldmatchthechoiceforcontractualobligations.

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Section 8.3, Sample Drafting 8, Clause (1) includes a contractual and non-contractualgoverninglawprovision.ThisguidanceandSection 8.3, Sample Drafting 8areintendedto be of general application, and to be used by Parties from civil and common lawjurisdictions,irrespectiveofwhethertheselectedlawisacivilorcommonlawsystemoflaw.

8.1.3 The concept of a dispute resolution provision

As explained above, the governing law provision determines what system of lawgovernsanydisputearisingoutofthePPPContract,butadisputeresolutionprovisionisthenneededtodeterminewhatforumwillapplythatlawtoresolveanysuchdisputeand,inthecaseofarbitration,theprocedurepursuanttowhichsuchdisputewillbeheardandresolved.

Adisputeresolutionclausesetsoutapre-agreedmechanismfortheresolutionofanydisputes that may arise out of the PPP Contract. All PPP Contracts should include adispute resolutionclause toprovideasmuchcertaintyas possibleaboutwhere and howdisputeswillberesolved.Suchaclauseaimstoensurethatpartiessticktotheagreedmechanismandhelpsreducetheriskoftheirwastingtimeandcostsarguingaboutwhereaclaimcanbeheard.Agooddisputeresolutionclausewillalsoreducethe risk of duplicative proceedings being commenced, and irreconcilable decisionsbeingissued,bydifferentcourtsortribunals.Theseclausesmaybecalled“jurisdictionclauses”,“choiceofcourt”or“forumselection”clauses.


If thereisnocontractuallyagreeddisputeresolutionclausespecifyinghowdisputesareto be resolved, there will be uncertainty about where disputes under the PPP Contractshouldbereferred.TheParties’preferredcourtsmaynotacceptjurisdictionoveradisputeifthereisnocontractualclausespecifyingtheyaretodeterminedisputes.Disputesmaybecommencedandheardbyunreliablecourts.Thiscanbeaparticularriskinnewanduntestedmarkets,wherelocalcourtsmaybeunfamiliarwithresolvingcomplexcommercialdisputesinatimelyway.Theremayalsobealackofconfidenceintheimpartialityoftheprocess.

TheenforceabilityoftheeventualdecisionwillalsobeanimportantfactorforEquityInvestorsandLenders(seebelow).GiventhatdisputesunderPPPContractsarelikelytohavesomeformoffinancialimpactonthePrivatePartnerandthechoiceofforumcanimpactenforceabilityof therespectivedecision, the inclusionofaworkabledisputeresolution clause is a key element in any assessment of the bankability of the PPPProjectby thePrivatePartnerand itsEquity InvestorsandLenders.See Section E, PPP Contracts in Context.

As with the governing law guidance, the guidance outlined below on selection anddraftingofdisputeresolutionprovisionsandSection 8.3, Sample Drafting 8isintendedto be of general application, and to be used by Parties from civil and common lawjurisdictions, irrespective of whether the selected court is a civil or common lawjurisdictionorthearbitrationisseatedinacivilorcommonlawjurisdiction.

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This Section 8.2 begins with a short overview of the key elements of any disputeresolution provision at Section 8.2.1. Section 8.2.2 then explains factors a ContractingAuthority should consider when selecting a dispute resolution provision, i.e. factorsrelevanttochoosingbetweencourtlitigation(whetherbeforelocalcourtsorthecourtsofan“offshore”jurisdiction)orarbitration.ItalsoincludessomeimportantguidanceastowhetheraContractingAuthority isabletoreferdisputestoparticularfora,forexampleforreasonsofpublicpolicy.TheguidancethendiscussesanumberofthekeyelementsofatypicaldisputeresolutionprovisioninaPPPContract.Keypointscoveredincludewhenaninvestormaywanttomoveawayfromlocalcourts,whenPartiesmayselectinternationalarbitrationasthedisputeresolutionmechanism,specificdraftingissuesinrelationtoarbitrationclauses,whenPartiesmightincludealternativedisputeresolutionmechanismssuchasexpertdeterminationandmediation,andfinallysomeguidance on waivers of any immunities and privileges that a Contracting Authority(andothersovereign/quasi-sovereignentities)mayhave.

What are the key elements of a dispute resolution provision?

InaPPPContract,adisputeresolutionprovisiontypicallyspecifies:

(1) thegoverninglawofthePPPContract(ifnotspecifiedinadifferentclause);

(2) anobligationtoattempttoreachaquickandamicablesettlement;

(3) aprovisionfortheresolutionofspecifictechnicaldisputesbyanindependentexpert;

(4) a recourse to either (a) the courts that will have jurisdiction to determine thedispute or (b) international arbitration to finally determine all disputes notinformally resolved or resolved by expert determination. An arbitration clauseshouldspecifythe“seat”ofarbitrationandusuallyalsoincorporatesbyreferenceinstitutionalproceduralrules.Itmayalsosetoutcertainbespokeproceduralrulestogovernthearbitrationprocessandjoinderandconsolidationprovisionsintheeventthedisputeconcernsmultiplerelatedcontractsand/ormultiplepartiesandwherearbitrationselected;

(5) anobligationtocontinueperformanceofthePPPContractduringtheresolutionofthedispute;

(6) where appropriate a waiver of sovereign and other immunities and consent toenforcementandexecution;and

(7) theallocationofcosts.

8.2.2 Selecting an appropriate dispute resolution provision and public policy

8.2.2.1 Local courts–AContractingAuthoritymayprefertoselectitslocalcourtsasthe forum for the resolution of any disputes under the PPP Contract.This selectionmay be made for a variety of reasons including familiarity, compatibility with anyconcession/PPP legislation, and because the PPP Contract is governed by local law.Thecostsoflitigatingbeforelocalcourtsmayalsobemuchlowerthanbeforecertain“offshore”courtsor thecosts involvedinan internationalarbitration.See Section 8.3, Sample Drafting 8, Clause (12) Option 1.

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8.2.2.2 Offshore courts–Insomesituations,however,PrivatePartnersmaybereluctanttoagreetohavedisputesdeterminedbylocalcourts.Forexample,theymaybeconcernedthatthecourtsintheContractingAuthority’scountryare(ormightbecome)unreliable,potentiallymorefavourabletothelocalparties/theContractingAuthority,inefficientandpronetosignificantdelayswhenaspeedyresolutionisneeded.Inthesecircumstances,PrivatePartnersmaypushfortheinclusionofanexternal(i.e.“offshore”)jurisdiction(orchoiceofcourt)provisioninthePPPContractandseektoselectacourtorcourtswithareputationforresolvingcomplexinternationaldisputesinafairandpredictablemanner.Offshore courts may be the preferred choice for Private Partners even where the PPPContractisgovernedbyadifferent(i.e.local)law.Courtsincertainjurisdictionsregularlydeterminecommercialdisputesarisingundercontractsgovernedbydifferentlaws(e.g.theEnglishcourtsoftendeterminedisputesarisingunderforeign(non-English)lawanddosobyhearingexpertevidenceonthatforeignlawalthoughthiscanincreasecosts).See Section 8.3, Sample Drafting 8, Clause (12) Option 1.

Offshore court litigation may be preferred as the dispute resolution mechanism forPrivatePartners if theyperceiveparticularcourtsasbeingtransparent,efficientandwithajudiciaryconsistingofhighlyregardedcommerciallawyerswithexperienceofdisputes under PPP Contracts. Further reasons for selecting offshore courts may bethepossibilityofobtaininginjunctiverelieffromthosecourtsortheabilitytoobtain“summary”judgment(theearlydeterminationofadisputewithoutafullhearing).Itisaprocedureavailableinsomecourtsbutislesscommoninarbitrations.

FromtheContractingAuthority’sperspective,evenifoffshorecourtsmightnotbeitspreferredoption,theremaybecircumstanceswherethisoptionneedstobeconsideredasanecessarycompromiseinordertoensurethePPPProjectisbankable.See Section E, PPP Contracts in Context.

8.2.2.3 Arbitration – Most commonly, Private Partners may suggest arbitration as adisputeresolutionmechanism.Arbitrationisacontractuallyagreedmethodofdisputeresolution that is an alternative to litigation before the courts. Broadly, the partiesagreethatoneorthreeindividualarbitratorswilldeterminetheirdisputeratherthanacourt. See Section 8.3, Sample Drafting 8, Clause (12) Option 2.

Arbitration may also be selected if there is a desire to keep the dispute confidential.Unlike court proceedings, arbitration proceedings often take place in private (but notalwaysandtheapproachvariesdependingonthejurisdictionandanyinstitutionalrules).PrivatePartnersconcernedabouttheenforceabilityofanydecisionmadeinrespectofadisputeunderthePPPContractmayseekto includeanarbitrationclauseratherthanacourt(litigation)clausebecausearbitrationawardstendtobemorewidelyenforceablethan court judgments. Arbitration can, however, be expensive and sometimes as time-consuming as court proceedings. However, the Parties can include provisions in theirarbitrationclauseforsummaryjudgmentorexpeditedproceduresandcertaininstitutionalrulesalsoincludeprovisionsinthisregard.ThePartieshavetopayforthearbitrators’timeandmayalsohavetopayforaninstitution’sadministrativecosts.See Section 8.2.3.

8.2.2.4 Local limitations on forum selection – Before selecting a foreign court orchoosing an offshore arbitration as the dispute resolution mechanism in any PPPContract, it is important toestablishthat,underallapplicable laws, theContractingAuthority is able to agree to refer disputes to a foreign court or be subject tointernationalarbitration(relatedtothisitisalsoimportanttoestablishitcanagreetobesubjecttoa“foreign”law).Forexample,aContractingAuthoritymayberequired

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underlocallawsrelatingtoconcessionarrangementstoreferalldisputesrelatingtoaPPPProjecttothelocalcourts(and/ortocontractonlyunderlocallaw).

Theremayalsobegeneralprohibitionsor limitationsunder local lawinrelationtoaContracting Authority’s ability to agree to an offshore jurisdiction clause or foreignseated arbitration clause (or agree to a foreign law). For example, under local lawsovereign entities may need specific waivers and approvals to agree contractually toarbitrate offshore, or to select a foreign jurisdiction clause and/or to contract underforeignlaws.ItwillalsobeimportanttoestablishthatunderlocallawtheContractingAuthority can contractually agree to waive immunity (see Section 8.2.6). Specificpermissionsmayberequiredandcertainformalitiesmayneedtobefollowed.Issuesofcapacityandauthoritymayariseinthisregard.

Theseareimportantpointstoestablishattheoutsetofnegotiations.PrivatePartnersmayrequirelocallawopinionstoaddresstheseissues.

8.2.2.5 General considerations – Given the long term nature of the PPP Contract, itcan be in the Parties’ interests to have a dispute resolution process which supportstheirlongtermrelationship.Generally,adisputeresolutionprovisioninaPPPContractshouldalsoincludeaclauseimposingatimelimitedobligationtoattempttoresolveadisputeinformally(amicably)inthefirstinstance.Therearevariousalternativedisputeresolutionoptionswhicharediscussedfurtherbelow.See Sections 8.2.4 and 8.2.5.

Therelativemeritsofarbitrationagainstlitigationbeforeaparticularcourtorcourtswill need to be assessed carefully for each project. If the Parties intend to insteadchooseanoffshorejurisdictionclause,thedraftingofsuchaclauseisgenerallymorestraightforward than the drafting of an arbitration clause, which tends to be morebespoke.Inallcases,theselectionofaforummustbeclearandunambiguous.

8.2.3 Key steps if selecting arbitration

STEP 1: Choosing arbitration and selecting the rules of established independent arbitration institutions

If the Parties decide to select arbitration as the dispute resolution mechanism forthe PPP Contract, it is recommended that institutional (administered) arbitration ischosen.Whilethereisaformofad hoc(non-administered)arbitration,thisisnottherecommendedapproachforthereasonshighlightedbelow.

(1) Institutional Arbitration. Insteadofdraftinganoverlylongarbitrationclausecontainingbespoke procedural rules, it is preferable for the Parties to incorporate the proceduralrulesofanestablishedindependentarbitrationinstitution.Forconsistency,alldisputeresolutionprocessesunderthePPPContractandtherelatedProjectAgreementsshouldapplythesameinstitution’srules.ThePPPContractdraftingwillthereforevarytosomeextentaccordingtotheinstitutionalrulesselected.

Referencetotherulesofthearbitralinstitutionusuallyincorporatestheassistanceofaninstitution,whichmayactasanappointingauthority(ifrequired)duringtheconstitutionof the tribunal, deal with the payment of arbitrators’ fees during the proceedings andmakearrangementsfortherespectivehearingsandissuanceoftheaward.

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A variety of institutional rules and of institutions are available for commercialarbitration.TherulesoftheICC(“ICCRules”)arefrequentlyused58.Othercommonoptions include the London Court of International Arbitration (“LCIA”) rules, theHongKong InternationalArbitrationCentrerulesor theSingapore InternationalArbitrationCentrerules. See Section 8.3, Sample Drafting 8, Clause (12), Option Two. See Section 8.3, Sample Drafting 8, Clause (12), Option 2.

In addition, there is a dispute settlement mechanism specifically designedfor disputes between foreign private investors and States (or their agenciesor subdivisions) created by the Convention on the Settlement of InvestmentDisputesbetweenStatesandNationalsofOtherStates(the“ICSIDConvention”).ICSIDarbitrationisavailablewhenthehomeStateofthePrivatePartnerandthehost State of the project differ in nationality, and both States are party to theICSID Convention (currently 153 States). As with the incorporation of any otherinstitutionalarbitrationclause,boththeContractingAuthority(thehostStateoritsagencyorsubdivision)andthePrivatePartnermayresorttoICSIDarbitrationforbreachoftheobligationssetforthinthePPPContract.

WhilerecoursetoICSIDarbitrationprovidessomecomforttothePartiesastotheenforceabilityofawards,itmightnotalwaysbeanoptionforaPPPContract.Thisis because the ICSID Convention establishes essential jurisdictional conditionsforaccess to ICSIDarbitrationand thePartieswouldneed to includea fallbackclause in the PPP Contract in case a dispute is determined not to meet theserequirements This may render the drafting of the dispute resolution provisionmorecomplex. ICSIDarbitrationmayalsobeviewedasmoreslow-moving thanstandardcommercialarbitration.Nevertheless,ContractingAuthoritiesshouldbeawareofthepossibilityofclaimsunderthisregime.

(2) Ad Hoc arbitration. If the Parties incorporate an arbitration clause in their PPPContractwithoutreferringtothearbitrationrulesofaparticulararbitralinstitution,and without expressly agreeing to have the assistance of an arbitral institutionto administer the proceedings, they will be agreeing to a non-administered orad hoc arbitration. In those cases, the Parties would need to include a detailedprocedurefortheconductoftheproceedings,including,forexample,theprocessfortheselectionofthetribunaldecidingthecase,itspowersandtheissuanceofawards (see Step 3).ThisisnotadvisableasthePartiesmayomittoagreeoncrucialelementsofthearbitralprocesswhichcanresultinproceduralstalemateoncethedisputearises.

ThePartiesmayalsochooseaparticularsetofarbitrationrulesthatdonotnecessarilyinclude theselectionofanarbitral institution thatwillassist in theadministrationofthecase.Thisisthecase,forexample,ifthePPPContractincorporatesareferenceto arbitration under the rules of the United Nations Commission on InternationalTrade Law (“UNCITRAL Rules”). The UNCITRAL Rules are often used in commercialdisputesinvolvingapublicandaprivateentity,andarealsocommonlyincorporatedininternationalinvestmentagreements(see Schedule 2).ThereisnoinstitutionspecializedinadministeringUNCITRALarbitrations,buttheyconstituteanintermediatesteptopuread hocarbitration, inthesensethattheyalreadyincludeprovisionsgoverningeach step of the arbitration process. Many institutions, such as the Permanent

58 Forillustrationpurposes,Section 8.3, Sample Drafting 8, Clause (12), Option 2onwardsisbasedonachoiceoftheICCRules.Thisdraftingisforguidanceonlyandwillneedreview/adaptationwhenusinganalternativeinstitution’srules.

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Court of Arbitration, the LCIA, the International Chamber of Commerce (“ICC”), theInternationalCentre forSettlementof InvestmentDisputes (“ICSID”), theAmericanArbitration Association and the Stockholm Chamber of Commerce are available toprovideinstitutionalsupportforproceedingsundertheUNCITRALRules,shouldthePartiesagreetosuchinstitutionalsupport. It isadvisableforsuchagreementtobeexplicitinthearbitrationclauseinthePPPContract,althoughthePartiescanintheoryagreethisonceadisputehasarisen.


Theselectionofanestablishedarbitralinstitutionandofinstitutionalproceduralrulesisofparticularimportanceinmanydevelopingcountries,wherePPPProjectsareunlikelytobebankableifrecoursetoacceptablearbitrationarrangements(orcourts)isnotagreed.SpecialistadviceshouldbetakenbyContractingAuthorities.

STEP 2: Choosing the seat of arbitration59

If the Parties select arbitration60 (as opposed to court litigation) as their disputeresolution mechanism, it is absolutely critical to specify a seat of arbitration. Theimportanceoftheseat(typicallyamajorcity)isthatitplacesthearbitrationwithinthelegalframeworkofaparticular jurisdiction(regardlessofwhereanyhearingsinthearbitrationarephysicallyheld).See Section 8.3, Sample Drafting 8, Clause (15).

TherearethreekeyreasonswhythePartiesshouldcarefullyconsiderthechoiceofseat:

(1) Thenationalcourtsattheseathave“supervisory”jurisdictionoverthearbitration.Thiscanbesignificantbecause thosecourtscan influencethearbitralprocessby,for example, staying concurrent court proceedings or granting injunctive relief toprotect assetssubject to thearbitration. It is also thecourtsof theseat that willgenerally be competent to hear applications to set aside an arbitral award. It isimportanttochooseaseatofarbitrationinajurisdictionwherethelocalcourtsaresupportiveofthearbitrationprocessandarenotexcessivelyinterventionist.

(2) Mostnationalarbitrationlawsincorporatedthroughselectionoftheseatincludemandatory procedural provisions (e.g. regarding rights of appeal or the powerof the courts to remove arbitrators) which will apply regardless of any contrarystipulation in the parties’ arbitration agreement. A careful assessment of suchlawsisthereforeimportant.

(3) An arbitral award is often only as good as the ability to enforce it effectively.Companies operating internationally typically hold assets in many jurisdictions.Before concluding an agreement providing for arbitration, it be should verifiedthatthechosenseatofarbitration,aswellthosecountriesinwhichenforcementofanyawardmaybesought(whichmayormaynotbetheStateoftheContractingAuthority), are party to the Convention on the Recognition and Enforcement ofForeignArbitralAwards.Usuallyreferredtoasthe“NewYorkConvention”, thereare now 156 State parties to this Convention. An arbitral award rendered by a

59 ChoosingtheseatmaybetheParties’firststepinforumselectionbutthismaycoincidewiththeselectionofinstitu-tionalrules(seeStep1).

60 ThisdoesnotapplytoICSIDarbitrationwhichisde-localized.

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tribunal“seated”inaNewYorkConventionStateshouldbeenforceableinallotherNewYorkConventionstateswithoutareviewofthemerits,althoughitshouldbenoted that thereare limitedgroundsonwhichacourtmayrefuseenforcementandlocaladviceshouldalwaysbesoughtastothepracticesofthecourtswhereenforcementislikelytobesought.


Thecourtsincivilandcommonlawjurisdictionsoftenhavedifferentapproachestodisputeresolution.However,whereresolutionofdisputesisbyarbitrationthen,generallyspeaking,itdoesnotmatterwhetherthearbitrationhasitsseatinacivillaworacommonlawjurisdiction(nordoesitmatterwhetherthepartiesarefromcivilorcommonlawjurisdictions).

Ashighlightedabove,thekeyselectionfactorsarewhetherajurisdictionisconsideredtobe“arbitrationfriendly”(thenationalarbitrationlawandlocalcourtsaresupportiveofthearbitrationprocessandwillnotinterferewitharbitralproceedingsunnecessarily)andwhetheritisasignatorytotheNewYorkConvention.

STEP 3: Determining the method of constituting the arbitral tribunal and selecting the arbitrators – number, qualifications and nationality

The Parties should agree whether the arbitration clause will specify the number ofarbitratorsaswellas themethodbywhichsucharbitratorswillbeappointed. In thiscontext,itshouldbenotedthatmostinstitutionalarbitrationruleswillcontaindefaultprovisions in the event the Parties fail to agree on the number of arbitrators and/ormethodofconstitutingthetribunal,orfailtoappointtheagreednumberofarbitrators.

Typically,forlargevaluecontractspartieswouldchoosetohavethreearbitrators,eventhoughthiswillmaketheresolutionofanydisputemorecostlyasthepartiesmustpaythefeesofthreearbitrators.Thisisbecauseathreearbitratortribunalislesslikelytoreachamaverickdecisionthanasolearbitratorandsoreducesunpredictability.See Section 8.3, Sample Drafting 8, Clause (13).

Somearbitrationclausesmayspecifyparticularexpertiseorotherrequirementsas toqualificationsarbitratorsshouldhave,forexamplethatanarbitratorshouldbealawyerexperiencedinaparticulartypeoftransaction.Itmaybehelpfultospecifythatallorthemajorityofarbitratorsarelegallyqualifiedinthegoverninglaw.Partiesshould,however,avoidbeingtooprescriptive,asthismaynarrowthepoolofpotentialarbitratorsavailable.

Sometimes Parties wish to specify that none of the arbitrators can be of the samenationalityasanyofthepartiestothearbitration.ThismayberelevanttoPPPContractsasthePrivatePartnermayhaveconcernsthatanarbitratorwhoisanationaloftheContractingStatemaynotbeimpartial.Certaininstitutionalrulesincludeprovisionsrelatingtothenationalityofarbitrators,andtheseshouldbechecked.

STEP 4: Consolidation and joinder – related contracts/related parties

The PPP Contract will be part of a wider“network of agreements” between variousparties. The Private Partner may, for example, enter into a PPP Contract with theContracting Authority regarding the underlying facility, but all cash flows may be

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governedbyaseparateagreementbetweenanoff-takerandthePrivatePartner61.Whenthisisthecase,thePrivatePartnermayrequirethatalltherelatedProjectAgreementscontainasimilardisputeresolutionprovision,togetherwithconsolidationandjoinderlanguagewherebyallpartiestotherelatedcontractsagreetosubmitdisputestothesamearbitraltribunal,underthesamerules.Forgreaterefficiency, it isrecommendedthatallagreementscontainsimilardisputeresolutionclausesunderwhichthereispre-agreementtoconsolidationofrelateddisputesandthejoinderofrelatedpartiestoanyarbitration62.However, thesameprincipledoesnotalwaysapplywithregardtomanyagreementsconcludedwithsub-contractors,asdisputesarisingunderthosecontractscanbethesoleresponsibilityofthePrivatePartneranditmaybeappropriatetokeepthedispute processes separate.This will avoid the Contracting Authority getting draggedintoexpensiveandtimeconsumingperipheraldisputes.Ontheotherhand,theremaybeareasofoverlap,e.g.wherethecounterpartytoaProjectAgreementisclaimingonthebasisofaprovisionthathasbeenpasseddownfromthePPPContract,participationin a consolidated dispute resolution process may be desirable and so limited joinderarrangementsmaybeappropriate.Anyassessmentoftheneedforjoinderprovisionsislikelytobefactdependent.See Section 8.3, Sample Drafting 8, Clause (20).

Generally,consolidationandjoinderislessofaconcernwithjurisdictionclauseswherecourtsoftenwillorderconsolidationofproceedingsbeforeit(andthePartiesoftencanotherwiseapply to the relevantcourts for removal/transfer fromone jurisdiction toanother)orthejoinderofpartiesunderlocalproceduralrulesorinherentjurisdiction.

8.2.4 Informal (alternative) dispute resolution – negotiation, mediation and alternatives

GiventhelongtermnatureofmanyPPPContractsandthedesirabilityofmaintaininganon-goingrelationshipbetweentheparties,theinclusionofaninformal(alternative)disputeresolution mechanism in the dispute resolution clause is often helpful. There are manyformsofalternativedisputeresolution(“ADR”),rangingfrominformalmeetingsofseniorexecutives(see Section 8.3, Sample Drafting 8, Clause (4)) tomediation,theuseofapanelofseniorrepresentativesandtheappointmentofanexternalDisputesBoard (see Section 8.3, Sample Drafting 8, Schedule 1, Options 1, 2 and 3).Someofthesearediscussedfurtherbelow.

TheinclusionofanADRclausecanencouragetheinformalresolutionofdisputes,atarelativelyearly stage, before significant amounts of time and costs have been spent in any formalarbitrationorcourtproceedingsand,importantly,beforerelationshipshavedeteriorated.

ThedisputeresolutionclauseshouldspecifyiftherecoursetoADRismandatoryandaconditionprecedenttocommencingarbitration(orcourtproceedings)andwhethertheresultoftheADRisbindingornon-binding.IfADRismandatory,thePartiesmayalsowishtoprovidethattheyarefreetoseekurgent(includinginjunctive)relieffromthearbitraltribunalorcourtifneededpriortoorduringtheADRprocess.Partiesmustalwaysensure,however,thatthereisafallbackdisputesclause(whetherarbitrationorlitigation)ifADRfailstoresolvethedispute.

8.2.4.1 Mediation –ItmaybedesirabletoaddarequirementforthePartiestoattempttosettletheirdisputesthroughmediation.Mediationisasettlementprocessinvolvinganexternal“mediator”whoactsasaneutralfacilitatortohelppartiestrytoarriveata

61 Otherexamplesincludegovernmentsupportagreementsanddirectagreements.62 TheICCRulesprovidesomeassistanceinthisregardinanyevent:seeArticles7-10.

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negotiatedsettlementoftheirdispute.TheuseofexternalmediatorsisincreasinglyseenincommercialdisputesintheUnitedStates,intheUKandpartsofcontinentalEurope,inTurkey,inpartsoftheMiddleEastandinsomepartsofSouthEastAsia.Mediationcanbeausefulmeansofgettingpartiestogetherandhelpingtoforgeacommerciallyacceptablesettlement,beforelegalcostsescalate–thiscouldproveparticularlyworthwhileinlargetransactionssuchasPPPProjects.Onthedownside,unproductivemediationmaysimplycausedelayinthefinalresolutionofthedisputeandincreasecosts(iftheprospectofanegotiatedsettlementisverylow).Therehavealsobeenconcernsabouttheimpartialityofmediatorsandconfidentialitybreachesintheprocess.Partiesarealwaysfreetoagreetoresolveadisputebymediationevenifthereisnocontractualclauserequiringthemtodoso.See Section 8.3, Sample Drafting 8, Schedule 1, Option 1.

8.2.4.2 Disputes Board – A Disputes Board is a more formal mechanism usuallyinvolvingtheappointmentofapanelofexternal individualsat thecommencementof a contract to whom disputes can be referred throughout the life of the contract.Thisprocessiscommoninconstructioncontractsandusuallyrequiresthepartiestopayfortheretentionofexternalexperts.Akeyconsiderationiswhetheritsdecisionwill be final and binding;63 the dispute may have to be re-tried before an arbitraltribunal(orthecourts)ifthepartiesdonotgiveeffecttotheboard’sdecision.DisputesBoards lack the consensual approach of mediation (or a panel of the Parties’ seniorrepresentatives)andtherecontinuestobeadebateabouttheefficacyandcostsofthismechanism.IfthedecisionoftheDisputesBoardisbinding,thereislittledifferenceascomparedwiththearbitrationprocess(thereforetheprocessmayberedundantgiventhe inclusion of the arbitration clause). If the recommendation is not binding theremaybelittledifferencewiththeobligationtotrytoreachamicablesettlement–theinvolvementofanddecisionbyexpertsmay,however,behelpfulinsteeringthePartiestowardsaresolution.See Section 8.3, Sample Drafting 8, Schedule 1, Option 3.

8.2.5 Independent experts for technical disputes

As noted in Section 8.2.1(3), PPP Contracts typically include a clause providing that“technical disputes” be referred to an independent expert or panel of experts fordetermination.Forexample,valuationissuesoraccountancyissuesareregularlyreferredtoexpertdeterminationbecausePartiesmaybelieveitisadvantageousfortheindividualdeterminingthedisputetohavedetailedknowledgeofaparticularmarket/area.

Partieswillalsoneedtothinkcarefullyaboutthedefinitionof“technicaldisputes”soastoavoid,asfaraspossible,adisputeaboutscope.Oneoptionistolistparticularclausesof the PPP Contract and specify that disputes under such clauses will be considered“technicaldisputes”unlessotherwiseagreed.Toencourageefficiency,itisrecommendedthat the clause specifies that the determination of the expert should be final andcontractuallybinding,exceptinthecaseofmanifesterrororfraud.Thisapproachshould,however,beconfirmedbylocalcounsel,ascertainjurisdictionsmaynotgiveeffecttoanexpertdeterminationclause,evenifthisisspecificallyagreedinthePPPContract.64

63 Forexample, theICCDisputeBoardRulesgivepartiesachoicebetweenthreedifferenttypesofDisputeBoards:(a)DisputeReviewBoards(whichissuenon-bindingrecommendations);(b)DisputeAdjudicationBoards(whichissuecon-tractuallybindingdecisions);and(c)CombinedDisputeBoards(whichissuenon-bindingrecommendationsbutmayissuebindingdecisionsifthePartiessorequest). Section 8.3, Sample Drafting 8, Schedule 1, Option 3illustratestype(a).

64 Forexample,itisunderstoodthat,whilstintheorythereisscopeforcourtsinthePRCtoenforceanexpertdetermi-nationclauseonthebasisofgeneralprinciplessetoutinPRCcontractlaw,inpracticethereisariskthatthecourtmayconsidersuchaclauseascontrarytopublicpolicy.InThailandthereisariskthatexpertdeterminationclausesmayalsobeineffective.

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An expert determination is generally not“enforceable” in the same way as a courtjudgmentorarbitralaward.Thismeans if theexpertdetermination isnotcompliedwith voluntarily the Parties will need to resort to arbitration (or court litigation) inany event to resolve the dispute and obtain an enforceable award or judgment. Forexample,aPartymayhavetobringaclaimforbreachofthePPPContractinrespectofafailuretocomplywiththeexpert’sdetermination.Accordingly,evenifPartieschoosetoincludeanexpertdeterminationclausetheymustalsoincludeanarbitrationclause(or a jurisdiction clause) as a fall back to cover a situation where there has been afailuretocomplywithadetermination.Itisalsoimportantthatmattersoutsidethescopeoftheexpertdeterminationclause,aswellassituationswheresomethinghasgonewrongwiththeexpertprocessitself,canbereferredtoarbitration(orthecourts).See Section 8.3, Sample Drafting 8, Clauses (6)–(11).

8.2.6 Waiver of immunities

As highlighted in Section 8.2.1, one of the key negotiation points for a ContractingAuthoritytoconsideriswhetherandtowhatextentthedisputeresolutionclauseinaPPPContractshouldincludeawaiverofanyprivilegesandsovereignimmunitieswhichthe Contracting Authority enjoys before local and foreign courts (such as immunityfromanysuitsbythePrivatePartner).65TheContractingAuthorityshouldseekadviceonthenatureandextentofanyimmunitiesearlyintheprocess.Generallyspeaking,a PPP Contract is expected to be fully enforceable and Private Partners and Lendersare therefore likely tohaveapolicyofseekinga“clean”andwide-rangingwaiverofsovereignimmunityclauseincommercialcontractswithsovereignsorquasisovereigns.TheContractingAuthoritywillthenneedtoassesswhetheritisbankabletoresistawaiverentirelyorwhethernegotiatinglimitationsisanacceptablecompromise.

Immunityisacomplexlegalareabut,inshort,awiderangingwaiverwouldusuallycoverbothawaiver fromanycourtproceedingsconnected to theresolutionof thedispute(if an arbitration clause is used this relates to any court orders needed to assist thearbitration)andrecognitionofanyaward/judgment.Itwouldalsoincludeanagreementbythesovereignentitytoexecution/enforcementagainstitsassets(orcertainofthem)andanagreementtocertainformsofreliefe.g.assetfreezes.ThepreciseambitofanywaiverinaPPPContractislikelytodependonrelevantlawsandtheParties’bargainingpowerintherelevantreallifecontractualnegotiations.AnillustrationofthescopeofawiderangingwaiverissetoutinSection 8.3, Sample Drafting 8, Clause (22).

ThePartiesshouldalsomakesuretheyunderstandwhetherornotitislegallypossiblefor the Contracting Authority to waive its privileges and immunities as a matter oflocal law (whether under constitutional arrangements, public policy or otherwise).Inthisregarditshouldbenotedthatundersomelawsanagreementtoarbitrateisdeemed to be a waiver of immunity from suit and a sovereign is not immune fromsuitwhereadisputerelatestobothcommercialactivitiesandisnotasovereignact.Ultimately,aContractingAuthoritymayfindithasmorescopetoresistornegotiatelimitstoanywaiverinrespectofrecognitionorenforcementofjudgmentsorawards.

65 ThisdoesnotapplytoICSIDarbitrationasaStateorContractingAuthoritythatconsentsinwritingtoICSIDarbitra-tionisalreadywaivingitsimmunityfrombeingsuedbythePrivatePartnerandmustthereforerecognizeanICSIDawardandenforcethepecuniaryobligationsunderitasifitwereafinaljudgmentofalocalcourt.However,thesamedoesnotapplyto“immunityfromexecution”.Theconcretemeasurestakentoexecutethepecuniaryobliga-tionsofanICSIDawardwillbegovernedbylawoftheStateinwhichexecutionissought,whichincludesthatState’srulesonsovereignimmunity.

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Governing Law

(1) ThisPPPContractandanynon-contractualobligationsarisingoutofor in connection with it, are governed by and shall be construed inaccordancewiththelawsof[country].

Dispute Resolution

(2) If any dispute arises out of or in connection with this PPP Contractincluding any dispute concerning any non-contractual obligationsarisingoutoforinconnectionwithit(a“Dispute”)itshallberesolvedinaccordancewiththisClause[].

(3) EitherPartymaybynoticeinwritingtotheotherParty,attheaddressfor sending of notices under this PPP Contract and in a mannerprovidedbyClause[],givenoticethataDisputehasarisen(“Notice”).TheNoticeshallsetoutbriefdetailsofthenatureoftheDispute.

Negotiation

(4) ThePartiesshallattempttosettleanyDisputereferredtoinaNoticeby good faith negotiation. Each party shall be represented in anynegotiationbythatparty’s[CEO/apersonwithauthoritytosettletheDispute].Suchnegotiationshalltakeplacewithinfifteen(15)daysofthedeliveryoftheNotice.Anynegotiationsshallbeconfidentialandshall be conducted without prejudice to the rights of the parties inanyfutureproceedings.

(5) Nothingin[Clause(4)]willprejudicetherightofaPartytoseekurgentinjunctiveordeclaratoryrelieforotherurgentreliefinrespectofaDispute.

Expert Determination

(6) Any Dispute arising out of or in connection with Clauses [insert reference to every clause where a Dispute is considered a Technical Dispute] (a “Technical Dispute”) which is not resolved amicably inaccordance with Clause [reference], shall be resolved in accordancewith Clauses [ ]. In any other case, the Dispute shall be resolved inaccordance with Clauses [reference to Jurisdiction or International Arbitration clause as appropriate].

(7) ATechnicalDisputeshallbereferred,attherequestofeitherparty,toanindependentexpertfordetermination.ThePartiesshallagreeontheappointmentoftheexpertandshallagreewiththeexpertthetermsofhis/herappointment.IfthePartiesareunabletoagreeontheidentityoftheexpert,orifthepersonproposedisunableorunwillingtoact,then,within[seven]daysofeitherPartyservingdetailsofasuggestedexpert

Carefulconsiderationshouldbegiventothe

governinglawselectedinanyPPPContract,as

thisdeterminesthelegalsystemwherebytherights

andobligationsunderthePPPContractwillbe

determined.Awell-establishedandpredictable

systemoflawshouldbeselected.Splitgoverning

lawclausesshouldbeavoidedastheycanresultincomplications.Investors

maybeconcernediftheContractingAuthority’snationallawisselected

becausetheymayfearthatthelocallawmaychangeinawaythatadverselyaffects

theirinterests.

Theclausecouldalternativelyprovideforatwostagenegotiation

process,withseniorrepresentativesonlybeingrequiredtobeinvolvedat

thesecondstage.

Analternativeapproachistolistindividualexpertson

anagreedlistandselectfromthatlist.However,

theselectionofindividualsatthetransactionstage

maybeatimeconsumingdistractionatastage

whenthePartiesaretryingtocompletethedeal.

Further,whenadisputearisesthereisarisktheexpertsidentifiedmay

notbeavailableormaybeconflicted,especiallyinalongtermPPPContract.

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ontheotherortheproposedexpertdecliningtoact,eitherPartyshallthenbeentitledtorequestthatanexpertbeappointedby[theICC]ontheapplicationofaParty.Allcostsofandassociatedwiththerequestfortheappointmentofanexpertbythe[ICC]shallbeborneequallybetweentheParties.

(8) The expert appointed may be an individual, partnership, association or bodycorporateandshallbegenerallyrecognizedasanexpertin[specify field]andshallhave[X]yearsofexperienceinthatfield.

(9) Theexpertshallactonthefollowingbasis:

(a) [on his/her appointment, the expert shall confirm his/her neutrality,independence and the absence of conflicts in determining theTechnicalDispute]/[nopersonshallbeappointedasanexpertwhoatthetimeofappointment (or at any time before he/she gives his/her determinationunder such appointment, is a director, officeholder, employee or [ ] of[]];

(b) theexpertshallactasanexpertandnotasanarbitrator;

(c) theexpert’sdeterminationshall(intheabsenceofmanifesterror)befinalandbindingonthePartiesandnotsubjecttoappeal;

(d) theexpertshalldecidetheproceduretobefollowedinthedeterminationinaccordancewiththisPPPContract[andinconsultationwiththeParties][andshallberequestedtomakehis/herdeterminationinwriting,withreasons,within[30]daysafterhis/herappointmentorassoonaspracticablethereafter];

(e) any amount payable by one Party to another as a result of the expert’sdetermination shall be due and payable within [seven] days of the expert’sdetermination being notified to the Parties or as specified within thedetermination;

(f) anyactionrequiredbytheexpertdeterminationshallbeimplementedwithin[14]daysfollowingtheexpertdeterminationbeingnotifiedtothePartiesorasspecifiedwithinthedetermination;

(g) the expert may, if he/she thinks fit, award interest at the rate of [ ] on anyamountwhichisdeterminedtobepayable(excludingcosts)byonePartytotheotherfromthedateof[theNotice]referredtoinClause[];

(h) thecostsofthedetermination,includingthefeesandexpensesoftheexpert(but excluding the Parties’ own costs which shall be borne by the Partyincurringthosecosts),shallbeborneequallybytheParties;

(i) theexpertdeterminationandallmattersconnectedwith it shallbeheld incompleteconfidencebyeachofthePartiesandshallnotbedisclosedtoanyotherpersonexcept:

(i) to the auditors and to the legal advisors of that Party to whom theconfidentialityobligationssetoutinthisagreementshallextend;or

(ii) wherethatPartyisunderalegalorregulatoryobligationtomakesuchadisclosure,butlimitedtotheextentofthatlegalobligation;or

ItisessentialtoincludeanappropriateappointingbodyincasethePartiesareunabletoagreeonanexpert.If

thereisnoappointingauthority,theclausemayfailaltogether.TheICC

offersthreeserviceswherebyitwill(1)putforwardthename(s)ofone

ormoreexpertsorneutralsuponarequestfromoneormoreparties,a

courtoranarbitraltribunal,(2)makeabindingappointmentiftheparties

requestthis,or(3)supervisetheentireexpertproceedingsifnecessary.

Alternatively,anumberofprofessionalbodiesarewillingtoassistinselecting

appropriateexpertsintheirfields,soarelevantprofessionalbodycouldbe

namedhere.

Partiesshouldconsiderwhether

theywanttoprovidethattheexpertmay

notbeconnectedwithanyparticular

companiesororganisationsdue

tothepossibilityofconflictsarising.

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(iii) totheextentthatitisalreadyinthepublicdomain(otherthanasaresultofaParty’sbreachofthisagreement);or

(iv) withthepriorwrittenconsentoftheotherPartytothisagreement[suchconsentnottobeunreasonablywithheld].

(10)ThePartiesagreetotakeallreasonablestepstomaketheiremployeesandagentsawareofthetermsof[Clause(9)(i)]andtoinstructthemtoobservethoseterms.

(11) IfthePartiesfailtoagree:

(i) whether or not a Dispute is a Technical Dispute within fifteen (15) days ofserviceoftheNotice;

(ii) whethertheExpert’sDeterminationwasinmanifesterrororfraudulent;or

(iii) whether a Party has failed to implement fully the Expert’sDetermination,

then the matter shall be resolved in accordance with Clauses[reference to Jurisdiction or International Arbitration clause asappropriate].

Option 1: Jurisdiction [delete if choosing arbitration – Option 2]

(12) The courts of [ ] shall have exclusive jurisdiction to determineany Dispute and any matter provided by Clause [(11)]. The Partiesirrevocablysubmittothecourtsof[as above]andagreenottoarguetheyareaninconvenientforum.

Option 2: International Arbitration [delete if choosing court jurisdiction – Option 1]

(12) AnymatterprovidedbyClause[(11)]andanyDisputewhichisnotaTechnicalDisputeandhasnotbeenresolvedamicablybetweenthePartiesinaccordancewithClause[(4)]shallbereferredtoandfinallyresolved by arbitration pursuant to the Rules of Arbitration of the InternationalChamberofCommerce(“ICC Arbitration Rules”)whicharedeemedincorporatedbyreferenceintothisPPPContract.66

(13) Thenumberofarbitratorsshallbethree(3)appointedinaccordancewiththeICCArbitrationRules(the“Arbitral Tribunal”).

(14)The arbitrators shall be fluent in [English and other relevant language].The language of the proceedings shall be [English] and all documentssubmitted in such proceedings shall be in [English or accompanied by a certified English translation].

66 Forillustrationpurposes,Option2draftingisbasedonachoiceoftheICCRules.Itwillneedreview/adaptationwhenusinganalternativeinstitution’srules.

Broadly,thismeansthatonlythechosencourtis

competenttotakejurisdictionoverdisputes,althoughthisisusuallysubjecttocertain

standardexceptions.Itmaybepreferabletohavecertaintyastowhichcourtswillhave

jurisdictionbyidentifyingthechosencourtinthisway.Other

optionsexistandspecificadviceshouldbesought.

WherethereisaUSnexus,inserta“jurywaiver”provision.

Further,whereproceedingsneedtobe‘served’tobe

formallyinitiatedthenaprocessagentprovisionmay

beadded.

Considerifthisispotentiallytoo

restrictive.

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(15) Theseatofarbitrationshallbe[insert choice].[Thisagreementtoarbitrateisgovernedbyandshallbeconstruedinaccordancewiththelawsof[country].]

(16)ThePartiesundertaketokeepconfidentialallawardsinanyarbitration,togetherwithallmaterialsintheproceedingscreatedforthepurposeofthearbitrationand all other documents produced by another Party in the proceedings nototherwise in thepublicdomain - save (i)with thepermissionof theArbitralTribunalor(ii)totheextentthatdisclosuremayberequiredofaPartybylegaldutyorregulatoryobligationortoprotectorpursuealegalright,ortoenforceorchallengeanaward inbonafide legalproceedingsbeforeastatecourtorotherjudicialauthority.

(17) TheArbitralTribunalshallissueareasonedawardinwritingandshallendeavourtodosowithin[sixty (60) calendar]daysfromthedateofthecloseofthearbitrationhearing.The award of the ArbitralTribunal shall be final and binding upon thePartiesfromthedateitismade.

(18)JudgmentontheawardoftheArbitralTribunalmaybeenteredandenforcedbyanycourtofcompetentjurisdiction.

(19)Unless otherwise determined by the Arbitral Tribunal, the Arbitrators’ fees andassociatedinstitutionalcostsshallbesplitequallybetweentheParties.

Consolidation

(20) In order to facilitate the comprehensive resolution of related disputes, in theeventthatmorethanonearbitrationiscommencedunderthisPPPContractandunder[addrelatedagreements],(the“Related Agreements”),thePrivatePartnerandtheContractingAuthorityconsenttotheconsolidationofarbitrationsasfollows:

(a) ForthepurposesoftheRules,thearbitrationagreementsetoutinthisPPPContractandthearbitrationagreementcontainedineachRelatedAgreementshalltogetherbedeemedtobeanarbitrationagreementthatbindseachPartytothisPPPContractandeachpartytoeachRelatedAgreement.

(b) AnypartytothisPPPContractoranyRelatedAgreementmay,inaccordancewiththeICCArbitrationRules,bejoinedtoanyarbitrationcommencedunderthisPPPContractoranyRelatedAgreement.

(c) In accordance with the ICC Arbitration Rules, Disputes may be resolved in asinglearbitrationtogetherwithDisputes(asdefinedinanyRelatedAgreement)arisingoutofanysuchRelatedAgreement.

(d) Pursuant to Article 10(a) of the ICC Arbitration Rules, the Parties agree to theconsolidationofanytwoormorearbitrationscommencedpursuanttothisPPPContractand/orthearbitrationagreementcontainedinanyRelatedAgreementintoasinglearbitration,asprovidedforintheICCArbitrationRules.

(e) EachPartywaivesanyobjection,onthebasisthataDisputehasbeenresolvedinamannercontemplatedinthisClause[],tothevalidityand/orenforcementofanyarbitralawardmadebyanarbitraltribunalfollowingtheDisputebeingresolvedinthatmanner.

Asnoted,theseatofarbitrationiskeyandrequirescarefulconsideration.See

Section8.2.3.Itshouldbenotedthatarbitralhearingscanphysicallytake

placeinanotherlocationthantheseatofarbitration.Iftheplaceofhearings

(thevenue)isimportantfortheParties,itshouldbeagreeduponatanearly

stageofnegotiations.

Thepartiesmaywishtoaddaprovisionspecifyingthelawapplicabletothearbitrationagreement.Tokeep

matterssimpleitisoftenhelpfultospecifythesamelawasfortheseat.

SeediscussionunderSection8.2.3,Step4:

ConsolidationandJoinder-related

contracts/relatedparties.

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Continuing Obligations

(21) Performance of this PPP Contract shall continue during arbitrationproceedingsoranyotherDisputeresolutionmechanismpursuanttothisClause[].

Waiver of Immunities

(22)[To the fullest extent permitted by law the Contracting Authorityirrevocablyandunconditionally]:

(a) submitstothecourtsofanyjurisdictioninrelationtotherecognitionofany judgmentororderof thecourtsof [jurisdiction of arbitration seat] in support of any arbitration in relation to any Dispute and inrelationtotherecognitionofanyarbitralawardandwaivesandagreesnot to claim any sovereign or other immunity from the jurisdictionof any court in relation to the recognition of any such judgment orcourtorderorarbitralawardandagreestoensurethatnosuchclaimismadeonitsbehalf.

(b) [consentstotheenforcementofanyorderorjudgmentinsupportofarbitrationoranyawardmadeorgiveninconnectionwithanyDisputeand the giving of any relief in the courts of any other jurisdictionwhether before or after final arbitral award including, withoutlimitation: (i) reliefbywayof interimorfinal injunctionororder forspecific performance or recovery of any property; (ii) attachment ofits assets; and (iii) enforcement or execution against any property,revenues or other assets whatsoever (irrespective of their use orintended use) and waives and agrees not to claim any sovereign orother immunity from thecourtsofanyother jurisdiction in relationto such enforcement and the giving of such relief (including to theextent that such immunity may be attributed to it), and agrees toensurethatnosuchclaimismadeonitsbehalf].

Theremaybecircumstancesin

whichaprovisionalongtheselines

wouldnotbeappropriate.(e.g.ifthePPPProject

isnottimecriticaland/ortheDispute

isfundamental)

Thisclauseisawiderangingwaiver

whichaContractingAuthorityislikely

towanttoresistorlimit,inparticular

subclause(b).

ContractingAuthoritiesmay

choosetoconcedeimmunityfromsuit

waiverlanguagebecauseasamatter

ofapplicablelawsuchimmunity

isdeemedtobewaived,for

examplebecauseitisacommercial

transaction.Specialistlegal

adviceshouldbesought.

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SCHEDULE .1 .– .FURTHER .DRAFTING .OPTIONS

In addition to the informal negotiation provision included in Section 8.3, Sample Drafting 8, Clause (4), the Parties may decide to include some or all of the informal dispute resolution provisions below. When considering these further options, reference should be made to Section 8.2.4. For illustration purposes, the drafting is based on a choice of the ICC Rules. This drafting will need review/adaptation when using an alternative institution’s rules.

Option 1 – Mediation

(1) If thePartiesareunable tonegotiate thesettlementofaDisputereferred toinaNoticewithin[15]BusinessDaysofthedateoftheNotice(orsuchfurtherperiodasisagreedinwritingbetweenthePartiesbeforetheexpiryofthat[15]BusinessDayperiod),[either/any]PartymayrefertheDisputetomediationbynoticeinwritingtotheother[Party/Parties][attheaddressgivenforthesendingofnoticesunderthisagreementatClause[reference](Notices),andinamannerprovidedforinthatClause](a“Mediation Notice”). IfaPartyrefersaDisputetomediation in accordance with this Clause [Mediation] [both/all] Parties to theDisputeshallbeobligedtofollowtheprocedurebelow.

(2) ThemediationshallbeconductedbyasinglemediatorwhoshallbeappointedbyagreementinwritingbetweentheParties.IfthePartiesareunabletoagreeontheidentityofamediatorwithin[five (5)]BusinessDaysofthedateofthe[MediationNotice],orifthemediatoragreedbythePartiesisorbecomesunableorunwillingtoact,themediatorshallbeappointedby[theICC]ontheapplicationof[either/any]Party.

(3) The mediation shall be conducted in [place] and in the English language underthe[ICCMediationRules].EachPartyshallberepresentedatthemediationbyanindividualwithauthoritytosettletheDispute.

(4) Saveforthepurposesofimplementingand/orenforcingawrittenlegallybindingsettlement agreement or as otherwise required by law, the mediation shall beconductedwithoutprejudicetotherightsofthePartiesinanyfutureproceedings.

(5) Thecostsof themediation, includingthefeesandexpensesof themediator (butexcludingeachParty’sowncosts,whichshallbebornebythePartyincurringthosecosts)shallbeborneequallybytheParties,unlessotherwiseagreedinwriting.

Option 2 – Escalation to a panel of senior representatives

(1) As soon as is practicable after the effective date of this agreement, theContractingAuthorityand thePrivatePartnerwillestablishapanelofseniorrepresentativesoftheParties.TheSeniorPanelwillmeetandattempttoresolveinformally any Disputes referred to the Senior Panel by notice for resolution(“SeniorPanelNotice”).

(2) The Senior Panel will comprise [four members], [two] appointed by each of theContractingAuthorityandthePrivatePartner.EachPartyisentitledtoterminatetheappointmentofarepresentativedesignatedbyittotheSeniorPanelandtoappointareplacement.

Option1maybeusefultoencourageinformalresolutionatanearlystagein

thedispute.

Option2isoftenseeninconstruction

disputes,butcanaddcostsanddelay

finalresolution.

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(3) TherepresentativesontheSeniorPanelwillbedulyauthorisedtomakedecisionsonbehalfof,andtobindcontractually,thePartyappointingsuchrepresentativeinrelationtotheDisputereferredfordetermination.

(4) [AtanymeetingtheSeniorPanelmay,byunanimousresolution,electtoappointamediatortoassisttheminresolvingaDisputeonsuchtermsastheymaythenagree].

(5) The Senior Panel must meet and attempt in good faith to resolve any DisputereferredtothePanelbynegotiationswithin[fifteen (15) business]daysofthedateonwhichtheSeniorPanelNoticewasdelivered.IftheSeniorPanelfailstomeetwithinthistimeframe,andnoextensionisagreedbyPartiestheneitherPartymaysubmittheDisputetoarbitrationorinthecaseofaTechnicalDispute,anexpertinaccordancewithClause[Expert Determination].

(6) Senior Panel Notices convening meetings of the Senior Panel will specify thenatureoftheDispute.

(7) MeetingsoftheSeniorPanelwillbeheldin[insert name of City or address]unlessotherwiseagreedbytheParties.

(8) ThequorumofanySeniorPanelmeetingwillbe[at least one representative of each of the Contracting Authority and the Private Partner]. Ifaquorumisnotpresentwithin30minutesafterthetimeappointedforcommencementofthemeeting,that meeting will be adjourned to a time, day and place agreed upon by therepresentativesofbothParties.Intheeventthereisnoagreementconcerningtheadjournedmeetingorthereisnoquorumattheadjournedmeeting,eitherPartymaysubmittheDisputetoarbitrationinaccordancewithClause[Arbitration]orin the case of aTechnical Dispute, an expert in accordance with Clause [Expert Determination].

(9) The Senior Panel will attempt to resolve the Dispute within [ten (10) business]days,followingthedateonwhichtheSeniorPanelinitiallyconvenespursuanttoClause(5),above.IftheSeniorPanelisunabletoresolvetheDisputewithinthatperiod,eitherPartymayimmediatelysubmittheDisputetoarbitrationorexpertdetermination as required pursuant to Clause [Expert Determination] or Clause[Arbitration].

(10)AtanymeetingoftheSeniorPanel,votingonanydecisionrelatingtotheDisputewillbebyunanimousresolution,witheachrepresentativehavingonevote.DulypassedresolutionsoftheSeniorPanelwillbefinalandcontractuallybindingontheContractingAuthorityandthePrivatePartnerprovidedthattheyareinwritingandsignedbyallmembersoftheSeniorPanel.

(11) If the Dispute is not resolved by amicable settlement between the Parties orthrougharesolutionbytheSeniorPanel,asevidencedbythesigningofitswrittenterms, within [thirty (30) calendar] days of delivery of the Senior Panel NoticeprovidedinClause(1)above],anyPartymaysubmittheDisputetoarbitrationinaccordance with Clause [Arbitration] or in the case of aTechnical Dispute to anexpertinaccordancewithClause[Expert Determination].

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Option 3 – Disputes Review Board Clause

(1) Failing an amicable settlement on a Dispute that is not a Technical DisputepursuanttoCLAUSE[insert reference to the amicable settlement clause]abovewithin[thirty(30)calendar]daysofthereceiptofthenoticeprovidedtherein,any such Dispute shall be referred by either Party for resolution by the disputereviewboard(“Dispute Review Board”)inaccordancewiththisClause[].

(2) ThePartiesherebyagreetoestablishaDisputeReviewBoardinaccordancewiththe Dispute Board Rules of the International Chamber of Commerce (the “ICC Dispute Board Rules”),whichareincorporatedhereinbyreference.

(3) TheDisputeReviewBoardshallbecomprisedofthree(3)members,eachofwhomshall be fluent in [English] with professional experience in the matters withrespecttocontractualobligationsinprojectssimilartothePPPProject,appointedinaccordancewiththeICCDisputeBoardRules.

(4) All Disputes arising out of or in connection with this PPP Contract shall besubmitted, inthefirst instance, totheDisputeReviewBoardinaccordancewiththeICCDisputeBoardRules.Foranygivendispute,theDisputeReviewBoardshallissuearecommendationinaccordancewiththeICCDisputeBoardRules.

(5) IfanyPartyfailstocomplywitharecommendationwhenrequiredtodosopursuanttotheICCDisputeBoardRules,theotherPartymayreferthefailureitself,withouthavingtoreferittotheDisputeResolutionBoard,toarbitrationinaccordancewithClause[insert reference to the arbitration clause].APartythathasfailedtocomplywitharecommendationwhenrequiredtodosopursuanttotheICCDisputeBoardRulesshallnotraiseanyissueastothemeritsoftherecommendationasadefensetoitsfailuretocomplywithoutdelaywiththerecommendation.

(6) If any Party sends a written notice to the other Party and the Dispute ReviewBoard expressing its dissatisfaction with a recommendation, as provided inthe ICC Dispute Board Rules, or if the Dispute Review Board does not issue therecommendationwithinthetimelimitprovidedintheICCDisputeBoardRules,oriftheDisputeReviewBoardisdisbandedpursuanttotheICCDisputeBoardRules,the Dispute shall be finally settled under arbitration in accordance with Clause[insert reference to the arbitrationclause].

Option3isoftenseeninconstruction

disputes,butcanaddcostsanddelay

finalresolution.

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SCHEDULE .2 .– .ASSESSING .WHETHER .THE .PRIVATE .PARTNER .MIGHT .HAVE .RECOURSE .TO .AN .INTERNATIONAL .INVESTMENT .AGREEMENT . .

The Parties should consider whether the Private Partner may, in addition to itscontractual rights, at some point have recourse to an international investmentagreement(“IIA”),whichcouldbeeitheraBilateralInvestmentAgreement(“BIT”)(ofwhichmorethan3,000havebeensignedglobally),amultilateral investmenttreaty(suchastheEnergyCharterTreaty)ortheinvestmentchapterinaFreeTradeAgreement(“FTA”).TheseIIAsprovideinvestorswithanumberofsubstantiveprotectionsagainstStatemeasures,suchasarbitraryanddiscriminatorytreatment,expropriationwithoutadequateandpromptcompensationorfailuretoprovidefairandequitabletreatmentandfullprotectionofsecurity.ThemajorityofIIAsalsoprovideinvestorswiththerightto refer investment disputes to binding arbitration against the host State in whichtheyhaveinvested.

If the home States of the Private Partner and the Contracting Authority are bothparties to an IIA, the Private Partner might, under certain circumstances, be able tobringclaimsforbreachesofsubstantiveprotectionssetforthintherespectiveIIA,andwhichrelatetothePPPContract,underthearbitrationmechanismestablishedintheIIA.Veryoften,themechanismsenvisagedinthisrespectwillbearbitrationundertheUNCITRALRules,ICSIDarbitrationortheICSIDAdditionalFacilityRules(anadditionalsetofarbitrationrulesthatapplytothesettlementofdisputesthatdonotmeetthejurisdictionalrequirementssetforthundertheICSIDConvention).

It is important to note that generally the right to bring a claim pursuant to an IIAexistsindependentlyof,andmaybeinadditionto,anycontractualclaimsunderthePPPContract.

BOND FINANCING9

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127


9.1.1 The concept of Bond Finance

In the general corporate world, instead of borrowing from a bank, companies maychoose to raise private finance by issuing bonds which are purchased by investors.Bonds in this context are debt instruments and may provide more certain, longer-termfinancingthanbankdebt.Thecompanywhichissuesthebondpaysinteresttothe bondholders periodically, most commonly at a fixed rate but also potentially atafloatingorindexlinkedrateandrepaystheprincipalamounteitherinfullonfinalmaturityorinscheduledinstalments.Aswithabankloan,specificdocumentationisrequiredforabondissueandthereisanestablishedprocesstofollow.

Bondissuesmaybepublic(listedonastockexchange)andfreelytradeablebetweeninvestors.Alternatively,bondsmaybeissuedbyprivateplacement(offeredtoaverylimitednumberofinvestors)inwhichcasetheymaybesubjecttotransferrestrictions.Therestrictionswilldependontherelationshipbetweentheissuerandtheinvestors.Aprivatelyplacedtransactioncanbelistedorunlisted.Ifabondispubliclylisted,theissuer will have to comply with the listing authority’s detailed rules on the level ofinformationitmustdisclosetoprospectiveinvestorsaboutitsbusinessandalsowillbesubjecttosecuritieslawswhichwilldictatethespecificsofthedisclosure.

Apublicbondissueisusuallyassignedacreditratingbyatleastoneratingagency.Aprivateplacementmayormaynothaveacreditrating.Thisprovidesanindependentassessment of the underlying credit of the issuer and is a guide to investors as tothe likelihood of the issuer meeting its principal and interest payment obligationsunderthebonds.Someinvestorsmayonly(forregulatoryorpolicyreasons)investin‘investment grade’ issuances (i.e. those rated at least BBB- by Standard & Poor’s orFitchorBaa3byMoody’s).

As bonds can be issued with long maturity dates, they suit the investment profileof institutions seeking predictable long term investments to match their maturingliabilities,suchaspensionfundsandinsurers.

9.1.2 Why are PPP Projects bond financed?

Priortothe2008globalfinancialcrisis,mostPPPProjectsweresuccessfullyfinancedthrough long term commercial bank debt borrowed by the Private Partner. Morerecently,asaresultofthefinancialcrisisandensuingbankingregulation67,thevolumeofbankdebtavailableforlargeinfrastructureprojectshasreducedandloantenorhasshortenedwithacorrespondingeffectonpricingandtheintroductionofrefinancingrisk ifdebtcannotbeobtainedfor thewholeprojectperiod. Inaddition,comparingbids with different tenors has proved challenging, with questions around the non-complianceandcomparabilityofbidswithoutfulltermcommittedpricing.

67 Forexample,theBaselIIIcapitaladequacyrequirementsimposedonbanks.

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ThishasmeantthatinsomePPPmarkets(e.g.particularlyEuropeandAustralia),bothbiddersandContractingAuthoritieshavehadtoconsideralternativeformsoffinance–onthebidders’sidetoensurethattheirbidscanbefinancedandremaincompetitive,andon theContractingAuthorities’side toensure thatvalueformoney isobtainedfromtherangeoffinancingoptionsprocuredbybidders(e.g.byrequiringnon-bankfinancingsolutionstobesubmittedaspartofbids.

Eveninmarketswhereliquidityisnotsuchaconcern,therearealsootherreasonstoconsiderbondfinancingasanalternativefinancingmethod. Insomecircumstances,bondfinance–privateorpublic–canofferlongtermfinanceforPPPProjectsatamoreaffordablepricethanbankdebt.RecentexamplesofthisindevelopedmarketsincludetheprojectsfundedundertheEIB’sProjectBondCreditEnhancementprogramme.Duetothelongertermrepaymentprofileofbonds,scheduledrepaymentsmaybelowerthanbankloanrepaymentsand,insuchcases,thisshouldfeedthroughtoalowerpricedPPP Contract for the Contracting Authority (or end user). From the Private Partner’sperspective,itmayalsoresultinmorecashbeingavailablefordistributiontoitsequityinvestorsduringtherepaymenttermthanwouldbethecaseinabankfinancing.Thelongterm(andgenerallyfixedrate)natureofbondfinancingalsoenablesthePrivatePartnertofixitsfinancingcostsforthelifeofthePPPProject(ortheremaininglifeifafterarefinancing)withouttheneedforseparateinterestratehedgingarrangements,givingitcertaintyandreducingthelikelihoodofasubsequentrefinancing.However,asdiscussedinSection 9.3.2,bondfinancingisunlikelytobesuitableforallPPPProjects,particularlythoseofsmallervalueduetotherelativesizeoftransactioncosts.

Investor appetite is another reason to consider bond financing. Non-bank financialinstitutions (such as insurance companies and pension funds) are becomingincreasingly interested in investing in PPP Projects because they recognize that thelongtermpredictablereturnsinPPPProjectscanprovideahedgetotheprofileoftheirlongtermliabilities.FacilitatingtheentryofsuchinstitutionstothePPPdebtmarketwidens the lender base and increases liquidity.With more private finance available,Contracting Authorities should in turn be able to procure more PPP Projects and atmorecompetitivepricing.68

Bond financing of PPP Projects does have its own challenges, however, which aredescribedfurtherinthisSection 9.Onekeyfactoristhat,particularlyforapublicbond,thepricingofthebondmaynotbefinallycommitteduntilshortly(e.g.fivebusinessdays)beforefinancialclose.ThismaycausedifficultiesfortheContractingAuthorityintheevaluationofbids,giventhatthechoicemaybebetweenabidwithcommittedfinancingandonewherethefinancingmaybenotionallymorecompetitivelypriced,but on an uncommitted basis.69 A bond financing process also has certain timingimplications which need to be factored into the procurement process. Some PPPProjects may also require credit enhancement in order to achieve a successful bondfinancing – this is discussed further in this Section 9 and is particularly relevant inprojects with specific risks (whether political, technological or developmental). Insuch cases, Contracting Authorities should consider engaging with potential creditenhancementprovidersearlyon in theprocurementprocess if thereare likely tobebenefitsinwideningthefieldofpossiblefinancingoptions. See Section 9.5.

68 Anumberofinstitutionshaveproducedresourcesonbondfinancingasanalternativetobankfinancingofinfra-structureprojects.Pleaseseelinksin Appendix, Additional PPP Resources–thesehavebeendrawnonwhereappro-priateincompilingthisGuidance.

69 Itshouldbeborneinmind,however,thateveninabankfinancing,certainelementsofpricingareonlyfixedatfinan-cialclose-seeSection 9.3.4.

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In some cases (e.g. due to the type of risks mentioned above or constraints such astiming), PPP Projects may be financed by other means (e.g. bank debt) at financialclose but refinanced by bond financing at a later stage (usually after constructioncompletion).This Section 9focusesprimarilyonbondfinancingatfinancialclosebutalsotouchesontherefinancingapproach.

TheguidanceinthisSection 9givesanoverviewofthebondfinancingprocessinaPPPProject,highlightsthefactorsaContractingAuthoritywillwanttotakeintoaccountinassessingwhetherbondfinancingcouldbeasuitableoptionforitsPPPProjectand(ifitdecidesthatitis)whatconsiderationsarethenrelevantbothduringthebidphaseandultimatelyinreachingsuccessfulclosewithabondfinancedbid.ThekeypointfortheContractingAuthorityisthatitwouldneedtobepreparedtoadaptitsapproachtofacilitatebondfinancingwhereappropriate–thisshouldnotrequiretheContractingAuthoritytotakeonmoreriskorresponsibilitythanunderabankfinancing.

9 .2 . .UNDERSTANDING .PROJECT .BOND .FINANCING

9.2.1 Overview of bond process

Bonds issued in a PPP Project financing context are commonly known as “projectbonds”. The Private Partner may be the issuer of the project bonds itself, but it iscommonforthebondstobeissuedbyaspecialpurposeentity(the“Issuer”),separatefromthePrivatePartner,whoonlendstheproceedstothePrivatePartner.Thismaybeforreasonsofconvenience,orforregulatoryortaxreasons.Commonly,theIssuerand the Private Partner will be sister companies. Issuers, like Private Partners, mustensure they comply with their constitutional documents, applicable legislation andregulationsandobtainallnecessaryinternalandexternalauthorisations.

The process for issuing the bonds will depend on whether they are to be publiclyissuedorprivatelyplaced.Thetimingdependsonarangeofissuesandduediligencerequirements,suchasthetimerequiredforduediligenceandcreditreviewbyratingagencies and investors, preparation of disclosure documents such as an offeringmemorandum or prospectus, the listing process (if applicable), the opening of bankaccounts, planning and implementation of a roadshow marketing process andpreparationoffinaltransactiondocumentation.

The arranging bank and Private Partner representatives usually go on an investorroadshowatwhichtheywillpresenttheIssuer,thePPPProject,themanagementofthePrivatePartner,theproposedfinancingandtheriskmitigationfeatures,andgivethe investors the opportunity to ask for more information. In the case of a privateplacement,asimilarbutmore targetedprocessaimedat individual investorswouldtakeplace.

Project bonds are repaid in instalments which may be equal or sculpted and/or a‘balloon’ (larger) principal repayment at final maturity. Interest is typically paidregularlyandisknownasthebond“coupon”–thisistheinvestors’return.

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9.2.2 Project Bond structure - single source financing

IfaPPPProjectisfinancedsolelybybondfinancing,thestructurewillresemblethis:

PROJECT BOND STRUCTURE – SINGLE SOURCE

Issuer may beseparate SPV, with

on-loan of bondproceeds to

Private Partner

Security Trust Deed

Account Bank

ISSUER

Bondholders

Bond/IndentureTrustee

ContractingAuthority

Project FinancingSub-contracts

Direct Agreement

Direct Agreement

9.2.3 Project bond structure – multi source financing

Many large project financing transactions include both commercial bank facilitiesandprojectbondfinancing.Thismulti-sourceapproachmaybeusedforavarietyofreasons, includingthediversificationoffinancingsources, theuseofbankfinancingasatemporarybridgewhileawaitingoptimalcapitalmarketfinancingconditionsandtheneedforrevolvingworkingcapitalfinance,whichrealisticallycanonlybeprovidedbybanks.

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IfthePPPProjectistobefinancedbyamixtureofbondandbankfinance,thestructureislikelytoresemblethefollowing:

PROJECT BOND STRUCTURE – MULTI SOURCE

Issuer may beseparate SPV, with

on-loan of bondproceeds to

Private Partner

Security

Bond proceedsIntercreditor

Agreement

Account Bank

ISSUER

Bondholders

Security Trustee Facility Agent

Bond Trustee

Bank Lenders

ContractingAuthority

Project FinancingSub-contracts

Direct Agreement

Direct Agreement

9.2.4 Parties

ThekeypartiesinaprojectbondfinancingaretheIssuer,thebondholdersand,forapublicbond,thearrangerandthebondtrustee.Inaprivateplacementtheremaybearepresentativeforbondholders,butthisisnotuniversal.

Asinabank-fundedproject,asecuritytrusteeoragentwillholdsecurityinterestsforthebondholders.

9.2.5 Documentation

The bond-specific documentation will depend on the transaction, but a bond issuegenerallyrequiresthefollowing:

• Aformofofferingmemorandum–thismustcontainallinformationanddisclosurewhichaninvestorneedstomakeaninformedinvestmentdecision.Thestandardofdisclosurewillbemandatedbytherulesoftherelevantstockexchangeand/orapplicablesecuritieslaws.TheIssuerisresponsibleandliablefortheaccuracyofthisdocumentbothundersecuritieslawsandcontractuallyunderindemnitiesgiven to the arrangers under the subscription arrangements for the bond. TheofferingmemorandumsetsoutriskfactorsrelatingtothebondsandinformationontheIssuer’sbusiness,theproject(includinganyriskmitigation),theIssuer,thePrivatePartner,anyguarantorandtheuseofthebondproceeds.ForaPPPProject,italsodiscloses thenatureof thePPPContract thePrivatePartnerhaswith therelevant Contracting Authority. A public bond issuance will always involve an

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offeringmemorandum;aprivateplacementmayhavea(lessformal)informationmemorandum. In each case, as well as its legal and contractual relevance, theofferingmemorandumisamarketingtool,usedbythearrangerstosellthebonds.

• Forapublicbondissuance,aSubscriptionorPurchaseAgreement–betweentheIssuerandtheArrangerbywhichtheArrangersubscribesforthebonds.

• ATrustDeed(orIndentureforNewYorklawbonds)–betweentheIssuerandtheBondTrustee.Thebondsareconstitutedunderthisdocumentanditmaycontainthe covenant package (if there is more than one source of finance, a commontermsagreementmaybeused).

• For private placements, a Note Purchase Agreement or Note SubscriptionAgreement–underwhichtheprivatelyplacedbondswillbeconstitutedandtheinitialholderswillagreetobuythebonds.

Aswithabankfinancing,therewillalsobesecurity,equityandintercreditordocuments,and the concession agreement will usually require some limited amendment asdescribedinSection 9.3.9below.

9.2.6 Public bond issuance

AsmentionedinSection 9.2.1,publicbondsmaybeissuedeitherbythePrivatePartner,orbyaseparate(usuallysister)companyincorporatedtoissuethebondsandon-lendthe proceeds to the Private Partner. An Issuer may choose to distribute its projectbondsthrougheitheranarranger(typicallyabank)orasyndicateofbanks(inwhichcasethearrangerwillbethe“leadmanager”or“leadarranger”).Thearrangerservesasanadvisor,structuresthetransaction,andsubscribesforthebondspursuanttoaSubscriptionAgreement(orlesscommonlyunderwritesthebondsviaanUnderwritingAgreement). Inpracticehowever, thearrangerwillonlyenter into theagreement tosubscribeforthebondsafewdays(normallyfivebusinessdays)priortotheclosingdate,andpriortodoingsothearrangerwillhaveenteredintoback-to-backarrangementswith investors whereby investors commit to buying the bonds from the arranger. Ifthis arrangement is not honoured by the investor, the arranger remains bound tosubscribefor(orunderwrite)thebondspursuanttothetermsoftheSubscription(orUnderwriting)Agreement.

9.2.7 Private placement issuance

The debt private placement process is similar to the public bond process but morestraightforward. No arranger is appointed, but rather a placement agent who willfacilitate but not underwrite the placement. No syndicate of banks is required asthe debt will be privately placed to a small number of select investors. The termsandconditionsof thebonds,willbenegotiateddirectlybetween the Issuerand theinvestors(similartothenegotiationprocessforabankloan).Similarly,theflowofduediligenceinformationwillbedirectlybetweentheIssuerandtheinvestors.Anagentwill probably still be required to carry out administrative tasks, such as making thepaymentsofprincipalandinteresttoinvestors.

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9.2.8 Types of non-bank bond investor

Non-bank capital market investors are typically insurers, specialist fund managers,pension funds and sovereign wealth funds. Traditionally, some of these investorshavetendedtoinvestinprojectequityasopposedtodebt,buttheyarenowlookingincreasingly at the debt side. Their investment strategies vary and various factorsinfluence their approach, such as market trends, investment beliefs, regulation,risk appetite, liability considerations, cultural factors, governance structures, taxissues, jurisdiction and, ultimately, domestically available assets. Some may requireinvestmentstohaveaninvestmentgradecreditratingorsecurity,ortobelisted.Otherscan hold non-investment grade or unrated instruments. The return they expect onbondinvestmentswilldependontherisksinvolvedandhoweasilytheycanliquidatetheir investment. As with commercial banks, they will have competing demands ontheirfundsandonlyinvestifrisksaremitigatedtotheirsatisfaction.

ThetwomainchallengesforinstitutionalinvestorslookingtoinvestinPPPProjectsareunderstandingtheriskprofileoftheassetandtheneedforextensiveinteractionwithcreditors.ThesearediscussedfurtherinSections 9.3.8 and 9.5.1.

9.2.9 Drawdown of Bond Finance

Bondproceedsareusuallyreceived ina lumpsumatFinancialClose,butas thePPPProject’s expenditure profile may vary, the Private Partner will need to invest theseproceeds until they are actually required by the PPP Project over its constructionperiod70.Thistypicallyresultsina“negativecarry”becausetheinterestreceivedbythePrivatePartnerisgenerallylowerthanthatpaidtothebondholders(althoughthismaybemitigatedbyanoveralllowercostoffunding).Thiscontrastswithtraditionalbankfinancingwherefundsaredrawnovertheconstructionperiodasandwhenrequired.

In some circumstances (more likely in private placements), the bondholders mayagreetostageddrawdownofthebondproceeds(moreinlinewiththePPPProject’sexpenditure profile). This means that bonds are only issued and subscribed foreffectivelyasandwhenthefundingisneeded,ratherthanallbeingissuedatfinancialclose.Whilethismayreducetheriskofnegativecarry,bondholdersmayrequireahigherreturnontheirinvestmentbecausetheyhavetokeepthosefundsavailableandarenotabletofreelyinvestthemelsewhere.Astageddrawdownstructurewillgenerallylimittheuniverseofpotentialinvestorsasonlycertaininvestorscancopewithit.ThisisonereasonwhyPPPProjectshavebeenbankfinancedduringtheconstructionperiodandthenrefinancedbyprojectbondsoncefinancingisfullydrawnandconstructionhascompletedsocashflowisbeinggenerated.


A staged drawdown structure is less likely to be workable in an emerging market PPPProject.Similarly,whilealternativesolutionstoreduce/avoidnegativecarryhavebeentriedindevelopedmarkets,thesearelikelytobehighlybespokeandonlyfeasibleforacertainclassofinvestorinanestablishedmarket.

70 Inabondfinancing,theproceedsareoftendepositedwithahighlyratedbankuntilrequired,throughafixed-ratedeposit,toreducethecostofservicingunutiliseddebt.

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9.2.10 Credit rating

As stated above, bond issuances (especially public issuances) often carry a creditratingfromanexternalcreditratingagency.Manyinvestorswill,forregulatory,capitaladequacyorpolicyreasonsonlybeabletoinvestinratedinstruments.Acreditratingisusedasatoolduringthemarketingofthebondtoinvestors.

Typically,eachratingagencywouldalsopublisha‘pre-salereport’,settingoutitsratingrationale for the PPP Project and assigning a provisional rating (denoted by a“[P]”infrontof therating). Informationfromthepre-salereportwill typicallybeusedtofacilitatetheroadshowphase.Adefinitiveratingistypicallyassignedoncethebondshavebeenissuedandfollowingtheagency’sreviewoffinaldocumentation.


9.3.1 Advisors

If bond financing is under consideration, the Contracting Authority should ensure itengages legal and financial advisers with the requisite experience in project bonds(aswellasotherfinancingoptions)asearlyaspossible.Suchadvicewillbeessentialin assessing suitability of financing, formulating bid requirements, evaluating bids,assessing pricing and deliverability, reviewing the relevant financing documentsand understanding how the bond financing impacts the PPP Contract provisionsand mechanics. As flagged in Section 4.2.2, Termination Payments, understanding therelevantagreementsisalsokeytolimitingtheContractingAuthority’sliabilityunderanycompensationprovisionslinkedtothefinancingdocuments.

9.3.2 Suitability of financing

IftheContractingAuthoritywishesbidderstobeabletosubmitthebestvaluefinancingavailable, thebidprocessshould,whereappropriate,allowforfinancingapproachesotherthanbankdebt.Atprojectpreparationstage,theContractingAuthorityshouldthereforeassessthesuitabilityofthekeyfeaturesofitsproposedPPPProjectforbondfinancingand,ifitisconsideredsuitable,publicisethistobidderswhenthePPPProjectis first launched. In such circumstances, bid documentation and procurement rulesshouldbedraftedaccordingly.

While the Private Partner will ultimately decide on its financing approach, theContractingAuthority’sroleistobeneutralastothefinancingmethodtotheextentappropriateforitsPPPProject,buttofacilitate,whereappropriate,differentfinancingmethods.SelectingtherighttypeoffinancingwilldependonaPPPProject’sparticularcharacteristics. Both Sponsors and Contracting Authorities will need to take intoaccounta rangeof factorsandassesshow thesecompareunderdifferentfinancingapproaches(e.g.bankorbondfinancing–whetherpublicorprivateplacement).TheseincludetheflexibilitytoaccommodatechangestocircumstancesoverthelifeofthePPP Project, the degree to which the tenors and interest rate structures offered byfinancepartieslendingthrougheachtypeoffinancingbestsuittherequirementsofthePPPProject’srevenuesanddebtprofile,thenatureofthetransactionriskandtheriskappetiteofthetargetinvestors,theimportanceofconfidentiality(inthecontextof the level of disclosure which may be required), the all-in cost effectiveness andeconomicsofthemethodchosenandtheconsequentvalueformoney.

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ContractingAuthoritiesshouldbearinmindthatbondfinancingsinvolvesignificantpreparatorycosts(e.g.obtainingacreditrating,preparingthebonddocumentationandmarketing).Legalcostscanbesignificantespeciallyinthecaseofpubliclylistedissues.Becauseoftheircosts,complexityandinvestorappetite,bondfinancingsaretypicallybestsuitedtoPPPtransactionsofasignificantsize (e.g. involvingbondfinancing inexcessofUSD200million).Whilstpublicofferingsmaysuitlargertransactions,privateplacements,giventhemoreflexibleinformationflowandthelessrigorousdisclosurerequirements,arepotentiallymoresuitedtothePPPmarket.Inaddition,theuniverseofprivateplacementinvestorsisgrowingandthereforeliquidityisenhanced.

Ifpublicauthoritybiddingprocedurerulesrequirecertaintyoffinancingthismaylimitthechoicetoadegree.Asexplainedabove,inapublicbondsolution,thepricingandavailabilityofthefinancingwillasaruleonlybecommittedveryshortlypriortoclosing,although, as noted, elements of a bank-funded solution are similarly uncommitteduntilclosing.Incertainjurisdictions,thechoiceoffinancingforpublicauthoritiesmayalsobeshapedbypracticeratherthanbylaw.See Section 9.3.6.

9.3.3 Comparing bids

Comparingbidscanbemorecomplexwheredifferentfinancingsolutionsarepresentedandbiddocumentationshouldbedraftedtofacilitateatransparentcomparisonofallfinancesolutionsorcategoriesofsolutions.

One option for the Contracting Authority may be to require bidders to submit acompliantbidbasedonspecificterms(e.g.bankdebt),buttopermitvariantbidsaswell(e.g.bondfinancing).TheContractingAuthorityshouldbearinmindthatpreparingtwofinancingoffersiscostlyforbiddersandbiddersarelikelytowanttoselectafinancingapproachasthebidprocessreachesthelatterstagesandafullydevelopedsolutionis typically required. As is the case for any tenders that require significant bidderinvestment,theContractingAuthoritymaywishtoconsiderwhetheritisappropriatetoreimbursepartofthecostsassociatedwithpreparingfinancingproposals.

AsflaggedinSection 9.3.1,specialistexpertiseisessentialtoassistinbidevaluationand,as regards bond solutions specifically, to assess differences in placement capability,pricinglevels,pricingfeaturesandmeansofmanagingpricingrisk–aprocesswhichcan be more complicated in bond financings due to the pricing process. See Sections 9.1.2, 9.3.4 and 9.3.5.

9.3.4 Assessing deliverability

The deliverability and pricing of public bonds are normally only firmed up shortlybeforeactualissuance(i.e.afewdayspriortofinancialclose)astheunderwritingofbondsbytheirarrangersisnotcommonpractice.AnelementofdeliverabilityriskwillthereforeremainwiththeContractingAuthorityinawaywhichwouldnotbethecasein a bank financing.The position can be different in the private placement market,althoughthiswilldependoninvestorsbeingwillingtoholdpricingduringabiddingprocess.ContractingAuthoritieswilloftenfinditdifficulttoseekfullycommittedbondfinancing offers at bid or final offer stages and commitments obtained from banksatbidorfinalofferstagesmaybe–orappeartobe–strongerthanthoseobtainedforbondsolutions.Itshouldhoweverbeborneinmindthat,whilstmarginsforbankdebt may be fixed and commitments (which will generally have a certain level of

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conditionality attached) can be obtained from banks in relation to the margin, theunderlying swap rate which will affect the all-in cost payable by the ContractingAuthoritywillonlybefixedatfinancialclose.Therefore,whilstdeliverabilityriskmaybesomewhatgreaterinabondsolution,elementsofthefinalcostofabanksolutionequallyremainaContractingAuthorityriskuntilfinancialclose.

Contracting Authorities can obtain some comfort that a public bond solution canbe delivered by requiring bond arrangers to provide letters of support at bid orfinal offer stages and relying on the expert opinion of the Contracting Authority’sadviser.Thetermsofthebondarrangersupportlettersshouldthereforebesetwithcare. Inaddition,atfinalofferstage,tohelpinmitigatingthedeliverabilityrisk, it isadvisable that the Contracting Authority require bidders to obtain a“pre-rating” ontheir proposed financial structure. The Contracting Authority may also ask biddersto (i) submitevidence thataminimumratingsufficient todrive investordemand isachievable(e.g. investmentgrade– that is,BBB-orhigher,orevenA)and(ii)accepttheriskofanypriceincreasesassociatedwithfailingtoeventuallysecurethetargetedrating.AsflaggedinSection 9.3.3,ContractingAuthoritiesmayneedtocomparebondproposalsfromseveralbidders.

9.3.5 Assessing price

Inordertobeabletocarryoutapropercomparisonoffinancingoffers,theContractingAuthorityshouldsetoutinthetenderdocumentsclearminimumrequirementsandevaluationcriteriatofacilitateacorrectcomparisonof(uncommitted)bondfinancedbidsasagainstcommittedbankorcorporatefinancedbids.Thesamecomplexityoccurswhen bidders are allowed to submit offers with mixed financing. The ContractingAuthoritymayalsowishtoincluderequirementsrelatingtorating(boththelevelandthe identityof theagencyoragenciesproviding therating).Inaddition toassessingprice(whichmaybedifficultwithoutafirmpricingcommitment), it iskeytoassesstheriskandrobustnessofthepricingmethodologyusedbybiddersforanyproposedbond solution (detailing the various pricing components).The pricing methodologyshouldrefer,totheextentpossible,tomarketpricesforsimilarbondissuesorbasketsof bond issues or, where such comparators are not available, sovereign issuances orissuances by government agencies or parastatal organisations could potentially beused as reference points. When seeking final offers, the Contracting Authority mayconsiderproviding indicativebondpricingdataorbenchmarkyieldcurvesonwhichbidderscanbasetheiroffers.Bidderswouldusesuchpricingintheirfinancialmodelsto derive the price of their offer. Such pricing data should break down informationaccording to different rating outcomes and other key features of the financing.TheContracting Authority could consider setting a pricing range within which the PPPremainsaffordableandthebondswouldbeissuedandreservingtherightnottoclosethetransactionifpricingfallsoutsidethisrange.

9.3.6 Price fluctuation between preferred bidder and financial close

Asmentionedin Section 9.3.4 ,thepricingofpublicbonds(andinsomecasesprivateplacements)isonlyconfirmedafewdayspriortoactualissuanceandfinalpublicbondpricing is largely market-driven, so there is a risk of price fluctuation between finaloffersandfinancialclose.Inordertohelpeliminateanypotentialuncertaintyinprice

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betweenthebidstageandfinalpricing,atanearlystageoftheprocurementprocesstheContractingAuthorityandthebiddersshoulddiscussarisksharingmechanismforallocatingtheriskofpricefluctuations.Dependingonthejurisdiction,thiswilloftenresultinbiddersprovidingafirmupfrontcommitment,withthefluctuationriskbeingassumedasagreed–usuallybytheContractingAuthoritybutsometimesbyall(oracombination)ofthesponsor,thebidder,theinvestorsandtheContractingAuthority.Suchmechanismsmayalsobelefttothebidders’discretionaspartoftheirbidstrategy.

Following appointment of preferred bidder, the Contracting Authority should alsorequire the preferred bidder to track pricing movements and inform it on a regularbasisuptofinancialclose.

ContractingAuthoritiesshouldalsoensurethatthemechanicsoftheclosingfitwithnational(public)lawrulesonbudgetapprovals(asthepreferredbidderannouncementorawardmaytakeplaceforapricethatwillonlybedeterminedaftertheawardandmayneedtobeconditional).


France’spublicprocurementrulesobligetheContractingAuthoritytoagreeonatotalcostofthePPPProjectatanearlystage–anapproachgeneratedbypracticeratherthanlaw.Thismaysteerthetransactiontowardsbankfinancingandprivateplacementsbecausethepriceinapublicbondissue isonlysetat the‘pricing’stage(afewdaysbefore issuance)whichcreatesuncertaintyintheexacttotalcostofthePPPProject.

Belgianmarketpractice,andtoalargeextentpubliclaw,isinmanywayssimilartothatinFrance,butabondfinancedroadprojectprovedpossiblethroughacombinationofinnovativetender and contract rules, including measures whereby the Contracting Authority couldassessandapprovemaximumexpenditurepriortocontractaward.

9.3.7 Timing

ContractingAuthoritiesneedtobeawarethatbondsolutionsgenerallyrequiremoretimetopreparethanbanksolutionsasthereisusuallyaneedtoobtaincreditratings,prepare the bond placement documentation, market the bonds with investors andmeetregulatoryrequirements.Theprocurementtimetablewillneedtocaterforthis.

AsflaggedinSection 9.2.10,apre-ratingmayberequiredatfinalofferstageandafinalratingatfinancialclose.Aratingprocesstypicallylastsforatleastfourweeks–longerforamorecomplicatedtransaction.However,thepreparationoftherequiredsupportingmaterialneedstotracktheprogressmadeindevelopingabid.Asaresult,theprocessofseekingapre-ratingcanonlystartoncethedealstructure(e.g.risksharing,otherkeytermsofthePPPContract)isstableandisunlikelytochangematerially.Likewise,afinalratingcanonlybesoughtoncethePPPProjectdocumentationisvirtuallyfinalised.Overall,onceapreferredbidderhasbeenselectedandthePPPProjectdocumentationisfinalised,seekingafinalratingandmarketingthebondsmaytakefourtosixweekslongerthanfinancialcloseinabankfinancing.

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9.3.8 Bondholder decision making

Holding project bonds requires more resources than holding sovereign or corporatebondsduetotheneedtorespondefficientlytothenumerouswaivers,changeconsentsandotherissueswhichwillinevitablyariseduringaPPPProject’sconstructionphase.Akeydifferencetobanklendersisthatinstitutionalinvestorsmaynothavethesamecapacity to be actively involved with the Issuer and the Private Partner, however,particularlyinEurope,therearemoreandmoreactiveprivateinvestorswhowillwishto be - and be capable of being - closely involved with a PPP Project on an ongoingbasis.TheContractingAuthorityanditsadvisersneedtobeawareofthisandcheckthatthebondholderdecisionmakingmechanismsinplacewillnotinhibitthePrivatePartner’sabilitytoperformthePPPContract.

In monoline-guaranteed bonds, this risk was mitigated by the monoline acting as“controllingcreditor”andtakingdecisionsonbehalfofthebondholders.Thisstructurehas, however, caused problems where monolines have been downgraded, but stillcontinue to be entitled to take such decisions, despite not offering tangible creditenhancement.Thereareothermechanisms,knownasmonitoringadvisersorsimilar,designed to facilitate effective decision-making, although these have not met withuniversal acceptance in the market since the monitoring adviser does not providecreditandthereforehasnoriskpositionalongsidethebondholders toprotect in itsdecision-making.Creditenhancementstructuresmayachieveasimilarresultwherethereisa“creditprovider”.See Section 9.5.

9.3.9 Changes to documentation

If a PPP Project is to be bond financed, the PPP Contract drafting must reflect thestructure,partiesanddocumentationinvolved.Thekeypointtobearinmindisthatinpracticethedraftingwillnotrequiremuchamendment.Broadlyspeaking,themainprovisionsaffectedare:

• Definitionofthefinancingdocuments(e.g.“SeniorFinanceDocuments”)–thiswillneedtoincludethebondfinancedocumentation(butnotanyon-loandocumentsbetweentheIssuerandthePrivatePartner).

• Referencestotherelevantparties-theIssuermayneedtobereferredtoifseparatefromthePrivatePartner,thedefinitionofLendersmayneedadapting.

• Terminationpayments-theseneedtoreflectthebondmechanics. See Section 9.4.

• Confidentiality–apartfromfacilitatingthedisclosurearoundthePPPProject intheofferingmemorandum,theprovisionswillalsoneedtopermitdetailsofthePPPProjecttobedisclosedtopotentialinvestorswherethebondsaretransferable.In addition, as well as the initial disclosure in the offering memorandum of the projectarrangements,includingdetailsofcontracts,securitieslawswillgenerallyrequireongoingpublicdisclosureofprojectperformance,especiallyofsignificantunderperformance.ThisshouldbothbeborneinmindbyprojectparticipantsandbereflectedintheProjectContract.

• Refinancing–theprovisionsneedtopermitordinarytradingofthebondswithouttriggeringtherefinancingprovisions(e.g.byadaptingthedefinitionof“ExemptRefinancing”).

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ThesameappliestoensuretheDirectAgreementworkseffectively(see Section 6, Lenders’ Step-in Rights).Additionalchangesmayberequiredtoreflectcertainbondmechanics(e.g.differentreportingrequirements/timing)andmorethanonepartymaywanttherights normally afforded to the Agent (e.g. both the Credit Provider and the SecurityTrusteewouldnormallyreceiveallnotificationsusuallyprovidedtoanAgent).

In considering amendments to documents, a Contracting Authority wishing toattract the full range of financing options will want to avoid making bond-specificamendments beyond those strictly necessary to ensure that it is not making otherfinance solutions less attractive to bidders and/or discouraging bank debt providersfromparticipating.Itwillalsowanttoensurethatanysolution-specificamendmentsareobjectivelyanddulyjustified.

Where the PPP Project is being financed through other means (e.g. bank debt) atfinancialclose,butabondrefinancingisenvisagedupfront,contractprovisionsshouldbedraftedwiththisinmind.ThismayentaildraftingprovisionsappropriatelyinthePPPContractsignedatfinancialclose(e.g.asregardsrefinancing),aswellaspotentiallyschedulingamendmentsdesignedtocomeintoeffectwhenthebondrefinancingisimplemented. Ifabondrefinancinghasnotbeencontemplated in thePPPContract,appropriateamendmentswillneedtobeagreedatthetimewhendiscussingconsentandrelatedmatters.See Section 5, Refinancing.

9 .4 . .TERMINATION .PAYMENT .CALCULATION

9.4.1 Calculation of Outstanding Senior Debt

Only bonds that have been issued and purchased at financial close should count asOutstanding Senior Debt. Bonds which have been issued but are being held by theIssuer to be sold to raise further financing at a later stage (e.g. to cover the cost ofcertain changes required under the PPP Contract) should not count until they haveactuallybeenpurchased.Onlytheactualamountpaidforthebondsshouldbetakenintoaccount-iftheyarenotissued“atpar”(i.e.attheirfacevalue)butatapremiumoradiscount,carefulconsiderationwillbeneededasregardstheirtreatment.

9.4.2 Make-whole payments

Thetermsandconditionsofprojectbondsusuallyincludebreakcostprovisionswherethereisanearlyrepaymentofthebondstocompensatebondholdersforthelossofyieldovertheremaininglifeofthebonds.Thebondtermswillthereforegenerallycallforthepaymentofaprepaymentfeetoputbondholdersinanequivalentpositionasifthebondshadnotbeenprepaid.Thisisknownasa“make-whole”paymentandiscalculated according to a specified formula which applies a particular discount rate(whichwillbebasedontheyieldonagovernmentbondwithamaturityequivalenttotheaveragelifeofthebonds),reflectingthefactthatthepaymentisreceivedearly.Essentially,themake-wholeamountwouldnotionallyallowtheinvestortoinvesttheamountreceivedinearlyredemptioninagovernmentbondandreceivethesameyieldasifithadremainedinvestedintheprojectbond.ContractingAuthoritiesmaywishtoconsiderimposingmoreriskoninvestorsbyaddingamargintothegovernmentbondyieldtoproducethediscountrate.

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It may not be appropriate for the Contracting Authority to include such break costsin the termination compensation calculation for every termination situation. Therecommended approach in some jurisdictions (e.g. the UK and Belgium) has beenfortheContractingAuthoritytopaythefullmake-wholeamountonterminationforContracting Authority Default71, a reduced amount on Voluntary Termination, andno payment on any other termination (including Force Majeure and Private PartnerDefaulttermination)althoughContractingAuthoritiesshouldconsiderwhetherafullmake-wholepaymentisrequiredinanycircumstances.However,inemergingmarkets,forexample,theremaybejustificationsforincludingamake-wholeamountinmoretermination scenarios (e.g. Force Majeure or potentially Private Partner Default,although–particularlyinthelattercase–thevalueformoneyquestionwouldhaveto be addressed). In relation to private placements, some investors (particularly USinvestors)willinsistoncurrencyswapbreakagepaymentsonearlyterminationofnon-USDinstruments,sincesuchinvestorsfundthemselvesonlyinUSdollars.ContractingAuthoritieswillneedtoconsiderthevalueformoneyquestions inherent infundingsuchpayments.See Section 4, Termination Payments.

9.4.3 Fees and other costs

As with bond break costs, the Contracting Authority will also want to ensure thatotherbond-relatedfeesandcostsareonlyincludedintheterminationcompensationcalculationifappropriateandthat there isnodoublecountingbetweenthevariousfinancial instruments. There may also be fees associated with guarantees or othercreditenhancementproducts.

9 .5 . .CREDIT .ENHANCEMENT

9.5.1 Benefits of credit enhancement

CreditenhancementcanbehelpfulforPPPProjectsthatfacechallengesinlong-termfinancing,ormightotherwisenotbefinanceableatall.ItisalsousefulforlargePPPProjects where liquidity may be an issue. While credit enhancement is not alwaysessential, it is likely to be extremely useful, if not vital, in successfully financingPPP Projects with particular risks (e.g. political, technological or development). TheContractingAuthorityneedstobealiveatanearlystageoftheprocurementprocessto where credit enhancement and particular credit ratings are likely to be requiredbyinvestorsandhowthiscouldbenefititbypossiblyloweringthecostoffinancingandresultinginamorecompetitivepriceandbettervalueformoney.TheContractingAuthorityshouldbepreparedtoengageearlyonwithpotentialcreditenhancementproviders. See Section 9.2.10.

Oneexampleofakeychallengeinachievingasuccessfulbondfinancingatfinancialcloseisconstructionrisk.Thebondmarkethastraditionallybeenaversetoinvestingpriortoconstructioncompletion,duetotheperceivedriskoftheassetnotbeingbuiltand being unable to start earning income to meet principal repayments under the

71 Byextrapolation,otherterminationeventsforwhichtheContractingAuthoritybearstherisk(e.g.MAGAandChangeinLaw)mightfollowasimilarapproach.

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bonds.72TherearesignsthatinvestorattitudesareslowlychangingastheinvestorsbegintounderstandPPPProjectriskbetter.Studiesofinfrastructureprojects(e.g.byMoody’s73)haveshownthatthedefaultrateinPPPProjectsisrelativelylow(perhapsbecause of the level of due diligence typically carried out by all parties before PPPContract signature, the in-built checks and balances in the project and financedocumentationand themutualdesireofallparties toensure thePPPProjectstartsgeneratingincome).However,creditenhancementcanalsohelpmitigatethisrisktoencouragenon-bankinvestors’appetite.

Credit enhancement usually has the effect of taking the “first loss”, insulatingbondholdersagainstacertainleveloflossinadefaultorterminationscenario,and/or providing liquidity in times of cashflow stress. This can provide reassurance topotentialinvestorsaswellaspotentiallyresultinginahighercreditrating.Dependingontheformofcreditenhancement,itmayalsoresultinthecreditproviderbeingthecontrollingcreditorfordecision–makingpurposes.See Section 9.3.8.


The institutional investor market for infrastructure in Europe has evolved to the extentthatthereisnowareadysupplyof institutionalcapitalforrobustPPPProjectsinstablecountries.Creditenhancementisnotalwaysneeded.However,itwillcontinuetobeneededto facilitate the use of non-bank funding in PPP Projects with technology risk, unusualdevelopmentorconstructionrisk,significantdemandriskorinchallengingjurisdictions.

9.5.2 Types of credit enhancement

Project bonds can be credit enhanced in whole or in part through various means,including:

• Guarantee: aguaranteeofthePrivatePartner’sobligationsmightbeprovidedbyasponsor(ifithasasuitablyhighcreditrating),abankoramultilateralagency.Insomecases,aguaranteemightequatetowholesalecreditsubstitution(asdistinctfromenhancement).

• Wrap: thisistheprovisionofinsurancebyahighlyratedprivatesectorfinancialguarantor (often a ‘monoline’ insurer), insuring the underlying principal andinterest payments on a bond in return for a fee. Although not uncommon inEuropebeforethefinancialcrisis,onlyonemajor internationalmonolineinsurercontinuestooperate.Theinsurer’screditratingiskeytotheratingofthebonds.

• Sovereign Guarantee: in some circumstances, it may be value for money forgovernmentstoprovideaguarantee(typicallyinreturnforafee).Thismaybepartofaconcertedprogrammetofacilitateinfrastructureinvestment.

72 Asinabankfinancing,abondfinancingistypicallystructuredsothatinterestpaymentsduringconstructionaremetoutofdrawdowns.

73 Moody’sInvestorsServiceDataReport(6March2017):DefaultandRecoveryRatesforProjectFinanceBankLoans,1983-2015

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• Multilateral product: theWorld Bank, MIGA and IFC have a long track record inproviding guarantees for bonds.74 These guarantees generally focus on specificriskswhichtheprivatesectorisunabletomanage(suchasadversegovernmentaction)andareavailabletoWorldBankandIDAcountries.MIGAinsurancefocusesonpoliticalrisk.Moregenerally,sincethefinancialcrisis,bodiessuchastheEIBandtheAsianDevelopmentBank75havebeenconsideringwaystoboostliquidityandincentivisecapitalmarketsinvestorstoinvestininfrastructureinbothdevelopedandemergingmarkets.Multilateralfundingagenciesanddevelopmentbanksaretheidealchannelforthistypeofsupportbecausetheyhaveboththecreditqualityandthepoliticalinfluencetostimulateinvestorappetite.

The EIB Project Bond Credit Enhancement Programme (PBCE) was launched toprovide support for capital markets financing of infrastructure and to broadentheinvestorbaseforinfrastructureprojects.Itofferscreditenhancementintwoforms:funded(internal)involvingEIBasaninternalpartyinvestinginthecapitalstructure, and unfunded (external). The unfunded form involves the provisionof a standby letter of credit in favour of the bond trustee for 20% (now 30%,followingthepilotphase)ofthevalueofthebond.ThisallowsthebondholderstodrawdowncashfromtheEIBwhichcanbeusedtomakeprincipalandinterestpaymentstotheseniordebtholdersaswellasfinancingacostoverrunor,insomecases,arevenueshortfall.ThePrivatePartnerpaysinterestonanydrawdownandacommitmentfeetotheEIB.EBRDandMIGAhaverecentlysuccessfullypartneredonariskmitigationproductusedonaTurkishproject.EBRDprovidedaliquidityfacilityforconstructioncostoverrunsandtokeepdebtpaymentscurrentduringoperationandMIGAprovidedpoliticalriskinsurancetoinsulatetheprojectfromtheriskofcertainadversegovernmentaction.

TenprojectsinvolvingthePBCEweresuccessfullybondfinancedinitspilotphase.Moody’sInvestorsService76reportedthatthisdemonstratedtheeffectivenessofproject bond credit enhancement in improving projects’ risk profiles, includingin thesecasesbymitigatingcountry-specific riskbyachievingproject ratingsator above the rating of the host sovereign77 (which the EBRD/MIGA product alsoachieved). Both the PBCE and the EBRD/MIGA products have therefore had theeffectofmakingtheprojectbondsintoaninvestmentassafeas,orindeedsaferthan,governmentbonds.

74 http://treasury.worldbank.org/documents/GuaranteesMatrix.pdf75 In2015,AsianDevelopmentBankprovideda75%guaranteetoaPhilippineprojectbond.76 Moody’s InvestorsServiceSectorIn-depth(14April2016): InfrastructureRenewalandInvestment-Europeproject

bondmarketsetforgrowthafterpilotinitiativeendorsed77 AsshownbytheratingMoody’sassignedtheN25inIreland(Baa1positive)andCAVinItaly(Baa2stable).

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Credit support like the PBCE could be used to mitigate sovereign and macroeconomicrisks as well as project-specific risks. It could benefit PPP Projects which are higherrisk instablecreditworthycountries,aswellasPPPProjects incountrieswithweakorchallengingcreditprofiles.Manysuchcreditenhancementtoolsarealreadyavailableforthispurposefrommultilateralandbilateralinstitutionsandtheiruseisbeinggraduallymainstreamedandincreased.

Credit support can also overcome basic unfamiliarity with non-bank funding forinfrastructureeven inmoredevelopedfinancingmarkets (e.g. thefirstBelgianprojectbondwasaPBCEpilotproject).

CORPORATE FINANCING10

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10.1.1 The concept of Corporate Financing

Corporateentitiestypicallyusearangeoffinancingmeanstofundtheirdailybusinessneeds across their corporate group.They will have credit facility arrangements withtheir relationship banks and may also raise finance through bond issues (public orprivate).Theymayalsohavemultipleoperatingassetsalreadygeneratingrevenue.Ifanewinvestmentopportunityarises(suchasaPPPProject),somecorporateentitiesmayprefertoputinplaceadditionalfinanceonacorporatebasis insteadofgoingdownaninvestment-specificroute(suchasprojectfinance).Thestrengthof thecorporateentity’sbalancesheet (potentiallyalongsideconsortiumpartners,parentcompaniesor key subcontractor(s)) will be key to its ability to do this, as generally the lendersorinvestorsinvolvedinthenewcorporatefinancingwillhaverecoursetothewholecorporateentity,notjustthespecificassetbeingfinanced.Dependingonthesizeofthecorporateentityrelativetothesizeoftheinvestmentinquestion,thelendersorinvestorsmayinfactbelessconcernedwiththeassetitself,andmorefocusedontheperformanceofthecorporateentityasawhole.

Some corporates may not even need to enter into specific additional financingarrangements for particular investments as their balance sheets are so strong thattheyhavesufficientfinancialreservestofinancetheinvestmentinquestion.

Thefundingofinvestmentsinthiswayiscalledcorporatefinancingandisalsoknownas“onbalancesheet”financing.

10.1.2 Why are PPP Projects financed “on balance sheet”?

As described in Section C, PPP Contracts in Context, PPP Projects are typically fundedthrough limited recourse project financing of an SPV owned by sponsor parties.Thisisbothbecauseoftheneedtobringtogetherdifferentsponsorstobuildandoperatean asset (e.g. financial investors would not have the technical capability to build therequiredasset)andpossiblybecausetheamountoffinancerequiredisusuallybeyondthebalance-sheetcapacityofanindividualsponsor.Projectfinancingisusuallyclassifiedas“offbalancesheet”whichmaybeusefulfromanaccountingperspectiveforthepartiesinvolvedandcanoftenhavealowercostofcapitalthancorporatefinancingbecauseofthehighgearingofcheaperthirdpartydebttomoreexpensiveequity.

However,althoughnotcommonlyused,corporate/onbalancesheetfinancingcanplayaroleinPPP-typeprojectsandmaybesuitableinanumberofcircumstances.Theseincludewhereabidder is thesolesponsor,hasastrongbalancesheetand typicallyusescorporatefinancefornewprojectsaspartofitsnormalbusinessmodelorwhereit may be more cost-effective to use balance sheet financing to reduce transactioncosts(e.gonsmallertransactions).Abiddermaywishtofinancethroughequityratherthan limitedrecoursefinancingfor taxreasonsorbecause it iswillingto takemoreriskthanthirdpartylendersarepreparedtotakeinaparticularmarket(particularly

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ifithasaccesstoexportcreditorothersupport)orsimplybecauseitisanoveralllessexpensiveformoffunding.FromtheContractingAuthority’sperspective,ifaprojectistobefinancedonbalancesheet,thekeyistoensurethatanappropriateriskallocationis maintained between the Contracting Authority and the Private Partner, followingthe same principles as in a project financing (and as outlined in this Guidance).Ideallytheprocurementprocessshouldaccommodatebidsusingcorporateandothertypesoffinancing,aswellasamix.Itisimportanttoensurethat,thetenderand(ifapplicable)draft-contractdocumentationworksfordifferentfinancingscenarios. Insome circumstances, it may also prove simpler, faster and more cost-effective – e.g.becauseofthefewerparties(andadvisers)involvedandsimplerdocumentationanddebtmechanics.

ItisalsopossiblethatPPPProjectsmaybefinancedbyacombinationofprojectandcorporate finance and the procurement process and documentation will need to beadaptedappropriately.ForthepurposesofthisSection 10,theassumptionisthatthePPPProjectistobewhollycorporatefinanced.


10.2.1 Advisors

Ifcorporatefinancingisanoption,theContractingAuthorityshould(aswithanyformoffinancingunderconsideration)ensure ithasengagedlegalandfinancialadviserswith relevant expertise as early as possible in the procurement process. Specialistadvice will be needed in relation to formulating bid requirements, evaluating bidsand assessing how the corporate financing impacts the PPP Contract provisionsand mechanics. Understanding the overall contractual structure will also be key informulating any compensation provisions and limiting the Contracting Authority’sliabilityunderthePPPContractappropriately.

10.2.2 Procurement implications

AshighlightedinSection 9, Bond Financing,iftheContractingAuthoritywantsbiddersto be able to submit the best value financing available, the bid process must allowforarangeoffinancingapproaches.TheContractingAuthorityshouldconsiderfromthestartoftheprocurementprocesstheimplicationsofacorporatefinancedbidascomparedwithalimitedrecourseprojectfinancedbid.Theprocurementdocumentationshouldmakeclearwhethersuchbidsarepermittedandwhatthebidderwillneedtoaddressinitsbidintermsofminimumrequirements(e.g.regardingpricecommitmentand contract terms), and in particular in place of bank commitment letters.The biddocumentation should also spell out transparently how bids will be evaluated andhow different solutions will be compared. Not only will this facilitate alternativefinancing solutions, but it will also mitigate the risk of non-compliant bids. Settingsufficientlyambitiousprequalification/selectioncriteria(includingasregardsfinancialstanding)and–ifconsortiaareallowed–requiring(amixof)jointandseveralliability,performancebonds,maintenanceguaranteesand/orparentcompanyguaranteesmaybenecessary.

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10.2.3 Due diligence

Inaprojectfinancing,thereareusuallyseveralpartiescarryingoutduediligenceonthePPPProjectfromtheprivatesectorside:thePrivatePartner,itssponsorsandthelenders,aswellasalltheiradvisers.AsmentionedinSection E, PPP Contracts in Context,thelendersgothrougharigorousprocesstosatisfythemselvesthatthePPPProjectisbankableand thiscangive theContractingAuthorityadditionalcomfort in termsofitsown(anditsadvisers’)assessmentofthePrivatePartner’sabilitytosuccessfullydeliver the PPP Project. In a corporate financed PPP Project, this level of third partyduediligencemaynothappen,so theContractingAuthoritymayhave torelysolelyonitsown(anditsadvisers’)evaluationofthefinancialandtechnicalrobustnessofthePrivatePartner,itsbidanditssub-contractors(whomayormaynotbepartofthesamecorporategroup).

10.2.4 Creditworthiness of Counterparty

Aproject-financedPPPProjectnecessarilyinvolvesanSPVwhichispartytocarefullystructured sub-contract arrangements and financing involving third party lenders,sponsor equity and guarantees or similar support at requisite levels (e.g. of equityor sub-contractor obligations). The SPV’s income and expenditure are relativelytransparentanditsfinancialrobustnessassessable.

InacorporatefinancedPPPProject,thisleveloftransparencymaynotbeautomaticallypresentwherethefinancingandsub-contractingarrangementsarebeingkeptwithintherelevantcorporategroupandnothirdpartyfundingisinvolved.TheContractingAuthorityneedstobeabletosatisfyitselfthatitsPrivatePartnerinthisscenarioisatleastasfinanciallyrobustasitwouldbeexpectedinaprojectfinancing(whichwouldbelargelyring-fencedfromexternalfactors).

AsdescribedinSection 10.2.2,atthebidstage,theContractingAuthoritywillneedtoconsiderwhatcomfortitrequiresfromthebiddertoshowthattherelevantcorporatefundingwillbeforthcomingastherewillbenothirdpartylenderstoprovidethetypeofcommitmentlettertypicallyrequiredinaprojectfinancedbid.IfthePrivatePartneris not demonstrably creditworthy in its own right (e.g. with a satisfactory creditrating),theContractingAuthoritymayneedtorequestspecificinformationabouttheproposed financing and/or require a form of guarantee or commitment letter froma creditworthy company in the corporate group (typically a parent company as itscreditrating/financialstandingwillbethedeterminingfactor),orfromathirdpartysubcontractororkeysupplierIfthebidderisaconsortium,theContractingAuthoritywillwanttheconsortiummembers(orappropriateparentcompanies)totakeonjointandseveralliabilityunderanycreditsupport(thismaybearequirementratherthananoptioninapublicprocurementprocesswhereentitieshaveformedaconsortiumtomeetminimumfinancialstandingrequirements).

10.2.5 Price fluctuation between preferred bidder and financial close

Unlike in a project financing, a corporate financed bid may be able to offer a fixedprice bid (without variation for funding costs, as its costs of funding will not be asdirectlyaffectedbyinterestratesthatmaymovebetweenbidandfinancialcloseasinabankfinancing,orbythepricefluctuationriskinabondfinancing).Thiscertainty

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maybeofparticularvaluetotheContractingAuthority,dependingonthePPPProjectcircumstances,andencouragingbiddersthatareraisingthirdpartydebttopre-hedgemaynotbefeasible.

10.2.6 Transparency

Section 10.2.4 highlightsthattheremaybelesstransparencyregardingpriceandcostinacorporatefinancedbidwherethesub-contractingandfinancingelementsarekeptwithin the corporate group. For example, group overhead costs and return on intra-grouploansmaybefactoredintothepriceinawaywhichwouldnotbepossibleinaprojectfinancingandthetruelevelofequityreturnmaynotbeeasilyascertainable.TheContractingAuthorityshouldtrytoobtainaleveloftransparencyequivalenttoaprojectfinancedbidandindoingsoshouldrequireafinancialmodelaspartofthebidsubmissionsothatithassufficientinformationtounderstandthebidder’sproposedflowoffundsandcapitalstructure.

ThesameappliesduringthelifeofthePPPProject.TheContractingAuthoritywillwanttoensurethatitisabletoobtainthesameleveloffinancialandtechnicalinformationthat it would expect in a project financing, particularly where relevant to its ownliabilityunderthePPPContract.

As mentioned in Section 7, Confidentiality and Transparency, governments in manyjurisdictionsareincreasinglymovingtowardsgreatertransparencyinrelationtopublicprocurementandtheuseofpublicfundsandthisisalsoafactorinaccessingsupportfrommulti-lateralagencies.ItmaythereforealsobeimportantfromapolicyperspectivefortheContractingAuthoritytoensurethatasufficientlevelofdetailisobtainable.

10.2.7 Addressing poor performance

TheContractingAuthorityshouldbearinmindthatinacorporatefinancedstructureinvolvingonlyonesponsorgroup,poorperformancemaynotrealisticallybeabletobeaddressedinthesamewayasitcanbeinastructurewheremorethanonecorporategroup is involved, as well as possibly third party lenders. There will be a differentdynamic without parties who would insist on contractual arrangements being putinplace toenableapoorlyperformingsub-contractor (and/orPrivatePartner) tobereplacedbeforethePPPContractisterminated(e.g.aswouldbethecaseinatypicalproject financing). Similarly, Direct Agreements with sub-contractors are unlikely tobe of much benefit if the whole PPP Contract is essentially being delivered by onecorporategroupandfailuretoperformis likelytobeindicativeofasystemicfailurewithinthegroupasawhole.

As there are no third party lenders, there will be no Direct Agreement either (seeSection 6, Lenders’ Step-in Rights).WhilethismeanstheContractingAuthorityhasfewerconstraintsonitsabilitytoterminatethePPPContractindefaultcircumstances,thelack of third party lender involvement removes one line of defense to rescue a PPPProjectintrouble.

TheContractingAuthorityshouldconsiderwhatalternativeprotectiontoseekinthesecircumstances–e.g.requiringcertainguaranteesorpaymentretentionrights,directrightsagainstkeysuppliersorrightstoappointthirdpartiestoremedydefaultsatthecostandriskofthePrivatePartner.

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10.2.8 Flexibility

A corporate financed Private Partner may have greater flexibility when it comes toagreeingsignificantchangestothescopeofwork/servicesunderthePPPContractifitdoesnothavetoinvolvethirdpartylendersintheprocess.

10.2.9 Changes to documentation

IfaPPPProjectisbeingcorporatefinancedandthereisnoprospectofarefinancing/introductionofseniordebtpostcommencement,thenlogicallyvariousadjustmentsshould be made to the PPP Contract terms to reflect the structure, parties anddocumentationinvolved.Thesewillinclude:

(a) Referencesandprovisionsrelatingtofinancingdocuments(e.g.SeniorFinancingDocuments)–therewillnotbeSeniorFinanceDocumentsasinaprojectfinancingcontext. Advice will be needed as to the extent that relevant definitions andprovisionsshouldbeadaptedtotakeintoaccountthecorporatefinancestructureand any credit support required (such as parent guarantees). Some of these areexploredfurtherbelow.

(b) Referencesandprovisionsrelatingtorelevantparties–e.g.therewillnotbeanythirdpartylenders.

(c) Pricingadjustmentprovisions–PPPContractstypicallyprovideforanadjustmentto pricing in certain circumstances (e.g. to cover the cost of implementing aqualifying change in law or the cost of certain delay events which are not thePrivatePartner’sfault).Inaprojectfinancing,theadjustmentmaybemeasuredbyreferencetorestoringseniordebtcoverratiosorEquityIRR.Asthereisnoseniordebt,thiswillneedtobeadapted(e.g.byprovidingforalumpsumpayment(s)orusingothercriteriaasareferenceinstead).

(d) Insuranceprovisions–inacorporatefinancing,insurancecovermaybeprovidedviacorporategrouppolicyarrangementsasopposedtobyproject-specificpolicies.This may feed through to a cheaper bid price but will also mean that the typeof insurance provisions typically seen in a project financed project may needadaptingasthepoliciesandpremiawillnotnecessarilybeproject-specificnorthetermsastransparent.AdvicewillbeneededtoensuretheContractingAuthorityhas equivalent (or satisfactory) protection in terms of uninsurability, placing ofinsurances, size of deductibles, indemnity cover, endorsements, notice of policychanges,losspayeeprovisionsandpremiumrisksharing.Inaddition,astherearenothirdpartylenders,thereshouldbenoneedtohaveathresholdabovewhichinsuranceproceedsareappliedagainstdebtasopposedtoreinstatementofthePPPProject.

(e) Refinancing–theseprovisionsshouldbetailoredappropriatelytoreflectthefactthattherewillnotbeanythirdpartyfinancing(ornonebeingplanned)butalsotocaterforapossiblefuturechangeinfinancingwhichshouldrequireContractingAuthorityconsentandwhichmaygiverisetoaformofrefinancinggain(e.g.fromacorporatefinancingtoaprojectfinancing).IfthisisenvisagedatFinancialClosethenrelevantamendmentsshouldbeagreedasascheduletothePPPContract–ifnot,thechangesandthesharingoftherefinancinggainwillneedtobenegotiatedaspartoftheContractingAuthorityconsentprocess.

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(f) Terminationpayments– ina corporatefinancedPPPProject withno thirdpartydebtthefundingisbeingprovidedbytheparentgroupandisinprincipleequity.However,itislikelythattheprinciplesrelatingtocompensationsetoutinSection 4, Termination PaymentswillstillneedtoapplyinorderfortheparentgrouptobepreparedtocommittheleveloffundingrequiredforthePPPProject.AppropriateadjustmenttothecalculationformulaewillberequiredtoreflectthatthereisnoSeniorDebtbutinsteadjustequity.See Section 10.3.

AsmentionedinSection 10.2.7,thereisnoneedforaDirectAgreementiftherearenothirdpartylenders.TheContractingAuthorityshouldconsiderwhetheranyalternativestep-in/directagreement-typecontractswithotherparties/parentcompaniesmightbeappropriateintheproposedstructure,includinginrelationtoensuringoversightofcorporatedocumentationandanyjointandseveralarrangements.

10 .3 . .TERMINATION .PAYMENT .CALCULATION

10.3.1 Contracting Authority Default, MAGA, Change in Law or Voluntary Termination

Following the market practice described in Section 4.3.1, Termination Payments, in acorporatefinancingthePrivatePartnerisstilllikelytoexpectfullcompensationifthePPPContractisterminatedearlyforContractingAuthorityDefault,MAGA,ChangeinLaworVoluntaryTermination.Aformoffinancing-basedcompensationapproachasdescribed in Section 4.3.3 (consisting of senior debt plus equity plus third party costelements)canbeadopted,butwillneedtotakeintoaccountthatthereisnoseniordebt.Optionsaresetoutbelow.

(a) As the equity element represents the full PPP Contract funding, if the PrivatePartner’ssolebusinessisthePPPProject,itispossibletochooseanyofthethreeOptionsdescribedinSection 4.3.3.2inplaceoftheseniordebtplusequityelement.Third party costs (e.g. redundancy and sub-contracting break costs) should beaddedasdescribedinSection 4.3.3.3.

(b) IfthePPPProjectisnotthePrivatePartner’ssolebusiness,theOptionsinSection 4.3.3.2 will not be appropriate and one approach is to use the value of the PPPContractasthebasisforcompensation–i.e.theamountwhichthePPPContractcouldbesoldontheopenmarket (assumingno termination).Again, thirdpartycostsshouldbeadded.ThisreflectstheapproachdescribedinSection 4.4.2(b).

(c) Analternativeto(b) is tobasecompensationonthenetpresentvalueoffuturepaymentswhichwouldhavebeendueunderthePPPContractfromtheterminationdate,lessfutureoperatingcostsandcapitalexpenditure(ineachcaseasshownintheOriginalBaseCaseanddiscountedatthepre-taxBaseCaseProjectIRR).Thirdpartycostsshouldagainbeadded.

Approaches which are based on a market value may prove hard to implement inpracticeonthebasisthatamarket isunlikelytoexist insomeoftheseterminationcircumstances,particularlyinanemergingmarketwithalimitedmarketanyway.Anestimatedvaluemayhavetobeusedinstead.

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Inacorporatefinancing,thePrivatePartnermaybeabletomoreeffectivelymitigatecosts to theContractingAuthority,particularlyonaVoluntaryTermination, inawaywhichproveslessexpensivetotheContractingAuthoritythaninaprojectfinancing.Onereasonforthisisthat,withreasonablenotice,resourcesandinvestmentmaybecapableofbeingredeployedinotherareasaroundthegroupontermination,reducingbreakcosts.

With any of these scenarios, the Contracting Authority will want to ensure thatterminationfeesunderanysub-contractsarenotsodisproportionateastoresult inexcessivecompensationofintra-groupcompanieswhoaresub-contractors.

10.3.2 Private Partner Default Termination

InaPrivatePartnerDefaultTermination,thedebt-basedoptionmentionedinSection 4.4.2(a) willnotbeapplicableas there isnoseniordebt.Theappropriatemethodofcalculating any termination payment should be determined on a case by case basisand will depend entirely on the particularcircumstancesof the PPP Project and thenatureandsourceofthecorporatefunding.Possiblealternativesinclude:

(a) basing compensation on the market value of the PPP Contract if retendered, ashighlightedinSection 4.4.2(b)andSection 10.3.1(b).Asbiddersmaywanttobidonaprojectfinancedbasis,thePPPContractdraftingshouldallowforthis.Asstatedabove, the market value approach is uncommon generally and more difficult toimplement in emerging markets and therefore careful consideration should begiventothejustificationforusingthisapproach.

(b) usingtherelatedandmorefeasiblealternativeto(a)ofestimatedmarketvalueasdescribedinSection 4.4.2(b).However,againsuchapproachmaybedifficultinemergingmarkets,andtheContractingAuthoritymayneedtoconsideragreeinga“topup”orbaselineamount.

(c) followingasimilarapproachtoForceMajeure(seeSection 10.3.3)andcalculatingcapital and operating expenditure up to the termination date (as shown in theOriginal Base Case), subtracting payments up to that date and adding someelementofthirdpartycosts.

(d) basing compensation on the equity investment cost, e.g. if financed byintercompanyloansbyreferencetothecouponsonthoseloans.

In any event, Contracting Authorities should bear in mind the principles set out inSection 4.4.1,particularlyinrespectofunjustenrichment.

10.3.3 Force Majeure Termination

OnaForceMajeureTermination,anycompensationwillagainneedtoreflectthatthereisnoseniordebt.Thiscanbedonebycalculatingcapitalandoperatingexpenditureupto the terminationdate (asshownin theOriginalBaseCase),subtractingpaymentsup to that date, and adding third party costs. As in any type of financing, theContractingAuthoritywillwant toensure that terminationfeesundersubcontractsareproportionatetoavoiddisproportionatecompensationofintra-groupcompaniesactingassubcontractors.

APPENDIX

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ADDITIONAL .PPP .RESOURCES

Public-Private Partnership in Infrastructure Resource Centerhttp://ppp.worldbank.org/public-private-partnership/

PPP Reference Guide Version 3.0, dated April 2017https://pppknowledgelab.org/guide/

Public-Private Partnerships Fiscal Risk Assessment Tool (April 2016)http://www.worldbank.org/en/topic/publicprivatepartnerships/brief/ppp-tools#T2

Public-Private Partnerships Fiscal Risk Assessment Model User Guide (April 2016) http://pubdocs.worldbank.org/en/422531461874706371/PFRAM20160401-Guidance-Note-for-PFRAM-March-28-2016.pdf

A Framework for Disclosure in Public-Private Partnerships, World Bank 2016http://pubdocs.worldbank.org/en/143671469558797229/FrameworkPPPDisclosure-071416.pdf

Disclosure in Public-Private Partnerships: Jurisdictional Studies, World Bank 2015http://pubdocs.worldbank.org/en/910311448299077946/Disclosure-in-PPPs-Jurisdictional-Studies.pdf

Disclosure in Public-Private Partnerships: Good Practice Cases, World Bank 2015http://pubdocs.worldbank.org/en/610581448292161621/Disclosure-in-PPPs.pdf

Infra Australia PPP Guidelineshttps://infrastructure.gov.au/infrastructure/ngpd/files/Volume-3-Commercial-Principles-for-Social-Infrastructure-Dec-2008-FA.pdf

https://infrastructure.gov.au/infrastructure/ngpd/files/Volume-7-Commercial-Principles-for-Economic-Infrastructure-Feb-2011-FA.pdf

South Africa PPP Guidelines http://www.ppp.gov.za/Legal%20Aspects/Standardised%20PPP%20Provinsions/National%20Treasury%20PPP%20Practice%20Note%20No%201%20of%202004;%20Standardised%20PPP%20Provisions;%20First%20Issue;%2011%20March%202004_1.pdf

UK PF2 Guidance https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/207383/infrastructure_standardisation_of _contracts_051212.PDF

UK Private Finance 2 (and related materials) https://www.gov.uk/government/publications/private-finance-2-pf2

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Dutch Model (DBFM infrastructure and DBFMO accommodation) https://www.rijksoverheid.nl/onderwerpen/publiek-private-samenwerking-pps-bij-het-rijk/documenten/richtlijnen/2016/06/01/dfbm-overeenkomst-rijkswaterstaat

https://www.rijksoverheid.nl/onderwerpen/publiek-private-samenwerking-pps-bij-het-rijk/documenten/richtlijnen/2016/04/01/rijksbrede-modelovereenkomst-dbfmo-huisvesting-rijksvastgoedbedrijf-versie-4-3

France FIN INFRA guidelines http://www.economie.gouv.fr/ppp/clausier-type

Termination and Force Majeure Provisions in PPP Contracts - Review of current European practice and guidance (March 2013) - EPEC/Allen & Overy LLPhttp://www.eib.org/epec/resources/Termination_Report_public_version

European PPP Expertise Centre Libraryhttp://www.eib.org/epec/library/index.htm

GlobalGuidetoPublic-PrivatePartnerships(March2010)andAsiaPacificGuidetoPublic-PrivatePartnerships(March2012)–Allen&OveryLLP

Global Infrastructure Hub Report: Allocating Risks in Public-Private Partnership Contracts, 2016 editionhttp://globalinfrastructurehub.org/allocating-risks-in-ppps/

Bond financing resources:

EPEC:FinancingPPPswithprojectbonds-Issuesforpublicprocuringauthoritieshttp://www.eib.org/epec/resources/publications/financing_ppps_with_project_bonds_en_11_11_2013

http://www.eib.org/epec/resources/financing-ppps-project-bonds-in-germany-july-2013pdf1.pdf

AFME:Guidetoinfrastructurefinancinghttps://www.afme.eu/en/reports/publications-and-data/publications/guide-to-infrastructure-financing/

OECD:https://www.oecd.org/finance/Financing-infrastructure-international-trends2014.pdf

InfraAustralia:http://infrastructureaustralia.gov.au/policy-publications/publications/files/Review_of _Infrastructure_Debt_Capital_Market_Financing_2014_03_28.pdf

Canada:http://www.pppcouncil.ca/

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