Public/Private Partnerships

1. Stikeman Elliott LLP Barristers & Solicitors Public/Private Partnerships Anticipating Success – Dealing With Disappointment

2. Stikeman Elliott LLP Barristers & Solicitors Focus of Presentation Focus will be on establishing, when entering into Public/Private Partnership Arrangements, an effective termination strategy to be available if the Public/Private Partnership Arrangements turn out to be a disappointment.

3. Stikeman Elliott LLP Barristers & Solicitors “Public Private Partnership” – Covers a Wide Range of Public/Private Commercial Relationships: • Outsourcing Arrangements – Private Partner retained to provide Services the Public Entity requires, at agreed upon prices • Design/Build Projects – construction and other risks undertaken by the Private Partner • Classic PPP: - Design/Finance/Build/Lease/Own/Operate/Transfer – all those functions, and most of the risks inherent in them, are transferred to a Private Partner • True Partnership or Joint Venture – Public Entity and Private Partner combine skills and assets to jointly accomplish a Service goal

4. Stikeman Elliott LLP Barristers & Solicitors Planning Strategies in the Event of Disappointment • Public Entity must identify, on a going-in basis: • The benefits it expects to receive from PPP Arrangements, including the timing of those benefits • What could happen to prevent the timely delivery of those Services • What should the Public Entity’s effective remedies be if the Private Partner fails to perform

5. Stikeman Elliott LLP Barristers & Solicitors Look at Three of the More Typical Public/Private Arrangements First • Outsourcing • Design/Build • Design/Build/Finance/Lease or Own/Operate/Transfer Then: Look at the True Public/Private “Partnership” or “Joint Venture”

6. Stikeman Elliott LLP Barristers & Solicitors Outsourcing: Going-In Preparation The Public Entity should, at the time of entering into the PPP Outsourcing Arrangements, ensure it has: • Clearly defined the level and quality of services and other specifications • Specified the method by which the Services are to be delivered • Specified a Performance Monitoring System, including Deficiency Points

7. Stikeman Elliott LLP Barristers & Solicitors Outsourcing: Remedies On default in providing Outsourcing Services, the Public Entity should be in a position to require: • The Private Partner to provide a corrective plan • An abatement/reduction in payment, depending on seriousness of non-performance • The replacement of one or more subcontractors • The termination of the Outsourcing Arrangements

8. Stikeman Elliott LLP Barristers & Solicitors Outsourcing: Effective Termination Rights • There must be a seamless, uninterrupted delivery of Services, even in case of termination of the Outsourcing Arrangements: • may be as simple as calling for tenders for replacement Service providers • may need employees, equipment and leased premises of the current Service provider to provide the Services • must be able to access those – by purchase, lease, hiring or otherwise • must have that contractual right going-in • If contracted with credit-worthy Service provider in first place, would be able to maintain an action for loss of bargain (as the costs of replacing the Services are likely to be higher than was payable under the Outsourcing Arrangements)

9. Stikeman Elliott LLP Barristers & Solicitors Design/Build – Going In Preparation The Public Entity should ensure, at the time of entering into the Design/Build Arrangements, that it has: • Fully developed standards for: • design quality • construction quality • Clearly defined construction completion milestones • Apportioned the risk of the occurrence of certain events (the so called force majeure events) between the Public Entity and the Private Partner Critical that the Private Partner have sufficient financial strength and underlying contractual support so that the risk of non-completion is virtually nil

10. Stikeman Elliott LLP Barristers & Solicitors Design/Build: Risk Sharing • Intent of the Public Entity is to achieve a fixed price contract with all external risks born by the Private Partner • Ideally there will be no excuse for the Private Partner performance not being on time/on budget • Specifying no risk to Public Entity may drive up the cost of the delivery of Services • More practical to have Public Entity retain some risks • So-called force majeure provisions are hotly negotiated. Examples are: • building on Crown lands – who bears soil and environmental risks? • who bears risk if development permits cannot be obtained?

11. Stikeman Elliott LLP Barristers & Solicitors Design/Build: Remedies • Liquidated damages, particularly for failure to achieve time milestones • Step-in rights: • Public Entity completes, or substitutes contractor to complete • Steps-in to subcontracts which it has pre-approved • Public Entity retains action for damages against Private Partner for cost overruns and other issues • Financial strength of Private Partner is critical • Termination rights: only effective if the Public Entity can substitute another Private Partner and carry on without any serious disruption or delay

12. Stikeman Elliott LLP Barristers & Solicitors Classic Public/Private Partnership Project • Design/Finance/Build/Lease or Own/Operate/Transfer • Public Entity looking for: • accommodation • Services • “fixed” price, to the extent reasonable 30 years out • ownership of the Facility at the end • Termination only effective if can: • step-in and have another Private Partner complete • maintain an action for damages for loss of benefit of the contract

13. Stikeman Elliott LLP Barristers & Solicitors True Partnership or Joint Venture • Often referred to as a Partnership or Joint Venture, though usually, in law, neither a Partnership nor a Joint Venture • Public Entity and Private Partner combine assets and skills to achieve a goal

14. Stikeman Elliott LLP Barristers & Solicitors Typical Rationale: True Partnership or Joint Venture • Typically occurs where Public Entity: • owns surplus lands • lacks capital and (perhaps) in-house skill-set to proceed through the development process • wants a share of development profits • secondary goal – often – to exercise more control over land than could through land use regulation • Therefore looking to Private Partner for: • capital • skills

15. Stikeman Elliott LLP Barristers & Solicitors Pre-Agreement Planning by Public Entity Public Entity must identify: • What it expects to receive from this relationship • What circumstances would make it want to terminate the relationship

16. Stikeman Elliott LLP Barristers & Solicitors Pre-planning Exit Strategies Caution - some potential remedies, if utilized: • could result in the Public Entity holding no further interest in the lands – the interest which it wanted to keep in first place • could result in the Public Entity having to buy-out the Private Partner – this requires a capital expenditure, and the Public Entity is left without a skilled Private Partner

17. Stikeman Elliott LLP Barristers & Solicitors Common “Joint Venture”/Termination Remedies • Right of First Offer • Public Entity no longer own lands • depresses price • Right of First Refusal • Public Entity no longer own lands • depresses price • Shotgun Buy/Sell • Public Entity may lose lands • Public Entity may be forced to buy out Private Partner - requires capital - lose Private Partner’s skills • not Public Entity style

18. Stikeman Elliott LLP Barristers & Solicitors • Private Auction • variation of shotgun buy/sell • minimizes risk of losing lands • Matching Bid • no partial-interest discount • still depresses value due to right to match • Public Entity will no longer have lands • Joint Sale of Project • Public Entity does not retain lands • maximizes price • Option of Public Entity to Acquire Project • perhaps only exercisable in case of default • no risk of Public Entity loss of lands • ideal from Public Entity view point