International Bar Association Annual Conference

1. International Bar AssociationAnnual Conference INTERNATIONAL CONSTRUCTION PROJECT Old-fashioned or new-fangled? Which procurement routes copes best when the going gets tough? The Magic of a well designed PPP Marc FRILET, Avocat - Paris Secretary General of the French Institute of International Legal Experts (IFEJI) Visiting Professor, University Paris V-René Descartes Deputy General Secretary International Bar Association (IBA) Fellow American College of Construction Lawyers (ACCL) Head of the PPP working Group - Paris Bar Prague, CZECH REPUBLIC September 29th 2005 FRILETSociété d’Avocats

2. The Magic of a well designed PPP I am very much interested by your query on the best procurement route for an hospital and an highway Project since I come from a country where a lot of debate has taken place for decades on the optimised use of public resources for designing and operating public service infrastructures specially for highways and hospitals I also have the chance to travel from time to time and know that those concerns are widely shared internationally Before advising you on a procurement route, I would like to show you on Outlook which summarise my perception of the options at your disposal and the main issues at stake

3. FRILETSociété d’Avocats OUTLOOK OF THE PPI FAMILY

4. The Magic of a well designed PPP Two projects: several common features • Construction to be completed and related hospital and highways services to be operational before next election : time is of the essence • Funding sources from Public money unknown for several months • Specifications and design remain to be prepared • Additional conditions and service specifications likely to come later • You seem open to ideas on best technical solutions and optimised quality of service

5. The Magic of a well designed PPP Preliminary considerations • Traditional procurement and remeasurement contract not appropriate (lack of sufficient specifications) • Design and Build or Turnkey: not advisable (since the funding is not secured before several months at least and since you are not sure to have the necessary operational resources) • Privately Financed Investment followed by repayments from the tax budget over the years based on a price for the service to be paid to the private builder/operator (service lease, PFI, “Partnership contract”): prima-facie not advisable due to the contingent liability on future tax budget and to the difficulty to establish criteria for the optimised nature of services and their price for twenty to thirty more years (risk of obsolete service or price in medium and long term)

6. The Magic of a well designed PPP Additional considerations • Readiness to outsource project management and operation • Both projects are designed for the same purpose : to deliver a particular service to the public: a service that the citizens are not obliged to purchase and for which they can be ready to pay a price up to a certain level directly through a toll for the highway and directly or indirectly (but not from the tax budget) for the hospital The way forward • You are a lucky man because both the highway and the hospital project may benefit from the magic of real PPP i.e. Concessionand assimilated schemes located in the South East of my chart

7. The Magic of a well designed PPP The potential magic of concession and assimilated scheme The magic may only operate if you take the following steps : • You should prepare with a small team of people close to you including economists, planners, politicians, and NGO, a long term view of the nature of the services which should be rendered both by the hospital and the highway infrastructure, taking into account the socio-economic externalities of those infrastructure in the long run • Based on the above, you will prepare a rough economical model and various scenarios by reference to internationally accepted standards • Assuming that your model shows a potential of full (or main) recovery of the investment and operation costs from the price to be paid for the services over the amortisation time of the infrastructure, you are an extremely luckyman since all indicators are green to follow the Concession route

8. The Magic of a well designed PPP Developing the magic • Prepare simple physical specifications (no more than general outlay) • Prepare detailed functional specifications i.e. in relation to the nature and the quality of the services to be rendered: do not limit yourself to the service to be rendered by comparison to existing situations but foresee as much as possible technological, economical, cultural and other changes • Assess and outline the main conditions for a satisfactory public service operation. Put yourself in the shoes of thousand of end users who are likely to benchmark and request the best value for money at any time during the Concession period (which for greenfield hospital and Highway is likely to be somewhere between twenty to forty years)

9. The Magic of a well designed PPP Appraise the main features of a public service Concession before considering selection of the Concessionaire : • Concession is not a privatisation, the service being an essential public service (unlike for instance cellular phone services) you should always retain the right to monitor very closely each step in construction maintenance and adaptation of the infrastructure and of the nature and quality of the service • The main rights and obligations of the Concessionaire: - Design, finance, build and operate the highway of the hospital, for a time period permitting him to recover his investment and make a reasonable profit on the basis of and economical and financial scenario contractually agreed upon (the baseline economic scenario together with the related financial equation is the corner stone of any public service concession) - Adapt the service as requested if justified by public interest - Obligation to hand over the infrastructure in good condition for the continuity of the service and for no consideration at the end of the concession period.

10. The Magic of a well designed PPP Understand the Concession dilemma How to design a concession contract with an acceptable equilibrium between : • The common interest of many citizens (represented themselves by yourself as public authority) eager to benefit from the best public service always adapted to their contributing possibilities and, • The interest of a private company having obtained the right to render such services and which must appraise and control numerous risks and keep the opportunity to make reasonable profit ?

11. The Magic of a well designed PPP Overcome the Concession dilemma • Understand that concession is very different from a construction contract even if construction is a part of it at the origin • Limit the contract documentation in terms of detail of service to be rendered, but focus most of your attention to various sets of clauses permitting to adapt easily the nature, the quality or the scope of the service including tariffs and prices • Accept that the concessionaire company may have the right of indemnification or compensation of some sort in case of change of the economic circumstances or risks that it cannot control by reference to the baseline economic scenario and related financial equation above a certain threshold • If you have no administrative law tradition, summarize in the contract or in an annex some universal principles of public service obligations by reference to international experience of numerous public service Concessions for more than a century

12. The Magic of a well designed PPP Overcome the Concession dilemma (continuing) • Build in the contract a true “public partnership venture” by using partnering techniques, rendez-vous clauses, review board, and include regular and transparent exchanges of information, including economic and accounting data, which will easily guide the parties towards agreeable changes when necessary, always by reference to the base line scenario and related financial equation. • Consider an ad’hoc adjudication board of very high caliber ruling in equity and referring preferably to the most common equitable principles applicable to public service concession in civil law countries with an administrative law framework (well known case law easy to implement) • Avoid referring to a regulatory body not truly independent and not guided by clear and equitable principles, based on the best of international experience.

13. The Magic of a well designed PPP Proposals for the selection of the Concessionaire Ask yourself : which Concessionaire do I want (or more to the point which service will acceptable in ten, twenty or thirty years for the users?) Some considerations : • track record : how many successful concession ventures completed (remember that the real success in only judged at the end of the concession period). Assess thoroughly the Pro and cons of SPV and Project Finance techniques • Is price an important factor for selecting a Concessionaire? - Cost of the infrastructure: not decisive, since in order to reach the same concession results in terms of nature, quality, and compliance with public service obligation, several options and combinations are possible: example : higher initial cost, less maintenance cost, etc … - Price of the service and value for money, not decisive either in many situations since it does not take into account capacity to adapt to changes and to provide future best value for money

14. The Magic of a well designed PPP Prepare the most appropriate competitive bidding based on the cutting edge of the international experience • Prepare a well designed but simple request for proposal including a list of carefully drafted objectives indicating that you reserve the right to accept or reject the RFP if in your opinion it does not meet the objectives. The appropriate definition of the objective (not too vague and not too detailed) is the secret of this procurement technique • Thereafter, choose a few bidders only (at most three or four) and develop with each of them a “competitive negotiation” which must clearly remain within the boundaries of the template document including the objectives outlined in the RFP. This will include the negotiation of the detailed terms of Concession Agreement • At the end of the process,you should be in a position to make a choice of a private Concessionaire with good track record and able to be a real partner for many years and working closely with you for the best interest of thousands of end users for decades

15. The Magic of a well designed PPP CONCLUSION : THE REAL MAGIC With my proposal : 1. You have all chances to have the hospital and highway services ready to operate on time at no cost for you with fair chance of a smooth venture in the long term 2. You have set a simple and a well tested methodology for agreeing changes of all nature at any time 3. You keep the right to impose changes in the benefit of public interest 4. You have good chances to have an happy Concessionaire 5. However, I advise you to set aside a part of some of your initial funds in order to participate to various “hardship situations” or in case where for sovereign reasons you want to impose different service and/or limit on tariffs or prices of service affecting the financial equation (remember it is a real PPP) Last but not least, you could use most of your initial public funds for other projects and have the best chances to be re-elected

16. THANK YOU Marc Frilet Frilet - Société d’Avocats94, boulevard Flandrin75016 Paris, France Tel : 00 33 1 56 26 00 40Fax : 00 33 1 56 26 50 21 e-mail : avocats@frilet.com