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General Introduction into PPP - Contracts

General Introduction into PPP - Contracts. Bernard Wilson. PPP Contract Design. PPP Operating contracts, not finance contracts Many different models for PPP contracts: concession agreements, DBOM, franchises, management contracts. What does the contract do?.

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General Introduction into PPP - Contracts

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  1. General Introduction into PPP - Contracts Bernard Wilson

  2. PPP Contract Design • PPP Operating contracts, not finance contracts • Many different models for PPP contracts: concession agreements, DBOM, franchises, management contracts

  3. What does the contract do? • Sorts out what the parties have agreed to do • Sorts out what will happen if one or other of the parties does not perform obligations • Should set out a mechanism for managing change

  4. What does the contract not do? • The contract documentation cannot by itself create a viable PPP contract • There must be a real consensus between the parties • The parties must be able to deliver what they have promised

  5. The Terms of the Agreement • What the parties do (contract specification) • How risks are allocated • What they are paid • How performance is measured • Other terms e.g. guarantees

  6. What happens if things go wrong • Incentives/penalties: “tickle, hurt, kill” • Step in rights: e.g. for safety or essential services • Substitution rights/ termination: ultimate remedy • [Re-negotiation : Start again]

  7. Dealing with Change • External challenges: change of law, regulatory action; physical threats • Internal change: revising specification, responding to changed economic circumstances

  8. Case Study • London Underground PPP • London Underground, largest, busiest (and oldest) urban railway system • 600km route miles, with 400 stations • 1bn passenger journeys • £2bn fare-box revenue

  9. The Project • Modernise the system: renew and upgrade track, stations and trains • Train operation and revenue risk retained in the public sector

  10. Why PPP? • Benefits of private sector project management expertise • PPP structure allows works to be carried out more quickly • Long term concession structure ensures stable funding

  11. How was it done? • Existing business restructured • Train operations split from infrastructure and train maintenance – 3 SPVs created • SPVs transferred to private sector on 30 year concession agreement • All assets return to the public sector at the end of 30 years

  12. The PPP contract • Output based specification: train miles, system availability, station condition: calibrated each day • Fixed charge; but with incentive payments and abatements • Planned enhancements built into specification • 30 year term; reviews after 71/2 years

  13. Procurement • 3 SPVs allows for competitive procurement process • EU rules apply to competition • EU Commission ruled no State Aid • Contracts split 2/1 between successful consortia • Contracts let in early 2003

  14. Financial Structure • System charge, initially £1.4bn per annum set at level to allow SPVs to borrow to fund enhancements • Financial return to investors through efficiency savings • Change mechanisms (Statutory Arbiter) to protect the parties at periodic reviews

  15. Progress so far • Too early to see improvements • Second round financing achieved in 2003 and 2004 • Structure sufficiently robust to cope with financial problems with two members of the consortia

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