The assets will be “handed-back” to the procuring authority at contract expiration. It is good practice to establish minimum criteria to be met by the assets so as to ensure that these are transferred back to the procuring authority in an acceptable condition. It is also good practice to note that demanding requirements or conditions will be priced into the PPP contract, resulting in higher user charges or government payments. The contract should require that the asset has a reasonable remaining useful life at the expiration date, otherwise there may be a perverse incentive for the private partner to avoid making desirable investments to maintain the condition of the asset, as the private partner will not bear the consequences of poor maintenance or the need for renewals.
The hand-back requirements must be clearly defined in the contract from the outset (that is, at tender launch) so as to allow and incentivize the successful bidder to build into its financial model the funds to be invested to meet the requirements.
Some common and good provisions to regulate the process include the following.
Third party inspections of the state of the asset sufficiently in advance of the expiration date (for example, 3 years) and yearly inspections to follow up on the need for and investment in the assets to meet the criteria. A retention equal to a percentage of the yearly revenues (or the payments) to fund a reserve with that purpose (for example, 2 percent of service payments). As soon as inspections detect that the reserve is oversized, the percentage of the retention should be downsized. At the end of the contract (which will effectively end with the hand-back process), and subject to the hand-back requirements being met, any remaining amount in that fund should be released to the private partner.
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