When dealing with under-performance and non-compliance in the Construction Phase, the issue is not the standard of services provided but rather the time taken to complete the asset and the quality of the asset on completion. In general terms, the private partner is incentivized to bring the asset into revenue-earning operation, but the government may suffer some losses in cases of delay and may create a right to claim some form of liquidated damages.
10.1.1. Impact of Non-Compliance by the Private Partner
Non-compliance by the private partner decreases the public benefit or Value for Money in the PPP by decreasing the quantity or quality of services offered to the public. The relationship between the public and private partners will be negatively affected to the detriment of the project’s sustainability. It also creates a bad precedent for PPPs as the public perception of private delivery of these services will be poor, and will lead to strong opposition to PPPs and questioning of the Value for Money offered.
There are also more direct implications. The workload of the contract management team in the government will increase as the contractual remedies are time consuming to apply and must be done correctly to be effective. The financial sustainability of the private partner will come under pressure and defaults under the financing agreements may be triggered, thereby leading to lender step-in.
10.1.2. Impact of Acceptance of Private Partner’s Non-Compliance by the Government (including waiver by the government)
It is inappropriate for the government to condone or accept material non-performance by the private partner. The most common manner in which this occurs is if the contract management team of the government misses or fails to apply a penalty for non-performance. This is not necessarily fatal to the government attempting to hold the private partner accountable for future non-performance, as an isolated failure or delay by any party in exercising any right or remedy may not operate as a waiver of such right or remedy. Any waiver of a breach of the terms of the PPP contract is not necessarily a waiver of any subsequent breach or default. However, depending upon the applicable legal system, repeated acceptance of non-compliance may result in the government losing the right to insist on compliance at a later date.
Where non-performance is not material and instead constitutes a technical non-compliance with the contract that will not compromise the project outcomes or Value for Money, it may be appropriate for the government to waive compliance with that requirement, as it may be counterproductive to initiate the contractual penalty or default processes for a non-material, non-performance issue. However, before doing so, the contract management team should seek the following advice and approvals.
- Legal advice as to whether the non-performance can be waived without comprising other obligations under the contract, as well as legal advice regarding how to document the waiver to ensure that it only applies to the specific non-material obligation;
- Technical advice (for example, from the government’s engineering advisers) to confirm that the non-performance is not material and will not compromise the project outcomes or Value for Money (VfM); and
- Approval through the contract governance arrangements for the waiver, following consultation with relevant stakeholders.
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