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Establishing a PPP Framework

21.6.3 Structure the Procurement Process and the Project Contract

Before the PPP transaction can be implemented, the tender documents and the draft PPP contract need to be prepared. To prepare the tender documents, the evaluation criteria and proposal requirements must be developed. To prepare a contract, the outputs, responsibilities, and risk allocation need to be fully defined and expressed in appropriate legal language.

Decision criteria

The procurement process, the tender documents, and the contract need to achieve government objectives while minimizing expected costs. In addition, the contract must be one that the government is capable of managing. The contract must be attractive to potential private partners, and stakeholders must be convinced it is in the public interest. PPP frameworks should therefore be designed to ensure that the following:-

  • All significant risks can be identified and allocated to the most appropriate partythe success of a PPP lies in how well risks have been allocated. If risks are not allocated appropriately, the project will cost more than necessary; and
  • Appropriate risk management plans can be developed. For those risks allocated to the public sector, appropriate plans need to be in place that both minimize the likelihood of the risk occurring and the impact in case the risk does occur.

Procedures and institutional responsibility

To ensure that developing the tender documents and contracts is as efficient as possible, the framework needs to indicate the following.

  • Approaches to risk allocation, risk management plans and draft contracts. Some governments have standardized rules about risk allocation, others look at each project on a case-by-case basis. Drafting contracts requires the expertise of experienced PPP lawyers. Agencies without this experience in-house will need to secure it by using outside counsel;

For example, when the Canadian British Columbia PPP market was in its infancy, it brought in lawyers and technical advisors from Australia and UK, jurisdictions with established PPP framework. . They not only helped to develop the PPP contracts, but also built the capacity of the Canadian public sector and private sector advisors who have since become in-country PPP experts.

  • Guidelines for procurement: The PPP framework should clearly indicate to line agencies and the private sector what the standard PPP procurement process will be. This will signal to prospective partners how they can be involved. Clear procurement guidelines will also reduce the likelihood of disputes about the award decision. “Model” and “Standard” contracts can ensure consistency in the design of PPP contracts, while sending clear messages to the market. However, they also have disadvantages since they may make it harder to tailor contracts to the needs and objectives of each case (see BOX 8).

 

 

 

 

BOX 2.8: Model and/or Precedent Contracts

A model contract is one that embodies good practice and is available for agencies to use. In contrast, a standard contract is one that public agencies are required to use (or at least required to document and justify any deviations from it). Also, standard contracts may not be a full set of all provisions in the contract, but rather a set of recommendations (including alternative approaches for some issues) in the form of guidelines.

Done well, model or standard contracts have a number of advantages as listed below.

· Reducing risk to the government because the chance of the contract being wrong (for example, poorly drafted or with an inappropriate risk allocation) is reduced;

· Saving time and money for the bidders by reducing the time required to understand each project contract;

· Enabling the project team to focus their work on developing and tailoring existing processes and legal documentation, rather than drafting contracts from scratch; and

· Reducing the time required for case-by-case negotiations as both parties have an expectation of what is acceptable.

Standard contracts in particular have risks. It is hard to write one contract that will apply to a wide range of different deals. Therefore, requirements to use standard contracts can actually reduce the quality of contracts below what they would be if specially developed by experienced advisors for each case.

Each jurisdiction will have to strike the right balance between standardization and customization. If most of the projects will be fairly similar (for example, all government-pays contracts for social infrastructure) then a single standard contract may make sense. If there are various categories of projects envisaged, standard contracts for each category may be warranted.

If a wide range of heterogeneous deals are expected, it may be that one or two model contracts, coupled with some standard for contract drafting, would be best. Standards for contract drafting could include preferred risks allocations, a list of topics that should be addressed in all contracts, and sample provisions for some topics that are likely to be similar across multiple contract types (such as extraordinary adjustments, force majeure, dispute resolution, and termination provisions).

Some international institutions such as the World Bank or United Nations (the United Nations Economic Commission for Europe – UNECE) are also working to provide precedents for materials and recommendations (for example, see PPP Infrastructure Resource Center http://ppp.worldbank.org/public-private-partnership) or standard provisions (such as the PPP standards under development by the UNECE[65]).

  • How to gain approval for tender: As with the previous two phases, the PPP framework will need to identify the approval process for proceeding to the next phase.

Refer to chapter 5 for key elements of PPP contract structuring and procurement.

 

[65] According to the UNECE, “PPP models and procedures can contribute to achieving the Sustainable Development Goals (SDGs) across a wide spectrum of different sectors like water and sanitation, health and renewable energy”. With this aim, the UNECE, through its International PPP Centre of Excellence, is developing a number of international PPP sets of standards (http://www.unece.org/ceci/ppp.html). To learn more about the SDGs, see http://www.undp.org/content/undp/en/home/mdgoverview/post-2015-developme....

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