The cost of complying with a law that is current or foreseen at the time of entering into the PPP contract is usually built into the price that the private partner bids in order to provide the services. It may, however, not be possible for the private partner to price specific costs that may arise from changes in a law which are not foreseen at the time it signed the PPP contract. The issue that arises from this is who should be responsible for the costs due to changes in a law and how such costs should be funded.
8.7.1. Allocation of Risk of Change in Law
The private partner’s concern is that a change in law is a risk that it cannot control and one which it regards as being within the control of the government. In a non-PPP business, the business operator would usually be able to pass on the costs of a change in law to its customers. In contrast, PPP contracts often lack flexibility in pricing, and the private partner may believe that it should not have to bear the costs of any change in law. Furthermore, governments are of the view that changes in law, to the extent that they apply to all businesses in the country, should not be the cause for extraordinary protection for the private party. To balance these arguments, countries with relatively stable and limited changes in law apply a test of discrimination in deciding who bears the cost and risk of a change in law.
8.7.2. General Change in Law
A general change in law is one that affects either all business in the country or all those involved in the sector in which the PPP contract is centred. In these cases, the risk and cost of compliance with the law remains with the private partner. Examples of general changes in law are changes in tax legislation or environmental law.
No variation is required for general changes in law except where the output specification must be changed. In such circumstances, a private partner variation will be appropriate. Foster Infrastructure (2012) states that where the government proposes a significant policy change that will affect a PPP project, it may be possible to implement that change through either the variation process or the change in law process. In these circumstances, the government should consider the relative merits of each process, including the impact upon Value for Money and the long-term PPP relationship.
8.7.3. Project-Specific Change in Law
A project-specific change in law occurs when there is an element of discrimination in the effect of the change in law. This discrimination may be against the private partner specifically or against businesses involved in PPP contracts, of which the private partner is one.
In such cases, the government bears the cost associated with the change in law. However, the private partner must be obliged to use all reasonable endeavors to mitigate any cost increases. The factual determination of whether a change in law is general or project specific, and whether or not the costs were reasonably mitigated, will be a source of dispute. Therefore, it is advisable for the parties to convene on any matter that may become a change in law. In some cases, the two parties may be able to avoid project-specific changes in law by jointly lobbying the institution driving such a change in the law.
Procedurally, the change management system used for government variations should be used in cases of project-specific changes in law.