Sections 4 and 5 of this chapter have extensively described financial and risk structuring matters. The defined structure (that is, all features related to risk allocation and risk treatment) and features related to the financial structure (means of compensation when there is more than just the payment mechanism or user charges, timing considerations, other direct financial and indirect support approaches) will have to be incorporated into the contract.
In general terms, but especially regarding risks, clarity is the essential driver for a proper implementation of the commercial structure. This is a challenging task, especially with respect to definitions of risk events and the existence of rights to claim for compensation. Ambiguities and misinterpretations have to be avoided as far as possible. But contracts must also build in flexibility (see box 5.28 ).
For this purpose, a good framework approach is to standardize some contract features and clauses.
This section, in addition to the main structuring matters explained in sections 4 and 5, introduces the basic contents of the contract and describes common practices with respect to other commercial terms of the contract.
A well-designed contract is clear, comprehensive, and creates certainty for the contracting parties. Because PPPs are long-term, risky, and complex, PPP contracts are necessarily incomplete, that is, they cannot fully specify what is to be done in all future states of the world. This means that the PPP contract needs to have flexibility built in to enable changing circumstances to be dealt with as far as possible within the contract, rather than resulting in re-negotiation or termination of the contract.
The aim of PPP contract design is therefore to create certainty where possible and bounded flexibility where needed — thereby retaining clarity and limiting uncertainty for both parties. This is typically done by creating a clear process and boundaries for change.