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Structuring and Drafting the Tender and Contract

59.7 Contract Changes

As noted, the contract must have flexibility built in to enable changing circumstances to be dealt with as far as possible within the contract. In this sense, the contract should consider and permit certain potential changes (which may be subject to limits in quantity or the law may provide those limits) and establish processes to implement those changes.

There are a number of types of changes that may occur in a PPP.

  • Changes requested by the procuring authority: changes in scope of service[92] or performance requirements (for example, as a recognition of too onerous or unrealistic service target levels), or change orders to the project design or change due to mandatory technological enhancements.
  • Changes in the project or service proposed by the private partner and accepted or negotiated with the procuring authority.
  • Changes in ownership and in financing structure.
  • Other changes in the contract due to the occurrence of compensation events (including changes in law) or force majeure (which usually are only related to a change in the amounts of payments so as to restore the financial balance).

 

Changes in the project and changes in service requirements should be specifically provided for in the contract whenever possible. They should be permitted cautiously and should be delimited with clear boundaries because otherwise competitive bidding may be distorted and competitive pressure may be lost (EPEC). See chapters 7 and 8 of the PPP Certification Guide for further information on good practice in managing such changes.

An example of potential changes specifically provided for in contracts may be seen in some urban transportation PPPs (for example, in Spain): the service plan (frequency and even routes for transportation by bus) will necessarily be changed from time to time, and supplementary services may be needed to accommodate non-planned events. The contract will grant the procuring authority the ability to request an increment of the service (in terms of kilometres/vehicles) up to a certain level (for example, 5 percent) in one particular year. The price by km/vehicle is offered by the successful bidder, and it avoids the need for negotiations as long as the increment in service is below the defined threshold.

As noted, compensation events and force majeure can also lead to contract changes. Typically, compensation events only affect the financial equation of the project contract. However, in other cases they may also require a change in the technical or service requirements (for example, an unforeseen event, contemplated in the contract, that increases the cost of operations may be compensated for by the parties agreeing to new and more relaxed performance standards, rather than increasing the price of the service).

 

[92] Generally, changes during the life of a PPP should be made through the contractual processes. However, on occasions, it may be in the interests of both parties to negotiate significant changes to the contract itself. These changes are often referred to as renegotiations. As discussed in chapter 1, 6 and 7, renegotiations must be managed carefully to avoid undesirable outcomes for the government. 

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