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Designing PPP Contracts

The PPP contract is at the center of the partnership, defining the relationship between the parties, their respective rights and responsibilities, allocating risk, and providing mechanisms for dealing with change. In practice, the PPP contract can encompass several documents and agreements, as described in What is the PPP Contract?

Most PPP projects present a contractual term between 20 and 30 years; others have shorter terms; and a few last longer than 30 years. The term should always be long enough for the private party to adopt a whole-life costing approach to project design and service management, guaranteeing service performance at the lowest cost. The term depends on the type of project and on policy considerations—the project should be needed over the term of the contract, the private party should be able to accept responsibility for service delivery over its term, and the procuring authority should be able to commit to the project for its term. The availability of finance, and its conditions, may also influence the term of the PPP contract.

As shown in PPP Contract Design Stage, the draft PPP contract is generally needed before a Request for Proposal (RFP) is issued. Detailed contract design takes significant time and resources—including from expert advisors. Approval is often required before embarking on detailed design and investing these resources.

The draft PPP contract is typically included with the RFP sent to prospective bidders. In some cases, the PPP contract issued with the RFP cannot be changed. In others, it may be changed because of interaction with bidders during the transaction process. Australia National PPP Guidelines Roadmap (AU 2015) and the South Africa PPP Manual (ZA 2004a) provide an overview of PPP contract development and how it progresses at each stage of implementing the PPP.

PPP Contract Design Stage
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Aim of PPP contract design

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 predict future conditions. This means 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 renegotiation or termination.

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 achieved by creating a clear process and boundaries for change. To implement this style of contract in practice requires strong contract management institutions, as described in Managing PPP Contracts. Where possible, involving the future contract manager in designing or reviewing the PPP contract can help ensure that change management processes are implementable in practice. PPP contract design is a complex task. This section briefly sets out some key considerations—and provides links to tools, examples, and further resources—in five areas of PPP contract design:

  • Performance requirements—defining the required quality and quantity of assets and services, along with monitoring and enforcement mechanisms, including penalties
  • Payment mechanisms—defining how the private party will be paid, through user charges, government payments based on usage or availability, or a combination, and how bonuses and penalties can be built in
  • Adjustment mechanisms—building into the contract mechanisms for handling changes, such as extraordinary reviews of tariffs, or changing service requirements
  • Dispute resolution procedures—defining institutional mechanisms for how contractual disputes will be resolved, such as the role of the regulator and courts, or the use of expert panels or international arbitration
  • Termination provisions—defining the contract term, handover provisions, and circumstances and implications of early termination

Together, these sets of provisions define the risk allocation under the contract. Obviously, the aim must be to draft these provisions so that the risk allocation chosen (as set out in Structuring PPP Projects) is achieved. The provisions dealing with adjustment mechanisms and dispute resolution are intended to avoid the need for renegotiation, by allowing changes to be made, and problems resolved, within the framework provided by the contract.

Some countries have made efforts to standardize elements of PPP contract design to reduce the considerable time and cost frequently involved in preparing and finalizing a given PPP contract. They have developed standardized contractual provisions or even complete standardized PPP contracts—Examples of Standardized PPP Contracts and Contract Clauses provides some examples. Other countries have chosen to incorporate certain elements of PPP contract design in legislation that governs all PPP contracts, as described in PPP Legal Framework.

For example, in Chile the dispute resolution mechanism is established in the Concessions Law. The World Bank Group’s Report on Recommended PPP Contractual Provisions (WB 2017e) sets out and analyzes certain contractual provisions dealing with particular legal issues encountered in virtually every PPP contract, such as force majeure, termination rights and dispute resolution. Another useful resource is the World Bank's online PPP in Infrastructure Resource Center (PPPIRC-Types)—this website hosts a collection of actual PPP contracts and sample agreements for a range of contract types and sectors. To review the impact of contractual clauses on statistical classification, the 2016 Eurostat Guide to the Statistical Treatment of PPPs (EPEC 2016) reviews a large set of PPP contractual provisions typical in European government-pays PPP contracts.

Examples of Standardized PPP Contracts and Contract Clauses

Jurisdiction

Standard

Links

Australia

Guidelines issued by Infrastructure Australia on standard commercial principles for social and economic infrastructure PPPs

Infrastructure Australia's PPP Guidelines (AU 2017): Volume 3 on social infrastructure and Volume 7 on economic infrastructure. 

 

India

Descriptions of model agreements for PPP in a range of transport sectors

Former Planning Commission (IN 2014d), (IN 2009

Netherlands

Standard PPP contract for DBFM in buildings and DBFMO in infrastructure

Ministry of Finance Publications (NL 2017)

New Zealand

Draft standard PPP contract

National Infrastructure Unit (NZ 2013)

Philippines

Sample contracts for PPP in bulk water supply, ICT, solid waste management, and urban mass transit. The PPP Center is currently developing standardized terms for broader application

Public-Private Partnership Center: PEGR Sample Contracts (PEGR 2009

South Africa

Standardized PPP provisions published alongside the South Africa PPP Manual

National Treasury Standardized PPP Provisions (ZA 2004c)

United Kingdom

Standardized contracts for PFI projects; includes extensive guidance on each element of the contract

Her Majesty’s Treasury: Standardized contracts (UK 2012c)

Key References

Designing PPP Contracts