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.
What is a PPP contract?
In practice, the PPP contract is often not just one contract, but rather several documents and agreements with various counterparts. For example, a PPP to design, build, finance, operate, and maintain a new power plant, with power supplied in bulk to a government-owned transmission company, may be governed by a power purchase agreement (PPA) between the transmission company and the PPP company, as well as an implementation agreement between the responsible government ministry and the PPP company. Each agreement may in turn refer to schedules or annexes to set out particular details—for example, detailed performance requirements and measures.
In addition to the PPP contract, there will also be numerous contracts between the private parties to the PPP. Chief among them are the contracts between the project company and its contractor, financing agreements between the project company and its lenders, and shareholders agreements between equity investors. The PPP contract is not effective until these other contractual agreements are in place.
The draft PPP contract is generally needed before a request for proposals (RFP) is issued and then 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 as a result of interaction with bidders during the transaction process.
Aim of PPP contract design
A well-designed contract is clear, comprehensive, and creates certainty for the contracting parties. However, 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 the PPP contract needs to have flexibility built in, to enable changing circumstances to be dealt with within the contract, rather than requiring in re-negotiation 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 typically done by creating a clear process and boundaries for change. To implement this style of contract in practice requires strong contract management institutions. 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.
Some key provisions in the in PPP contract are
- 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 in to 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 reflect the risk allocation underpinning the contract. 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 to be resolved, within the framework provided by the contract.
Many countries standardize elements of PPP contract design. This helps reduce the cost of developing the contract for each PPP contract. Some develop model contracts or contract clauses, others incorporate some elements in overall legislation to govern all PPP contracts.