WHAT LEGAL AND CONTRACTUAL ISSUES CAN DETERMINE THE SUCCESS OR FAILURE OF A PPP PROJECT?

1. WHAT LEGAL AND CONTRACTUAL ISSUES CAN DETERMINE THE SUCCESS OR FAILURE OF A PPP PROJECT? ESCL – ANNUAL CONFERENCE 25 OCTOBER 2018 EDWINA UDRESCU, FCIArb Lawyer

2. Concession Vs PPP I Concession Projects • The Private Partner can charge end-users for the use of the asset (e.g. a toll road, a commercial port, an airport, a toll bridge, an underground parking) • These projects involve a demand risk as revenues depend on the use of the asset by end-users => Concessions are revenue generating projects

3. Concession Vs PPP II PPP Projects • The asset itself cannot generate income directly from charging the end-users but the government pays a consideration for the availability of the asset which is used for providing activities of public interest (hospitals, schools, prisons, etc) • These projects do not involve demand risk as the payment from the government is not, or at least is in a minimum part, linked with the use of the asset by end-users. => PPPs are a non-revenue generating projects

4. THE PLAYERS AND THE CONTRACTUAL FRAMEWORK I

5. THE PLAYERS AND THE CONTRACTUAL FRAMEWORK II • The Public Partner commits to pay to a Special Project Company (SPV) financed by the Private Partner a yearly amount (Unitary Payment) against the Special Project Company making available to the Public Partner the required building and associated Facility Management (FM) Services. • Investors => Private equity (10-30%) • Lenders (banks or other financial institutions) => 70-90 % financing (the Debt)

6. KEY ISSUES FOR SUCCESS • To appoint reputable/experienced advisors by the Public Partner • PPP models deliver greater value for money (VFM) than conventional delivery model • Optimal operation guaranteed and maintenance forecasted • Use of better infrastructure solutions, new technology, management skills, innovation provided by the Private Partner • Fair allocation of risks • Use international best practices in preparing, procuring and monitoring PPP projects

7. FAIR ALLOCATION OF RISKS • “Risks must be allocated to the party best able to mange them” • Allocation of risks has a significant impact on the bankability of the project. • Public Partner risks • Shared risks • Private Partner risks

8. PUBLIC PARTNER RISKS • Financing risks: currency, inflation, interest rates • Legal recourses and permitting: obtaining permits and authorizations and compensate the Private Partner for any recourses initiated by the third parties • Site risks: pre-existing contamination and unforeseeable sub-soil conditions • Government initiated variations: the Public Partner should pay for those additional or modified works it is willing to have executed

9. SHARED RISKS • Change in Law => may occur due to the long term nature of PPP projects • General change in law vs discriminatory change in law • General change in law during the construction vs general change in law during operation • Force Majeure • Insurance

10. PRIVATE PARTNER RISKS • Design and construction • Operating and maintaining/Facility management services • Latent defects • Handback requirements => at the end of the term of the PPP agreement, the Private Partner hands back the assets to the government in a condition that meets the conditions specified in the contract

11. INVESTORS ISSUES • Payment mechanism • Long Stop Date => the PPP agreement shall provide for a reasonable period of time (at least 9 month) between the completion date and long stop date which triggers the right for public sector to terminate the agreement for default of the SPV • Lenders direct agreements => In order to secure payment on termination, lenders will enter into direct agreements that entitle them to step-in rights to enable them to rescue the project (e.g. insolvency of the private partner) • Lock-up period: it is the period during which the investors commit not to sell their shares in the SPV => it is advisable that such period should not exceed 5 years after commencement of operation of the asset • Settlement of disputes

12. Common reasons for failures I • Most PPP failures can be attributed to inadequate or non-existent feasibility studies, including unrealistic traffic forecasts and undefined public contribution of funds => the absence of a solid feasibility study diminish also project attractiveness to private investors • Poor Legal Framework and enforcement => a solid legal framework for PPP is needed to specify the “rules of the game” for the Private Partner and reduce the project risk • Weak institutional capacity and lack of PPP strategy => must be in place an infrastructure plan or a priority list in order to demonstrate top-level political commitment • Unstable political environment, poor governance and corruption undermine the economies of the countries

13. Common reasons for failures II • High capacity and skills of the Public Partner personnel: "PPP REQUIRE THEIR OWN INFRASTRUCTURE" • Comply with Project Agreement => financial profitability and sustainability is heavily dependent on Government’s observance of contractual agreements (e.g. pre-construction obligations undertaken by the Public Partner) • Lack of Competitive Procurement => uuncompetitive procurement gives a strong position to the negotiating private party and can lead to long delays and excessive cost to the public partner

14. Thank you!!!