The PPP Risk Allocation Tool 2019 Edition is the second edition of the guidance tool, with the first edition focused only on economic infrastructure in the transport, energy, water and waste sectors. The 2016 version of the guidance tool was delivered in 2016 by global law firm Norton Rose Fulbright with the GI Hub team led by Mark Moseley.

The updated PPP Risk Allocation Tool 2019 Edition was delivered by Allen & Overy and builds on the earlier 2016 work with the GI Hub team led by Jack Handford and close continued involvement from Mark Moseley, Morag Baird and Maud De Vautibault. In addition to economic infrastructure projects, the 2019 version of the guidance tool contains risk allocation matrices for social infrastructure projects (such as hospitals and schools), submarine cables and industrial parks.

The PPP Risk Allocation Tool 2019 Edition is based on the collective global experience of over 20 senior lawyers from Allen & Overy. These lawyers have extensive experience advising project grantors and regulators, sponsors, proponents, funders and contractors in both established and emerging markets in civil law and common law jurisdictions as well as those with Islamic legal systems and on a wide range of projects.

Two workshops were held, in Istanbul in November 2018 and in Singapore in April 2019, to garner feedback on earlier drafts of the PPP Risk Allocation Tool 2019 Edition. Additional feedback was sought more broadly from those working in the industry or representing various interest groups through online public consultation. Norton Rose Fulbright continued to play a role in contributing to the evolution of the PPP Risk Allocation Tool and additional key contributions were received from the World Bank, the European PPP Expertise Centre and the Asian Development Bank.

The diversity of experiences across markets means that particular risk allocation arrangements are not necessarily suitable for every market. Each of the matrices that will be found in the PPP Risk Allocation Tool 2019 Edition reflects positions reached in projects that have been shown to be bankable (i.e. they have reached financial close) but, as indicated, each matrix will contain annotations discussing alternative arrangements for different circumstances.

The PPP Risk Allocation Tool 2019 Edition aims to provide governments (and, additionally, private sector stakeholders) with targeted guidance on the appropriate allocation of project risks between the government contracting authority (Contracting Authority) and the private counterparty (Private Partner) in a PPP contract. Risk allocation is at the centre of every PPP transaction, and a deep understanding of the risk allocation arrangements is a precondition to the drafting of every successful PPP contract.

The appropriate application of risk allocation principles is what determines whether a PPP project will satisfy the needs of the government, achieve value for money and be financially viable for the private sector (i.e. whether investors will be willing to commit financial resources to the project).

The approach taken was to base the guidance tool on PPP transactions that have reached financial close, but drawing also on the experience of projects that have failed to reach that stage. Financial close is often seen as a proof of success, but reaching financial close does not mean that value for money has been achieved for the public sector. Reaching financial close does not automatically constitute proof of value for money. For example, where the risk allocation has been too favorable to the Private Partner (e.g. the public sector granting excessively generous guarantees) or the Private Partner is taking on and computing expensive risk premiums for risks that are not best managed by the private sector, these circumstances may not represent value for money for the public sector. Contracting Authorities will want to strike a balance between bankability and value for money. In addition, appropriate risk allocation will significantly increase the chances of procuring a project that is sustainable over the long term.

The essence of the guidance tool is a set of 18 risk allocation matrices, showing the allocation of risks between the Contracting Authority and the Private Partner in various types of PPP transactions, along with related annotations on the rationale for the allocations, as well as potential mitigative measures and government support arrangements. The sample matrices cover projects for both economic and social infrastructure facilities.

This guidance tool is aimed to be used in conjunction with the World Bank’s Guidance on PPP Contractual Provisions 2019 Edition. Once an appropriate allocation of risks between a Contracting Authority and a Private Partner is decided upon, the parties need to appropriately document that risk allocation in an agreement or contract to ensure that each party can effectively enforce their rights. The World Bank document provides drafting and guidance for specific provisions that are typically included in PPP contractual arrangements. In addition, it provides detailed analysis on the rationale underlying these provisions and how they have evolved over time.

Although the risk matrices in this reference tool focus on risk allocation that may be agreed in a PPP contract, more detailed risk matrices often play a broader role as a living tool that evolves and is refined through time, with different functions through the various stages of a project. For example, a more detailed risk matrix can be used to support ongoing decision-making post signature, during construction and operations (as a continuing tool for contract management). See also PPP Project Preparation and Detailed Risk Identification and Analysis.

As well as PPP structures, there are other non-PPP contractual structures and procurement models that Contracting Authorities can use to deliver infrastructure with private sector involvement. These include more traditional procurement of just the construction (or rehabilitation) of infrastructure, or procurement of standalone maintenance contracts.

The risks addressed in this guidance tool and much of the risk allocation guidance will be relevant to different contractual structures, but will need to be adapted appropriately taking into account the scope and duration of the relevant contract and financing methods (such as whether there is a need for long term third party lending).

PPP risk allocation and contract drafting should be also considered in the broader context of project preparation. Project preparation is widely accepted as a key driver to ensure investment in infrastructure is transformed into positive outcomes for the public. This is particularly true in the case of PPPs, as they are complicated arrangements for the delivery of infrastructure. A PPP contract that is structured around a project that does not deliver the social benefits in a sustainable manner will have a negative impact irrespective of how well the contract is structured and drafted.

Together with the World Bank guidance, an ancillary aim of the PPP Risk Allocation Tool 2019 Edition is to help to develop greater consistency and standardisation in the way that PPP contracts are structured and drafted. With a growing focus on delivering infrastructure using PPP methods, consistency and standardisation can play an important role in providing efficiency gains for governments, as well as predictability for private sector participants looking to enter new countries or markets, thereby reducing overall costs.

As is the case with any guidance, care must be exercised in adapting the guidance tool to the specific characteristics of any given project. PPP project risks vary depending on the country or region where the project is located, the nature of the PPP project and the assets and services involved. Even within the same sub-sector, the individual characteristics of each project make it inherently problematic to suggest a ‘one size fits all’ risk matrix. The risk categories contained in the matrices in this guidance tool set out the key risks that are generally applicable to the sub-sector in question. There will, however, inevitably be more detailed risk identification required in individual projects, as well as additional risks to take into account in building a risk matrix which is specific to the project concerned. Procuring Authorities should use the risk allocation matrices contained in this guidance tool as a starting point, but always recognising that there will be additional project-specific risks and issues that need to be addressed.

In addition, the risk allocation and contractual drafting processes should include consideration of local laws and market conditions. Specific market considerations and differences in local laws (including differences in civil law, common law and specific jurisdictions) are discussed in detail throughout this guidance tool, including in the sub-sector specific risk allocation matrices. The guidance tool can therefore inform Procuring Authorities procuring PPP projects in any jurisdiction, in conjunction with professional legal advice which is jurisdiction and project-specific.

The underlying principle of risk allocation in a PPP transaction is that risks should be allocated to the party best able to bear - or most incentivized to bear – those risks. This involves identifying which party is best able to manage the likelihood that such risks will occur, as well as to manage impacts if they do eventuate. Although the principle is widely known and accepted, operationalising the principle in a detailed PPP contract is a complex task, requiring deep analysis.

From the Contracting Authority's perspective, the bankability of a PPP project is often a key consideration in determining if an infrastructure project can be procured using a PPP approach. However, governments should not just consider bankability, but also value for money and robust risk allocation. I.e. a project can be bankable, but not deliver value for money because a Contracting Authority is transferring risks to the private sector that could be more efficiently managed by the government. PPP is not a procurement method which transfers all risk to the Private Partner. There will always be some risks for which the Contracting Authority should be wholly or partly responsible.

In general terms, the Contracting Authority should retain those risks that are not realistically capable of being properly assessed or efficiently priced by the private sector market or where the Contracting Authority can manage and price the risk in a more efficient manner. If risks are carefully assessed and transferred to the party best able to control or mitigate them, this should result in a reduction of overall project costs, and thereby improve value for money for the government. This can be achieved in several ways:

• less expensive risk premiums will be charged by bidders;
• projects will be attractive to multiple bidders, creating competitive pricing tension; and
• the infrastructure services will be delivered on a sustainable basis, due to lower rates of disputes, defaults, renegotiation and insolvency.

If risks are not allocated properly, the Contracting Authority may not be able to generate enough interest for the project, with the result that experienced bidders may not be willing to participate in the tender process or may withdraw after an initial expression of interest. This can lead to a failed tender process (where there are no or very few bidders) or to a flawed process with only inexperienced bidders or speculative bids.

The parties to a PPP contract should also strive to achieve a balanced and reasonable risk allocation that will provide an appropriate basis for a long-term partnership. PPP contracts typically run for a significant period of time, typically between 15 and 30 years, and poor risk allocation can result in the project failing before the end of its expected lifespan, due to excessive claims, disputes, requests for renegotiation, insolvency or termination.

It is important for Procuring Authorities to have an understanding of the corporate structure of a Private Partner in a PPP transaction, so as to better understand which risks can be appropriately transferred to the Private Partner, and which should be retained by the Contracting Authority. From the Private Partners’ perspective, risk will be managed primarily by reallocating it to the main subcontractors, i.e. the construction contractor and the operations and maintenance contractor. The availability of insurance or hedging will also be a key consideration, and the Private Partner will be required to place certain insurances by both its lenders and the Contracting Authority. While PPP projects usually involve limited recourse to the Private Partner’s shareholders, its shareholders may also provide some degree of support to lenders, or to the Contracting Authority, to cover specific risks.

In assessing the likely cost impact, the parties may look at each other's ability to bear such costs and the related impact on price, as well as whether and how the cost impact could be offset or passed on by, for example, increasing the price of the service to end-users (in the case of user-pay PPPs) and/or by spreading the cost across taxpayers (in the case of government-pay PPPs).

Conducting ‘market soundings’ of the risk appetite of the private sector (including potential lenders, equity investors and contractors) in advance of the formal procurement process will allow the Contracting Authority to inform itself of, and take into account, key issues before the finalising the risk allocations for a proposed transaction and enable that risk allocation to be tendered among several competing bidders.

The Contracting Authority may also obtain some comfort (though not as a substitute for its own due diligence) from the involvement of private sector third party funders who go through a rigorous process to satisfy themselves that the PPP Project is bankable. This can give the Contracting Authority additional reassurance in terms of its own (and its advisers') assessment of the Private Partner's ability to successfully deliver the PPP Project.

The primary objective of this PPP Risk Allocation Tool 2019 Edition is to provide additional guidance to countries that wish to develop a programme of PPP transactions. The desired outcome is that countries will have a useful reference guide to assist with their understanding of typical PPP risk allocation arrangements. The risks identified in the PPP Risk Allocation Tool 2019 Edition are risks that can be allocated and mitigated between the Contracting Authority and the Private Partner, primarily addressed through the PPP, concession or project agreement or the underlying law. Other risks -- such as government procurement risks, private sector financial and performance risks, third party intervention/delay and the risks particularly associated with unsolicited projects -- are outside the scope of this guidance tool.

The matrices assume a project financed project structure. There may be projects (particularly smaller projects) that are not project financed but are, instead, corporate financed (such as projects financed on the balance sheet of a construction contractor or an operating company). The focus of this guidance tool is on more complex project financed structures, but although some of the risk allocation guidance is specific to project financed structures (such as termination compensation), much of the risk allocation will be relevant to both project financed and corporate financed PPP structures.

The document also provides guidance for a wider range of contract structures, as they address risks that are key to any infrastructure procurement method (whether that be a PPP contract or a more traditional design and build contract), such as land availability, environmental risk, design risk and construction risk.

The initial 2016 edition of the guidance tool provided commentary in the transport, energy and water and waste sectors. In this PPP Risk Allocation Tool 2019 Edition, the guidance has been expanded to include new projects in the social and telecommunications sectors, with the result being that the guidance tool now contains 18 sample risk allocation matrices. In addition, the original 12 risk allocation matrices have been updated, building on the 2016 work, to reflect developments in global leading practices and feedback received since 2016. The 18 sample risk allocation matrices in this 2019 edition of the guidance tool are set out below, with the new project types marked with an asterisk.

• Feasibility and Decision to use a PPP Approach
• Project Structuring
• Procurement
• Construction, Operation and Handback
• Additional Guidance Material

PPP risk allocation and contract drafting should be considered in the broader context of PPP project preparation and delivery. A typical process of preparing for and delivering a PPP project involves the identification of infrastructure priorities, feasibility analysis, deciding to deliver the project using a PPP approach, project structuring, procurement, construction, operations and finally handback.

This guidance tool does not purport to act as a complete guide to PPP project preparation and delivery; instead it focuses on one area of the process -- namely the structuring of the project in terms of risk allocation -- which is complicated, and can lead to negative outcomes if it is not properly handled. However, risk allocation is only one of the critical elements of the process. Good risk allocation in a PPP contract will not fix a project that is economically unviable or not well prepared. Similarly, it won’t make a project socially acceptable or ensure its effective management through construction and operations. For completeness, this section provides a brief contextual background to typical preparation and delivery processes and provide links to additional guidance on leading practices in other areas of PPP project preparation and delivery.

Feasibility and Decision to use a PPP Approach

Before procuring any project, the Contracting Authority should carry out a feasibility study for the project, looking at all relevant issues including land requirements and title, access and security, site condition, demand, necessary approvals and economic, social and environmental impacts. A project needs to go through these feasibility processes irrespective of which procurement option is being chosen to deliver the project. 

The use of a PPP approach is then simply one of the procurement options available to a Contracting Authority that is seeking to provide new infrastructure services. The Contracting Authority should choose the procurement method that provides the best value for money, and a PPP approach will not be the right choice in all cases. Most of the other methods available to governments typically also involve some level of private sector involvement, whether through traditional procurement of the design and construction of an asset, the outsourcing of operation of an asset or service, or through a joint venture arrangement, a privatisation transaction or the establishment of regulated business.

This guidance tool specifically addresses risk allocation in a PPP contract, assuming that the Contracting Authority has carried out a thorough analysis in relation to how best to procure its infrastructure and has concluded that a PPP procurement is the right method for the project in question. In coming to this conclusion, the Contracting Authority may have its own government procurement guidance to follow and can also draw on the GI Hub’s Governmental Processes Facilitating Infrastructure Project Preparation Report and other guidance material, as described below.

Project Structuring

Project structuring is the process of configuring the legal obligations of the public and private parties in the proposed project, and these obligations will be expressed in the draft contract often found in the request for proposals package send to prospective bidders. Project structuring should take place after a government has decided to use a PPP approach, and before the procurement process begins.

A key aspect of project structuring is the allocation of risks as between the Contracting Authority and the Private Partner, but this allocation can only be done after all of the project risks have been identified and analysed. This process of identification and analysis is described below in the next section of this introduction, titled “Detailed Risk Identification and Analysis”. Once that identification and analysis has taken place, this guidance tool can then be used to consider the most appropriate allocation arrangements for each particular risk detailed.

Once an appropriate allocation of risks between a Contracting Authority and a Private Partner has been decided upon, the next step in the project structuring process is to appropriately document the proposed risk allocation in an agreement or contract to ensure that each party can effectively enforce their rights. As noted above, the World Bank’s Guidance on PPP Contractual Provisions 2019 Edition provides drafting guidance for specific provisions that are typically included in PPP contractual arrangements, and provides detailed analysis on the rationale underlying the contractual drafting options.

The European PPP Excellence Centre’s Termination and Force Majeure Provisions in PPP Contracts and State Guarantees in PPPs guidance documents provide additional important guidance on the structuring of PPP projects.

Procurement

Both this guidance tool and the World Bank’s Guidance on PPP Contractual Provisions 2019 Edition are also relevant to the procurement stage of a PPP project, where bidders may have an opportunity to suggest changes to the PPP contract (and the underlying risk allocation detailed in the PPP contract). Accordingly, the procurement process will serve to determine the final risk allocation and contractual rights and obligations of the parties throughout the lifespan of the PPP contract.

It is important to set the right minimum requirements and criteria when designing the tender process for the award of a PPP project. Choosing the right tender process and setting the right standards and criteria will define the quality of the competition. For example, if the Contracting Authority is concerned to ensure that the PPP project brings wider benefits to the local economy (such as using local businesses and employees and developing local skills and expertise), it may want to impose specific requirements.

Sharing reports from the feasibility stage with bidders can help to reduce bid costs and, consequently, the price bidders’ propose for the PPP project. To the extent any information from the feasibility stage is given to the Private Partner to rely upon (in terms of accuracy and sufficiency), the risk that such information is not accurate or sufficient will be borne by the Contracting Authority (as flagged in the relevant risk categories of the matrices in this guidance tool).

The choice of the right Private Partner is also of great importance and the Contracting Authority should ensure that it chooses the right partner. The relationship between the Contracting Authority and the Private Partner is key in a long-term PPP contract. In order to achieve this, the Contracting Authority will typically specify the technical and financial capabilities required of the key parties in each bid (i.e. the Private Partner and its proposed key subcontractors and investors) and evaluate their respective strengths as part of the procurement process. In some jurisdictions, the Private Partner may be required to provide certain additional performance security.

The World Bank’s Procuring Infrastructure Public-Private Partnerships Report 2018 provides additional data and guidance on the procurement stage of a PPP project.

Construction, Operation and Handback

Because of their long-term and complex nature, PPP contracts cannot specifically provide for the entire range of events that might arise during their lifetime. As a result, PPP contracts typically have flexibility built in to enable changing circumstances to be dealt with as far as possible within an agreed contractual framework. All stakeholders in a PPP Project will need assurances that situations which are beyond their immediate control and which affect contractual performance will be dealt with in a way that allows them to arrive at a mutually acceptable solution. For this reason, both parties will typically want to place contractual restrictions on changes to the identity of the parties (and these contractual restrictions are addressed in the risk allocation matrices under the risk heading ‘counterparty risk’).

The GI Hub’s PPP Contract Management Tool, which provides guidance for governments through the construction, operations and handback phases of PPP projects, highlights the importance of choosing the right Private Partner. It provides data and detailed case studies to guide governments in managing the day-to-day management of PPP contracts and situations where particular risks have materialised.

Additional Guidance Material

Several other reference documents are available to provide governments with guidance for the various stages in the development of a PPP project, including guidance materials produced by other multilateral development banks, other development finance institutions, the OECD, the European PPP Expertise Centre, the United Nations Economic Commission for Europe (UNECE), the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) and other entities. Many of these resources can be found on the GI Hub’s Infrastructure Knowledge Exchange and/or the World Bank’s PPP Knowledge Lab.

As highlighted above, care must be exercised in adapting guidance to the specific characteristics of any given project. PPP project risks vary between projects and the individual characteristics of each project make it inherently problematic to suggest a ‘one size fits all’ risk matrix. The risk categories contained in the matrices in this guidance tool set out the key risks that are generally applicable to the sub-sector in question. There will, however, inevitably be more detailed risk identification required in individual projects, as well as additional risks to take into account in building a risk matrix which is specific to the project concerned.

From the Contracting Authority’s perspective, it should make timely appointments of technical, legal and financial and insurance advisers experienced in PPPs and market practices in the relevant project sector. It is also important to involve internal and external stakeholders (including through public consultation) on a timely basis, so that all relevant risks can be identified. As identified in the GI Hub’s PPP Contract Management Tool, it is beneficial to involve government officials who will be eventually managing the PPP contract during construction and operations. This will allow their experiences to be considered in the identification and analysis of risks during those phases. For example, the Contracting Authority will likely be responsible for signing off construction works, which may be complex and involve multiple assets. A lack of a full understanding of what is involved in the sign-off process can create risks of delay, so appropriate time needs to be provided for this in the PPP contract.

A typical risk analysis process will estimate the likelihood and potential impact of the eventuation of the identified risks. In this way, the Contracting Authority can make informed decisions on whether it is more efficient to retain a given risk or to transfer it to the Private Partner. It will also allow the Contracting Authority to fully consider its payment obligations, potential compensation liabilities and its contingent liabilities. There are several methods for considering the potential implications of risks eventuating, including qualitative and quantitative methods.

The risk matrices contained within this reference tool are not a “full” project risk matrices or risk registers as the Contracting Authority will need to consider not only the distinct risks, but also the probability of occurrence of individual (or concurrent occurrence of) risks, their impact, their valuation, their likelihood of occurring, etc.

This guidance tool does not go into detail on risk analysis other than to note its importance in informing the ultimate risk allocation structure used in a PPP contract.

For a summary of guidance on risk identification and the qualitative and quantitative methods for considering risks, see Section 3.3.1 (Identifying Risks) of the Public-Private Partnership Reference Guide 3.0 that was developed by the World Bank and others.

Risk allocation is influenced by various factors, including the maturity of markets, the experience of the participants and the level of competition between bidders. As a government delivers more PPP projects successfully, the risk perceived by private sector participants will reduce, making projects more attractive to investors, thereby creating a more competitive environment. In addition, because perceived risks change, the government may be in a position where it can begin to transfer more risk to the Private Partners as it develops a ‘track record’.

A stable political, economic and legal regime and environment is desirable when seeking to successfully procure PPP projects. While certain associated risks can be managed under the PPP contract, ultimately the risk of investing in and lending to a PPP Project where these conditions do not exist may be too high for some private sector participants, particularly when compared with alternative investment or lending opportunities. Jurisdictions without a clear legal framework and solid institutional basis are perceived as likely to be more susceptible to inefficient and corrupt procurement which not only stalls the completion of infrastructure projects but also lowers the quality of infrastructure.

Depending on the Contracting Authority’s credit rating and the level of government involvement, government guarantees or co-contracting may be sought by the private sector parties (e.g. if the relevant Contracting Authority is not a sovereign entity). The involvement of export credit agencies and multilateral and development finance institutions can also give investors greater confidence in bidding for and contracting a PPP in certain jurisdictions and act as a form of risk mitigant. This is due not only to their ability to offer more favourable financing terms or products such as political risk insurance in respect of commercial loans and equity contributions, but also because of the relationship dynamics at government level. Similarly, the existence of bilateral investment treaties between governments may play a part in the decision of a prospective private sector participant to invest in a particular jurisdiction. These elements are additional factors in the negotiation of a well-balanced PPP contract in such jurisdictions, but are not a substitute for appropriate contractual risk allocation in the PPP contract itself.

In addition, the level of development of a country’s local capital markets, construction industry, government and private sector capacity, land rights or local courts will all have an impact on what makes for robust risk allocation in that country.           

For these reasons, even within the same sector, the individual characteristics of each project make it inherently difficult to suggest a ‘one size fits all’ risk matrix. To begin to address market differences, the matrices contain market comparison summaries for Procuring Authorities to use as a starting point, but always recognising that there will be additional project-specific risks and issues to consider.

A factor that has affected government’s interest in using PPP approaches to deliver infrastructure has been the availability of advantageous accounting treatments, in particular the perceived ability to treat such investments as ‘off balance sheet’. However, this has attracted increasing scrutiny from accounting bodies around the globe, due to concerns that governments may use PPPs to bypass spending controls (by taking public investment out of the budget and representing debt off the balance sheet), although they are still bearing substantial risk and incurring significant contingent liabilities.

This has resulted in bodies such as Eurostat, the International Monetary Fund and national accounting boards (e.g. in Australia) embarking on measures focusing on the overall risk/reward balance under PPP contracts for the purposes of determining whether they should be classified as on or off government balance sheets. For example, Eurostat in the EU currently requires EU governments to follow certain accounting rules for the debt and deficit treatment of PPP Projects (European System of National and Regional Accounts 2010 or ESA 2010). These focus on how construction risk, availability risk and demand risk are allocated between the Contracting Authority and the Private Partner to determine the accounting treatment that must be applied.

Under these rules (which themselves have given rise to some debate), for a PPP to be recorded off government balance sheet, the majority of the risks and rewards under the PPP contract have to be borne by the Private Partner. A ‘user pays’ PPP contract will be off the government’s balance sheet if government control over the Private Partner is deemed minimal and the risk and reward distribution is not distorted by other provisions, such as clauses on government financing, the existence of government guarantees, termination and the allocation of project assets at the end of the contract. “Government pay” PPPs may not be off balance sheet depending on the specific risk allocation between the parties.

This assessment of the overall risk/reward balance can play a role in deciding on an appropriate allocation of risks between the parties to a PPP contract where a government is looking for a specific accounting treatment. However, it is generally not considered good practice for accounting treatment to be a factor that should drive approaches to risk allocation in PPP contracts.

Additional guidance in respect of the management of the fiscal costs and risks associated with PPP projects is provided in the World Bank’s Public-Private Partnerships Fiscal Risk Assessment Model (PFRAM) and Eurostat and EIB/EPEC’s Guide to the Statistical Treatment of PPPs.

As noted above, the underlying legal system in each country may have an impact on risk allocation arrangements, and it will very likely have an impact on how contractual provisions are drafted. Two of the major legal systems globally are the civil law and common law systems. In addition, a number of PPP transactions are now being undertaken in countries with Islamic legal systems.

In civil law countries, PPP contracts are generally governed by administrative law which, besides giving jurisdiction to specific administrative courts, includes a number of fundamental principles which protect the public interest and which the parties cannot always alter by contract. These principles may include, for instance, the right of the Contracting Authority to unilaterally cancel or amend the contract in the public interest (with the Private Partner being entitled to compensation), or the right of the Private Partner to obtain compensation if there is an unexpected and exceptional increase in the costs of performing the contract due to unforeseen economic circumstances. Such codified provisions and underlying principles may be implied into civil law contracts without being expressly drafted into the PPP contract. As a result, less importance is generally placed on the PPP contract expressly setting out all the terms governing the parties’ relationship and allocation of risks, partly because gaps or ambiguities can be remedied or resolved by operation of law. A civil law contract is, consequently, often less detailed than an equivalent common law contract.

Some civil law jurisdictions enjoy extensive freedom to contract, whereas in others it may not be possible to derogate from certain principles or to completely waive certain rights, so the parties will need to take this into account in their risk allocation negotiations. Generally, there is an increasing preference in civil law jurisdictions to expressly set out the legal position in PPP contracts so that they are clear on their face and are not relying on implied terms from underlying law. This is partly because this approach will be more familiar to parties from common law jurisdictions, but also because relying on underlying law may create more interpretation risk and it is in the interest of all parties to minimise the risk of ambiguity, particularly investors in a project financed structure, who require detailed security arrangements in exchange for providing their financial support.

In countries with a common law system, parties typically enjoy extensive freedom of contract and few provisions are implied into a contract by law. Judicial decisions set precedents which will be followed in the determination of contractual disputes and therefore influence contractual drafting. A consequence of this freedom is that the terms of any contractual arrangements should be expressly set out in the relevant contract. In a PPP context, all arrangements governing the relationship and allocation of risks between the parties therefore need to be expressly set out in the PPP contract itself.

In some countries with increasingly active PPP programmes, Islamic law (shariah) provides the substance of the legal system. These jurisdictions can be organised as common law or (more often) civil law systems. In these countries, no legal instrument-whether legislation, regulation, court ruling or private or public contract-may contravene Islamic principles. This means contracts that provide for forbidden interest (riba) or undue uncertainty/speculation (gharar) will not be enforceable in these countries. As a result, contractual structures—such as cost-plus financing (murabaha) or procurement-leasing (istisna-ijara)-have been adopted that, while compliant with the shariah, achieve the same commercial outcomes as their conventional counterparts.

An overarching consideration in relation to freedom to negotiate under all legal systems is whether the applicable procurement processes and rules limit the ability of the parties to negotiate and amend the terms of a PPP contract issued as part of a tender process, and whether any changes might give rise to procurement challenges or allegations of corruption. The Contracting Authority should take this into account when formulating the terms of the PPP contract, to ensure it retains the flexibility it is likely to require over such a long term and avoid tendering contractual arrangements which do not meet the test of bankability and which are not robust over the lifespan of the project.