Allocating Risks in Public-Private Partnership Contracts

Understanding risks is essential to every PPP agreement. Search below for how to best allocate risks between public and private sectors.

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Questions and Answers

The risk matrices produced by GIH are a great tool for implementing PPP projects in infrastructure, particularly in the transport ...
Posted 20 Mar 2017

Different jurisdictions and sectors tend to use different terms (including for historical reasons), and of course the risk allocation on projects has... More

Any examples of PPP project failure due to exchange rate risk? ...
Posted 4 Oct 2016

In most PPPs the tariff paid to the private sector (whether by the government or users) is paid in the domestic currency... More


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Overview

As part of its ‘leading practices’ mandate, the Global Infrastructure Hub has developed a set of annotated risk allocation matrices for public-private partnership (PPP) transactions, in a variety of sectors.

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 PPP agreement. The appropriate application of risk allocation principles is what determines whether a given PPP project will be ‘bankable’ (i.e. financeable), and whether it will be long-lasting (i.e. able to remain viable though to the end of a long-term contract).

The GI Hub has engaged Norton Rose Fulbright, a global law firm, to prepare a report on Allocating Risks in Public-Private Partnership (PPP) Contracts, 2016 Edition (the Report), with matrices showing the allocation of risks as between the public and private sectors in typical PPP transactions, along with related information on mitigative measures and typical Government support arrangements. Separate matrices are developed for 12 designated types of projects within the transport, energy and water and sanitation sectors.

Each matrix is accompanied by annotations, explaining the rationale for the allocations, mitigative measures, any Government support arrangements, and describing alternative measures for countries with differing levels of PPP market maturity.

The selection of the sectors and projects is reflective of the outlook of the GI Hub. That is, the focus of the Report has been based on economic infrastructure, as opposed to social infrastructure, such as education and health related projects. The risks identified in Report focus on the risks that can be legislated, allocated and mitigated between the public and private sectors and are risks addressed primarily through the concession or project agreement.

Therefore, risks such as Government procurement risk, private sector financial and performance risk, third party intervention/delay and specific risks arising in unsolicited projects, are outside the scope of this Report.

It should also be noted that the matrices in the Report reflect positions reached in actual projects that have reached financial close. However, it must be emphasized that the solution found in one project may not necessarily be right for another.

The objective of this Report is to provide additional guidance to countries, including both members and non-members of the G20, that wish to develop a programme of PPP transactions. The primary focus is on those countries with limited or no prior experience of PPPs, and the desired outcome of the Report is that those countries will have a useful reference guide to assist with their understanding of typical PPP risk allocation arrangements. It is hoped that this ‘upstream’ work will, in turn, assist in the development of a pipeline of robust PPP projects.

Please also refer to WBG Recommended PPP Contractual Provisions initiative for 2015 for further information on the contractual risks in PPP projects. A copy of the 2015 edition of the WBG Report on Recommended PPP Contractual Provisions can be found at http://ppp.worldbank.org/public-private-partnership/library/wbg-report-recommended-ppp-contractual-provisions

 


Common and Civil Law Distinctions

Although the UK and certain other Commonwealth countries have been at the forefront of the legal and contractual development of PPP projects in the past 25 years, civil law countries (such as France) have long had a tradition of transferring to the private sector, in particular through the use of end users pay concessions (but also through public works and services procurement contracts), some of the risks associated with the construction or operation of public infrastructure such as rail, bridges, roads, water or power utilities.

Whether based on user or Government pay models, to the extent that these arrangements seek to allocate risks between private and public parties they could be described as falling, more or less depending on the degree of cooperation between the parties, under the very generic term of ‘PPP’ contracts.

Where such civil law PPP contracts differ from common law contracts is that they generally are governed by administrative law which, besides giving jurisdiction to specific administrative courts, include a number of fundamental principles which protect the public interest and which the parties cannot always easily contract out of. These principles may include, for instance, the right of the public party to unilaterally cancel or amend the contract in the public interest, (the private party being entitled to compensation), or the right of the private party to obtain compensation if there is an unexpected and exceptional increase in the costs of performing the contract due to unforeseen economic circumstances.

Notwithstanding such differences since many of the technical, commercial and financial risks that PPPs seek to address tend to be similar worldwide, many civil law countries have sought to benefit from the more recent experience gained by the UK and other common law jurisdictions when developing, negotiating and implementing complex PPP risk allocation structures. This trend has been facilitated by the various sponsors, construction companies, lenders and professional advisers that were involved in the earlier projects and have since sought to apply similar matrices and practices to civil law projects.

As a consequence some civil law countries have had to pass specific laws to permit the introduction of contractual arrangements developed in the UK (and other markets) as they did not fit existing administrative law structures.

At a more practical level (i) the introduction of UK and common law inspired PPP practices, (ii) the use of common law precedents as a starting point for the drafting of PPP contracts in civil law countries and (iii) the larger number of international participants who feel more comfortable with detailed provisions rather than general clauses requiring further analysis of underlying local laws have resulted in longer and more detailed contracts than would be traditionally the case in civil countries.

It seems that the same trend has occurred in terms of risk allocation: whilst some jurisdictions’ mandatory laws might interfere with the risk allocation (e.g. a provision excluding compensation for a private party expropriated for its own default may entitle such party to an unjust enrichment claim), on the whole there is no significant difference in the allocation of risk between civil and common law jurisdictions.

Accordingly it seems that the differences between common law and civil law do not play a significant role when it comes to general risk allocation. In this context, an individual country’s background and political objectives are probably more important.

So whilst each individual country will have its own way of documenting general risk allocation, the risk matrices in the Report even those based on projects developed in common law countries will be of useful application when considering a similar PPP in a civil law jurisdiction.


Norton Rose Fulbright

The GI Hub has engaged Norton Rose Fulbright, a global law firm, to prepare a report on Allocating Risks in Public-Private Partnership (PPP) Contracts, 2016 Edition (the Report), with matrices showing the allocation of risks as between the public and private sectors in typical PPP transactions, along with related information on mitigative measures and typical Government support arrangements. Separate matrices are developed for 12 designated types of projects within the transport, energy and water and sanitation sectors.