Sector:

Transport

Name of Agreement:

The Design, and Finance of improvements to and the Operation and Maintenance of an  urban highway,  under a Public Private Partnership Agreement

Type of Agreement:

Draft Road PPP Contract

Region (if known):

North America

Year of Agreement/ Draft:

2010

Principal Author(s) (firm and contact person):

Private Consulting Firm

Annotated by:

Robert Phillips

Purpose and Context:

Project agreement to develop improvements to a road, in return for milestone payments during construction and availability payments during operation. 

Circumstances where this contract may be appropriate:

Development under a public private partnership (with possibility for real tolls) of highway project in an urban area where certain works (phase 1 works are being carried out by the public sector and the road improvement works for phase 2 are to be carried out by the private sector (the Developer) in part over land with a cultural and special natural and biological resources.

Drafted for common law/ civil law jurisdiction:

Common Law

Main Features:

Term:  Thirty years after date for completion of the phase 2 works (Clause 2.2)

Concessionaire Covenants

Developer is a consortium incorporated in the host country with the sole object of undertaking the project.

The Developer has certain exclusive rights under the project agreement including the right to receive milestone and availability payments so long as it meets its obligations. Under Clause 11.6 it may introduce tolling and the amount of the tolls received is offset against periodic (availability) payments otherwise payable. As an incentive once there is no balancing amount payable by the public sector (the Department) the split of tolls is 80 per cent to the Department and 20 per cent is retained by the Developer).

If tolling introduced then deductions which the Department might otherwise make from periodic payments become payments to be made by the Developer.

Annexes are missing from the suite of documents.  These are important, as they comprise documents for the commercial relationship including details for design/construction, o&m, financing as well as pre existing third party agreements to which the Developer is to adhere.

There are 3 key events namely NTP1 (when the design work may commence), NTP2 (when the phase 1 works are completed and the Developer takes over o&m of those works) and NTP3 (when the Developer commences construction of phase 2). During construction Developer has right to occupy and on completion of phase 2 a lease is granted by the Department to the Developer (Clause 2.1).

In addition to the procuring of the phase 1 works the Department had entered into a series of agreements with third parties listed in Appendix 23. A key agreement was with the custodian of an area of cultural and biological importance. Another was for the supply of a major utility line. These agreements are to be observed by the Developer (Clause 1.4).  

Series of Bonds or Letters of Credit e.g. construction and o&m during construction period see clause 16.2).

Three discretions exercisable in relation to a class of approvals and submissions by the Department; sole, absolute and good faith. Only good faith is subject to review and if found to be arbitrary then certain costs and other relief may flow. (Clause 3.3.2). If approval not given within a specified time then deemed refused.

Other submittals are subject to review and if no comment received within a specified time then Developer may proceed at own risk. (Clause 3.3.3). However, if the circumstances listed in Clause 3.3.6 apply then Department may object. As Clause 3.3.6 includes issues of Departmental policy then there would need to be transparency about this at the outset.

The Developer may seek an Interpretive Engineering Decision but bears the risk of doing this including delay. However, if the Department insists on one interpretation after the Dispute Resolution Procedure has found in favour of another, this is treated as a Departmental Change. (Clauses 3.4.2 and 3.4.3)

No development rights are granted to the Developer in relation to business rights other than the road project. Developer can approach Department with ideas (Clause 20).

Payment Structure:  There is a fee of a capital sum payable by the Developer to the Department before the commencement of construction There are periodic payments  consisting of milestone payments during construction period and availability payments during operation,  payable by the Department to the Developer. Milestone payments are specifically designated as not being periodic payments for construction for the purposes of local legislation. Both milestone and availability payments are subject to deductions. In the case of milestone payments deductions are treated as liquidated damages and are made in accordance with Appendix 4 and for availability payments are made in accordance with Appendix 7 (subject to the limit on deductions referred to in Clause 6.6.).

Related-Party transactions are not permitted without the written consent of the Department once a threshold amount for each contract has been reached (Clause 7).

 The State in which the project is located has a long history of engineering contracts for roads being carried out in the public sector with a strong lobby by state employed engineers. Accordingly the regime relating to the carrying out of works might be seen to be more interventionist than might otherwise be strictly necessary. Within that environment there are priced quantities for carrying out work. This has led, for instance, to a right for the Department to claw back if the cost of carrying out the removal of haul roads over a designated area if the actual costs fall below the priced amount for that item (Clause 4.13).

Pre existing contaminated/hazardous material risk is shared where there can be disposal by deposit off site (Clause 4.10). A defined volume is at the Developer’s risk, the costs relating to a further volume is shared 50/50 and any excess is borne by the Department. The costs of special disposal of contaminated/hazardous materials are borne by the Department.

Departmental Changes can be ordered but up to an aggregate sum no recovery is made by the Developer. Once that aggregate sum is exceeded then the Department pays for changes ordered by it (Clause 5.2). 

Unless necessitated by default or potential event of default, Department shares in 60 per cent of the refinancing gain (Clause 15.5).

Under Clause 21 certain intellectual property rights were to be granted to the Department. It was recognized that certain intellectual property rights may relate to sensitive design developments or similar commercial sensitive information which the Developer or its contractors might wish to exploit in the future without risk of leakage. Accordingly certain intellectual property is to be held in an escrow account and to be released to the Department for use in connection with the project on the occurrence of certain events. It might have been better if  the project agreement was more attuned to the electronic age; e.g. read only access to computer based data to be given to the Department and also if consideration be given to the advantages of a computer based asset condition register.

Developer has an obligation to observe or cause to be observed local law concerning the engagement of certain classes of enterprise. Specific provision was made with percentages in respect of design and construction works but no minimum requirement was stated in respect of o&m.(Clause 7).  Examples of classes include disabled ex army personnel and small enterprises as well as local businesses.

An obligation on the Department to make available vacant possession of the project sites to the Developer. Under Clause 4.4.7 the grant is to be 90 days before the expected date of NTP2 in respect of the phase 1 areas and 15 days before the expected date of NTP3 for the balance. A lease is to be granted by the Department to the Developer upon completion of the phase 2 works.

No review etc by or on behalf of the Department will relieve the Developer of liability under or in connection with the project agreement. (Clause 3.3.7.1) Owing to the jurisdiction in which the project is located the exclusion of liability clause including waivers is probably longer and more complex than might ordinarily be expected.

Utilities-Developer is to deal with utilities but receives some relief for instance when the physical assets are outside a given distance of where they are supposed to be located or where assets are shown not to be operational but in fact are (Clause 45.7 and 45.8).

Handback at the end of the agreement also includes provisions for a handback reserve account and letters of credit to give security for performance by the Developer.  (Clauses 5.9 and 5.10)

Insurance is to be maintained by Concessionaire and the extent and types of insurance are listed. Certain insurances would fall under a band of cover effected by the Department on its own road schemes and the Developer may seek to obtain the benefit of that cover. If insurance not available at commercial rates then Department can take the risks attributable to the events no longer covered (with a reduction in periodic payments equal to the what would have been the commercial rate for that cover); Department can pay the excess between the commercial rate and the amount being demanded by the market or Department can terminate the project agreement and pay no fault compensation.

Force Majeure is dealt with under relief events (Clause 9)-

 Termination: Where the Developer is in breach then Lenders have the right to intervene and to appoint a substituted entity. Department, subject to Lenders’ rights can also intervene to correct breach by the Developer.

In addition to termination through default the Department may terminate voluntarily.

Upon termination, calculations for payment by either party are set out in the agreement. Lenders are at risk, in the event of a Developer Default to 20 per cent or more of senior debt.(Clause 19.4)

Dispute Resolution: Disputes have to be referred to a Disputes Resolution Board as a condition precedent to litigation. Decisions of DRB are not final and binding unless parties otherwise agree.

Possible additional provisions that it might be appropriate to include:

Without the detailed schedules it is difficult to know what else is missing.

Provisions that may not be advisable to replicate/ may need further thought:

The use of extensive definitions is probably relevant for the jurisdiction but a number  of definitions would not be necessary for other jurisdictions. Generally speaking it is not necessary to define terms which are in general use even if that general use is within a specific industry such as the construction industry.

Provisions of wider general use:

The intellectual property provisions are worth considering for other projects.

The sensitivities arising from the carrying out of certain works procured by the public sector as well as carrying out work in an area of cultural and environmental significance are worth following through for projects with similar issues.

Experience Since Coming Into Force (including any amendments)/ if draft form, whether it has been applied:

The Department reached agreement with the preferred bidder in early 2011 but litigation then followed brought by employees in the public sector. As a consequence an amendatory agreement has been entered into to address not only the issue of delay caused by the litigation but also issues which have come to light in the meantime.

Tracking Number:

 Ref#: Presidio_Prkwy_Prjct_Initial_Drft_Lease_Agrmnt