A look at the fundamentals of the contract agreement, contract management and dispute resolution
Public–private partnership (PPP) describes a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies. These schemes are sometimes referred to as PPP or P3.
Many developed nations in the world jumpstarted their economies by accelerating their infrastructure and building on it; India and the United States of America is one of such nations. The late President J.F. Kennedy of USA once stated that, “America has good roads, not because America is rich, but America is rich because it has good roads”.
The crux of this matter is that a country cannot be rich without good infrastructure. All the great civilizations attained greatness only through the entrenchment of adequate and sustainable infrastructure. The World Bank estimates that every 1% of government funds spent on infrastructure leads to an equivalent 1% increase in Gross Domestic Product (GDP), which invariably means that there is a correlation between any meaningful inputs in infrastructure development which reflects on economic growth, indices, hence the value of infrastructure cannot be underplayed.
Infrastructure development has in recent times assumed a central importance in Nigeria’s fight to attain social and economic stability. The federal government and all state governments are using infrastructure as the focal point of their administrations and policy enactments. Infrastructure generally has to do with the fixed provision of tangible assets on which other intangibles can be built on. Not limited in scope, it revolves the provision of Housing, Power (electricity), Transport, Education, Communication, and Technology.
In the history of Nigeria, it has been a mix of daunting challenges and boundless opportunities. However, since the transition to democracy in 1999, the country has laid a solid foundation for economic growth and development. Nigeria’s rich human and material resource endowments gives it the potential to become Africa’s largest economy and a major player in the global economy. The present government of Nigeria has proposed to be among the top 20 economies in the world by the year 2020. That notwithstanding, our huge infrastructure deficit has greatly constrained economic growth and development, thus inhibiting our ability to improve the quality of life as envisaged in the Agenda of the Federal Government.
There is therefore the need for the development of an infrastructure base comparable to those of other nations in the world. These Infrastructure and related Investments are critical in achieving and sustaining a high double-digit annual growth rate necessary for Nigeria to achieve its Vision 2020.
Given the huge amounts needed and the drive necessary for development, the Nigerian government does not have the requisite capability to achieve this on its own and has thus among other options embarked upon the use of Public Private Partnerships (PPPs), for infrastructure development and thus addressing the challenges constraining the growth of the Nigerian economy. The Federal Government of Nigerian has further established the Infrastructure concession regulatory commission through the Infrastructure Concession Regulatory Commission (Establishment, Etc) Act of 2005 (The ICRC Act) in this regard.
Nigeria’s policy on PPP is to the effect that it will develop regulatory and monitoring institutions so that the private sector can play a greater role in the provision of infrastructure, whilst ministries and other public authorities will focus on planning and structuring projects. The private sector will be contracted to manage some public services, and to design, build, finance and operate some infrastructure. It is the Government’s expectation that private participation in infrastructure development through PPPs will enhance efficiency, broaden access, and improve the quality of public services. This policy statement, sets out the steps that the Government will take to ensure that private investment is used, where appropriate, to address the infrastructure deficit and improve public services in a sustainable way; and it will ensure that the transfer of responsibility to the private sector follows best international practice and is achieved through open competition.
The ICRC Act therefore seeks to provide for the participation of the private sector in financing, construction, development, operation, and maintenance of Federal Government infrastructure or development projects through concession or contractual arrangements. The Infrastructure Concession Regulatory Commission (ICRC) and its Governing Board were then established to regulate, monitor, and supervise the concession and development projects. The Infrastructure Concession Regulatory Commission (ICRC) is responsible for setting forth guidelines to promote, facilitate and ensure implementation of Public Private Partnership (PPP) Projects in Nigeria with the objective of achieving better value for money (vfM)for infrastructure services and enhanced economic growth.
This piece which is the first in many series intends to offer an overview of PPPs, its different models, including their potential benefits for both the public and private sectors in Nigeria and the necessary conditions in negotiating and executing concession or contractual agreements in this regard.
As a legally-binding contract between government and private businesses, a PPP arrangement provides assets and delivers services by allocating responsibilities and business risks among the various partners. In this arrangement, government remains actively involved throughout the project’s life cycle. The private sector is responsible for the more commercial functions such as project design, construction, finance and operations. This distinction of responsibilities is secured by agreements.
In some types of PPP, the cost of using the service is borne exclusively by the users of the service and not by the taxpayer. In other types (notably the private finance initiative), capital investment is made by the private sector on the strength of a contract with government to provide agreed services and the cost of providing the service is borne wholly or in part by the government. Government contributions to a PPP may also be in kind (notably the transfer of existing assets). In projects that are aimed at creating public goods like in the infrastructure sector, the government may provide a capital subsidy in the form of a one-time grant, so as to make it more attractive to the private investors. In some other cases, the government may support the project by providing revenue subsidies, including tax breaks or by providing guaranteed annual revenues for a fixed period.
Typically, a private-sector consortium forms a special company called a “special purpose vehicle” (SPV) to develop, build, maintain and operate the asset for the contracted period. In cases where the government has invested in the project, it is typically (but not always) allotted an equity share in the SPV. The consortium is usually made up of a building contractor, a maintenance company and bank lender(s). It is the SPV that signs the contract with the government and with subcontractors to build the facility and then maintain it. In the infrastructure sector, complex arrangements and contracts that guarantee and secure the cash flows and make PPP projects prime candidates for project financing.
Benefits of PPPs for government and taxpayers
PPPs provide an opportunity to:
1. Improve service delivery by allowing both sectors to do what they do best. Government’s core business is to set policy and serve the public. It is better positioned to do that when the private sector takes responsibility for non-core functions such as operating and maintaining infrastructure.
2. Improve cost-effectiveness. By taking advantage of private sector innovation, experience and flexibility, PPPs can often deliver services more cost-effectively than traditional approaches. The resulting savings can then be used to fund other needed services.
3. Increased investment in public infrastructure. Investments in hospitals, schools, highways and other provincial assets have traditionally been funded by the State and, in many cases, have added to levels of overall debt. PPPs can reduce government’s capital costs, helping to bridge the gap between the need for infrastructure and the State’s financial capacity.
4. Reduce public sector risk by transferring to the private partner those risks that can be better managed by the private partner. For example, a company that specializes in operating buildings may be better positioned than the government to manage risks associated with the changing demands of commercial real estate.
5. Deliver capital projects faster, making use of the private partner’s increased flexibility and access to resources. A typical example being the new MMA2.
6. Improve budget certainty. Transferring risk to the private sector can reduce the potential for government cost overruns from unforeseen circumstances during project development or service delivery. Services are provided at a predictable cost, as set out in contract agreements.
7.Make better use of assets. Private sector partners are motivated to use facilities fully, and to make the most of commercial opportunities to maximize returns on their investments. This can result in higher levels of service, greater accessibility, and reduced occupancy costs for the public sector.
The PPPs approach also encourages a “life cycle” approach to planning and budgeting, through the use of long-term contracts. For example, a company that agrees to operate and maintain an infrastructural facility for 50 years will have to ensure that the asset remains in a certain condition and, therefore, must include maintenance costs in its budget for the life of the agreement. By contrast, public sector maintenance costs can sometimes be deferred in response to budget pressures, which can reduce the value of an asset over time.
Benefits of PPPs for the private sector
1.PPPs give the private sector access to secure, long-term investment opportunities. Private partners can generate business with the relative certainty and security of a government contract. Payment is provided through a contracted fee for service, or through the collection of user fees – and the revenue stream may be secure for as long as 50 years or more.
2.Private sector partners can profit from PPPs by achieving efficiencies, based on their managerial, technical, financial and innovation capabilities. They can also expand their PPPs capacity and expertise – or their expertise in a particular sector – which can then be leveraged to create additional business opportunities. For example, the company can market its experience in other jurisdictions, once it has established a track record of working successfully with the public sector in Nigeria.
PPPs in other jurisdictions
In other jurisdictions, PPPs have been used to develop large transportation infrastructure projects, including roads, railways, transit systems, seaports and airports. They have also been used in the transportation, power, water, wastewater and gas sectors, as well as for asset-based projects in health care, education, corrections and defence. Examples of these include the United Kingdom, Australia, Ireland, the province of British Colombia, Canadia, India, to mention a few. (See www.partnershipsuk.org.uk)
Models of Public-Private Partnerships
The following terms are developed from commonly used terms to describe PPP agreements Globally as in Nigeria.
• Design-Build (DB) or “Turnkey” contract: The private sector designs and builds infrastructure to meet public sector performance specifications, often for a fixed price, so the risk of cost overruns is transferred to the private sector. (Many do not consider DB’s to be within the spectrum of PPP’s).
• Service Provision (e.g., Specific customer services or operation & maintenance) contract: A private operator, under contract, operates a publicly-owned asset for a specified term. Ownership of the asset remains with the public entity.
• Management contract: A private entity contracts to manage a Government owned entity and manages the marketing and provision of a service.
• Lease and operate contract: A private operator contracts to lease and assume all management and operation of a government owned facility and associated services, and may invest further in developing the service and provide the service for a fixed term.
• Design-Build-Finance-Operate (DBFO): The private sector designs, finances and constructs a new facility under a long-term lease, and operates the facility during the term of the lease. The private partner transfers the new facility to the public sector at the end of the lease term.
• Build-Operate-Transfer (BOT): A private entity receives a franchise to finance, design, build and operate a facility (and to charge user fees) for a specified period, after which ownership is transferred back to the public sector. This has been used in telecommunications service contracts.
• Buy-Build-Operate (BBO): Transfer of a public asset to a private or quasi-public entity usually under contract that the assets are to be upgraded and operated for a specified period of time. Public control is exercised through the contract at the time of transfer.
• Build-Own-Operate (BOO): The private sector finances, builds, owns and operates a facility or service in perpetuity. The public constraints are stated in the original agreement and through on-going regulatory obligations.
• Build-Own-Operate & Transfer (BOOT): The Private Sector builds, owns, operates a facility for a specified period as agreed in the contract and then transfers to the Public.
• Operating License: A private operator receives a license or rights to build and operate a public service, usually for a specified term. Similar to BBO arrangement. This is often used in telecommunications and ICT projects.
• Finance Only: A private entity, usually a financial services company, funds a project directly or uses various mechanisms such as a long-term lease or bond issue.
Legal Regulatory Framework for Developing PPPs
The legislation on PPP procurement is provided under the Infrastructure Concession Regulatory Commission (Establishment etc) Act 2005 and the Public Procurement Act 2007. These Acts set out the requirements for competition in all public procurement and for the prior approval by FEC of all PPP contracts. The Public Procurement Act also sets out the grounds for direct contracting for goods or services in exceptional circumstances. The transitional arrangements set out in this guidance apply to projects which started a procurement process before June 2007 (the date of enactment of the Public Procurement Act) but where FEC approval is required under the ICRC Act. It applies to projects based on unsolicited proposals by a private sector party as well as projects which are financially free-standing (i.e. which do not require funding from the Federal budget), but which involve the transfer of rights to use public assets and/or to charge users of an unregulated public service through a concession.
Contract Agreement, Contract Management and Dispute Resolution
Several parties are involved in the implementation of a PPP project. They include government, project sponsor(s), banks and other financial institutions, experts, suppliers, off-taker(s) and third parties. As already stated, a special project company called SPV may also be established for the purposes of project implementation and its operation. The details of implementation and payment arrangements are negotiated between the parties involved and are documented in a number of written agreements signed by them. If an SPV is established, it is at the centre of most of such agreements. In other words, the SPV negotiates the contract agreements with most of the parties involved in the process. If establishment of an SPV is not required, the concessionaire (or the private project company which sponsors the project) is at the centre of such agreements and negotiates the contract agreements with the other parties including the government involved in the process.
Among the agreements executed between an SPV (or the concessionaire/private project company) and other parties, the two most important are the contract agreement with the government and the agreement with the financiers. In fact, the contract agreement with the government forms the basis for subsequent agreements with other parties, for example, an off-take agreement in case of a toll road. This piece, considering the scope will be limited to the contract agreement between the SPV or the concessionaire and the government.
Contract agreements of a project between the contracting authority in government and the concessionaire may be contained in a single document or may consists of more than one separate document. It is difficult to generalize all possible contents of such agreements as they vary due to difference in legal and regulatory provisions from one country to another, type of PPP model and the nature of involvement of the public sector, implementation arrangements (including financial matters), operational and various sector specific resource High-level Expert Group Meeting on Public-Private Partnerships, utilisation, technological and other matters. There are, however, certain global key elements that are expected to be covered in all PPP contract agreements. These will be discussed hereunder:
The preparation of contract documents can be a major administrative task in PPP development and may also require a considerable amount of time. The availability of standardized contract documents or model contract agreements with the provisions of model clauses can be of great help in this respect. It helps considerably in streamlining the administrative process by reducing the time in preparing such documents and getting them cleared from the concerned government agencies. Model concession/contract agreements or MCAs also help in this regard.
The agreements in a typical PPP arrangement may include the following: SPV (Project company) Output Input supply agreement, Labour agreement, Other supply/procurement agreement, Third party agreement, Insurance Agreement, Escrow agent Agreement, Operation and maintenance agreement, Engineering procurement construction (EPC) Concession agreement, Project development Agreement, License and Permit Obligations, Shareholders agreement, and so on. Further, generally acceptable terms of a PPP agreement must include a preamble, the interpretation and Definition clauses for purposes of identification of the parties, their responsibilities and clarity of the transaction.
The contract management is an important activity in PPP programme/project administration. A management process needs to be in place from the outset to ensure timely completion and operation of a project. The contract management process not only helps to fix responsibilities, but also allows timely response to any deviation in project implementation or operation from the provisions in the contract agreements and thus helps to avoid disputes between the parties at later stages.
The contract management is required by the implementing agency, regulator and the government. The main tasks include:
i. Formalisation of management responsibilities by organization and at different levels
ii. Monitoring of project delivery (construction phase) (by implementing agency)
iii. Management of variations during project implementation (time schedule, change of design and specification etc.) (by implementing agency)
iv. Monitoring of operational aspects and service outputs after project implementation (implementing agency and regulator)
v. Maintaining the integrity of the contract (implementing agency)
vi. Fiscal obligations of the government (concerned ministry of the government)
vii. Financial matters related to debt servicing (concerned bank of the government)
Separate monitoring frameworks need to be developed for the construction and operational phases. A mechanism also needs to be in place to gather, collate and analyze the required information for these frameworks on a regular basis, and to feed that information to the relevant authorities according to their requirements. The information requirement for different agencies is different. As such, the implementing agency, regulator and the government may also establish separate monitoring frameworks to serve their own specific needs. However, the monitoring frameworks need to be based on performance indicators mentioned in the contract/concession agreement and other requirements of the administrative procedures related to PPPs.
The legal basis for the settlement of disputes is an important consideration in implementation of PPP projects. Private parties (concessionaire, financiers and contractors) feel encouraged to participate in PPP projects when they have the confidence that any disputes between the contracting authority and other governmental agencies and the concessionaire, or between the concessionaire and other parties (for example, the users or customers of the facility), or between the private parties themselves can be resolved fairly and efficiently. Disputes may arise in all phases of a PPP project namely, construction, operation, and final handover to the government. The agreed methods of dispute resolution between the parties are generally mentioned in the contract agreement as allowed under the legal framework of dispute resolution in the country.
The legal framework for dispute resolution may be embodied in a number of legal instruments and relevant rules and procedures of the country. The legal instruments may include the private contract law, company law, tax law, competition law, consumer protection law, insolvency law, infrastructure sector laws, property law, foreign investment law, intellectual property law, environmental law, public procurement law or rules, acquisition or appropriation law, and various other laws.
The commonly used methods for dispute resolution include:
Conciliation and mediation
Non-binding expert appraisal
Review of technical disputes by independent experts
It is important that the settlement mechanisms are in line with the international practices, particularly when large-scale investments from a foreign private sector, is expected.
Generally, the contract agreement(s) specifies what methods of dispute resolution would be followed to settle any disputes arising between the parties and the rules and procedures to be followed for that. The United Nations Commission on International Trade Law (UNCITRAL) has prepared a Legislative Guide on Privately Financed Infrastructure Projects. The Guide provides guidance on clauses related to dispute resolution that may be considered for inclusion in the contract document.
With the current state of dilapidated infrastructure in our economy, and a view to enhancing better economic development post 50 years of our National existence, it is hoped that the public and private sectors of our economy would seize the opportunities provided by evolving global partnerships to create enduring infrastructures and development in Nigeria.
The bane of our national development has been a dearth in infrastructures. This must change and as the parties take practical steps in this regard by harnessing the PPPs strategy, while tailoring them to the needs of the different sectors of the economy, they must look critically at the legal implications of such arrangements to further mutually beneficial partnerships.
Finally, what emerges from the observation of currently adopted schemes is that each PPP arrangement should be designed and adapted to the specific characteristics of the asset at stake, as well as to the peculiar abilities of all partners involved in the project. In order to guarantee value for money (VFM), the relative strengths and weaknesses of each PPP scheme should be considered. Depending on the sector of application, some models are better suited than others in delivering targeted outputs and in ensuring accurate risk management. Choosing the wrong model or inaccurately evaluating the risk management capacities of each party may have extremely costly consequences and a negative impact on public accounts,
Dominic E. Obozuwa
Wali-Uwais & Co.