A case for standardising PPP contracts
Martin Preston* points out that sophisticated markets are moving towards standardised PPP contracts and says that the region should adopt such an approach.
01 September 2009
THE Middle East has seen an increase in public-private partnerships (PPP), which in the simplest form, involve the private sector in public sector projects, usually where a government service is funded and operated through a partnership of government and one or more private sector companies.
PPP as a form of procurement is widely used in many jurisdictions around the world including, the UK, Australia, South Africa, Japan and Canada. Within the Middle East, countries such as Bahrain, Qatar, Jordan, Saudi Arabia and the UAE have all undertaken projects that have been procured or are being procured on a PPP basis. However, for many of these Middle Eastern countries, the PPP market is still in its infancy and to some extent they have an opportunity to learn from the experience of the more sophisticated markets.
One of the common developments in the more sophisticated markets has been the introduction of standardised PPP contracts or documentation either for use across the particular jurisdiction or within a specific sector.
In the UK, the Private Finance Initiative (PFI) was developed by the government as a form of PPP aimed at joining the public and private sectors to design, build or refurbish, finance and operate new or improved facilities and services generally. In 2001, HM Treasury elected to standardise the PFI contract and in April this year, the latest standard guidance and drafting documents (Standardisation of PFI Contracts Version 4, or SoPC4) were released.
SoPC4 contains the general principles for each main component of the project agreement in PPP projects and covers issues such as the duration of the contract, service commencement, force majeure events, performance monitoring, structuring the payment mechanism, early termination, dispute resolution and authority step-in rights. There are also sector-specific standard form agreements based on the central standard SoPC4 document that have been developed for use in sectors such as education, health and social housing.
The main purpose of the guidance and the drafting is to identify and allocate risks to the party best able to manage that risk and to provide some standard drafting for inclusion in the project agreements. In some cases, this drafting is obligatory and funding will not be provided if it is not used. In other cases, the drafting is recommended, giving the parties a strong indication of what would be appropriate.
Other jurisdictions outside the UK including Australia, South Africa, Japan and Canada are also undertaking a process of standardising key documents involved in PPP projects.
PPP Risk Allocation in Australia has produced standardised documentation for PPP projects in the form of the National Standard Commercial Principles for Social Infrastructure Projects and draft Standard Commercial Principles for Economic Infrastructure Projects. Currently, each state has its own PPP policies and documents. However, a process of harmonisation amongst the individual states has begun and is expected to be accelerated following the recent formation of a new national government body, Infrastructure Australia. It is intended that the new body will develop the standardisation of the tender processes and contract documentation between the Commonwealth and state jurisdictions for the use of PPPs and other relevant procurement options.
In South Africa, the ‘Preparation for Requests for Proposals for PPPs Guidelines’ was issued in 2001 and covers not only the structure of the Request for Proposal but sets out numerous distinct contractual provisions, which include risk allocation through the RFP process, the evaluation of proposals and preferential procurement issues.
Japan is in the process of implementing non-mandatory guidance for the standardisation of PFI contracts and governmental authorities are looking particularly at key issues such as change in service, price variation, change in law, voluntary termination and payment mechanism.
Lastly, Partnerships British Columbia is an entity that has been created to advise and support government departments embarking on PPP projects and is currently developing standardised documentation for PPP procurement.
Despite the number of countries electing a standardised approach to PPP contracts, many argue that there are disadvantages to this approach which undermines PPP as a form of procurement. For example, adopting a ‘one-size-fits-all’ approach by standardising PPP contracts for use within an entire jurisdiction may not be appropriate for unique or complex projects. Similarly, where market practices change over time, the reduced flexibility of standardised contracts may become cumbersome.
However, the number of different jurisdictions adopting a standardised approach to PPP contracts demonstrates that there are many advantages to embarking on this process. It is these advantages, which have been recognised by other countries around the world and which Middle Eastern countries may also benefit from when considering whether to standardise current or new PPP contracts.
One key advantage of standardisation is the opportunity for public bodies and government entities to have a common understanding of the main risks involved in the PPP projects they undertake and to reduce the costs and delays associated with the negotiation of contracts for individual projects. By ensuring that all public bodies within a particular jurisdiction or within a specific sector have an understanding of the key risks associated with their projects, standardised contracts can provide a consistent and efficient risk allocation framework.
Further, the development of standard contractual clauses can aid in a reduction of the cost and time associated with contractual negotiations. Other key advantages associated with standardisation include: it ensures that each tender submission provides sufficient information so that public bodies can evaluate the length of time between the appointment of the preferred bidder and achieving contract award, thereby enabling them to meet expected timetables set by the end-user or relevant government department; it allows consistency of approach and pricing in similar projects; and it provides bidders with the opportunity to bid for several projects of interest with the possibility of spreading preparation and bidding costs over a number of potential contracts.
As a result, this can also make the PPP approach feasible for smaller projects. As Middle Eastern governments continue to procure a greater number projects by way of PPP, they may consider adopting a standardised approach to PPP contracts in order to capitalise on the benefits that it can offer.
* Martin Preston is partner, Infrastructure and Construction, at the Dubai office of Norton Rose (Middle East) LLP. Legal queries related to the construction sector can be addressed to Norton Rose (Middle East) LLP through Gulf Construction magazine at editor@gulfconstructionworldwide.com.
Norton Rose Group has had a presence in the Middle East for 30 years and has advised developers, lenders, and contractors in relation to the legal aspects of a wide variety of construction and infrastructure projects in the region. With a combined team located in Bahrain, Dubai and Abu Dhabi, Norton Rose (Middle East) LLP is able to provide both contentious and non-contentious support to financiers, developers, contractors and specialist contractors in the region.
