DB/DBO in emerging economies and LDCs: A practical answer to address the infrastructure challenge with improved governance Marc Frilet Managing Partner « Frilet – Société d’Avocats » Chair of the Management Committee of GcilA Vice-President of the French Institute of International Legal Experts (IFEJI) Vice-chair of CICA PPP-Working Group Board member of ETIC-PPP Fellow American College of Construction Lawyers 03/31/2015© Frilet Société d'Avocats1 DB / DBO Workshop March 31st 2015 – Paris SEFI

2 Public infrastructure needs and issues © Frilet Société d'Avocats The UN post 2015 objectives: The need of massive investment in public infrastructure projects  Hundred of Billion US Dollars per year  For Africa alone 90 billion per year Two main issues: 1.Financing gap  Public budget and development aid will not be able to finance the need: example: African gap = 40 billions USD 2.Implementation gap Many projects are:  Not implemented  Poorly implemented  Most projects are not implemented on time and budget (no statistics!)  In Africa alone Public budget and development aid savings for well prepared and well implemented projects may be evaluated to several billion USD per year How to bridge those gaps ?  Through private investment in public infrastructure projects (Concessions and other PPPs)  Through better use of public and development money for infrastructure projects 03/31/2015

3 How to optimize project delivery and value for money for project directly funded by State budget and IFI’s ? © Frilet Société d'Avocats For repetitive or basic infrastructure, example: roads  Developing capacity building actions  Allocating much more resources to project preparation  Optimizing the use of consultants and engineers  Improving procurement process and optimize the use of standard conditions adapted to sector, culture and legal tradition  If those conditions are met, Design Bid Build (DBB) should remain the preferred delivery option (i.e. traditional remeasurement contract and bill of quantity (BQ)) For complex projects, examples: public utilities, ports, railways, bridges, stadiums, hospitals, etc.  Several design and related technical options and process possible  Public Authority interested by outcome: service delivery is of the essence  Defining in advance all technical specifications, process and O&M conditions is costly and limit optimization of the infrastructure design and operation by the bidders  DB and DBO may deliver best value for money (BVFM) 03/31/2015

4 Private participation in public infrastructure projects: DB and DBO position © Frilet Société d'Avocats 03/31/2015

5 Respective role of public and private sector in DB/DBO © Frilet Société d'Avocats Public sector role:  Planning, prioritization  Functional specification: Focus on outcome Conceptual design (more or less APS in the French system) Performance parameters during operation: O&M output and costs Private sector role: 1.DB  Developing technical and industrial feasibility in an integrated manner for construction and operation Private sector selected on the basis of a tender design (more or less APS in the French system) Once selected, contractor obligation to develop detailed design (APD in France) Thereafter: situation similar to remeasurement contract with major lump sum element  Contractor develops shop drawings (more or less plans EXE in France)  Contractor build the infrastructure or plant Contractor paid upon completion including successful commissioning 2.DBO: Same as above and in addition:  Obligation to operate the infrastructure of facility in compliance with O&M parameters (and/or service delivery obligations) (PSO) 03/31/2015

6 What to expect from well prepared DB and DBO ? © Frilet Société d'Avocats 1.Optimized input from the private sector  Optimum combination of private sector skills and technologies such as: Design Construction engineering Optimized process Optimized operation of service (minimum O&M costs, guarantee of smooth service adapted to the needs) 2.Simplified preparation and implementation process for public sector  Main public resources spent on planning prioritization and conceptual design:  Shorter preparation phase limiting bad governance risks  Less public resources on evaluation and control of design, of construction and operation  Conditions for successful DB or DBO projects: need of innovative procurement and contract conditions including appropriate dispute avoidance and dispute settlement clauses 03/31/2015

7 DB / DBO : need of innovative procurement process © Frilet Société d'Avocats 03/31/ Need of a published framework which clarify and organize the role of the Public Authority for:  Planification  Definition of needs and options  Prioritization  Drafting of pre-selection documents  Drafting of the tender documents on the basis of functional specifications  Organizing the bidders information and selection process in an ethical and transparent manner including: in most cases: 2 stages tender:  technical offer  Financial offer For more complex cases:  Competitive dialogue 2.Need of clear and enforceable guarantees against misprocurement:  Ethical charter  Probity or compliance officer  Efficient judicial review

8 DB : need of innovative contract conditions © Frilet Société d'Avocats 03/31/2015 I.Concept: “General contractor approach” Lessons learnt during the last 30 years in developing countries of civil law tradition: example: Algeria  Algeria has developed landmark Turnkey Projects for heavy plants (TKHP) in the 90’s A.Many contract conditions deriving from underlying legal and contractual framework and practice: a)Civil code: Concept of entrepreneurship contract (“contrat d’entreprise”) Case law on good faith obligation: contractor far reaching duty to advise Contract interpretation base on industry usages Joint and several liability of engineers, architects and contractors: strict liability for 10 years in case of structural problems in building and works or rendering them unfit for purpose Entitlement to payment and price: successful completion b)Equitable public contract law (administrative case law): Hardship Sovereign interference justified by general interest Special compensation rights for contractor when sovereign interference

9 DB : need of innovative contract conditions (2) © Frilet Société d'Avocats 03/31/2015 B.Other contract conditions: 1.Identifying generic issues in local context of developing countries and addressing them in contractual clauses: Decreasing risks for both parties Sharing some residual risks Allocating others residual risks 2.Examples: Custom regime and related procedures Tax regime and related procedures Availability of land and related procedures Permitting and related procedures EISE and related procedures Price breakdown and related procedures for any evaluation and claim Variation and related procedures Disruption of public supply(including power, water) and related procedures Force majeure ad related procedures Performance guarantee Insurance Dispute avoidance mechanisms Alternative Dispute Resolution mechanisms Dispute settlement

10 DBO : need of additional innovative contract conditions © Frilet Société d'Avocats 03/31/ main situations may roughly be distinguished:  Situation 1: O&M for limited duration (from 1 to 10 years) not involving delivery of the service to end users  Situation 2: O&M for duration for over 5 years involving full delivery of public service to end users Situation 1:  Price of construction of infrastructure partly paid at the end of operation period  Addition of traditional clauses for “facility management contract” with bonuses and penalties  Addition of clauses for hand over of infrastructure or facility in good operating condition at the end of O&M period Situation 2: Same as situation 1 and in addition:  Several sets of clauses relating to the condition of operation of public service by private sector  Many of those clauses similar to the series of clauses found in Concession PPP family for public service in developing countries Examples: Scope of public service Delivery of the service:- Continuity - Non discrimination - Adaptation Stability of regulatory framework

Thank You ! Me Marc Frilet Frilet – Law firm/ GcilA 91, rue du Faubourg Saint Honoré Paris – France Tel : © Frilet Société d'Avocats 03/03/