ESCL – ANNUAL CONFERENCE 25 OCTOBER 2018 EDWINA UDRESCU, FCIArb Lawyer WHAT LEGAL AND CONTRACTUAL ISSUES CAN DETERMINE THE SUCCESS OR FAILURE OF A PPP PROJECT?   ESCL – ANNUAL CONFERENCE 25 OCTOBER 2018 EDWINA UDRESCU, FCIArb Lawyer

Concession Vs PPP I Concession Projects The Private Partner can charge end-users for the use of the asset (e.g. a toll road, a commercial port, an airport, a toll bridge, an underground parking) These projects involve a demand risk as revenues depend on the use of the asset by end-users => Concessions are revenue generating projects

Concession Vs PPP II PPP Projects The asset itself cannot generate income directly from charging the end-users but the government pays a consideration for the availability of the asset which is used for providing activities of public interest (hospitals, schools, prisons, etc) These projects do not involve demand risk as the payment from the government is not, or at least is in a minimum part, linked with the use of the asset by end-users. => PPPs are a non-revenue generating projects

THE PLAYERS AND THE CONTRACTUAL FRAMEWORK I

THE PLAYERS AND THE CONTRACTUAL FRAMEWORK II The Public Partner commits to pay to a Special Project Company (SPV) financed by the Private Partner a yearly amount (Unitary Payment) against the Special Project Company making available to the Public Partner the required building and associated Facility Management (FM) Services. Investors => Private equity (10-30%) Lenders (banks or other financial institutions) => 70-90 % financing (the Debt)

KEY ISSUES FOR SUCCESS To appoint reputable/experienced advisors by the Public Partner PPP models deliver greater value for money (VFM) than conventional delivery model Optimal operation guaranteed and maintenance forecasted Use of better infrastructure solutions, new technology, management skills, innovation provided by the Private Partner Fair allocation of risks Use international best practices in preparing, procuring and monitoring PPP projects

FAIR ALLOCATION OF RISKS “Risks must be allocated to the party best able to mange them” Allocation of risks has a significant impact on the bankability of the project. Public Partner risks Shared risks Private Partner risks

PUBLIC PARTNER RISKS Financing risks: currency, inflation, interest rates Legal recourses and permitting: obtaining permits and authorizations and compensate the Private Partner for any recourses initiated by the third parties Site risks: pre-existing contamination and unforeseeable sub-soil conditions Government initiated variations: the Public Partner should pay for those additional or modified works it is willing to have executed

SHARED RISKS Change in Law => may occur due to the long term nature of PPP projects General change in law vs discriminatory change in law General change in law during the construction vs general change in law during operation Force Majeure Insurance  

PRIVATE PARTNER RISKS Design and construction Operating and maintaining/Facility management services Latent defects Handback requirements => at the end of the term of the PPP agreement, the Private Partner hands back the assets to the government in a condition that meets the conditions specified in the contract

INVESTORS ISSUES Payment mechanism Long Stop Date => the PPP agreement shall provide for a reasonable period of time (at least 9 month) between the completion date and long stop date which triggers the right for public sector to terminate the agreement for default of the SPV Lenders direct agreements => In order to secure payment on termination, lenders will enter into direct agreements that entitle them to step-in rights to enable them to rescue the project (e.g. insolvency of the private partner) Lock-up period: it is the period during which the investors commit not to sell their shares in the SPV => it is advisable that such period should not exceed 5 years after commencement of operation of the asset Settlement of disputes

Common reasons for failures I Most PPP failures can be attributed to inadequate or non-existent feasibility studies, including unrealistic traffic forecasts and undefined public contribution of funds => the absence of a solid feasibility study diminish also project attractiveness to private investors Poor Legal Framework and enforcement => a solid legal framework for PPP is needed to specify the “rules of the game” for the Private Partner and reduce the project risk Weak institutional capacity and lack of PPP strategy => must be in place an infrastructure plan or a priority list in order to demonstrate top-level political commitment Unstable political environment, poor governance and corruption undermine the economies of the countries

Common reasons for failures II High capacity and skills of the Public Partner personnel: "PPP REQUIRE THEIR OWN INFRASTRUCTURE" Comply with Project Agreement => financial profitability and sustainability is heavily dependent on Government’s observance of contractual agreements (e.g. pre-construction obligations undertaken by the Public Partner) Lack of Competitive Procurement => uuncompetitive procurement gives a strong position to the negotiating private party and can lead to long delays and excessive cost to the public partner

Thank you!!!