1. CAIDP Contracting Workshop Contracts Performance Guarantee Update
December 10, 2015

2. Intro 1 2 3 4 5
Introduction
Objective:
Update and seek input from CAIDP on the use of performance guarantees for DFATD development contracts above $500K
For Clarity: Contracts in support of International Development are projects designed by DFATD which are implemented by an Executing Agency “Consultant” and are governed by the Treasury Board Contracting Policy
Topics to be Covered:
Performance security overview – ISLOCs
Performance security overview – EDC’s PSG Program
Understanding the Concerns around ISLOCs
Managing Contract Risks – An Evolving Process for DFATD
Key Themes and Take-Aways
Please share your thoughts and comments – your input will help shape DFATD’s thinking and approach

3. 1 Irrevocable Stand-By Letters of Credit (ISLOCs)
Intro 1 2 3 4 5
1 Irrevocable Stand-By Letters of Credit (ISLOCs)
Brief overview to make sure we are all on the same page
An ISLOC is a guarantee of payment issued by a bank on behalf of a Contractor
Used as a type of "payment of last resort“ should the Contractor fail to fulfill its contractual commitment
Is a sign of good faith in business transactions
ISLOCS specify an amount (e.g., 10% of contract value) and tenor (e.g., 3 years)
The Bank will require security to issue the ISLOC, e.g., Contractor’s line of credit
If EDC backstops the Bank, the Bank does not need security from the Contractor
EDC
Bank
Buyer
(e.g., DFATD)
APSG
ISLOC x
SECURITY, e.g.:
Line of Credit
Exporter/ Contractor
Recourse
CONTRACT

4. 2 EDC’s APSG (Account Performance Security Program)*
Intro 1 2 3 4 5
2 EDC’s APSG (Account Performance Security Program)*
An “account” (the APSG) is established whereby EDC agrees to issue guarantees to the Contractor’s Bank covering ISLOCs with tenors potentially up to 3 years (to a maximum $ amount)**
On an annual basis, EDC reviews and potentially renews the account (the APSG)
EDC protection to the Bank is a 100% guarantee (with recourse to Contractor)
EDC guarantee frees up the Contractor’s line of credit, as the Bank does not take security from the Contractor if it has EDC protection
Example (assuming APSG established for ISLOCs up to 3 years)
Yr 1: EDC guarantees all ISLOCs issued during the year with terms up to 3 years
Yr 2: EDC guarantees all ISLOCs issued during the year with terms up to 3 years
Subject always to a maximum $ amount for all ISLOCs, maximum ISLOC term as agreed between EDC and Contractor, and annual renewal of the APSG account
Year 1
Year 2
Year 3
Year 4
Year 5
ISLOC 1
ISLOC 2
ISLOC 3
ISLOC 4
ISLOC 5
ISLOC 6
* Based on information available on EDC’s website
** While the APSG program provides guarantees for ISLOCs up to 3 years in tenor, EDC may consider guarantees for ISLOCs longer than 3 years; however this would be on a case-by-case basis

5. 3 Concerns Regarding ISLOCs
Intro 1 2 3 4 5
3 Concerns Regarding ISLOCs
DFATD is aware of concerns among CAIDP members regarding the use of ISLOCs in connection with contracts:
When are ISLOCs required and why?
How do ISLOCs correspond to the nature and level of contract risk?
What amount of ISLOC is necessary?
What term of ISLOC is necessary?
What will my bank charge to issue an ISLOC?
What will EDC charge to guarantee my bank?
How long an ISLOC will my bank provide?
Will EDC provide cover for the same amount of time?
Will all contracts require an ISLOC for the full term?
Can DFATD consider other measures (e.g., holdbacks) for lower-value contracts?
DFATD wants to minimize the cost and burden on contractors, while still being able to deal with contract problems if they arise

6. 4 Managing Contract Risks at DFATD
Intro 1 2 3 4 5
4 Managing Contract Risks at DFATD
DFATD awards millions of dollars in contracts in order to help achieve Canada’s international development priorities
When it awards contracts, DFATD wants to know that the contract will be completed and, if problems occur in the developing country, that these problems can be addressed
Ensuring no problems in the developing country is of utmost importance as DFATD is issuing these contracts in order to achieve benefits in the developing country
What kinds of exposures could arise for DFATD, if these contracts are not able to be completed? (note: not all will apply to each contract)
Retendering Costs
Local Networks (managing or re-establishing)
Need to Deploy Experts
Dealing with Unpaid Debts in Country
Dealing with Unpaid Subcontractors
Larger replacement contract (e.g., if IP cannot be
transferred)
Security Concerns
Consequences of a Major Accident (without insurance)
Contractor Health & Safety problems (without insurance)
Legal
TB Policy Text
Excerpt S12.6
“Contracting authorities should take the necessary steps to serve and protect the interests of the Crown in meeting the terms of the contract and then to protect (where appropriate) the interests of other parties involved in the contract.”

7. 4 Evolving Framework for Managing Contract Risks
Intro 1 2 3 4 5
4 Evolving Framework for Managing Contract Risks
If a contract cannot be completed, there are various potential exposures to DFATD in the developing country context
ISLOC is only one mechanism used to mitigate these risks!
Relying on other mitigating techniques – as relevant to the contract – keeps the ISLOC amount and tenor as low as possible to minimize contractor burden
ISLOCs in most cases should be set mainly to cover DFATD’s retendering cost – which depends on the complexity of the contract
Other problems can be addressed in other ways
This risk-based approach – still in development – minimizes the tenor and amount of ISLOC required
DFATD Potential Exposures upon Contract Termination
Risk Mitigation Technique(s) Being Explored
Retendering Costs
Local Networks
Deploy Experts
Unpaid Debts in Country
Unpaid Subcontractors
Larger Replacement Contract
Security Concerns
Consequence of Major Accident
Contractor health & safety problem
Legal
ISLOC
Local agencies
Contract legal terms
Liquidated Damages
ISLOC Remainder (if any)
Existing Project Budget
Contract payment terms
Contractor Insurance

8. 4 Assessing the ISLOC Amount and Tenor (Evolving)
Intro 1 2 3 4 5
4 Assessing the ISLOC Amount and Tenor (Evolving)
ISLOC amount and tenor may be assessed based on two factors:
How much would it cost to retender the contract, if necessary? How complex is it?
In what year does DFATD’s risk profile peak?
The lower the retendering cost, the lower the ISLOC amount
Exposure to DFATD
Risk Profile
Retendering Costs
Staff time
Contracting time
Issuing new RFP
Low
Med
High
Local Networks
Need to manage or re-establish local relationships?
Low
Med
High 1 2 3 4 5
Need to hire technical, audit, evaluation experts?
Low
Med
High 1 2 3 4 5
Deploy Experts
The earlier the risk peak, the shorter the ISLOC term
Unpaid Debts in Country
Potential for sizeable unpaid accounts (e.g., for material, unfinished work)?
Low
Med
High 1 2 3 4 5
Low
Med
High 1 2 3 4 5
Unpaid Subcontractors
Numerous subcontractors? Potential for severance and other payments?
Low
Med
High 1 2 3 4 5
Larger Replacement Contract
Sizeable custom IT? Potential for inability to transfer IP?
Potential for sensitive information (e.g., armoured cars, confidential information) or increased conflict/political risks?
Low
Med
High 1 2 3 4 5
Security Concerns
Low
Med
High 1 2 3 4 5
Fallout from major accident
On the ground accident which is NOT covered by insurance?
Contractor health/safety problem
Potential for Contractor health or evacuation needs which are NOT covered by insurance?
Low
Med
High 1 2 3 4 5

9. 5 Key Themes and Take-Aways
Intro 1 2 3 4 5
5 Key Themes and Take-Aways
DFATD wants to avoid a “one size fits all” approach
DFATD seeks to minimize the cost and burden on the contractor by using a risk- based approach, so that risks/exposures are covered by both ISLOCs and other means
DFATD will not require that all contracts have ISLOCs with 5 year fixed terms
In most cases, a non-complex contract with limited termination exposures may simply require a 1-year renewable ISLOC
Contracts which are more complex, but where exposures are minimal after year 3 may only require a 3-year fixed ISLOC, with renewable 1-year ISLOCs thereafter
Contracts below $500K will not necessarily require ISLOCs, but will use other measures (e.g., holdbacks)
EDC’s APSG program parameters allow for ISLOCs up to 3 years to be guaranteed
DFATD continues to engage with EDC on this important issue

10. Thank You!
Questions?