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Book Details
Abstract
Public sector funding and resources are often inadequate to meet increasing demands for investment and effective management, and a growing case history shows increasing involvement by the private sector in provision of infrastructure and services through PPP arrangements. The objective of this book is to determine, and make recommendations on, means of optimizing the use of Public Private Partnerships (PPP) in development of infrastructure whilst ensuring the sustainable long term provision of water and waste water services. The focus is on providing detailed recommendations on contractual issues and contract structures to achieve this objective.
Public Private Partnerships in the Water Sector - Innovation and Financial Sustainability:
- Identifies what is needed to establish effective and sustainable water and wastewater service reform when using a PPP arrangement, and importantly how those issues can be addressed contractually.
- Provides specific recommendations of a comprehensive and detailed approach to contract drafting to ensure effective, sustainable and long term provision of water and wastewater services, including an approach for adaptation of public procurement procedures for PPP arrangements.
- Recommends a proposed approach to dealing with the influence of imperfect or unavailable data on the long term effectiveness or sustainability.
See also: Public and Private Participation in the Water and Wastewater Sector - Developing Sustainable Legal Mechanisms, Cledan Mandri-Perrott, 2009 Private Sector Participation in Water Infrastructure, Organisation for Economic Co-Operation and Development (OECD), 2009.
Table of Contents
| Section Title | Page | Action | Price |
|---|---|---|---|
| Cover\r | Cover | ||
| Contents | v | ||
| About the Authors | xiv | ||
| Acronyms & Abbreviations | xvii | ||
| List of Boxes | xix | ||
| List of Tables | xxi | ||
| List of Figures | xxii | ||
| Chapter 1:\rIntroduction | 1 | ||
| 1.1 PUBLIC PRIVATE PARTNERSHIPS – SOLUTIONS TO MEET INFRASTRUCTURE INVESTMENT AND MANAGEMENT IMPROVEMENT NEEDS\r | 3 | ||
| The infrastructure challenge | 3 | ||
| Public private partnerships – a possible solution | 5 | ||
| Risks, asset responsibility and types of PPP structures | 7 | ||
| 1.2 CHARACTERISTICS OF URBAN AND PERI-URBAN WATER AND WASTEWATER SERVICES | 8 | ||
| The current state of play in the water sector | 8 | ||
| New trends in PPP designs | 9 | ||
| Wastewater service issues | 11 | ||
| 1.3 CAN PPPs BE AN EFFECTIVE SOLUTION FOR THE CHALLENGES OF THE WATER AND WASTEWATER SECTOR? | 12 | ||
| Key questions | 13 | ||
| Achieving value for money in PPP arrangements | 14 | ||
| 1.4 OUTLINE OF THE BOOK | 15 | ||
| PART 1 – Background to the sector and PPP | 15 | ||
| PART 2 – Main factors influencing effective development and operation of PPP schemes | 15 | ||
| PART 3 – Developing sustainable PPP arrangements | 16 | ||
| Summary conclusions and recommendations | 18 | ||
| ENDNOTES | 19 | ||
| Part I:\rBackground to the Sector & PPP | 20 | ||
| Chapter 2:\rSector issues in the water & waste water service | 21 | ||
| 2.1 INTRODUCTION | 21 | ||
| 2.2 STRATEGIC PLANNING, POLICY CONSIDERATIONS & THE COUNTRY CONTEXT | 22 | ||
| Level of decentralization | 24 | ||
| Managing water resources | 25 | ||
| Integrated water resources management | 25 | ||
| 2.3 SOCIAL ASPECTS\r | 26 | ||
| Small private operators | 26 | ||
| Ensuring access for all | 27 | ||
| The customer approach | 28 | ||
| 2.4 SUMMARY AND CONCLUSIONS | 28 | ||
| Chapter 3:\rIncorporating private sector participation | 30 | ||
| 3.1 INTRODUCTION | 30 | ||
| 3.2 LITERATURE REVIEW AND CONSIDERATIONS FOR PPP IN THE PROVISION OF WATER AND WASTEWATER SERVICES | 32 | ||
| Frameworks conducive to PPP in the water and wastewater sector | 35 | ||
| 3.3 OVERVIEW OF POSSIBLE PPP CONTRACT STRUCTURES | 36 | ||
| PPPs and the European Union | 38 | ||
| Specific PPP forms in the water sector | 39 | ||
| Service contracts | 40 | ||
| Management contracts | 41 | ||
| Lease contracts | 43 | ||
| Concession contracts | 44 | ||
| BOOT contracts | 46 | ||
| Joint ownership | 47 | ||
| Outright sale/divestiture | 48 | ||
| 3.4 KEY REQUIREMENTS FOR A SUCCESSFUL PPP | 48 | ||
| Achieving value for money | 49 | ||
| Contingent liabilities | 52 | ||
| Budgetary implications | 53 | ||
| 3.5 PARTNERSHIPS BETWEEN PUBLIC AND PRIVATE INSTITUTIONS | 53 | ||
| 3.6 MANAGING THE STAGES OF DEVELOPMENT AND IMPLEMENTATION OF PPPS | 54 | ||
| Developing PPP policy | 55 | ||
| Designing the details of the arrangement | 56 | ||
| Selecting the private service operator | 57 | ||
| Managing the arrangements | 57 | ||
| 3.7 SUMMARY AND CONCLUSIONS | 60 | ||
| ENDNOTES | 62 | ||
| Chapter 4:\rBalance of costs and service standards | 65 | ||
| 4.1 INTRODUCTION | 65 | ||
| 4.2 SETTING SERVICE STANDARDS AND LINKING TO COSTS | 66 | ||
| 4.3 FINANCIAL SUSTAINABILITY, SETTING TARIFFS AND SUBSIDY REQUIREMENTS | 68 | ||
| 4.4 SETTING TARIFFS FOR ACHIEVING ECONOMIC, EFFICIENCY AND EQUITY OBJECTIVES | 72 | ||
| 4.5 PERFORMANCE INDICATORS | 75 | ||
| 4.6 SUMMARY AND CONCLUSIONS | 78 | ||
| ENDNOTES | 79 | ||
| Part II:\rMain Factors Influencing Effective Development & Operation of PPP Schemes | 83 | ||
| Chapter 5:\rPerformance monitoring, legal and regulatory issues | 84 | ||
| 5.1 INTRODUCTION | 84 | ||
| 5.2 PERFORMANCE MONITORING | 85 | ||
| Allocating responsibility | 87 | ||
| 5.3 LEGAL FRAMEWORK | 91 | ||
| 5.4 BASIC PRINCIPLES OF REGULATION | 93 | ||
| Economic regulation | 95 | ||
| Working with the existing institutional framework | 97 | ||
| 5.5 DEVELOPING A REGULATORY FRAMEWORK FOR EFFECTIVE PPP AGREEMENTS | 101 | ||
| Process for developing the most appropriate PPP agreement | 102 | ||
| Regulation, national policy within the EU legislative context | 103 | ||
| 5.6 SUMMARY AND CONCLUSIONS | 105 | ||
| ENDNOTES | 106 | ||
| Chapter 6:\rUnderstanding and managing risk | 108 | ||
| 6.1 INTRODUCTION | 108 | ||
| 6.2 ANALYZING RESPONSIBILITIES AND RISKS | 109 | ||
| 6.3 COMMON RISKS AND RESPONSIBILITIES | 110 | ||
| 6.4 POLITICAL AND MACROECONOMIC RISKS\r | 111 | ||
| Political risks | 111 | ||
| Change of law risk | 112 | ||
| Contingent liabilities | 112 | ||
| Risk of change in interest rate | 113 | ||
| Risk of change in inflation rate | 113 | ||
| Risk of change in foreign exchange rates | 115 | ||
| 6.5 SPECIFIC RISKS IN THE WATER SECTOR\r | 116 | ||
| Demand risk | 116 | ||
| Operation & maintenance risk | 117 | ||
| Risk of increased project costs | 117 | ||
| Development risk | 118 | ||
| Design and construction risk | 118 | ||
| Financing risk | 119 | ||
| Government guarantees | 119 | ||
| Environmental risk | 119 | ||
| 6.6 RISKS ASSOCIATED WITH MANAGING THE PPP AGREEMENT | 119 | ||
| Price and tariff variations | 120 | ||
| Residual value risk | 121 | ||
| 6.7 SUMMARY AND CONCLUSIONS | 122 | ||
| ENDNOTES | 123 | ||
| Chapter 7:\rFunding and finance | 125 | ||
| 7.1 INTRODUCTION | 125 | ||
| 7.2 CONSIDERING BANKABILITY | 126 | ||
| 7.3 STRUCTURING FINANCE FORWATER PPP PROJECTS | 128 | ||
| 7.4 TYPICAL FINANCING STRUCTURE OF A LONG TERM PPP AGREEMENT | 130 | ||
| 7.5 PUBLIC FUNDING, SUPPORT AND INTERNATIONAL FUNDING INSTITUTIONS | 132 | ||
| Exemptions from taxes and import tariffs | 133 | ||
| Loan guarantees | 134 | ||
| Equity contributions | 134 | ||
| Export credit financing | 134 | ||
| 7.6 CONSIDERATION AND EVALUATION OF CONTINGENT LIABILITIES | 135 | ||
| 7.7 HEDGING | 136 | ||
| 7.8 REFINANCING | 137 | ||
| 7.9 SUMMARY AND CONCLUSIONS | 138 | ||
| ENDNOTES | 139 | ||
| Chapter 8:\rGeneral procurement issues of PPP’s | 140 | ||
| 8.1 INTRODUCTION | 140 | ||
| 8.2 PRINCIPLES FOR GOOD PROCUREMENT AND MANAGING THE BIDDING PROCESS | 140 | ||
| Managing the bidding process | 142 | ||
| 8.3 SELECTION CRITERIA & BID EVALUATION | 143 | ||
| Selecting criteria for competitive bidding | 144 | ||
| 8.4 PRE-QUALIFICATION | 146 | ||
| 8.5 CHOOSING THE BIDDING PROCESS | 148 | ||
| Single stage bidding | 149 | ||
| Two stage bidding | 149 | ||
| Final request for proposals8 | 151 | ||
| The technical proposal | 153 | ||
| The financial proposal | 153 | ||
| 8.6 SUBMISSION, OPENING AND COMPARISON OF BIDS | 154 | ||
| Bid evaluation methods available | 155 | ||
| Final selection | 157 | ||
| Negotiating with preferred bidders | 159 | ||
| Negotiation options | 159 | ||
| Unsolicited proposals and direct negotiations | 161 | ||
| 8.7 EUROPEAN UNION POSITION ON PPPs | 161 | ||
| 8.8 SUMMARY AND CONCLUSIONS | 165 | ||
| ENDNOTES | 167 | ||
| Chapter 9:\rDealing with existing PPPs and re-negotiation | 170 | ||
| 9.1 INTRODUCTION | 170 | ||
| 9.2 WHY SHOULD RENEGOTIATION AND ADAPTATION CLAUSES BE CONSIDERED AS PART OF THE PPP AGREEMENT | 171 | ||
| 9.3 LEGAL ISSUES RELATED TO RENEGOTIATIONS | 174 | ||
| Applicable Law – Common and Civil Law systems14 | 174 | ||
| 9.4 INTERNATIONAL BUSINESS PRACTICES FOR RENEGOTIATIONS | 175 | ||
| 9.5 SUMMARY AND CONCLUSIONS | 177 | ||
| ENDNOTES | 178 | ||
| Part III:\rDeveloping Sustainable PPP Arrangements | 182 | ||
| Chapter 10:\rImproving key contract provisions | 183 | ||
| 10.1 INTRODUCTION | 183 | ||
| 10.2 CONTRACT FORM AND RISK ALLOCATION | 184 | ||
| Contractual linkages | 185 | ||
| Financial links | 187 | ||
| 10.3 GENERAL PROVISIONS | 190 | ||
| Conditions precedent, effective date and financing agreements | 190 | ||
| Parent company guarantees and minimum equity requirements | 191 | ||
| Provisions related to construction and assets | 191 | ||
| 10.4 PROVISIONS RELATED TO SERVICE STANDARDS AND OTHER OBLIGATIONS | 192 | ||
| 10.5 PROVISIONS APPLYING TO IMPLEMENTATION, MONITORING AND ENFORCEMENT | 195 | ||
| Monitoring and contract monitoring units | 195 | ||
| Penalties and grantor ability to intervene for persistent minor breaches | 196 | ||
| Performance bonds and set-off rights | 197 | ||
| Enforcement of customer payments | 198 | ||
| 10.6 PROVISIONS APPLYING TO FINANCING Financing – developer obligations | 199 | ||
| Security, step-in rights and direct agreements | 199 | ||
| Exchange rate issues | 200 | ||
| 10.7 PROVISIONS RELATED TO ‘FORCE MAJEURE’ & TERMINATION | 201 | ||
| ‘Force majeure’ | 203 | ||
| Step-in rights23 and remedial action | 204 | ||
| Handover provisions for assets which transfer to the authority | 204 | ||
| Valuation of terminal payments on expiry where residual value risk has been transferred | 205 | ||
| Calculation and payment of early termination liabilities | 205 | ||
| Transition on handover | 206 | ||
| Treatment of assets on expiry of service period | 206 | ||
| Preserving the conditions of the assets on expiry | 207 | ||
| 10.8 VARIOUS STANDARD CONTRACTUAL ISSUES\r | 208 | ||
| Transparency provisions | 208 | ||
| Intellectual property rights | 208 | ||
| Labour issues | 208 | ||
| 10.9 SUMMARY AND CONCLUSIONS | 209 | ||
| ENDNOTES | 210 | ||
| Chapter 11:\rMaintaining the economic and financial equilibrium of the PPP Agreement | 214 | ||
| 11.1 INTRODUCTION | 214 | ||
| 11.2 DEALING WITH THE LONG TERM NATURE OF PPP AGREEMENTS: PROVISIONS FOR PERIODIC, EXTRAORDINARY AND EMERGENCY VARIATIONS | 215 | ||
| 11.3 PERIODIC VARIATIONS IN PPP AGREEMENTS\r | 217 | ||
| UK system of price-cap regulation | 217 | ||
| US-style rate of return regulation | 217 | ||
| Chilean model: Fixed NPV of revenue, variable length concession | 218 | ||
| Rate of return bands and stabilization funds | 218 | ||
| Rate of return over the life of the contract | 219 | ||
| Hardship clauses | 219 | ||
| 11.4 RECOMMENDATIONS FOR TARIFF INDEXATION AND COST PASS-THROUGHS | 219 | ||
| 11.5 CONCLUSIONS | 224 | ||
| ENDNOTES | 225 | ||
| Chapter 12:\rImproving PPP structures | 228 | ||
| 12.1 INTRODUCTION | 228 | ||
| 12.2 NEW MODEL: OUTPUT-BASED LONG TERM PPP AGREEMENT | 229 | ||
| 12.3 NEW MODEL: PPP TRUST STRUCTURE | 233 | ||
| 12.4 CONCLUSIONS | 236 | ||
| ENDNOTES | 237 | ||
| Chapter 13:\rDealing with imperfect data | 239 | ||
| 13.1 INTRODUCTION | 239 | ||
| 13.2 IDENTIFICATION AND CATEGORISATION OF DATA | 240 | ||
| 13.3 DIFFERENTIATING BETWEEN DATA TO BE COLLECTED AT BID STAGE AND POST CONTRACT AWARD | 242 | ||
| 13.4 RECOMMENDATIONS ON DEALING WITH IMPERFECT DATA | 244 | ||
| Data gathering leading up to the bid period | 245 | ||
| Data validation period | 246 | ||
| Data acquisition between the bid stage and first major review period of contract | 247 | ||
| Periodic revision of targets, service parameters and operator remuneration | 248 | ||
| 13.5 CONTRACTUAL PROVISIONS TO ADJUST FOR THE IMPLICATIONS OF IMPERFECT DATA | 249 | ||
| Data improvement clause | 249 | ||
| Mutual convenience termination or break clause | 250 | ||
| 13.6 SUMMARY AND CONCLUSIONS | 252 | ||
| ENDNOTES | 253 | ||
| Chapter 14:\rImproving procurement proposals for PPP Agreement | 255 | ||
| 14.1 INTRODUCTION | 255 | ||
| 14.2 ENHANCED PROCUREMENT TO DEALWITH THE DATA IMPROVEMENT PERIOD | 255 | ||
| Responsibility for capital investments during the initial concession period | 256 | ||
| 14.3 PREQUALIFICATION AND AWARD RECOMMENDATIONS | 257 | ||
| Evaluation at prequalification stage | 257 | ||
| Pre-Contract Signature assessment | 258 | ||
| 14.4 THE DEVELOPER’S REMUNERATION AND THE BID PRICE | 259 | ||
| 14.5 SUMMARY AND CONCLUSIONS | 260 | ||
| ENDNOTES | 261 | ||
| Chapter 15:\rSummary conclusions and recommendations | 262 | ||
| Future considerations | 268 | ||
| Annex 1:\rEuropean legal framework and its implications on PPP | 270 | ||
| Relevance of the EU law in the water sector | 272 | ||
| EU Utilities Directive | 272 | ||
| Implications of public involvement & ownership under EU | 274 | ||
| Implications of state aid | 274 | ||
| EU competition law | 274 | ||
| Test 1: The capacity of a firm to engage in actions that do not take into\raccount their competitors, customers or suppliers | 275 | ||
| Test 2: The capacity to prevent other undertakings/firms from\rentering the market | 275 | ||
| Test 3: The market share of the undertaking in question | 275 | ||
| Test 4: The economies of scale realised by the undertaking/firm | 276 | ||
| Test 5: The capital strength of the firm and its access to\rcapital markets | 276 | ||
| Test 6: The ownership structure | 276 | ||
| EU legal position on PPP | 276 | ||
| Purely contractual PPP | 279 | ||
| PPPs as concessions | 280 | ||
| Institutionalised PPPs (IPPPs) | 280 | ||
| Water framework directive – background & development | 281 | ||
| Annex 2:\rSector specific risk matrix | 285 | ||
| References & Bibliography | 293 |