Comparative Study of Contractual Clauses to Provide for the Smooth ...

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Comparative Study of Contractual Clauses for the Smooth Adjustment ofPhysical Infrastructure and Services through the Lifecycle of a PPP ProjectAugust 2012As the private party needs to consult with its sub-contractors and its financiers to understandall of the impacts of a variation upon the PPP, assessment of variation requests can becostly for the private party. In projects in which the private party’s revenue is received in theform of unitary payments, the private party has little capacity to bear these costs.Consequently, the private party may be reluctant to receive and assess variation requestsfrom government. To prevent this situation arising, some PPP Frameworks requiregovernment to compensate the private party for the costs of assessing a variation request.For example, under the Australian Social Infrastructure Principles, UK SOPC 4 and theNHAI Annuity Road Contract, if government chooses not to proceed with a variation it mustcompensate the private party for some or all of its costs in assessing the variation 6 .4.1.3 Limits on the size or nature of variationsA key question that arises in relation to government’s right to request variations is whetherthere should be some limit on the size or the nature of variations that government canrequest. Government may wish to retain a high degree of flexibility so that it can request anyvariations necessary to meet increases in the demand for use of the infrastructure orchanges in operational requirements. In contrast, the private party may wish to deliver andoperate or maintain the infrastructure with as little disruption or change as possible. Theprivate party’s financiers are likely to see variations as a source of potential risk.Table 3 on page 8 summarises the recommended limits on the size or nature of variationsthat government can require under each of the PPP Frameworks. There are significantdifferences in the approaches taken. At one end of the spectrum, the Australian SocialInfrastructure Principles and the Australian Economic Infrastructure Principles theoreticallyenable government to require the private party to implement any variations, regardless oftheir size or impact upon the project. At the other end of the spectrum, the NHAI Toll RoadContract and the NHAI Annuity Road Contract significantly limit government’s right to requirethe private party to implement variations. The NHAI Toll Road Contract imposes a relativelylow cap on the cost of variations, while the NHAI Annuity Road Contract imposes a cost capand also only allows variations during the construction stage. The UK SOPC 4 and theSouth African Standardised PPP Provisions take intermediate positions, allowing the privateparty to refuse to implement a variation if, for example, it materially changes the nature ofthe project or its risk profile.In its practical operation, the Australian approach is not as unfavourable to the private party,as might first appear. It assumes that, in responding to government's initial variation request,the private party will consider any adverse impacts of the variation upon the project or its riskprofile, and the private party's response to government will incorporate the cost of managingor mitigating these impacts and risks. Therefore, in theory, the terms on which the variationwill be implemented should offer an acceptable risk/return outcome for the private party.Australian PPP contracts typically include detailed modification compensation principles thatprotect the private party’s risk/return outcome.6 Australian Social Infrastructure Principles, section 19.3.2(f); UK SOPC 4, section 13.4.5; NHAIAnnuity Road Contract, section 7.2(d).Page 14 of 35Foster Infrastructure
Comparative Study of Contractual Clauses for the Smooth Adjustment of Physical Infrastructure and Services through the Lifecycleof a PPP ProjectAugust 2012Table 3: Recommended limits on the size or nature of variations that government can requireAustralian SocialInfrastructurePrinciplesAustralian EconomicInfrastructurePrinciplesUK SOPC 4South AfricanStandardised PPPProvisionsNHAI Toll RoadContractNHAI Annuity RoadContractThere are no limits onthe size or nature ofvariations thatgovernment canrequire. The privateparty must providegovernment with aproposal as to howthe private partywould implement thevariation. If theproposal isunacceptable togovernment, the issueis referred to anindependent expert(section 19.5.3-4).There are no limits onthe size or nature ofvariations thatgovernment canrequire. The privateparty must providegovernment with aproposal as to howthe private partywould implement thevariation. If theproposal isunacceptable togovernment, the issueis referred to disputeresolution (section18.3.2(f)). Howeverthe private party isgiven some protectionagainst adverserevenue effects(section 18.3.5).Government shouldconsider the need formonetary limits on thesize of variations(section 13.2.8). Theprivate party shouldbe entitled to refuse toimplement a variationin certaincircumstances,including if it wouldmaterially andadversely change thenature of the project(section 13.3.4).The private partyshould be entitled toveto any variation thatadversely affects therisk profile of theproject for the privateparty (sections 50.2.3;50.3.6-8).Variations must notexceed 5% of the totalproject cost and mustnot affect thecommercial operationdate (clause 17.1).A monetary limit isspecified to restrictthe size of variationsduring theconstruction stage(clause 7.1). Duringthe operations stageof the project, a“capacityaugmentation”process applies,under whichgovernment invitesbids for augmentationof the project(clause 10.1). Theprivate party is notrequired to bid, but if itis not the successfulbidder for theaugmentation, itsconcession isterminated and itreceives a terminationpayment(clause 10.2).Page 15 of 35Foster Infrastructure
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