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 noted in section 3 of this report, the need for variations is generally greater in socialinfrastructure projects than in economic infrastructure projects. This provides one indicationas to why the NHAI Toll Road Contract and the NHAI Annuity Road Contract place morerestrictive limits on the size and nature of variations that government can require comparedto the Australian Social Infrastructure Principles, the UK SOPC 4 and the South AfricanStandardised PPP Provisions.The Australian Economic Infrastructure Principles adopt a very different approach to theNHAI Toll Road Contract, despite both these frameworks having specific application to tollroad projects. The difference may be due to differences in the use of the toll road PPPmodel in these countries. PPP toll roads in Australia have been concentrated in urban areas,where they form parts of metropolitan motorway networks. In contrast, India's nationalhighway network links the individual urban areas across the country. It is possible that theneed for variations is greater in Australia's metropolitan motorway networks, compared toIndia's national highway network.In summary, the limits on the size or nature of variations that government can require underthe selected PPP frameworks reflect the following principles:1. The need for government to have flexibility to request variations over the life of aPPP project can depend upon the nature of the project, and is generally greater insocial infrastructure projects than in economic infrastructure projects.2. The need for government to have flexibility to request variations can depend uponthe setting in which the project is undertaken. For example, toll roads in metropolitanareas may require more frequent and more significant variations as the surroundingroad network develops, compared to national highways.4.1.4 Ensuring that variation costs represent value for moneyIt is good practice for government to require that any procurement be undertaken throughprocesses that ensure value for money is received and the outcome is transparent. Whereprocurement takes the form of a variation under a PPP contract, it is often not possible ornot appropriate to apply government’s more general procurement processes. Nevertheless,the variation process under the PPP contract should enable government to satisfy itself thatthe variation costs represent value for money.Government’s general procurement requirements in many jurisdictions vary depending uponthe cost of the goods or services being procured. For example, if the costs exceed aparticular threshold, a public tender process may be required. For lower cost procurements,a public tender process may not be required, but other measures will be used to ensure thatgovernment receives value for money.Some PPP Frameworks also recognise that less complex processes may be appropriate forlow-cost variations. In these Frameworks, minor works variations can be implementedoutside of the general variation process. Minor works variations are discussed in more detailin section 4.1.6.For variations other than minor works variations, a variety of approaches are adopted toensure that the variation costs represent value for money for government. Table 4 onpage 17 summarises the approaches under each of the PPP Frameworks.Page 16 of 35Foster Infrastructure
Comparative Study of Contractual Clauses for the Smooth Adjustment of Physical Infrastructure and Services through the Lifecycleof a PPP ProjectAugust 2012Table 4: Pricing of variationsAustralian SocialInfrastructurePrinciplesAustralian EconomicInfrastructurePrinciplesUK SOPC 4South AfricanStandardised PPPProvisionsNHAI Toll RoadContractNHAI Annuity RoadContractVariations must bepriced on a "fullytransparent basis"(section 19.3.2(b)).The private party isnot entitled to chargea margin if thevariation cost is belowa specified threshold(section 19.6(b)). Ifthe parties do notagree upon the cost ofthe variation, it isdetermined by anindependent expert(during theconstruction stage ofthe project) or byconducting a tenderfor the variation works(during the operationsstage) (section19.3.2(d)).Variations must bepriced on an openbook basis. If theparties do not agreeupon the cost of thevariation, it may bedetermined by anindependent expert(section 17.1). Duringthe operations stage,government mayrequire the privateparty to price avariation through atender process(section 18.3.1(c)).The private party’smargins for variationsare fixed in thecontract (section18.6(a)).For medium valuevariations, thereshould be pre-agreedstandard allowancesfor professional fees,overheads,contingencies andprofit margins, aschedule of rates forspecialist labourservices, market ratesfor materials andopen-book pricing ofany specific risks(section 13.4.4.5).Large value variationsmay be priced throughbenchmarking,competitive tendering,or by an independenttechnical adviser.Pricing of variationsmust be transparent.If a variation will beimplemented by asub-contractor, theprivate party mustconduct a competitivequotation process. If avariation will beimplemented by theprivate party itself, thecost must bebenchmarked (section50.3.10).Variations are pricedthrough negotiationbased on the NationalHighway Authority ofIndia’s currentschedule of rates(clause 17.2(c)), withresort to a disputeresolution process ifnecessary (clause17.3).The cost of a variationis estimated by theprivate party (clause7.2(b)(ii)) and settledby an independentengineer (clause7.2(c)).Page 17 of 35Foster Infrastructure
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