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Planning and Negotiating PPPs:

An International Legal Perspective

Day Two, Thursday 12th May 2011

Jean-Paul Gauthier,

Dep. Sec. General, WEPZA; MD, Locus Economica LLC

AFZA Convention 2011

Mlimani City Conference Centre, Dar es Salaam

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Confused as to what a PPP is?

BOT Build-Operate-Transfer

BBO Buy-Build-Operate

BLT Build-Lease-Transfer

BOO Build-Own-Operate

BOOM Build-Own-Operate-Maintain

BOOT Build-Own-Operate-Transfer

BT Build-Transfer

BTO Build-Transfer-Operate

DB Design-Build

DBB Design-Bid-Build

DBFO Design-Build-Finance-Operate

DBOM Design-Build-Operate-Maintain

DBOT Design-Build-Operate-Transfer

DBM Design-Build-Maintain

DBFM Design-Build-Finance-Maintain

DBFOM Design-Build-Finance-Operate-Maintain

DOO Design-Own-Operate

DOT Develop-Operate-Transfer

LDO Lease-Develop-Operate

ROO Rehabilitate-Own-Operate

ROT Rehabilitate-Operate-Transfer

TOT Transfer-Own-Transfer

EOT Equip-Operate-Transfer

Asset Capitalization

Developer Finance

Divestiture

Lease

Maintenance Agreement

Management Contract

Service Contract

Turnkey Delivery

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PPP: A Definition

A PPP is a contractual agreement between a public agency and a private sector entity, through which the assets and skills of each party are shared in delivering a facility or service to the general public, as well as in the risks and rewards of the delivery of this facility or service.

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PPPs: The Basic Construct

Customers

Regulator

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PPP Partnering Principles

Two or more parties share assets, skills, risks, and rewards associated with project development and operation

Private sector seeks to make a return commensurate with risk taken on

Public sector seeks to achieve public policy objectives

Public partner needs to monitor private sector partners

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4 Basic Types of PPP

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DBFO / Concession Structure (SEZ)

Direct Agreement

Financial Institutions

Project Agreement

Gov. Authority

Land Lease

Shareholders

Sub Developers

Developer/Operator

(SPV)

Construction Company

Subcontractors e.g. design engineers, architects,

builders

Subcontractors e.g. maintenance

firm, facilities services

Shareholders

AgreementFinancing Agreement

Tenants

Tenant Leases

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Typical JV Legal Instrumentation

Development Corp.(Public SOE, Crown Corp.

EPIC/EPAC)

Ministry / Dept. / Agency of “tutelle”

State Shareholder M.D.A.s

Private Shareholders

Shareholders’ Agreement

Articles / Bylaws

Zone Operator

Management Contract

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Legal Agreements Made Simple

Project Instrumentation

Master Project / Concession / Developer Agreement

Financing Agreement / Loan/s

Security Instrument/s

Subcontracts (Construction, Operation, Maintenance, Services…)

[Feed stock Contract/s]

End-User Contract/s (Tenant Leases, Off-take Contracts...)

SPV Instrumentation

Articles / Bylaws

Shareholder Agreement

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Risk Mitigation

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Complex Financial Flows

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5 Stages of a PPP Infrastructre Project

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Illustrative Risks & Solutions at Operation Stage

Risks Solutions

Raw Material Supply Feedstock contracts

Market Market StudyOff Take Agreements

Performance / Technical Proven TechPerformance Guarantees

Operations / Maintenance Experienced Operator

Foreign Exchange Flexible Tariff FormulaForeign Exchage GuaranteeEscrow Accounts

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Mitigating Risk Through PPP “Contract Networks”

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Risk Management in Project Contracts

Clear definition of assets

Clear definitions of roles and responsibilities of parties

Periodic testing/benchmarking and re-pricing mechanisms or Phased Development Options

Liability caps

Insurance / Bond / Contingency Fund requirements

Step-in rights

Subrogation rights

Legal Stability Clause

Contract and Legal Primacy

Choice and Language of Law & Jurisdiction

Fast-Track Dispute Resolution Mechanism

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Up-stream financial and economic modeling

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Modeling required before to decide on the PPP structure

• Summary Market Study and 10-year Land Uptake Forecast, specifying the sources of the investment and resulting cumulative land uptake. Investment and land uptake should be based both on an annual incremental and annual cumulative projections of the number of firms expected with sector-based assumptions regarding necessary space in square meters for each firm’s investment. Construction years should be separated from the operational years, and clearly indicate options projections. The study and forecast should be developed under three scenarios: i) optimistic; ii) pessimistic; and, iii) conservative.

• Summary economic analysis of the zone’s expected long term contribution to the national economy

• Financial feasibility study, demonstrating anticipated sources of finance and an acceptable Internal Rate of Return, calculated from the beginning of year 1 of the acquisition of the land lease, encompassing the construction years, and 10 years from operational start-up.

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Legal Due Diligence: Take your time, Do it Once, Do it Right!

Market Risk

Secure/Disposable Assets (Sureties)

Equity Caps

Environmental and Social Impact Assessments

Transaction Risk

Considered/Transparent Procurement

Developer Track Record Verification

Suitable legal Transaction Advisors

Operating Risk

Performance Guarantees

Don’t overly focus on the transaction!

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Case Study: Abu Dhabi HCSEZ

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Background

HCSEZ is the apex organization in Abu Dhabi charged with development, operation and regulation of SEZs and related infrastructure.

ICAD was publicly developed and operated. Although fully leased, there were no cost-recovery objectives or delivery; development was heavily subsidized and its operation consumed considerable resources. Recognition that HCSEZ cannot and should not replicate the ICAD model

BearingPoint hired to restructure HCSEZ operations, enhance its capabilities, refocus it on the promotion of private zones, and assist in the prioritization, development and implementation of priority projects. Under a management contract, we are providing a world-class management team to manage HCSEZ for a period of five years.

HCSEZ is the apex organization in Abu Dhabi charged with development, operation and regulation of SEZs and related infrastructure.

ICAD was publicly developed and operated. Although fully leased, there were no cost-recovery objectives or delivery; development was heavily subsidized and its operation consumed considerable resources. Recognition that HCSEZ cannot and should not replicate the ICAD model

BearingPoint hired to restructure HCSEZ operations, enhance its capabilities, refocus it on the promotion of private zones, and assist in the prioritization, development and implementation of priority projects. Under a management contract, we are providing a world-class management team to manage HCSEZ for a period of five years.

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Abu Dhabi HCSEZ Development initiatives

Petrochemical Zone

Industrial City Al Ain

Industrial City Abu Dhabi(ICAD Phase I)

O&G Services Complex Automotive Cluster

ICAD Phase II

Airport Logistics Hub

ICAD Other Phases

Basic Material Zone

Medical CityScience & Technology Complex

(Laboratories)

Industrial City Close to Dubai (Al Maha)

Pharmaceutical Cluster

Food & Beverage Cluster

Free Zone & Financial Services Business Park

Military Industrial City

Special Tourism Zone

Agro-Industrial & Agro Research Zone

Military Training Zone Others

HCSEZ

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HCSEZ Approach to PPP

1. HCSEZ builds backbone infrastructure

2. HCSEZ builds-out its infrastructure responsibilities in phases, linked to market up-take

3. HCSEZ goes to market to determine interest of private zone developers as sub- or master developers.

4. Based on market feedback, HCSEZ structures modified DBFO PPP as follows:

transfers to developer responsibility for backbone infrastructure continues build-out of on-site infrastructure, and then transfers responsibility continues with limited built-to-spec buildings, and then transfers

responsibility

5. HCSEZ & Developer negotiate final PPP contract

HCSEZ needed to act quickly to realize its

program implementation

objectives

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The Project Agreement

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Standard PFI Project Contract Clauses

Services to be provided / Performance Standards Duration (Commencement, Critical Dates, Expiry/ Termination/ Release) Contributions (Assets, Capital, Payments) Performance Monitoring (Events, Acceptances, Measurement Methods) Liability & Limitations Warrantees (Due Diligence, Latent Defects…) & Exclusions Delivery Protections (Performance Bonds, Parent Company Guarantees, Security, Insurance, Long-Stop Date, Access, Step-in Rights) Assignment / Change of Ownership / Subcontracting Early Termination/ Suspension (Events, Force Majeure, Compensation/ Relief/ Prorating & Valuation) Breach, Rectification, Damages & Indemnities Disclosure, Information, Confidentiality, IPR Dispute Resolution (Law, Language, Jurisdiction, Forum)

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Key Elements in SEZ Concession Agreement (Suleimaniya SCA, Iraq)

Objectives, Summary Description of Proposed Development & Project: What is the Deal? Relevant Economic Development Plans, Context, and Legal & Regulatory Structure in place Government Commitments Role of the Developer Property, Site and Surrounding Areas, with Description Agreement to Lease (Payment of Rental Price and Charges, Transfer of the Land / Delivery of Possession, Land Use) Duration Limitations and Restrictions (Amalgamation, Activities Pursuant to Approved Plans, Restrictions on Use, Multiple Developers, Alienation of Developer Interests and Rights) Covenants of Concessionaire (Access, Liability for Damage and Indemnity for Events on Site, Insurance, Constitution of the Concessionaire and Other Conditions Precedent) Expiry, Extension or Renewal of Contract, and Survival of Obligations Termination (Default Events, Cause, Rescission, Consequences, Whole Rights and Remedies Upon Rescission, Survival of Obligations, Force Majeure) Breach (Consequences, Payments, Forfeiture of Performance Bond/Security) General Provisions (Notices, Authorized Representatives, Time of the Essence, Cumulative Rights and Remedies, Agreement Binding on Successors, Permitted Assigns, Agreement Supersedes Previous Agreements) Dispute Resolution, Governing Law, Arbitration

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Additional Concession Terms and Conditions(SEZ Project)

Fixed Land ownership and residual rights to all buildings

Site planning requirements and standards

Minimum land lease rate

Minimum land absorption rate

Minimum level of developer equity investment

Regulatory regime and monitoring/control procedures

Variable (subject to negotiation with the Private Partner) Land lease rate above minimum

Land absorption rate above minimum

Level of developer equity above minimum

Cost to end-users (tenants)

Expected returns

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Recap

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PPP Legal “Rules of Thumb”

Fundamental Rules PPPs require sound legal underpinnings Begin with preparation of adequate documentation and a clear

understanding of developers/users requirements Private sector can enter at different stages depending on strategic

goals/objectives Models and transaction structures are nearly unlimited Specifications, Specifications, Specifications (the Public Interest!)

Key Factors in deciding on specific PPP approach Market (Developers, Users) Asset Capitalization / Expected Returns Terms and Schedules for RoI Public Interest Level of Certainty (Long-term Trends) Capacity to Contract / Supervise

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Final Thought: Sound PPP Frameworks are not enough…

You also need:

An underlying market capable of paying for the infrastructure services

Skills and capacity to develop and monitor PPPs

Soft enablers for infrastructure developers

Open investment framework

Development planning flexibility

Incentives

Long-term development horizon

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Acknowledgements

• Adrian Rouse, Deloitte Consulting LLP

• David Spira, Deloitte Consulting LLP

• Kishore Rao, Deloitte Consulting LLP

• Julien Galant, IFC

• Jim O’Gara, AECOM International