ESCAP Transport Division

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1 Asia Public-Private Private Partnership Practitioners Network (APN) Training Seoul, Republic of Korea, 4-8 October 2010 Legal Framework for PPPs Laws, Contract, and Dispute Resolution by A.S.M. Abdul Quium

2 Structure of the Session Legal Framework Contract Dispute resolution A quick run through a model concession contract in the roads sector (involving projects less than US$ 50 million) How different would be contracts for projects in other sectors?

3 Why both the public sector and private parties may undertake due diligence on LFWs? Should be part of institutional due diligence to find out if such a PPP project was legally tenable, and if so, what risks were involved - are they too many and too high?

4 Why Legal Framework is Important to PPPs? Provides the legal coverage to enter into an enforceable contract Provides the private sector the necessary legal coverage to finance, build, operate and collect revenues or service payments Covers issues to avert future confusions related to obligations of parties, services, land acquisition, risk and profit sharing, pricing and handover of facilities Deals with issues in contract management (monitoring, dispute settlement mechanisms)

5 Legal Frameworks for PPPs Legislations at different levels (local, provincial, and national) related to infrastructure sector Special laws on PPPs Operational rules and guidelines Annual/mid-term plans Institutional/administrative arrangements Legal authority of an appropriate level of government is required to permit PPPs Legal provisions also required to process, promote and facilitate private involvement.

6 Laws That May Apply Legal provisions related to PPPs may scatter over many different legal instruments Private Contract Law, Company Law, Tax Law, Labour Law, Competition Law, Consumer Protection Law, Insolvency Law, Infrastructure Sector Laws, Property Law, Foreign Investment Law, Intellectual Property Law, Environmental Law, Public Procurement Law or rules,...law Many countries have enacted special legal and regulatory instruments and/or have suitably amended their existing infrastructure sector laws. Also, PPPs cannot be considered in isolation from the regulatory and the general legislative environment

7 What aspects are looked into? Basically three things: Do they sufficiently meet the requirements/ interests of parties involved? To know, how a contract would need to be structured around the provisions in all those applicable law How difficult it would be to enforce the rights of the parties

8 Consider some of these laws l Property Law- restrictions on foreign private ownership of assets; use of lands and buildings; use, purchase, sell, transfer of property in PPPs l Company Law - how far clear, reliable and consider practical provisions on corporate matters- establishment, corporate governance, issue of shares and their sales or transfer; limited liability of investors equal to capital value of their shares in the company l Pledge Law in case of termination can the lenders take effective security over the assets of the project company? Are there step-in rights? l Insolvency Law Can the lenders' foreclose on securities despite the opening of bankruptcy proceedings?

9 What Purpose LFWs Should Serve? Reduce the level of uncertainty in PPP project deals and their implementation Minimize the risk of legal challenge Increase investors confidence Promote and facilitate private involvement and issuance of various licences and permits Licences for setting up a company Licence for mining and extraction of mineral resources Work permit for foreigners Import licence for equipment and other supplies Building permits Radiofrequency spectrum allocation for ICT services

10 Special Laws on PPPs The Act on Public-Private Partnerships in Infrastructure, ROK Build-Operate-Transfer Law, the Philippines Act on Private Participation in State Undertaking, Thailand Build-Operate-Transfer Law, Turkey Private Finance Initiative Promotion Law, Japan Land Transport Management Act, New Zealand Public Private Partnerships Act 2006, Fiji Law on Concession 2007, Cambodia Decree on Investment on the Basis of Build-Operate-Transfer (BOT), Build-Transfer-Operate (BTO) and Build-Transfer (BT) Contracts, 2007, Viet Nam Gujarat Infrastructure Development Act, Gujarat, India Punjab Infrastructure Development Act, Punjab, India

11 What Do These Laws Provide? Coverage in national laws vary widely but should provide clarity and certainty to award and implement and may specify: Division of responsibility between levels of government and power of authority Sectors covered, details of project identification, approval, procurement and implementation arrangements Types of permitted PPP models and general conditions for these models Guidelines on risk sharing arrangements Provision of financial and other incentives If the concessionaire can grant security interests over the project assets to support financing

12 The legal instruments and/or government rules and guidelines can also define: How agencies and local governments may initiate, develop, submit projects for approval of government Procure, negotiate and make deal with private sector Implement a project Manage contracts Define the authority and responsibilities at different levels or tiers of government

13 Administrative Arrangements Depends on the system of government, overall administrative structure, and the legal framework concerning PPPs. The administrative arrangements and mechanism vary from one country to another Generally, sectoral agencies at the national and provincial levels (in a federal structure) initiate and implement PPP projects. In many countries, local level governments such as city governments are also allowed to undertake PPP projects.

14 PPP Units and Programmes Success of PPP projects depends on a strong public sector which has the ability to identify, develop, negotiate, procure, and manage projects through a transparent process The knowledge and the necessary skills that are required are often lacking in the public sector Special PPP Units/Programmes established to address the capacity issue and facilitate project implementation

15 Dedicated Public-Private Private Partnership Units or Special PPP Programs with Similar Objectives The administrative status of PPP units varies from one country to another Can be a government, semi-government, autonomous or even a quasi-private entity The role and function of such units greatly vary Can have a very strong role and wide range of functions from project development to project approval; in other countries they have advisory role with limited functions

16 PPP Units in Governments Australia (PPP Unit, Department of Finance and Deregulation) Bangladesh (Infrastructure Investment Facilitation Centre or IIFC) Indonesia (PPP Central Unit or P3CU) Philippines (BOT Center) Pakistan (Infrastructure Project Development Facility or (IPDF) Republic of Korea (Private Infrastructure Investment Management Center, PIMAC) Fiji (PPP Unit) Sri Lanka (PPP Unit, Board of Investment) Some states in India such as Gujarat and Punjab have established PPP units Many Governments have established a special cell within the Prime Minister s Office or a senior ministry as in Australia (PPP Unit, Department of Finance and Deregulation), India and Malaysia. Some countries have established PPP units at the provincial level: States in Australia (such as, Partnership Victoria in the State of Victoria), and India (such as, Gujarat Infrastructure Development Board).

17 Why Regulation is Necessary? Services provided are adequate and meets the desired standard or quality Economic efficiency in utilization of natural and other resources Sustainable development in a sector A response to natural monopolies and market failures associated with network industries such as electricity, gas, water, telecommunications and transport

18 May lead to: Excessive tariff What, if not Regulated? Inadequate service level and quality Non compliance of contractual obligations to users, government or other parties Low efficiency in production and in the provision of goods and services Inadequate level of investment in the sector Frequent discontent between the parties

19 Regulatory System The regulatory system consists of: A set of legal instruments and rules (laws, contract agreements, statutory rules framed by the government, etc.) Procedures and processes (for obtaining required approvals, licences and permits, etc.) Regulatory authorities (ministry, regulatory agency, judiciary, competition commission, etc.) with the delegated power Actual functions depend on the overall structure of the regulatory regime, empowerment of authorities as provided in the legal framework, administrative arrangements and autonomy, and technical capacity.

20 Protection of public interest Functions of Regulator Monitoring compliance with contractual obligations to the government and users, and other legal and regulatory requirements Establishing technical, safety and quality standards (if not defined in the contract agreements) and monitoring their compliance Imposing penalties for non compliance Administering tariff adjustments and periodic reviews Establishing accounting standards and undertaking operator s cost and performance analysis Facilitating dispute resolution between parties Providing advice and counsel to government on policy matters and other related matters to private sector involvement in the sector

21 Regulatory Actions Price of infrastructure service Quantity and quality of service (physical attributes of service, safety and security, environmental standard) Level of investment, choice of technology and innovation Performance of the operator (service coverage by population segment and geographical area) Public service obligation Entry to and exit from the market Regulatory action impact

22 Regulatory Tools Policy framework-aspects that can be turned into regulatory tools Legal instruments (sector and regulatory laws) as applicable Concession period and its linkage to rate of return Financial modelling of regulatory policy Tariff rate, structure, formula, revision/ adjustment mechanisms Accounting standards on regulated firms Fiscal instruments (subsidy, incentives or services in kind) Payments to government/regulator Penalties and fines for non-compliance Investment level and its timing Technical efficiency and quality standards of service Depreciation and amortization rules within the control of regulator. Rules related to transfer of assets

23 Structure of the Regulatory Authority There can also be various institutional arrangements that may include: the concerned ministry a special cell within the ministry regulation by contract an independent regulator with discretionary power

24 Concession Contracts/Agreements A contract is a binding legal agreement that is enforceable in a court of law or by binding arbitration. A contract is an exchange of promises with a specific remedy for breach. A PPP contract should be: Administratively implementable Commercially viable Legally enforceable Meets requirements of concerned parties Substantive contents and legal standings of contracts may depend on the legal framework on PPPs in the country as well as type of project

25 Typical Contracts/Agreements in a PPP Debt Equity

26 Concession Contracts/Agreements The legal nature of a "concession depends on the laws of the jurisdiction. Generally civil law based countries have a separate category of laws dealing with the concession. When a concession is granted under the administrative laws, it may be revocable at the will of the government. The private sector, including the lenders, would obviously be concerned. If the general contract law does not apply, then the private parties will need to consider the extent to which it affects their commercial rights. Irrevocability, certainty and enforceability of rights. An enabling legislation may be needed to overcome these concerns. A concession agreement may not be considered in isolation from the regulatory and legislative environment.

27 Contents of Concession Contract Definitions and interpretations of terms in the contract Tenure of contract, end of term arrangements, access rights Obligations of parties to the agreement Project, project site, and ownership of land and other assets Design, construction, commissioning, O&M of the facility Engagement of subcontractors Handover of project facility Performance requirements Payment and other financial matters (including tariff, fees, price review and adjustments; and penalties) Tariff, fees, levy and their collection and appropriation

28 Contents of contract (continued) Insurance Preparation, review and approval of designs and drawings Independent engineer, Independent auditor Applicable law and dispute resolution, change in law Liability and indemnity Force Majeure Termination of contract Events of default and termination Contract compliance and management Redressal of public grievances Representations and warranties, disclaimer Substitution Agreement

29 An Example Split into the following modules: Module 1: Introduction Module 2: Definitions Module 3: Construction Module 4: Payments and Financial Matters Module 5: Changes and Supervening Events Module 6: Changes in Control and Miscellaneous Items SCHEDULES: An outline of attached Schedules to the concession contract

30 Format in the Manual on Model Concession Contracts

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32 Dispute Resolution Why disputes may arise? Difference in interpretation of terms, failure to meet contract obligations, unilateral action by a party, contract compliance Disputes may arise in all phases: construction, operation, and final handover to the government (when applicable) The legal basis for the settlement of disputes is an important consideration in implementation of PPP projects. Private parties (concessionaire, financiers and contractors) feel encouraged when they have confidence that disputes can be resolved fairly and efficiently The agreed methods of dispute resolution between the parties are generally mentioned in the contract agreement as allowed under the legal framework of dispute resolution in the country.

33 Issues in Dispute Resolution Legal jurisdiction and or an arbitral body in whom parties would rely If the final determination of the court or arbitral body concerned is enforceable. (Arbitration decisions are legally enforceable if a country has adopted laws to say that arbitration decisions are legally binding. ) If foreign arbitration judgments would be enforceable. (Some countries are signatories to an international convention on the enforcement of arbitral awards.) The enforcement of judgments of a foreign court. The choice of law. Exclusive jurisdiction of a specified court and the law from another jurisdiction. (This means that the courts of one jurisdiction will be forced to decide on a case based on the law of another jurisdiction.) It is not necessary to set out the process, unless the parties wish to. (The disputes are heard according to the procedures stipulated in the arbitration tribunal chosen. )

34 Methods of Dispute Resolution Facilitated negotiation Conciliation and mediation Non-binding expert appraisal Review of technical disputes by independent experts Adjudication by regulatory authority Arbitration Legal proceedings See UNCITRAL Guidelines (also for contract clauses)

35 Methods of Dispute Resolution Facilitated negotiation. A facilitator appointed by parties assist in analyzing the merits of their cases but does not give any opinion. Conciliation and mediation. A person or a panel provides independent and impartial assistance - may end in settlement or ends unsuccessfully. Non-binding expert appraisal. A neutral third party provides an appraisal on the merits of the cases and suggests an outcome for their consideration. The process is usually followed by negotiations. Review of technical disputes by independent experts. An independent expert reviews technical disputes. His decision may either be binding or non-binding as agreed in the contract agreement. Arbitration. The matter is referred to a board or tribunal of arbitrators. Such arbitration is held in accordance with the rules and at a place as agreed in the contract. Any award made is binding on parties. Adjudication by Regulatory Authority. Matters of dispute may be referred to a statutory Regulatory Authority with powers to adjudicate. An appellate tribunal or a court of law as defined can consider an appeal. Legal proceedings. In accordance with the legal provisions, parties in dispute may go to the judiciary.

36 Interested in Model Contract Clauses? Download PPP Primer from: Primer.pdf UNCITRAL Guidelines available at: guide/pfip-e.pdf Online course materials from: To log in User ID: contract1316 Password: contract2062

37 Thank you