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NATIONAL GOVERNMENT AGENCY PUBLIC-PRIVATE PARTNERSHIP MANUAL
2V
OL
UM
EProject
Tenderingand
NegotiationsDRAFT
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National Government Agency Public-Private Partnership
CHAPTERS
4 Overview of the Tender Procurement Process5 The PPP Contract Design - Key Considerations6 Steps and Issues Leading up to the Negotiation Stage7 Award of Contract and Implementation Steps8 Unsolicited Proposals9 Key Project Documents
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Acknowledgement
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Contents
4 Overview of the Tender/Procurement Process 1
Introduction 1 GeneralPPPProcurementProcessforSolicitedProposals 3 PPPProcurementProcessforUnsolicitedProposals 4 ManagingthePPPProcurementProcess 5 TheInformationMemorandum(otherwiseknownasthe InstructionstoBidders) 6
5 The PPP Contract Design – Key Considerations 9
Introduction 9 DesignofthePPPContract:KeyConsiderations 10 ProjectCommitteeandMeetings 11 Inspections 11 IndependentConsultant 12 Completion 13 ProtectionagainstLateorInsufficientServiceDelivery includingFailuretomeetPerformanceStandards 14 PerformanceMonitoringSystem 17 ForceMajeureEvents 17 ForceMajeureQualificationRequirements 18 ForceMajeureduringDesignandConstructionPhase 19 ForceMajeureduringOperatingTerm 19 MitigationofForceMajeureEffects 19 EffectonGovernment’sStep-InRights 20 TerminationEventforForceMajeure 20 MaterialAdverseGovernmentAction 20 ThresholdforCompensationforMaterialAdverseGovernmentAction 21 CircumstancesofStep-In:GovernmentandLenders 21 CostofStep-In 22 LiabilityorLimitationonGovernment’sRights 23 Stepping-Out 23 Insurance 24 Default 26 TerminationEvent 27 TerminationforForceMajeureandUninsurability 28 VoluntaryTermination 29 TerminationforGovernmentDefault 29
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ProcedureforTerminationEvent 29 ConsequencesofaTerminationEvent 29 TerminationPayments 29 DefaultTerminationCompensationAmount 30
6 Steps and Issues Leading Up to the Negotiation Stage 33
ClarificationorRejectionofProposals 33 RankingofallResponsiveBidsfromQualifiedBidders 34 DirectNegotiation 34
7 Award of Contract and Implementation Steps 37
PBACRecommendationtoAward 37 NoticeofAwardtoWinningBidder 37 FormationofaSpecialPurposeCompany(SPC) 38 Withdrawal/SubstitutionofaMember 39 ValidityofBids/ReturnofBidSecurity 39 Execution/ApprovaloftheContract 39 GrantofFranchise 40 NoticetoCommence 40
8 Unsolicited Proposals 41
ProcessingUnsolicitedProposals 41 PPPProcessforUnsolicitedProposal 42 PostTenderClarificationandNegotiation 49 PreparationsfortheNegotiationofthePPPContract 49 “CheckandBalance”oftheSupplementaryDocumentsinUnsolicited Proposals 51
9 Key Project Documents 53
ThePPPContract 54 AncillaryAgreementstoPPPContracts 55 ProjectFinanceVariationsinCostStructure 64
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Boxes, Figures, Tables
Box2.1 Non-RequirementofPerformanceSecurity 16Box2.2 ParentGuarantees 16
Figure2.1 PPPProcurementStageinthePPPCycle 2Figure2.2 PPPProcurementProcessOptionsforSolicitedProposals 3Figure2.3 OutlineofthePPPProcessforUnsolicitedProposals 43Figure2.4 IdealConcessionArrangements 10Figure2.5 GeneralStructureofaPPPConcessionContract 53 Table2.1 CoverageofVolume2 3Table2.2 AdvantagesandDisadvantagesofProcurementProcessOptions 4Table2.3 ElementsofDocumentationforPre-andPost-Tender 51
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Acronyms
BOT Build-Operate-and-TransferBTO Build-Transfer-and-OperateCOA CommissiononAuditDED DetailedEngineeringDesignDENR DepartmentofEnvironmentandNatural ResourcesDOF DepartmentofFinanceEPC Engineering,Procurementand ConstructionESIA EnvironmentalandSocialImpact AssessmentFM ForceMajeureGOCC GovernmentOwnedandControlled CorporationGSIS GovernmentServiceInsuranceSystemIA ImplementingAgencyIC IndependentConsultantICC InvestmentCoordinationCommitteeIDC InterestDuringConstructionIRR ImplementingRulesandRegulationsKPIs KeyPerformanceIndicatorsL/C LetterofCreditLD LiquidatedDamagesLGUs LocalGovernmentUnitsMAGA MaterialAdverseGovernmentActionMPSS MinimumPerformanceStandardsand SpecificationsNGA NationalGovernmentAgencyNEDA NationalEconomicandDevelopment AuthorityO&M operationsandmaintenanceOBA output-basedaidODA OfficialDevelopmentAssistanceOGCC OfficeoftheGovernmentCorporate Counsel
OSG OfficeoftheSolicitorGeneralPhilGEPS PhilippineGovernmentElectronic ProcurementSystemPMS PerformanceMonitoringSystemPPP Public-PrivatePartnershipPPPC PPPCenterRA RepublicActSCBA SocialCostBenefitAnalysisSPC SpecialPurposeCompanyTRB TollRegulatoryBoardUNDP UnitedNationsDevelopment Programme
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NationalGovernmentAgencyPublic-PrivatePartnershipMANUALVolume2 1
CHAPTER 4Overview of the Tender/Procurement Process
4.1 Introduction
Afteranimplementingagency(IA)obtainsapprovalofitsproposedPPPprojectfromtheApprovingBody,theproject
enterstheprocurementstageofthePPPprocess.ThekeyobjectivesoftheIAatthisstageofthePPPprocessaretoensure:
1. Adherencetotheprinciplesoftransparencyandequaltreatmentofbidderstobolstertheprofessionalismand
legitimacyoftheprocess;
2. Adequatecompetitivetensionbetweenbidderssoastoarriveatthebestbidfromthemostcompetentbidder;
3. Minimizecostanddelayswithoutsacrificingtherigororqualityoftheprocess;and
4. Selectionofabid.
ThePPPprocurementstagestartsattheadvertisementandendsatthestartofconstruction/groundbreaking.Construction
orimplementationbeginssoonafterfinancialclose(seeFigure2.1).
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Figure 2.1 PPP Procurement Stage in the PPP Cycle
AtStage3,thelevelofinteractionbetweentheIAandtheprivatesectorincreasesdramaticallywithdetailedinformation
abouttheprojectgiventopotentialbiddersandintheprocess,informationonpotentialbiddersisrevealedaswell.This
leadstoanimportanttaskofmanagingtheflowofinformationbetweentheIAandinterestedprivatesectorbiddersto
ensuretransparencyandadequatecompetitivetensionintheprocurementprocess.
ThischapterprovidesaverybriefoverviewofthePPPprocurementprocessinthePhilippinesprescribedundertheRevised
IRRoftheBOTLaw.Thesucceedingchaptersinthisvolume(seeTable2.1)willthendiscussbasiccontractandnegotiation
principlesthatwouldhelpIAsindealingwithissuesthatmayariseintheprocurementprocess.
Stage 1: Identification, Selection and Prioritization
Stage 4: Implementation, Operations and Handover
Stage 2: Project Preparation, Evaluation & Approval
Stage 3: Project Tendering and Negotiation(PPPContractandKeyDocuments,Negotiations)
Project Roll-out/Advertisement
Prequalification and/or Tendering, Submission and Receipt of Bids
Bid Evaluation
Award of Contract / Notice to Proceed
Finalize PPP Contract
Financial Close
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Table 2.1 Coverage of Volume 2
Figure 2.2 PPP Procurement Process Options for Solicited Proposals
4.2 General PPP Procurement Process for Solicited Proposals
Therearetwooptionsforundertakingtheprocurementofsolicitedproposals.Thefirstoption(atwo-stageprocurement
process)requiresapre-qualificationprocessbeforethe issuanceoftherequest forproposals.Thesecondoption isan
abbreviated (single-stage) process wherein the IAmay opt to do a simultaneous qualification/request for proposals
insteadofundertakingapre-qualificationprocess.Underthesimultaneousqualificationprocess,thebiddersareaskedto
submittheirqualificationrequirementsalongwiththeirbidproposalsonthefinancialandtechnicalaspectsoftheproject.
Figure2.2depictsthisprocess.
Section Topical Coverage
Chapter5 The PPP Contract Design: Key Considerations -Asthedraftcontractformsakeypartofthetenderdocumentation,thischapterprovidesanunderstandingofPPPcontracts,theirstructureandhowtheyworkandtheprocessofdraftingaPPPcontract.
Chapter6 Steps and Issues Leading up to Negotiation -ThischapterdealswithmanagingtheinterfacewiththeprivatesectorduringthestagewheretheIAundertakesthenecessaryduediligencebeforetherecommendationforawardofacontract.
Chapter7 Award of Contract and Implementation Steps -Afterfinancialevaluation,theIA’sPre-qualification,BidsandAwardsCommittee(PBAC)needstosubmitarecommendationofcontractawardandthischapteroutlinesthestepsrequired.
Chapter8 Unsolicited Proposals -Whilethegovernmentrecognizestheroleofprivatesectorinitiativesthroughunsolicitedproposals,therearehoweverstrictprovisionsthatenablethemtobeconsideredonlyonanegotiatedbasisinexceptionalcases.Thischapterdiscussestheseprovisions.
Chapter9 Key Project Documents -ThischapterdiscussesfeaturesofPPPprojectsandtheissuesthatIAsmayfaceafterthecontractawardwhenkeycontractdocumentsstartcomingtogetherandthepartiesprepareforfinancialclose.
Award ofContractBid EvaluationPre-Qualification
Advertisement / Invitation to
Pre-Qualify & Bid
Advertisement / Invitation to Bid
Tendering, Submission,
Receipt &Opening of Bids
Tendering, Submission,
Receipt &Opening of Bids
Two-StageProcess
Single-StageProcess
Award ofContract
Bid Evaluation
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Bothoptionshavetheirownadvantagesanddisadvantagesandthechoiceofprocurementprocessmaywelldependon
thestrategyoftheIAandthelevelofinterestshownbytheprivatesectorduringthemarketsoundingexercise.Theoverall
keyobjectiveistoattractalargeenoughnumberofbidderstoensurestrongcompetition.Thetablebelowprovidesa
summaryoftheadvantagesanddisadvantagesofthetwoprocurementoptionsandconsiderationsinchoosinganoption.
4.3 PPP Procurement Process for Unsolicited Proposals
TheRevised IRRof theBOTLawprescribesaprocess for theawardofunsolicitedproposals.Theprocess isdescribed
brieflyhereandinmoredetailinChapter8.AftertheApprovingBodyclearstheprojectfortender,theHeadofAgency
negotiatestheprojectscopeandcontractbasedoncontractparameterssetbytheICC.Oncethedraftcontractisreviewed
Procurement Process Advantages Disadvantages
Remarks/Considerations
Two-StageProcess • Discouragesbiddersthatareunlikelytodelivertheproject
• Createsmorecompetitivetensionasnumberofbiddersisreduced,providinganincentivetopre-qualifiedbidderstoputmoretimeandeffortintotheirsubmittedbid
• Maypresentthepossibilityofcollusionamongalimitednumberofpre-qualifiedbidders
• Subjectivescoringonthequalitativecharacteristicsofbidders,whichmaybechallengedtherebyfurtherlengtheningtheprocurementprocess
• Atthepre-qualificationprocess,IA’sevaluationfocusisonthequalityandthecapacityofthebidders
• Suitableforprojectswhereitisdesirabletohavebiddersthatpossessaleveloftechnicalskillsandpreviousconstructionoroperationalexperience
• Suitablewhenthereisalargenumberofprivatesectorentitiesthatarelikelytobid
• Alsosuitablewhenthenumberofpotentialbiddersislargelyunknownastheinvitationtopre-qualifycouldhelptestthelevelofinterestandavailabilityofpotentialbidders
• Appropriatewhentheprojectscopewouldneedtobefurtherrefinedordiscussedwiththeprivatesector–typicaloflargeorcomplexprojects
Single-StageProcess
• Shorterprocurementprocess,thusappropriateiftheprojectisunderatighttimeframe
• Attractswiderrangeofbidders
• Timeandeffortcanbewastedinevaluatingbidsfrombiddersthatmayclearlybeunlikelytodelivertheproject
• Unrealisticbidsofunqualifiedbidderscancrowdoutbetterbidders
• Suitableforsmallerprojectswhennumberofbiddersisrelativelyknownorthereisalimitednumberofprivateentitiesthatarelikelytobid,thusnotnecessarytoreducethenumberofpossiblebidders
• Appropriatewhentheprojectscopeandservicedeliveryoptionsareclearandwell-defined
• MaybeappropriateiftheIAhasfundlimitationsrelatedtotheprocurementprocess
Sources:UNDPPPPforUrbanEnvironment(http://pppue.undp.2margraf.com/en/16_2.htm);PPPToolkitinIndia–SolidWasteManagementSector(http://toolkit.pppinindia.com/solid-waste-management/module2-leapsfp-dotpp.php?links=ctbspm1b)andE.Farquharson,C.deMastle,andE.R.Yescombe(2011).HowtoEngagewiththePrivateSectorinPPPinEmergingMarkets,WorldBankandthePublic-PrivateInfrastructureAdvisoryFacility.
Table 2.2 Advantages and Disadvantages of Procurement Process Options
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Figure 2.3 Outline of the PPP Process for Unsolicited Proposals
Submission of Complete Proposal Invitation for ComparativeProposals
Evaluation of proposal by IA Preparation & submission of comparative proposals
Original proponent Right to Match
Negotiations after Original Proponenthas been Pre-Qualified Evaluation of proposals of Challenger/s
Award of contract
Adjustment of Terms / Fees / Rentals / Charges Determination of Winning Proponent
Acceptance of Terms & Conditions by Proponent
Approval by Approving Body
1 7
2 8
3 9
4 10
5 11
6 12
bytheOfficeoftheSolicitorGeneralorOfficeofGovernmentCorporateCounsel,andDOF(ifnecessary)andsubsequently
approvedbytheIA,acertificateofnegotiationissigned.Anelementofcompetitionisinjectedintheunsolicitedproposal
processthroughaSwissChallenge.TheagreementsonthedraftcontractformthebasisfortheSwissChallengeorthebid
termsofreferencewhereincomparativeorcompetitiveproposalsaresolicitedfromchallengers.
Proposalsfromchallengersarecomparativeiftheymeettheminimumtechnicalrequirements,andarecompliantwith
theprescribedtermsandconditionsofthebidtermsorreference;andarecompetitive if thefinancialproposaloffers
bettervalue,asdefinedinthebidtermsofreference.Ifthechallengerssubmitabetterproposal,theoriginalprivatesector
ProjectProponentisthengiventherighttomatchthelowestbid.Figure2.3presentstheoutlineoftheprocessbasedon
theRevisedIRRoftheBOTLaw.Chapter8ofthisManualdiscussesindetailtheprocessforUnsolicitedProposals.
4.4 Managing the PPP Procurement Process
AttheprocurementstageofthePPPproject,thePre-qualification,BidsandAwardsCommittee(PBAC)isresponsiblefor
overseeingallaspectsofthepre-biddingandbiddingprocessincludingthatoftheSwissChallengeprocessforunsolicited
proposals.AsindicatedinRule3oftheRevisedIRRoftheBOTLaw,thePBACiscomposedofthethirdrankingregular
officialof the IA; technicalexpertson legal, technicalandfinance; representatives fromtheprivatesector (contractors
associationandfacilityusers);arepresentativefromtheCommissiononAudit(COA);andarepresentativefromthePPP
Center.Therepresentativesfromtheprivatesector,COAandthePPPCenterareconsiderednon-votingmembers.
Thekeytasksundertheprocurementstagecanbebrokendownintotwophases:(i)BiddingProcess(fromProjectRoll-out
totheAwardofContract/NoticetoProceed)and(ii)FinalizationofthePPPcontractandFinancialClose.
At thebiddingprocessphase, the PBAC’s objective is to ensure that theprocurement activities complywithwhat is
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prescribedbytheRevisedIRRoftheBOTLaw.Thisiscrucialnotonlyfortheprojecttoachievevalueformoneybutalso
toensurethat legalchallengesandcostlydelaysareavoided.AbigpartofthePBAC’seffortsduringthisphaseofthe
procurementprocessliesinensuringthatcomparablebidsarereceivedandthatwell-qualifiedbidderssubmitquality
bids.ThiswouldentailundertakingadequateduediligenceasdiscussedinChapter8.
Oncethecontracthasbeenawarded,theobjectiveofthePBACinPhase2istofacilitatethefinalizationofaPPPcontract
thateffectivelyleadstofinancialclose.Chapter5providesdetailsonthekeyclausesofaPPPcontractwhileChapter7
providesamorethoroughdiscussionontheissuesthatmayarisebeforereachingfinancialclose.
4.5 The Information Memorandum and Instructions to BiddersTheProjectInformationMemorandumisthedocumentissuedbytheIAtodescribethePPPprojectandthePPPtransaction
that is being tendered to themarket. The development and provision of an InformationMemorandum is standard
internationalpractice.ItisadocumentthatthemarketexpectsfromtheIAwhenaPPPtransactionistobetendered.Itis
akeyaspectofthetransactiontransparencyarrangementstheGovernmentofthePhilippinesputsintoplace.
The InformationMemorandumdoesnothavea standard format,but thereareexpectationsabout the information it
shouldcontainattheminimum.AhighstandardInformationMemorandumwillprovidedetailsaboutthefollowing:
a) ProjectDescription:Typeofinfrastructureproject,theactualPPPtransactionproposed,theprojectdemand
andkeydemandfigures,thestandardsandspecifications,thescopeoftheprojectdesign.
b) Theprincipalriskallocationarrangementsfortheproject.
c) TheProjectImplementingAgencyandtheirroleandresponsibilities.
d) The legal frameworkforthePPPContract, includingaspecificstatementthattheprojectshallbeproposed
underRepublicAct6957,asamendedbyRepublicAct7718anditsIRR,contractualarrangements,thedraftPPP
ContractitselfandtheMinimumPerformanceStandardsandSpecifications.
e) Theprojectpackagingarrangements– landavailability, the formofGovernmentcontribution, resettlement
issues,environmentalissuesandclearancesandotherkeygovernmentpermissions/licensesthatarerequiredfor
theproject.
f) Bidderqualificationcriteria.
g) The taxation and investment regime of the Philippines with reference to relevant laws and responsible
departments. Foreign Investment constraints, including restrictions on foreign ownership or operation of
infrastructurearealsosetoutforthemarket.
Diagrams(includingprocessesanddecisionprocesses),keyfactsabout,andmapsof,theprojectlocationandalignments
arecriticaltothestructureandclarityoftheInformationMemorandum.
ThisissupplementedbyInstructionstoBidders,whichshallincludethefollowingminimuminformation:1
a. Bidsubmissionproceduresandrequirements,whichshallincludeinformationonthemannerofbidsubmission,
thenumberofcopiesofthebidproposaltobesubmitted,wherethebidsaretobesubmitted,thedeadlineforthe
submissionofbids,permissiblemodeoftransmissionofbidproposals,etc.;InvestmentIncentivesandGovernment
Undertakings;Bidsecurityandbidsecurityvalidityperiod;
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1Section4.2oftheImplementingRulesandRegulationsofRepublicAct7718
b. Milestones;
c. Methodandcriteriafortheevaluationofthetechnicalcomponentofthebids;
d. Parametersandcriteriaforevaluationoffinancialcomponentofthebids;
e. Anyoneormoreofthefollowingcriteriamaybeusedintheevaluationofthefinancialcomponentofthebid
fordeterminingthemostadvantageousbidfortheGovernment:
i. Lowestproposedtoll,fee,rentalorchargeatthestartofprojectoperation,ifapre-agreedparametrictariff
adjustmentformulaisprescribedinthebiddocument;
ii. Lowestpresentvalueofgovernmentsubsidytobeprovidedfortheperiodcoveredbythecontract;
iii. Highest present value of proposed payments to Government, such as: concession fees, lease/rental
payments,fixed/guaranteedpayments,and/orvariablepayments/percentagesharesofrevenuefortheperiod
coveredbythecontract;or
iv. AnyotherappropriatefinancialbidparameterasmaybeapprovedbytheApprovingBody.
f. MinimumamountofequityasprescribedbytheApprovingBody;
g. Formulaandappropriateindicestobeusedintheadjustmentsoftolls/fees/rentals/charges,whenapplicable.
Saidformulashalltakeintoaccountthereasonablenessofthesametousersoftheproject/facilityunderbidding;
h. Requirementsof concerned regulatorybodies, suchas,butnot limited to: theDepartmentofEnvironment
andNaturalResources(DENR),fortheissuanceofanEnvironmentalComplianceCertificate(ECC);NationalWater
Resources Board (NWRB), for the issuance of theWater Permit; the PCAB, for the registration requirements of
Contractors;and,theTollRegulatoryBoard(TRB),forthereviewoftollratesandadjustmentformula;
i. Requirementsandtimelines/milestonesofconcernedAgenciesingrantingoffranchise,ifapplicable;
j. CurrentrulesandregulationsoftheCentralBankofthePhilippines;
k. Revenuesharingarrangements,ifany;and
l. Expectedcommissioningdate.
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CHAPTER 5The PPP Contract Design – Key Considerations
5.1 Introduction
ThedraftPPPcontractisakeybiddocumentwhichallowsprospectivebidderstoreviewtheproposedtermsandconditions
andstructuretheirbidsaccordingly.ThepurposeofthischapteristoprovideanunderstandingofPPPcontracts,andan
understandingofthetypesofPPPcontracts,theirstructureandhowtheywork.
TheRevisedIRRoftheBOTLawdefinesaseriesofpotentialcontractualarrangementsforPPPstructures.Thesestructures
andtheirapplicabilitytoprojectsandrisktransfersaresetoutinVolume1oftheManual.
IntheprocessofdraftingaPPPcontract,thereareanumberofsignificantquestions/issuesthatneedtobeaddressed
tohelptheIAtodevelopaPPPcontractfittingforthetransaction.TheapprovalbytheNEDAICCoftheprojectandthe
proposedriskallocationprovidesfundamentalguidancetotheIA.
TheprocessofdraftingaPPPcontractwilladdressthefollowingkeyconsiderations:
1. Policyquestionsareidentifiedandanswered;
2. AllocationofriskadequatelyconsiderstherecommendedtransactionandFSisconsistentwiththeNEDAstandard
riskallocation;
3. Theconditionsprecedentareidentified;
4. Theroleoftheregulator(ifany);
5. Thestructureofthecontractismappedout;
6. Restrictionsthatexistintheblackletterlaw;and
7. Takeintoaccountwhathasbeendonebefore;whatotherprojectshavebeendone;whatisabouttobedone;and
identifylessonslearnedfrompriorexperience.
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ThestyleofdraftingisimportantandthePPPcontractmusthaveclarityandgoodstructure.Modernandplainlanguage
expressionispreferredasinternationalcompaniesarelookingforinternationalstandarddraftingandstyleinconcession
contracts.
ThestructureofaPPPconcessioncontractwillvaryfromprojecttoproject,butthegeneralapproachtocontractstructuring
canbepatternedafterthefollowingmodelinFigure2.4.
Figure 2.4 Ideal Concession Arrangements
5.2 Design of the PPP Contract: Key Considerations
Oneof the key aspectsof a PPP contract is appropriate allocationof risk for infrastructure construction anddelivery.
ConstructionriskisoneofthemostcommonlytransferredriskstotheProjectProponent.Inprinciple,theProjectProponent
isresponsible,atitsowncost,forconstructingthefacilityinaccordancewiththeMinimumPerformanceStandardsand
Specifications(MPSS)andotherrequirementsofthePPPcontractandwithintherequiredtimeperiod.
5.2.1 Construction Obligations
TheProjectProponentshallbearallcostsrelatedtotheconstructionofthefacility,asspecifiedinthePPPcontract.The
obligationsastofitnessforpurposewillalsoapplytoconstructionofthefacility.TheProjectProponentisnotrelievedof
itsobligationsandliabilitiesunderthePPPcontractbytheprivatepartiessubcontractingtheperformanceofanyworks.
Pre-Construction Period(ROW & DED) Construction Period Operation Period
Turnover
Asset transfer to IA
construction performance security
Construction insurance etc - up to CFC
construction performance security (12 months past CFC)OR
operation performance security
operation performance security
Operation: Property insurance etc - from CFC issue
defects liability
security double up period
defects security
Use right for Concessionaire & service charging
Issue Franchise Issue of NTP Issue CFC 2 inspections
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5.2.2 Construction Updates and Reports
Provision of construction progress reports
During the construction phase, the Project Proponent must provide government with written reports outlining the
progress of theworks by reference to the construction program, certified by an Independent Consultant (described
furtherbelow).The formof theconstructionprogress reportwillbeagreedwithgovernment,basedonan indicative
reportpreparedbytheProjectProponentpriortocontractexecution.
Effect of government involvement
Theprovisionofprogressreportsorupdatedconstructionprogramsandtheiracceptance(orotherwise)bygovernment
doesnotrelievetheProjectProponentofitsconstructionandcompletionobligations.
5.3 Project Committee and Meetings
5.3.1 Role of the project committee
AsmentionedinVolume1,Chapter3.2.1,itisadvisablefortheIAtoset-upaProjectSteeringCommitteetooverseethe
PPPprocess.Theprojectcommitteewillmeetregularlytodiscussanymattersrelatingtotheproject, includingissues
relatingtothedifferentphasesoftheproject(fromthepre-effectivephaseuptoandincludingtheturnoverphase)aswell
asissuesofpublicconcern,contractmonitoringandcommunityandmediarelationsissues.
TheProjectSteeringCommitteedoesnothaveanylegalresponsibilitytoeithertheProjectProponentorgovernmentand
willnothavethepowertorequireeitherpartytoactorrefrainfromactinginissuesassociatedwithsub-contracting.The
committee’sdecisionswillnotaffecttherightsorobligationsofeithertheProjectProponentorgovernmentunderthe
ProjectDocuments.
5.3.2 Composition of the project committee
AlthoughtheProjectSteeringCommittee’sformandmake-upmayvaryfromprojecttoproject,typicallythiscommittee
willcompriseoftheIA’sHeadofAgencynominee(referredtoastheProjectDirector)aschairperson,tworepresentatives
oftheProjectProponentandrepresentativesofgovernmentoversightagenciessuchasthePPPCenter(seeTable1.8in
Chapter3,Volume1forteamcomposition).Eachpartypaystheirownexpenses.TheIA’sPPPUnit/Teamprovidessupport
totheProjectCommittee.
TheProjectProponentmustensure that theProject SteeringCommittee’s chairperson is afforded theopportunity to
attendsitemeetingsinrespectoftheworks.
5.4 Inspections
5.4.1 Government’s right to inspect and test
AccordingtoSection12.10oftheRevisedIRRoftheBOTLaw,thegovernment(includingitsauthorizedrepresentative)
hastherighttoenter,inspectandtestanypartoftheworksduringtheconstructionphaseandtoinspectanydrawings,
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documents,testresults,samplesandspecificationsusedinrelationtosuchworks.Exceptinthecaseofanemergency
(wherenopriornoticeisrequired),governmentmustgivereasonablepriornotice.TheProjectProponentmustprovide
allreasonableassistancerequiredbygovernment.
Whenexercisingitsrighttoenter,inspectandtest,governmentmustprovidewrittennoticeofatleast3-workingdays
(orasmaybeagreedwiththeProjectProponentpriortoentrance,inspectionortesting)soasnottocauseunnecessary
disruptiontotheProjectProponent,anysub-contractororanyotherauthorizeduserofthesiteandwillcomplywiththe
reasonablesafetyandsecurityrequirementsoftheProjectProponentortherelevantconstructionsub-contractorthatare
notifiedtogovernmentbytheProjectProponent.
Thecostofanygovernmentinspectionandtestingwillbebornebythegovernmentunlesstheinspectionortestshows
thatthedesignand/orconstructionisnotconsistentwiththeMPSSorotherrequirementssetoutinthePPPcontract.
5.5 Independent Consultant
AnIndependentConsultant(IC)isoftenengagedinPPPcontractsinthePhilippines.Insomeothercountriestheposition
isreferredtoastheIndependentReviewer.
TheroleoftheICistoprotecttheinterestsoftheprojectitself.Theroleisdirectlyasitisstated:anIndependentConsultant
thatadvisesbothpartiestothePPPconcessionabouttheimplementationofthecontract.TheICmaybeengagedforthe
constructionperiodandinsomecasesforthedurationofthePPPconcession.
Keyaspectsofthisroleare:
1. ToreviewtheprojectDEDsubmittedbytheProjectProponenttoensurethat itconformstotheMPSSpriorto
construction;
2. Toadviseonconstructionofaproject,asapplicable,andcompliancewiththeprojectDEDand/orMPSS;
3. TosignofftheCertificateofFinalCompletion;
4. Tomonitordeliveryoftheprojecttoensurethatitisontimeandatbudget;
5. Toadviseoncontractvariationsandtheirimplications;and
6. Tohelpresolvedisputesspecifiedintheappointmentdocument.
International practice is to jointly appoint the IC following agreement between the Contracting Agency, the Project
ProponentandtheICitself.Appointment/procurementoftheICshouldideallycommenceaftertheawardofthecontract.
SpecificprovisionsoftheIC’sprocurement/appointmentshouldbeclearintheconcessioncontract.Rightsandduties,
andprocessandmechanisms,arecontainedinasideagreementsignedbythethreepartiesasatripartiteagreement.A
sideagreementisgenerallyrequiredbecausetheICcannotbeapartytothePPPconcessioncontract.
IfanIChasbeenappointedwithadutyofcaretoeachofthepartiestoactprofessionallyandindependently,theICmaybe
assignedthefunctionofdeterminingentitlementtoreliefarisingfromaforcemajeureevent.Thisisparticularlythecase
whereanICisappointedtomonitortheprogressoftheworksinaccordancewiththeirrelevantexpertiseandknowledge
ofthetimerelatedaspectsoftheproject.
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If the ICdeterminestheentitlementto forcemajeure, thenhe/shemustdosoactingreasonablyand, ifdisputed, the
matterwillbereferredtoanindependentexpertforresolution.
5.6 Completion
ForCompletiontobeachieved,anumberofcriteriawillneedtobemet,including:
1. Theworksmustbecompletedexceptforminordefectsandthefacilitymustbefitfortheintendedpurposes;
2. AllcommissioningtestsmustbecarriedoutinaccordancewiththeMPSSandthecommissioningplan;
3. All consents, approvals, authorizations and certificates required for the facility tobeoccupiedandused for its
intendedpurposes(includingacertificateofoccupancy)mustbeobtainedandcompliedwith;
4. Allconstructionmachinery,equipmentandmaterialsandwastemustberemovedfromthesite;
5. TheProjectProponentmustprovidethegovernmentwithallas-builtdocumentationincludingmaterialdocuments,
designwork,relevantreportsandas-builtdrawings;
6. The Project Proponent must have issued and provided to the government the operation performance bond
requiredundertheconcessioncontract;
7. The Project Proponentmust have provided copies of relevant insurance policies applicable to the operations
period;and
8. AllothertestsandrequirementsrequiredtosatisfytheIndependentConsultantthatoperations(inaccordance
withtheMPSS)cancommencemusthavebeensatisfied.
Withina specifiedperiodafter completionhasbeen reached, the IndependentConsultantmust issueaCertificateof
Completionandprovideadviceofanyminordefects remainingoutstanding. If the IndependentConsultantdoesnot
considerthatcompletionhasbeenachieved,he/shemustpromptlynotifytheProjectProponentandthegovernment;
CertificateofCompletionwillnotofitselfbeevidencethatanyworkshavebeencarriedoutinaccordancewiththePPP
Contract.
5.6.1 Failure to meet Completion
AnEventofDefault(allowingtheProjectProponentacureperiod)willoccurif:
1. TheProjectProponentfailstoreachcompletionbythedateforcompletion;or
2. AnICconsiders(onorafteraspecifiedperiodafterthesiteismadeavailabletotheProjectProponent)thatthereis
noreasonableprospectthattheProjectProponentwillachievecompletionbythedateforcompletion.
Further,ifthefacilitydoesnotbecomeavailablebytheLongstopDate2,andiftheIndependentConsultantdetermines(on
orafteraspecifiedperiodafterthesiteismadeavailabletotheProjectProponent)thatthereisnoreasonableprospect
thattheProjectProponentwillachievecompletionbytheLongstopDate,thiswillconstituteaDefaultTerminationEvent.
5.6.2 Minor Defects
Completionisnotachieved(andpaymentoftheservicefeedoesnotcommence)untilallidentifieddefectshavebeen
2LongstopdateisthatdatebywhichtimetheIAcanissueaNoticeofTerminationduringtheconstructionperiodforfailuretocompleteconstruction.ItisthedatespecifiedinthecontractwhenconstructionmustbecompletedordefaultoccursandaTerminationNoticecanbeissued.
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rectified.Theonlyexceptionsareminorpunchlistomissionsordefectswhichindividually,orinaggregate,donotprevent
thefacilityfrombeingusedforitsintendedpurposes.Althoughtheycannotbeimmediatelyrectified,rectificationcan
beachievedwithinanagreedperiodfollowingcommencementofoperationswithouthavinganadverseeffectonthe
facility.
WheretheProjectProponentfailstorectifythesedefects,thegovernmentmayeitherdirectrectificationbytheProject
Proponent(inwhichcaseafurtherdefectsliabilityperiodwillapplytosuchdefect),ormayitselfrectify(orhaveathird
partyrectify)suchdefectsattheProjectProponent’scost.SuchamountshallbeadebtdueandpayablebytheProject
Proponenttothegovernment.Thegovernmentmaysetoffsuchamountsagainstamountsowingtoitormakeademand
forsuchamountunderanyperformancebondprovidedinrespectoftheproject.
5.7 Protection against Late or Insufficient Service Delivery including Failure to meet Performance Standards
AspartoftheriskallocationthatoccursinaPPPtransaction,theProjectProponenthasanobligationtoperformagainst
thePPPContract.Toensuretheperformanceobligationsaremet,severalmechanismsareusuallyputintoplaceunderthe
PPPContract.Inprinciple,wherenon-paymentoftheservicefeeisinsufficienttocompensategovernmentforcostsand
lossesincurredasaresultoflateorinsufficientdeliveryofthefacilityorservices,thegovernmentwillrequireadditional
protectionfromtheProjectProponentsuchasliquidateddamages,performancebondsorparentguarantees.
5.7.1 Liquidated damages
Thegovernmentmayseekthepaymentof liquidateddamages(orKPIcharges)fordelayindeliveryofthefacilityand
complianceshortfall in theMPSSand/orKeyPerformance Indicators (KPIs). It isprovidedbyPhilippine lawthat those
whointheperformanceoftheirobligationsincurdelayorwhoinanymannercontravenethetenorthereofareliablefor
damages.3
Exceptasprovidedbylaworbystipulation,thegovernmentmayseekactualorcompensatorydamages,whichmeans
adequatecompensationonlyforsuchmonetarylosssufferedanddulyproved.4
Incasesofbreachofcontract,wherethepartyindefaultactedinliabilityforactualorcompensatorydamages,liquidated
damagesshallbelimitedtothosethatarethenaturalandprobableconsequencesofthebreachoftheobligation,and
whichthepartieshaveforeseenorcouldhavereasonablyforeseenatthetimetheobligationwasconstituted.5
UnderPhilippinelaw,liquidateddamagesarethoseagreeduponbythepartiestoacontracttobepaidincaseofbreach
thereof.6TheRevisedIRRoftheBOTLawprovidesthatwheretheProjectProponentfailstosatisfactorilycompletethe
workonorbefore completiondate, including any extensionorgraceperioddulygranted, ormeet theperformance
standardasprescribedinthecontract,wherePhilippinelawgoverns,theProjectProponentshallpaythegovernment
liquidateddamages,asspecifiedinthecontractasanindemnity.7
3NewCivilCodeofthePhilippines(CivilCode),Article1170.4CivilCode,Article2199.5CivilCode,Article2201.6CivilCode,Article2226.7RevisedIRRoftheBOTLaw,Section12.14
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AlthoughtheRevisedIRRoftheBOTLawindicatesthatitisnotapenalty,underPhilippinelaw,liquidateddamagesare
understoodtocoverpenaltyorindemnity.8
a. Rate of liquidated damages
Duringtheconstructionperiod–Theamountof liquidateddamagesdue foreverycalendardayofdelaybeyondthe
completiondatewillbedeterminedbytheIAbasedonaformulastipulatedinthecontract.
Duringtheoperationperiod–Theamountofliquidateddamages,whichwillbedeterminedbytheIA,shallbebasedon
theprincipleoffaircompensationfordamageswhichitwillsustainasaresultoftheProjectProponent’sfailuretomeet
itsobligations.9
Decided cases indicate that liquidated damages, whether intended as an indemnity or a penalty, shall be equitably
reducediftheyareunconscionable(i.e.,soharshsoastobecontrarytogoodintent).
b. Operation of Liquidated Damages as a Remedy
IftheProjectProponentfailstosatisfactorilycompletetheworkonorbeforecompletiondate,includinganyextension
orgraceperioddulygranted,ormeet theoperatingperformance standardasprescribed in the contract, theProject
ProponentshallpaytheAgency/LGUconcernedliquidateddamages,asspecifiedinthecontractasanindemnityandnot
bywayofpenalty.10ThisisnotasoleremedyandtheIAisabletotorescindthecontract.
c. Security for liquidated damages
GovernmentgenerallyrequirestheProjectProponentorcontractortoprovidesecurityforliquidateddamagesthrough
bonds or guarantees. The Revised IRR of the BOT Law requires the Project Proponent to post separate performance
guarantees for constructionworks and for operations. Theperformance securitymaybe forfeited to answer for any
liquidateddamages.
5.7.2 Performance bonds
a. During the construction phase and defects liability period
Section12.8oftheRevisedIRRoftheBOTLawrequirestheProjectProponentasoneofitsobligationsunderthecontract,
topostaperformanceguaranteeinfavoroftheIA.TheIAshalldeterminetheformofperformancesecurityitwillrequire
whichmaybe in cash,bankdraft orguarantee confirmedby a localbank (in the caseof foreignbiddersbondedby
a foreignbank), letterofcredit issuedbya reputablebank, suretybondcallableondemand issuedby theGSISorby
suretyorinsurancecompaniesdulyaccreditedbytheOfficeoftheInsuranceCommissioner,oracombinationthereof,in
accordancewiththefollowing:
• Cash,irrevocableletterofcredit,bankdraft-aminimumoftwopercent(2%)ofthetotalProjectCost.
• BankGuarantee-aminimumoffivepercent(5%)ofthetotalProjectCost.
• SuretyBond-aminimumoftenpercent(10%)ofthetotalProjectCost.
Theamountofthebondmaybereducedfollowingcompletion(byanamountwhichappropriatelyreflectsthefactthat
theprojecthasmovedbeyondtheperiodwiththegreatestlevelofconstructionrisk).However,thebondwillremainfor
8CivilCode,Article2227.9RevisedIRRoftheBOTLaw,Section12.14.10Ibid.
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aspecifiedperiodaftercompletion(atareducedamount)tosecuretheProjectProponent’sperformanceofitsdefects
rectificationobligations.
Therequiredformofthebondwillbesetout inanappendixtothePPPcontractandmustnotbeamendedwithout
government’sapproval(suchapprovalnottobeunreasonablywithheld).
b. During the operation period
TheuseofPerformanceBonds(PerformanceSecurityforOperations)forPPPcontracts inthePhilippinesisdetailedin
theRevised IRRof theBOTLawatSection12.9. It is the roleof the IA todecide if theProjectProponent shallposta
performancesecuritytoguaranteetheproperoperationoftheprojectinaccordancewiththecontract.Inthisregardit
isalsousefultolookatinternationalpractice,particularlycircumstancesunderwhichperformancesecuritymaynotbe
required(discussedinBox5.1)andalsoontheuseofguaranteesfromtheparentcompanyoftheProjectProponent(Box
5.2)
Box 2.1 Non-Requirement of Performance Security Insomecountries,performancesecuritymightnotbenecessaryforthefollowingcircumstances:
• ThecomfortthatthegovernmentrequiresfortheproponenttodeliveritsContractedServiceswillgenerallybeprovidedbytheabatementregime,thegovernment’sterminationandstep-inrightsondefaultandthefactthatanyamountofcompensationonterminationwillbereducedbythecosttothegovernmentofremedyingdefectsand/orappointinganewcontractorandcollateralwarranties.However,wherethegovernmenthasconcernsastothecreditworthinessoftheoperationalsubcontractors,ortheirabilitytoperformtheirobligations,itmayrequiretheproponenttoprocureaperformancebondorparentcompanyguaranteeinrespectoftheoperatingsubcontractor’sobligations(orboth).
• Alternatively,althoughthegovernmentmaynotrequireperformancebondsorparentcompanyguaranteesatprojectcommencement,itmayreservetherighttorequirethatsuchbondsorguaranteesbeprovidedatanytimeduringtheoperatingtermwhenarepeatedorsevereservicedeliveryfailureoccurs.
• Wherethegovernmentreliesonthesubcontractor’sperformancebond,itmayrequirethefinanciers’directagreementtoenablethegovernmenttoclaimunderthebondtorectifyanydefaultbytheconstructionsubcontractor,totheextentthattheproponentorthesecuritytrustee(onbehalfofthefinanciers)failstorectifythedefault.Government’sabilitytoclaimwillbesubjecttothefinanciers’righttoaccessthebond.
Box 2.2 Parent GuaranteesParentGuaranteesarenotnormallysoughtinthePhilippinesthroughtheConcessionContract.Theguaranteesthataresoughtaregenerallythroughperformancebondsestablishedfortheconstructionandoperationphaseoftheconcessionperiod.
Inothercountries:
1. Governmentgenerallyseeksperformanceguaranteesfromtheparentcompaniesoftheproponentand/orofthematerialsubcontractors.However,thisdependsonwhetherthecommitmentofaparentcompanyisanimportantelementintheselectionoftheproponentoramaterialsubcontractor.
2. Generally,governmentprefersthatperformancebonds(whetherbankguaranteesorinsurancebonds)begivenbythecontractorandsubcontractors(infavoroftheproponent)asthisismorerobust.
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5.8 Performance Monitoring System
5.8.1 Requirement for audit
The IA isempoweredto requireanauditofanyperformancedata for,or resulting from, theperformancemonitoring
system(PMS)atanytimeuptosixmonthsaftertheendofthetermoftheproject.
5.8.2 Who will conduct the audit?
Theauditwill be conductedby an independentexpert appointedby the IAon termsand conditionsdeterminedby
government.
5.8.3 Who will pay for the audit?
The IAwillpay for thecostof theaudit.However, if anaudit identifies incorrect informationprovidedby theProject
Proponentthataffectstheservicefee,thelattermustpayforthecostoftheaudit.
5.8.4 Inaccurate PMS or performance data
Iftheauditor’swrittenreportshowsaninaccuracy,incorrectnessorincompletenessinthePMSoranyperformancedata
for,orresultingfrom,thePMS,thentheProjectProponentmust:
1. Correctandre-issuetheaffectedreportordataandtakestepstoremedythefaultinitsmonitoring,measuringand
reportingsystem;and
2. Iftheerrorhasaffectedtheamountofaservicefee,maketheappropriateadjustmentfromthenextscheduled
servicefee,or, ifthereisnofurtherservicefeescheduled,theamountwillbeadebtdueandpayablefromthe
ProjectProponenttothegovernment.
5.8.5 Fraudulent or false, misleading or negligent reporting
Ifanyfraudorfalse,misleadingordeceptivereportingisdisclosedintheauditor’sreport,thiswillconstituteanEventof
DefaultpotentiallyleadingtoterminationofthePPPcontract.
5.9 Force Majeure Events
These are events whichmay excuse parties from performance of the obligation, to the extent such performance is
hindered,delayed,orpreventedbyfactors fromacauseoutsidethereasonablecontroloftheparties.Thepurposeof
forcemajeureprovisionsistogivetheaffectedpartyrelieffromliabilityand,iftheeventcontinuesforacertainperiod,to
givethepartiesanopportunitytoterminatethePPPcontract.
ThereisalegaldefinitionforforcemajeurebasedonthePhilippineCivilCode,11butforpurposesofdrafting,thedefinition
offorcemajeureeventsshouldonlyincludeeventswhicharelikelytohaveacatastrophiceffectoneitherparty’sabilityto
fulfilltheobligationsunderthePPPcontract.Asneitherpartyislikelytobeinabetterpositionthantheothertomanage
theoccurrenceand theeffectsof forcemajeure,and theeventsmaycontinue fora longperiodof time thefinancial
consequencesaresharedinaccordancewiththemechanismprovidedinthecontract.12
11Definitionofthetermisprovidedindecidedcases.12ForceMajeureasasometimes‘difficultclause’isfurtherdiscussedinVolume3,Chapter12.
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5.9.1 Causes of Force Majeure
Causesofforcemajeureevents,thatmateriallyimpairtheimplementationofthePPPcontract,mayincludebutarenot
limitedto:
1. Anywar,whetherornotdeclared;
2. Hostilities,embargo,revolution,insurrection,riots,nationalstrikesorotherpublicdisorder,
3. Exportor import restrictions,closingofharbors,docks,canalsorotherassistance tooradjunctsof shippingor
navigation;
4. Rationing,allocation,whetherimposedbylaw,decreeorregulation,orbycomplianceofindustryattheinsistence
ofthegovernment;
5. Fire,flood,drought,earthquake,volcaniceruption,storm,tsunamiorothernaturaldisaster;
6. Aircrash;
7. Hazardousmaterials,unexplodedordnance,nuclearcontamination;
8. Epidemic,quarantine.
5.10 Force Majeure Qualification Requirements
5.10.1 Acts of Project Proponent
Inorderthataforcemajeureeventmayexemptapartyfromliability,itisnecessarythatthepartybefreefromanyprevious
negligenceormisconductbyreasonofwhichthelossmayhavebeenoccasioned.AnactofGodcannotbeinvokedforthe
protectionofapartywhichhasbeenguiltyofgrossnegligenceinnottryingtoforestallitspossibleadverseconsequences.
Whenaparty’snegligenceconcurswithanactofGodinproducingdamageorinjurytoanother,suchpartyisnotexempt
fromliabilitybyshowingthattheimmediateorproximatecauseofthedamageorinjurywasafortuitousevent.When
theeffectisfoundtobepartlytheresultoftheparticipationofman—whetheritbefromactiveintervention,orneglect,
orfailuretoact—thewholeoccurrenceistherebyhumanized,andremovedfromtherulesapplicabletoactsofGod.13
Further, theProject Proponentwill notbegranted relief from thoseobligationsgovernmentwouldordinarily expect
theProjectProponenttocomplywithduringaforcemajeureevent(i.e.,anyobligationtoreinstateortoprovidecertain
criticalfacilitymanagementserviceswhichthegovernmentwouldordinarilyexpecttobeprovidedduringsuchevents).
5.10.2 Notification
TheProjectProponentmustnotify thegovernmentwithina specified timeof theoccurrenceandeffectof theForce
Majeure Event and of the Project Proponent’s intention to claim. The Project Proponent must submit a claim to
governmentprovidingfulldetailsofthereliefclaimedstrictlyinaccordancewithspecifiedproceduresinthePPPContract
andaseparateplanaimedatmitigatingtheeffects.
IftheProjectProponentdoesnotnotifygovernmentoftheForceMajeureEventwithinthespecifiedtime,theProject
Proponentwillbebarredfrommakinganyclaiminrespectofthatforcemajeureevent.
TheProjectProponentmustcontinuetoupdategovernmentatspecifiedintervalsforthedurationoftheforcemajeure
eventandmustnotifythegovernmentimmediatelyafteritsobligationsceasetobeaffectedbythesame.13CivilCode,Article1174.
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5.11 Force Majeure during Design and Construction PhaseIftheforcemajeureeventoccursduringthedesignandconstructionphase,itmustcauseadelaytocompletion,i.e.,a
delayinanyactivityontheactualcriticalpathoftheproject.
Provided theProject Proponenthas compliedwith its obligations for claiming relief for the forcemajeure event, the
dateforcompletionwillbeextendedbythenumberofdaysbywhichcompletionwillbedelayedasaresultoftheforce
majeureevent.
GovernmentmayalsoexcusetheProjectProponentfromanyotherobligationsasisreasonablegiventhenatureofthe
forcemajeureevent.
InPPPcontracts,thepartyprovidingnoticeoftheforcemajeureeventhastheburdenofprovingthesame,includingthe
provisionofmitigatingmeasures.
5.12 Force Majeure during Operating Term
5.12.1 Project Proponent Entitlement from Force Majeure Event
If a forcemajeure event occurs during the operating term, reliefwill only be granted to the extent that the Project
Proponentcandemonstratetogovernment’sreasonablesatisfactionthatitispreventedfromprovidingthecontracted
servicesasadirectresultoftheforcemajeureeventandisotherwisecomplyingwithitscontractualobligations.
TotheextenttheforcemajeureeventaffectstheProjectProponent’sabilitytodeliverthecontractedservices(andother
thresholdrequirementsaremet),theProjectProponent’sobligationtodelivertheaffectedcontractedserviceswillbe
suspendedandnodefaultnoticemaybegiveninrespectofsuchinterruptionofservice,unlesstheforcemajeureevent
persistsforaperiodoftimethatgivesrisetocontractterminationwithoutdefault.
5.12.2 Alternative Service arrangements
DuringthesuspensionoftheProjectProponent’sobligationsthegovernmentmaymakealternativearrangementsforthe
deliveryofthecontractedservices.Theallocationofrisksassociatedwiththedeliveryofanyalternativearrangementswill
bedeterminedonaproject-specificbasisdependingonthenatureoftheadditionalservicesandtheirinterfacewiththe
existingcontractedservicesandthenatureoftheeventleadingtothesuspension.
5.13 Mitigation of Force Majeure Effects
TheProjectProponentmusttakeallproperandreasonablestepsandusereasonableendeavorstoprovidetemporary
measuresduringanyperiodofsuspension.TheProjectProponentmustalsorepair,replaceorimproveaffectedassetsto
returntheprojecttooperationassoonaspossible.
The insurance provisions of a PPP contractmay apply to forcemajeure events. As an example, theDaangHari Toll
ConcessionContractprovides:“Allinsuranceproceedsreceivedbyorpayableunderanyinsurancepolicycoveringforce
majeureshallbeutilizedtorepairorreconstructtheDaangHari-SLEXLinkRoad.Theconcessionaireshallberesponsible
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foranyrepairsorreconstructiontotheDaangHari-SLEXLinkRoadcausedbytheforcemajeureeventassoonaspossible”.
If insurance is inadequate to cover force majeure damages, then an additional option is to introduce a restitution
mechanismsuchasa ‘FMShortfall’provisiontosharethecostsbetweenthegovernmentandtheconcessionaire.The
DaangHariTollRoadmakesprovisionforanoccurrenceofthiskind:
“……..if the Concessionaire serves notice to the DPWH that the insurance proceeds received or to be
receivedorpayablebyreasonofanysuchdamagewillbeinsufficienttocoverthecostsoftherequired
reconstructionofrepairworkonthedamagetotheDaangHari-SLEXLinkRoad,theConcessionaireand
DPWHshallmeettodiscusshowtheConcessionairecanbecompensatedforthedifferencebetweenthese
costsandtheinsuranceproceedsreceivedortobereceived(the“FMShortfallAmount”).”
5.14 Effect on Government’s Step-In Rights
TheProjectProponent’srighttoreliefarisingfromaforcemajeureeventdoesnotaffectgovernment’sstep-inrights.In
otherwords,thegovernmentmaystep-inandoperatetheassetsduringaforcemajeureevent.
5.15 Termination Event for Force Majeure
Assoonaspracticablefollowingtheforcemajeureevent,thegovernmentandtheProjectProponentmustconsultwith
eachotherandusereasonableendeavorstoagreeuponappropriatetermstomitigatetheeffectsoftheforcemajeure
eventandfacilitatecontinuedperformanceofthePPPcontract.
IftheProjectProponentandgovernmentareunabletoagreeuponappropriatetermstomitigatetheeffectoftheforce
majeure event and facilitate the continued performance of the PPP contractwithin a specified period and the force
majeureevent(orthereliefeventgivingrisetotheforcemajeureevent)iscontinuingoritsconsequencesremainsuch
thattheaffectedpartyhasbeenorisunabletocomplywithalloramaterialpartofitsobligationsunderthePPPcontract
foraperiodofmorethanaspecifiedperiod,thenthiswillbea“ForceMajeureTerminationEvent”subjecttotheprovisions
ofthePPPcontract(terminationpaymentclause).
5.16 Material Adverse Government Action
Materialadversegovernmentactionmeansanynationalgovernmentagencyactionwhichhasamaterialadverseeffect
onanyoftherightsandprivilegesof,orontheenjoymentand/orexercisethereofby,theProjectProponentunderthis
concessioncontract,orwhichhasamaterialadverseeffectontheconstructionscheduleortheProjectProponent’sability
tocomplywithitsfinancialand/orothercontractualobligations,andmayincludebutisnotlimitedtoanyofthefollowing:
1. achangeinlaw;
2. thediscriminatoryimpositionofanynewnationalorlocaltax,orchangeinmaximumrateofanynationalorlocal
tax.
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5.17 Threshold for Compensation for Material Adverse Government Action
5.17.1 Notification of Material Adverse Government Action
1. TheProjectProponentmustnotify thegovernmentwithinaspecifiedtimeof theoccurrenceandeffectof the
Material Adverse Government Action (MAGA) and of the Project Proponent’s intention to claim. The Project
Proponentmust submit a claim to government providing full details of the compensation claimed strictly in
accordancewithspecifiedprocedures.
2. IftheProjectProponentdoesnotnotifygovernmentoftheMAGAwithinthespecifiedtime,theProjectProponent
willbebarredfrommakinganyclaimforsame.
5.17.2 Recovery of costs and losses
TheProjectProponentwillbeentitledtoclaimcompensationinaccordancewiththeprovisionofthePPPcontract.Where
MAGAoccursduringthedesignandconstructionphase,theProjectProponentisnormallyentitledtoanextensionoftime
only.IfMAGAoccursduringtheoperationandmaintenanceperiodtheProjectProponentisentitledtocompensation
equaltotheadditionalcostsincurredand/orlossofrevenue.
TheProjectProponentmusttakeallproperandreasonablestepstominimizethedurationandimpactofaMAGA.
5.18 Circumstances of Step-In: Government and Lenders
5.18.1 Circumstances of Government Step-in
Governmentmayassumeallorsomeof theservicedeliveryobligationsof theProjectProponent foraperiodof time
where:
1. Theproject(a)islikelytobeaseriousrisktotheenvironment,arisktothehealthorsafetyoftheusersofthefacility
orothermembersofthepublic,arisktothestructuralintegrityorsafetyofanypartsoftheworksorthefacility,
oraseriousriskofmaterialdamagetopublicorprivatepropertyorotherspecifiedemergency;or(b)requiresthe
governmenttotakeimmediateactiontodischargeorexerciseastatutorydutyorpower.Wheretheservicebeing
providedisanessentialservice,thegovernmentmaybegivenstep-inrightstoguaranteethecontinuityofthat
essentialservice.
2. Therehasbeenadefaultterminationevent.
5.18.2 Extent of rights in a Lender Step-in situation
1. The step-in rights which are contained in the PPP contract are assigned to the lender, who by virtue of this
assignmentthenassumestheserights.Beforeitstepsin,however,itmustadvisethegovernmentthatitintends
todoso.Besidesthisobligation,theremaybeotherrequirementsassociatedwiththelender’sstep-inrights,but
thesewouldbesetforthintheDirectAgreement,anagreementthatlaysouttherightsoflendersinrespectofthe
facilitytheyarefinancing,particularlytherightsofstep-in.
2. Howeverthegovernmentmayelectto:
a. takeoverthefacility,temporarilyassumetotalorpartialpossession,managementandcontrolofthefacilityand
theprovisionoftheservices;and
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b. takesuchotherstepsnecessaryordesirabletocontinuetheprovisionoftheservicesandtominimizetherisk
totheenvironment,thepublicorusersofthefacility,orofmaterialdamagetopublicorprivateproperty.
3. Ininternationaljurisdictions,asanalternativetoexercisingitsstep-inrights,insomecircumstances,thegovernment
mayrequiretheProjectProponentto:
a. immediatelyperformanycontractedserviceinrespectofwhichtheProjectProponentisinbreachwherethe
step-inrightsareexercisedduetoaneventofdefaultordefaultterminationevent;
b. doallthatitcantoprocureadditionaloralternativecontractedservices;or
c. suspendperformanceofthecontractedservicestoensurethattheeventisdealtwithandnormaloperationof
thefacilityresumesassoonasisreasonablypracticable.
4. Suchrightsareinadditiontothestep-inrightslistedabove,butshouldgenerallybetreatedanalogouslytostep-in
rightsunderthePPPcontract.
5.18.3 Assistance by Project Proponent
TheProjectProponentmustassistgovernmentwheneverandhoweverpossibletoexerciseitsstep-inrights.
5.18.4 Government Obligations
1. Governmentisnotobligedtoremedyorcureanybreachorterminationeventtoovercomeormitigateanyriskor
consequencesinrespectofwhichitexercisesstep-inrights.
2. Whenexercisingitsstep-inrights,thegovernmentmustexerciseallreasonableeffortstooperatethefacilityand
deliverthecontractedservicesinaccordancewiththePPPcontract.Whatisreasonableunderthecircumstances
willbedeterminedinthelightofthereasonforthegovernmentstepping-in.
5.18.5 Project Proponent’s rights and obligations suspended
TheProjectProponent’srightsandobligationsunderthePPPcontractaresuspendedtotheextentnecessarytopermit
governmenttoexerciseitsstep-inrights.
5.18.6 Power of Attorney
TheProjectProponentirrevocablyappointsgovernment(anditsnominees)asitsattorneywithfullpowertoexerciseits
step-inrights.ThepowerofattorneywillbeinthesecuritygrantedbytheProjectProponentinfavorofgovernment.The
securitywillsecuretheexerciseofthestep-inrightsandassociatedcosts.
5.19 Cost of Step-in
Whilegovernmenthasstepped-in,itmustcontinuetopaythefullservicefeereducedbythefollowingamounts:
1. Where thegovernmenthasstepped inasa resultofaneventofdefaultordefault terminationevent (without
doublecounting):
a. Thegovernment’sreasonableestimateofthecostsnotincurredbytheProjectProponentasaresultofnon-
provisionofthecontractedservices;and
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b. Thecostsincurredbythegovernmentinexercisingthatstep-inright,includingallreasonableandpropercosts
itincurredindeliveringtheaffectedservices(whetherdirectlyorthroughareplacementsubcontractor).
2. If theaggregateamount tobededucted isgreater than the service fee, thedifferencewillbeadebtdueand
payablefromtheProjectProponenttothegovernment;and
3. Where thegovernmenthas stepped inasa resultofanyother triggeringevent, theProjectProponentwillbe
entitledtocompensation.However,thegovernment’spaymentwillbereducedbytheoperatingorothercosts
whichwillnotbeincurredbytheProjectProponentasaresultoftheexerciseofthegovernment’sstep-inrights.
Volume3,Chapter12,citesanexampleofabest-practicestep-inrightclauseinaPPPcontract.
5.20 Liability or Limitation on Government’s Rights
5.20.1 Liability
ThegovernmentwillhavenoliabilitytotheProjectProponentandtheProjectProponentwillnotbeentitledtomake
anyclaimarisingoutofor in connectionwith theexerciseof step-in rightsunless thegovernmenthasactedgrossly
negligently(inrelationtoemergencystep-inonly),fraudulentlyorinbadfaithintheexerciseofthoserights.
5.20.2 Limitation on existing rights
Theexerciseofstep-inrightsdoesnotlimitanyotherrightofgovernmentunderthePPPContract,includingrightsarising
pursuanttoaneventofdefaultanddefaultterminationevent.
5.21 Stepping-Out
Thegovernmentmayceasetoexerciseitsstep-inrightsatanytime.ItmustgivetheProjectProponentreasonablewritten
noticeof its intenttocompleteorceasethestep-inandshallcomplete,orceasethestep-in, inaccordancewithsuch
writtennotice.
Thegovernmentmustceaseexercisingitsstep-inrightsunderthefollowingcircumstances:
1. Thegovernmenthasexerciseditsstep-inrightsasaresultofaneventofdefaultordefaultterminationevent,as
soonastheeventofdefaultordefaultterminationeventisremediedorgovernmentceasestopursuearemedy;or
2. Thegovernmenthasexerciseditsstep-inrightsasaresultofanyothertriggeringevent,therelevantmaterialrisk
isaverted,overcome,ormitigatedtogovernment’ssatisfaction,orthestatutorydutyhasbeenperformed.
Thegovernmentwillnotbeobligedtoceaseexercisingitsstep-inrightsinrespectofaparticularstep-ineventif,priorto
thedateuponwhichitwouldotherwisehavebeenrequiredtostep-out(inrespectofthatevent),thereoccursanother
step-inevententitlinggovernmenttostep-in.
Whenthegovernmentceasestoexerciseitsstep-inrights(subjecttogovernmentnothavingterminatedthePPPcontract)
theProjectProponentmustimmediatelyrecommenceperformanceofthesuspendedobligations;andthegovernment
will,atthecostandexpenseoftheProjectProponent,givereasonableassistancetoensureasmoothtransition.
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5.22 Insurance
Aspartof the riskallocationarrangements, insurance is a keyaspectof riskmanagement that theProjectProponent
needstoundertakeandmanage.ItisrequiredbyGovernmenttoensurethattheProjectProponentiscapableofmaking
paymentsandeffectingrepairsfrominsurableevents.Thisisacriticalaspectofcontinuingtodeliverservicessetoutin
theConcessionContract. Asaguidingprinciple,theProjectProponentmustobtainandmaintainformsofinsurances
infullforceandeffect(andonsuchterms)forthetypeoffacilityfromwhichthecoreservicesandcontractedservices
aredelivered,and/orinsurancesrequiredbylawandofakindonnolessfavorabletermsthantheminimuminsurance
requirementsspecifiedinthePPPcontract
5.22.1 Insurance generally
TheProject Proponentmust, at its own cost, effect andmaintain such insurances throughout the contract termas a
prudentownerorserviceproviderwouldobtainandmaintainforthefacility,theinsurancesandthetermsforinsurances
specifiedinthePPPcontract.
The Project Proponentmust also ensure that it and its subcontractors effect andmaintain appropriate insurances in
accordancewithgoodindustrypracticeandataprudent levelofcover,havingregardtothenatureandscopeofthe
serviceseachsubcontractoristoprovide.Levelsofcovershouldbelinkedtotherateofinflation,suchthattheamountof
insuranceincreasesovertime.
Insurancerequirementswillreflectthedegreeofrisktransfer,theabilityoftheProjectProponenttopaypremiums(relative
tothesizeoftherisk),valueformoneyconsiderationsandthespecificsoftheparticularprojectinquestion.Examplesof
requiredinsurancesduringboththeconstructionandoperatingperiodsincludeconstructionall-risksinsurance,workers
compensation insurance, property/material damage insurance, public/products liability insurance andmotor vehicle
insurance.
Incertaininstances,insurancesmaybeeffectedbymeansoftheProjectProponent’sexistinggroupinsurancepolicies,withappropriatecaretakenthattheseareextendedtoadequatelycovertherequiredprojectrisksonanindividualand
aggregatebasis.
5.22.2 Proof of insurance
By financial close, the Project Proponent must have provided the government with evidence from its insurers thatthe construction phase insurances are in effect. Throughout the contract term, the Project Proponentmust providegovernmentwithcopiesof insurancepolicies, certificatesofcurrency, renewalcertificatesandanyendorsementslipsinrelationtoallrequiredinsurances.Wherethegovernmentisnotrequiredtobeaninsuredunderthepolicy,andtheactualpolicycopiescannotbeprovided(duetocommercialconfidentiality),appropriatelywordedcertificatesconfirmingexpresslyalloftheinsurancetermsandconditions,assetoutinthePPPcontract,mustbeprovidedfromtheinsurerorinsurancebroker.
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5.22.3 Reputable insurer
Theinsurancesaretobeeffectedandmaintainedatalltimeswithreputableinsurersapprovedbygovernmentandon
conditionsrequiredbygovernment.
WhendeterminingwhethertoaccepttheinsurancesproposedbytheProjectProponentandwhatconditionsitmayseek
toimpose,thegovernmentmustconsider:
1. therating(ifany)oftheproposedinsurer;
2. thecontractingentityoftheproposedinsurerandtheirrelationshiptotheultimateunderwriter;
3. theproposedinsurer’sexposuretootherprojectsofasimilarnatureintherelevantjurisdiction;and
4. suchothermattersasthegovernmentconsidersrelevantinthecircumstances.
5.22.4 Amendments
Theapprovedinsurancesarenottobemateriallychanged(including,withoutlimitation,thescopeofcover,limits/sub
limitstoliabilityanddeductiblelevels)withoutthegovernment’spriorconsent(whichisnottobeunreasonablywithheld).
Indeterminingwhetherandonwhatbasistoprovideitsconsent,thegovernmentwillconsidertheproposedchanges
inthelightofmarketconditionsatthetime,theimpactofthechangesontheprojectriskprofileandvalueformoney
considerationsgenerally.
TheProjectProponentmustindemnifythegovernmentforitsreasonablelegalandothercosts(ifany)associatedwith
determiningwhetherornottoconsenttoanyrequestedchange.
5.22.5 Government may effect insurance policies
If theProjectProponent fails toeffectormaintain the required insurances,governmentmayeffect andmaintain the
relevantinsuranceandpaythepremiumsforthatinsurance.Anyamountpaidbygovernmentwillbeadebtdueand
payablefromtheProjectProponentandmaybedeductedfromamountsowingtotheProjectProponentunderthePPP
contract.
5.22.6 Terms of insurance
Allrequiredinsurancepoliciesmust,ataminimum,include:
1. abreachofconditionorwarranty/severability/non-vitiationprovisionacceptabletothegovernment;
2. aprovisionrequiringatleast30-days’noticetobegiventothegovernmentpriortocancellationoramendment;
and
3. wherethegovernmentisaninsuredunderthepolicy:
a. aprovisionrequiringthepolicytooperateasifeachwasaseparatepolicyofinsurancecoveringeachinsured
party;
b. failurebyanyinsuredtoobserveandfulfillthetermsofthepolicyortocomplywiththedutyofdisclosuredoes
notprejudicetheinsuranceofanyotherinsured;
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c. awaiverofsubrogationagainstanyoftheinsuredparties;and
d. noticeofaclaimbyanyinsuredwillbeacceptedbytheinsurerasnoticebyallinsured.
5.22.7 Government as insured under Project Proponent insurance
GovernmentshallbeanadditionalnamedinsuredpartyunderthepoliciesprocuredbytheProjectProponent,savein
respectofthosepoliciesunderwhichtypicallyonlytheProjectProponentoritsrelevantsubcontractorscanbeinsured,
suchasprofessionalindemnityinsurance.
Theextentofgovernment’s rights and interests in respectof specific insurancepolicies, suchaspublic andproducts
liabilityinsuranceandworkers’compensationinsurance,willbedetailedinthePPPcontract.Theactualtermsinwhich
government’sinterestissetoutinthepoliciesareveryimportant,asthewordsusedwilldefinetheextenttowhichcover
isextendedandthusthecircumstancesunderwhichgovernmentcanclaimontheinsurance.
5.22.8 Settlement of claims
Uponsettlementofaclaimforanyotherpropertylossordamageunderanyrequiredinsurance,wheregovernmentdid
nothavean insurable interest, theProjectProponentmustpass through togovernment thebenefitof the insurance
wheregovernmenthassufferedalossforwhichgovernmenthasbeenindemnifiedbytheProjectProponentunderthe
PPPcontract.
5.23 Default
It is normal for contracts to have clear provisions on defaults and the impact of defaults in delivering contractual
obligations. A PPP contract is no different to a normal commercial contract in that defaults should be built into the
contractingarrangement.Inprinciple,thePPPcontractwillcategorizecertaindefaultsandotherconductoftheProject
Proponent,oritssubcontractors,tobe:
(a)an‘eventofdefault’;or
(b)a‘defaultterminationevent’.
ThetypeofeventwilldeterminetheremediesavailabletogovernmentandtheopportunitygiventotheProjectProponent
tocurethedefaultbeforegovernmentcanexerciseitsremedies.
5.23.1 Events of Default
Aneventofdefaultgivesrisetovariousgovernmentremedies.However,itdoesnotofitselfgiverisetoanautomaticright
oftermination.
1. Aneventofdefaultmayoccurif:
a. thereisaseriousservicefailure;
b. duringthecontracttermarepresentationorwarrantygivenbytheProjectProponenttogovernmentprovesto
beuntrue;
c. duringthecontracttermthereisfraud,collusive,misleadingordeceptiveconductonthepartoftheProject
Proponentoritssubcontractorsintheperformanceoftheprojectoranypartofit(includinginrespectofreporting
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in the formoffinancial andpayment statementsand invoicesorotherbooksand recordsor in respectof the
masterworksprogramandsub-programs).Thisalsoincludesfraudorbreachingthelawinregardtoawardingthe
contract;
d. there isanyotherbreachby theProjectProponentof itsobligations in thePPPcontractorother specified
contractswithgovernment(althoughthiswillonlybeaneventofdefault ifthebreachhasnotbeenremedied
withinareasonableperiod,whichistraditionally,20businessdays);or
e. thereisanybreachofanyotherprojectcontract.
2. Inadditiontotheabove,governmentmayalsospecificallylistthefollowingeventsaseventsofdefault:
a. failuretoachievetechnicalcompletionbytheduedate;
b. the independent expert determines (following a reasonable period after financial close) that there is no
reasonableprospecttheProjectProponentwillachievetechnicalcompletionbytheduedate;
c. theworksnotbeingcommencedwithinsuchperiodafterfinancialclosewherethisislikelytohaveamaterial
adverseeffectontheabilityoftheProjectProponenttoachievecompletionbytheduedate;
d. abreachofthesub-contractorprovisions;
e. a failureby theProjectProponent to obtainconsent toor tocureanunauthorizedchange incontrolofa
relevantcompanyotherthantheProjectProponent(e.g.,amaterialsubcontractor)withinareasonabletime;
f. abreachbytheProjectProponentofitsassignmentobligations;
g. the Project Proponent failing to take out and maintain required insurances (subject to the uninsurability
provisions[seeinsuranceprovisionsinsection5.22above]);
h. wheretheProjectProponentassigns,transfersorotherwisedisposesofanyofitsrightsunderthePPPcontract
withouttheconsentofgovernment(otherthaninthepermittedcircumstancessetoutinthePPPcontract)or,
dependingonthenatureoftheproject,whereaspecifiedmajorsubcontractordisposesoftheir interest inthe
relevantsubcontract;or
i. the Project Proponent’s right to obtain finance or draw down funds under the finance agreements being
terminated,withdrawnorotherwisemateriallyrestricted.
5.23.2 Cure Periods and Remedies for Events of Default
ThegovernmentmaygiveadefaultnoticetotheProjectProponentspecifyingthataneventofdefaulthasoccurred.The
ProjectProponentisobligedtocurethedefaultwithinthespecifiedperiodintheNoticeofDefault;ifnot,thegovernment
mayaccordinglyexerciseitsrightstoissueaNoticeofTermination.
5.24 Termination Event
Asafollowondiscussionfromthedefaultprovisions,aterminationeventresultsfromacontractdefault.APPPcontract
needstoincludeclearterminationprovisionsandnotetheconsequencesofaterminationevent.Inprinciple,government
mayterminatethePPPContractontheoccurrenceofaDefaultTerminationEventoraForceMajeureTerminationEvent
ormayVoluntarilyTerminatethePPPContract,eachsubjecttopaymentofaTerminationPayment.
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5.24.1 Default Termination without cure
Subjecttothefinanciers’rightsunderthefunders’directagreement,ifadefaultterminationeventoccurs,thegovernment
hastherighttoterminatethePPPcontractwithoutanycureperiodbeinggiventotheProjectProponent.
5.24.2 What constitutes a Default Termination Event?
Thespecificeventsthatwillbecategorizedasdefaultterminationeventswillbedeterminedonaprojectbyprojectbasis
butwilltypicallyinclude:
1. theProjectProponentwhollyorsubstantiallyabandoningtheworks,thefacilityortheprovisionoftheservices,or
displayinganintentiontodoso;
2. aprojectdefault;
3. apersistentbreach;
4. theoccurrenceofanInsolvencyEventinrelationtotheProjectProponent;
5. the occurrence of an Insolvency Event in respect of anymember of the Project Proponent group, ormaterial
subcontractororanyguarantor,andthatmemberoftheProjectProponentgrouporguarantor isnotreplaced
withinaspecifiedperiodoftheInsolvencyEventbyapartywhichisreputable,solventandhastheresourcesand
experiencetoperformitsobligationsundertherelevantsub-contractsorguarantee(asapplicable);
6. abreachofthechangeofownership/controlprovisionsofthePPPcontractinrespectoftheProjectProponent;
7. completion not having occurred by the longstop date, or an IC reasonably forming the view that the Project
Proponentwillnotachievecompletionbythelongstopdate;
8. anIllegalityEventhasoccurred;
9. aspecifiedcaporaspecifiedpercentageofthecapbeingreachedinrespectofanyperformancebondsorparent
companyguaranteesprovidedtogovernmentasrequiredunderthePPPcontract,oranysuchbondorguarantee
ceasingtobevalidwithout,ineachcase,rectificationorreplacementwithinaspecifiedperiod;
10.thegovernmentdirectingtheProjectProponentnottoreinstateorrepairdamagewheretherelevantdamagewas
causedbyaProjectProponentdefault;
11.whereperformancepointsaccumulatedoverafixedperiod(i.e.duetoaseriesofservicefailures)exceedaspecified
level;and
12.theProjectProponentsufferingabatementsoveraspecifiednumberofconsecutivemonths,whichinvalueequate
toanamountwhichisatoraboveaspecifiedpercentageofthetotalservicesfee.
On certain projects the government may also include additional default termination events but only where this is
warrantedbytheuniquefeaturesoftherelevantProject.
5.25 Termination for Force Majeure and Uninsurability
5.25.1 Force Majeure Event
EitherpartymayterminatethePPPcontract:
1. foraforcemajeureeventthathasenduredforaspecifiedperiodandhasnotbeenextendedbymutualconsent;or
2. ifthegovernmentdirectstheProjectProponentnottoreinstateorrepairthedamagecausedbyaforcemajeure
event.
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5.25.2 Uninsurability Provisions
Thegovernment,atitssolediscretion,mayterminatethePPPcontractpursuanttotheuninsurabilityprovisions,referring
toeventsnotacceptabletooroutsidetheambitofeligiblecoverageofinsurancecompanies(forexample,civilunrest).
5.26 Voluntary Termination
In addition to default termination events and forcemajeure termination events, governmentmay at any time, in itssolediscretion,terminatethePPPcontractbygivingaspecifiedperiodofnotice(“voluntarytermination”). Wherethegovernmenthasdirected theProjectProponentnot to reinstateor repairdamage,and the relevantdamagewasnotcausedbyaforcemajeureeventorProjectProponentdefault,terminationofthePPPcontractbythegovernmentwillbe
treatedasavoluntarytermination.
5.27 Termination for Government Default
Governmentdefaultisaneventoftermination.Terminationpaymentsdependonwhetherthedefaultoccurredbeforeor
aftertheissueoftheCertificateofFinalCompletion.
5.28 Procedure for Termination Event
Following a default termination event, forcemajeure termination event or otherwise, the governmentmay elect to
terminatethePPPcontractbygivingnoticetotheProjectProponent.Terminationwilltakeeffectwithinaspecifiedtime
afterthedateofthenotice,orsuchearliertimeasspecifiedinthenotice.
5.29 Consequences of a Termination Event
Upontermination,theProjectProponentwillbeentitledtocompensationinaccordancewiththeprinciplessetoutunder
TerminationPayments,below.
TherightsandobligationsofthepartiestothePPPcontract(orotheragreementsthatmayberelevanttoincludehere,
suchasanyleasebetweentheProjectProponentandthegovernment)willceaseexceptfor:
1. anyaccruedrightsandobligations;and
2. anyrightsorobligationswhichareexpressedtocontinueaftertermination.
5.30 Termination Payments
Terminationprovisionsinanycontractanditsconsequencesmustbeclear.InPPPcontracts,terminationprovisionswilldependonthenatureandcomplexityoftheproject.Theycanalsochangedependingonthestageatwhichacontractisterminated,forexample,terminationatpre-constructioncanhaveadifferentimpactthanwhenterminationoccursduringconstructionorpostconstruction.Terminationprinciplesthereforeareestablishedtoallowforflexibility.Ingeneral,ontheearlyterminationofthePPPcontract,thegovernmentpaysaTerminationPaymenttotheProjectProponent.TheamountoftheTerminationPaymentisaffectedbytheunderlyingreasonsforterminationandthepartyresponsiblefor
termination.Thepartyresponsibleforterminationisliableforterminationcostsincurredbytheotherparty.
Moregenerally,terminationarrangementsshouldconsiderthespecificcircumstancesoftheprojectandmayincludethe
followingcircumstances:
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• Terminationforfailuretoreachfinancialclosure.
• TerminationduringpreconstructionwhereintheProjectProponentholdstherighttotheassetatthisstageofthe
PPPcontractperiod.
• Terminationduringtheconstructionperiodwhereinthereisacaseforfailuretomeetstandards,timeframes,among
others,andalsoforforcemajeure.TheProjectProponentholdstheassetunderconstructionandterminationsare
basedonassetvaluesandcompletion.
• Terminationduringtheoperationandmaintenanceperiodatastagewheretheassetshavebeentransferredto
theIAandsotheProjectProponentholdsnophysicalassetsbutratheruserightsandrightstocashflowsfromthe
project.Termination(eitherfordefaultorforforcemajeure)isbasedonvaluesrelatingtotheserightsandnotthe
physicalasset.
ThedetailedprovisionsandformulasshouldbedesignedtodeliverequitableresultsfortheIAandtheProjectProponent
basedon the stageof thePPPcontract itself.Most importantly, the IAand its advisers should seek specificguidance
from the considerable literature on this topic. The World Bank PPIAF Reference Guide14, pages 173 – 177, includes
referencestoanumberofusefulresourcesinprintandontheinternet.Morerecently,theEuropeanPPPExpertiseCentre
hascommissionedlawyers,Allen&Overytoresearchandpublish ‘TerminationandForceMajeure–Provisions inPPP
Contracts:ReviewofcurrentEuropeanpracticeandguidance’,March2013.15
5.31 Default Termination Compensation Amount
Thefollowingsectionsdiscussterminationcompensationamountsandthetheorybehindtheircalculation.Thediscussion
hasbeendevelopedwithaviewtoapplyinggeneralprinciplesforterminationeventcompensation.Specificsectorswill
needtoadapttheseprovisionsandapplythemonacase-by-casebasistosectorprojects.
5.31.1 Termination Payments – Project Proponent Default
Fundamentalcommercialandlegalprinciples,thetypeofprojectarrangement(BOO,BOT,BTOetc.,)andthestageof
theprojectatwhichtheProjectProponentdefaults(pre-orpost-finalcompletion),willdeterminethespecificprovisions
of the terminationpaymentarrangementandhow it is applied.Moreover, therewillbe threeparties involvedas the
financiers’ alsohave their interests at stakeand shouldbeallowed to try to rescue theproject toprotect their loans.
If thefinancierschoosenottostep-in, fail intheireffort tostep-in,oropttostep-out, itcanbeassumedthat inmost
circumstancestheprojectcompany’sequitywillbelost.However,intheeventthatthePPPprojectassets,ortherights
overthem,aretransferredbacktothegovernmentontermination,thefinancierswouldexpectcompensation.Hence,
thestructuringofterminationpaymentsbecomesanimportantcriterionfortheproject’sbankability.TheEuropeanPPP
ExpertiseCenter’sGuidetoGuidance16discussesanumberofmethodsforagreeingcompensationinthisevent;
• Repayment of all, or a pre-specifiedpart, of theoutstandingdebt that hasbeenproperly used to finance the
project’sassets;
• Thedepreciatedbookvalueoftheprojectassets(withvariationstotheapproachtaken);
• Thenetpresentvalueoftheexpectedfuturereturns,thatistheexpectedfuturenetcashvaluewhichwouldhave
beenpayablebythegovernmentiftheprojecthadnotdefaulted(thegovernmentwouldbeentitledtorecoverits
actualcostsasaresultoftheterminationevent);and
14WorldBank:Public-PrivateInfrastructureAdvisoryFacility(PPIAF),Public-PrivatePartnershipsReferenceGuideVersion1.0,201215www.eib.org/epec/resources/Termination_Report_public_version.pdf16EuropeanPPPExpertiseCenter–TheGuidetoGuidance:HowtoPrepare,Procure,andDeliverPPPProjects.EuropeanInvestmentBank,2011
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• Anopenmarketsaleunderwhichthegovernmentcouldre-tenderthePPPcontract,selectanewProjectProponent
andthenpayofftheoriginalprojectcompanyand/oritslenders,fromtheproceeds.
Eachoftheseapproacheshasprosandcons.Forexample,anagreementwhichpaidoffthefinanciers’debtinfull,whileattractivetolendersandpositiveforaproject’sbankability,couldhavethedownsideeffectofremovingtheincentiveforfinancierstodoproperduediligenceandtomonitortheprojectcompany’sperformance.WhereasanopenmarketsaleapproachisonlyviablewherethereisastrongmarketforPPPcontracts.Thenetpresentvalueapproachcouldbeconceptuallyappealing,howeverforecastingfuturerevenuesandcostsandagreeingdiscountratescanbeproblematic.Yescombe17providesadviceonhowthesevariousapproaches,oracombinationthereof,canbeturnedintoformulae
specifictocontractrequirementsandtheoperatingenvironmentforthesectorbeingconsidered.
Theoverridingprincipleshouldbetoremoveanyfinancialincentiveforthepublicsectortoseekanearlytermination,
whileatthesametimeensuringthattheprivatesectorisnotshieldedfromstandardcommercialrisksandappurtenant
lossesattheundueexpenseofthepublicsector.
5.31.2 Termination Payments – Government Default
Ifterminationoccursasaresultofdefaultbythegovernment,theunderlyingprincipleshouldbethatneithertheproject
company nor its financiers are financially disadvantaged. This is critical to the reputation of the PPP program in the
Philippines,andtoensureastrongPPPmarketcanreadilysecurebankabilityforprojectsputuptothefinancialmarkets.
Determiningcompensationtotheterminatedproject’sfinanciersisrelativelystraightforward,forexampleitcouldinclude
debtoutstanding,unpaidinterestandfeesandactualcostsofundoingtheloanandhedgingagreementscappedrelative
topreviouslydeterminedcapitalexpenditureandgearinglevels.However,calculatingcompensationduetotheequity
investorscanbemorecomplex.Again,citingtheEuropeanPPPExpertiseCenter,optionscouldinclude:
• Thenetpresentvalue(NPV)ofthefuturereturnshadterminationnotoccurred.Thecalculationwouldassessthe
cashflowstreamlikelyfromthedateofterminationthroughtotheoriginallyintendedexpirydateenvisagedin
thePPPcontract.Whileconceptuallythepreferredmethod,actuallyimplementingthecalculationandgettingall
partiestoreachagreementisinpracticecomplex;
• AvariationoftheNPVapproachistousethecashflowprojectedatfinancialclose;and
• A paymentwhich provides the equity investorswith the internal rate of return expected on their investment
atfinancialclose.Dependingonthestageatwhichtermination iscalled, thiscouldbebasedonthecashflow
receivedfromthebeginningofthecontractuptoandincludingtermination.
5.31.3 Voluntary Termination by Government
In addition to the underlying principles for termination by government default, on termination of the PPP contract
resultingfromagovernmentvoluntarytermination,governmentmustpaytotheProjectProponentanamountequalto
theaggregateof:
1. wheretheseniordebt18amounthasbeenfinancedbybankdebt,thelowerofseniordebtowingtofinanciersat
theterminationdatecappedrelativetopreviouslydeterminedcapitalexpenditureandgearinglevels;
17ERYescombe,(2002)PrinciplesofProjectFinance,AcademicPressandERYescombe,(2007)Public-PrivatePartnerships:PrinciplesofPolicyandFinance,Butterworth-Heinemann
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2. wheretheseniordebtamounthasbeenfinancedbycapitalmarketinstruments(bonds),thepresentvalueofthe
futurecashflowsunderthebondsforecasttobeoutstandingattheterminationdateinthebasecasefinancial
modelcapped relative topreviouslydeterminedcapitalexpenditureandgearing levels.This is calculatedwith
regardtotheyieldatwhichtheunderlyingcapitalmarketinstrumentsarepricedinthemarketatthetermination
date,usingstandardmarketconventionsforeachrelevantinstrument,onthebasisthatthePPPcontractandthe
otherprojectcontractsimmediatelypriortotheterminationdatecontinuetooperatetotheexpirydate.
3. a return to equity holders, being on both any share capital subscribed at financial close and any shareholder
subordinated debt not taken into account as debt above, (taking into account distributions already paid to
shareholders) capped relative to previously determined capital expenditure and gearing levels. This may be
calculatedastherealblendedequityinternalrateofreturninthebasecasefinancialmodel,orthemarketrateof
equityreturn.
4. thebreakcosts(i.e.feechargedbylenderswhenextrarepaymentsonafixedrateloanaremadeorwhentheloan
ispaidoutbeforethefixedtermhasexpired)andallotherreasonablecostsincurredbytheProjectProponentas
adirectresultofterminatingafinanceagreement,includingbankfees,pastdueinterest,hedgingarrangements
andwithanybreakgainsdeducted;and
5. demobilizationcostsincludinganyredundancypaymentsforemployeesoftheProjectProponentandamounts
owingtothesub-contractors,whichare,ineachcase,reasonablyandproperlyincurredandariseasadirectresult
ofthetermination.
5.31.4 Force Majeure Compensation Amount
Theunderlyingprinciple in thisevent is thatsinceneitherparty isat fault,andbecauseneitherpartycanchangethe
circumstances,theburdenofterminationshouldbeequallyshared.Theremayhoweverbecasesindevelopingcountries
whereforcemajeurecausedbypoliticalevents(war,terrorism,civilunrest,oranactionbythehostgovernmentsuchas
blockingthetransferoffunds)istreatedthesamewayasdefaultbygovernment.
Interminationclausestriggeredbynaturalforcemajeureevents,theterminationpaymentswillnormallybehigherthan
in thecaseofProjectProponentdefault,but lower than in thecaseofgovernmentdefault. Innormalcircumstances,
theterminationpaymentwouldcovertheoutstandingdebtandtheactualcostsofunwindingthe loanandhedging
agreements.Itcouldalsoincludethevalueofequitycontributions,butexcludeanyreturntothatequity.Thetreatment
ofsalvageassetvalueandinsuranceproceeds(assumingthatthereareany)wouldneedtobetreatedaccordingtothe
underlyingprinciplesstatedabove.
18Debtthatwillbepaidfirstincaseofdefault.
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CHAPTER 6Steps and Issues Leading Up to the Negotiation Stage
TheRevisedIRRoftheBOTLaw,startingatRule5,setsoutthetenderingprocessinconsiderabledetail,particularlyrelated
totheearlystagesofthetenderingprocessanditshouldbereadinconjunctionwiththisChapter.
ThisSectionpicksupthetenderingprocessatthetimeoftheClarificationorRejectionofProposalsandtracesstepsand
issuesleadinguptotheNegotiationStage.
6.1 Clarification or Rejection of Proposals
ClarificationofBids:AcomparisonoftheratingsassignedbyeachmemberofthePBACoftenbringstolightambiguities
inthebidwhichshouldbeclarifiedbythebidder:
i. ThePBACmayaskbiddersforclarificationoftheirbidsinordertoassist intheexamination,evaluationand
comparisonofbids.However,nochangeinamatterofsubstanceinthebid,includingchangesinpriceorchanges
aimedatmakinganunresponsivetenderresponsive,shallbesought,offeredorpermitted.
ii. Notwithstandingsubparagraph(i)above,thePBACshallcorrectpurelyarithmeticalerrorsthatarediscovered
duringtheexaminationofbids.ThePBACshallgivepromptnoticeofanysuchcorrectiontothebidder.
iii. Whentheclarificationofbids is required, the IAshallmaintainawrittenminutesof themeeting.Adequate
noticeshouldbegiventothebidderpriortoconductingthemeeting.Thelocationandsettingofthemeeting
shouldbeconducivetoprofessionallydiscussissuesleadingtoaresolutionofthemattertobeclarified.
Incertaincases,itmaybenecessaryfortheIAtorejectallbids;
i. SubjecttoapprovalbytheHeadofAgency,andifsospecifiedinthebiddocuments,theIAmayrejectallbids
atany timeprior to theacceptanceofabid.The IAshall communicatepromptly toallbidders that submitted
proposals,thegroundsforitsrejectionofallbids;
ii. TheIAshallincurnoliability,solelybyvirtueofitsinvokingthisprovisionandrejectingallsubmittedbids.The
IAisnotobligatedtorebidifbidsarerejected.
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6.2 Ranking of all Responsive Bids from Qualified Bidders
TheIAshallfairlyandimpartiallyrankthosebidsdeterminedtoberesponsibleandresponsive,fromqualifiedbidders.Bids
shouldnotberejectedduetominordeviationswhichdonotaffecttheprice,quality,scope,orcompletiondateofthe
PPPrequirementorlimitsinanymaterialwaytheresponsibilities,duties,orliabilitiesofthebidderoranyrightsoftheIA:
TheIAshallnotacceptnorrankabid:
a. Ifthebidderthatsubmittedthebidisnotqualified;or
b. Ifthebidisnotresponsive.
TheIAshallprepareareportdetailingthebidevaluationprocessandtherankingofallresponsivebids.Thereportshall
alsodetail:
a. Theevaluationcriteriaasstatedinthebiddocument;
b. Listallofbidderssubmittingbids;
c. Listofthosebiddersfoundtobequalified;
d. Detailtheevaluationofeachbidfoundtobequalified;
e. Listallbidsdeemedresponsiveintheorderranked,withthefirstrankedhereinafterreferredtoastheProject
Proponent.
6.3 Direct Negotiation
6.3.1 Single Complying Bid
Directnegotiationmaybeconductedwhenthereisonlyonecomplyingbidderleftasdefinedhereunder:
a. If, afteradvertisement,onlyoneprospective ProjectProponentapplies forpre-qualificationandmeets the
pre-qualificationrequirements,afterwhich,theProjectProponentisrequiredtosubmitabid/proposalwhichis
subsequentlyfoundbytheIAtobecomplying;
b. If,afteradvertisement,morethanoneprospective ProjectProponentappliedforpre-qualificationbutonly
onemeetsthepre-qualificationrequirements,afterwhichitsubmitsabidproposalthatisfoundbytheIAtobe
complying;
c. If, afterpre-qualificationofmore thanoneprospectiveProjectProponent,onlyone submits abidwhich is
foundbytheIAtobecomplying;
d. If,afterpre-qualification,morethanoneprospectiveProjectProponentsubmitbidsbutonlyoneisfoundby
theIAtobecomplying.
Insuchevents,however,anydisqualifiedbiddermayappealthedisqualificationtotheHeadofAgencyoftheconcerned
IA,incaseofnationalprojects,withinfifteen(15)workingdaysfromreceiptofthenoticeofdisqualification.TheHeadof
Agencyrepresentativeshallactontheappealwithinforty-five(45)workingdaysfromreceiptthereof.Thedecisionofthe
HeadofAgencyshallbefinalandimmediatelyexecuted.
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6.3.2 Unsolicited Proposal
Section9.2oftheRevisedIRRoftheBOTLawallowsunsolicitedproposalstobeacceptedonanegotiatedbasis.Chapter
8Sections8.2.3,8.3and8.4discussesthenegotiationstagesundertheprocurementprocessforunsolicitedproposals.
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CHAPTER 7Award of Contract and Implementation Steps
7.1 PBAC Recommendation to Award
Withinthree(3)calendardaysfromthedatethefinancialevaluationiscompleted,thePBACwillsubmittotheHeadofthe
IAarecommendationofaward.ThePBACwillprepareandsubmitadetailedevaluation/assessmentreportonitsdecision
regardingtheevaluationofthebidsandexplainincleartermsthebasisofitsrecommendations.
Withinthree(3)calendardaysfromthesubmissionbyPBACoftherecommendationtoaward,theHeadoftheIAshall
decideontheaward.
The approval shall bemanifestedby signing and issuing the “NoticeofAward” to thewinningbidderwithinfive (5)
calendardaysfromapprovalthereof.
AllunsuccessfulbiddersshallbeinformedinwritingofthedecisionoftheIAtoawardtheprojecttothewinningbidder.
Suchdecisionshallbemadeavailabletothepublic.
7.2 Notice of Award to Winning Bidder
TheHeadoftheIAshall issuea“NoticeofAward”toindicatethatthewinningbiddermustsubmitwithintwenty(20)
calendardaysfromofficialreceiptofthe“NoticeofAward”thefollowing:
a. Prescribemmitmentoftherequiredequitycontribution,asspecifiedbytheIA:
i. Inthecasewherethewinningbidderisacorporation-e.g.,treasurer’saffidavitattestingtoactualpaid-
up capital, subscription agreement(s) between a shareholder(s) of the Project Proponent and the Project
Proponentitselfcoveringsaidequitycontribution,orshareholdersagreementbetweenandamongst2ormore
shareholdersoftheProjectProponentundertakingtocontribute/subscribetherequiredequitycontribution;or
ii. In the case of a consortium - an undertaking of the members thereof to infuse the required equity
contributiontotheconsortium.
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c. Proofoffirmcommitmentsfromareputablefinancialinstitutiontoprovidesufficientcreditlinestocoverthe
totalestimatedcostoftheproject;
d. Inthecaseofaconsortium,theagreementindicatingthatthemembersarejointlyandseverallyliableforthe
obligationsofthewinningbidderunderthecontract;or
e. IncaseaSpecialPurposeCompany(SPC)isformedforpurposesofundertakingtheproject,proofofregistration
inaccordancewithPhilippinelaws.
f. SuchotherconditionsimposedbytheIA.
Failuretosubmittherequirementswithintheprescribedtwenty(20)calendardayperiodwill result inconfiscationof
thebidsecurity.Withinfive(5)calendardaysuponreceiptoftheforegoingrequirementsforaward,theHeadofIAshall
determineandnotifythewinningbidderofitscomplianceofalltheconditionsstatedinthesaidnotice.
ThePBACshallpostthenoticeofawardinthePhilippineGovernmentElectronicProcurementSystem(PhilGEPS),andthe
websiteofPPPCwithinseven(7)calendardaysfromtheissuanceofNoticeofAward.
Theexecutionofthecontractshallbemadewithintheperiodofthevalidityofthebidsecurity.Thevalidityofthebid
securityshallinnocasegobeyondonehundredeighty(180)calendardaysfollowingtheopeningofthebids.
Whenanextensionofvalidityofbidsisconsiderednecessary,thosewhosubmittedbidsshallberequestedinwritingto
extendthevalidityoftheirbidsbeforetheexpirationdate.However,biddersshallnotbeallowedtomodifyorrevisethe
priceorothersubstanceoftheirbids.
Biddersshallhavetherighttorefusetograntsuchanextensionwithoutforfeitingtheirbidsecurity,butthosewhoare
willingtoextendthevalidityoftheirbidsshouldberequiredtoprovideasuitableextensionofbidsecurity.
7.3 Formation of a Special Purpose Company (SPC)
ThewinningProjectProponentmaycausetheincorporationofanSPCthatshallassumeandaccedetoalltherightsand
obligationsofthewinningProjectProponent,provided,that:
a. TheSPCisregisteredinaccordancewithapplicablePhilippinecorporate/commercial/investmentlaws;
b. ThewinningProjectProponentsubscribestoandpaysforasignificant/principalshareholdingorcontrolling
interest in the SPC, subject to the nationality and ownership requirements under the Constitution and other
applicablelaws.Therequiredlevelofshareownershipmaybeindicatedinthebiddocumentsordeterminedasa
conditionpriortocontractaward;
c. Inthecaseofaconsortium,allmembersthereofshallpresentproofofcontractualorotherlegallybindingties
toorrelationshipswiththeSPCforthedevelopmentandimplementationoftheprojectinaccordancewiththeir
submittedbusinessplan,e.g.,forfacilityowners/developers/equityinvestors-subscriptiontoandpaymentfora
significantnumberofsharesintheSPC;
d. AnagreementisexecutedbytheSPCandtheProjectProponentinfavoroftheIAmakingtheSPCprincipally
liablefortheperformanceofthewinningProjectProponent’sobligationsundertheNoticeofAwardand/orthe
contract;and
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e. AwrittennoticetoformtheSPCandtheproposedagreementaresubmittedtotheIAwithinfive(5)calendar
daysfromdateofreceiptofNoticeofAward.
7.4 Withdrawal/Substitution of a Member
SubjecttotheapprovaloftheIA,anymemberoftheconsortiumorashareholderoftheSPCcreated(whowasamember
ofsuchconsortium),oritspre-qualifiedContractorsmaywithdrawpriortoawardoftheproject,oranytimeduringthe
contractterm.
Theremainingmembersorshareholdersmuststillbelegally,technically,andfinanciallycapableofsuccessfullycarrying
outtheimplementation/operationoftheprojectorasuitableandacceptablesubstitutewithequalorbetterqualifications
isfoundtoreplacethewithdrawingmemberorshareholder.
Awithdrawalmadeinviolationofthissectionshallbeagroundfordisqualificationorcancellationofthecontract,asthe
casemaybe,andforfeitureoftheProjectProponent’sbidorperformancesecurity.
TheIAshallinformthePPPCenterinwritingofsuchchanges.
7.5 Validity of Bids/Return of Bid Security
Theexecutionofthecontractshallbemadewithintheperiodofvalidityoftheproposalsecurity.Therequiredproposal
securityshallbevalidforareasonableperiodbutinnocasebeyondonehundredeighty(180)calendardaysfollowing
theopeningoftheproposals.ProposalsecuritiesshallbereturnedtotheunsuccessfulComparativeProjectProponentsas
soonasthecontractissignedbythewinningProjectProponent.Proposalsecurityshallalsobereturnedtothewinning
ProjectProponent,iftheinstrumentisnototherwisedeclarednullandvoid.
7.6 Execution/Approval of the Contract
Theauthorizedsignatory(ies)ofthewinningbidderandtheHeadoftheIAshallexecuteandsignthecontractforthe
project,withinfive(5)calendardaysfromreceiptbythewinningbidderofthenoticefromtheIAthatallconditionsstated
intheNoticeofAwardhavebeencompliedwith.ConsistentwithArticle1159oftheNewCivilCode,thecontractisthelaw
betweenthepartiesandthepartiesshallperformtheirrespectiveobligationsandundertakingsthereunderwithutmost
goodfaith.AnoriginalsignedcopyofthecontractshallbesubmittedtotheApprovingBodyandthePPPCenterwithin
five(5)calendardaysaftersigningthereofbytheagency.
Intheeventofrefusal,inabilityorfailureofthewinningProjectProponenttoenterintocontractwiththeIAwithinthe
timeprovided,theProjectProponentshallforfeititsbidsecurity.Insuchanevent,theIAconcernedshallconsiderthe
ProjectProponentwiththenextrankedcomplyingproposal.Ifthesameshalllikewiserefuseorfailtoenterintocontract
withtheIA,itsproposalsecurityshalllikewisebeforfeitedandtheIAconcernedshallconsiderthenextrankedcomplying
proposal,andsoonuntilacontractshallhavebeenenteredinto.
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IftheconcernedIAisunabletoexecutethecontractwithanyofthecomplyingProjectProponents,afailureofcomparative
proposalswillbedeclaredandtheprojectmaybesubjectedtoasubmissionofnewcomparativeproposals.
TheProjectProponentshall,asmayberequiredundertheexistinglaws,rulesandregulationssecureanyandallother
approvalsforthecontractortheimplementationthereoffromgovernmentagenciesorbodiesincludingtheRegulator
inthecaseofPublicUtilityProjects.Thisincludessecuringthenecessaryandappropriateenvironmentalclearancesfrom
theDENRpriortoactualprojectconstruction.TheDENRshallactontheenvironmentalclearanceoftheprojectwithinthe
timeframeprescribedandfollowingtheguidelinesofDENRAdministrativeOrderNo.96-37andsubsequentguidelines
asmaybeissuedfromtimetotime.TheIAmayprovidethenecessaryassistancetotheProjectProponentinsecuringall
therequiredclearances.
Thecontractshallprovidemilestonesinsecuringsuchotherapprovalsrequiredfortheimplementationofthecontract.
7.7 Grant of Franchise
SubjecttotheprovisionsoftheConstitutionandotherexistinglaws,rulesandregulations,onceacontractisexecutedby
theProjectProponentandtheIA,apresumptionarisesthatthepublicinterestwillbeservedbytheimplementationofthe
projectcoveredthereby,andimmediatelyuponapplicationbytheProjectProponent,theRegulatorshallautomatically
grantinfavoroftheProjectProponentaFranchisetooperatethefacilityandcollectthetolls,fees,rentals,andother
chargesstipulatedunderthecontract.
7.8 Notice to Commence
Upon approval of the signed contract by the approving body, the agency shall issue the “Notice to Commence
Implementation”oftheprojecttotheProjectProponentnotlaterthanseven(7)calendardays.
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CHAPTER 8Unsolicited Proposals
8.1 Processing Unsolicited Proposals
There isaproper role forprivatesector initiatives.However, in thecaseofunsolicitedproposals, thegovernmenthas
expressedapreferenceforthesolicitedproposalmodalitywhereverfeasible.Accordingly,thegovernmenthasdecided
tocraftverystrictprovisions toenableunsolicitedproposals tobeconsideredonlyonanegotiatedbasisandonly in
exceptional cases. Further, any component of an approved project shall not be eligible for an unsolicited proposal.
UnsolicitedproposalsmayonlybeacceptedforevaluationbytheIAif:
a. Suchprojects involveanewconceptor technology,asdeterminedby theagency,andarenot included in
the list of priority projects, the lists being the Public Investment Program, the Comprehensive and Integrated
Infrastructure Program for national projects, and Provincial/ LocalDevelopment Investment Programs for LGU
projects.However,projectsintheprioritylistmaybeeligibleifnewconceptsortechnologyareintroduced;
b. Nodirectgovernmentguarantee,subsidyorequityisrequired;and
c. TheIAhasinvited,bypublicationforthreeconsecutiveweeksinanewspaperofgeneralcirculation,comparative
orcompetitiveproposalsandnootherproposalisreceivedforaperiodofsixty(60)workingdays.
Section10.2oftheRevisedIRRoftheBOTLawprovidesthat“new”technologymustbecharacterizedbyatleastoneof
thefollowingattributes:
a. A recognized process, design,methodology or engineering conceptwhich has demonstrated its ability to
significantlyreduceimplementationorconstructioncosts,accelerateprojectexecution,improvesafety,enhance
projectperformance,extendeconomiclife,reducecostsoffacilitymaintenanceandoperations,orreducenegative
environmentalimpactorsocial/economicdisturbancesordisruptionseitherduringtheprojectimplementation/
constructionphaseortheoperationphase;
b. Aprocess forwhich theProjectProponentor anymemberof theProjectProponent consortiumpossesses
exclusiverights,eitherworld-wideorregionally;or
c. Adesign,methodologyorengineeringconceptforwhichtheProjectProponentoramemberoftheProject
Proponentconsortiumorassociationpossessesintellectualpropertyrights.
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Concerningdirectgovernmentguarantee,equityorsubsidy,theRevisedIRRoftheBOTLawdefineseachoftheseterms,
asfollows:
a. A direct government guarantee refers to an agreement whereby the government guarantees to assume
responsibilityfortherepaymentofdebtdirectlyincurredbytheProjectProponentinimplementingtheprojectin
caseofaloandefault(Section1.3,itemj);
b. Adirectgovernmentsubsidyreferstoanagreementwherebythegovernmentwill:(i)defray,payfororshoulder
aportionoftheprojectcostortheexpensesandcosts inoperatingormaintainingtheproject; (ii)condoneor
postpone anypaymentsdue from theProject Proponent; (iii) contribute anypropertyor assets to theproject
(right-of-way,costofrelocationandresettlementincluded);(iv)inthecaseofLGUs,waiveorgrantspecialrates
onrealpropertytaxesontheprojectduringthetermofthecontractualarrangement;and/or(v)waivechargesor
feesrelativetobusinesspermitsorlicensesthataretobeobtainedfortheconstructionoftheproject,allwithout
receivingpaymentorvaluefromtheProjectProponentand/orfacilityoperatorforsuchpayment,contributionor
support(Section13.3,itemc);
c. Directgovernmentequityreferstothesubscriptionbythegovernmentofsharesofstockorothersecurities
convertibletosharesofstockoftheprojectcompany,whethersuchsubscriptionwillbepaidbymoneyorassets
(Section13.3,itemd).
Thesale,lease,orgrantofusufruct,ofgovernmentassets,includingamongothers,right-of-way,withcompensationfrom
theProjectProponentsshallnotbeconsideredasadirectsubsidyorequity.Thestandardsofvaluationofgovernment
assetswill be subject to RA 8974, “An Act to Facilitate the Acquisition of Right-of-Way, Site or Location for National
GovernmentInfrastructureProjectsandforOtherPurposes”andotherexistinglaws,rulesandregulations.Theappraisal
shallbeundertakenbyathirdpartyaccreditedtoconductsuchappraisal.
8.2 PPP Process for Unsolicited Proposal
Figure2.3(fromChapter4,Section4.3)isrepeatedbelowandpresentstheprocessforunsolicitedproposalsunderRA
7718.Thesucceedingsectionsdiscussthestepsintheprocess.
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8.2.1 Submission of Complete Proposal
Onlycompleteproposalswillbeprocessed,andacompleteproposalshouldinclude:
a. Coverletter,whichindicatesthebasicinformationontheunsolicitedproposalsuchasitsexpectedoutputand
outcome,implementationperiod,andgeneraldescriptionofthenewconceptortechnology;
b. Companyprofile;
c. Feasibilitystudy;
d. Draftcontract;and
e. Otherdocumentsthatareproprietaryinnature.
Uponreceiptofanunsolicitedproposal,theIAshall,firstacknowledgeinwritingthereceiptoftheUnsolicitedProposal
withinseven (7)calendardays.Thewrittenacknowledgementshallbesent to theProjectProponentstating that the
proposalwillbeadministrativelyprocessedtodetermineitscompleteness.
8.2.2 Evaluation of the Unsolicited Proposal by the IA
IA Review of Unsolicited Proposal
TheIAshallreviewtheproposalandadvisetheProjectProponentwhetheritiscompleteorincompletewithin30calendar
daysfromsubmissionthereof.Ifincomplete,itshallindicatewhatinformationislackingornecessary.Theagencymay
entertainsameorsimilarprojectproposalsatthispoint.
Theevaluationforcompletenessandadministrativecomplianceshalldeterminewhetherornottheproposedproject:
a. Involvesanewconceptortechnology;
b. Isnotincludedinthelistofpriorityprojects;
c. Doesnotrequireadirectgovernmentguarantee,subsidy,orequity;and
Figure 2.3 Outline of the PPP Process for Unsolicited Proposals
Submission of Complete Proposal Invitation for ComparativeProposals
Evaluation of proposal by IA Preparation & submission of comparative proposals
Original proponent Right to Match
Negotiations after Original Proponenthas been Pre-Qualified Evaluation of proposals of Challenger/s
Award of contract
Adjustment of Terms / Fees / Rentals / Charges Determination of Winning Proponent
Acceptance of Terms & Conditions by Proponent
Approval by Approving Body
1 7
2 8
3 9
4 10
5 11
6 12
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In theevent the IA receivesmore thanoneunsolicitedproposal involving the sameor similarproject, the IAhas the
followingoptionstoacceptandvestoriginalProjectProponentstatus:
a. theIAmayrejectallsuchproposalsandinstead,competitivelytendertheproject.
b. the IA shall evaluate the proposals using a first in time approach. Under this approach, the first complete
proposalisevaluatedanddecidedupon.Thesecondcompleteproposalwillonlybeentertainedifthefirstoneis
rejected.Otherwise,thesecondproposalwillbeconsideredonlyifthereisafailureinthenegotiationofthefirst
proposalorduringthe“invitationforcomparativeproposals.”
Evaluation and Acceptance of Unsolicited Proposal
Intheeventtheproposalfulfillstheadministrativeevaluationandsubmissionisdeterminedcomplete,theIAshall:
a. Appraisethemeritsoftheproject;
b. QualifytheProjectProponent,inaccordancewiththerequirementsofRule5oftheRevisedIRRoftheBOTLaw,
tocarryouttheproject;
c. Assesstheappropriatenessofthecontractualarrangementandreasonablenessoftheriskallocation;
d. Recommendareasonablerateofreturn;
e. InformtheICCandPPPCofitsacceptanceoftheunsolicitedproposal;
f. Endorsetotheapprovingbodyallpertinentdocumentationtoseekapprovaltoproceedwiththenegotiation
withtheunsolicitedProjectProponent;and
g. AdvisetheProjectProponentinwritingwithin120daysofitsacceptanceoftheproposalandconfirmingits
OriginalProjectProponentstatus.AtthispointtheIAshallnolongerentertainsimilarproposalsuntilthisstatus
is revoked because of disagreements in negotiations or inability of the Project Proponent tomeet terms and
conditionssetbytheapprovingbody,oruntilsolicitationofcomparativeproposalshasbeenconcluded.
8.2.3 Negotiations after Original Project Proponent has been Pre-Qualified
TheIA,withinfive(5)calendardaysuponissuanceoftheletterofacceptancebytheIAtotheProjectProponent,thehead
ofagencyshallendorsetotheICCtheproposedunsolicitedproject.
Obtaining ICC Concurrence
TheICCshalldeterminethereasonablerateofreturnoninvestmentsandoperatingandmaintenancecostsbasedonthe
reasonablerateofreturnrecommendedbytheagency,priortonegotiationand/orcallforcomparativeproposals.
ICC shall determine such rate and other parameters for negotiationwithin thirty (30) working days upon receipt of
endorsement,resultsofduediligenceevaluationconductedandsubmissionofcompletedocumentationfromthehead
ofagency.TheICCshallformallyadvisetheagency,thereafter,thatsuchdeterminationisfinalandexecutable.
Withinseven(7)calendardaysuponreceiptbytheagencyoftheformaladviceofthe ICC,theagencyshall informin
writing the original Project Proponent of the mechanics of negotiation, including the commencement date and its
authorizedrepresentatives.
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Appointment of a Pre-Qualification Bids and Awards Committee
IntheeventofadecisiontoaccepttheunsolicitedproposalandconcurrenceoftheApprovingBodytoproceed,thehead
oftheIAshallappointaPBAC.ThemembersofthePBACshallbeknowledgeableonprocurementproceduresand,more
importantly,ofthetypeofprojectbeingprocured.ThePBACshouldreflecttheappropriatemixofspecialistskillsand
includekeystakeholders(seeChapter4.4ondiscussiononthePBAC’sroleinmanagingthePPPprocurementprocess).
Preparing for PPP Contract Negotiations
AnoverviewofthetheoryofPPPContractNegotiationsisprovidedbelow.
Negotiations shall focus on the project scope, implementation arrangements, reasonable rate of return and other
parametersdeterminedbyICC,andthetermsandconditionsofthedraftcontract,amongothers.
TheIAandtheoriginalProjectProponentshallconcludenegotiationswithinaperiodofeighty(80)calendardaysfrom
receiptbytheProjectProponentofwrittennoticefromtheIAtocommencenegotiations.
TheIAandtheoriginalProjectProponentshallnegotiateingoodfaithandendeavortocompletethenegotiationwithin
theeighty(80)-dayperiod;provided,thatshouldtherebeirreconcilabledifferencesduringthenegotiationperiod,theIA
shallhavetheoptiontorejecttheproposalbyadvisingtheoriginalProjectProponentinwritingstatingthegroundsfor
rejectionandthereaftermayacceptanewUnsolicitedProposal,orbidouttheprojectasasolicitedproposal,orundertake
theprojectonitsown.
8.2.4 Approval of the Approving Body
Ifnegotiationissuccessful,theheadoftheIAandtheauthorizedsignatoryoftheoriginalProjectProponentshallissuea
signedcertificationthatanagreementhasbeenreachedbybothparties.Thecertificationshallstatethattheagencyshall
commenceactivitiesforthesolicitationofcomparativeproposals.Theagencyshallwithinseven(7)calendardaysafter
theeighty(80)calendardaynegotiationperiodsubmitareporttotheICCoftheresultofitsnegotiationwiththeoriginal
ProjectProponentforapproval/validation.
TheapprovaloftheunsolicitedprojectbytheApprovingBodyshallbevalidonlyforaperiodofeighteen(18)months
fromtheissuanceoftheapprovalunlesstheinvitationforcomparativeproposalshasbeenissued.
8.2.5 Adjustment of Tolls/Fees/Rentals/Charges
TheIAshallsecureeithertheadviceoftheRegulator(ifapplicable)ortheApprovingBodyorboth,asthecasemaybe,for
theparametricformulaandofficialpriceindicesfortheadjustmentoftolls,fees,rentalsandchargesthatmaybegranted
duringcontractadministration.
TheHeadoftheIAshallreviewandapprovethedraftcontractwhichshallbebasedontheparameters,andtermsand
conditionsstipulatedbytheApprovingBody.
PriortotheapprovaloftheHeadofAgency,thedraftcontractshallundergoreviewbytheOfficeoftheGovernment
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CorporateCounsel(OGCC),andtheOfficeoftheSolicitorGeneral(OSG).Theprescribedstatutorycounsel,andifnecessary,
theDepartmentofFinanceshallissueanopiniononthedraftcontractwithinten(10)calendardaysuponreceiptofthe
draftcontract.
ChangestothedraftcontractasagreeduponbytheIAandoriginalProjectProponentandasapprovedbytheHeadof
Agencyshallnotbeallowedexceptforchangestocontracttermsaffectedordecidedbythewinningbidder’sbidduring
thesolicitationofcomparativeproposalsandmatchingbytheoriginalProjectProponent.
8.2.6 Acceptance of Terms and Conditions by the Original Project Proponent
Withinfortyfive(45)calendardaysfromthereceiptoftheapprovalissuedbytheApprovingBody,theoriginalProject
ProponentshallnotifytheIAinwritingofitsacceptanceofallthetermsandconditionsoftheapprovaloftheApproving
Body.FailurebytheoriginalProjectProponenttosubmitsuchacceptanceinwritingshallbedeemedarejectionofthe
unsolicitedproposal.
8.2.7 Invitation for Comparative Proposals (the Swiss Challenge)
Preparationofsolicitationandcontractualdocumentsshallbepreparedinaccordancewiththeprovisionsspecifiedunder
IRRRules4and5oftheRevisedIRRoftheBOTLaw.ThecontractexecutedwiththeProjectProponent,andasapproved
bytheApprovingBody,shallbepartoftheComparativeProposaldocuments,andshallbeconsideredfinalandnon-
negotiablebythecomparativeProjectProponents.
Proprietaryinformationshall,however,berespected,protectedandtreatedwithutmostconfidentiality.Assuch,itshall
notformpartofthebidding/tenderandrelateddocuments.
SolicitationDocumentsshallincludeadraftof:
a. PrequalificationQuestionnaire,usingthesamecriteriausedforqualifyingtheoriginalProjectProponent;
b. ComparativeProposalDocumentandthecriteriaforevaluatingproposals,andthethresholds,ifany,setbythe
IAforidentifyingnon-responsiveproposals;therelativeweighttobeaccordedtoeachevaluationcriterion;and
themannerinwhichthecriteriaandthresholdsaretobeappliedintheevaluationandrejectionofproposals;
c. AdvertisementAnnouncingtheAvailabilityofthePrequalificationQuestionnairesandComparativeProposal
Documents;and
d. AnnouncementofaPre-ProposalMeeting.
ThedecisionofwhetherornottodisclosetheOriginalProjectProponent’spriceoffinancialproposalintheSolicitation
Documents shall bediscussedbetween the IA and theOriginal Project Proponent. If they agree, theOriginal Project
Proponent’s price or financial proposalmay be disclosed. If the original Project Proponent’s price proposal was not
disclosedintheComparativeProposalDocuments,itshallberevealedupontheopeningofthefinancialproposalsofthe
ComparativeProjectProponents.
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The Contractual Document clearly defines the basic legal relationship between the parties and their rights and
responsibilitiesincludingthespecificGovernmentUndertakingstobeprovidedbytheIArelativetotheproject.Thedraft
contractshallbethedraftapprovedbytheApprovingBodyandshallhavethefollowingmandatorytermsorconditions:
a. Specificcontractualarrangement,terms,andscopeofwork;
b. Projecttechnicalspecificationsandsystemfeatures;
c. Implementationmilestonesincludingthoseforsecuringotherapprovals,andprojectcompletiondate;
d. Costrecoveryschemeviaproposedtolls,fees,rentalsandcharges,asthecasemaybe;
e. LiquidateddamagesascontemplatedunderSection12.14oftheRevisedIRRoftheBOTLaw;
f. PerformanceandwarrantybondscontemplatedunderSections12.8and12.9oftheRevisedIRRoftheBOT
Law;
g. Minimum insurancecoverageas follows:Contractors’ all risk,motorvehicle,workmen’scompensation,and
thirdpartyliabilityfortheprojectincludingcomprehensivegeneralliabilityinsurance;
h. Acceptancetestsandprocedures;
i. Warrantyperiodandprocedures(aftertransfer);
j. Groundsforandeffectsofcontractterminationincludingmodesforsettlingdisputes;
k. Themannerandproceduresfortheresolutionofwarrantyagainstcorruption;and
l. Compliancewithallotherapplicablelaws,rules,andregulations.
Withinseven(7)daysuponissuanceofthecertificationofasuccessfulnegotiationinaccordancewithSection10.11of
theRevisedIRRoftheBOTLaw,theIAPBACshallpublishtheinvitationforcomparativeproposalsafterreceiptofthe
notificationfromtheOriginalProjectProponentthatthelatteracceptsallthetermsandconditionsindicatedintheNotice
ofApproval.
The invitation for comparative or competitive proposals shall be published at least once every week for three (3)
consecutiveweeksinatleastone(1)newspaperofgeneralcirculation.Theinvitationshouldalsobepostedcontinuously
inthewebsiteoftheIAconcerned,ifavailable,duringtheperiodstatedabove.
ForprojectscostingatleastPhP500million,theinvitationshouldalsobepublishedatleastonce(1)inatleastone(1)
internationalpublication.Itshallindicatethetime,whichshouldnotbeearlierthanthelastdateofpublication,andplace
wheretender/biddingdocumentscouldbeobtained.
The invitation shall explicitly specify a time of sixty (60) working days, calculated from the date of issuance of the
ComparativeProposaldocuments, forproposalstobereceivedbytheIA.Beyondthatdeadline,noproposalsshallbe
accepted.
8.2.8 Preparation and Submission of Comparative Proposals
Apre-bidconferenceshallbeconductedthirty (30)workingdaysafter thesimultaneous issuanceof theComparative
Proposaldocumentstoallbidders.
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Tobeeligibletocompetefurther,theoriginalProjectProponentshallberequiredtosubmitabondequaltotheamount
andintheformrequiredofthecomparativeProjectProponents.ThesubmissionoftheBondshallbedueatthedateof
thefirstdayofthepublicationofthe“invitationforcomparativeproposals”.
To be eligible to compete further, each Comparative Project Proponent is required to submit its proposal in three
separately-sealedenvelopesatthetimeandplacespecifiedintheTenderDocuments.Thefirstenvelopeshallcontainthe
qualificationdocuments,thesecondenvelopethetechnicalproposalasrequiredunderSection7.1(b)oftheRevisedIRR
oftheBOTLaw,andthethirdenvelopethefinancialproposalasrequiredunderSection7.1(c)ofthesameIRR.
8.2.9 Evaluation of Proposals of Challenger/s
TheIAshallevaluateproposalsinthreestages:
• Stage1–ThequalificationsofeachComparativeProjectProponenttocarryouttheproject;
• Stage2–EachComparativeProjectProponent’stechnicalproposal;and
• Stage3–EachComparativeProjectProponent’sfinancialproposal.
Onlythoseproposalswhichpassthefirststagewillbeconsideredforthesecondstageandsimilarly,onlythosewhichpass
thesecondstagewillbeconsideredforthethirdstageofevaluation.
TheIAwillreturntothedisqualifiedComparativeProjectProponentstheremainingenvelopesunopened,togetherwith
aletterexplainingwhytheyweredisqualified.ThecriteriaforevaluationwillfollowRule5oftheRevisedIRRoftheBOT
LawforthequalificationofbiddersandinRule8ofthesameIRRforthetechnicalandfinancialproposals.Thetimeframes
underIRRRules5and8shalllikewisebefollowed.
8.2.10 Original Project Proponent Right to Match
TheoriginalProjectProponentshallbegiventherighttomatchthecomparativeProjectProponent’sbid.
8.2.11 Determination of Winning Project Proponent
IfthepriceofthewinningcomparativeProjectProponentisnotmatched,thewinningcomparativeProjectProponent
shallbeconsideredforaward.Butintheeventofrefusal,inabilityorfailureofthewinningcomparativeProjectProponent
toenter intocontractwiththe IA, the IAwillconsider forawardthenext-rankedcomplyingcomparativebidwhich is
betterthantheoriginalProjectProponent.TheoriginalProjectProponentshallagainbegiventherighttomatchthe
comparativeProjectProponent’sbid.Ifnoothercomparativebidisdeterminedtobebetterthantheofferoftheoriginal
ProjectProponent,theprojectshallimmediatelybeawardedtotheoriginalProjectProponent.
8.2.12 Award of contract
Rule11oftheRevisedIRRoftheBOTLawprescribestherequirementsandtimeframeoftheawardofcontract;thisalso
appliestoUnsolicitedProposals.Chapter7ofthisManualalreadydiscussedtheprocessfortheawardofthecontract.
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8.3 Post Tender Clarification and Negotiation
TheProjectProponentcanbeassumedtohaveavestedinterestinamendingthegeneraloutlinesofrisktransferprovisions
agreedinthePPPContractoncethemoreintensemultiple-partynegotiationscommenceonsupplementarycontracts.
The Project Proponentwill likely have at its disposal aNegotiation Team, supportedby technical, legal and financial
advisors,whomay,ormaynot,bepresentatthenegotiationtablebutwillbeavailableforsupportfunctions.Together
withtheNegotiationTeam,theyformwhatiscommonlyknownastheProjectProponent’sTransactionTeam.
For the IA’s side, thePBAC is responsible for negotiatingwith theProject Proponent and itmay compriseof experts
in areas suchas legal, financial, engineering, operation, and riskmanagement. Forunsolicitedproposals, thePBAC is
comprisedofthe IA’sPPPUnitandthePPPCenter (observercapacityonly). Representatives fromthe IAandthePPP
CenterthatnormallycompriseaProjectStudyCommitteemayrepresenttheirrespectiveinstitutionsduringnegotiations
forunsolicitedproposals.
Atthisstageoftheprocess,thePBACwillconductafullduediligenceontheproject.Itisworthwhiletorecapthemore
importantpartsof thisduediligenceand its impactondevelopinganegotiationstrategy.Thereare twosteps in this
process: (a) thenegotiationof thePPPContract,whichhas tobecompletedbefore theprojectcanbeawarded;and
(b)participationand,whererelevant,negotiationinvolvingalltheothersupplementaryagreementsaftertheprojectis
awarded.
Thissectionsetsoutguidelinesfornegotiations,includinganessentialchecklistforthePBAC.
8.4 Preparations for the Negotiation of the PPP Contract
ThePBACwillreviewthevalueformoneyanalysisdoneontheproposalandotherevaluationparameters,including:
a. An SCBA, establishing that theproposedprojectmeets threshold criteria establishedbyNEDA andwill be
economicallybeneficialtothecountry;
b. The feasibility study and corresponding investment appraisal, establishing the commercial viability of the
project;
c. Asocialandenvironmentalimpactreport,identifyinganymajoradversesocialandenvironmentaleffectsof
theprojectinareassuchasenvironment,healthandsafetyofemployeesandcommunity,genderopportunities,
resettlementissues,concernsregardingindigenouspeoplesand,ifapplicable,affordabilityissuesandwillingness
topayfortheservicesthataretobeprovided.
Aspartofduediligence,itisalsoessentialtoundertakescrutinyofthefinancialmodelandthewinningbidder’sproposal
toestablishthereasonablenessoftheprojectedcapitalcosts,operatingcosts,tarifflevels,risksandotherrelatedaspects
oftheproposal.
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ThePBACshoulddevelopaNegotiationPlan.Thisconfidentialplanshouldincludeataminimum,identificationof:
a. Non-negotiableitemsidentifiedassuchbytheapprovingbody;
b. Obstaclesthatarelikelytoimpedethesuccessfulnegotiationoftheproject;
c. Factorswhichhavechangedsincetheunsolicitedproposalhasbeenreceived;
d. Ariskmanagementstrategythatidentifies,quantifies,andprioritizesthedifferencesintheissuesbetweenthe
RequestforComparativeProposalsandtheproposal;
e. Parametersthatarenegotiable,asagreedbytheIAwiththeapprovingbody,andthescopeforvariance;
f. Anegotiatingstrategywithregardtotechnicalspecifications,particularlywheretheseimpactonprojectcost;
g. (g)renegotiationoptionsonspecificitems;
h. (h)otheritemsthatmaybespecifictotheparticularproject;and
i. Establishingacommonunderstandingandagreementonacomprehensiverangeofperformanceindicators,
how these aremeasuredand reported and clarity tobothpartiesof PPPContractprovisions. This is to avoid
contractdisputesduringtheoperationalstage.
TheIRRprescribesamaximumperiodof180daysforthenegotiation.Duringthisperiod,thekeytoasuccessfulnegotiation
istokeepthegovernment’smainobjectivesattheforefront,whileatthesametimemaintainingflexibilityinorderto
arriveatacontractualagreementthatisacceptabletoboththeIAandtheProjectProponent.
Ifbytheendof180daysthereislittleornoprogress,thePBACshouldconsiderbreakingoffnegotiations.Anydecisionto
breakoffnegotiations,however,shouldbemadebytheIAbasedontherecommendationbythePBAC.Ifthenegotiations
aresuccessfulandapprovalisextendedbytheIA,thedraftcontractwillbeupdatedandsenttotheICCforconcurrence.
ThesecrettosuccessfulPPPnegotiationsistoproceedasfaraspossibletomeettherequirementsoftheprivatesector
whileatthesametimeensuringthecostsandbenefitsandtheoptimalallocationofriskisachieved.Hence,thePBACwill
aimtonegotiateanagreedPPPContractthatwillhavenosubstantialshiftofrisktothegovernmentfromtheparameters,
termsandconditionssetbyICC.
8.4.1 An attitude of ‘doing business’
Inadditiontotheabove,itisessentialtoestablishanynon-permissiblevariationstothegovernmentpositionforcontract
negotiations.TheIAwillhaverecommended,andICCwillhaveapproved,whichitemsarenon-negotiableandshould
beidentifiedassuch.TheremayremainanumberofotheritemsintheRequestforComparativeProposalswhichthe
ProjectProponentmaynotmeetandwhichwillformthebasisofexplanation,discussionandnegotiation.Forexample,
negotiationsbetweentheProjectProponentandthegovernmentareoftenneededtoclarifyissues(usuallykeyissues)
thatariseasaresultofgapsorlackofclarityinthedraftPPPContract.
Wherenecessary, thePBACshouldbeabletoestablishtheparameters forpermissiblevariations,especiallytheupper
limit.ThatpositionmustbedocumentedandapprovedbytheIAbeforenegotiationscommencesotheleadnegotiator
isabletoconfirmanycontractvariationswiththesuccessfulbidderwithouthavingtoseekapprovalforeachvariation.
Thismakesforgoodpractice,asnegotiationismorelikelytoproceedsmoothlywithoutthenegotiatorhavingtoobtain
permissionfromthegovernmentside.
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Ifnegotiationsareunsuccessful,theacceptanceoftheunsolicitedproposalwillberevoked.
8.5 “Check and Balance” of the Supplementary Documents in Unsolicited Proposals
Akeyquestion iswhoreviewsthedocumentation (other thanthe IA)beforefinancialclose.Sincethemajorityof the
projectdocumentationisdevelopedafterthePPPContractisinitialed,itisassumeditisjusttheIAwhoisawareofits
scopeandcontent.Thiscreatesaprocedural“checkandbalance”issue.
Table2.3followingdescribeswhatelementsofthedocumentationarepreparedpre-andpost-tender.
Table 2.3 Elements of Documentation for Pre- and Post-Tender
PPPContract Pre-tender,partofthetenderingpackagebutsubjecttoclarifications,theconditionsprecedenttoeffectivenessareusually180daysbutextendableattheoptionoftheParties
SchedulestothePPPContract Posttender
EPCContract Posttender
O&MContract,ifrequiredFuelSupplyAgreement,ifany
Posttender
JointVentureAgreement,ifrequired Posttender
SubordinationandFundingAgreement,ifrequired
Posttender
EquityGuaranteeorStandbyfundingarrangement
Posttender
TrusteeAgreement(s) Posttender
SideLetters,ifrequired Posttender
DirectAgreement Posttender
Theelementsofthedocumentationnegotiatedpost-tenderarepartiallyintendedtoclarifyrisktransferarrangementsthat
mayhavebeen(insomecases)obliquelyagreedduringconstructionoroperation.Forexample,theconstructioncontract
maycontainprovisionsrelatedtotheperformancebond-ortheunderlyingliquidateddamagesprovision-thatmaybe
suitablefortheproject(andacceptabletothelenders)butimplicitlyunfavorabletotheIA–thereby,latently,lesseningrisk
transfertotheprivatesectorduringconstructionandcreatingunwanted(andperhapscomplicated)contingentliabilities.
ThesameistrueoftheO&MAgreement,EquityGuarantee,orthestandbyfundingarrangements.EventheJointVenture
AgreementmayhaveprovisionslimitingthesupportthatparentcompanieswillgivetotheSPCcreatedtoimplement
theproject.Forexample,aJointVentureAgreementmayspecify that theparentcompanieswillbackuptheirequity
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CHAPTER 9Key Project Documents
Thissectionaddressestheissueswhichariseinthepost-tenderperiod,whentheprojectdocumentsarecompiledandthe
partiesstartlookingforwardtofinancialclose.Theseissuesinclude:
• HowotherkeyprojectdocumentslinkwiththePPPContract.Thesedocumentsarenotnormallycreateduntilsome
monthsafterthefirstrankedbidderhasbeenselected.Thefocusinthediscussionbelowisontheshareholder
agreement,thePPPContract(usinganAvailabilityAgreementfortheElectricitySectorasanexample),theEPC
Contract,andtheOperationsandMaintenanceAgreement;
• What to look for in the structureofeachagreement (andparticularly theway that it relates to theAvailability
Contract)thatmakesitbankable;and
• The contractual variations in the EPCContract, and theO&MContract used for each of the documents,while
retainingtheelementofbankability.
Thegeneral structureofcontracts foraPPPConcession is setout inFigure2.5 following. Thecenterof theContract
StructureistheSpecialPurposeCompanythatundertakesthePPPConcessionContract.
Special PurposeCompany
(SPC)
Operators Agreement (O&M)
Financiers Agreement ShareholdersAgreement
Side Agreements (Utilities, etc.)
Engineering Procurement & Construction
(EPC)
PPP Contract(Government of the Philippines)
Input Contracts
AvailabilityAgreements
(Water/Power)
Figure 2.5 General Structure of a PPP Concession Contract
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ThepurposeofthisChapteroftheManualistodescribebroadlythescopeofdocumentsthatarerequiredforafunctioning
PPParrangementandthetypesofcontractdocumentsthatarerequiredfromtheGovernmentandtheprivatesector
partner.
APPPProjectProponentinthePhilippinesisnormallyorganizedasastockcorporation.Inthecaseofaconsortium,the
ProjectProponentcanbeorganizedasalimitedorgeneralpartnership,butthepreferredbasisforlegalorganizationisa
jointventurestockcompany.
ThefollowingarethedefinitionssetforthintheCorporationCode:
a. Corporation-isestablishedundertheCorporationCodeandregulatedbytheSECwithapersonalityseparate
anddistinctfromthatofitsstockholders.Theliabilityoftheshareholdersofacorporationislimitedtotheamount
oftheirsharecapital. Itconsistsofat leastfiveto15incorporators,eachofwhommustholdat leastoneshare
andmustbe registeredwith theSEC.Acorporationcaneitherbeastock,ornon-stockcompanyregardlessof
nationality.Suchcompany,if60%Filipino-40%foreign-owned,isconsideredaFilipinocorporation;Ifmorethan
40%foreign-owned,itisconsideredadomesticforeign-ownedcorporation;
b. A stock company isacorporationwithcapital stockdivided intosharesandauthorizedtodistribute to the
holdersofsuchsharesdividendsorallotmentsofthesurplusprofitsonthebasisofthesharesheld;
c. Joint ventureisacommercialundertakingbytwoormorecorporateshareholders.
9.1 The PPP Contract
ThePPPcontractcantakeanumberofforms(themostcommonbeingAvailabilityandConcessionContractsrespectively).
Thoseformsarediscussedbelowwiththeirbasicprinciplesandstructures,includingriskallocationarrangements.
9.1.1 Issues Related to Finance
Both Concession and Availability Contracts share certain preconditions related to their finance-ability, including the
following:
a. Project-relatedpermitsandconsentsshouldbeissuedforthedurationoftheproject.Insomecases,counter-
partiesmaynotbeabletograntconsentsforsuchlongperiods.Ifso,thetermsforrenewalshouldbesubjectto
aslittlevariationbyregulatorsaspossible.Anacceptablemechanismisthattheconsentsshouldbeissuedfora
specifiedperiodoftimeandrenewed,subjecttomeetingsomeclearandpredefinedstandardsofoperation;
b. Projects should not be exposed to the possibility of discriminatory taxation. In developing countries and
indeed,inthePhilippines,infrastructureprojectsareusuallyawardedcorporatetaxholidaysforadefinedperiod.
Incaseswheretherearenocorporatetaxholidaysorsuchtaxholidaysexpire,lenderswilltaketheriskofachange
ingeneraltaxesbutnottheriskthattheirparticularprojectissingledoutfordiscriminatorytaxation;
c. Projectcompany’sliabilityforconsequentiallossfrombreachingitsobligationsunderaprojectcontractmust
becapped,notopen-ended;and
d. Projectsmaybe terminatedearly for anumberof reasons, includingeventsofdefault, orprolongedForce
Majeure(FM).Incaseofterminationbyeitherparty,compensationisgenerallytailoredtomeetthecircumstances.
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However, theminimumterminationpayment shouldconsistof the sumofprincipal andall interest, including
defaultinterest,outstandingtothelendersunderthefinancingdocuments.TerminationEventsandcompensation
isdiscussedinconsiderabledetailinChapter5ofthisManual.
Banksmaybepreparedtoacceptvariouslevelsofriskdependingonthejurisdictioninwhichtheyaredealingandthe
trackrecordofthevariousregulatorsandissuingauthorities.
9.2 Ancillary Agreements to PPP Contracts
WhilesupplementarytothemainPPPcontract,theIAneedstonegotiatetheancillarycontractsjustasthoughtfullyas
themaincontract.
9.2.1 AVAILABILITY AGREEMENTS
Availabilityagreementsaretypicallylong-termpurchaseandsalecontractsinwhichacreditworthypurchaseragreesto
buytheoutputofafacilityonspecifictermsoveradefinedperiod(theoff-takeagreement).Anoff-takeagreementcan
applytocommodityprojectssuchastheproductionofgold,silver,copper,tin,oil,naturalgasorcoal;orindustrialprojects
suchasprocessingofvegetables,wood,packagedfoods,data,newsprintormedicalsupplies.
The Availability Agreement for Purchase of Electricity
ByfarthemostcommonagreementforthepurchaseofelectricityisanAvailabilityContract.ThisContractisanagreement
forthesaleofpower(usuallyonthebasisof“availablecapacity”and“netelectricaloutput”)betweentheutilityandthe
projectcompany.Thisstructureservestwoimportantfunctions:
a. Itguaranteesamarket,acostbasisforthepowerplantandcorrespondingpredictablerevenuestreamforthe
powertobeproducedbytheproject(therebyallowingthefacilitytobefinancedonaffordablepaymenttermsand
withareasonabletariff);
b. It defines in reasonable detail the rights, responsibilities and obligations of the project company and the
purchasingutilitythroughthefinancing,constructionandoperationalphasesoftheproject.UndertheAvailability
Contract,theprojectcompanyagreestomakethecontractedlevelofelectricitygenerationcapacityavailableto
theutility(subjecttoacertainamountofannualoutagetimeformaintenanceorotherdowntime)byanagreed
dateandforanagreedperiodoftime;andthepurchaseragreestopaytheagreedtariffforcapacitymadeavailable
to it and thenet electrical outputdispatched to it. TheAvailabilityContract includesprovisions related to the
arrangementsandmechanicsofpaymentsundertheContract.AlthoughthereareonlytwopartiestotheContract,
theresponsibilitiesandobligationsofeachpartyunderthisumbrellaagreementmustbeacceptabletotheutility,
sponsor(s), investors and lenders to the project and interface properlywith other PPPContracts. In particular,
provisionsthereinrelatedtotheallocationofriskmustbeacceptabletothefuelsupplier,constructioncontractor
andtheO&Mparties.Thisbroaderconsensusisimportantbecausethelenderswillrequirethattherisksassumed
bytheprojectcompanyundertheContract,whichpotentiallyaffectitscashflowadversely,bepassedthrough
theotherPPPContractstotheappropriateparties.Aspreviouslymentioned,thefundamentalprincipleapplied
isthatthepartybestpositionedtomanageaparticularriskshouldberesponsibleformanagingit,andtheparty
responsiblefortheriskshouldbecompensatedforitsacceptanceandbeliable(paycompensation)foritsfailure
toproperlymanagetherisk.
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TheAvailabilityContractincludesprotections,incentivesanddamagesdesignedtoensurethatperformanceisrendered
aspromisedbyallocatingtherisksassociatedwithloadgrowthorshrinkageandfuelpricevariationstotheutilitywhile
construction,financingandoperationalrisksassociatedwiththeprojectareallocatedtotheprojectcompany.TheContract
alsoincludescompensationpayabletotheutilityortariffadjustmentsforperformance(reliabilityandavailability)notup
tocontractualrequirements.
OtherkeyprovisionsoftheAvailabilityContractinclude:
a. Thefirmpurchaseofcapacityandnetelectricaloutputatanagreedtariff,assumingthattheprojectcompany
meetstheperformancerequirementsintheContractincorporating:
i. Capacity price, payable per unit of dependable capacity at a level demonstrated through testing upon
commissioning of the facility and not less often than annually thereafter. Capacity price is usually fixed at
thetimeofexecutionoftheContract(oratthetimeofbidsubmissionifthecapacityisprocuredthrougha
competitivebiddingprocedure),butsomeadjustmentinthetariff,orinthetariffcomponents,isoftenallowed
atthetimeoffinancialclosingandperiodicallythereafter.Capacitypriceisusuallystructuredsoastoinclude
operatingexpenses,debtserviceandareturnonequity;
ii.Energyprice,includingsomeformof“pass-through”offuelcost,payableoneachunitofenergydispatched
byanddeliveredtotheutility.Energypricewillbepaidbytheutilityattheagreedpricefortheamountof
energyactuallydeliveredtotheutility.Energypaymentsarestructuredtocovertheriskoffuelpricevariations
sincethisisanunacceptableriskfortheprojectcompanytotakefromtheviewofsponsor(s)andlenders.Waste
fuelorby-productfuelprojectsmayrepresentanexceptiontothisgeneralrule;
b. Tariffadjustmentmechanisms,usuallylinkedtoinflationorchangeinparitybetweenthecurrencyofpayment
andthatofexternaldebtandequitymobilized;
c. Tariffadjustmentandliquidateddamagesleviedagainsttheprojectcompanyfordelaysandpoorperformance;
d. Project description (including the agreed capacity commitment), required completion date and electrical
specifications;
e. Description of type and location of interconnection facilities and the respective obligations of the parties
regardingthedesign,cost,constructionandmaintenanceofthefacilities,andtheconsequencesassumedbythe
utilityofnotcompletingsuchfacilitiesbytherequireddate;
f. Invoicingandpaymentproceduresaswellasmeteringrequirements;
g. Eventsofdefault,terminationoftheContract,rightsupontermination,includingarighttopurchaseorsellthe
project;
h. FMprovisions,asdiscussed inChapter5, including its impactonperformanceandpaymentobligations (as
discussedearlier,paymentobligationsarenotexcusedbyFM);
i. Testingandcommissioningprocedures;and
j. Dispute resolution (including arbitration in a neutral forum and if the government is involved, waiver of
sovereignimmunity).
9.2.2 INPUT CONTRACTS
InputcontractscoverarangeofcontractualissuesfortheSPC.TheyareenforcedtocoverservicestotheSPCsoitcan
deliverduringtheconstructionaswellastheoperationstagesofaPPPContract.
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The InputAgreementscancover: specialist servicesduring theoperationandmaintenanceperiod (suchas road line
markingfortollroads),specialistservicesduringconstruction(geotechnicalservicesforspecialgroundconditions),and
supplycontractsthatarenotcrucialtotheoperationofinfrastructure.
9.2.3 SIDE AGREEMENTS
SideAgreementsarenotakeypartofthePhilippinePPPContractstructureatthistime,butwilllikelygainmoreuseas
morePPPcontractsareplacedintothemarket.Theyareimportantagreementsthatarenotincorporatedinto,butoperate
alongside,thePPPContract.SideAgreementsusuallycombinethreeparties–theProjectProponent,theIAandathird
party.SideAgreementscoverthefollowingissues:
• Removalorrelocationofutilities:water,telecoms,power;
• Brownfields(i.e.projectsthatbuildonpriorworkorrebuildfromanexistingone):assetallocationtotheproject
(consents);
• AppointmentoftheIndependentConsultant;and
• InteroperationandInterconnectionAgreements–tollroads,telecoms,power(intheabsenceofaformalindustry
regulator).
SomeexamplesofSideAgreementsandtheirusesare:
• Removalorrelocationofutilities:water,telecoms,power.
» TheProjectProponentisbetterplacedtomanagetheprocessandfititwithintheprojectplanandscheduling;
» Transferofriskmayormaynotoccur–ContractingAgencymaystillaccepttheriskortransferittotheProject
Proponent;
» Sideagreementmaybetripartite–ContractingAgency,ProjectProponentandUtilityOwner.
• Brownfieldprojectswhereassetallocationtotheproject(consents)isrequired:forexample,Governmentowners
needtotransferassetstotheProjectProponentortheContractingAgencyorGOCCJointVentureswithprivate
sectororLGUs–asset transferconsent iscritical toavalidPPPcontractand theContractingAgency’s right to
Contract.
• TheIndependentConsultantisnominatedinthePPPContracttoperformspecifieddutiesinrelationtothePPP
Contract.ItisinternationalbestpracticetojointlyconcludeatripartiteagreementbetweenContractingAgency,
ProjectProponentand the IndependentConsultant. The rightsanddutiesandprocessesandmechanismsare
containedinthesideagreement.
• Interoperationand InterconnectionAgreements for toll roadsthat interconnect: Interconnectionduringdesign
and construction leads to interoperation agreements. These canbe commercial agreementsbetweenProject
Proponents.
9.2.4 EPC CONTRACTS
Threegeneraltypesofconstructioncontractsexist:(a)engineering;(b)procurement;and(c)construction.Afourthisan
EPCcontractcoveringallthreephasesofconstruction.
Becauseitencompassesallphasesofconstruction,anEPCContractprovidessingle-pointresponsibilityforitsexecution.
Underitsterms,thecontractoracceptsfullresponsibilityfordeliveringtotheprojectcompanyafullyoperationalfacility
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withagreedspecifications (on-spec)byacertaindate (fixedschedule)andataspecifiedprice (fixedprice).Moreover,
contractorswillbackuptheirperformanceobligationswithliquidateddamages(LDs)payablefornon-performance.In
returnforthisarrangement,anEPCContractwillcostaprojectcompanyapproximately10–20%morethanaconventional
lump-sumconstructioncontract.Despiteitshighercost,lenders(andsponsor/s)preferthearrangementbecauseofthe
single-pointofresponsibilityandbuilt-inhedgesagainstprice,scheduleandperformanceshortcomings.
IninternationalProjectFinancing,anEPCcontractisthemostimportantofthecost-basedcontractsbecause:
a. Itisthelargestsinglecomponentofcapitalcostandwillabsorb,therefore,themajorityoftheprojectcompany’s
capitalization;
b. Qualityandefficacyofthedesignandconstructionoftheplantwillimpactonprojectexpenditureandrevenues
throughoutprojectoperation;
c. Completionof construction and commissioningby a specificdate is often a fundamental conditionof the
concessionorlicense.Timeliness,ordelay,incompletionoftheconstructionwillimpactonprojecteconomics.
UnderanEPCcontract,thecontractorandtheprojectcompanyareallocatedrisksbasedonstandardriskmitigating
principles.Boththeparticipantshaveavestedinteresttoensurethattheprojectcompletionoccursontime.
Asconstructionproceeds,newrisksarisewhilesomeoftherisks(alreadyallocatedtotheparties)subside.Mostsevere
amongthepossibleconstructionrisksthroughouttheconstructionperiodarecostoverruns,delaysincompletion,start-
upandtestingproblems,hiddendefaultsandcontractorpaymentdefault.
Avoiding delays, cost-overruns and a failure tomeet performance specifications is a particularly important objective
for theproject company. If theproject takes longer tobuild thanwas anticipated, project costwill exceedfinancing
commitmentssincetheroll-upofinterestduetolenderswillbegreaterthanprojected.Aprojectcompanythatisexposed
todelaysandcostoverrunswillhavetoborrowmoremoneyatadditionalcostand/orinvestmoreequity.Normallythe
contractwouldhavebonusesforcostlessthanbudget,meetingorexceedingtimelydeliveryleadingtoearlydeliveryand
increasedrevenue.Conversely,penaltiesalsoapplyasnoted.
Additionalborrowings result in agreater-than-anticipateddragonoperating cashflows,whilemoreborrowings and
investingmoreequitybothcontributetoalowerinternalrateofreturn.Ifpronouncedenough,aseriousdelayorcost
overruncouldevenleadtodefault.Meetingtheagreedrangeofspecificationsisanequallyimportantobjectivebecause
ifthefacilityisrejectedtotally,itmaynevergetcommissioned.Inthatcase,itsvaluewillnotbesufficientinaliquidation
torepaythelendersorrecoverequityforthesponsor(s).
Theclassicconstructionriskisthatofcostoverrun,i.e.thethreatthattheproposedfacilitywillnotbeconstructedwithin
theoriginalbudgetallocated.Enteringintoafixed-priceturnkeyisthemostpowerfulmethodavailabletoshiftthisrisk
entirelyfromtheprojectcompanytothecontractor.
Asecondriskisthatofdelayincompletion.TheEPCContractwillspecifyadateforthecompletionoftheprojectwork
thatmatchestherequiredcommissioningdatespecifiedintheoff-takeorconcessionagreement.Ifnotmet,theturnkey
willprovideforthepaymentofLDsfromthecontractorforanyunexcuseddelayincompletingthefacilityontime.The
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LDsaresetusuallyatalevelthatwillcoveratleastsix(6)tonine(9)monthsofdelay,althoughthereareexceptionstothis
rule.Beyondthelevelofcoverage,theprojectcompanyandthelendersareexposed.
Thefailuretomeetperformancespecificationsduringthetestingandcommissioning isanother important risk.Three
situationsmayoccurinthisregard,i.e.thefacility(a)isrejected;(b)achievesaperformancelevelbelowspecifications,
withintheacceptablerangeandissubjecttoLDs;and(c)meetsspecificationsandiscommissionedsuccessfully.
Still another source of risk is the contractor’s performance during the warranty period. The contractor should give
extensivewarrantyperiodguarantees.Inapowerplantoperation,thestartingpositionisusuallytwoyearsformechanical
andelectricalworks andfive years for civilworks commencing from the commissioningdate. Themore rigorous the
commissioningandreliabilitytests,andthelongerthewarrantyperiod,thesaferpositiontheprojectcompanyisin.
Summary: EPC Contract
The banks’ requirements for EPC Contracts are predictable. Although there are exceptions as discussed above, EPC
arrangementsmustexhibitthefollowingattributestobefinanceable:
a. FixedScheduleandOn-Spec.Completionsubjecttomeetingperformancespecificationsandafixedschedule
generally tied to the scheduled commissioning date under the appropriate off-take or concession agreement
withanagreedlevelofLDspayable ifthefacility isoff-specordelayed.LDsshouldbepayable ifcompletionis
notachievedbyafixeddatesufficienttomeet(a)LDspayableundertheserviceagreement;(b)interestduring
construction(IDC)rolled-upduringthedelay;(c)LDspayableundersomeothercontracts,ifappropriate;and(d)
fixedoverheadcoststhroughouttheperiodofdelay.Ifnodelayisexperienced,thereshouldbeclearlyspecified
proceduresforthetakeoveroftheworksbytheprojectcompanyfromthecontractor;
b. FixedPrice.Thecontractoragreestoperformtheentirecontractscopeofworkforalumpsum(fixedprice)
establishedatthetimethecontract isentered into,which isfinalandbindingandnotsubjecttoescalationor
adjustmentofanykindotherthanthatspecificallyprovidedforintheconstructionagreementoreventualchange
orders.Thecontractshouldbeincapableofbeingreopenedexceptforrelativelyfewsituationsandalwayssubject
toapprovalbythelenders;
c. Performancemilestones.Paymentstocontractortiedtotheachievementofperformancemilestones,generally
theScurve;
d. Single-point responsibility with respect to the whole works. Generally, one single contractor should be
responsible to the project company for the execution of the entire scope ofworks. If the EPC is divided into
morethanonecontract,oriftheprojectcompanyentersintomorethanonecontract(e.g.,oneforequipment
supply;theotherforinstallation,erectionandcommissioningservices),bothcontractorsmustprovidetheproject
companywithacross-guarantee,underwhicheachagreestoguaranteetheother’sperformance.Ifonecontractor
defaultsunderthetermsofitsportionoftheturnkey,theothermustcurethedefaultandensuretheappropriate
completionofthecontract;
e. AfullEPCcontract.Noaspectoftheconstructionshouldfallbetweenthecracks.Hence, ifthecontractor is
basing thedesignonanyplans,ordata, suppliedby theprojectcompany, thecontractorshouldbegiven the
opportunitytoverifytheiraccuracyandtake“ownershipresponsibility”,eventhoughtheyweresupplied,oreven
preparedby,theprojectcompany.Similarly,theremustbenosubcontractor,orequipment,thatisselectedbythe
projectcompany.Ifsuchspecificationexists,thecontractormusttakeresponsibility;
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f. AfinanciallysolventEPCcontractor,unquestionablycreditworthyforitsobligationsundertheturnkey.Ifitis
not,acreditworthyentitymustbefoundtoguaranteethecontractor’sperformanceunderthecontract;
g. Pre-completion revenues applied against the project’s capital expenditures, thereby reducing the amount
thatneeds tobe fundedby the lenders. Forexample,apowergenerationplantmaybebuilt instageswhere
newsourcesofrevenuearerealizedatthecompletionofeachstage.Inthatcase,revenuesabovethoserequired
tooperatethepartiallycompletedfacilityshouldbeappliedtotheconstructioncostsoftheunfinishedportion
thereof.
9.2.5 O&M AGREEMENTS
A project sponsor(s) has the option of being the operator for the project company pursuant to a technical services
agreementorhavingthisfunctionperformedbysomeoneelse.TheO&Moftheprojectisoftendonebyanarms-length
participant.
TheOperatorhastobe,ataminimum,a60%Philippineownedcompanyifitisforinfrastructureoperation–tollroad,
powersupply,railprojectetc.InthecaseofaTollRoad,theOperatorwillberequiredtoholdaTollOperationCertificate
issuedbytheTRB.
TheO&MContractwillbegovernedbythePPPContractandtheMPSSthataresetfortheproject.TheMPSSwillbethe
majorsourceofobligationsandperformancestandardsthatwillapplytotheO&Mcontract.
TheservicesoftheoperatorinanO&Magreementareusuallyidentifiedinthreephases:mobilization,pre-operationsand
operations.Theagreementapportionsoperatingrisksbetweentheoperatorandtheprojectcompany forobligations
relatedtoO&Mcontractapprovalbythehostgovernment.Italsoreflectsagreementson(i)trainingoftheworkforce;(ii)
acceptanceofthefacility;(iii)enforcementofitswarranties;(iv)undertakingofresponsibilityforacceptableandefficient
performance thereof; (v)maintenanceof permits; (vi) drawingup andobservationof budgets for operations and for
routine,periodicandmajormaintenance;and(vii)ensuringinputavailability.
The IA and the lenderswill normally have to approve theO&Mcontractbefore it canbe implemented. In reviewing
thecontract, thehostgovernmentmaybeconcernedprimarilywithwhethertheprojectwilloperateasplannedand
complywithalllaws,includingenvironmentalandsafetylaws.Incontrast,thelendersmayfocusprimarilyonwhether
projectrevenueswillbesufficienttorepaytheirinvestmentwithinterestandthesponsor(s)maywantassurancethatthe
projectrevenueswillbesufficienttoprovideareasonablerateofreturn.Tosatisfythemselves,government,sponsor(s)
andlenderswillwantaminimumperformancestandarddefinedintheO&McontractgovernedbythePPPContractand
theProjectMPSS.Aperformancestandardshouldbedesignedtofacilitatemonitoring.
Aftercompletionofconstructionandinitialstart-upandtesting,theoperatorshouldberequiredtoinspectandcertify
thatthefacilitymeetstherequiredperformancespecificationsguaranteedbytheconstructioncontractorandcomplies
withtheMPSSsetfortheproject.Itshouldalsohavetheresponsibilityforobtainingandmanaginganywarrantedwork
asaresultofdefectiveconstructionorequipment.Sincetheoperatorhastheresponsibilityofoperatingthefacility,itisin
thebestpositiontodeterminewhetherornotithasbeenbuilttoperformproperly.
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Inapowerplant,theperformancestandardshouldbesetinrelationtooperatingcapacity,whileinatollroadproject,it
willbesettoachievearangeofperformances,includingservicelevels,compliancewiththeprojectMPSS,minimizinglost
revenuefromuncollectedtollsandassetpreservation.Toensuregoodperformance,thereshouldbeprovisionsforgiving
incentivestotheoperatorundertheO&Magreement.Thereareseveraloptionsavailabletocompensatetheoperator
for itsservices.They includefixed-price,cost-plus-feeandperformance-basedcompensation. Inafixed-pricecontract,
theoperatorwillreceiveaflatfeeforprovidingitsservices.Whilethisoptionrepresentsthelowestriskalternativetothe
projectcompany,itisusuallyappropriateonlywherebothscopeandmagnitudeoftheservicetoberenderedcanbe
predictedwithsomeaccuracyandisunlikelytofluctuate.
Amorecommonarrangement isacost-plus-feecontract. “Cost-plus”could include(a)consumablesnecessary forthe
operationandmaintenanceofthefacility;(b)costsofanythird-partycontractsbeingadministeredorenteredintobythe
operator;and(c)costoftheoperator’semployees.Alsoincludedintheagreementarecorporateoverheadallocations,
changesinpersonnel,incentivesfortheuseoflocalstaff,andagreedpaymentrates.The“fee”iseitherafixedpercentage,
apercentage tied toperformanceor a combination, thereof. The fee canalsobe tied to specifiedcriteria to createa
performance-basedincentivefortheoperatortoprovidethebestavailableservice.Feeincreasesforsuperiorperformance
canbecoupledwithLDsforpoorperformance.Thesearrangementsareparticularlyusefulwhentheoperatorisanequity
investorintheprojectcompanywithasignificantstakeinthesuccessoftheproject.
Summary: O&M Agreement
Themajorconcernsforthebankscorrespondwiththoseoftheprojectcompanyandareasfollows:
a. Theoperatorshouldbegivenincentivestoruntheprojectproperlyandefficientlyinordertocomplywiththe
PPPContractTermsandtheProjectMPSSandoptimizetheprojectcompany’sprofit;
b. Conversely,theoperatorshouldbesubjecttotoughpenaltiesifcertainoperatingbudgetarytargetsarenot
met;
c. Thebanksshouldbeabletoremove(orbringabouttheremovalof)theoperatorforpoorperformance;and
d. Iftheoperatoristhesponsor(s),orastockholderintheprojectcompany,acontractmustbedrawnupbetween
thepartiesthatreflectsarms-lengthnegotiationsandagreements.
9.2.6 FINANCIERS’ AGREEMENTS
Financiers’AgreementsareacriticalelementoftheSPC’ssuiteofcontractualobligations.19Fullycommittedfinancing
packagesmaybedifficult toobtainat the timeofbidding.Thismaymeanthat thefinancingagreementswillnotbe
concludedimmediatelyoncethePPPcontractissigned.
Thestrengthofthefinanciers’commitmenttofundthePPPprojectatthebiddingstagewilldependontheprojectand
market.TheIAshouldatleastrequirethatbiddersprovideevidenceofareasonableanddeliverablefinancingplanintheir
proposals.Biddersshoulddemonstratethatthedebt,theequityand,whereapplicable,thegrantprovidershavereviewed
andaccepted thebroaddesignof thePPPand themajor contractualprovisions (e.g. theproposed riskallocation).A
fundingcommitmentfromthelenderswilloftenbeconditionalsincetheywillgenerallynotbeinapositiontocomplete
theirdetailedduediligenceandapprovalprocessuntilafewweeksbeforefinancialclose.
19Source:EuropeanPPPExpertiseCenterPPPguide
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A large number of financing agreements are needed for a project-financed PPP. These agreements have three basic
purposes:
• They are designed to protect the interests of senior lenders20 vis-à-vis other providers of finance (e.g. equity
investors)andsubcontractorsofthePPPCompany.Inparticular,theseniorlenderswillwanttoensurethattherisks
bornebytheirborrower(i.e.theSPC)aresatisfactorilymitigated.Inpractice,thismeansthat,tothegreatestextent
possible,therisksbornebythePPPCompanyunderthePPPcontractare‘passedthrough’tothesubcontractors.
• Theagreementsneedtoclearlyestablishthattheservicingofthedebttakespriorityovertheremunerationofall
otherformsoffinance(thisiswhat“senior”debtmeans).
• The suiteof financingagreements isdesigned toensure that, should therebeproblemswith theproject that
jeopardisetheservicingofthedebt,thelendershavethepowerstotaketheactiontheydeemnecessarytoprotect
theirloan.
Thetypicalfinancingagreementstobepreparedandconcludedcomprise:
• Seniorloanagreements:agreementsbetweenthelendersandtheSPCsettingouttherightsandobligationsof
eachpartyregardingtheseniordebt;
• AnagreementbetweenthefinancingpartiesandtheSPCwhichsetsoutthetermsthatarecommontoallthe
financinginstrumentsandtherelationshipbetweenthem(includingdefinitions,conditions,orderofdrawdowns,
projectaccounts,votingpowersforwaiversandamendments).Acommon‘termsagreement’greatlyclarifiesand
simplifiesthemulti-sourcingoffinanceforaPPPprojectandensuresthatthepartieshaveacommonunderstanding
ofkeydefinitionsandcriticalevents;
• Subordinatedloanagreements(wheresubordinatedormezzaninedebtisusedinthefinancingstructure);
• Ashareholders’agreement;
• Anaccountsagreement:thisinvolvesabankwhichwillcontrolthecashflowingtoandfromtheSPCinaccordance
withtherulessetoutintheagreement;
• An inter-creditor agreement: an agreement between the creditors of the SPC that spells out aspects of their
relationshipwithoneanotherandtheSPCitself,sothat,intheeventofaproblememerging,groundruleswillbe
inplace;
• Hedgingagreements:agreementswhichenabletheSPCtofixtheinterestrateonallorpartofitsdebtortolimit
itsexposuretoexchangeraterisks;
• Securityagreements(e.g.sharepledge,chargeoveraccounts,movablespledge,receivablespledge);
• Legalopinionsfromthelender’slegaladvisersontheenforceabilityofthecontracts.Enforceabilityofcontractsis
akeyissuethelenderswilltackleintheirduediligence.ThiswillincludethereviewofthepowersoftheIAtoenter
intotransactions(theso-calledviresissue).
9.2.7 SHAREHOLDERS AGREEMENT
Memorandumandarticlesofincorporationaretheconstitutingdocument(s)whichgovernacorporation.Sponsorsmay
wishtosupplementthese(largely)templateconstitutionstoincorporatemoresophisticatedapproachestoadministration
andoversight,andShareholdersAgreementsarethemostcommonwaytoachievethatinProjectFinance.
20HoldersofseniordebtorlendersthatwillberepaidfirstbeforeothercreditorsintheeventtheSPCbecomebankrupt.
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Ashareholdersagreementisthegenerictermforanycontractbetweentwoormoreshareholdersgoverningtheirconduct
inrelationtothecorporation,orpartnership,inwhichtheyownsharesandintherangeofcorporateactivitypermitted
tothem.Ashareholderagreementcancreatevotingagreements,votingtrustsandotherprovisionsforthegovernance,
ownershipstructure,andmanagementcontrolofaproject.Itisalsousedtosetforthobligationsbetweenandamong
theshareholdersinrelationtotheprojectcompany,establishproceduresfortheirexecution,anddefineremediesinthe
eventthatoneormoreshareholdersisunabletocomplywiththeirobligations.Finally,suchagreementsmaybeusedto
createprocessesforthearbitrationofdisputes,clarifyrightsofpre-emptionordescribeconditionsunderwhichtheSPC
wouldbesubjectedtoavoluntarywindingup.
Someoftheissuesarebestresolvedthroughtheprojectcompany’sconstitutionaldocumentsratherthanashareholders’
agreement,apointtotakeintoconsiderationonacase-by-casebasis.Areaswheretheshareholders,orstakeholders,must
seekcommongroundinordertoavoidfutureproblemsinclude:
a. Theprojectwillhavecreditriskrelativetoitssponsor(s)duringthedevelopmentperiodwhencallsforcapital
aremade,aswellastoitsshareholdersduringconstructionandoperation,whencallsforbaseorcontingentequity
aremade.Specifically,thisreferstothepossibilitythatoneormoreoftheseshareholderswillnotbeabletomake
acapitalcallwhendue.Ifanycapitalcontributionistobemadeduringthedevelopmentorconstructionperiods,
eachshareholderwillhavetotakeaviewonthecreditworthinessoftheothers.
b. Theissueinevitablyarisesastowhathappenswhenonepartywishestosellitsinterestsintheproject.Inthis
regard,acommonprovisionistoobligatethesellingpartytooffer its intereststotheotherparties inthe joint
venture.Iftheothersarenotinterested,thesellingshareholderisthenpermittedtonegotiateasalewithanon-
relatedthirdparty.Underthisprovision,existingshareholderswillhaveapre-emptiverighttotheshares,which
placestheminapositionofstrengthrelativetotheseller.Toavoidabuses,however,ifthesellingshareholderisnot
satisfiedwiththepriceofferedbyanexistingshareholder,itisusuallypermittedtoidentifyathirdpartywillingto
payahigherprice.Theexistingshareholdermustthenmatchthatpriceorforegoitspre-emptiveright.
c. Whereaprojectcompanyhas,or is likelytohave,acontractualrelationshipwithacontractingshareholder,
othershareholderswillwanttoeliminatethecontractingshareholder’sconflictofinterest.Conflictsarelikelytobe
mostpronouncedwhenissuesinrelationtothecontractareaddressedformallybytheBoardofDirectors.Typically,
theissueismitigatedbyasupplementalagreement(intheshareholders’agreementorelsewhere)excludingthe
contractingshareholderfromanydiscussion,orvote,relatedtothatspecificmatter.
Issues Related to Finance
Whileevaluatingashareholders’agreement,lenderswillbasetheirjudgmentsonthefinance-abilityoftheprojectonthe
followingfactors:
a. Lenders will undertake a thorough review of the shareholders’ agreement, as well as the balance of the
projectcompany’sorganizationaldocuments,toensurethatallofthecommonproblemareasareidentifiedand
proceduresforresolutionareaddressed.Theywillalsoensurethateachshareholderhastheauthoritytoenterinto
aloanandequitysupportagreementwiththeSPC;
b. Thegeneralexperienceandtrackrecordofthesponsor(s)withthetypeoffacilityunderconsideration,including
itsfeaturedtechnology,isthemostimportantcriterionrelatedtofinance-ability.Theidealcaseisonewhereevery
shareholderisexperiencedintheprojectanditstechnology,andisseentobecreditworthyforitscommitments.
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Atthevery leasttheleadsponsor(s)musthavepriorexperiencein implementingsimilarlysizedprojects inthe
countrywheretheproposedprojectislocated,orsomeothercountrywithsimilarattributes;
c. The proposed structure of project capitalization should meet acceptable ratios of debt to equity in the
internationalmarkets.Moreover,theproposalshouldalsoreflectlegalorstatutoryrequirementsofthePhilippines
inthatregard;
d. Ideally,thesponsor(s)entersintoanequitysupportagreementthatstipulatesthateachshareholder, jointly
andseverally,willprovideequitycontributionsupfrontasdescribedinaproperlydrawnsubscriptionagreement
conformedtotheCommercialCodewiththetimingofdisbursementsassetforthintheEPCcontract,priortoany
disbursementbythelendersunderthefacility(loan)agreement.Asafallback,payinganequitycontributionover
time,orevenback-endingthosecontributions,isacceptableprovidedthat:(a)TheIAandlendersaresatisfiedwith
each individual shareholder’screditworthinessandareprovidedwitha jointandseveralguarantee instrument
fromeach,effectivelybackstoppingallotherequitycommitments;or(b)EachshareholderdeliversastandbyL/C
fromabankacceptabletothefinancepartiesbackstoppingitsowncommitment;
e. Thesponsor(s)mustprovidesatisfactorycoverforcostoverruns.Ideally,thisisdonethrougharelativelyopen-
endedcommitmentreferredtoasacompletionguarantee.Alternatively,thesponsor(s)maynegotiatewiththe
lenderstoputatriskanagreedlevelofcontingentequitytosupporttheprojectcompletion;
f. Inadditiontocostoverruns,thesponsor(s)mustagreetocoveranygaps in insurancecoverage,or forthat
matter,anysignificantresidualriskthatoneormoremajorparticipantsarenotwillingtoabsorb.
9.3 Project Finance Variations in Cost Structure
This section discusses the common variations to the typical Project Finance structure. Depending on circumstances,
thesevariationscreateadditionaluncertaintiesforlendersinassessingthepredictabilityofrevenue,constructioncosts,
resourcesupplycostsandoperatingcosts.Specifically,thissectiondiscussesbasicvariationsincost-basedcontractsthat
haveprovedtobeacceptable inthemarket;whileothersections intheManualdiscusscreditenhancementsusedto
managerevenuerisks.
9.3.1 EPC Contract Variations
Currently,themostcommonpracticeisforlenderstoagreetoshareconstructionriskswiththeprojectcompany.When
lenders assume this risk, mitigation typically is in the form of a fixed-price, lump-sum, fixed-date EPC contract with
substantialLDs,asdescribedearlier.UsuallytheLDswillprotectlendersandtheprojectcompanyforsome,butnotall,of
themoreextremeoutcomes.
Thesponsor(s)isnormallyrequiredtocontributecontingentequitytotheprojecttocovercostoverruns.Strongerprojects
havefullcompletionguaranteesprovidedbysponsor(s).Whenthesponsor(s)providesafullcompletionguarantee, it
acceptsallrisksassociatedwiththecompletionoftheproject,regardlessofitscauseortheinabilityoftheEPCcontractor
tomitigatetheproblemwithLDsorotherremedies.
There are variations on how this is done. Some sponsors simply issue a performancebondor a letter of credit (L/C)
coveringtheirobligationstocompletetheproject;othersuseothermechanisms.Someyearsago,HopewellHoldingsof
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HongKong,forexample,undertooktobuildthecoal-firedpowerstationatShajiao,China,andthediesel-firedNavotasI
projectinthePhilippinesunderafixed-priceEPCcontractestablishingsingle-pointresponsibilitythroughoneofitsown
companies.Throughasubsidiary,thesponsorenteredintoanEPCcontractwitheachprojectcompany.Itthen“hedged”
itsriskbynegotiatingineachcasewithaconsortiumofequipmentsuppliersandcontractorsforguarantees,warranties
andothercoverthatwouldbackstopitscommitmentsundertheEPC.SydneyHarbourTunnel(Australia)andtheDartford
RiverCrossing(UK)areexamplesofprojectswherethesponsor(s)enteredintosimilararrangements.Inallthesecases,the
sponsor(s)throughitsownconstructionsubsidiary,providedthesinglepointresponsibilitythatisordinarilyundertaken
bytheEPCcontractor.
9.3.2 O&M Agreement Variations
Apartfromthethird-partyoperator,thereareothermethodsforstructuringtheprojectcompany.FortheO&Magreement:
(a)theprojectcompanycanperformtheO&Mitself;(b)itcanenterintoanO&Magreementwitharelatedthirdparty,e.g.
oneofitsshareholders,oritsaffiliate;or(c)itmaysharetheO&Mwithathirdpartybyenteringintoanagreementwith
thethirdpartytoprovideaworkforceand/ormaintenance.
Lenders generally prefer arms-length, third-party arrangements; however, this is not a strict requirement. When a
shareholderprovidesO&Mtotheprojectcompany,careistakentoavoidallconflictofinterests.
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