drafting of PPP documents is complex and little has been written about it. The
genesis and present state of PPP documents both in the UK and here in Australia
are outlined. Typical documentation includes the: Concession Deed or Project
Agreement; Output Specifications; Construction Contract; Operation and
Maintenance Agreement; and Financing Documents. Each of these documents is
discussed with a focus on road projects.
UK has had extensive experience dating from the early 1980s and has now standardised
its forms and procedures for generating equitable and reasonable rates of
returns for government and private sector partners.
while also undertaking many PPP projects in various States, appears to be at an
early stage in the development cycle of standardisation. The Australian PPP
market currently has: a lack of standardisation in process across the States; a
lack of deal flow; a widely adopted philosophy of risk transfer; tendering
processes that are perceived as being operated unfairly; a stranglehold by
local financiers or funders on the process; and a lack of international
construction contractors and lenders.
documentation quality, professional ethics, transparency and equitable risk
strategy should help to overcome problems.
Public Partnerships, drafting project contracts, risk assessment, risk
management, financing, government, construction contractor.
The writer would like to acknowledge the help in
producing this paper of Nicholas Hallett and Forbes Johnston of Mott MacDonald,
Ian Radford of Pinsent Masons, Mark Lynch of Thiess Contractors and Ahmed El
Gamal of Department of Primary Industries.
The drafting of PPP documents is complex and little
has been written about it.
To set some bounds the paper assumes a Queensland
toll road project as a point of reference for PPP projects.
PPP projects should be considered to be major
projects rather than major financing projects. They represent 10‑15% of the total number of major
projects and should be subject to principles of successful major project
delivery in particular:
a principal may
contract into trouble but cannot contract out of trouble completely;
PPP contracts are best
thought of as relational contracts characterised by the interdependence of the
parties necessitating sophisticated management of performance and extensive co‑operation.
The article says a little about the UK history of
drafting PPP documents and suggests that recent UK and Australian successes
a reduction in
Government project transaction costs of up to 40%;
a similar reduction
in project transaction time; and
a reversal of the
declining quality of project documentation.
IT RIGHT FIRST TIME” – THE TRENDS IN DOCUMENT PRODUCTION
Industry trends in documentation (Queensland
Division of Engineers Australia, 2005) show:
is declining in quality and this decline is contributing an additional 10 to
15% or more to project costs in Australia. This is estimated to equate to
approximately A$12 billion per annum.
For complex projects,
relationship contract formats should be preferred such as alliances, partnering
and incentive based contracts that involve negotiated fee structures where
risks of cost overruns and underruns are shared between the parties on an
agreed equitable basis.
contracts should be used whenever possible.
The problem of poor
documentation is particularly evident in building and infrastructure projects
where proper design and project documentation should be: fit for purpose;
unambiguous and coherent; timely, accurate, and complete; easily communicated
and constructed, with the best possible economy and safety; and aligned with
the owner’s requirements.
There is poor
understanding and skilling in risk assessment and management processes on the
part of owners, consultants and constructors.
There needs to be
industry wide recognition that fair and equitable risk management and
allocation processes play a significant role in coordination and integration of
the supply chain.
Documentation as a
deliverable under professional consultants’ commissions will require a strong
focus on these aspects of project delivery.
Each sector of the
industry needs to play its part in arresting and reversing the declining
standard of project: Project owners by the proper preparation of project briefs,
by putting consultant capability and value ahead of low fees and by effective
risk management; financiers and lawyers by espousing cooperative
approaches and by crafting contracts which are a fair contract between equals
rather than tight outdated master servant contracts.
types of PPP document can be divided into construction or commercial documents
subject to the
drafting and interpretation principles that govern any other legal
.affected by industry
trends in the production and management of such documentation including
standardisation to minimise transaction costs.
2.2.1 PPP and PFI
A PPP is best described as an arrangement between
the private and public sectors to deliver cost effective and high quality
services to the public sector over an extended period of time. A PPP is a
flexible arrangement and its structure varies according to the type of service
delivered and the risk allocation between the participants. In some cases the
private sector may design, construct and maintain the asset, while Government
provides the essential service or core service (eg hospital service) while in
other cases the private sector provider provides both the asset and the
services (eg a toll road).
There is a distinction between PFI (Private Finance
Initiative, a UK term) and PPP, which is not widely understood. PFI is only one
type of PPP used in the UK. A PFI is based on Government paying a private
sector provider for the supply of service delivered through an asset developed
by or transferred to the private sector provider.
For new highways (and in due course the management
of the existing network), the focus is on the availability and performance of
the network to specified standards, with payment deductions imposed on the
private sector service provider if they do not meet availability and
performance targets. The result has been a very noticeable shift to better
consideration of whole life issues within design and construction.
2.2.2 Accommodation projects and linear
With economic infrastructure such as a toll road
the private sector provides the infrastructure directly to the end user in
exchange for a fee or toll. With social infrastructure, such as hospitals,
prisons, schools, courts and police facilities, the private sector provides
services directly to the public sector in exchange for a concession (Millhouse,
2002; Queensland Govt., 2002).
following shows a typical PPP project structure (adapted from Radford, 2003):
2.4.1 The Project Agreement or Project
is likely to include:
compliance rights for Government during development and construction.
An obligation on
Government to obtain and transfer to the DBFO Co any land rights.
Government to carry out any works which are necessary on its part for the
entitling Government to intervene and run the project without terminating the
Project Agreement if the DBFO Co fails to meet required performance
with the transfer of assets and personnel at the end of the concession period
or earlier termination.
variations and increased costs.
A payment mechanism
which reduces the service payments if the Output Specifications are not
2.4.2 Output Specification
The Output Specification will state the
Government’s desired outcomes and the private sector service provider’s
responsibilities to meet them. The specification should state outputs desired
by Government to ensure it avoids design risks it is not well placed to
manage. It is not a detailed design specification. The focus is on
Government needs not how they are to be met.
The Public Private Partnerships Guidance Material
(Queensland Government, 2002) describes the nature and role of the Output
Specification and gives an outline for a Road/Transport Project.
2.4.3 Construction Contract
The Construction Contract is between the
DBFO Co and the Construction Contractor. The DBFO Co will seek to
pass to the Construction Contractor all design and construction obligations and
risks. Hitherto this has been done by a fixed price D&C contract. The
drafting has been a complete ‘pass‑down,’ clause by clause, from the Project Agreement.
Even in the UK where, as we shall see, the Project
Agreement is rigidly standardised as a result of SoPC3 this method governs the
risk allocation and drafting of the construction contract because there is no
equivalent standard form construction contract.
The Construction Contractor is therefore in the
position of a subcontractor with influence over the content of the Project
Agreement only insofar as any investment group or division of the Construction
Contractor has a place at the table in the negotiation of the Project
The ‘pass‑down’ approach will not always be applicable and particularly in
specialist subcontracts it can produce unintelligibly onerous results.
2.4.4 Operation and Maintenance
The DBFO Co subcontracts by one or more
Operation and Maintenance agreements the provision of all on-going services
during the operating phase of the concession imposed on the DBFO Co under
the Project Agreement. The DBFO Co may also enter into a contract
with a facilities management contractor to co-ordinate the provision of the
operating services during the operation phase life of the concession. The
construction contractors employed may themselves enter into sub-contracts in
order to carry out their obligations to the DBFO Co.
Operation and Maintenance Agreements are one
category of agreement where use of a relational contract should be considered
because technical obsolescence or market volatility may make it impossible to
predict maintenance requirements for more than a fraction of the concession
2.4.5 Financing Documents
The project must be capable of being financed and
financial models will be produced showing how the cash inflows will be
sufficient to service the cash outflows over the life of the Concession.
Sources of finance available to the DBFO Co
may include internal funds, share capital or bank loans. Bank loans may be
available for a long period of time. Interest will be rolled up during
the construction period and added to the principal amount of the debt because,
revenue will not be generated until the project facilities are completed and
service payments commence. In order for the project to be bankable, it
will be necessary for the banks to be satisfied that their loans, together with
interest, are capable of being repaid over their life out of the revenue which
the concession is likely to produce.
DRAFTING ‑ THE UK HISTORY
– THE BATES REVIEWS
In 1992 private finance was given a boost by the
announcement of a new policy, the “Private Finance Initiative”, where the
Government actively encouraged the private sector to take the lead in joint
ventures with Government.
Before May 1997 PFI projects were commissioned in
transport, health, defence, office accommodation, information systems, prisons,
education, and water resources. However, despite the growth in PFI there was
still a considerable delay in bringing projects from conception to completion.
In 1997 the Bates Committee undertook a thorough
review of PFI with the intention of removing the barriers hindering the
delivery of projects and proposed:
improving the process
and aiming for standardisation;
gaining and retaining
knowledge and skills; and
minimising bid costs.
In 1999 The Treasury Taskforce published guidance
on the standard terms and conditions expected in a PFI contract. The TTF
Guidance comprised a commentary setting out the principles to be followed
together with some specific drafting.
After a further review by Bates in 1999, a
permanent body majority owned by the private sector (but with a significant
Government minority stake), Partnerships UK, was established in 2000 to:
continue to offer
project management skills to Government bodies;
undertake audits of
Business Cases/financial models on behalf of HM Treasury;
continue to work with
Government bodies to improve the operation of their PFI procurement programmes;
provide support to
local authorities promoting PFI schemes; and
provide initial seed
capital for projects.
It also introduced new guidelines adopting whole
life cycle service costing for PFI.
The Standardisation of PFI Contracts was developed
and refined over three editions (SoPC1, 2 and 3 – see UK Government,
To promote a common
understanding of the main risks;
To allow consistency
of approach and pricing across a range of similar projects; and
To reduce the time and
costs of negotiation by enabling all parties concerned to agree a standard
approach without extended negotiations.
An important feature of SoPC3 for drafting purposes
is the division of post contract events into compensation events, relief
events, and force majeure events. These are exceptions to the principle
of absolute transfer of construction risk to the DBFO Co which would
generally be accepted in Australia (see eg Public Private Partnerships Guidance
Material, Queensland Government, 2002).
In the UK all PFI schemes must be SoPC3
compliant. To avoid uncontrolled sector specific derogations from the
model contract at time of writing all derogations from SoPC3 require specific
prior approval from HM Treasury.
DRAFTING ‑ THE AUSTRALIAN HISTORY
The private sector for some time has been involved
in the provision of public infrastructure in particular in road transport
infrastructure in New South Wales (NSW) and Victoria. Projects have
largely been BOOT (Build-Own-Operate-Transfer) arrangements, under which a
private sector service provider contracts to build infrastructure, owns it for
an extended term (retaining maintenance risks), operates it and then transfers
ownership to Government. Examples include the Melbourne CityLink tollway, the
Sydney M2, M5 and Eastern Distributor to the Sydney Airport and many items of
the Sydney Olympic structure (Jones, 2003).
In the 90s a number of RTA road projects in NSW,
provided an understanding of the project documents to a relatively small number
of parties and advisers.
The experience in Victoria has been more far‑reaching and transparent.
Partnerships Victoria was launched in June 2000 and based on the UK PFI model
and provided a framework for the integration of private investment in public
infrastructure. Guidance material was published in Victoria to assist the
public and private sectors in developing and implementing the new policy. Since
then, PPP policies and guidance material have been published in all states and
territories promoting: value for money; open and effective competition;
innovation; economic growth and employment opportunities; and reasonable risk
distribution between the parties.
Partnerships Victoria focuses on the purchase of
services rather than the assets, bringing with it benefits such as risk
transfer, whole of life costing, innovation and asset utilisation. Value for
Money is a key driver in Victoria and the debate about on and off-balance sheet
financing does not play a significant role in the decision to undertake a PPP
perhaps because Victoria has a low debt level.
Since November 2003 the Victorian State Government
has promoted a National PPP Ministerial Council with the aim of building better
support for PPP’s among different governments and facilitating the development
of a national PPP market. Standardisation of documentation and processes
features on this agenda.
Victoria’s Standard Commercial Principles released
in June 2005 represents the latest attempt at a considered Government position
in relation to risk allocation, and may therefore be preferred to Appendix A to
the Queensland Government (2002) VFM framework.
PPP documents are very sophisticated financing,
construction or commercial documents and the draftsperson should follow best
practice drafting procedures such as having full and clear instructions and
information as to what the document to be drafted is to achieve and finding out
as much as possible about the subject matter, etc.
SPECIFIC DRAFTING CONSIDERATIONS
Contractual Framework requires:
allocating risk to
the party who is best able to manage the risk;
defined service requirements and key performance indicators;
arrangements to deal with the change which is likely over the period of the
including value for
money mechanisms such as benchmarking; and
resolution mechanisms which avoid litigation.
5.2.2 The Partnership Framework
A successful partnership requires a framework upon
which the parties can build their relationships. The use of project
alliancing and partnering in the construction industry suggests possible frameworks.
The parties need to understand and respect each other’s objectives and align
their objectives and their business strategies as much as possible during
procurement, development and delivery.
5.2.3 The stepping down of risk and the
Teflon Tube (Radford 2003).
The use of standard risk allocation has reduced the
time and cost of negotiating a UK PPP contract. In Australia, however standard
guidance such as Appendix A in Queensland Government (2002) is only an
influential starting point. The parties engaged in each project still need to
assess the specific risks associated with their project and allocate them
through the Project Agreement.
In a road project PPP demand or market risk cannot
be passed down by the DBFO Co to either the construction contractor or the
operator. It must therefore be borne by either or both of the DBFO Co and
for dealing with difficult risks such as demand or market risk will usually
Ensuring that the
DBFO Co takes a robust line with Government;
management procedures allow the Construction Contractor maximum freedom and
opportunity to manage and control construction risk with minimum interference
from Government, DBFO Co and/or Operator;
sharing options with DBFO Co and Shareholders and/or risk sharing between
Construction Contractor and Operator; and
If all else fails
insuring against construction risk, pricing construction risk and/or making
sufficient allowance in design and construction programmes for managing risk
and/or dealing with the consequences of a risk occurring.
PPP Construction Contractor is generally in a far better position than a
D&C Construction Contractor to manage and avoid or mitigate risks because
greater awareness of
risks as a consequence of relatively sophisticated risk analysis, a longer
project gestation period and the use of lawyers, accountants and lenders;
to plan risk management strategies and price difficult to manage risks;
more elaborate and
sophisticated risk management tools and procedures which give the Construction
Contractor greater control over his own destiny than corresponding D&C
to manage and avoid/mitigate risks through design development and change
and certainty of losses and liabilities likely to be incurred In the event of
different categories of Construction Contractor default which should facilitate
consequential capping / limiting of liabilities.
5.2.4 Risk Allocation and Dispute
Resolution or risk management?
Risk allocation in a PPP is governed by: Service
delivery specifications; Payment/pricing structure; and Express contractual
provisions adjusting risk allocation.
A PPP can be used to transfer the bulk of the risk
involved with a major project to the private sector. A key feature of
PPPs is the explicit allocation of risk. This means that the private
sector service provider will need to price the risks into its bid for the
project. Complexities arise when risks need to be allocated between the
members of the private sector consortium or the preferred risk allocation is
Regardless of the project structure, Government
cannot transfer ultimate responsibility and accountability to the private
sector service provider for the delivery of services it is legally obliged, or
has undertaken, to provide to the public. Similarly no principal can transfer
the risk of complete project failure.
Until recently, commercial parties were free to
agree to their rights, obligations and liabilities. Freedom of contract
also meant risk allocation was generally static. However, the law of contract
is now subject to proactive judicial and legislative intervention including the
Practices Act (Australia
any draftsperson of project contracts needs to consider these points:
A risk matrix is a
shorthand version of a contract and as such is the document that all project
stakeholders need to understand and have the ability to understand. It is
important to ensure the target destination of the contract is the right one;
Most of the risks in
a project can be dealt with by a principal prior to the selection of the
private sector party;
If the construction
contractor suffers losses due to an inappropriate allocation of risk, the
construction contractor can seek to recover those cost overruns by claims,
aggravating an inherently adversarial relationship and making litigation a
probability rather than a possibility;
With the complexities
and uncertainties of major projects there may also be no ideal strategy for
distributing risk at the time of contracting so that parties must expressly or
impliedly agree to adjust initial risk allocation in the light of future
If overriding weight
is given to risk allocation in contract drafting, the risk is that these
realities are ignored; and
can make risk management a whole of contract life strategy and the continued
use of risk management can lead to significant benefits (MacDonald, 2001).
CAN BE DONE
Arguably the Australian PPP market has currently: a
lack of standardisation in process across the States; a lack of deal flow; a
widely adopted philosophy of risk transfer; tendering processes that are
perceived as being operated unfairly; a stranglehold held by local financiers
or funders on the process; and a lack of international construction contractors
The last is potentially the most important and what
is necessary to attract them includes standardisation of processes and
documentation, particularly forms (Hibberd, 2004).
Australia is close to
the beginning of this development cycle, reinventing the wheel at great cost
with each new PPP project transaction.
There is little
published information on Australian transaction costs. This much, however
mean the fees and commissions payable to parties or their advisers. These
transaction costs will differ in the time at which they will be incurred; their
amount and how they will be reimbursed vary according to whether the costs are
incurred by Government or PPP Co.
transaction costs are principally the fees of external advisers, ie legal
advisers, financial advisers and technical advisers.
costs are substantial although information about them or their make up is
sparse. The UK Parliamentary Public Accounts Committee has recently
suggested adviser costs generally represent between 2 & 2.5% of a project’s
capital cost of smaller projects (UK Parliamentary Committee on Public
Australia the transaction costs of a DBFO Co: may range between 5% and 15%
of a project’s capital cost; may be payable to a single entity acting as fund
arranger; may be payable at times unrelated to the staging of the VFM process
eg upfront or as a retainer; and will be factored into the bid price.
In addition to
containing transaction costs standardisation has allowed the UK to focus on
other ways of streamlining PPP projects in particular limiting private sector
profit taking. Three developments need mention here:
The first is the
treatment of super profits in SoPC3. A bidder has to include his
financial model and this will be analysed because government expects the
internal rate of return through the life time of the project to be somewhere
between 13% and 15%. Super profits beyond this will be shared with
The second way of
controlling private sector profit taking is through the Credit Guarantee Fund
(CGF) which operates on debt and is a guarantee of payment of that debt, but
has not been trialled.
The third way is the
funding competition. Funding competitions are described in OGC Guidance
(UK Government, 2002).
As yet there seems to
be no real understanding in Australia of the success of changes in PPP
processes such as:
the measure of
standardisation reached in the use of SOP3 since the Treasury guidance issued
in April 2005;
efforts being made to reign in private sector super profits by means including
piloting CGF and funding competitions.
The promise of standardisation is primarily a
promise of reducing transaction time and cost and increasing throughput on
deals as enormous transaction costs cease to be incurred with every single
project. A project like Southbank Education & Training Precinct
Redevelopment Project seems to have taken about 29 months from inception to
financial close. The UK experience suggests standardisation could possibly
reduce this time to something like 18 months. That alone suggests the
promise of a consequent reduction in the transaction costs to Government of the
order of 40%.
Future PPP drafting needs to focus on three
6.1.1 Risk allocation. The current
approach may be unsustainable because:
We have lost sight of
the meaning of the Abrahamson principle that risk is allocated to the person
best able to manage. To Government the phrase now means best able to manage ‘at
the least cost’. To a bidder the phrase means is that there is risk which the
bidder has to price. In what is a market where construction contractors with
the capacity to carry out these projects are too few, the approach also means
that they will take their pick of what they bid and carry out.
underpins risk transfer and generates costly inefficiencies for participants in
a PPP project because of this.
One must look more at risk management rather than
6.1.2 D&C Construction Contractors
as Operators/Facility Managers
Currently in Australia bids for this kind of
project are being driven by financiers whose aims are not those of the long
term investor. The D&C Construction Contractor who mutates into the
operational facility manager has the potential to be a long term investor and a
6.1.3 Developments in Contracting
A PPP project is many projects. It is
commonplace that it is a risky short term construction project and a stable
long term investment once constructed. However, even as a construction
project it is both a financing project and a design and construct project. This
second aspect of the project reinforces risk allocation and underpins the
Teflon Tube. It allows little or no room for “efficient co-operation” between
the D&C construction contractor and the D&C construction contractor’s
subcontractors and suppliers.
However, developments in contracting such as the
technique of Early Contractor Involvement (ECI) with which Department of Main
Roads is experimenting promise price certainty to principals and financiers and
a fair contract to them and other project parties. In this they offer a
further means of getting project documentation right first time in this kind of
major project as well as other projects.
P, 2004, The Place of Standard Forms of Building Contract in the 21st Century, www.scl.org.uk
D, 2003, Evaluating what’s new in the PPP Pipeline
C, 2001, Allocation of Risk in Major Infrastructure Projects - Why Do We Get it
so Wrong? ICLR 1 p345
A. 2002, Public Private Partnerships — The Dawn of a New Era for Private
Division of Engineers Australia, 2005. Getting it Right First Time, http://qld.ieaust.org.au/jetspeed/static/items/2/3209/FinalReport.pdf
Government, 2002, Public
Private Partnerships Guidance Material: Supporting Documents: Business Case
Department of State Development. http://www.sdi.qld.gov.au
I. (2003). PFI Contracting – A Brief Synopsis, London.
Parliamentary Committee on Public Accounts (2005), London Underground Public
Private Partnerships, http://www.publications.parliament.uk/pa/cm200405/cmselect/cmpubacc/446/446.pdf
Government, 2002, OGC Guidance on Certain Financing Issues in PFI contracts,
Office of Government Commerce
Government, 2004, Standardisation of PFI Contracts, (www.hm_treasury.gov.uk/documents/public_private_partnerships/key_documents).
Government, 2005, Partnerships Victoria, Detailed Guidance Material Standard
Commercial Principles, http://www.partnerships.vic.gov.au.