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									PUBLI
    PUBLIC PRIVATE PARTNERSHIPS
             GUIDANCE MATERIAL




                          SUPPORTING DOCUMENTS

                          CONTRACT DEVELOPMENT
                               AND MANAGEMENT
                 RIVATE
TABLE OF CONTENTS

1. INTRODUCTION                                               2    6. INDUSTRIAL RELATIONS                           23

                                                                   6.1 Introduction                                  23
PART ONE: CONTRACT DEVELOPMENT                                3
                                                                   6.2 Consultation                                  23
                                                                   6.3 Employment and Entitlements                   23
2. THE PARTIES                                                3
                                                                   PART TWO: CONTRACT MANAGEMENT                     24
2.1 Introduction                                              3
2.2 The Private Party                                         3
                                                                   7. KEY CONTRACT MANAGEMENT
2.3 Financiers                                                3
                                                                   IMPLICATIONS                                      24
2.4 Design and Construction Contractor                        4
2.5 Operator                                                  4    7.1 Management of Risks                           24

What is a “Material Adverse Effect” Regime                    5    7.2 Performance Monitoring                        24
                                                                   7.3 Changes                                       24
3. CONTRACTS WITH THE PRIVATE PARTY                           6    7.4 Contract Management Challenges                24

3.1 Project Development Agreement                             6
                                                                   8. ROLE OF THE GOVERNMENT CONTRACT
3.2 Project Agreements                                        6    MANAGER                                           27
3.2.1 Process                                                 6
                                                                   8.1 Role                                          27
3.2.2 Risk Allocation And Mitigation In The Project Agreements 6
                                                                   8.2 Skills and Experience                         27
3.2.3 Contractual Issues In The Project Agreements            7
3.3 Guarantee or performance bond                            16    9 THE PARTNERSHIP RELATIONSHIP                   28
What are the options for dispute resolution                  16
                                                                   9.1 The Importance of the Relationship            28
What are intervening events?                                 17
                                                                   9.2 Establishing the Relationship                 28
When should liquidated damages be used?                      18
                                                                   9.3 Looking to the Future                         28
4. CONTRACTS WITH FINANCIERS                                 19    Case Study                                        29

4.1 Finance Agreements                                       19    10. MAINTAINING THE INTEGRITY OF THE
4.2 Direct Agreements                                        19    CONTRACT                                          31
What is a Direct Agreement                                   20
What are “Hard” and “Soft” services?                         20

5. CONTRACTS WITH DESIGN AND
CONSTRUCTION CONTRACTORS AND
OPERATORS                                                    21

5.1 Design and Construct Contract and Operating
Agreement                                                    21
5.2 Direct Agreements                                        21
5.3 Sub-Contracts and Collateral Warranties                  22




                                                                                                            AUGUST 2002
                                                                                                                          1
    1. INTRODUCTION                                              Part One of this document discusses some of the key
                                                                 points related to contract development and the
                                                                 appropriate contractual mechanisms that are necessary in
    Queensland’s Public Private Partnership Policy –
                                                                 undertaking a PPP project.
    Achieving Value for Money in Public Infrastructure and
    Service Delivery was launched in September 2001. This        Part Two discusses the contract management stage. It
    Policy is a key strategic initiative that supports the       covers the requirements for successful ongoing
    Queensland Government’s central economic objective of        management, outlines the role of the Contract Manager,
    achieving high and sustainable levels of economic growth     the partnership relationship and the requirements for
    and employment by providing efficient and effective          maintaining the integrity of the contract.
    services and infrastructure. The objectives of this Policy
    are to:

    •   deliver improved services and value for money
        through appropriate risk sharing between Public and
        Private Sector parties;

    •   encourage Private Sector innovation;

    •   optimise asset utilisation; and

    •   integrate whole of life management of public
        infrastructure.

    This document is part of a suite of Guidance Material
    issued by the Infrastructure Partnerships Taskforce (IPT)
    within the Department of State Development (DSD). The
    material provides practical guidance on key technical
    issues that arise from the development and
    implementation of Public Private Partnerships (PPPs) in
    Queensland.

    The initial Guidance Material issued by the IPT comprises
    the Overview, the Value for Money Framework and a
    range of Supporting Documents that each provide further
    detail. These include:

    •   Risk Management;

    •   Project Resourcing;

    •   Probity and Process Governance;

    •   Business Case Development; and

    •   Contract Development and Management.

    This document should be read in conjunction with the
    other Guidance Material, as relevant information in the
    other documents is not duplicated here.




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    AUGUST 2002
                                         PART ONE: CONTRACT DEVELOPMENT



2. THE PARTIES



                                             GOVERNMENT




                                            PRIVATE PARTY
                                                                                                    GUARANTOR
                                           (SPV/SPONSORS)




                                                                     DESIGN &
                DEBT                    EQUITY
                                                                   CONSTRUCTION                      OPERATOR
             FINANCIERS              PARTICIPANTS
                                                                    CONTRACTOR




                                                                  SUB-CONTRACTOR                 SUB-CONTRACTOR




Figure 2.1




2.1 INTRODUCTION                                               who will be seeking to have their interests represented
                                                               through the Private Party.
One of the keys to a successful project lies in
understanding the relationships between the parties and        In the case of a privately financed PPP project, a
their respective roles. Most PPP projects will bring           consortium is likely to include equity investors/sponsors,
together a variety of interested parties, each with their      a design and/or construction contractor, and the operator.
own agenda.                                                    For some smaller projects, a much simpler consortium
Figure 2.1 shows the typical parties to a privately financed   structure may apply. In such cases, the sponsor may be a
PPP project.                                                   large company that finances the project on its balance
                                                               sheet. In some cases, the sponsor may refinance the
                                                               project upon successful commissioning and an SPV may
                                                               be established at that stage.
2.2 THE PRIVATE PARTY

The term ‘Private Party’ is used within the Guidance
Material to describe the Private Sector entity with which      2.3 FINANCIERS
Government contracts. This may be a ‘Special Purpose
Vehicle’ (SPV), created specifically for the purposes of the   Unless the sponsor is financing the project on its balance
project, a subsidiary of an existing company, a joint          sheet, the funding for the project is likely to come from a
venture or a trust structure. The Private Party may consist    mix of limited-recourse debt finance and equity
of a number of Private Sector parties (the “consortium”)       investment.



                                                                                                           AUGUST 2002
                                                                                                                             3
    The debt financiers will generally take their security over    2.4 DESIGN AND CONSTRUCTION CONTRACTOR
    the revenue stream of the project and the project
    contracts, rather than the project asset. The term of the      The design and construction contractor will be appointed
    debt may be for some 20 years, but will generally be           by the Private Party to carry out or manage the design and
    shorter than the contract period under the Project             construction of the project assets. The contractor will also
    Agreements. The Private Party will repay the debt out of       typically assume the associated long-term maintenance
    the service payments it receives from Government (or from      obligations. Some consortia will elect to appoint a
    the end users in a ‘user-pays’ project). This gives the debt   different contractor for the long-term maintenance, but
    financiers a strong incentive to ensure that the project       this can lead to tensions within the consortium where
    remains on track, and that service delivery commences on       design, construction and maintenance liabilities overlap.
    time and is carried out at optimum performance. This in        The contractor will commonly be a member of the Private
    turn reduces the likelihood of non-payment or abatement        Party consortium.
    of service payments.

    Commentators have often noted that the debt financiers’
    interests in a PPP project are most closely aligned with       2.5 OPERATOR
    those of Government. Whilst this is true in many regards,
                                                                   The operator will be appointed by the Private Party to
    there will be occasions when Government’s public
                                                                   undertake the operational and facilities maintenance
    interests and the commercial expectations of the
                                                                   obligations that form part of the Project Agreements. The
    financiers diverge (for an example, see the discussion on
                                                                   operator, often part of the Private Party consortium, will
    insurance in Section 3.2.3). However,Government can
                                                                   usually sub-contract some or all of the obligations to a
    certainly take some comfort from the initial due diligence
                                                                   number of specialist contractors. This is particularly likely
    and through continual checking and monitoring, both of
                                                                   for the facilities management role. Where the project
    which are part of the debt financiers’ role.
                                                                   involves a significant ICT or energy component, the Private
    Whilst the debt financiers are concerned with ensuring         Party may appoint several specialist operators.
    steady, long term returns, that will keep the project viable   Alternatively, one operator may assume and sub-contract
    and service the debt (at agreed rate); equity investors        all those responsibilities.
    have a stake in the “overall” success of the project, and
    will be hoping to maximise the return on their investment.
    Equity investors’ interests most closely align with those of
    the other Cconsortium members.




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    AUGUST 2002
WHAT IS A “MATERIAL ADVERSE EFFECT” REGIME?
•   A Material Adverse Effect regime is a risk mitigation tool that can assist in allocating difficult areas of risk.

•   Some risk events may, if they eventuate, have a Material Adverse Effect on those project revenues used by the
    Private Party to make scheduled debt or equity repayments.

•   A Material Adverse Effect regime is most effective when used to specify the outcome the parties wish to be
    achieved if the risk eventuates, such as maintaining the Private Party’s ability to make debt or equity
    repayments in accordance with the defined schedule.

•   The Project Agreements will allocate the relevant category of risk to a party in the normal way; for example,
    force majeure risk would be allocated to the Private Party in accordance with the Risk Management Supporting
    Document.

•   The Project Agreements will then specify those categories of risk, such as force majeure, to which a Material
    Adverse Effect regime will apply.

•   The Project Agreements will also identify what outcomes are to be achieved through the regime, such as
    maintenance of a revenue stream sufficient to service debt repayments.

•   The Project Agreements will provide that if:

    –   a risk within the specified categories materialises; and

    –   it has a Material Adverse Effect on the project;

        then, the parties will negotiate in good faith to agree on the appropriate method of redress to achieve the
        pre-agreed outcomes, by, for example, extending the concession period.

•   If a risk within the specified categories materialises, but its effect on the project is not material, the risk will be
    borne by the party to whom the risk was allocated in the Project Agreements. In the above example of force
    majeure, this would be the Private Party.

•   This type of regime is Government’s preferred approach for difficult-to-allocate risks, as it offers the flexibility of
    an “agreement to agree”, leaving the parties to decide on the appropriate methods of redress at the time,
    combined with the certainty of a prescriptive, black-letter solution (as the desired outcomes are defined in
    advance).




                                                                                                              AUGUST 2002
                                                                                                                              5
    3. CONTRACTS WITH THE PRIVATE PARTY



                                                GOVERNMENT
            PROJECT
            DEVELOPMENT
            AGREEMENT
            (IF USED)

            PROJECT                            PRIVATE PARTY
            AGREEMENTS                                                                                   GUARANTOR
                                              (SPV/SPONSORS)




    Figure 3.1




    The principal contract in a PPP project is the Project        3.2 PROJECT AGREEMENTS
    Agreement. The Project Agreement governs the
    relationship between Government and the Private Party         3.2.1 PROCESS
    from Financial Close, through the design and construction
                                                                  The Project Agreements will be drafted in an iterative
    phases to the expiry of the term.
                                                                  process from Stage Three (PPP Business Case
    In some circumstances, Government may also choose to          Development) through to the end of Stage Five (Binding
    have a Project Development Agreement to address issues        Bids). It is expected that a first draft of the Project
    between Government and the Preferred Bidder prior to          Agreements will be produced in conjunction with the
    Financial Close.                                              preliminary Risk Allocation Matrix and submitted to
                                                                  Cabinet at the conclusion of the Business Case
                                                                  Development stage. The Agreements will be developed
                                                                  during the EOI stage as the risk allocation matures, and an
    3.1 PROJECT DEVELOPMENT AGREEMENT
                                                                  indicative summary of commercial principles may be
    A Project Development Agreement can be used to give           released with the EOI documentation.
    pre-contractual certainty to Government and the Preferred     The draft Project Agreements will be made available to
    Bidder, in relation to planning and environmental             Shortlisted Proponents at the Binding Bid stage, together
    approvals. Whilst Government’s likely preferred position is   with the Risk Allocation Matrix. As indicated in the Value
    that the risks and costs associated with these approvals      for Money Framework, Government retains the right, in its
    should lie with the Private Party, there may be               absolute discretion, to consider any proposed
    circumstances where Government is prepared to share           amendments and redistribute Benchmark Project
    some of these costs (refer to Risk Management                 Agreements.
    Supporting Document, Chapter 4). Where the approvals
    process is of necessity carried out during the Bidding        The Project Agreements provide the opportunity to embed
    Stage, Government can enter into a Project Development        the agreed allocation of risk in the contractual agreement
    Agreement with the Preferred Bidder, to govern the basis      between the parties, and the opportunity to fine-tune that
    on which the Private Party will seek to obtain the relevant   allocation.
    approvals prior to Financial Close. Government may agree      3.2.2 RISK ALLOCATION AND MITIGATION IN THE
    to share additional costs exceeding a specified level, that   PROJECT AGREEMENTS
    arise out of the approvals process. The Preferred Bidder
    would be bound to proceed with the project once the           As noted in the Risk Management Supporting Document,
    approvals were obtained.                                      risk allocation is governed by:

                                                                  •   service delivery specifications;

                                                                  •   payment/pricing structure; and

                                                                  •   express contractual provisions.




6
    AUGUST 2002
3.2.2.1 SERVICE DELIVERY SPECIFICATIONS
Services must be measurable, in terms of quantity and
quality, against objective key performance indicators,
(KPIs) and be expressed in terms of outputs. Where an
element of input specification is required, it should,
wherever possible, be expressed in terms of a measurable
output to be achieved within defined parameters.

The allocation of service delivery risk to the Private Party
will be supported by contractual mechanisms within the
Project Agreements for dealing with any failure to perform
the services to the required standards.

3.2.2.2 PAYMENT/PRICING STRUCTURE
The Project Agreements will reinforce the allocation of
service delivery risk to the Private Party, and provide
incentives for good performance through a robust
payment mechanism. The basic rule of payment, with few
exceptions, is, “no service, no payment”.

3.2.2.3 EXPRESS CONTRACTUAL PROVISIONS
The Project Agreements should contain a statement
regarding the principle allocation of risk – that unless
specifically allocated, in whole or in part, to Government,
all risks in the Agreements lie with the Private Party. Any
risks to be borne by Government or to be shared between
the parties must be clearly identified in the Project
Agreements.

3.2.3 CONTRACTUAL ISSUES IN THE PROJECT
AGREEMENTS

The precise issues to be covered in the Project
Agreements will vary from one project to the next. The
following checklist highlights some of the key issues
relevant to a privately financed PPP project.




                                                               AUGUST 2002
                                                                             7
    PROJECT AGREEMENT CHECKLIST

            Land tenure and access   The Private Party must have adequate tenure or rights over the site
                                     from which it will be providing services. In a privately financed PPP
                                     project, the Private Party will often own the project assets (the
                                     infrastructure) and provide services to Government or to the public
                                     from the project assets. Whether the Private Party will own the site
                                     upon which the project assets are constructed, or will hold the site
                                     under a lease from Government for the duration of the concession,
                                     will depend on the nature of the project. Whatever the ownership
                                     position, the Private Party will need appropriate tenure to enable it to
                                     carry out its obligations under the Project Agreements. If inadequate
                                     tenure interferes with the Private Party’s ability to carry out its
                                     obligations, the transfer of risk will be prejudiced.

                                     Government must ensure that it has (and, where appropriate,
                                     members of the public have) adequate rights of access to the site and
                                     the project asset. The appropriate rights for Government will depend
                                     on the nature of the project, but will range from inspection and audit
                                     rights, (where the Private Party is responsible for providing services
                                     directly to the public) to the right to access and use the facilities at all
                                     times (where Government will be carrying out core services from the
                                     facilities).


            Services and Service     The Project Agreements will require the Private Party to take full
            Commencement             completion and commissioning risk. Assumption of these risks
                                     includes the responsibility to ensure that the infrastructure is
                                     designed and constructed in such a way that it supports the services
                                     which the Private Party is required to provide, that it is able to
                                     commence service provision at the agreed time, (this will be
                                     particularly crucial in a project for an educational facility, where
                                     commencement is scheduled for the beginning of the academic year)
                                     and that it can continue to provide the services to the required
                                     standards and within the agreed pricing structure.

                                     The Project Agreements should define:

                                     •   the output requirements and any constraints within which those
                                         requirements must be achieved (in the output specification);

                                     •   procedures for changing the service requirements;

                                     •   procedures for commissioning and service commencement;

                                     •   consequences of late service commencement;

                                     •   audit procedures required to assure Government that delivery is
                                         proceeding on schedule; and

                                     •   information to be provided to Government during the design and
                                         construction process.




8
    AUGUST 2002
Mechanisms to maintain quality   A variety of mechanisms may be incorporated into the Project
of service                       Agreements to encourage continuity and quality of supply. These
                                 include:

                                 •   benchmarking of services or supply in terms of price and/or
                                     quality against other market participants or through market
                                     testing;

                                 •   revenue sharing triggered when revenue reaches a defined level;

                                 •   requiring a specific maintenance program or a maintenance
                                     regime;

                                 •   requiring a completion certificate and performance tests or
                                     demonstrations to ensure integration and quality of the service or
                                     supply;

                                 •   requiring compliance with relevant standards or industry code;
                                     where incentive payments may be offered if the quality of service
                                     is delivered above the relevant standard;

                                 •   imposing financial penalties and/or deductions from service
                                     payments if supply fails;

                                 •   compensation for costs incurred in the event that a service or
                                     supply is not provided; and

                                 •   right to terminate for certain events of default.


“Hard” Services                  The Private Party will be responsible for maintenance of the
                                 infrastructure during the Operating Phase. The precise maintenance
                                 requirements should not be prescribed in the Output Specification,
                                 but the required outcomes of the maintenance program should be
                                 clearly stated. The key outcome during the Operating Phase is the
                                 provision of services to the required standards. If the infrastructure is
                                 to be handed over to Government at the end of the Operating Phase,
                                 it may be necessary to provide for a survey before expiry and for a
                                 retention fund as incentive for good maintenance in the later years.


“Soft” Services                  Wage costs comprise the majority of the cost of providing soft
                                 services. These can be difficult to predict over a long contract period,
                                 and it is therefore common to provide for periodic benchmarking and,
                                 if necessary, market testing of these costs – generally every three to
                                 five years.




                                                                                          AUGUST 2002
                                                                                                             9
             Performance Monitoring        The principle responsibility of the Private Party is to provide services
                                           to the required standards to meet the Output Specification. Required
                                           standards must be reasonable and achievable. The Project
                                           Agreements will contain a range of measures to address sub-standard
                                           performance (indicated below). It is imperative that the Agreements
                                           also provides an objective process for measuring performance.

                                           The Project Agreements should define:

                                           •   the standard of performance required;
                                           •   the method of monitoring and measuring performance against
                                               that standard, for example, the Key Performance Indicators to be
                                               used;
                                           •   how performance will be monitored, and those responsible for the
                                               measuring;
                                           •   Government’s rights to carry out audits or spot checks, if the
                                               Private Party will carry out the regular performance measurement;
                                           •   when performance measurement will start, and whether, for
                                               example, there will be an initial “settling in” period;
                                           •   how the results of the performance measurement will be reported
                                               and acted upon; and
                                           •   the consequences of poor performance.
                                           Mechanisms to monitor performance may include periodic reports or
                                           meetings, examination of financial data, and inspections.

                                           If the mechanism of performance measurement is untested, or if the
                                           benchmark for the required performance standard is untried, it may
                                           be appropriate to include a procedure for review of the performance
                                           measurement mechanism after an initial period of operation.


             Price and payment mechanism   The pricing and payment mechanism specified in the Project
                                           Agreements is the primary tool for enforcing the allocation of service
                                           delivery risk to the Private Party. Full payment will be made for full
                                           service delivery to the required standards, but any shortfall in
                                           performance can be reflected in abatements in payment.

                                           Payment to the Private Party will typically be a single, unitised
                                           payment. Depending on the nature of the project, payment may be
                                           based on any or all of:

                                           •   services delivered;
                                           •   functional availability of facilities;
                                           •   usage; or
                                           •   outcomes.
                                           Where payment is based on service standards, availability, (which will
                                           itself contain criteria to be met for functional availability to be
                                           achieved) or outcomes, substandard performance will result in
                                           abatement of payments until the required level of performance is
                                           attained. This abatement may be a direct response where there is a
                                           material shortfall in performance (or a minor shortfall in a critical area
                                           such as safety), or an indirect response in the case of minor faults
                                           where no immediate action will be taken. Instead, the cumulative
                                           effect of minor faults will be measured and, at a given point, trigger a
                                           major fault, with a corresponding effect on payments.

                                           Circumstances exist where it is appropriate to base payment on usage
                                           alone, so as to provide incentive for a larger volume output at the
                                           expense of other factors. For a road project, for example, payment
                                           may be based on a combination of usage and safety standards or
                                           outcomes.

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     AUGUST 2002
Changes in service specification   Given the long-term nature of PPP contracts, it is inevitable that both
                                   circumstances and Government’s needs will change over time. The
                                   Project Agreements should seek to maintain the balance between
                                   flexibility and certainty by:

                                   •   identifying current service requirements in output terms that do
                                       not presuppose a particular, familiar method of performing the
                                       service;

                                   •   incorporating specific procedures, and possibly pricing schedules,
                                       for dealing with changes that can be anticipated from the outset;

                                   •   including procedures for the Private Party to propose a change, at
                                       its own cost, where it sees scope for innovation;

                                   •   allowing Government to require changes, either during the design
                                       and construction phase, (although the need for these should be
                                       rare) or during the operating phase, and setting out procedures
                                       for transparent costing of those changes; and

                                   •   where Government-initiated changes will involve capital
                                       expenditure, (such as construction of new infrastructure) detailing
                                       the options for payment. This will give the Private Party the first
                                       option to raise finance for the additional work, and provide for
                                       Government to fund the work if the Private Party cannot.


Intervening events and force       The Project Agreements should define the various categories of
majeure                            intervening events, including force majeure, and identify the
                                   consequences flowing from each event category. In view of the
                                   differing allocations of risk between the various events, the definitions
                                   should have been considered during the Risk Allocation stage.

                                   It may be appropriate to include a Material Adverse Effect regime in the
                                   force majeure provisions, as the chosen method of sharing the risk of
                                   force majeure (see the Risk Management Supporting Document,
                                   Section 12). In addition, the insurance provisions of the Project
                                   Agreements should address the consequences of force majeure.

                                   The Project Agreements must provide that no relief will be offered in
                                   respect of intervening events where their effect could have been, but
                                   was not, avoided or mitigated by the exercise of reasonable standards
                                   of care.




                                                                                            AUGUST 2002
                                                                                                               11
             Insurance   As a general rule, since the basic design, construction,
                         commissioning and service delivery risks are allocated to the
                         Private Party, it is the Private Party who will be required to bear
                         the majority of the insurances under the Project Agreements. If an
                         insured event occurs, the insurance proceeds should be sufficient
                         to ensure that the Private Party can continue to provide the
                         services. However, particularly in a changing insurance market,
                         Government should consider the best value for money options for
                         each project – in some cases the cost of insurance may not be
                         commercially viable when compared with the cost of one party
                         assuming the risk on a self-insured basis.
                         Insurance may be a factor in the allocation of some risks, such as
                         force majeure. The Private Party may, for example, be required to bear
                         the risk of insurable force majeure risks, with only the uninsurable
                         risks being treated as true events of force majeure.

                         Within the Project Agreements it should be recognised that some
                         risks, although insurable at the commencement of the project, may
                         become uninsurable (or not insurable at commercially viable rates)
                         during the course of the project. It will not be possible to define
                         precisely how such a situation may be resolved, but the parties will
                         have to agree to negotiate the appropriate resolution. A Material
                         Adverse Effect regime may be of assistance in these circumstances.

                         Where the project asset from which the services are to be provided is
                         destroyed or damaged as a result of force majeure or another insured
                         event, Government will expect to have the proceeds of insurance
                         applied to reinstatement. The financiers may seek to argue that the
                         project is beyond rescue, and that the proceeds should instead be
                         used to pay out the project debt. Government should avoid this
                         approach, although it may wish to retain the right to decide at the
                         time how the proceeds should be applied.




12
     AUGUST 2002
Government Step-in   Continuity of service to the public is critical to any PPP project. In the
                     unlikely event that the Private Party is simply unable to provide
                     continuity of service, Government will be entitled to exercise the right
                     of step-in. The Project Agreements must allow Government to take
                     over performance of all or some of the services if such action is
                     necessary to prevent or mitigate a material threat to the environment,
                     to public health or to the safety of people or property. In some cases
                     Government may also require step-in rights to guarantee continuity of
                     an essential service or discharge of a statutory duty.

                     Government’s right to step in may arise out of a default by the Private
                     Party under the Project Agreements, or in the absence of default, as a
                     result of external circumstances to which Government is better placed
                     to respond than the Private Party.

                     The Project Agreements should:

                     •   clearly define the circumstances under which Government may
                         step in;

                     •   provide, where possible, for notice to be given by Government to
                         the Private Party prior to step-in, even if it is verbal notice
                         followed by written notice;

                     •   ensure that Government, upon step-in, has the necessary rights to
                         enable it to perform the necessary services;

                     •   require the Private Party to provide necessary assistance and
                         cooperation to Government;

                     •   define how the costs of step-in will be met (generally by the
                         Private Party if the step-in results from its own default, and by
                         Government if there has been no Private Party default);

                     •   describe the effect of step-in on the rights (including the right to
                         payment of the service charge) and obligations of the Private
                         Party; and

                     •   provide for Government to step out once the situation has been
                         resolved.

                     Although Government must have the right to step in where the need
                     arises out of the Private Party’s default, the right of step-in should not
                     be viewed as a remedy for default. Step-in is intended to provide
                     immediate short-term relief in an emergency situation. If the Private
                     Party is in default, then, the procedures and remedies for default in
                     the Project Agreements should be followed, unless Government is in a
                     position to affect an immediate cure.




                                                                               AUGUST 2002
                                                                                                  13
             Default and remedies   The Project Agreements should contain a variety of remedies available
                                    to the parties in the event of default. The primary aim of these
                                    remedies should be to maintain continuity of services to the public.
                                    While it is important to ensure that the remedies are adequate, it is
                                    equally important to ensure that they appropriate to the scale of the
                                    default. If there is a “hair trigger” response or overreaction to minor
                                    defaults, the contract is unlikely to be bankable.

                                    The majority of operational defaults should be dealt with under the
                                    performance measurement, leading to non-payment or abatement of
                                    service payments. Operational defaults will only require remedy if
                                    they are severe or persistent. For example, Government may wish to
                                    retain the right to order removal and replacement of an individual
                                    sub-contractor who is shown to be particularly prone to performance
                                    faults. As noted above, a Government right of step-in may be used to
                                    remedy an immediate material problem, but should not be viewed as
                                    a long-term remedy for default. The ultimate remedy for Government is
                                    termination, but as a general rule, this right should only be exercised
                                    when all other options have failed.

                                    The Private Party’s events of default and Government’s remedies will
                                    generally include the following:

                                    •   failure to meet a milestone date (for example, the date for
                                        commencement of services) or abandonment of the project will
                                        entitle Government to issue a notice of termination;

                                    •   insolvency of the Private Party will entitle Government to issue a
                                        notice of termination;

                                    •   when the effect of one disastrous episode or cumulative episodes
                                        of shortfalls in performance lead Government to abate service
                                        payments beyond a specified amount then the Government will
                                        be entitled to issue a notice of termination;

                                    •   if a breach which is not itself material becomes a persistent
                                        breach, Government will be entitled to issue a notice of
                                        termination;

                                    •   if a breach capable of remedy has a Material Adverse Effect on the
                                        project, Government may issue a notice requiring the Private Party
                                        to remedy the breach; if the breach is not remedied, Government
                                        will be entitled to issue a notice of termination;

                                    •   compensation for default or liquidated damages may be
                                        appropriate in some circumstances.

                                    Given that the primary purpose of these remedies is to uphold the
                                    provision of services to the public, allowance should be made in the
                                    Project Agreements for the Private Party to prevent or mitigate a
                                    default by making alternative arrangements for the temporary
                                    provision of services; for example, by using other facilities for a period
                                    of time.

                                    The Private Party will also expect to have access to remedies if
                                    Government is in default under the Project Agreements.




14
     AUGUST 2002
Termination          A notice of termination issued by Government will generally be issued
                     subject to the terms of the financiers’ direct agreement. A period of
                     time should be allowed for the financiers to step in and ‘rescue’ the
                     project, to allow continuity of service to the public. If the financiers
                     are unsuccessful, they and/or the Private Party should be required to
                     cooperate during the transition to Government. Government may
                     choose to exercise its rights to take over any properly performing sub-
                     contracts, where appropriate.

                     The Project Agreements must address the financial consequences of
                     termination. Where termination follows the Private Party’s default,
                     Government should be entitled to recover the costs it incurs as a
                     result of the default and termination. Whether any compensation will
                     be payable to the Private Party, or its financiers, will generally depend
                     on the status of the project assets. If the assets are to be returned to
                     Government, some form of compensation, based on fair market value,
                     may be appropriate.


Dispute resolution   Disputes will inevitably arise during the course of the project: the key
                     is to develop a partnering relationship and establish a dispute
                     resolution process sufficiently robust to resolve those disputes as
                     they occur, and to prevent them escalating into major disputes. Most
                     Project Agreements should contain a graduated, three or four stage
                     process, including some or all of the following options:

                     •   discussions between the parties;

                     •   fast-track resolution process;

                     •   committee or dispute resolution board;

                     •   expert determination;

                     •   mediation or conciliation (i.e., alternative dispute resolution); or

                     •   arbitration or courts.




                                                                              AUGUST 2002
                                                                                                 15
     3.3 GUARANTEE OR PERFORMANCE BOND

     The choices available to Government to secure long-term
     delivery by the Private Party are discussed in Chapter 6 of
     the Risk Management Supporting Document. Briefly,
     Government’s choices include sponsor guarantees, parent
     company guarantees and performance bonds. The
     decision to seek additional security in this form, and the
     choice of security, must be made in the context of
     obtaining a value for money outcome.




       WHAT ARE THE OPTIONS FOR DISPUTE RESOLUTION?
       • STEP ONE

       The first step involves internal good faith discussions aimed at resolving the dispute. This step may include
       differing levels of internal escalation.

       •   Discussions between Government and the Private Party; and/or

       •   Discussions between designated senior individuals within Government and the Private Party; and/or

       •   Meeting of a standing committee of senior representatives from Government and the Private Party. The
           committee may sometimes be referred to as a dispute resolution board.



       • STEP TWO

       If the dispute is not resolved, the appropriate second step will often depend on the nature of the dispute. For
       example, an expert from a relevant field may best deal with questions of fact, such as pricing, whilst more wide-
       ranging issues may be best resolved through mediation or conciliation.

       •   Expert determination; or

       •   Mediation (where the mediator attempts to facilitate resolution between the parties); or

       •   Conciliation (where the conciliator attempts to work with the parties to reach a mutually acceptable resolution).



       • STEP THREE

       If neither of the previous steps is successful, the parties may have to rely upon full-blown dispute resolution
       processes. The emphasis should be clearly that this step is the option of last resort, to be avoided wherever
       possible.

       •   Arbitration; or

       •   Litigation through the court system.



       • FAST-TRACK DISPUTE RESOLUTION

       It may be appropriate to include the option of fast-tracked or accelerated dispute resolution for specific, identifiable
       categories of dispute.




16
     AUGUST 2002
WHAT ARE INTERVENING EVENTS?
In many contracts the parties will be granted relief from their obligations if circumstances outside their control
prevent or restrict performance. It is common for these circumstances to be grouped together under a wide
definition of force majeure.

Although the Private Party takes the service delivery risk in a PPP project, there will still be circumstances in which
it is appropriate to grant some relief from its obligations. However, the category of force majeure, which offers
comprehensive relief from obligations, is generally defined very narrowly in PPP contracts. As a result, there have
developed a number of categories of extenuating events, offering varying degrees of relief. These can be grouped
under the general heading of Intervening Events, and are as follows:

    •   Relief Events

        Events that are outside the control of either party to the Project Agreements, and which the Private Party
        will have to manage as best as it can. The Private Party will bear the financial risk of lost revenue or
        increased costs to work around the event, but it will be granted relief from termination for failure to
        perform. Examples of relief events are fire, explosion, lightning, earthquakes and riots.

    •   Compensation Events

        Events that interfere with the Private party’s performance of its services that are either within Government’s
        control, (such as Government actions that occur during its provision of core services), or particular
        categories of change in law which have the effect of discriminating against the project or the Private Party,
        and which, whilst not necessarily within Government’s control, are generally perceived to be a Government
        risk. The Private Party may be entitled to compensation for losses incurred, whether through payment of
        increased costs or through continued service payments even where the Private Party is unable to perform
        the services as a result of the event. The Private Party will also be granted relief from those obligations,
        such as meeting milestone dates, which it cannot perform as a result of the event.

    •   Force Majeure

        Events that are unarguably beyond the control of either party to the Project Agreements. Force majeure
        should generally be narrowly defined to include those events that are highly unlikely to eventuate but
        which will have a catastrophic effect on a party’s ability to perform its obligations if they do. The affected
        party will be given relief from liability, but not compensation. A continuing force majeure event may lead to
        termination of the Project Agreements.




                                                                                                           AUGUST 2002
                                                                                                                          17
       WHEN SHOULD LIQUIDATED DAMAGES BE USED?
       •   In traditional contracts, liquidated damages play a dual role: acting as a disincentive to poor or late
           performance, and, if payable, serving as compensation for the party that has incurred costs as a result or the
           poor or late performance.

       •   Liquidated damages for late completion of construction under a traditional construction contract, for example,
           will often be the only contractual incentive to complete on time.

       •   In a privately funded PPP project there are other reasons to complete the construction on time: the Private
           Party will only be able to perform services in the project asset once the asset has been commissioned and
           completed, and it will not receive the service payments until it starts to perform the services. The lenders, on
           the other hand, often require debt repayments to start on the scheduled date for commencement of services –
           if service commencement is late, the Private Party will be making debt repayments without receiving service
           payments to fund them, (although it will also not be incurring the cost of providing the services).

       •   If the Project Agreements provides for liquidated damages to be payable in those circumstances as well, the
           Private Party will include a contingency in the price to allow for that risk – in addition to the contingency to
           allow for the risk of having to make debt repayments before services actually commence. Government will pay
           for the latter contingency in its service payments.

       •   Liquidated damages must, of course, be a genuine pre-estimate of Government’s likely losses; they are only
           likely to offer value for money in a PPP project if the scale of those losses, or the impact of delay on core
           services would be so great that the expense can be justified. An example would be if Government was
           committed to providing the services to the public by a set date, and would have to pay to procure other
           facilities during the period of delay. This might occur, for example, where Government was unable to open a
           new educational facility on time and had to use alternative facilities.

       •   In a PPP project, liquidated damages will usually have only one role – to compensate for loss – and should
           not be used as incentive for timely performance.




18
     AUGUST 2002
4. CONTRACTS WITH FINANCIERS




                                                                                        GOVERNMENT




               FINANCIERS’
               DIRECT
               AGREEMENT                                                               PRIVATE PARTY
                                                                                      (SPV/SPONSORS)




                                                          DEBT                     EQUITY
                                                       FINANCIERS               PARTICIPANTS




Figure 4.1




4.1 FINANCE AGREEMENTS                                         opportunity to step in and attempt to rescue the project,
                                                               providing they can provide Government with the comfort
The financing documents that govern the relationship           that they have the ability and resources to rescue the
between the Private Party and its financiers will be put in    project and meet critical timeframes and output
place at Financial Close. Although Government will not be      standards.
a party to those documents, it is important for
Government to conduct due diligence over the financing         Under a financiers’ direct agreement:
documents in order to obtain a clear understanding of the      •    government will agree not to exercise its rights of
constraints and protection mechanisms being                         termination under the Project Agreements until it has
established. Government needs to know, for example,                 given the financiers the prescribed notices and
how the Private Party proposes to finance delivery of the           opportunity to step into the project in place of the
service, how much the finance will cost at the various              Private Party; and
stages of the project, what constraints the financiers are
placing on the operations of the Private Party and what        •    the procedures for step-in will be detailed, including
costs and procedures will apply if the Project Agreement            the financiers’ responsibility for remedying the Private
are terminated early.                                               Party’s default and arrangements for payment.




4.2 DIRECT AGREEMENTS

The financiers will generally have security over the Project
Agreements and sub-contracts, and the revenue stream of
the project, but not over the project’s physical assets. A
direct agreement is a contractual document entered into
between Government and the financiers at the beginning
of the project, that is intended to deal with the
relationship between the two parties if the Project
Agreements are terminated, or if there is a threat of
termination, as a result of the private party’s default. The
direct agreement should provide the financiers’ with the



                                                                                                            AUGUST 2002
                                                                                                                               19
      WHAT IS A DIRECT AGREEMENT?
      •   Under a PPP arrangement, Government will have a direct contractual relationship with the Private Party through
          the Project Agreements.

      •   The Private Party will itself be contracting with various third parties to obtain consultancy services, finance,
          design, construction and operational services.

      •   In the course of a successful project, Government need not have any direct dealings with those third parties.
          However, if the Private Party defaults under the Project Agreements, Government may need to deal directly with
          the financiers in the event that they step into the shoes of the Private Party. Alternatively, if Government
          proposes to take over the project during the Operating Phase Government may need to deal with the operator.
          This process will be smoother and faster if the mechanics are agreed upon in advance.

      •   A direct agreement is a contractual document entered into between Government and the third party at the
          beginning of the project. It is intended to deal with the relationship between these parties on the occurrence of
          specified circumstances, such as the default of the Private Party.




      WHAT ARE “HARD” AND “SOFT” SERVICES?
      •   “Hard” services are operational services related to the physical condition of a material asset, such as building
          maintenance and road repairs.

      •   “Soft” services are facilities management services such as cleaning and janitorial services, catering, laundry
          and security.




20
     AUGUST 2002
5. CONTRACTS WITH DESIGN AND CONSTRUCTION CONTRACTORS AND
OPERATORS




                                             GOVERNMENT

   SUB-CONTRACTORS
   COLLATERAL
   WARRANTIES


                                            PRIVATE PARTY
                                           (SPV/SPONSORS)




                                                                     DESIGN &
                                                                   CONSTRUCTION                      OPERATOR
                                                                    CONTRACTOR
                                          CONTRACTOR /
                                          OPERATOR DIRECT
                                          AGREEMENTS

                                                                   SUB-CONTRACTOR                SUB-CONTRACTOR




Figure 5.1




5.1 DESIGN AND CONSTRUCT CONTRACT AND                          Other issues to be considered in these contracts are:
OPERATING AGREEMENT                                            •   whether the contractor or operator is placing a limit on
                                                                   its liability to the Private Party;
The Private Party will be entering into contracts with a
designer and constructor (whether together or separately)      •   whether liability interfaces between the contractor and
to carry out the design and construction of the physical           the operator, and between construction and
asset, and with one or more operators to carry out                 operational services, are covered; and
services such as maintenance or cleaning and janitorial
                                                               •   what step-in rights have been granted to the
services. These contracts will be signed at Financial Close
                                                                   financiers or other third parties.
or, possibly earlier, but left conditional upon Financial
Close taking place. Government will not be a party to
these contracts, but it is important for Government to
conduct due diligence in order to obtain a clear               5.2 DIRECT AGREEMENTS
understanding of how the Private Party proposes to
                                                               It will be necessary to strike an appropriate balance
deliver the service. Government will likely be seeking the
                                                               between respecting the limited recourse nature of a
right to take over the contracts in the event of termination
                                                               privately financed PPP project, and ensuring that
of the Project Agreements; or may be taking the benefit of
                                                               Government has adequate recourse in the event of early
direct agreements from the contractors. In either case it is
                                                               termination. The Private Party SPV will have no track
essential that Government is satisfied that the details of
                                                               record in service delivery, and, in early projects, the
the contracts are consistent with the principles of the
                                                               Private Party consortium may have limited experience in
Project Agreements.
                                                               this method of service delivery. The contractor and




                                                                                                           AUGUST 2002
                                                                                                                              21
     operator will have been chosen for their experience in          5.3 SUB-CONTRACTS AND COLLATERAL
     design and construction and in service delivery, whether        WARRANTIES
     or not they are experienced in PPP projects, and
     Government must ensure that it retains a contractual link       It is likely that the “real’ constructor or operator will not be
     with those entities even if the Project Agreements are          the design and construction contractor or operator, but
     terminated early.                                               the next level of sub-contractor – potentially an operating
                                                                     subsidiary of the design and construction contractor or
     The optimum contractual link for the design, construction       operator. Where most or all of the responsibilities under
     and operating contracts will be a direct agreement, under       the design and construction contract or operating
     which the contractor or operator:                               agreement are being sub-contracted, Government should
     •   warrants that it will properly carry out its duties under   consider obtaining direct contractual undertakings or
         the relevant contract;                                      Collateral Warranties from those sub-contractors. Under a
                                                                     Collateral Warranty a sub-contractor would:
     •   agrees not to amend the contract without
         Government’s consent;                                       •   warrant that it will properly carry out its duties under
                                                                         the sub-contract;
     •   agrees not to terminate the contract without first
         complying with notice obligations; and                      •   undertake to provide a parent company guarantee
                                                                         upon request; and
     •   agrees to allow Government, at its discretion, to step
         into the contract in the event of default by the Private    •   undertake to comply with any Government rights to
         Party, and to take over the Private Party’s rights under        take a novation or assignment of the sub-contract.
         the contract.                                               Where Government seeks Collateral Warranties from sub-
     Depending on the financial strength of the company              contractors it must conduct appropriate due diligence over
     providing the direct agreement, it may be necessary to          the sub-contracts to verify that their principles are
     seek a guarantee from their parent company on the               consistent with the warranties to Government.
     contractor or operator’s obligations under the direct
     agreement. It is likely that step-in rights will have to take
     second place to the financiers’ rights to step into the
     contracts, but it will generally be preferable for
     Government to have the financiers step in and resurrect
     the project, if possible, rather than for Government to
     exercise its step-in rights.




22
     AUGUST 2002
                                                               •   if employees are offered employment with the Private
6. INDUSTRIAL RELATIONS
                                                                   Party or its sub-contractors, measures Government will
                                                                   adopt to protect accrued entitlements of employees;
                                                                   and

6.1 INTRODUCTION                                               •   measures Government will take to minimise the
                                                                   impact of the proposed changes on employees.
Government recognises the importance of the industrial
relations implications of service-based PPP projects.
Where the best value for money option for an individual
project is for existing service provision to be brought into   6.3 EMPLOYMENT AND ENTITLEMENTS
the PPP, Government will support that option. In doing so,
                                                               As a condition of the project, Government will require
Government is also committed to protecting the legal
                                                               that:
rights of staff affected by those changes, including an
employee’s right to employment without suffering a             •   the Private Party or its sub-contractors will offer
decrease in remuneration and entitlements.                         employment to those employees of Government
                                                                   nominated or identified by Government;

                                                               •   employment offered by the Private Party or its sub-
6.2 CONSULTATION                                                   contractors to the relevant Government employees will
                                                                   be on conditions of remuneration no less favourable
Where existing Government employees will be directly               than those that pertain under any applicable award,
affected by a PPP project, Government will consult with            certified agreement or other registered industrial
affected employees and their union (or unions) in relation         agreement;
to:
                                                               •   the Private Party satisfies Government that it will take
•   the consequences for employees of the proposed                 steps to protect and secure the accrued entitlements
    transaction;                                                   of those Government employees who become
•   the number of employees affected;                              employees of the Private Party or its sub-contractors;
                                                                   and
•   the classification of employees affected;
                                                               •   the Private Party and its sub-contractors will comply
•   measures Government will adopt in relation to                  with their legal obligations in relation to
    redeployment or transfer within the Public Sector;             superannuation contributions on behalf of employees
•   whether employees will be offered employment with              carrying out work related to the PPP services.
    the Private Party or its sub-contractors as part of the    In entering into the Project Agreements, Government will
    project and the terms and conditions upon which            take into account any liability that a Private Party may
    such employment will be offered;                           acquire under legislation or otherwise as a consequence
•   the timing of the project;                                 of being required to employ any Government employees.

                                                               Sample contract wording addressing these issues is set
                                                               out below.



    SAMPLE CONTRACT WORDING

    The Private Party must offer or ensure that the applicable sub-contractor offers employment to those Government
    employees identified in writing by Government on or before [insert relevant date] (“the transferring employees”).

    The Private Party must offer or ensure that the applicable sub-contractor offers employment in writing to the
    transferring employees on conditions of remuneration no less favourable than those pertaining to the transferring
    employees under any applicable award or certified agreement or other registered industrial agreement at the time
    that the offer of employment is made.

    The Private Party must comply, or ensure that the applicable sub-contractor complies, with any statutory award or
    other applicable obligation in relation to superannuation contributions for transferring employees.




                                                                                                            AUGUST 2002
                                                                                                                              23
                                               PART TWO: CONTRACT MANAGEMENT



     7. KEY CONTRACT MANAGEMENT                                      7.3 CHANGES
     IMPLICATIONS                                                    One area fraught with difficulty for contract management
                                                                     occurs as a result of Government-initiated changes. It is
                                                                     important to use the same approach to changes as per the
                                                                     initial specification – specify outputs and parameters, not
     7.1 MANAGEMENT OF RISKS                                         design details and inputs – to avoid unintentional
                                                                     assumption of risk by Government. It is also important to
     The Contract Management process involves managing the           bear in mind that the financiers will have funded the
     risks and issues that arise during the life of the project by   project on the basis of an agreed risk profile. If changes to
     managing the Project Agreements in accordance with best         the service requirements will involve material changes to
     practice. In order to optimise the value for money solution     the risk profile, the financiers will expect to be consulted
     chosen under the Value for Money Framework and the              and may even seek a right of veto.
     preferred bid, it is essential to initiate management
     processes that maximise the potential for best practice.

                                                                     7.4 CONTRACT MANAGEMENT CHALLENGES

     7.2 PERFORMANCE MONITORING                                      Potential pitfalls encountered by stakeholders in PPP
                                                                     projects relate primarily to risk allocation and the
     An important component of effective contract                    partnership relationship. Effective and cooperative
     management lies in developing and implementing                  contract management is therefore vital to the successful
     appropriate mechanisms to monitor the performance of            development and implementation of the project.
     parties, and encourage their optimum performance.
                                                                     Mechanisms must be incorporated into contract
     Contractual mechanisms to monitor performance enable            management to prevent potential pitfalls or problems and
     the parties to better manage the Project Agreements and         realise the benefits of improved value for money,
     allow evaluation of the partnership relationship in light of    competition, innovation in service quality, efficient risk
     policy objectives, to ensure attainment of a ‘value for         allocation, additional capital investment and reduced
     money’ outcome.                                                 costs.
     Contractual incentives and performance indicators should        The following table illustrates some of the challenges that
     themselves be monitored to determine whether they are,          have been identified in PPP projects to date, together with
     and remain, appropriate and effective. This is particularly     some mechanisms for dealing with such challenges.
     important for long-term projects, during which
     Government’s requirements may alter. Monitoring of
     performance indicators also allows the parties to assess
     whether a project is providing value for money, and
     whether any changes are necessary.




24
     AUGUST 2002
Issues                  Contract management challenges                Contractual solutions

Risk allocation         Unsatisfactory risk identification and risk   An efficient allocation of risk first
                        transfer, resulting in a failure to deliver   involves a comprehensive identification
                        the necessary incentives for the Private      of the contractual, operational, financial
                        Party to perform.                             and external risks relevant to the project.
                                                                      Once identified, the risks should be
                                                                      allocated to the party best able to
                                                                      assess, control and manage those risks
                                                                      in a manner that allows the reduction of
                                                                      costs and best access to risk mitigation
                                                                      techniques.

Clearly defined roles   Inadequate definition of roles and            Government and the Private Party must
                        responsibilities assumed by Government        be in clear agreement on all key issues
                        and the Private Party.                        before commitment to the project. The
                                                                      project objectives and the respective
                                                                      roles of Government and the Private
                                                                      Party must be clearly defined and
                                                                      understood by the stakeholders, both
                                                                      contractually and culturally.

Output specification    Difficulty in establishing the output         The output specifications must be clear
                        specification. While excessively              and comprehensive to ensure the
                        prescriptive output specifications may        continuity and quality of supply. This will
                        create obstacles to innovation and            require detailed collaboration and
                        competition, ambiguous or broad               research during the planning and
                        specifications may create uncertainty.        development phase, including the
                                                                      comparison of performance incentives
                                                                      and penalties against forecasted output.
                                                                      Comprehensive output descriptions
                                                                      must also be accompanied by
                                                                      performance monitoring and reviews so
                                                                      that actual output meets the
                                                                      performance required by Government
                                                                      over time.

Flexibility             Lack of flexibility amongst contract          The need to ensure flexibility to optimise
                        administrators to respond to changes          further ongoing improvement and value
                        required by Government over time, or as       for money in a project is an inevitable
                        a result of legislative or policy changes.    corollary to the long-term nature of PPP
                                                                      projects and the often underlying
                                                                      objective to achieve a desired public
                                                                      policy outcome that may change over
                                                                      time.

                                                                      The contract management should
                                                                      include a commitment to monitor and
                                                                      evaluate the project and, incorporate a
                                                                      mechanism that enables the Project
                                                                      Agreements to manage change in both
                                                                      the short-term and long-term. The
                                                                      process should also consider the impact
                                                                      of change on the costs and resources of
                                                                      the parties, and the possible
                                                                      apportionment of any costs and savings.




                                                                                                   AUGUST 2002
                                                                                                                    25
      Issues                   Contract management challenges            Contractual solutions

      Trust and teamwork       Protracted negotiations or an             An attitude of trust and teamwork is
                               uncooperative partnership relationship.   desirable to reach a productive
                                                                         partnership relationship. This may be
                                                                         fostered by maintaining communication
                                                                         and providing constructive feedback as
                                                                         well as carrying out a review of the
                                                                         project progress and any difficulties or
                                                                         obstacles that arise.

      Administrative support   Non-existent or redundant                 The Contract Manager must be
                               administrative and technology systems.    supported by up to date project
                                                                         management systems and processes.

      Performance              Ineffective or unsuitable incentive       Contractual mechanisms to encourage
      mechanisms               and/or penalty based contractual          optimum performance should be
                               mechanisms to support the achievement     appropriate for the PPP model and
                               of performance criteria.                  transaction.




26
     AUGUST 2002
8. ROLE OF THE GOVERNMENT
CONTRACT MANAGER


8.1 ROLE

An Agency should invest resources in appointing a high
quality Contract Manager. The Contract Manager can
monitor the project progress on Government’s behalf,
(ensuring, also, that Government meets its obligations
during commissioning) and be available to consult with
the Private Party on risk management issues.

The Contract Manager should be appointed early in the
process and should stay in the project as long as
possible, to ensure continuity. The Contract Manager’s
roles will include:

•   ensuring that all parties have a comprehensive
    understanding of their roles;

•   ensuring that all parties carry out their roles and
    responsibilities to the required standard;

•   where performance is sub-standard, properly applying
    the appropriate contractual mechanisms to achieve
    optimum performance; and

•   managing the contractual processes under the Project
    Agreements, including the payment process,
    performance monitoring and management, change
    mechanisms, audits, price reviews and audits.



8.2 SKILLS AND EXPERIENCE

The particular skills required of the Government Contract
Manager will vary according to the nature of the project,
but should include:

•   experience in:

    –   contract management;

    –   project management;

    –   commissioning;

    –   performance monitoring;

    –   applying performance-based payment regimes;
        and

    –   working in a partnering relationship.

•   an understanding of:

    –   the project;

    –   the field relative to the project, e.g. health, roads,
        education;

    –   the business and drivers of the Private Party and
        its financiers; and

    –   the Project Agreements.



                                                                 AUGUST 2002
                                                                               27
     9. THE PARTNERSHIP                                             9.3 LOOKING TO THE FUTURE
     RELATIONSHIP                                                   There is a significant movement within the construction
                                                                    sector towards relationship contracting, with an
                                                                    increasing number of relationship models to choose from.
                                                                    These models vary in their detail, but share a number of
     9.1 THE IMPORTANCE OF THE RELATIONSHIP                         common factors, including:

     The overwhelming evidence from case studies and                •   a focus on building an effective relationship, breaking
     surveys of PPP projects that are now in the Contract               down the barriers between the respective parties;
     Management stage reveals that the development of a             •   a clearly articulated vision for the project, both in
     successful partnership relationship is fundamental to the          terms of outcomes and the methods used to achieve
     success of the project. While the parties may encounter            those outcomes;
     delays, defects and other obstacles common to projects
     for the development and/or operation of assets or              •   a move away from adversarial relationships and
     provision of services, the key to successful resolution of         towards a “no-blame” culture;
     those difficulties will be the establishment of an effective   •   a focus on problem-solving on a best-for-project
     partnership between Government and the Private Party.              basis; and
     Government’s aim should be to achieve open and
                                                                    •   the use of financial, rather than contractual,
     effective communication and project management, and
                                                                        incentives for excellence and disincentives for poor or
     foster a genuine desire to work together to achieve ‘value
                                                                        average performance.
     for money’ outcomes.
                                                                    In the UK, NHS Estates (the Executive Agency of the
     The case studies in Figure 9.1 illustrate how this has been
                                                                    Department of Health, involved with health estate
     addressed in the United Kingdom’s Scottish Schools PFI
                                                                    management, development and maintenance) is taking
     program.
                                                                    steps to bring relationship contracting into all of its
                                                                    contractual partnerships, including those under the PFI.
                                                                    NHS Estates has instituted a pilot-partnering project
     9.2 ESTABLISHING THE RELATIONSHIP                              known as ProCure21. Under ProCure21, organisations will
                                                                    be invited to undertake an innovative partnership with the
     Some of the key factors in establishing effective
                                                                    NHS by entering into a four-year framework agreement.
     partnering relationships are:
                                                                    During the agreement, organisations will each take single
     •   understanding each other’s business and objectives;        point responsibility to the NHS for the delivery of
                                                                    construction schemes, including those under PFI
     •   establishing a common vision for the project and for
                                                                    agreements. This move follows recognition that the
         the relationship;
                                                                    adversarial approach to contractual relationship building
     •   ensuring the Contract Management Team has a full           is inefficient and outdated.
         understanding of the project and the contract, and
                                                                    Government should be moving towards the relationship
         has appropriate contract management skills and
                                                                    models established in its PPP contracts.
         training;

     •   maintaining continuity of individuals involved in
         contract management;

     •   striving to avoid adversarial relationships; and

     •   reassessing the relationships on a regular basis.




28
     AUGUST 2002
    CASE STUDY
    THE MANAGEMENT OF PFI CONTRACTS FOR COUNCIL SCHOOLS IN SCOTLAND1

    •    In the late 1990s, the Scottish Office and councils explored the use of PFI as a possible means of financing, in
         response to the pressures for additional investment in the Public Sector. In particular, PFI in Scotland’s
         education sector was investigated for the purpose of supporting the procurement of council services, such as
         new and refurbished schools.

    •    In 1998, the Scottish Office provided support to 12 PFI Schools Projects. Falkirk Council reached commercial
         agreement for the first PFI education project in Scotland on March 31, 1998 with the consortium Class 98 Ltd.
         The project consists of the construction of five schools for the city of Falkirk to the value of approximately £71
         million. Other PFI Schools Projects now operating include Balfron High School Stirling, East Renfrewshire and
         the Glasglow Project 2002. The remaining first tranche of PFI Schools Projects have either been agreed upon or
         are in negotiation. Those projects include Aberdeenshire, West Lothian, Fife, Highland, Edinburgh, Midlothian,
         East Lothian, and Dumfries & Galloway. In 2001, a second tranche of funding for PFI schools deals were
         proposed and bids from local authorities invited by the Scottish Executive.

    •    An audit review of the PFI Schools Program reports that:

         –    Broadly speaking, the councils have managed the PFI processes well. This has largely been achieved by
              implementing strong project management and governance procedures.

         –    In many cases, formal project steering groups have been established to supervise the projects and ensure
              a strategic overview. To assist in the effective progression of the projects, councils have typically
              established a project team. This team, usually with a core membership of 5 or 6 key council staff and a full-
              time project manager, reports to the steering group and is responsible for the day-to-day responsibility of
              progressing each project.

         –    In addition to the standard reporting requirements, most of the PFI schools projects exhibit a high standard
              of regular written analysis and reporting between the project team and the steering group. This procedure
              reinforces effective project management in accordance with best practice.

         –    Project teams should, at the outset, review and determine the standard of internal reporting to be
              achieved. Maintaining good records of the development of the project and key decisions made is more
              likely to promote accountability and effective decision-making.


1 Audit Scotland Audit Review, Taking the initiative – Using PFI Contracts to renew council schools, June 2002




                                                                                                                 AUGUST 2002
                                                                                                                               29
         CASE STUDY
         GLASGOW SCHOOLS PROJECT 20022

         •    Glasgow Council is now operating the Glasgow Schools Project 2002. The goal of this bundled PFI Schools
              Project is to build and refurbish 30 schools for Glasgow City Council at a capital value of £225 million. The
              project will undertake the refurbishment of 10 secondary schools, the refurbishment and extension of 8
              secondary schools, the construction of 11 new secondary schools, a primary and nursery school. A key element
              of the Glasgow Schools Project is the provision of technology services for the secondary schools , including
              laptops, over 15,000 desktop classroom computers, 350 network servers and fully networked open learning
              system linked to Scottish Universities.

         •    The Glasgow Schools Project 2002 is the largest education PFI deal in the United Kingdom, and one of the
              continent’s most successful PFI cases. The audit review reports that:

              –     The construction phase of the project was on or ahead of schedule for most of the schools in the project.
                    Within 14 months of the Private Party consortium assuming managerial responsibility for the project
                    schools, 4 schools were completed and made available and a further 5 schools were nearing completion.

              –     This success was largely a consequence of performance monitoring strategies implemented by Glasgow
                    Council. The Council established teams to monitor and ascertain the satisfactory delivery of the project’s
                    contractual obligations.

              –     The monitoring teams also determined the basis for approving contract payments to the Private Party
                    consortium.

              –     The monitoring teams reported that they were satisfied with the level of service provided and the positive
                    relationship established with the Private Party consortium.


     2 Audit Scotland, ibid.




30
      AUGUST 2002
10. MAINTAINING THE INTEGRITY
OF THE CONTRACT
The risk allocation approved by Government is reflected in
the Project Agreements. It is essential to ensure that the
contract is performed in accordance with the terms of risk
allocation and that each party discharges its respective
obligations. Failure to do so is contrary to the approval
given by Government and has the potential to diminish
the value of the project.

In addition, it is imperative to ensure that actions, or
inaction, by the Contract Management Team does not
result in Government implicitly taking back some of the
risks allocated to the Private Party in the Project
Agreements.

In the event of a project failing to deliver services in
accordance with the performance specifications, the
remedies available to Government will be clearly defined
in the Project Agreements. The Project Agreements should
comprehensively take into account the implications of
non-performance and thereby ensure there are no legal
grounds for either party to seek alternative remedies. This
should ensure that a value for money outcome is
achievable for Government, even in circumstances where
a project encounters performance difficulties.

Government should refrain from engaging with the project
Proponents other than as prescribed within Project
Agreements. However, it is recognised that in exceptional
circumstances, variations to the Project Agreements or
waivers of rights may be an appropriate response to
ensure the Government’s value for money outcome. The
appropriate delegate should approve any such variations
in advance.




                                                              AUGUST 2002
                                                                            31
PUBLI
  FOR FURTHER INFORMATION:


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  Department of State Development
  PO Box 168
  ALBERT STREET BRISBANE 4002

  Phone: (07) 3224 2971
  Fax: (07) 3224 2978
  Email: ipt@sd.qld.gov.au
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