(a)        Construction and design risk

The general principle on PPP projects is that the concessionaire designs and constructs the asset at its own cost (using external finance) to meet an agreed output specification. When the facility is complete, the operation period will start and project revenues will begin (whether from user payments or from payment of an availability fee by the government).

The government clearly has an interest in the quality of the final product. A concession agreement can therefore be expected to contain similar provisions to those found in a standard construction contract, but these are often less extensive in a PPP contract, for reasons discussed below.

(b)        Payment regime during construction

Firstly, a PPP contract does not usually have the same type of payment regime during the construction period as a construction contract. To the extent the concessionaire is expected to raise private finance, valuation and certification of payments for completed works are a matter to be agreed between the concessionaire, the EPC contractor and the lenders.

Some projects do involve a capital contribution from the government (for example, to meet a viability gap that cannot be secured through private funding), but in this case the government’s payments are often back-ended toward the end of the construction period. To the extent that the government is required to make direct capital contributions during construction, it increases the government’s risk of exposure on a termination if payment is made before the assets are fully developed and the full value not materialised.

That said, the lenders and their technical advisers may consider that they are taking a greater risk in this regard and will therefore be reviewing the works with greater scrutiny. If so, the government may be able to take reliance on the scrutiny of this certification process rather than add a second layer of review and certification at its own cost.

(c)        Defects

Similarly, a typical construction contract will contain extensive design and construction warranties which can be enforced by the employer. In a PPP context, the government’s guarantee of quality of the construction is usually covered by the mechanics of the payment regime during operations (namely, that deductions may be made to the extent that the quality of the project falls below specified standards at any time). Accordingly detailed defect liability provisions may only be needed where part of the construction works are being handed over to parties outside the concession (such as traffic improvement works on neighbouring land).

(d)         Delay / Performance damages

The same rationale may apply to delay and performance damages. If the project is late or under-performing, the concessionaire’s revenue stream will be severely delayed and, on an availability-based project, the government will not be obliged to make availability payments. This can be seen as already providing suitable motivation for the concessionaire to achieve a timely delivery.

That said, on some projects it may be merited to have delay damages in favour of the government. This might be necessary for example, on an airport project where operations are already handed over on day one and the government needs to have a suitable incentive for timely completion, or on a revenue generating project where the government had budgeted for a percentage of the expected tolls or fares to be paid back to the government as a royalty.

(e)        Design review process

As PPP contracts typically work on the basis of an output specification to be achieved rather than an input specification provided by the government, the final design may not be available at contract signature and will need to be developed in detail during the construction period as works progress. The government will therefore have a keen interest in seeing how the concessionaire’s final design is developed to ensure that it meets the government’s understanding of what the output specification is intended to deliver. This is particularly the case with projects where functionality of the asset is key for the government users; medical professionals will have a keen interest in seeing how their operating theatres are laid out for example. In a technically complex project, the government party may want to scrutinise the technical aspects of the project carefully before the concessionaire goes too far with the design process.

(f)         Certification process

Given the risks undertaken by the concessionaire and its lenders, and the significance of the completion date for the commencement of the revenue stream, it would be very unusual to see a PPP project that did not provide for certification to be undertaken by a neutral third party. The “independent engineer” or “independent certifier” would normally be appointed jointly by the government and concessionaire, and would owe a duty of care to all parties. The rationale for this is that, in the absence of a third party certifier, a dispute could arise between the government and concessionaire as to whether completion had occurred, the concessionaire would likely be insolvent before the tribunal reaches a decision, and even a positive decision would be too late at that point.