kuwait files/arabic...feasibility study offered by the proposer that has an economic and social...

KUWAIT PUBLIC-PRIVATE PARTNERSHIP PROJECTSPROJECT GUIDEBOOK 2018

2 K U WA I T P U B L I C - P R I VAT E PA R T N E R S H I P P R O J E C T S

© 2018 Kuwait Authority for Partnership Projects Touristic Enterprises Company BuildingSecond FloorAl-Shuwaikh Administrative ZoneAl-Jahra Street Telephone: 00 965 – 2496 5900 Internet: http://www.kapp.gov.kw/en/Home

This work is a product of the staff of the Kuwait Authority for Partnership Projects with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Kuwait Authority for Partnership Projects, its Board of Executive Directors, or the governments they represent.

The Kuwait Authority for Partnership Projects does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the Kuwait Authority for Partnership Projects concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

Rights and Permissions

Any queries on rights and licenses, including subsidiary rights, should be addressed to the Kuwait Authority for Partnership Projects, Touristic Enterprises Company Building, Second Floor, Al-Shuwaikh Administrative Zone, Al-Jahra Street or email [email protected].

71 photo © ArloMagicman/istockphoto.com/ Original Report and Cover design: Victoria Adams-Kotsch.

i

KUWAIT PUBLIC-PRIVATE PARTNERSHIP PROJECTSPROJECT GUIDEBOOK 2018

i i K U WA I T P U B L I C - P R I VAT E PA R T N E R S H I P P R O J E C T S

i i iC O N T E N T S

CONTENTS

MESSAGE FROM HIS EXCELLENCY, THE MINISTER OF FINANCE viii

MESSAGE FROM THE DIRECTOR GENERAL OF KUWAIT AUTHORITY FOR PARTNERSHIP PROJECTS ix

ACKNOWLEDGMENTS x

ABBREVIATIONS AND ACRONYMS xii

CHAPTER 1: PUBLIC-PRIVATE PARTNERSHIPS—AN INTRODUCTION 1

1.1 What are PPPs? 1

1.2 What are the Benefits of PPPs? 2

1.3 Value for Money 2

1.4 Types of PPP 4

1.5 PPP Process 6

1.5.1 Project Initiation 7

1.5.2 Project Feasibility and Structuring 7

1.5.3 Project Procurement 8

1.5.4 Project Implementation and Monitoring 8

1.6 Further Readings 9

CHAPTER 2: PPP LEGAL AND INSTITUTIONAL STRUCTURES IN KUWAIT 11

2.1 Introduction 11

2.2 Key Features of Law No. 116 of 2014 Regarding Public-Private Partnerships 11

2.2.1 Transition Arrangements 13

2.2.2 Key Aspects of Executive Regulations 13

2.3 Key Differences between the 2008 and 2014 Legislation 13

2.3.1 Establishing the Project Company and Shareholding Structure 14

2.3.2 Changes in Project Documentation 14

2.3.3 Ownership and Security over Assets 15

2.3.4 Procurement Processes 15

2.3.5 Term 16

2.3.6 Land 16

2.4 Interface with Other Legislation 16

2.5 Institutional Structure for PPPs 17

i v K U WA I T P U B L I C - P R I VAT E PA R T N E R S H I P P R O J E C T S

2.5.1 The Higher Committee (HC) 17

2.5.2 The Kuwait Authority for Partnership Projects (KAPP) 18

2.5.3 Public Entities 19

2.5.4 The Department of Legal Advice and Legislation 20

2.5.5 The State Audit Bureau 20

2.6 Kuwait PPP Flow Process 21

CHAPTER 3: PROJECT INITIATION 23

3.1 The Legal Framework for Project Initiation 23

3.2 Solicited Project Proposals 24

3.2.1 The Role of the Public Entity at Initiation 24

3.2.2 The Role of KAPP at Initiation 25

3.2.3. Establishing the Competition Committee 25

3.2.4 The Role of the Transaction Advisor 25

3.2.5 The Process for Recruiting the Transaction Advisor 26

3.3 Unsolicited Project Proposals 36

3.3.1 Introduction to Unsolicited Proposals 36

3.3.2 Procedures for Initiating Unsolicited Project Proposals 38

CHAPTER 4: PROJECT FEASIBILITY AND STRUCTURING 39

4.1 The Legal Framework for Feasibility Studies 39

4.2 Feasibility Studies for Solicited Projects 43

4.2.1 Pre-Feasibility Studies 43

4.2.2 Comprehensive Feasibility Studies 45

4.2.4 Indicative List of Requirements for the Comprehensive Feasibility Study Report 62

4.2.5 Feasibility Study Approval 63

4.2.6 Indicative Timelines for Tendering a Project 64

4.2.7 Financing Sources, including Viability Gap Funding 66

4.2.8 Other Forms of Government Support 67

4.3 Feasibility Studies for Unsolicited Projects 67

4.3.1 Legislative Arrangements for USP Feasibility Studies 67

4.3.2 Feasibility Study Arrangements for USP Initiatives 69

CHAPTER 5: PROJECT PROCUREMENT 71

5.1 Important Considerations in the Pre-Procurement Stage 71

5.1.1 The Legal Framework for Procurement Process 71

5.2 Initiation of the Procurement Process: Calls for Expressions of Interest 78

5.3 Pre-Qualification 78

vC O N T E N T S

5.3.1 Introduction to Pre-Qualification 78

5.3.2 Important Considerations in the Pre-Qualification Stage 79

5.4 Preparation, Approval, and Distribution of the RFQ Documents 81

5.4.1 Preparation of RFQ Documents 81

5.4.2 Approval of RFQ Document 85

5.4.3 Advertisement and Distribution of RFQ Document 85

5.5 Pre-Qualification Documents and Approval of Pre-Qualified Parties 87

5.5.1 Receipt of Pre-Qualification Documents 87

5.5.2 Evaluation of the Pre-Qualification Documents 87

5.5.3 Approval of Pre-Qualified Investors 88

5.6 Preparation and Approval of the Request for Proposals (RFP) 89

5.6.1 Preparation of the Request for Proposal 89

5.6.2 Approval of the Request for Proposal 106

5.6.3 Important Considerations for Managing the Bid Process 106

5.7 Bidding 109

5.7.1 Role of the Competition Committee 114

5.7.2 Bidding Process with Post-Qualification 114

5.8 Competitive Dialogue Process (pursuant to Article 34 of the Regulations) 115

5.9 Contract Finalization 116

5.10 Sale of Shares of Public Joint Stock Company 122

5.10.1 Incorporation of Public Joint-Stock Company 126

5.10.2 Process of Transfer of Shares 126

5.10.3 Role of KAPP as Temporary Shareholder 127

5.10.4 Tender Process for Investor Shares 127

5.10.5 Equity Rate of Return for Citizen Shareholders 127

CHAPTER 6: PROJECT FINANCING ISSUES 129

6.1 Equity Bridge/Shareholder Loans 129

6.2 Security 129

6.3 Refinancing 130

6.4 Timetable to Financial Close 130

6.5 Termination Payments 130

CHAPTER 7: OTHER CONTRACTING ISSUES 131

7.1 Kuwaitization Requirements 131

7.2 Handover Bonds 131

7.3 Bidding Restrictions 131

v i K U WA I T P U B L I C - P R I VAT E PA R T N E R S H I P P R O J E C T S

CHAPTER 8: PROJECT IMPLEMENTATION AND MONITORING 133

8.1 Contract Management Process 135

8.2 Performance Monitoring 136

8.3 Review Processes 137

8.4 Dispute Resolution 139

8.5 Renegotiation Requests 140

8.6 Termination 140

8.7 Concession Extension 141

8.8 Handback Procedures 141

ANNEX A: RISK ALLOCATION IN PPPs: SAMPLE RISK MATRICES 142

Risk Matrix for a Water Desalination Project 143

Risk Matrix for a Container Port Project 190

ANNEX B: RECOMMENDED PPP CONTRACTUAL PROVISIONS, WITH GUIDANCE NOTES 224

B.1 Force Majeure 224

B.2 Material Adverse Government Action 231

B.3 Change in Law 235

B.4 Termination Payments 242

B.5 Refinancing 248

B.6 Lenders’ Step-in Rights 251

B.7 Confidentiality and Transparency 254

B.8 Governing Law and Dispute Resolution 259

v i iC O N T E N T S

FIGURES

Figure 1.1: Spectrum of PPP Agreements 4

Figure 1.2: The PPP Process 6

Figure 2.1: PPP Project Cycle, Kuwait 21

Figure 4.1: Process to Calculate Risk Adjusted PSC 57

Figure 4.2: Competitive Neutrality Adjustment 58

TABLES

Table 2.1: Comparison of Joint Stock Company Share Allocation Arrangements under the PPP Law and the Old Law 14

Table 4.1: Indicative Timelines for Tendering a Project 64

Table 8.1: Overview of Required Reviews and Reports 137

Table 8.2: PPP Concession Extension 141

Table A1.1: Risk Matrix for a Water Desalination Project 144

Table A1.2: Risk Matrix for a Container Port Project 190

BOXES

Box B.1: Enforcement of Arbitral Awards 266

v i i i K U WA I T P U B L I C - P R I VAT E PA R T N E R S H I P P R O J E C T S

MESSAGE FROM HIS EXCELLENCY THE MINISTER OF FINANCE

Aspiring for creating a comprehensive legislative system and a procedural framework to regulate the process of partnerships between private and public sectors in strategic projects, the State of Kuwait has enacted Law No. 116 of 2014 on Public Private Partnerships, followed by Decree No. 78 of 2015 issuing its Executive Regulations, which called for the preparation of this Guidebook, to define the mechanisms for tendering Public Private Partnership (PPP) projects.

This Guidebook was prepared with the assistance of the World Bank, and benefits from the Institution’s international experience and expertise. It includes general instructions on project tendering in accordance with Law No. 116 of 2014 on Public Private Partnerships and its Executive Regulations, taking into consideration Kuwait’s own legal and economic stance.

The State of Kuwait aims at keeping pace with the international and regional developments in executing strategic projects in a manner consistent with the latest international standards and best practices. This goes in line with developing a safe and attractive investment climate to accomplish the Government’s goals of securing citizens’ needs for sustainable infrastructure and establishing a prosperous society.

H.E. Dr. Nayef Al-Hajraf,Minister of Finance of Kuwait

i xM E S S A G E F R O M T H E D I R E C T O R G E N E R A L O F K U WA I T A U T H O R I T Y F O R PA R T N E R S H I P P R O J E C T S

MESSAGE FROM THE DIRECTOR GENERAL OF KUWAIT

AUTHORITY FOR PARTNERSHIP PROJECTS

Striving to improve the business environment in Kuwait, develop the investment climate and increase direct investments by engaging the private sector and Kuwaiti citizens through owning shares in major infrastructure projects, Law No. 116 of 2014 on Public Private Partnerships created the Kuwait Authority for Partnership Projects (“KAPP”) as a national institution specializing in Public Private Partnership (“PPP”) Projects.

Law No. 116 of 2014 on Public Private Partnerships regulates and defines the mechanism and procedures of tendering PPP projects. The tender process is regulated to achieve the highest levels of transparency, provide equal opportunities to investors, and to ensure that PPP projects are developed under a well-integrated legal and institutional system. This represents a significant development in Kuwait’s legal system and investment framework.

This Guidebook is issued pursuant to Law No. 116 of 2014 on Public Private Partnerships and its Executive Regulations to provide detailed guidance on PPP project tendering, so as to facilitate PPP processes in Kuwait.

His Excellency Mutlaq Al-Sanea,Director General of the Kuwait Authority for Partnership Projects

x K U WA I T P U B L I C - P R I VAT E PA R T N E R S H I P P R O J E C T S

ACKNOWLEDGMENTS

This Guidebook was prepared by Kuwait Authority for Partnership Projects (KAPP) in close collaboration with the World Bank. The World Bank team was led by Mark M Moseley, Lead Lawyer in the Infrastructure, PPPs and Guarantees (IPG) Group under the Global Themes Vice Presidency. Mark Giblett (Senior Infrastructure Finance Specialist), Christina Paul (Lawyer) and Deblina Saha (Infrastructure Analyst) were the other members of the IPG Group from the Singapore Urban and Infrastructure Hub who drafted the Guidebook. The team would like to express its sincere appreciation for the guidance and support of Firas Raad (Country Manager, Kuwait Country Office), Maher F. Abu-Taleb (Senior Operations Officer), Maryam Abdullah (Operations Analyst) and Ayah Elhashash (Team Assistant) throughout the preparation of the Guidebook.

The Guidebook benefited from the valuable contributions of the staff of KAPP led by Engineer Nayaf AlHaddad (Manager, Research Strategic Planning, Risk). The team gratefully acknowledges the guidance provided by the KAPP working group as well as Messrs. Ahmad AlShorbagy (Legal Consultant, Al-Hamad) and is thankful for the feedback received from other KAPP officials during the seminar for the dissemination of the Guidebook, which was held in Kuwait in November 2017.

x iA C K N O W L E D G M E N T S

x i i K U WA I T P U B L I C - P R I VAT E PA R T N E R S H I P P R O J E C T S

ABBREVIATIONS AND ACRONYMS

Authority Kuwait Authority for Partnership Projects

BOO Build-Operate-Own

BOT Build-Operate-Transfer

Contracting Authority (in annexes)

Public Agency contracting a partnership project. See “Public Entity”

DBO Design-Build-Operate

Distinguished Project Project approved by the Higher Committee and based on an integral feasibility study offered by the proposer that has an economic and social return conform to the State’s strategy and developing plan (also called Privileged Project)

GCC Gulf Cooperation Council

EPC Engineering, Procurement and Construction

ECOD Early Commercial Operation Date

ECWPA Energy Conversion and Water Purchase Agreement

Executive Regulations Kuwait PPP Law Executive Regulations (Decree No. 78 of 2015)

Guidebook Kuwait Public-Private Partnership (PPP) Projects Guidebook

HC The Higher Committee for PPP Projects

HoldCo A corporate entity, formed by the members of the investor consortium, for owning shares in the Project Company

Initiative An innovative Partnership Project for a creative unprecedented idea, in Kuwait, approved by the Higher Committee, per an integral feasibility study offered by the proposer to the Authority, with an economic and social return conform with the State’s strategy and developing plan.

IPP Independent Power Producer

IRR Internal Rate of Return

IWP Independent Water Project

IWPP Independent Water and Power Project

IWPP Law Law 39 of 2010 and its amendments

IWPP Regulations Executive Regulations associated to IWPP Law and its modifications (Decree No. 1 of 2015)

KAPP Kuwait Authority for Partnership Projects

x i i iA B B R E V I AT I O N S A N D A C R O N Y M S

KDIPA Kuwait Direct Investment Promotion Authority

KM Kuwait Municipality

KMRT Kuwait Metropolitan Rapid Transit System

KNRR Kuwait National Rail Road

KWD Kuwaiti Dinar

MIGD Million Imperial Gallons per Day

MEW Kuwait Ministry of Electricity and Water

MPW Kuwait Ministry of Public Works

MW Megawatt

O&M Operations and Maintenance

Old Law Law No. 7 of 2008 regarding the Regulation of Build, Operate and Transfer (BOT) Operations

PCOD Project Commercial Operation Date

PPP Public-Private Partnership

PPP Law Kuwait Public-Private Partnerships Law (Law No. 116 of 2014)

Private Partners (in annexes)

Private investors

Project Company The corporate entity created to implement a PPP project. See “SPV”

Public Entity Public Agency contracting a partnership project. See “Contracting Authority”

PTB Kuwait Partnerships Technical Bureau (the predecessor to KAPP)

SAB State Audit Bureau

SLA Service Level Agreement

Solicited Proposal Proposal for a PPP submitted at the behest of the government

SPV The corporate entity (Special Purpose Vehicle) created to implement a PPP project. See “Project Company”

State (the) State of Kuwait

TA Transaction Advisor(s)

Unsolicited Proposal Proposal made by a private party to undertake a PPP project, submitted at the initiative of the private firm, rather than in response to a request from the government.

WBG World Bank Group

x i v K U WA I T P U B L I C - P R I VAT E PA R T N E R S H I P P R O J E C T S

1

CHAPTER

1

PUBLIC-PRIVATE PARTNERSHIPS: AN INTRODUCTION

1.1 WHAT ARE PPPs?

There is no single widely-accepted definition of public-private partnerships (PPPs). The PPP Knowledge Lab1 defines a PPP as “a long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance.”

Kuwait’s PPP Law (Law No 116 of 2014) defines a PPP as being “a project to implement an activity through which the State targets to provide a public service of economic, social or service importance, or to improve an existing public service or to develop, reduce the costs or increase the efficiency of any such service, procured by the Kuwait Authority for Partnership Projects (KAPP) in cooperation with the Public Entity and in accordance with the PPP Model after the approval of the Higher Committee, provided it does not contradict with the provisions of Article 152 and 153 of the Constitution.”

PPPs typically do not include turnkey construction contracts, which are usually categorized as public procurement projects, or a full privatization, where there is typically only a limited ongoing regulatory role for the public sector.

PPPs are very flexible and can be used for both economic infrastructure as well as social infrastructure. Economic infrastructure includes energy projects (e.g. IPPs, IWPPs), transportation projects (e.g. roads, rail, ports, airports, bus rapid transport, etc.), water projects (e.g. desalination plants, bulk water and waste water treatment plants) and waste management projects. Social infrastructure includes schools, universities, hospitals, social housing, sports facilities and government office buildings.

1 The PPP Knowledge Lab is a curated and comprehensive knowledge resource on public-private partnerships: https://pppknowledgelab.org/


1.2 WHAT ARE THE BENEFITS OF PPPs?

Facing constraints on public resources and fiscal space, while at the same time recognizing the importance of investment in infrastructure to help their economies grow, many governments are increasingly turning to the private sector as an alternative additional source of financing to help meet the funding gap.

However, aside from the potential fiscal benefits of entering into a PPP (e.g. reducing the upfront costs to the government of providing a service and/or building an asset), governments often look to collaborate with the private sector for other reasons, including:

~ economic diversification and, in the case of Kuwait, reduction in the relative GDP share of the oil sector;

~ exploring PPPs as a way of introducing private sector technology and innovation in providing better public services through improved operational and maintenance efficiency;

~ incentivizing the private sector to deliver projects on time and within budget;

~ imposing budgetary certainty by setting present and the future costs of infrastructure projects over time;

~ utilizing PPPs as a way of developing local private sector capabilities through joint ventures with large international firms, as well as sub-contracting opportunities for local firms in areas such as civil works, electrical works, facilities management, security services, cleaning services, maintenance services thereby creating new job opportunities for citizens;

~ using PPPs as a way of gradually exposing state owned enterprises and government to increasing levels of private sector;

~ supplementing limited public sector capacities to meet the growing demand for infrastructure development; and

~ extracting long-term value-for-money through appropriate risk transfer to the private sector over the life of the project – from design/ construction to operations/ maintenance.

1.3 VALUE FOR MONEY

A PPP project yields value for money (VfM) if it results in a net positive gain to society which is greater than that which could be achieved through an alternative procurement route. It is often considered essential to carry out a VfM analysis during the feasibility stage as part of the initial preparation of any PPP project. However, VfM analysis can be very subjective and heavily driven by underlying assumptions, which themselves can be unreliable, especially at a pre-transaction stage where little or no upfront analysis has been done.

Based on a long and successful track record across various countries and sectors, it has frequently been demonstrated that the PPP procurement option can be more efficient in terms of investment and operating and maintenance

3P U B L I C - P R I VAT E PA R T N E R S H I P S : A N I N T R O D U C T I O N

costs than the public procurement option. Therefore, the key question in assessing value for money is usually whether the greater efficiency of the PPP project is likely to outweigh factors that might make the PPP costlier, the main ones being transaction and contract oversight costs (i.e. additional bidding, contracting and monitoring costs in a PPP setting) and financing and legal costs (i.e. possible added costs due to private sector financing). The value for money assessment should also take into account the potential non-financial benefits of PPPs, such as the accelerated and enhanced delivery of projects, improved quality of service, greater transparency in the procurement process, better focus on due diligence, etc. Experience suggests that the likelihood that a PPP project or a PPP program will provide value for money is higher when all or most of the following conditions are met:

~ there is major investment involved, whether it is local or foreign, which would benefit from the effective management of risks associated with construction and delivery (this may be a single major project or a series of replicable smaller projects in a given sector);

~ the private sector has the expertise to design, implement and operate complex projects;

~ the public sector is able to define its service needs as outputs that can be written into the PPP contract ensuring effective and accountable delivery of services over the long run;

~ risk allocation between the public and private sectors can be clearly identified and implemented;

~ it is possible to estimate, over the whole life of the project, the long-term costs of providing the assets and services involved;

~ the value of the project is sufficiently large to ensure that procurement costs are not disproportionate; and

~ the technological aspects of the project are reasonably tested and proven and not susceptible to obsolescence.

There are numerous analyses and reports developed by (or for) governments and national audit offices as to whether PPPs are, in fact, delivering VfM. The majority of these reports conclude that PPPs do generate VfM. United Kingdom studies indicate that government departments which implemented PPPs, registered cost savings of between 10 and 20 percent. According to the 2002 census of the United Kingdom National Audit Office (NAO), only 22 percent of PFI deals experienced cost overruns and 24 percent experienced delays, compared to 73 percent and 70 percent of projects undertaken by the public sector as reviewed in an NAO survey in 1999. The UK Treasury reported in 2006 that, according to a study for the Scottish Executive by Cambridge Economic Policy Associates (CEPA), 50 percent of authorities administering PPPs reported that they received good value for money, with 28 percent reporting satisfactory value for money. Australia’s National PPP Forum (representing Australia’s Commonwealth, State and Territory governments) commissioned the University of Melbourne in 2008 to compare 25 Australian PPP projects with 42 traditionally-procured projects. The study found that traditionally-procured projects had a median cost overrun of 10.1 percent, whereas PPP projects had a median cost overrun of 0.7 percent. Traditionally-procured projects had a median time overrun of 10.9 percent, whereas PPP projects had a median time overrun of 5.6 percent.


1.4 TYPES OF PPP

Public-private partnerships can take a wide range of forms, varying in the extent of involvement of and risk taken by the private party. The terms of a PPP are typically set out in a contract or agreement that outlines the responsibilities of each party and clearly allocates risk. The diagram below depicts the spectrum of PPP agreements:

FIGURE 1.1: Spectrum of PPP Agreements

Utility Restructuring Corporatization Decentralization

Civil Works

Service Contracts

Management andOperatingContracts

Leases/Affermage

Concessions

BOT Projects

DBOs

JointVenture/PartialDivestitureof PublicAssets

FullDivestiture

HighLowExtent of Private Sector Participation

Public-Private Partnership

Public Ownsand

Operates Assets

Private Sector Owns and

Operates Assets

PPPs can range from the public sector entering into a relatively straightforward management and/or operating contract with the private sector, through to a joint venture or partial divestiture of ownership in a public asset.

Examples of the different forms that a PPP may take include:

Management and Operating Contracts

The term “management contract” can apply to a range of contracts from technical assistance contracts through to full-blown operation and maintenance agreements and, as such, it is difficult to generalize about them. However, the main common feature is that the awarding authority engages the contractor to manage a range of activities for a relatively short time period (two to five years). Management contracts tend to be task specific, and more focused on inputs rather than outputs. Operation and maintenance agreements may have more outputs or performance requirements.

The simplest management contracts involve the private operator being paid a fixed fee by the awarding authority for performing specific tasks—the remuneration does not depend on collection of tariffs and the private operator does not typically take on the risk of asset condition. Where the management contracts become more performance-based, they may involve the operator taking on more risk, potentially including the risk of asset condition and replacement of more minor components and equipment.


Leases/Affermage Contracts

Leases and affermage contracts are generally public-private sector arrangements under which the private operator is responsible for operating and maintaining the existing utility but is not responsible for building and financing any new investments.

Leases and affermages differ from management and operating contracts in that:

~ the operator does not receive a fixed fee for its services from the awarding authority but charges an operator fee to consumers, with

� in the case of a lease: a portion of the receipts going to the awarding authority as owner of the assets as a lease fee and the remainder being retained by the operator

� in the case of an affermage: the operator retaining the operator fee out of the receipts (prix du fermier) and paying an additional surcharge that is charged to customers to the awarding authority to go towards investments that the awarding authority makes/ has made in the infrastructure;

~ the operator tends to bear greater operating risk; and

~ the operator tends to employ the staff directly.

In the case of a lease, the rental payment to the authority tends to be fixed irrespective of the level of tariff collection that is achieved, so the operator takes a risk on bill collection and on the level of receipts being sufficient to cover its operating costs. In the case of an affermage transaction, the operator is assured of its fee (assuming that the receipts are sufficient to cover it) and it is the authority that takes the risk of the rest of the receipts collected from customers covering its investment commitments.

The awarding authority in each case remains responsible for financing and managing investment in the assets – which is supposed to come, at least in part, from the rental payment/surcharge.

Concessions, BOT Projects and DBO

Concessions, Build-Operate-Transfer (BOT) Projects, and Design-Build-Operate (DBO) Projects are types of PPP transactions that are output-focused. BOT and DBO projects typically involve significant design and construction as well as long-term operations, for new build (greenfield) or projects involving significant refurbishment, rehabilitation or extension (brownfield).

A Concession gives a concessionaire the long-term right to use all assets conferred on the concessionaire, including responsibility for operations and some investment. Asset ownership remains with the authority, and the authority is typically responsible for replacement of larger assets. Assets revert to the authority at the end of the concession period, including assets purchased by the concessionaire. In a concession, the concessionaire typically obtains most

P U B L I C - P R I VAT E PA R T N E R S H I P S : A N I N T R O D U C T I O N


of its revenues directly from the consumer and so it has a direct relationship with the consumer. A concession covers an entire infrastructure system (so may include the concessionaire taking over existing assets as well as building and operating new assets). The concessionaire will pay a concession fee to the authority which will usually be ringfenced by the authority and put towards asset replacement and expansion.

A Build Operate Transfer (BOT) Project is typically used to develop a discrete asset rather than a whole network and is generally entirely new or greenfield in nature (although refurbishment may be involved). In a BOT Project the project company must build the asset and generally obtains its revenues through a fee charged to the utility/ government rather than tariffs charged to consumers. At the end of an agreed period of time, the asset will be transferred to the government.

In a Design-Build-Operate (DBO) Project, the public sector owns and finances the construction of new assets. The private sector designs, builds and operates the assets to meet certain agreed outputs. The documentation for a DBO is typically simpler than a BOT or Concession, as there are no financing documents. Typically, there will be a turnkey construction contract plus an operating contract, or a section added to the turnkey contract covering operations. The private sector party takes no or minimal financing risk on the capital and will typically be paid a sum for the design-build of the plant, payable in installments on completion of construction milestones, and then an operating fee for the operating period. The private sector party is responsible for the design and the construction as well as operations, and so if parts need to be replaced during the operations period prior to the end of its assumed life span, the private sector party is likely to be responsible for replacement.

1.5 PPP PROCESS

FIGURE 1.2: The PPP Process

Project Initiation

ProjectFeasibility and

Structuring

ProjectProcurement

Project Implementationand Monitoring

7

1.5.1 PROJECT INITIATION

Governments are often faced with competing priorities in terms of infrastructure investments and this fact, combined with fiscal constraints, frequently requires governments to be selective in initiating infrastructure projects. Projects can be initiated by the central government (through the various line ministries) or by local governments2. However, irrespective of which entity has initiated the project, it is important to note that not all projects are suitable for procurement through a PPP. Indeed, before a decision is made to procure a project through a PPP route, it is important to carry out a feasibility study.

Under the Kuwait PPP Law, a concept for a PPP project can be initiated by either a Public Entity, the Higher Committee or as an unsolicited proposal from a private Kuwaiti or non-Kuwaiti person/entity.

1.5.2 PROJECT FEASIBILITY AND STRUCTURING

It only makes sense to procure a project through a PPP framework if it is economically viable. Therefore, most governments subject proposed PPP projects to the same technical, social and economic appraisal as any other public investment decision. There are typically two broad elements to this assessment. The first is assessing the feasibility of the project concept itself (including technical feasibility, legal feasibility and environmental and social sustainability) and the second is appraising whether the project is a good public investment decision based on some form of economic viability analysis, i.e. an assessment as to whether the economic benefits of the project exceed its economic costs and that there is appetite/interest for the project in the market - which will be heavily influenced by whether the project generates sufficient returns for the private sector investors.

In accordance with the PPP Law, a Public Entity that proposes a PPP project must carry out a feasibility study and submit it to KAPP for its review (Article 2 of the Executive Regulations). However, KAPP may, in certain cases, choose to commission a feasibility study in cooperation and coordination with the Public Entity (Article 10 of the Executive Regulations). For an unsolicited proposal, any Kuwaiti or foreign natural or legal person must prepare an initial feasibility study for submission to KAPP. In both cases, the feasibility study must demonstrate, amongst other matters, that the project provides an economic return or social benefit in line with the State’s strategy and development plan.

Structuring a PPP project means allocating responsibilities, rights and risks to each party to the PPP contract. Information from the feasibility and economic viability analysis is a key input to the structuring of a PPP, e.g. identifying the key technical risks and providing estimates of the demand for the proposed infrastructure. It is important that PPP projects are structured in a way that is not only commercially viable from a private sector perspective but is also economically and socially viable and beneficial from the public sector’s perspective, i.e. the project provides value for money to the public sector. Market sounding is often carried out during the feasibility study/structuring phase to find out the views of the various stakeholders and this feedback is used to help strengthen the viability of the project.

2 When the public sector invites the private sector to tender for a PPP project, this is often called a ‘solicited bid.’ However, sometimes, the private sector can propose a PPP project to the government in which case it is called an ‘unsolicited bid.’

P U B L I C - P R I VAT E PA R T N E R S H I P S : A N I N T R O D U C T I O N


1.5.3 PROJECT PROCUREMENT

Once the project structure has been finalized (with the support of the Transaction Advisors, i.e. professional advisors such as financial advisors, legal advisors and technical advisors) and approved by the relevant authorities—the project is ready to be procured. The objective of the procurement phase is to select a firm or consortium that provides the most effective and efficient solution to the proposed project’s objectives from both a technical and financial perspective. The best way to achieve these objectives is to carry out a competitive, efficient and transparent procurement process, as this will likely maximize value for money from the government’s perspective.

1.5.4 PROJECT IMPLEMENTATION AND MONITORING

It is important for the Public Entity to establish a project management team as soon as possible in the procurement process to manage the project after financial close. Managing PPP contracts involves monitoring and enforcing the PPP contract requirements as well as managing the relationship between the public and private partners. Contract management spans the whole lifetime of the agreement, from the date of contract effectiveness through to the end of the contract period. Managing PPP contracts differs from managing traditional government contracts. PPPs are long-term and complex and, as such, contracts are necessarily incomplete i.e. the requirements and rules covering all possible scenarios cannot be comprehensively specified upfront in the contracts. Therefore, the aims of contract management for PPPs are to ensure:

~ services are delivered continuously and to a high standard in accordance with the contract, and payments (or penalties) are made accordingly;

~ contractual responsibilities and risk allocations are maintained and the government’s responsibilities and risks managed efficiently; and

~ changes in the external environment (both risks and opportunities) are identified and acted on in an effective and timely manner.

Under Article 33 of the PPP Law, the Minister of Finance is required to submit an annual report to the Council of Ministers (with a copy to the National Assembly) that provides a status update on all PPP projects that have been executed or implemented. This report will cover, amongst other matters, land issues and the degree to which the private sector counterparties are complying with the terms of the PPP agreements together with a summary of any breaches of these agreements. This information will be provided by the relevant ministries that are undertaking the PPP project.


1.6 FURTHER READINGS

Additional information on the above and PPPs in general can be found from the following sources:

~ PPP Knowledge Lab (https://pppknowledgelab.org/)

~ PPP Infrastructure Resource Centre (http://ppp.worldbank.org/public-private-partnership/)

~ PPP Reference Guide Version 3 (https://ppp.worldbank.org/public-private-partnership/library/ppp-reference-guide-3-0 )

~ The Private Participation in Infrastructure Database (https://ppi.worldbank.org/)

~ The Public Private Infrastructure Advisory Facility (https://ppiaf.org/ )

~ The Global Infrastructure Hub (https://www.gihub.org/ )

~ The APMG Public-Private Partnerships Certification Program (https://ppp-certification.com/ )

~ PPIAF paper on Mobilizing Islamic Finance for Infrastructure Public-Private Partnerships (https://ppiaf.org/documents/5369?ref_site=kl)

~ A Framework for Disclosure in PPPs (http://pubdocs.worldbank.org/en/773541448296707678/Disclosure-in-PPPs-Framework.pdf)

~ World Bank Group paper on Financial Viability Support (https://library.pppknowledgelab.org/documents/2847?ref_site=kl)

1 0 K U WA I T P U B L I C - P R I VAT E PA R T N E R S H I P P R O J E C T S

1 1

CHAPTER

2

PPP LEGAL AND INSTITUTIONAL STRUCTURES IN KUWAIT

2.1 INTRODUCTION

The Kuwait PPP Law (Law No. 116 of 2014 regarding Public Private Partnerships) establishes a legislative framework to promote and facilitate PPPs in public infrastructure and services in the State of Kuwait, based on the principles of transparency and competitiveness. A PPP is defined in the PPP Law as “a project to implement an activity through which the State targets to provide a public service of economic, social or service importance, or to improve an existing public service or to develop, reduce the costs or increase the efficiency of any such service, procured by the Authority in cooperation with the Public Entity and in accordance with the PPP Model after the approval of the Higher Committee, provided it does not contradict with the provisions of Articles 152 and 153 of the Constitution.”

2.2 KEY FEATURES OF LAW NO. 116 OF 2014 REGARDING PUBLIC- PRIVATE PARTNERSHIPS

PPPs must follow the “PPP Model” which, in Article (1) of the PPP Law, is defined as “a model whereby a private Investor invests in State-owned real property – if required – in one of the projects procured by the Authority in collaboration with one of the Public Entities after signing an agreement with the Investor to implement or build or develop or operate or rehabilitate a service or an infrastructure project, and to provide financing thereto and operate or manage and develop the project, for a specified term, after which the project shall be transferred to the State; the foregoing shall be carried out in one of two forms: 1) the implementation of the project in consideration for fees – for services or works performed - to be paid to the Investor by the beneficiaries or by the Public Entities who have entered into an agreement with the Investor, and whose objectives are in compliance with the project or by both the beneficiaries and the Public Entities; and 2) the purpose of the project is for the Investor


to implement a project with strategic importance to the national economy and to exploit it for a specified term. In both cases, the Investor shall pay a fee for the use of any State-owned real property allocated for the project.”

In accordance with this definition, the PPP Model in Kuwait therefore requires the following criteria to be met:

~ a private investor to invest in a project on state-owned property (if required);

~ procurement of the project by KAPP, in collaboration with a Public Entity;

~ the signing of an agreement with the Investor to implement or build or develop or operate or rehabilitate a service or an infrastructure project, to provide financing to this end and to operate or manage and develop the project, for a specific period of time; and

~ following the end of the agreement, the transfer of the infrastructure facilities to the State.

This process may be conducted in one of two forms:

~ the implementation of the project in consideration for fees (for services or works performed) to be paid to the Investor by the beneficiaries or by the Public Entities who have entered into an agreement with the Investor, or

~ the implementation by an Investor of a project of strategic importance to the national economy, whereby the project can be exploited by the Investor for a specified term.

The salient features of the PPP Law include:

~ in general, no public body may enter into a PPP Contract without first obtaining the approval of the Higher Committee for PPPs3;

~ KAPP provides advisory support to the Higher Committee in its decision making;

~ a time limit for PPP Projects of 50 years4 (if a project's bid documents do not contain a certain term, its lifespan will be deemed to be 25 years);

~ restrictions on the sale or mortgage of State Land/public property in PPP Projects, although security over the “private assets” are permitted, which includes revenues of the project and shares in the project company;

~ provisions allowing the State to collect a fee from the project for use of State land;

~ projects exceeding KWD 60 million in value must be carried out by a PPP Project Company which will be a special purpose vehicle formed as a Kuwaiti joint stock company, in which no less than 26% and up to

3 There are a few exceptions to this general rule, such as is the case with the Public Authority for Housing Welfare established under Law No. (47) of 1993, which may tender PPPs within its scope of work.

4 Under the IWPPP Law and the IWPP Regulations the time limit for PPP Projects is capped at 40 years.

1 3P P P L E G A L A N D I N S T I T U T I O N A L S T R U C T U R E S I N K U WA I T

44% shares would be offered to an Investor, with the majority of the remainder of the shares being offered to the Kuwaiti citizens and Public Entities allowed to invest in the project (subject to these shares being held temporarily by KAPP until full operation of the project);

~ provisions allowing for unsolicited proposals of two types: (i) Initiative Projects and (ii) Distinguished Projects;

~ possibility of settlement of disputes through arbitration; and

~ grievance mechanism for violations of the PPP Law and the Executive Regulations.

2.2.1 TRANSITION ARRANGEMENTS

Under Article 7 of the PPP Law, projects existing before the entry into force of the PPP Law shall continue until the expiry of the term in the agreement or until termination. Upon the entry of the PPP Law into force, no amendments, renewals or extensions may be given on such projects, and such projects shall be handed back to the State for re-tendering or for operating and managing the project itself (in accordance with Article 30 of the PPP Law). Further transitional arrangements are in place for projects whose term has expired at the time the PPP Law came into force. These may be granted a one-time extension for a maximum period of one year pursuant to their respective contractual provisions and subject to the approval of the Higher Committee.

2.2.2 KEY ASPECTS OF EXECUTIVE REGULATIONS

The PPP Executive Regulations (Decree No. 78 of 2015) were issued to set out further details on the project flow process, procurement, and implementation of PPPs in Kuwait. These aspects are dealt with in detail in Sections 3 to 6 of this Guidebook.

2.3 KEY DIFFERENCES BETWEEN THE 2008 AND 2014 LEGISLATION

The PPP Law replaces previous Law No. 7 of 2008 regarding the Regulation of Build, Operate and Transfer (BOT) Operations (the Old Law), and the new PPP Law was designed to support the Government of Kuwait’s program to promote collaboration between the public and private sectors to develop infrastructure and to provide services to Kuwaiti citizens and local residents. More specifically, the legal framework under the new PPP Law is aimed at enhancing the procurement process for PPP projects in Kuwait (while incorporating lessons learned from recently closed transactions), clarifying the provisions for their implementation, and bringing it better into line with international standards to attract more private sector investment into Kuwait. The following sections set out the key differences between the two laws.


2.3.1 ESTABLISHING THE PROJECT COMPANY AND SHAREHOLDING STRUCTURE

The PPP Law clarifies that, for projects that are estimated to be worth less than KWD 60 million in total cost, the successful Investor shall establish a Project Company. For projects with total costs deemed to be above KWD 60 million, KAPP will establish a Joint Stock Company (with an exception for “projects of a special nature” as detailed in Article (16) of the Law). The method of calculating the value of the project is changed in the PPP Law, such that only capital expenditure is considered in the calculation5, which, in theory, should reduce the cost for most projects, allowing more to fall under the KWD 60 million threshold. If a Joint Stock Company must be established, specific share allocations are specified under both laws, though the percentages and entities are different (see Table 2.1, below).

TABLE 2.1: Comparison of Joint Stock Company Share Allocation Arrangements under the PPP Law and the Old Law

Share Allocation under the Old Law (%)

Share Allocation under the PPP Law (%)

Project Sponsors (i.e. the successful bidders)

10% [Art. 5(b)] 26%–44% [Art. 13(2)]

Kuwaiti Citizens, acquiring shares through a transfer offered to them

50% [Art. 5(c)] 50% [Art. 13(3)]

Joint stock companies listed on the Kuwait Stock Market

40% [Art. 5(a)] —

Kuwaiti Public Entities (i.e. Government entities)

May be allocated up to 20%, equally deducted from Kuwaitis and joint stock companies listed on the Kuwait Stock

Market

[Art. 5]

6%–24% [Art. 13(1)]

Also, any shares that are not subscribed after the transfer of shares can then be offered to the Public Entities or to the private consortium, rather than being auctioned, as was the case previously, which introduced uncertainty into the shareholding structure (Article 15 of the PPP Law).

2.3.2 CHANGES IN PROJECT DOCUMENTATION

The Old Law prohibited changes to contracts or authorizations, even in the event of a ‘material adverse government action,’ such as change in law. The PPP Law now permits negotiations of contracts as far as the project’s technical and financial aspects are concerned during the tendering and bid evaluation stage (except for those aspects that are deemed non-negotiable) (Article 17 of the PPP Law), as well as amendments to the contracts after signature (Article 36 of the PPP Law).

5 Compare the definition of a project’s “Total Cost” in Article 1 No. 20 of the PPP Law and Article 11 of the Executive Regulations. For commentary on how this is calculated, please see Section 4.2.2.4.


2.3.3 OWNERSHIP AND SECURITY OVER ASSETS

Under the Old Law, security over project assets and land was not permitted. Under the PPP Law, permitted security now includes:

~ security over project assets owned by the private party;

~ a pledge over accounts (revenues in the project); and

~ shares in both the Project Company and the consortium company, even during the initial lock-in period.

The PPP Law states that the split of public/private ownership of assets will be set out in the PPP Agreement (Article 18). Under the Old Law, all project assets were to be considered as “state property,” that is, they could not be secured, and had to be transferred back to the state at the end of the term without compensation. Under the new PPP Law, certain project assets are now categorized as “private assets,” that is, they are allowed to be mortgaged and, to the extent any of these assets are transferred to the Government of Kuwait, compensation is payable. Also, the new PPP Law does not stipulate any additional criteria for foreign companies to observe other than those applicable to all proponents participating in a tender process.

2.3.4 PROCUREMENT PROCESSES

The PPP Law articulates some basic principles on the procurement process for PPPs, including the principle that the selection of investors should be transparent, open, competitive, and equal, in conformity with international best practice (Article 8 of the PPP Law).

Unsolicited proposals, or proposals originating from the private sector, require special consideration. The Executive Regulations provide that all projects that are initiated by unsolicited proposals must be competitively tendered, but different rules apply for the two different types of unsolicited proposals:

~ “Initiatives,” which are defined as “an innovative Partnership Project for a creative unprecedented idea, in Kuwait, approved by the Higher Committee, according to an initial feasibility study offered by the proposer to the Authority, with an economic and social return conform[ing] with the State’s strategy and develop[ment] plan;” and

~ “Distinguished Projects” which are defined as “a Partnership Project approved by the Higher Committee based on an initial feasibility study offered by the proposer to the Authority, with an economic and social return conform[ing] with the State’s strategy and develop[ment] plan.”

For Initiatives, the proposer will still receive the same benefits that were provided under the Old Law:

~ reimbursement of the costs of the feasibility study, plus a bonus of 20% of those costs (to a maximum of KWD 200,000) and;


~ during the tender, an advantage of 5% of the best bid value or a share of the stocks in the Joint Stock Company, if applicable, not to exceed 10% of the shares’ nominal value.

On the other hand, for Distinguished Projects, the proposer simply gets reimbursed for the costs of the feasibility study, plus a bonus of 10% of those costs (to a maximum of KWD 100,000). In this regard, KAPP may develop procedural guidelines for dealing with these reimbursements.

In all cases, these fees should be indicated in the Request for Proposals (RFP) that is prepared for the competitive tendering process, on the basis that these fees will paid by the successful bidder via the project company upon financial close. (Article 58 of the Executive Regulations).

2.3.5 TERM

The term of PPP Agreements has been extended to a maximum of 50 years, from 30 years under the Old Law (40 years with Cabinet approval), with a default of 25 years if no term is specified in the bid documents, allowing more flexibility for structuring PPPs (Article 18 of the PPP Law).

2.3.6 LAND

Leases on state-owned land under the PPP Law will be back-to back with the PPP Agreement, that is, the term of the lease will be set forth in the tendering documents and will be the same length as the term of the PPP (Article 18 of the PPP Law). The PPP Law specifically annuls a provision in the State Property Law that limited the length of leases on State-owned land. Aside from that, in case of termination of a PPP Agreement, the land lease is automatically terminated.

2.4 INTERFACE WITH OTHER LEGISLATION

The PPP Law must be considered alongside the entire legal framework in Kuwait. These laws include, but are not limited to, land laws, companies law, investment laws, environmental and social regulations.. Before embarking on any PPP project in Kuwait, local legal counsel should be sought to understand how these laws might impact the project.

One law has a particularly important role to play in PPPs: Law No. 39 of 2010 on the Incorporation of Kuwaiti Joint Stock Companies to Undertake the Building and Execution of Electricity Power and Water Desalination Stations in Kuwait (the IWPP Law), and the associated IWPP Executive Regulations.

Essentially, the IWPP Law outlines specific requirements concerning the construction and implementation of electric power and water desalination plant projects in Kuwait as part of a PPP arrangement.


The IWPP Law governs those projects which fall under its mandate, including projects which are purely power projects without any water desalination component. In case of conflicts between the IWPP Law and the PPP Law, the former will prevail. However, where the IWPP Law is silent on matters that, in turn, are covered in the PPP Law, the provisions of the latter apply to such projects.

2.5 INSTITUTIONAL STRUCTURE FOR PPPs

The institutional structure for the implementation of PPP Projects, as presented in the PPP Law and the Executive Regulations, consists of the following institutions:

2.5.1 THE HIGHER COMMITTEE (HC)

The Higher Committee has the powers and authorities of acting as KAPP’s board of directors. It is chaired by the Minister of Finance and consists of:

~ the Minister of Municipalities;

~ the Minister of Public Works;

~ the Minister of Trade and Industry;

~ the Minister of Electricity and Water;

~ the Director General of the Kuwait Environment Public Authority;

~ the Director General of KAPP;

~ three experienced specialists to be named by the Council of Ministers from civil servants; and

~ a representative of the Public Entity responsible for the project under consideration, who shall be invited to the concerned meeting but will not have a right to vote.

The responsibilities of the Higher Committee include:

~ setting the general policies for projects and initiatives of strategic importance to the national economy, identifying priorities and approving detailed documentation related thereto;


~ approving the requests of the Public Entities for the procurement of PPP Projects;

~ proposing PPP projects to Public Entities;

~ approving KAPP’s proposed budget and final accounts;

~ approving the financial and administrative statutes as well as KAPP’s employees’ regulations and its organization structure;

~ identifying the relevant Public Entity which will participate in the procurement of a project with KAPP and which will countersign the PPP Agreement and be responsible for its implementation and monitoring;

~ approving requests for allocation of land necessary for the implementation of PPP Projects, in coordination with the competent authorities;

~ approving the studies and concepts of PPP Projects and approving the procurement thereof;

~ approving the successful investor for a project, on the recommendation of KAPP;

~ approving PPP Agreements to be executed by Public Entities;

~ deciding upon the requests of Public Entities for contract cancellation/termination (including for public interest); and

~ examining the semi-annual report of PPP Projects.

Article 2 of the PPP Law states that the decisions of the Higher Committee will only have effect after they have been approved by the Minister of Finance.

2.5.2 THE KUWAIT AUTHORITY FOR PARTNERSHIP PROJECTS (KAPP)

The PPP Law creates a new PPP governing authority, the Kuwait Authority for Partnership Projects (KAPP), which replaced its predecessor, the Partnerships Technical Bureau (PTB). KAPP is overseen by a governing board (i.e. the Higher Committee) and will be staffed by a Director General appointed by the Council of Ministers (upon nomination from the Minister of Finance).

KAPP has a budget provided directly from the State Budget rather than from the Ministry of Finance.6 It is primarily responsible for preparing PPPs, as well as advising the Higher Committee. It also ensures standardization and consistency in PPP projects in Kuwait through its responsibilities of setting out procedures and creating templates.

6 Though KAPP’s budget is supplemented by the budget of the Ministry of Finance, KAPP’s resources are generated from funds allocated to it from the State Budget as well as from fees offered for the services it renders.


Specifically, KAPP is responsible for (Article 6 of the PPP Law):

~ conducting surveys and preliminary studies to identify projects and referring them to the Higher Committee;

~ reviewing and studying projects and Initiatives prepared by the Public Entities or a concept proposer and submitting appropriate recommendations regarding the same to the Higher Committee;

~ assessing feasibility studies, preparing and completing the studies as needed, and submitting recommendations on projects to the Higher Committee;

~ preparing a Guidebook for PPP projects;

~ setting a mechanism for submission of Initiatives, as well as their methods of evaluation and procurement;

~ setting out approaches to evaluating the performance of approved PPP projects over the entire contract period;

~ developing contract templates;

~ preparing drafts of PPP Agreements and Terms of Reference;

~ submitting recommendations to the Higher Committee for approval of the selection of a successful investor;

~ incorporating public joint stock companies for PPP implementation, and determining the capital of such companies;

~ developing PPP Project programs and following-up on their completion, and issuing necessary decisions in relation thereto;

~ compiling and submitting a semi-annual report on PPP Projects to the Higher Committee for approval, prior to the Ministry of Finance presenting the same to the Council of Ministers;

~ following-up on PPP project implementation and addressing any associated obstacles in collaboration with the contracting Public Entity; and

~ proposing the exemption of projects from taxes and custom duties, and raising such recommendations with the Higher Committee.

2.5.3 PUBLIC ENTITIES

Public Entities include any government, Ministry or Department, or any public entity with an independent budget that enters into a PPP Agreement to implement a PPP Project. Their responsibilities include:


~ proposing projects to KAPP (with feasibility studies) for their review and recommendation to the Higher Committee;

~ participating in project procurement with KAPP;

~ executing, implementing and monitoring PPP Agreements after approval by the Higher Committee;

~ recommending, where appropriate, contract cancellation/termination for the public interest;

~ collaborating with KAPP on project and contract management issues; and

~ providing all necessary means and support towards the project, including but not limited to land allocation, required budget for payments under PPP arrangements, required infrastructure, data and information, preparation of terms and conditions as well as technical advice.

Given that Public Entities have critical responsibilities in the procurement and management of PPP projects, it is important for the relevant Public Entity to be actively engaged from the beginning of the project initiation, through tendering and contract negotiation.

Under Article 3 of the Executive Regulations, for every project which is approved after the initial screening, KAPP is to set up a Competition Committee to represent the Public Entity and other relevant entities where needed, which will be responsible for reviewing or developing the project’s studies, documents, tender and approval documents. The Competition Committee will also participate in the procurement, review the technical and financial proposals, and supervise the public session scheduled for opening the financial tenders.

2.5.4 THE DEPARTMENT OF LEGAL ADVICE AND LEGISLATION

The Department of Legal Advice and Legislation (Fatwa and Tashrea) is crucial to the preparation of PPP contracts in Kuwait. While Fatwa and Tashrea does not have a formal role under the PPP Law, it must provide legal advice on all government contracts and it is responsible for interpreting the laws and defending the State’s interest and safeguarding it. Therefore, Fatwa and Tashrea will be consulted during the process of developing the documentation related to PPP projects, i.e. the RFP and PPP contracts, and negotiation of the same with the preferred bidder.

2.5.5 THE STATE AUDIT BUREAU

The State Audit Bureau plays an essential role in completing the procurement process for a PPP Project. In accordance with Article 44 of the Executive Regulations, its approval is required before a project can ultimately be awarded to the preferred bidder. Accordingly, all relevant documentation (i.e. the RFP, the preferred bidder’s proposal, minutes of the negotiations as well as the PPP contract that has been agreed between the parties) needs to


be submitted to it for its review. In addition, Article 31 of the PPP Law stipulates that all PPP contracts (including related consultancy agreements) are subject to the ex-ante and ex-post auditing by the State Audit Bureau.

2.6 KUWAIT PPP FLOW PROCESS

Figure 2.1 shows a diagram of the PPP project flow process in Kuwait.

For all the various stages under the PPP project flow process as outlined above, KAPP may engage the services of Transaction Advisors. This is detailed in subsequent sections of this Guidebook.

FIGURE 2.1: PPP Project Cycle, Kuwait

Proposal (PE/Private Sector)tScreening and

Feasibility Studies (PE, KAPP, and HC)

Approval of Studies,Procurement, and Land

(HC)

Procurement of PPP(Competition Committee

[KAPP & PE representatives], Fatwa to review tender

documents and PPP form agreements)

Negotiation of PPP Agreement

(Competition Committee [KAPP & PE representatives],

Fatwa approval)

Approval of Successful Bidder*

(SAB, HC on recommendation

from KAPP)

Executing and Implementing PPP Agreement

(PE)

Monitoring PPP Agreement(PE and KAPP)

*With respect to the “Approval of Successful Bidder” stage, it should be noted that the Higher Committee will not approve a preferred bidder as successful unless the State Audit Bureau has granted its approval beforehand.

2 3

CHAPTER

3

PROJECT INITIATION

3.1 THE LEGAL FRAMEWORK FOR PROJECT INITIATION

The relevant article of the PPP Law related to the initiation phase of PPP Projects is as follows:

Article 6—THE AUTHORITY AND ITS COMPETENCES

The Authority (KAPP) shall collaborate and cooperate with the Public Entities …. and shall carry out the following: 1. Conduct surveys and preliminary studies to identify projects that may be procured under this Law and submit reports regarding the same to the Higher Committee. 2. Review and study projects and Initiatives prepared by the Public Entities or Concept proposer and submit appropriate recommendations regarding the same to the Higher Committee. 3. Assess the comprehensive feasibility studies of PPP Projects and proposed Concepts, prepare and complete these studies as needed, submit appropriate recommendations in relation to the same to the Higher Committee in preparation for the procurement of the project….

The relevant article of the Executive Regulation in regard to project initiation is:

Article 2—PROPOSING A PPP PROJECT

The proposal for the procurement and implementation of a PPP Project may be submitted by the following entities:

1 | Public Entities: a Public Entity wishing to propose a project that falls within its competences in accordance with the PPP Law shall submit a request to the Authority along with the comprehensive feasibility studies of the project in accordance with the Law, its Executive Regulations and the Guidebook.

2 | The Higher Committee: the Higher Committee approves the request of the relevant Public Entity for the procurement of a PPP Project in accordance with a PPP Model, and it may propose PPP Projects to Public Entities.


3 | The private sector: the private sector may submit before the Authority draft Concepts along with preliminary feasibility studies, as per the Authority’s requirements, for the implementation of a project and the approval of the procurement thereof in accordance with the provisions of the Law.

The Authority shall in coordination with the Public Entity review the feasibility studies presented by the aforementioned entities and finalize the same, as needed, in order to submit an appropriate recommendation thereon to the Higher Committee.

The Authority may prepare the project’s comprehensive feasibility studies and procurement documents, and it may in all cases seek support from advisory firms and specialized offices whether local or foreign as it deems suitable for this purpose in accordance with the provisions of the laws and regulations.

This part of the Guidebook provides guidance on project initiation issues for the implementation of the above-mentioned provisions.

3.2 SOLICITED PROJECT PROPOSALS

3.2.1 THE ROLE OF THE PUBLIC ENTITY AT INITIATION

A Public Entity that is interested in proposing a project within its area of jurisdictional competence shall submit a request to KAPP, along with a comprehensive Feasibility Study for the Project (Article 2 of the Executive Regulations). The process of submission, and the required set of documents, are set out on KAPP’s website.

However, notwithstanding the foregoing, KAPP may choose to develop a Feasibility Study in cooperation and coordination with the Public Entity. KAPP may also refer to anyone it deems convenient for this purpose, whether from local or foreign consultant offices or other Public Entities, depending on the Project’s nature and needs (Article 10 of the Executive Regulations).

At the time of submitting a proposed project to KAPP, the Public Entity should nominate a Project Manager, to act as the Public Entity’s focal point for interaction with KAPP. The Project Manager is the Public Entity’s anchor and champion for the proposed PPP Project, and should be given suitable delegations by the Public Entity for this central, driving role. It is recommended that the Project Manager also be appointed as the Head of the Competition Committee. The Project Manager should, therefore, be a member of the Public Entity’s senior management throughout the assignment, to ensure the Public Entity’s buy-in for key project decisions. The Project Manager should be appropriately resourced with administrative authority, support and a suitable operating budget. The Project Manager should have the delegated authority within the Public Entity to coordinate the implementation of the project and, specifically, to manage, along with KAPP, the Transaction Advisor. The Project Manager/Head of the Competition Committee shall appear before and answer to the Higher Committee for all matters related to the project.

2 5P R O J E C T I N I T I AT I O N

3.2.2 THE ROLE OF KAPP AT INITIATION

KAPP shall collaborate and cooperate with the Public Entities for the implementation of PPP projects in compliance with the provisions of the PPP Law, and shall carry out the following activities:

~ conduct surveys and preliminary studies to identify projects that may be procured under the PPP Law and submit reports regarding the same to the Higher Committee;

~ review and study projects and Initiatives prepared by the Public Entities or concept proposer and submit appropriate recommendations regarding the same to the Higher Committee; and

~ assess the comprehensive feasibility studies of PPP Projects and proposed concepts or pre-feasibility studies submitted by the Public Entity, prepare and complete these studies whenever KAPP deems it necessary, and submit appropriate recommendations in relation to the same to the Higher Committee in preparation for the procurement of the project.

3.2.3. ESTABLISHING THE COMPETITION COMMITTEE

After the approval of the Higher Committee and as required, the KAPP shall constitute for each project a committee known as the Competition Committee, to represent the Public Party(ies) associated with the project, having at least one member with a level of seniority exceeding that of an auxiliary agent, and with the required technical, financial, and legal expertise. The Competition Committee shall be responsible for examining, integrating, or developing the project studies and its tender and contractual documents. The Competition Committee shall also be responsible for evaluating the technical and financial offers, and supervising the public session scheduled for opening the financial tenders of the technically approved bids for the project.

In addition to dealing with the procurement of the investor for a project, the Competition Committee also has a key role to play in the selection of the Transaction Advisor, except in those situations where KAPP appoints a Transaction Advisor directly, pursuant to the exemption process permitted under the Law on Public Tenders (Law 49 of 2016).

3.2.4 THE ROLE OF THE TRANSACTION ADVISOR

The Transaction Advisor is typically a team of professional consultants, from one or more firms, who work collectively under a single contract with the Public Entity through a lead advisory firm or a consortium of advisory firms. The Transaction Advisor shall be appointed by the Public Entity or KAPP in accordance with Law on Public Tenders (Law No. 49 of 2016), through a competitive bidding process, and should be managed on a day-today basis by the Project Manager who is the contact point between the Transaction Advisor and all relevant parties to the Project. The Transaction Advisor will conduct all the detailed financial, technical, environmental and legal due diligence associated with the project, starting from the feasibility studies and leading to the successful signing of the PPP Contract and Financial Closure by the Project Company. The professional skills and experience of the


team are typically in: a) project finance transactions, financial assessment for similar projects and financial closing for PPP Projects, b) developing contractual frameworks/security packages for similar projects and PPP projects, c) administrative and local laws, insurance policies, d) PPP procurement management, project management, and e) all technical disciplines relevant to the particular project sector. An effective Transaction Advisor brings clear advantages to the project procurement process through:

~ experience from similar transactions (national and international);

~ demonstrated track record in closing PPP projects on time;

~ avoidance of mistakes which could have significant costs associated with them;

~ access to national and international best practice;

~ enhancement of local and foreign Investor interest and confidence;

~ an opportunity for skills development and capacity building among relevant parties; and

~ assuming the role of being a single point of accountability for delivering high quality results on time.

The agreement between the Public Entity/KAPP and the Transaction Advisor may include two distinct phases:

Phase I: The task in Phase I is to conduct/complete/review and/or amend a Feasibility Study as per the PPP Law and the Executive Regulations to a standard that will enable the Competition Committee to seek Higher Committee approval (or to review and comment on an Unsolicited Proposal’s Feasibility Study for Higher Committee consideration). If the Higher Committee approves a PPP project, the relevant Competition Committee may assign the Transaction Advisor to continue with Phase II.

Phase II: The task in Phase II is to prepare for and implement the PPP procurement process, including preparing all necessary documentation to enable the Competition Committee to obtain Higher Committee approvals in terms of the PPP Law and the Executive Regulations, and proceed with the project procurement.

3.2.5 THE PROCESS FOR RECRUITING THE TRANSACTION ADVISOR

The process for recruitment of the Transaction Advisor will be governed by the provisions of Law on Public Tenders (Law No. 49 of 2016), which is applicable for regulating the procurement of items, contracting and services operations, by public authorities.


The Central Agency for Public Tenders

The Central Agency for Public Tenders is a public authority attached to the Council of Ministers, and is responsible for performing the following tasks in coordination with the Public Entity:

~ offer public tenders (and similar methods of contract);

~ receive and evaluate bids;

~ award and cancel contracts; and

~ extend or renew administrative contracts, as well as variation orders.

Procurement Committee in the Public Entity

The head of the relevant Public Entity forms the Procurement Committee, consisting of at least five members, to be selected from among the staff of the Public Entity, with appropriate qualifications and experience in accordance with what is determined by the procurement systems department of Ministry of Finance. This Procurement Committee is responsible for all procurements undertaken by the relevant Public Entity and as described in the Law on Public Tenders (Law No. 49 of 2016), including the procurement for Transaction Advisors.

The process for hiring a Transaction Advisor starts with the preparation of a Transaction Advisor Bid Package by the Competition Committee in conjunction with the Procurement Committee of the Public Entity. Different components of the bid package are discussed below, in the order in which they should be prepared. Once prepared, the entire Bid Package must be endorsed by KAPP and the Central Agency for Public Tenders in accordance with its internal procurement system, prior to issue, as elaborated below.

3.2.5.1 Drafting the Terms of Reference for Transaction Advisors

The purpose of the Terms of Reference is to give the bidding Transaction Advisor clear direction on what the Procurement Committee and the Competition Committee seek and expect. It is important to consider that the quality of the technical solutions, pricing and other terms of the bid package will depend on the quality of inputs or information made available to the prospective transaction advisors by KAPP and the Public Entity. The Terms of Reference need to be customized, based on the needs of the particular project. However, some of the key sections which Terms of Reference should contain are listed below, along with their descriptions.


Background: This section should introduce the project as comprehensively as possible and outline:

~ the State’s needs (such as power generation, treated water, and so on) that has led to the project;

~ the legal and policy framework within which the project is being proposed; and

~ all non-confidential preliminary work done to date by the Public Entity and/or KAPP.

Scope of Work: This is one of the most important sections in the Terms of Reference, as this lays out the extent and type of work for which the Transaction Advisor is being hired. It is important that clear, unambiguous details on each type of action by the Transaction Advisor as envisaged by the Public Entity and/or KAPP be included in this section.

Time-Bound Deliverables: In this section, KAPP, in conjunction with the Public Entity, must specify precisely the timelines for delivery, i.e. what the Transaction Advisor must deliver at each stage of the PPP project timeline.

Requisite Skills and Experience: The full range of required skills (such as technical, legal, environmental, financial, and so forth) and experience (both company and individual) must be listed, emphasizing that the persons named in the bid are expected to be properly available and committed to the project.

Budget for the Transaction Advisor’s Fees: While a proposed budget for the Transaction Advisor should be developed during the inception process, the extent of the envisaged work will only become evident during the preparation of the Terms of Reference. The work should, therefore, be carefully costed by the KAPP in conjunction with the Public Entity at this stage, regarding current market rates for professional services and to similar projects that have been awarded in recent months.

Fees for Deliverables: The Transaction Advisor should be paid on a fixed lump-sum price (not by daily rates) for identified deliverables based on certain milestones, and their bids should be structured accordingly. However, larger and more complicated projects may require flexibility, as it would be very difficult to budget or price any unforeseen tasks or the magnitude of such tasks, and hence this should be reviewed on a case by case basis.

Administrative Requirements: The agreement with the Transaction Advisor must set out the reporting and decision-making arrangements under which the Transaction Advisor will be required to work, including the roles and responsibilities of the Competition Committee.

Conflicts of Interest: It must be made clear that the potential Transaction Advisor must not have any vested interest in the proposed project and that no conflicts of interest arise from the Transaction Advisors, their staff or associates participation in other KAPP projects. KAPP recognizes that conflicts of interest may arise when:

~ the Transaction Advisor, or any affiliate owning, owned by, managed or controlled, directly or indirectly by the applicant, seeks to act as a lead sponsor or affiliate member of a sponsor’s consortium for the same PPP project; or when


~ the Transaction Advisor, or any affiliate owning, owned by, managed or controlled, directly or indirectly by the Transaction Advisor, seeks to provide advisory services to third parties who will be tendering on the same PPP project.

Transaction Advisors bidding for any specific project must understand that, when the Transaction Advisory Contract is signed with the winning firm(s), then such firm(s) and/or any member of such consortium is not allowed to act as advisor(s) to Third Parties participating as investors for that specific project.

Current or former KAPP Transaction Advisors, who seek to participate in another Kuwait PPP project, must submit an application to KAPP, in the format specified by KAPP, and seek approval of the proposed participation. KAPP will grant its approval if it is clear that no conflict of interest situations will result from the Transaction Advisers’ participation.

Bidding Rules and Process: This section of the bid package sets out all rules and procedures of the bidding process for hiring the Transaction Advisors. The bid process should require bidders to submit a ‘technical’ bid along with a ‘financial’ bid. The ‘technical’ bid would respond to the technical requirements of the assignment, while the ‘financial’ bid would quote the price for the services. This section will also detail how the bid is to be conducted, as well as details of the Bid Clarification session.

Bid Submission Requirements: This explains the format in which bids are to be compiled and submitted. Importantly, all bids must be submitted in two envelopes: a technical envelope and a financial envelope, allowing only those that pass the threshold scores of the former to be evaluated based on the scoring formula provided in the RFP for the tender.

Evaluation Criteria: This section of the Terms of Reference sets out the criteria on which the bids of the prospective Transaction Advisors will be evaluated, and also specifies the weightings for each criterion for scoring the bids, as well as the scoring formula that determines the ranking of the bidders. The bids must be evaluated on a combination of technical and financial elements. The criteria as well as the weights will vary from project to project and must be decided on a case-by-case basis.

Background and Supporting Documentation: As an addendum to the Terms of Reference, the Competition Committee should include all non-confidential project information that can usefully inform potential Transaction Advisors in preparing and costing their bids. This should include:

~ preliminary needs assessment documents;

~ statements of the project objectives;

~ relevant government policy documents; and

~ any preparatory studies that may have been done.


If practical, KAPP may set up a Data Room containing this background information, and give bidders the opportunity to obtain any of the information contained therein, in preparation for their bids. The Data Room shall be supervised by KAPP, from the date the advertisement is published until a few days before the bid submission date.

The disclosure of background information as part of the Terms of Reference is important, to assist potential Transaction Advisors in calculating the cost of the assignment. Bidders may be required to sign a confidentiality agreement upon their request to purchase access to the RFP documents, in order to maintain the confidentiality of the provided supplementary documents/studies.

Draft Agreement: In order to inform bidders of the contractual terms under which the Transaction Advisor is to be hired, a draft agreement should be an attachment to the Terms of Reference. Bidders may recommend minor modifications or comments to this draft agreement, and submit that draft as part of their bids.

Some important features of the draft agreement are:

~ the payments made to the Transaction Advisor are linked directly to deliverables, not to consulting hours spent;

~ the Transaction Advisor must deploy the professionals who were presented in their winning bid and cannot substitute them other than in exceptional circumstances and with the Competition Committee's consent;

~ the agreement may be terminated at completion of the Feasibility Study if the Higher Committee decides not to pursue the proposed PPP project;

~ the agreement may be terminated if the Transaction Advisor fails to perform as required; and

~ individual members of the Transaction Advisor consortium may be asked to be replaced if they fail to perform.

It is to be noted that such draft agreement is a standardized agreement contract, hence recommendations of modifications or major mark-ups may be rejected or render the bidder non-compliant.

3.2.5.2 Prequalification Requests

The announcement of the invitation for tender, or for submitting bids or prequalification requests shall be published in the Official Gazette, as well as on the website of the Central Agency for Public Tenders, no later than (30) thirty days prior to the deadline for submitting proposals. In addition, the announcement may be published in a periodic commercial publication, and/or an appropriate technical or professional magazine.


3.2.5.3 Requests for Proposals

A Request for Proposal is the document which will solicit proposals from potential Transaction Advisors to submit their proposals for the project. The Central Agency for Public Tenders—at the request of the relevant Public Entity – shall announce the tender in the Official Gazette and on its website. The Central Agency for Public Tenders determines the appropriate period for submission of proposals from the date of announcement in the Official Gazette. The least possible period of validity of proposals, after they are opened, would be determined, on the basis that this period will not exceed (90) ninety days; and the announcement shall show the due date for filing proposals (closing date) and the duration of their effectiveness, the product or work required to be executed (in the format as described below), and the authority to which the proposals are to be submitted.

Format of Request for Proposals: While the Request for Proposal needs to be customized on a project-by- project basis, some of the key sections contained in the Request for Proposal are:

~ Letter of Invitation: This is in the form of a covering letter inviting prospective Transaction Advisors to submit their proposals for the project. It introduces the project briefly, mentions the purpose of the Request for Proposal, the relevant laws, and the contents of the Request for Proposal.

~ Instructions to Transaction Advisors: This section will serve as a guidance note to the potential bidders to understand the process. This section should include, amongst other things, instructions on:

� avoiding conflict of interest, unfair advantage, fraud and corruption, disqualification parameters;

� procedure for seeking clarification and amending Request for Proposal documents;

� formats of the proposal, i.e. technical proposal format and financial proposal formats;

� procedure for submission, receipt, and opening of proposals;

� procedure to evaluate the proposals; and

� negotiation procedures, contract termination and confidentiality.

~ Technical Proposal: This section will include the Technical Proposal Standard Forms to be used for the preparation of the Technical Proposal, in accordance with the instructions in the ‘Instructions to Transaction Advisors’ section. The forms generally have the following sections:

� a Covering Letter/ Technical Proposal Submission Form;

� the bidding organization/consortium’s profile and experience;


� a description of the Approach, Methodology and Work Plan for performing the assignment; and

� information regarding team composition and the résumés of proposed staff in the team.

~ Financial Proposal: This section will include the Financial Proposal Standard Forms to be used for the preparation of the Financial Proposal, in accordance with the instructions in the ‘Instructions to Transaction Advisors’ section. The forms generally have the following sections:

� a Covering Letter/ Financial Proposal Submission Form setting out a total amount for the proposal (which must match the one indicated under Total Cost of Financial Proposal in the following section);

� the Total Cost of Financial Proposal;

� a Breakdown of the proposed Payment Schedule; and

� Bid Bond and Performance Bond Specifications.

~ Terms of Reference: The Terms of Reference drafted as described in Section 3.2.5.1 of the Guidebook is included in this portion of the Request for Proposal.

~ Annexure: The Conflict of Interest Declaration format as developed by KAPP is also appended to the Request for Proposal.

Publishing the Request for Proposals: Some important considerations for publishing the Request for Proposals are:

~ at least four weeks should be allowed for potential Transaction Advisors to prepare their bids (to prepare good bids, since bidders will need sufficient time to become familiar with the assignment, construct consortia of professionals—often from different firms—and cost the assignment as accurately as possible; and

~ once the advertisement has been published, the assigned Technical Specialist must be directly available via email to electronically receive and respond to administrative queries.

Handling queries: Once the advertisement is published, the assigned Public Entity staff can expect to receive email enquiries. The assigned staff must keep strict records of all correspondence, and no information that would be prejudicial to other parties should be conveyed to any one party exclusively, i.e. clarifications given to one bidder should generally be shared with all potential bidders, unless where such information is confidential and refers mainly to the bidder's private matters. Any such queries should be discussed in the bid clarification session where all potential Transaction Advisors will be represented, and then the Competition Committee replies will be confirmed in writing to all bidders. If any telephone enquiries are received, the caller should be asked to email the query for written response. Copies of all such correspondence must go to all the registered addresses of the potential Transaction Advisors, unless where such queries are considered to be privately concerned to a particular bidder. The assigned staff should exert their best efforts to reply to all emails the same day they are received or as


stipulated within the RFP. A deadline for receiving and responding to queries—normally not less than 48 hours before bid submission date—must be given in the Terms of Reference section on Bidding Rules and Process.

3.2.5.4 Preparing and Conducting the Bid Clarification Session

The assigned staff should conduct a well-structured session for providing bid clarifications to all prospective Transaction Advisors. The bid clarification session helps to:

~ introduce the assignment to potential Transaction Advisors in person, brief them verbally on the most important elements of the Bid Package, and highlight key issues and challenges of the assignment;

~ give potential Transaction Advisors the opportunity to meet the key Public Entity managers and ask the Public Entity and the KAPP to clarify any relevant matters; and

~ register all potential Transaction Advisors for the project, so that all subsequent queries received by the Competition Committee and KAPP can be answered in writing and copies sent to all parties.

The briefing session should be set for approximately halfway through the bid preparation period. This allows the potential Transaction Advisors to consider the elements of the project that need clarification for purposes of bidding, and for the bids to be completed afterwards. Attendance at this session should be encouraged for any prospective Transaction Advisor intending to submit a bid.

The Law on Public Tenders (Law No. 49 of 2016) stipulates that the announcement for the session should include the date and venue, and also stipulates that the Public Entity should circulate the replies immediately to all potential bidders, without disclosing the source of the questions.

3.2.5.5 Bid Submission

The Law on Public Tenders (Law No. 49 of 2016) also stipulates the following as bid submission requirements:

~ bids shall be submitted in writing and signed, according to the official documents of the tender;

~ bids should be complete in all aspects, as per the conditions set forth in the tender documents;

~ bidders shall not make any modification in the documents of the tender;

~ documents should be submitted in tightly sealed envelopes: torn, damaged or distorted envelopes are unacceptable, and in case of damage, distortion or loss of the official tender envelope, the bidder must obtain another envelope instead, subject to the deadline not having passed;

~ bids will not be received after the deadline for submission of bids has passed; and


~ electronic transmissions can be used to complete the previous procedures, in whole or in part, provided that the electronic transmissions meet all requirements and conditions.

Every bid that violates these provisions would be considered void, unless the members of the board of directors of the Central Agency for Public Tenders agree to accept it unanimously for considerations related to public interest.

Further, the terms of offering tenders, which require a technical proposal and a financial proposal, shall include a provision that the bids should be submitted in two sealed envelopes, one for the technical proposal and the other for the financial proposal.

The bid should be accompanied by a Bid Bond. This Bid Bond should be in the form of a certified cheque or guarantee letter from a bank authorized in the State of Kuwait, issued in the name of the bidder, and in favor of the Central Agency for Public Tenders, and without any restrictions or conditions. Those bids not accompanied with this Bid Bond will not be taken into consideration, even though they are technically acceptable. The Bid Bond shall be valid for the effective duration of the bid.

3.2.5.6 Receiving Bids

The envelopes of technical bids shall be opened first, at the time and place set forth in the tender documents in a public session in the presence of bidders or their representatives, and they shall be disseminated on the website of the Central Agency for Public Tenders. Once the technical evaluation is complete, the financial bids for the qualified bidders will be opened in their presence.

3.2.5.7 Evaluating Bids

The Central Agency for Public Tenders shall send the envelopes of technical bids to the relevant Public Entity for them to evaluate and submit their recommendations to the Central Agency for Public Tenders within a period of (30) thirty days from the date of referral to it. In cases of major and technically complex projects (which is the case for most PPP projects), the Public Entity shall have a right to demand extending this period up to a maximum (60) sixty days. The Public Entity shall, in turn, refer the bids to the Competition Committee.

Evaluation of Bids by Competition Committee

The main purpose of bid evaluation is to determine the lowest-priced technically strongest bid i.e. the best value bid among all the bids submitted. The best value bid may or may not necessarily be the lowest priced bid. In order to determine accurately the best value bid in accordance with the terms and conditions of the bidding documents, a logical systematic evaluation procedure designed to cover all aspects of the evaluation process should be followed, in accordance with the procedure specified in the Request for Proposals.

~ Once the Competition Committee determines which bidders, if any, meet the mandatory requirements, taking into account the bidders’ financial capabilities and any special certificates or licensing, the qualified


proposals are then distributed to the Competition Committee for review and evaluation in accordance with the established evaluation criteria in the Request for Proposal. The Competition Committee is responsible for evaluating each bidder’s financial condition in accordance with the evaluation criteria. Where additional information or clarification is required to complete the technical evaluation, the Competition Committee may seek information or clarification in writing, specifying the request and the date and time it is due.

~ During the technical evaluation process, the Competition Committee members shall review and evaluate the technical proposals, in accordance with the criteria and weights included in the Request for Proposals. The technical review includes an evaluation of the technical/operational merit of each proposal, as well as a review of each bidder’s experience, capability, capacity and resources, approach and methodology.

~ The technical evaluation is usually based on criteria which are assigned numerical ratings. A relative weight is also given to each criterion; this varies with the type of assignment and must be determined at the Request for Proposal stage. Common high-level criteria categories are:

� technical or operational capability;

� experience of the bidding entity;

� methodology and approach; and

� composition and quality of proposed team.

~ Each member of the Competition Committee independently evaluates each proposal and assigns a score to each bidder in accordance with the approved evaluation plan. Alternatively, the assigned staff may convene the members of the Competition Committee and obtain a consensus on each evaluation factor and documents the reason for each score. The Committee members’ worksheets and individual scores are recorded and additional information is sought in cases of inconsistent evaluation or extreme differences in technical scores among the evaluating members.

These scores, along with the bid envelopes, are then returned to the Central Agency for Public Tenders. The financial envelopes of the proposals shall be opened by the Central Agency for Public Tenders only after the receipt of the technical recommendation from the Competition Committee/Public Entity. The financial envelopes of the unacceptable technical proposals shall be returned to their owners without opening them. The Competition Committee/Public Entity should provide adequate justification for such disqualification.

The tender is then awarded to the bidder who met the technical requirements and had the lowest cost, after evaluating the bid in all technical and financial aspects. The Central Agency for Public Tenders shall notify the Public Entity of the result of the tender, and the Public Entity shall respond commenting on the award during a period not exceeding ten days from the date of receipt of the notification. The Central Agency for Public Tenders, after the approval of the State Audit Bureau on the awarding, shall notify the successful bidder in writing—with acknowledgment of receipt—of the acceptance of its bid and of the awarding of the tender to the firm, within one


week, and a copy of this letter shall be sent to the Public Entity. The decision shall be published in the Official Gazette and on the website of the KAPP immediately after its issuance.

3.2.5.8 Finalizing and Signing the Agreement

The assigned staff from the Public Entity will meet with the lead Transaction Advisor to finalize the terms of the Transaction Advisory Contract and complete all the necessary documentation. The final terms of the agreement may not deviate materially from the original Terms of Reference or the terms of the draft agreement, taking account of the comments submitted by the proposed Transaction Advisor as part of its bid. A bidder should not be required, as a condition of award, to undertake responsibilities for work not stipulated in the Terms of Reference.

The Public Entity shall notify the successful bidder to submit a Performance Bond after ten days from the awarding. If the bidder doesn’t submit the Performance Bond within one month of the notification, the bidder will be deemed to have withdrawn its bid, unless the Public Entity decides to extend the deadline.

The Performance Bond shall include a letter of guarantee from a bank authorized in the State of Kuwait, and issued in the name of the successful bidder, in favor of the Public Entity, without any conditions or reservations, to be effective from the date of its issuance until the expiration of the contract, plus three-months, unless the tender conditions stipulate a longer period. The value of the Performance Bond shall be estimated as a percentage of the total value of the contract which will be stipulated in the tender documents.

The Performance Bond shall be a guarantee for the implementation of the contract, and it shall be returned immediately after the successful completion of the contract without request, unless it is due for covering any obligations to the Public Entity, which have resulted from the implementation of the contract.

3.3 UNSOLICITED PROJECT PROPOSALS

3.3.1 INTRODUCTION TO UNSOLICITED PROPOSALS

Instead of a solicited project initiated by a Public Entity, an Unsolicited Project Proposal (USP Proposal) may be prepared by an Investor for consideration by the Higher Committee. An Unsolicited Project must provide a service or facility that is currently not available (or the alternate is substantially more expensive) and/or has an advantage that a Public Entity has not considered before. USPs must be consistent with the State’s strategic objectives.

The initiation of USP Proposals is governed by the following provisions in Chapter 7 of the Executive Regulations:


Article 52: Submission of a Concept through a Preliminary Feasibility Study

Any person, whether a natural person or a legal entity, Kuwaiti or non-Kuwaiti, may submit a Concept before the Authority that comprises a request for the implementation of a project in accordance with a PPP Model, and such request shall include the following:

1 | An initial feasibility study showing the project’s components and the preliminary estimates of its expenses and benefits in accordance with the provisions of the Law and these Executive Regulations and in compliance with the instructions stated in the Guidebook.

2 | Information with regards to the Concept Proposer, his expertise and management, and technical and financial capabilities to implement the project or a part thereof.

3 | The fee as set by the Higher Committee for the review and study of the Concept and the analysis of the elements of the initial feasibility study.

Article 53: Initial Study of a Concept

The Authority shall communicate with the Public Entity(ies) whose capacities and authorities are consistent with the Concept to cooperate for the completion of the requirements of the feasibility study presented by the Concept Proposer.

The Public Entities shall provide the Authority with their responses on an urgent basis in a period not exceeding (20) twenty working days for matters requiring economic and financial analysis and (10) ten working days for matters which do not require such analysis.

Upon the receipt of the Public Entities’ responses, the Authority shall undertake the study of the Concept and prepare a report in this regard together with its recommendation and present it to the Higher Committee.

Article 54: Decision of the Higher Committee

The Higher Committee shall issue a decision approving the Concept and considering it an Initiative or a Distinguished Project or rejecting it, in light of the Authority’s recommendation which shall be based on the feasibility study presented by the Concept Proposer.

The Authority shall notify the Concept Proposer of the Higher Committee’s decision within five working days from the date of issuance thereof. The Concept Proposer may submit a grievance before the Grievance Committee in case of rejection of its Concept.

The decision of the Higher Committee approving the Concept shall include particularly the following:

1 | Determine the Concept Proposer, the type of the Concept, whether an Initiative or a Distinguished Project.

2 | The proposed name for the project and the service provided therefrom.


3 | Costs of the approved feasibility study.

4 | The Public Entity.

5 | The estimated cost of the project.

6 | The rights of the Concept Proposer approved as per the circumstances and the preference granted to it—if any—, or the percentage of shares allocated to it in the Public Joint Stock Company, if any.

The Higher Committee shall issue a decision whether to approve the idea and consider it an Initiative, approve it and consider it a Distinguished Project, or reject it, in light of the Authority’s recommendation based on the Feasibility Study submitted by the Proposer.

3.3.2 PROCEDURES FOR INITIATING UNSOLICITED PROJECT PROPOSALS

An Unsolicited Project Proposal may be submitted to KAPP, along with the information described in Section 52 of the Executive Regulations. After the USP proponent has paid the processing fee prescribed by the Higher Committee, KAPP will study the proposal, working collaboratively with the Public Entity having responsibility for the sector in which the proposed project would operate. USP proposals shall be made and submitted in compliance with the forms and guidelines made by KAPP and published on its website. As a general rule, the USP proponent should respond within 30 days to any clarifications or additional information requests made by KAPP.

After KAPP and the concerned Public Entity have concluded their analysis of the USP Proposal, KAPP shall submit to the Higher Committee a report setting out the details of the proposal and the analysis of it, and shall include in that report a recommendation as to whether the USP should be approved by the Higher Committee. If KAPP’s recommendation is that the USP should be approved, KAPP should also make a recommendation as to whether the USP should be designated as an “Initiative” or as a “Distinguished Project.” As discussed below in Section 4.3, in the case of an Initiative, the USP Proposer will receive reimbursement of the costs of the feasibility study, plus a bonus of 20% of those costs (to a maximum of KWD 200,000) and, during the tender, an advantage of 5% of the best bid value or a share of the stocks in the Joint Stock Company, if applicable, not to exceed 10% of the shares’ nominal value. For Distinguished Projects, the USP Proposer is only reimbursed for the costs of the feasibility study, plus a bonus of 10% of those costs (to a maximum of KWD 100,000).

3 9

CHAPTER

4

PROJECT FEASIBILITY AND STRUCTURING

4.1 THE LEGAL FRAMEWORK FOR FEASIBILITY STUDIES

The relevant Articles of PPP Law related to Feasibility Studies are as follows:

Article 3—THE HIGHER COMMITTEE AND ITS COMPETENCES:

“The Higher Committee shall have the following competences… Approving the studies and Concepts of PPP Projects and approving the procurement thereof in accordance with the PPP Model...”

Article 6—THE AUTHORITY AND ITS COMPETENCES:

“The Authority shall collaborate and cooperate with the Public Entities for…. and shall carry out the following: 1) Conduct surveys and preliminary studies to identify projects that may be procured under this Law and submit reports regarding the same to the Higher Committee. 2) Review and study projects and Initiatives prepared by the Public Entities or Concept proposer and submit appropriate recommendations regarding the same to the Higher Committee. 3) Assess the comprehensive feasibility studies of PPP Projects and proposed Concepts, prepare and complete these studies as needed, submit appropriate recommendations in relation to the same to the Higher Committee in preparation for the procurement of the project...”

The relevant Articles of the Executive Regulations in regard to Feasibility Studies are as follows:

Article 2—PROPOSING A PPP PROJECT:

The proposal for the procurement and implementation of a PPP Project may be submitted by the following entities:


1 | Public Entities: a Public Entity wishing to propose a project that falls within its competences in accordance with the PPP Law shall submit a request to the Authority along with the comprehensive feasibility studies of the project in accordance with the Law, its Executive Regulations and the Guidebook.

2 | The Higher Committee: the Higher Committee approves the request of the relevant Public Entity for the procurement of a PPP Project in accordance with a PPP Model, and it may propose PPP Projects to Public Entities.

3 | The private sector: the private sector may submit before the Authority draft Concepts along with preliminary feasibility studies, as per the Authority’s requirements, for the implementation of a project and the approval of the procurement thereof in accordance with the provisions of the Law.

The Authority shall in coordination with the Public Entity review the feasibility studies presented by the aforementioned entities and finalize the same, as needed, in order to submit an appropriate recommendation thereon to the Higher Committee.

The Authority may prepare the project’s comprehensive feasibility studies and procurement documents, and it may in all cases seek support from advisory firms and specialized offices whether local or foreign as it deems suitable for this purpose in accordance with the provisions of the laws and regulations.

Article 7—STANDARDS FOR PREPARING THE FEASIBILITY STUDY

The project to be tendered for investment in accordance with the PPP Model must meet, the following criteria, based on its feasibility study:

1 | The project shall conform to all the technical, legal and environmental requirements and shall be economically viable, and the benefits offered by the project to the State or to the beneficiaries of the service provided shall be suitable according to the parameters set in the feasibility study and the best practice applicable in this regards.

2 | It shall be established through the comparison between the implementation of the project in accordance with the PPP Model or its implementation by the Public Entity, provided that the comparison is conducted in light of any or all of the following criteria:

A | Implementation cost (value for money).

B | Risk allocation.

c | Transfer of knowledge and use of technology.

d | The project shall have a promising rewarding financial yield to the Investor and the investment risk shall be allocated in an acceptable manner towards the private sector thus creating an opportunity for competition thereon and motivating the Lenders to finance it.

E | Any other standards or requirements set by the Guidebook.

4 1P R O J E C T F E A S I B I L I T Y A N D S T R U C T U R I N G

Article 8—THE INITIAL FEASIBILITY STUDY

The initial feasibility study shall contain a preliminary analysis of the comprehensive feasibility study components. The Guidebook shall provide for the general framework for the preparation of the feasibility study of PPP Projects including the proposed service to be offered, its economic, social and service outcome, the benefit and the expected return of the project, as well as the means of comparison for its tendering in accordance with the PPP Model or by the Public Entity, taking into consideration the allocation of the project’s investment risks whether during the construction, implementation or operation phase, as well as the hypothetical term of the project and the financial, social and economic aspects and other requirements as per the best practices in this regards.

Article 9—THE COMPREHENSIVE FEASIBILITY STUDY

The comprehensive feasibility study shall particularly determine the technical and operational aspects of the project’s Concept as well as its economic aspect, taking into consideration the following rules:

1 | Technical aspects of the project.

2 | Operational aspects of the project.

3 | Assumptions with regards to the project’s ability to recover the cost and the expected internal rate of return of the project.

4 | Assumptions with regards to the participation of the private sector in the project and its interest to participate in the implementation thereof.

5 | The expected Total Cost for the project including the suggested capital in addition to the anticipated operational and maintenance expenses for one year of operation.

6 | Schedule for project risk allocation.

7 | Determination of the anticipated economic benefits of the project.

8 | Suggestion of the proposed incentives and tax and custom exemptions as well as other exemptions essential for the success of the project.

9 | Determination of the Investor’s role.

10 | Determination of the contractual framework of the project.

11 | Setting the proceedings to ensure the selection of the Investor on a competitive basis.

12 | Determination of the legal documents.


13 | Setting the roles and duties of the proposed parties to participate in the project.

14 | Setting a timeline for the implementation of the project including the proposed Construction Term and the Investment Term.

15 | Funding sources.

Article 10—THE PREPARATION OF THE FEASIBILITY STUDY

The Public Entity wishing to procure one of the PPP Projects falling within its competences for implementation in accordance with the PPP Model shall prepare a comprehensive feasibility study of the project in accordance with the provisions of the Law, its Executive Regulations and the Guidebook. The Public Entity shall also draft the Terms of Reference of the study setting the tasks and elements of required research in connection with the project and shall submit the same to the Authority for approval.

However, in exception to the above, the Authority may prepare the feasibility study of a PPP Project in collaboration and cooperation with the Public Entity, provided that the Public Entity provides it with all the data, documents and studies required for the same. The Authority may seek assistance from whomever it deems suitable for this purpose including local or foreign consultancy firms as well as other Public Entities according to the nature and the requirements of the project.

Article 11—COMPONENTS OF THE TOTAL COST FOR PREPARATION OF THE FEASIBILITY STUDY

The Total Cost of a PPP Project shall be determined in accordance with the project’s feasibility study, which shall include the following components:

1 | The market value for the usufruct right of the project’s land, if any.

2 | The value of the assets provided by the Public Entities to the Investor or the fee due for the land usufruct right.

3 | The estimated expenses for the implementation of the project including capital expenditures, comprising fees for the establishment, design, construction, financing and equipping.

4 | The estimated expenses for the operation of the project for one year.

5 | Any other expenses in accordance with the nature of the project.

Taking into account the above articles, this Chapter of the Guidebook provides guidance on the Feasibility Study phase for the implementation of the above-mentioned provisions of the PPP Law and the Executive Regulations. Best business practice dictates that any investment or procurement decision should be backed up by a thorough Feasibility Study. Through the Feasibility Study, the Public Entity is able to compare the possible procurement choices for a project. Properly prepared feasibility studies should:


~ provide information about project costs (explicit and hidden);

~ allow for the identification, quantification, mitigation and allocation of project risks;

~ prompt Public Entities to consider how the project will be structured;

~ identify constraints that may cause the project to be delayed or cancelled; and

~ ensure that the project is in accordance with a proper business plan.

In undertaking a Feasibility Study, a comprehensive Needs and Options Analysis is necessary to ensure that the Public Entity considers all the alternatives available to it for conducting such a project. While an investor shall have the responsibility for the assessment of viability before a tender is submitted, including commercial risks, detailed feasibility analysis, and engineering parameters, the Feasibility Study should be carried out with broad functional specifications on technical matters but should place more emphasis on commercial aspects, and assess the risks and regulatory and monitoring frameworks very carefully.

Similarly, the Feasibility Study should contain sufficient details of the commercial and contractual relationships between the Public Entity and the investor. Different options or models for private sector participation should be discussed in terms of their risk, investment and market implications to the State, the Public Entity, the prospective investors and consumers.

The information set out in the Feasibility Study report must be sufficiently detailed, and any assumptions made must be reasonably realistic, so as to ensure that the optimum commercial or contractual arrangements may be determined. The main purpose of the Feasibility Study is to consider all factors associated with the project, and determine if the investment of time and other resources will yield a desirable result.

4.2 FEASIBILITY STUDIES FOR SOLICITED PROJECTS

4.2.1 PRE-FEASIBILITY STUDIES

After the initial approval/registration of the project and the appointment of the Transaction Advisor, the Transaction Advisor will conduct an Initial Feasibility Study (also known as a Pre-Feasibility Study) for each project, if the Public Entity does not have any prior study on the project. This Pre-Feasibility Study is a short, focused, and low-cost assessment of a project’s viability. The Pre-Feasibility Study shall be a preliminary evaluation of the key elements of a comprehensive Feasibility Study, including the service suggested to be provided, its financial, social, or service return, its expected benefit and incomes, and a comparative analysis of undertaking the project as a PPP, instead of being undertaken as a traditional public works project. The Pre-Feasibility study is required to be presented to the Public Entity and needs to be to the satisfaction of the Public Entity, for the Public Entity to then take further action.


Specifically, the Pre-Feasibility Study will:

~ assess the technical and operational parameters of the project concept through preliminary analysis of:

� the engineering/technical aspects of the project; and

� the manageability of the operational aspects of the project;

~ assess the financial and economic parameters of the project concept, through a preliminary assessment of:

� the cost recovery/income generation assumptions of the project;

� the likely private sector interest in the project;

� the overall project cost (capital plus operations plus maintenance costs), based on industry benchmarks;

� possible risks; and

� an identification of the likely economic benefits of the project.

~ provide a comparative analysis of undertaking the project as a PPP versus being undertaken as a traditional public works project, including an analysis of:

� the distribution of the investment risks in the project, during its establishment, implementation and operation;

� the monetary, social, and financial attributes of the project, including transfer of knowledge or technology use; creation of jobs, nationalization and

� the implementation cost (Value for Money);

~ identify possible arrangements for private sector participation by:

� identifying the proposed contractual framework for the project;

� outlining the procedure for ensuring competition in the selection of an investor; and

� identifying the legal documentation required to allow participation of local and foreign Investors; and

~ Identify the next steps in the procurement process, including determining the timeframe required for completing the procurement process up to financial closure.


4.2.2 COMPREHENSIVE FEASIBILITY STUDIES

Following the completion of the Pre-Feasibility Study, the Competition Committee shall determine if the project should proceed to the stage of having the Transaction Advisor prepare a Comprehensive Feasibility Study for consideration by the Higher Committee.

A Comprehensive Feasibility Study analyses the financial, legal, technical and operational dimensions of the proposed project, including the following topics:

~ the project’s technical aspects;

~ the project’s operational aspects;

~ the project’s presumed capacity to recover the cost and the project’s presumed income rate;

~ the project’s expected financial and social benefits (such as jobs created, poverty reduction, etc.);

~ the project’s economic rationale and affordability;

~ the likely desire of the private sector to participate in the project;

~ the project’s expected total cost, including the suggested capital and the expected operation and maintenance expenses;

~ the project’s risks distribution matrix allowing for identification, quantification, mitigation, and allocation of risks associated with the project throughout the life of the project;

~ the necessary government incentives, and the customs, tax, and other exemptions for the success of the project;

~ the proposed contractual framework for the project;

~ the procedures to be used to ensure competition in choosing the investor;

~ the roles and responsibilities of the suggested participating parties in the procurement process;

~ the timetable for the project’s implementation, including the construction duration and the investment term;

~ the financing sources and a financial model with key investment ratios, with the capability of running scenario and sensitivity analyses;

~ project-specific land allocation plans, and the identification of any necessary resettlement plans for people affected by the project, including resettlement compensation programs and costs; and


~ environmental and social assessment studies (in line with Kuwait’s environmental legislation) for the project, and identification of possible mitigation methods.

The Comprehensive Feasibility Study should also include the broad technical design for the project, with an appropriate level of detail that meets good engineering design and construction practices and standards in accordance with relevant policies and legislation.

The Competition Committee shall be responsible for ensuring the preparation of the Comprehensive Feasibility Study for the project and shall also develop the terms of reference for the Comprehensive Feasibility Study.

4.2.2.1 Needs Analysis and Definition of Project Parameters/Scope

In this stage, the Transaction Advisor gathers all the available information on the project, the Public Entity’s needs, and the resources on hand for project development and implementation, including budget. The Needs Analysis gives definition to the proposed project, paving the way for the Solution Options Analysis component of the Feasibility Study phase. Needs Analysis will comprise the following elements:

Part 1: Demonstrate the need for the project: A project needs to align with the Public Entity’s objectives, policies, and priorities and, most importantly, the Public Entity must clearly establish the rationale for the project. This can be determined as follows:

~ Step 1: Summarize the Public Entity’s objectives and the State’s policy with respect to the project.

~ Step 2: Discuss the need and other aspects of the project:

� how does the project contribute to the implementation of State and Public Entity’s policy;

� what problem will the implementation of the project solve;

� what is the capacity of the private sector to deliver the project;

� what is the expected life of the project—will it address the broad needs of the State over time; and

� what is the impact of the project on the State or Public Entity’s budget and what are their financial obligations towards the project.

Part 2: Specify the parameters of the project leading to its desired objectives. Once a Public Entity’s objectives and budget are identified, the parameters of the proposed project need to be specified. While specifying these parameters, care should be taken to ensure that inefficiencies are not subsidized and parameters identified are clear and measurable. PPPs focus on project outputs, as opposed to the conventional procurement method, where inputs are specified. The Public Entity needs to define clear specifications for the project outputs. This is done by means of the following steps:


~ Step 1: Describe the objectives that the project will meet.

~ Step 2: Specify the outputs required to be delivered under the project.

~ Step 3: Specify the standards/specifications for outputs of the project to ensure that the project meets the defined objectives/expectations.

~ Step 4: Specify key indicators that will measure performance to allow for more accurate costing of the output specifications.

Part 3: Define the scope of the project. In light of the Public Entity’s needs and strategic objectives, and the project’s output specifications, a brief concept note defining the proposed scope of the project is prepared. This concept note should be a concise outline of the Public Entity’s requirements, allowing for the selection of reasonable service delivery options. While conducting the needs analysis, ensure that the following are carried out:

~ identify/devise a list of significant State assets that will be used for the project (such as land and any equipment);

~ identify the existing facilities in the project area;

~ determine how the project will complement other developments taking place in the area through review of sector master plans/studies;

~ review existing land-use plans and topographical and geotechnical data for the development of project design;

~ specify environmental and social assessment work plans through description of projected work tasks; and

~ assess land acquisition and any resettlement requirements.

4.2.2.2 Options Analysis

An Options Analysis provides a range of technical, legal, and financial options available for meeting project output specifications. The options should not just be limited to technical options but should also contain an analysis of different PPP structures suitable for the project. The various options identified are evaluated against set criteria specific to the project, allowing the identification of a preferred option from the available options.

The Transaction Advisor will conduct the Options Analysis by undertaking the following steps:

~ Step 1: List all reasonable options including different PPP structures which will be suitable for the project and the State e.g. availability payment or user-fees payment etc..

~ Step 2: Evaluate each option in terms of its advantages and disadvantages by taking into account its:


� technical and financial aspects;

� land acquisition and resettlement impacts and costs;

� environmental impacts and costs;

� the likelihood of attracting private sector investment in the project.

~ Step 3: Recommendation of the preferred option.

The purpose of the Options Analysis is to identify the advantages and disadvantages of each option and to examine its risks, benefits, and potential impacts. The analysis must cover all viable delivery options available for meeting the Public Entity’s specific identified needs, including the different PPP structures that can be adapted for the project.

All reasonable options considered need to be evaluated clearly and with appropriate weightings of criteria. The criteria by which the Comprehensive Feasibility Study evaluates each option will be decided on and devised by the Transaction Advisor during the Needs Analysis stage, under the guidance of the Competition Committee.

Once the preferred option is selected, a broad design appropriate to the complexity of the project is prepared, in order to provide sufficient information for costing, risk, and financial analysis. This design may be a preliminary design (in the case of more complex and higher-cost projects) or a complete design (for simpler projects that have reliable cost data). It may be noted that this design is not to be provided in full to any private-sector bidders as it will result in the design risk remaining with the Public Entity, and may also have an adverse effect on the efficiency of private-sector design. The final design of the project will be done by the investor.

4.2.2.3 Project Due Diligence

At this stage of the Feasibility Study process, all legal, land, site, technical, social safeguard and environmental issues are dealt with. The list below is not comprehensive, but is indicative of the issues to be considered by the Transaction Advisor:

~ environmental scoping assessment report with identification of mitigation measures for the negative impacts, including an estimate as to the magnitude of the mitigation measures;

~ legal issues, including all legal aspects pertaining to project development and implementation such as relevant legislation, tax laws, land title, etc.;

~ site ownership and land availability issues, including investigations into the status of any land claims, servitudes, long leases, and constraints, as well as investigations into geotechnical conditions, existing contamination, utility service availability and capacity, and the environmental and heritage status of the land need to be


made (in this regard, the Competition Committee should be proactive in obtaining all necessary filings and approvals to avoid subsequent delays);

~ stakeholder consultation issues, so as to ensure that all affected parties are provided with information and opportunity to express concerns regarding project impacts;

~ technical and project design issues;

~ issues related to supporting infrastructure;

~ the availability of required raw materials and fuel supplies;

~ a full technical analysis of the site;

~ preliminary financial due diligence on the availability of financing, sources of revenue, hedging/risk mitigation products, tax structures, etc.; and

~ miscellaneous other issues, such as pre-existing contracts, Service Level Agreement standards, human resource issues, etc.

The due diligence exercise collates all the necessary data and information needed to thoroughly assess the project. A thorough due diligence is expensive, but saves time and money at subsequent stages of the procurement process. Early identification of the key issues is essential for future success. The importance of legal, social, technical and environmental issues should not be underestimated.

4.2.2.4 Financial Assessment

In this stage of the Comprehensive Feasibility Study process, the deliverable is a risk-adjusted financial model of the project. This model provides analysis of the financial soundness (viability and bankability) of the proposed project, including its fiscal sustainability based on the capital costs, as well as costs projected for adequate maintenance and operation. The model will present the financial costs and benefits of delivering the preferred solution/options through a PPP arrangement.

In developing the financial model, the following steps may be required:

Technical Definition of the Project: Set out a technical definition of the parameters of the project. What norms and standards will be applied? What maintenance cycles are expected?

Computation of Total Project Cost: In order to compute the total cost of the project, it is important to first identify all the current and future costs of the project. Some important elements of the cost of the project as laid down in the Executive Regulations are:


~ the market value of the project’s land use—if any;

~ the value of assets to be provided by the Public Entity to the investor or the applicable usage fees;

~ the estimated costs for the implementation of the project, including capital costs, and the total establishment, design, construction, finance, and installation expenses;

~ the estimated costs for operating the project over the life of the project; and

~ any additional costs associated with the project.

The following paragraphs set out the different costs to be considered for computing the total project cost:

Capital costs: These are costs specifically associated with the design and construction of the project. The model should account for capital costs in the year in which they occur, including, but not limited to, the design, land7 and development costs, raw materials, construction, plant, and equipment. Capital costs should also account for labor-related and management-related costs associated with the development and implementation of a project, including financial, legal, procurement, technical, and project management services, as well as all the costs incurred for incorporating the project company. Costs pertaining to asset replacements as they occur during the project’s life should also be included. For the purpose of estimating total costs of intended projects, the average market value of land and the usufruct rights8 shall be determined by a specialized Ministry of Finance accredited firm, which is to be hired by the Transaction Advisor following a competitive bidding process with the approval of KAPP. Any costs related to risk mitigation, compliance with environment regulations, and resettlement of affected population, if any, need to be accounted for. Any expected/advised tax holidays and waiver of custom duties impacting capital costs should also be considered while computing the Capital Costs.

Maintenance costs: Maintenance costs will include the full lifecycle costs of maintaining the assets in the condition required to deliver the output specifications. It may include elements such as raw materials, tools and equipment costs, and labor costs associated with maintenance. The level of maintenance costs assumed must be consistent with the capital costs and the operating cost forecasts. Any costs related to risk mitigation related to project maintenance need to be accounted for.

Operating costs: These are associated with the regular operation for the provision of services under the project, such as staff costs (including wages and salaries, employee benefits, accruing pension liabilities, contributions to insurance, training and development, annual leave, travel, and any expected redundancy costs); raw materials and consumables; direct management costs; and insurance. Any costs related to risk mitigation and compliance with environment regulations need to be accounted for. Finally, any rent or fee for use of State land must be factored into the financial model (unless it is proved that it reduces project affordability and is waived—final approval of this will be provided by the Higher Committee when it approves the Comprehensive Feasibility Study).

7 Land valuation is critical from the point of view of determining the size of the project with regard to selection of an appropriate procurement meth-od (discussed in subsequent chapters). However, since the land will be provided by the State, its value should not be reflected in the Capital Cost. If a fee is charged it should be reflected in the Operational Cost of the project.

8 The right to enjoy the use and advantages of another's property short of the destruction or waste of its substance.


Identifying Project Revenue: The total cost of the output specifications is offset by the anticipated project revenues. It should be borne in mind that forecasting potential revenues (based on demand analysis and forecast) can be a particularly difficult aspect of the model, especially where there is little or no historical data available. This element is a vital part of the Comprehensive Feasibility Study, and therefore steps such as involving specialist advisers and conducting market testing should be taken. Any assumptions on projected revenue must reflect the project’s ability to invoice and collect revenue. Where relevant, analyses should also be conducted on the appropriateness of fees in relation to user affordability and long-term marginal costs, operation and maintenance costs, and the effect of pricing and cost recovery policies on the financial viability of the project, as well as the legal and financial requirements of the State.

Note that revenue overestimation and cost underestimation are the most common failings of feasibility studies. Carrying out scenario and sensitivity analysis is therefore an integral part of this exercise.

Model Assumptions: Any assumptions made regarding inflation rates, discount rates, depreciation, VAT, taxes, custom waivers and budget availability must be explained in detail and presented in a user-friendly form, where all assumptions are identified and justified.

The Base Case Model: A discounted cash flow model must be created that takes into account the maintenance costs, operating costs, capital costs, and revenues anticipated for the project. Upon expiration of the PPP Contract, all state-owned assets (including land and buildings) must be handed back to the State at no cost or compensation (Article 18 of the Law) and the model should account for no residual value of these assets.

The Risk Allocation Matrix: Constructing a risk matrix is a fundamental part of the Comprehensive Feasibility Study process and can be usefully integrated with the construction of the financial model. It involves the following interrelated stages:

~ identifying risks involved with the project;

~ assessing the various impact of these risks;

~ assessing the likelihood of these risks arising;

~ calculating the value of the risks and ranges of possible outcomes;

~ identifying strategies for mitigating risk; and

~ allocating risks to party or parties best able to manage them.

It must be noted that the valuation of risks should be calculated as a separate cash flow item, and not by adjusting the discount rate as an indication of the level of risk for each project. Principal reasons for adopting the cash-flow impact approach are that it promotes a focus on the costs of each risk and helps promote an understanding of


how risk transfer can be achieved and what its financial consequences would be. In addition, different risks have different timing implications throughout the project term (some risks may only have an impact on the initial stages, while the impact of others diminishes or escalates over the life of the project).

An indicative list of risks is given below, categorized as “project-related risks” and “non-project-related risks.” This is discussed in greater detail in the subsequent chapters and a sample risk allocation matrix is presented in Annex A.

Project-Related Risks: These risks are relatively manageable by the investors and lenders:

~ completion risk (engineering and construction cost/time cost control);

~ operational performance risk (technical and operational know-how);

~ market risk (volume and tariff), although these risks are often shared between the parties in PPP transactions;

~ financial risk (the cost of financing); and

~ environmental risks (past and future liabilities, project delays, costs overrun), although these risks are often shared between the parties in PPP transactions;

Non-Project Related Risks: These risks are not manageable (or only partially manageable) by investors and lenders:

~ political risks, such as expropriation, defaults on government contractual obligations, political instability, currency convertibility and transfer;

~ regulatory risks, such as regulatory pricing risks;

~ macroeconomic risks, such as exchange rate and inflation risks; and.

~ legal environment risks, such as risks arising from changes to the judicial system or policy changes such as changes in tax policy; lawsuits from relevant parties or arbitration procedures.

Investors usually require the State to assume the non-project related risks to the extent that any adverse effect from these is negated or compensated, so as to restore the investor’s original financial return position, i.e. its position before the adverse event occurred. Some non-project related risks can be shared or even mitigated by the investor (such as exchange rate and inflation risks). However, there will be a cost for mitigating such risks, and the Transaction Advisor should advise the Competition Committee whether there is value for money in transferring these risks to the investor.

The Risk-Adjusted Financial Model: The base case financial model needs to be remodeled to include project risks. For this, the Transaction Advisor undertakes a detailed project risk analysis exercise, covering all of the


risks noted above. This would provide a reasonably realistic overview of the project in terms of size, cost, viability, bankability, and sustainability.

Creating a Financial Model to Reflect the PPP Structure and the Sources of Funding: A proposed structure of the project is prepared, demonstrating the relationships among the Public Entity, the investor’s Special Purpose Vehicle (SPV)—set up specifically for the purpose of undertaking the project—and lenders, shareholders, suppliers, subcontractors, plus other stakeholders. This planned project structure must incorporate the funding structure, appropriate equity returns, and the costs and key terms of debt funding (including, for example, debt service coverage ratios). Devising the optimal capital structure for the project is a key element in this analysis, as it directly affects the project’s bankability.

All assumptions must be clearly stated, as these will directly affect the cost of capital for the project. It is important to examine the needs of the project and the timeline for reaching certain financial goals in order to determine the appropriate capital structure for the business that will be conducted. The timing and management of cash flows is critical to selecting the right type of funding and maintaining the long-term stability of the business.

It is important to note that the Investor can only mortgage or grant security over its own assets in the project and not any of the State assets (Article 23 of the PPP Law). The ability to grant security to lenders is critical, as lenders will require a minimum level of collateral from the project investors. In this regard, the PPP Law also allows for security over the project’s receivables to raise financing.

In a project finance structure (typical in PPP projects), the following elements must be addressed:

~ Annual Debt Service Coverage Ratio: This ratio assesses the project company’s ability to service debt from its annual cash flow, and is calculated as the project’s operating cash flows over the year divided by the project’s debt servicing requirement over the year. This will be determined for each project, based on its risk assessment, but should not be less than 1.10x and should be left to each Transaction Advisor/Public Entity to evaluate, based on project specifics.

~ Loan Life Cover Ratio: This ratio is based on a similar calculation, but taken over the whole term of the loan. It is calculated by dividing the net present value of the future cashflows available for debt repayment by the total amount of senior debt owed by the company.

~ Financial Internal Rate of Return (Financial IRR): This measures the return on investment over its life. It is the discount rate at which the net present value of the project (the value today of the sum of money due in future, taking into account the cost of money/discount rate) is zero. The discount rate should be based on the appropriate government bond yield (chosen at the time of appraisal and based on the duration of the project) plus an appropriate risk margin determined by the Transaction Advisor in consultation with the Public Entity and KAPP for each project.

Note: Where an Investor can sell directly to one or more end users, but there is little scope for competition, the government usually regulates prices (through sector regulations or via the PPP Contract). However, the challenge is to design well-functioning regulation that increases output, holds down prices, and limits monopoly profit while


preserving the incentive for private firms to be more efficient and reduce costs. Of the two most common forms of regulation, rate of return regulation suffers from the problems involved in establishing appropriate cost benchmarks in a monopolistic situation. The main alternative, price regulation, involves limiting price increases, but also requires significant analysis. Finally, profit sharing between the government and the Investor is an alternative form of regulation that, if properly designed, can preserve incentives. For profit-sharing projects, the Transaction Advisor, as part of the Comprehensive Feasibility Study exercise, will calculate the return on investment to be derived from the profit-sharing scheme. This will determine how the revenue will be distributed once the project becomes operational. The Investor will be selected from the bidders who are willing to undertake the project at a lower return on investment and a larger share of profits for the State. Where earning revenues is not the main aim of the State, profit sharing could be reflected as a lower amount of payment that the Investor would ask from the Public Entity in cases where a state-owned entity is the off-taker of the project services, or it could be reflected as lower prices charged to the end-users. A competitive procurement process should be designed in a way that puts pressure on the bidders to provide the best value for money to the off-takers of its services.

For some projects, a minimum internal rate of return on the shareholding of the Kuwaiti investors may be stipulated and, in that context, KAPP is currently working on identifying a minimum threshold for such internal rate of return on projects, wherever applicable and specific to each project.

Carrying out a Share Valuation Exercise: The Transaction Advisor can utilize several valuation methodologies and assess the different approaches to determine the appropriate valuation range for shares that may be auctioned when the Joint Stock Company option is used (as discussed in subsequent chapters). The approaches are as follows:

~ discounted cash flow, using technical assumptions;

~ comparable company analysis; and

~ precedent transaction analysis in the applicable sector on a global basis.

It is important to note that the prices are not determined randomly: disclosure may be required for all of the quantitative and qualitative factors that justify the price. It should also be noted that the real test is when the project goes to the market, as the market is the final determinant of its true value. Finally, it is important to note that this valuation is for an internal benchmarking exercise for the information of the Higher Committee.

Sensitivity Analysis: A sensitivity analysis is essential to determine the resilience of the project to changes in assumptions and risk components over the project term. It will differ from project to project. It needs to be conducted on the key cash flows projections and assumptions. The Transaction Advisor should test the sensitivity of key model assumptions and respond to specific requests by the Competition Committee in testing the sensitivity of the model. Some key variables that can be relevant in a sensitivity analysis are:

~ project duration;

~ inflation rate assumptions;


~ construction cost assumptions;

~ operating cost assumptions;

~ demand forecasts;

~ third-party revenue (if relevant and material, such as parking fees in a hospital project); and

~ financing terms

In this analysis, the Transaction Advisor may be required to develop cases or scenarios for expected annual payments to be earned by the project, where such sensitivities are analyzed and factored in.

Note: Subsidies, if required, will need to be structured so that they do not reduce the incentives for the Investor to be efficient and cost effective. They will need to be explicit (as opposed to implicit budgetary support) and milestone/output-based. Sensitivity analysis should be done on the financial model to see how to minimize the amount and duration of subsidies and, if required, a ceiling on the amount of subsidy to be provided can be introduced based on the merits of the project. If an upfront capital subsidy is provided during the development phase that eliminates the need for longer-term operational subsidies, this might produce more value for money. Similarly, if demand is difficult to assess or is very volatile or untested, then there may be a need for a minimum revenue guarantee. Sensitivity analysis of the financial model can reveal if there is more value for money in providing the guarantee versus the potential risk margin that the Investor may charge if it retains the demand risk. Market soundings will also reveal whether bidders are willing to proceed on a project with no minimum revenue guarantee.

All this will be done by the Transaction Advisor under the Competition Committee’s supervision.

At this stage, it is crucial to determine the affordability of the project to ensure the costs the Public Entity will take on is within its budget and/or end users are willing to pay for the benefits associated with the services to be provided. If affordability cannot be demonstrated, the Public Entity may be obliged to both reexamine and modify the output specification, in order to meet the affordability constraint or to consider other options. If the outputs cannot be readjusted, then either the allocated budget must be increased or a subsidy must be provided to the users.

4.2.2.5 Value for Money

It is important that the project is not only affordable to the government and end users, but also provides Value for Money (VfM). VfM describes the net benefit, both in quantitative and qualitative terms, from a PPP project compared to the same project delivered by the public sector over the entire lifespan of the project.

A PPP may provide VfM compared with traditional procurement models if the advantages of risk transfer combined with private sector incentives, experience and innovation in providing improved service delivery


and efficiencies over the project life time outweigh the increased costs of contracting and financing the project through the PPP route.

Therefore, prior to procuring a project through a PPP, it is important that the Public Entity has carried out, as part of its Comprehensive Feasibility Study, a robust and comprehensive VfM analysis to determine whether the project, if procured through a PPP transaction, will actually provide greater VfM than procuring the same project via traditional procurement.

A proper VfM analysis requires the use of both qualitative and quantitative factors:

~ Quantitative assessment: This assesses the quantitative value of doing the project through a PPP i.e. does the project generate a Net Present Value (NPV) taking into account whole of life costs, risk allocation and an incentive based penalty/compensation structure.

~ Qualitative assessment: This involves ‘sense-checking’ the rationale for adopting a PPP approach and determining whether a project is suitable for private financing. This assessment looks at the qualitative aspects of procuring the project through a PPP e.g. will doing the project through a PPP provide a better design, quicker delivery and improved provision of service.

To determine the VfM from a quantitative perspective, the Public Entity needs to compare the cost of a proposed PPP project with a Public Sector Comparator (“PSC”), which is essentially the cost to the public sector of designing, constructing and operating the same project over the life of the asset.

The Public Entity does this by preparing two models:

1 | PSC Model: This estimates the hypothetical risk-adjusted costs to the public sector if a project were to be financed, owned and implemented by the government. A PSC should capture the costs of assets, services, staff and other elements required to deliver the project to the same standards as anticipated under a PPP arrangement.

2 | PPP or Shadow Bid Model: This is an estimate of how much the bids from the private sector are expected to be. Prices are calculated based on delivery of the project by the private sector. Costs include risk, insurance, taxes, debt servicing and profit. The shadow bid analysis can also be useful for negotiators and decision-makers in evaluating bids that come in from the private sector.

It is important that the PPP or Shadow Bid Model includes base case, low case and high case scenarios, so that the Public Entity has an in depth understanding of the potential costs of the project and the related projected capacity/annual payments that will need to be paid over the life of the project.

PSC Model

To construct the PSC model, the Public Entity, together with the Transaction Advisor, needs to calculate the Base PSC which represents the net present value of the full costs (direct and indirect) to the public sector of delivering


the required service according to the specified outputs via the preferred solution option using conventional public sector procurement. In addition to this, it is important to quantify the cost of the risks expected to be transferred to the private sector as well as the costs of those risks to be retained by the Public Entity, so as to have a risk adjusted9 PSC (see process chart below). Finally, it is necessary to adjust the PSC to ensure that there is Competitive Neutrality between the PSC and the PPP or Shadow Bid Model. The need to adjust to ensure Competitive Neutrality arises from the fact that the public sector benefits from some inherent advantages that are typically not available to the private sector e.g. the public sector does not pay taxes on revenues, often self-insures and sometimes has access to land at no cost. If these advantages are not factored into the PSC then the PSC will be artificially lower.

PPP or Shadow Bid Model

Under the PPP or Shadow Bid Model, the Public Entity, together with the Transaction Advisor, needs to accurately and fairly estimate the costs to the private sector of providing the required service through a PPP. In addition to this, the Public Entity needs to determine the cost of any public sector payments (e.g. availability payments) that needs to be provided to the PPP project over the life of the project. This will provide the Base PPP Cost. Like the PSC Model, the Base PPP Cost will then need to be risk-adjusted, to take into account those risks that the public sector will bear to arrive at a Risk Adjusted Base PPP Cost.

Once the risk-adjusted PSC and PPP (or Shadow Bid) costs have been determined and agreed, the VfM can be calculated by comparing the costs. Based on the example in the chart below, the VfM under the Risk Adjusted PPP model is ‘A’ while the VfM based on the actual bid is ‘B’.

9 Risks should be allocated to the party best able to manage the risks. If a risk is passed to an Investor which that Investor can’t substantially mitigate, then the Public Entity runs the risk of the Investor not bidding for the Project or incorporating the cost of that risk into the bid which will adversely impact VfM. The Public Entity should compile a detailed risk register and then construct a risk matrix to allocate the risk accordingly.

FIGURE 4.1: Process to Calculate Risk Adjusted PSC

Identify Risk

Identify Impact on

Project

EstimateCost ofRisk onProject

DiscussHow to

MitigateRisks

AllocateRisks toPublic orPrivateSector

RiskAdjust

PSCModel

AssessProbability

of RiskOccurring


It is important that this exercise is carried out using realistic assumptions and estimates. This is best done by employing independent technical experts that can provide accurate estimations of costs as well as by benchmarking costs based on similar deals.

It is also very important that the assumptions and outputs of the feasibility and VfM studies are considered by the Public Entity in direct consultation with the Ministry of Finance, in order to secure the required budget—and for the Ministry of Finance (as well as the Public Entity itself) to have a detailed understanding of the financial obligations of the State towards the project over the life of the contract.

4.2.2.6 Economic Assessment

For this part of the Feasibility Study, the Transaction Advisor calculates the incremental benefits and costs of the project to society as a whole, based on “with” and “without” project scenarios. This will be done by estimating the expected economic benefits to be generated from the project. By this means, the public sector understands the various social and economic costs and benefits to the private sector entity, the government and the local community. Estimation of all economic costs and benefits of the project is required to ensure that it is still the

FIGURE 4.2: Competitive Neutrality Adjustment

X

Y

Z

W

Base PSC Risk Adjusted Base PSC

Actual Bid plusRisk Retained

by Public Sector

Risk AdjustedPPP Model plusRisk Retained

by Public Sector

AB

NPV of capital and operating costs

associated with the project should it be

procured and operated by the public sector

Full risk adjusted coststo the public sector

(NPV) of delivering therequired serviceaccording to the

specified outputs usingconventional publicsector procurement

Best estimate (NPV) ofthe total (risk inclusive)

cost of the project tothe public sector using

a PPP with anestimate of the risk

retained by thepublic sector

NPV of total cost (incl.risk) of the project to

the public sector basedon actual bid received

A: VfM at feasibilityis difference withrisk-adjusted PSC

B: VfM at financial closeis difference with risk-

adjusted PSC

CN*

Risks RisksRisks

CostsCosts

*CN = Competitive Neutrality Adjustment (See the discussion above regarding the PSC Model)


least-cost option, taking into account all externalities to stakeholders. Changes may be necessary to the project design if negative externalities are large. It includes:

~ determining the economic costs of the project (investment cost and operating cost) derived from the financial costs by excluding taxes and duties and by converting the non-traded components to the domestic price numeraire (i.e. the economic costs expressed at equivalent domestic market price levels);

~ estimating expected economic benefits to be generated from the project, such as increase in land values, time saving, employment generation, improved public health conditions (where applicable), reduced pollution; and various other cost-saving benefits. It could also consider other indirect benefits related to increase in local business opportunities; participation opportunities for local banks and financial institutions; creation of stock listed companies who are involved in provision of services and adding value to the market; and contributions to local GDP;

~ creating jobs and encouraging recruitment of nationals into SPV companies, where knowledge, experience and technology would be transferred to nationals, as well as generally promoting nationals to work in the private sector thereby reducing pressure on the government to provide jobs;

~ determining major assumptions to be applied to the economic analysis including (i) projected life of the proposed project asset; (ii) constant value (currency and year) for defining incremental costs and revenues; and (iii) opportunity cost of capital based on the current savings rate of local commercial banks; and

~ undertaking calculation of the Economic Internal Rate of Return for each component as well as for the project as a whole, and the Economic Net Present Value for the whole project.

4.2.2.7 Socio-Environmental Assessment

Environmental Assessment: A strategic environmental assessment is an effective instrument for integrating environmental issues into the formulation of plans to undertake the project. Environmental requirements for infrastructure projects involve far more than simply ensuring that there is compliance with environmental legislation. Authorization of projects by the environmental authorities is an important step because a project’s inability to meet environmental requirements can have an adverse impact on its financing efforts. There needs to be proper and full consideration, understanding, and mitigation of the environmental risks throughout the project’s lifecycle.

Social Assessment: This should include land acquisition and any resettlement of affected population, if any. It should also consider future potential land use on or around the land that has been allocated to the PPP asset, and not only the existing social setting but also the future planning that might happen during the PPP contract such as the development of new residential cities.


4.2.2.8 Market Sounding

It is worthwhile at this stage to market-test the project structure and financing requirements. This ‘reality check’ may be done by obtaining feedback from potential investors, through workshops, presentations and ‘road shows’. These should be carried out by the Transaction Advisor under the Competition Committee’s supervision and involvement. The Transaction Advisor is responsible to recommend and liaise with potential investors/lenders in regard to such meetings, and their timings, and for preparing the supporting documents that should be used to promote the project and seek feedback from interested parties.

4.2.2.9 Verifying Information and Signing Off

The Public Entity, including relevant parties when needed, must ensure that all information used in the Feasibility Study is as accurate and verified as possible. This requires:

~ a statement from the Transaction Advisor on the reasonableness of the information collected and the process by which the information was collected;

~ a description of why the assumptions used in constructing the financial model are realistic and appropriate, taking into account past practice and performance, current practice, and anticipated future developments;

~ a record of the methodologies used for valuing various costs, including the costs of key risks; and

~ sign-off by each of the Transaction Advisor’s consortium members that all the inputs into the Feasibility Study are robust and verified.

4.2.2.10 Revisiting the Feasibility Study

The Comprehensive Feasibility Study may need to be updated or modified when changes in project scope, external market conditions, or macroeconomic environment occur. If at any time subsequent to the approval of the Comprehensive Feasibility Study by the Higher Committee and before the award of the final PPP Contract, any assumptions in the Comprehensive Feasibility Study are materially revised, including any assumptions concerning affordability and substantial technical, operational, and financial risk transfer, then approval must be sought again from the Higher Committee for proceeding with the project procurement. Under such circumstances, the Public Entity must immediately:

~ provide KAPP and the Higher Committee with details of the intended revision, including a statement explaining the purpose of the intended revision and its impact on affordability, and on the risk transfer evaluation in the Comprehensive Feasibility Study; and

~ ensure that KAPP and the Higher Committee are provided with the updated Comprehensive Feasibility Study which has been duly revised by the Transaction Advisor, taking into account all the changes.


It is to be noted that the Public Entity would be wholly liable for any delays associated with the implementation of such modifications/changes and is responsible for reflecting them in the procurement stage documentation.

4.2.3 Management and Procurement Plan

The preparation of a Project Management Plan based on the packaging of the various project components needs to be part of the Comprehensive Feasibility Study agreed upon by all concerned parties. The plan must include a section setting out the procedure for the PPP procurement. The procurement procedure (including the possible formation of a Joint Stock Company) is dependent on the size of the project. The Comprehensive Feasibility Study will have ascertained the project size as part of the Transaction Advisor’s mandate.

The plan will outline the procurement requirements (discussed in Chapter 5 of this Guidebook) and must contain at least the following elements:

~ the project timetable, highlighting the key milestones and all approvals which will be required to take the project to implementation;

~ a list of any current and/or potential challenges to the project and a discussion/recommendation of how these can be reasonably addressed;

~ an identification of all key stakeholders and the extent of their involvement in the project;

~ categories of information to be made available to bidders and how such information will be developed;

~ a list of required approvals from all departments and agencies and a list of action items necessary for obtaining these approvals (for example, land acquisitions and environmental studies);

~ contingency plans for dealing with deviations from the timetable and budgets;

~ proposed bid evaluation parameters and the process for bid evaluation;

~ appropriate quality assurance process for bid documentation; and

~ a methodology for establishing and maintaining an appropriate audit trail for the bid process.


4.2.4 INDICATIVE LIST OF REQUIREMENTS FOR THE COMPREHENSIVE FEASIBILITY STUDY REPORT

The following lists sets out some of the submission requirements for the Comprehensive Feasibility Study Report:

~ Memo from the Competition Committee endorsing and requesting approval of the Feasibility Study from the Higher Committee

~ Cover Letter signed by representatives of the Transaction Advisor

~ Executive Summary

~ Section 1: Introduction

� Project Background

� Approach and methodology to the Comprehensive Feasibility Study

~ Section 2: Needs Analysis

~ Section 3: Options Analysis

~ Section 4: Project Due Diligence

~ Section 5: Financial and Economic Assessment

� Financial model

� Risk-adjusted financial model

� Economic Costs and Benefits Assessment

~ Section 6: Affordability and Value for Money Assessment

~ Section 7: Socio-Environmental Assessment

~ Section 8: Project Viability, along with Market Feedback

~ Section 9: Verification and Sign Off

~ Section 10: Project Management Plan


~ Annex A: Statements for Information Verification and sign off from Transaction Advisor (each consortium member)

~ Annex B: Complete Financial Model and Assumptions

~ Annex C: Document List (listing all documentation related to the project)

~ Annex D: All other documents that have a material bearing on the Comprehensive Feasibility Study and are of decision-making relevance to the project

Additional Requirements:

~ The Comprehensive Feasibility Study must be compiled in a single report in Microsoft Word format (with financial models in Microsoft Excel format), and both electronic and hard copy formats should be submitted.

~ All financial models must clearly set out all assumptions made, with adequate sensitivity analyses, and model outputs. The financial models must be sufficiently adaptable for use by others at later stages. The models shall not be locked or protected against any testing or enhancements from its owners upon acceptance.

~ The Comprehensive Feasibility Study must be presented with an appropriate Executive Summary in Arabic and English. The Transaction Advisor may be requested to present the Comprehensive Feasibility Study to the Competition Committee or the Higher Committee

~ The Executive Summary must also be compiled in such a manner that it can be used by the Competition Committee, KAPP and Public Entity’s management for decision-making purposes

~ All provided documentation shall be considered as property of the Public Entity/KAPP where applicable and all references made to the Transaction Advisory, logos or identification are to be inserted only upon the Public Entity/KAPP’s permission.

4.2.5 FEASIBILITY STUDY APPROVAL

The Competition Committee and KAPP shall present the Comprehensive Feasibility Study’s conclusions and its own recommendations for the proposed project to the Higher Committee, so the Higher Committee can decide whether to proceed with project procurement, or may suggest other directives for KAPP and the Public Entity.

For a project to be approved for implementation as a PPP, the project shall satisfy the following key criteria and hence the recommendations in the Comprehensive Feasibility Study should be tailored to cover these criteria:

~ the project must be technically sound, economically feasible, and cost efficient for the State and beneficiaries;


~ the project must offer Value for Money, relative to the alternative of providing the services by undertaking a traditional public works project; and

~ the project must be financially viable for prospective investors.

4.2.6 INDICATIVE TIMELINES FOR TENDERING A PROJECT

The following table summarizes the indicative timelines for the tendering of a project in Kuwait. The suggested timelines set out below are for illustration purposes only and may change from time to time according to practice.

TABLE 4.1: Indicative Timelines for Tendering a Project

Project Phase Main Activities Responsible AgencyActivity duration

(Estimated)Notable Points

Hiring the Transaction Advisor

(2-3 months*)

Preparing Request for Proposal (RFP) Documents

Competition Committee

2 weeks

Obtaining approvals from supervisory agencies (for hiring the Transaction Advisor)

2-3 months 2 weeks

Provide a sample contract and obtain the approval from the Department of Legal Advice and Legislation

6 months - 1 year 2 weeks

For appointments made directly by KAPP, an exemption in respect of the Law on Public Tenders (Law 49 of 2016) should be sought

Advertising the RFP KAPP 1 week

Submitting the proposals

KAPP

1 month

(from date of advertising)

Evaluating the proposals


2 weeks

Contracting the Transaction Advisor after obtaining the approvals

State Audit Bureau 3 weeks Subsequent observation





Feasibility Study Phase

(2 -3 months*)

Preparing the Feasibility Study

Competition Committee + Transaction Advisor

2 months

From the date of hiring the Transaction Advisor

Note: The Feasibility Study may be prepared by the Public Entity

Review and obtain clearance of the final report for the Feasibility Study

Competition Committee 2 weeks

Obtain approval of the final report for the Feasibility Study by the Higher Committee


2 weeks

Expression of Interest by Investors

(5 weeks**)

Preparing the Call for Expressions of Interest


1 week

Optional Phase

Reviewing the Call for Expressions of Interest


1 week

Translating the Call for Expressions of Interest

KAPP 1 week

Receiving Expressions of Interest from prospective investors

KAPP 2 weeks

Qualifying Investors

(3-4 months ***)

Prepare documents for qualifying investors


0

Prepare the draft Request for Qualifications

Coordinate with the Higher Committee and prepare the notice to be placed on the KAPP’s website

Review documents for qualifying investors


0

Approve documents for qualifying investors by the Higher Committee


0

Advertising qualification request

KAPP 1 week

Give, receive and evaluate documents for qualification of investors


1–3 months

Approve the results of the qualification of investors by the Higher Committee


1 week

Advertise the qualified investors

KAPP 2 weeks





Submission of proposals by the investors

(12 – 13 months *)

Prepare the RFP documents


1 month**** Starts with qualification

Review the RFP documents


1 month

Obtain approval of the RFP documents by supervisory agencies


2 weeks

Department of Legal Advice and Legislation

2 weeks

Advertise and issue the RFP documents

KAPP 1 month

Receive the proposals by the investors

KAPP 3 months***

Evaluate the proposals Competition Committee

2–3 months***Includes technical and financial evaluation and clarifications

Negotiating with the preferred investor


1 month

Obtaining approvals from the supervisory agencies

Department of Legal Advice and Legislation*****

2 weeks

State Audit Bureau 2 weeks

Announcing the identity of the successful investor

Approval of the Higher Committee

2 weeks

KAPP 1 week

* Duration may range depending on Time Necessary for obtaining the approvals by Entities as well as the time necessary to inquire about project proposal documents.

** Optional Stage

*** Estimated duration may increase for the qualification and presenting proposals phase based on the number of applicants

**** Estimated duration may increase depending on the nature of the project

***** If there is an adjustment in the contract after negotiation

4.2.7 FINANCING SOURCES, INCLUDING VIABILITY GAP FUNDING

Procurement documentation is dependent on identifying possible financing sources during the Comprehensive Feasibility Study. The source(s) of financing will be very much driven by the type of project and its probable Investors. Furthermore, different source(s) of financing (for example, commercial lenders, specialized funds)


may well have a considerable impact upon the terms of the PPP Agreement. In addition, some projects are more suited to on-balance-sheet financing, whereby the Investors will finance the project directly themselves rather than using an SPV structure, while other projects will be financed using limited recourse debt borrowed by the SPV. The latter financing structure typically requires much higher levels of due diligence. Given this, limited recourse debt is best used for those large high capital projects whose size justifies the cost and time involved in structuring a limited recourse transaction.

Sometimes a project may have significant economic benefits or urgent state requirement but may not be commercially viable. Under such circumstances, it may be necessary for the Public Entity (with the approval of the Higher Committee) to provide some form of financial support to the project to ensure that the project is commercially viable from the private sector’s perspective while at the same time still generating VfM for the Public Entity. This support may come in the form of Viability Gap Funding which reduces the upfront capital costs of the project to the private sector, thereby improving its commercial viability. However, at all times, the Public Entity must be able to demonstrate that, even with financial support, the project still generates VfM for the Public Entity, and the Public Entity would need to secure all required State approvals for such financial support to be provided for the project.

4.2.8 OTHER FORMS OF GOVERNMENT SUPPORT

Under certain circumstances and subject to approval from the Higher Committee, a project may require other forms of support that may include a minimum revenue guarantee or guarantees of the performance of the Public Entity’s obligations under the project agreement. However, since the State of Kuwait is a sovereign state with excellent globally recognized credit rating, all public entities are secured by the State and are obliged to conform to their commitments mandated within the PPP agreements.

4.3 FEASIBILITY STUDIES FOR UNSOLICITED PROJECTS

4.3.1 LEGISLATIVE ARRANGEMENTS FOR USP FEASIBILITY STUDIES

Feasibility Studies for USP Proposals are undertaken by the USP Proposers, after the Higher Committee has approved the proposal. The arrangements regarding the feasibility studies are set out in following provisions in Chapter 7 of the Executive Regulations:

Article 55—PREPARATION OF THE FINAL FEASIBILITY STUDY

Once the Concept Proposer is notified of the acceptance of its Concept, it shall commit to the following:

1 | Submit a Final Feasibility Study for the project addressing all the technical, financial and environmental aspects as well as other aspects as may be requested by the Authority, in accordance with the nature of the project, the


provisions of the Law and the Guidebook within a period of (6) six months extendable subject to the approval of the Authority.

2 | Settle the fee due for the analysis of the Final Feasibility Study.

3 | Present a request indicating the percentage of shares it wishes to own from the shares of the Public Joint Stock Company which shall be allocated to the Concept Proposer in a percentage not exceeding (10%) of the shares of the company to be established for the implementation of the project if the cost of the project exceeds sixty million Kuwaiti Dinar, without prejudice to its right to fully or partially renounce such request within a period not exceeding one month from the date of publication of the announcement of project procurement for investment in the Official Gazette.

Article 56—PREPARATION OF THE PROCUREMENT DOCUMENTS AND ASSURANCE OF CONFIDENTIALITY

The Authority shall in collaboration with the Public Entity(ies) stated in the decision of the Higher Committee prepare the project procurement documents in accordance with the provisions of the Law, ensuring the nondisclosure of confidential technical, economic and financial information of the project submitted by the Concept Proposer and specifically the technical designs of the project and any technique proposed for the implementation thereof as well as any other confidential information.

The principle of confidentiality shall not hinder the procurement of the project in accordance with the principles of free competition, whereby during the preparation of the project documents all the sufficient data and information to prevent the project’s monopoly by the Concept Proposer are provided, ensuring the competition thereon while being procured as per the standards of transparency and fairness.

Article 57—THE INITIATIVE

The approval by the Higher Committee of a feasibility study presented by a Concept Proposer and its consideration as an Initiative entails the granting of the following rights to its proposer:

1 | The reimbursement of the costs of the feasibility study as approved by the Higher Committee’s decision plus 20% of such cost or two hundred thousand Kuwaiti Dinars, whichever is less. Such amount shall be mentioned in the project procurement documents and shall be paid by the Project Company at Financial Close.

2 | A preference of 5% granted to its proposal which meets the terms of the project’s procurement documents over the value of the best proposal, unless the implementation of the project is to be undertaken through a Public Joint Stock Company.

3 | The allocation of a percentage determined by the Higher Committee of the shares of the Public Joint Stock Company not exceeding 10% of the shares of the company at their nominal value in addition to the issuance fee, to be deducted from the percentage allocated to the Investor under Clause (2) of Article (13) of this Law, if the project is implemented through a Public Joint Stock Company. The Concept Proposer that is considered an Initiative shall initiate the subscription to the shares allocated to it within a period not exceeding (15) fifteen


working days as of the day of its notification. If the Concept Proposer refrains from subscribing fully or partly, the provisions of the aforementioned clause shall apply, without prejudice to the Authority’s right to confiscate the guarantee it has submitted.

Article 58—THE DISTINGUISHED PROJECT

The Concept Proposer which Concept has been approved as a Distinguished Project shall have the right to be reimbursed only for the costs of the feasibility study, as per the decision of the Higher Committee, plus 10% of its cost as approved by the Higher Committee or one hundred thousand Kuwaiti Dinars, whichever is less. Such amount shall be mentioned in the project’s procurement documents and shall be paid by the Project Company at Financial Close.

4.3.2 FEASIBILITY STUDY ARRANGEMENTS FOR USP INITIATIVES

As indicated above in Section 3.3, and as set out in Section 57 of the Executive Regulations, for those USP Proposals that have been designated by the Higher Committee as Initiatives, the USP Proposer shall receive reimbursement of the costs of the feasibility study, plus a bonus of 20% of those costs (to a maximum of KWD 200,000) and, during the tender, an advantage of 5% of the best bid value or a share of the stocks in the Joint Stock Company, if applicable, not to exceed 10% of the shares’ nominal value.

4.3.3 Feasibility Study Arrangements for USP Distinguished Projects

As set out in Section 58 of the Executive Regulations, for those USP Proposals that have been designated by the Higher Committee as Distinguished Projects, the USP Proposer is only reimbursed for the costs of the feasibility study, plus a bonus of 10% of those costs (to a maximum of KWD 100,000).

4.3.4 Feasibility Study Arrangements for USP Projects that are Not Tendered

In situations where projects (both Initiatives and Distinguished Projects) do not proceed to the tender phase, without any fault of the Proposer, the Public Entity may, on a discretionary basis, reimburse the Proposer for the costs of the Comprehensive Feasibility Study. This will be elaborated in KAPP procedures.

7 1

CHAPTER

5

PROJECT PROCUREMENT

5.1 IMPORTANT CONSIDERATIONS IN THE PRE-PROCUREMENT STAGE

5.1.1 THE LEGAL FRAMEWORK FOR PROCUREMENT PROCESS

The most relevant Articles of the Law with respect to project procurement procedure start with Article 8, which reads, in part, as follows:

“The announcement shall include the Public Entity identified as responsible for the project, a short description of the project and its objectives, incentives to be provided to the contracting party, the PPP Model, its term and the deadline to receive the project documentation….”

Extracts from the relevant Articles of the Executive Regulations are presented below:

Article 13: PROCUREMENT STAGES—EXPRESSION OF INTEREST

The Authority may announce the Request for Expression of Interest for PPP Projects, as a procedure preceding the qualification proceedings, in order to assess the interest and willingness of the private sector to participate in the implementation of the project prior to undertaking the procurement proceedings, in the Official Gazette and other local or international media that are suitable with the nature of the project, and through the publication of the same on the website of the Authority.

The announcement shall include a short description of the project, its objectives and the proposed location for the implementation thereof – if any – the method for presenting the request and any other information or conditions related to the project. The duration for receipt of a Request for Expression of Interest shall be no less than two weeks from the date of publication of the announcement.


The Requests for Expression of Interest may be accepted through electronic mail.

The Authority shall review and study the Requests for Expression of Interest submitted by the Investors. The Authority shall, upon that study, decide on the feasibility for undertaking the proceedings set by the law and invite interested parties for Prequalification to participate in the competition for the implementation of the project or to refrain from undertaking such proceeding, in preparation to present a recommendation in this respect to the Higher Committee.

Article 14: INVITATION FOR QUALIFICATION

The Authority shall, following the approval of the Higher Committee on the PPP Project and the determination of the PPP Model and the method of procurement in accordance with the provisions of Article (8) of these Executive Regulations, in collaboration with the Public Entity appointed by the Higher Committee, announce the invitation for qualification for the project in the Official Gazette and at least two Kuwaiti dailies in both Arabic and English, and in local or international media as may be deemed necessary in accordance with the nature of the project, as well as publishing it on the website of the Authority.

The announcement of the invitation for qualification shall include the following:

1 | Determination of the Public Entity or the Public Entities relevant to the project.

2 | A short description of the project and its objectives.

3 | The required expertise for qualification.

4 | The contracting model and term.

5 | The fee due for the collection of qualification documents. The Authority may postpone the payment thereof until the submission of qualification requests.

6 | The duration fixed for submission of the requests for qualification, the address for its submission and the mail or electronic mail address as per the circumstances. The duration for submission of the qualification requests shall be no less than (15) fifteen days from the date of publication in the Official Gazette unless it was decided to undertake a Post-qualification in which case the duration shall be included in the duration for submission of proposals.

Article 15: TERMS FOR QUALIFICATION

Each investor wishing to participate in a project being tendered in accordance with the provisions of the Law shall prove its capacity to implement the project and fulfill its obligations in case it would be awarded the project through the competition and contracted in that respect.

The determination of the investor’s capacity is undertaken through qualification proceedings. The Higher Committee may either undertake a Prequalification or a Post-qualification process based on the recommendation of the Authority

7 3P R O J E C T P R O C U R E M E N T

and in accordance with the nature of the project, in order to ensure the proper selection of investors capable of implementing each project separately.

Article 16: PREQUALIFICATION

After the approval of the Higher Committee of the feasibility studies and qualification documents, the Authority shall announce the acceptance of requests for qualification from investors wishing to invest in a PPP Project through the Prequalification proceedings, in order to ensure the ability of the applicant for a request for qualification to implement the project, based on the terms and conditions specified in the qualification documents.

Article 17: POST-QUALIFICATION

The Higher Committee may decide to merge the qualification phase with the request of proposals phase; in this case the qualification of Investors wishing to invest in the project shall be considered a Post-qualification.

The terms of Post-qualification shall be similar to that of the Prequalification. The investor wishing to invest shall present the qualification documents in an envelope that is separate from the other envelopes containing the technical and financial proposals.

The envelopes of Post-qualification shall be opened prior to the opening of the technical and financial envelopes and a list of the qualified applicants shall be prepared and submitted to the Higher Committee for approval prior to reviewing and evaluating the technical and financial proposals.

The investors who do not meet the Post-qualification criteria may request the reimbursement of their bid bonds.

Article 18: QUALIFICATION DOCUMENTS

Taking into consideration the special nature of each PPP Project, the qualification documents shall comprise the following:

1 | Information for the parties wishing to apply for qualification indicating the means for preparation and submission of the request of qualification.

2 | A description of the PPP Project procured for investment including its location, nature and main features as well as the surface of the proposed land for project implementation, if any.

3 | A statement of specific expertise that the investor is required to meet in order to be qualified in the qualification phase.

4 | Qualification standards.

5 | The deadline for collection of qualification documents, indicating the date and hour thereof.


6 | The place and the method of submission of qualification documents; the Higher Committee may decide to accept them through means of electronic communication.

7 | The deadline for submission of qualification documents which shall be no less than (15) fifteen days as of the date of the publication of the announcement for qualification in the Official Gazette.

Article 19: REQUESTS FOR QUALIFICATION SUBMITTED BY CONSORTIA

Should a consortium of several companies apply for qualification, such consortium shall elect a leader to undertake through official proxies issued by the consortium members their representation before the Authority.

The consortium leader shall meet all the expertise conditions and the ownership ratio that shall be held by the consortium leader as predefined in the qualification documents.

When evaluating the requests for qualification submitted by consortia, the qualifications and capacities of each consortium member shall be considered and whether collectively they meet the qualifications and capacities or not. The request for qualification shall be reviewed based on the role of each member of the consortium in accordance with its proposed tasks in terms of design, construction, equipping/outfitting, operation, development, maintenance, qualification or financing, in accordance with the nature of the project and the adopted PPP Model and the terms stated in the qualification documents.

A consortium member may not participate in the qualification through more than one consortium except with the prior approval of the Authority.

Qualified consortium members may request that the Authority consent their transfer to another consortium, or to the formation of other new consortia formed of such members, provided that such new consortium meets the terms stated in the qualification documents.

Article 20: EVALUATION OF QUALIFICATION DOCUMENTS

Requests for qualification shall be evaluated based on the standards representing the required elements to be available in the request and relative weights of these elements, in accordance with the terms provided for in the qualification documents, specifically:

1 | Prior works of the applicant for qualification in the management, implementation and operation of PPP Projects.

2 | Similar expertise in terms of size and nature of PPP Projects in the sector in which the proposed project is included.

3 | The capacity of the applicant for qualification to secure technical and managerial requirements in order to prepare the required designs of the PPP Project when being procured.

4 | The capacity of the applicant to secure the necessary equipment and machineries for the implementation of the project.


5 | The financial solvency of the applicant for qualification and its ability to secure financing and funding.

1 | Any other terms and standards in accordance with the nature of the project.

Article 21: QUALIFICATION DECISION

The Competition Committee shall review and study the requests for qualification submitted by the investors, and it shall prepare a report addressing all of its review and the results of the evaluation of the qualification requests, as well as the investors that are approved to participate in the second phase of the procurement, the investors who are proposed to be excluded and the justifications of any such exclusions. A report regarding the same shall be presented to the Authority.

After reviewing the aforementioned report, the Authority shall present its recommendations with regards to the requests for qualification to the Higher Committee so that it may issue an appropriate decision in this matter. The Authority shall notify the investors of the final decision regarding their requests for qualification at the addresses stated in their requests.

Article 22: PROCUREMENT DOCUMENTS

The Public Entity in collaboration with the Authority shall prepare the project’s procurement documents in accordance with the provisions of the Law, and shall submit the same to the Higher Committee in order to issue an appropriate decision in this regard. The Authority may seek the assistance of local or international consultancy firms to review and prepare such documents.

The project’s procurement documents shall mainly include the following:

1 | Instructions to bidders.

2 | The Terms of Reference comprising the technical and financial terms and standards of the project and the formulae defined for the award of the project.

3 | The Confidentiality Agreement.

4 | The model Agreement Documentation(s) and its language, including the draft PPP Agreement and the lease agreements of the land, if any.

5 | The Letter Agreement – should the project be awarded to a consortium – and the Substitution Agreement allowing the substitution of the Investor in cases of default.

6 | Any other terms or documents in accordance with the nature of the project.


Article 23: INSTRUCTIONS TO BIDDERS

The instructions to bidders shall in particular include the following:

1 | Means for the preparation of proposals and the number of required envelopes and their content and place for submission. The Higher Committee may approve the submittal of Proposals through electronic means of communication which support the necessary confidentiality, as per the proceedings set by the Higher Committee.

2 | Specify the deadline for submitting proposals indicating the date and hour, provided that the duration for submission of proposals is no less than (90) ninety days from the date of publication of the announcement for request of proposals in the Official Gazette.

3 | The value of the initial bid bond, to be settled in Kuwaiti Dinar through a certified check or letter of guarantee issued or confirmed by a bank licensed to operate in the State of Kuwait as per the form provided in the instructions to bidders.

4 | Duration of validity of proposals and the method for extension thereof.

5 | The financial proposal must be fixed in the official currency of the State of Kuwait upon submission.

6 | Documents and information that the Investor submitting a proposal must include therewith.

7 | The required documents from any consortium submitting a proposal including a copy of the consortium agreement certified by the Public Entities and an identification of the person entitled to represent the consortium and its appointment document.

8 | Statement of amount of the required performance bond to be submitted by the Contracting Investor, and the submission thereof in the form of a letter of guarantee issued or confirmed by a bank licensed to operate in the State of Kuwait and indicating the wording of this guarantee and its time of delivery after the appointment of the Successful Investor along with its validity period and means of renewal.

9 | Statement indicating whether the PPP Project was procured for investment based on a Concept approved by the Higher Committee as an Initiative or Distinguished Project. A statement of the specified percentage set by the Higher Committee as a preference margin or the percentage allocated to the Proposer of the accepted Concept in the shares of the Public Joint Stock Company to be established for the implementation of the Project.

10 | Any other terms necessary in accordance with the nature of the project and the best practices for the completion of the instructions to bidders.


Article 24: THE TERMS OF REFERENCE

Taking into consideration the nature of the PPP Project, its type and PPP Model as well as the adopted method for competition and the specific considerations related to its implementation, the request for proposals document shall include the following:

1 | Detailed information regarding the project, including its specifications, proposed location for implementation and the specifications of the services to be provided through the project.

2 | Technical, financial, legal and environmental terms and other matters required for the submission of proposals and implementation of the project.

3 | The formulae adopted by the Higher Committee within the project procurement documents based on which the project shall be awarded, to be set in light of the relative technical, financial and legal weights and project risk allocation.

4 | Surface Area of the land allocated for the project, if any, and the price of its usufruct right, as well as any other assets existing upon the land or to be provided by the Public Entity to the Contracting Investor and whether the Investor will be paying any fee in return for the use thereof.

5 | A statement indicating the costs for the preparation of studies and the amounts due to the Concept Proposer, if any, as well as any other expenses that the Contracting Investor must settle for the benefit of the Authority at Financial Close.

6 | The incentives and exemptions to be granted for the project.

7 | A statement of criteria for the determination of non-negotiable issues considered as a Material Deviation that might affect the competitive ranking between accepted proposals.

8 | A statement of the number of envelopes comprised in the proposal. The envelopes shall be separate and signed by the Investor or its legal representative with a note on the back of the envelope indicating the content thereof.

9 | Any other terms required as per the nature of the project.

Article 25: THE DRAFT AGREEMENT

Taking into consideration the nature of each PPP Project, its type and the PPP Model as well as the adopted method for competition and the special considerations in connection with the method of implementation thereof, the draft PPP Project documentation shall, inter alia, include the following:

1 | The PPP Agreement.

2 | The land lease agreements, if any.


3 | The Letter Agreement.

4 | The Substitution Agreement.

5 | The Confidentially Agreement.

5.2 INITIATION OF THE PROCUREMENT PROCESS: CALLS FOR EXPRESSIONS OF INTEREST

KAPP announces a Call for Expressions of Interest in proposed PPP projects in order to know the extent of the private sector’s interest and desire to participate in the implementation of the project, before commencing subsequent tender procedures. Calls for Expressions of Interest shall be made through an announcement in the Official Gazette in addition to publishing the announcement on KAPP’s website.

The Call for Expressions of Interest shall identify the Public Entity that is responsible for the project, and provide an overview of the project and its purposes. The announcement shall also set out the proposed duration of the project; its suggested location; incentives to be provided to the Project Company, a description of the PPP Model; and such other preliminary information as deemed appropriate by KAPP. The time period for receiving Expressions of Interest shall not be less than two weeks following the date of the announcement.

Expression of interest applications may be submitted by e-mail or an official letter signed by the authorized personnel of the bidder.

KAPP will review the Expression of Interest submitted by prospective investors, and will determine if it is feasible to proceed with the pre-qualification process, and KAPP will then make a recommendation to the Higher Committee in this regard. Rules regarding the identification of Investors who are ineligible to participate in the bidding process are set out in a subsequent section of this Guidebook (Section 5.3.2).

5.3 PRE-QUALIFICATION

5.3.1 INTRODUCTION TO PRE-QUALIFICATION

The basic objective of pre-qualification is to ensure that bidders have the ability, technically and financially, to implement the project effectively and efficiently, and to fulfill all contractual obligations. Each bidder willing to invest in a tendered project shall, according to the PPP Law, prove its ability to implement the project and perform its obligations.

The qualifications of the prospective bidders are confirmed through the Qualification procedures, and the Higher Committee shall adopt either a Pre-Qualification or Post-Qualification procedure, based on KAPP’s recommendation and the nature of the project.


The Higher Committee may decide to combine the Qualification phase with the tendering phase; in this case, the Qualification of the bidders is considered to be a Post-Qualification. The same conditions of the Pre-Qualification shall apply in the Post-Qualification, and the prospective Investors shall submit their Qualification documents in an envelope separate from the ones containing the technical and financial offers. The Post-Qualification envelopes shall be opened before the technical and financial offers envelopes, and a list of the qualified applicants shall be elaborated and submitted to the Higher Committee for approval, before studying and evaluating the technical and financial offers.

It should be noted that, while the Old Law required that any companies not registered on the Kuwaiti Stock Exchange, and all foreign companies, to submit to a “pre-qualification” round, Article 34 of the new PPP Law now permits project companies to be foreign-owned, and it removes the pre-qualification provision for companies registered on Kuwait Stock Exchange. Hence, the pre-qualification round (for projects where a pre-qualification round is being undertaken) now applies to all interested parties, whether or not they are listed on the Kuwaiti Stock Exchange or are of foreign origin.

5.3.2 IMPORTANT CONSIDERATIONS IN THE PRE-QUALIFICATION STAGE

The following are some important issues that the Public Entity and KAPP shall consider while initiating the Pre-Qualification process:

Number of Pre-Qualified Bidders

To ensure successful bidding and implementation of the project, the number of Pre-Qualified bidders should be neither too low (one or two) nor too high (eight or more). A low number is a disadvantage, as competition for the project is greatly reduced. A high number reduces the chances of success for bidders which, in turn, may reduce their interest to bid for the project.

Having only one Pre-Qualified bidder does not mean that bidding cannot be conducted. It may, however, be an indication that the project has not been well structured or conceived, in which case, KAPP would follow the guidance below:

~ Ascertain the likely reasons for the limited interest, and revisit the Request for Qualification (RFQ) documentation and the Comprehensive Feasibility Study to see what assumptions could be revised to increase market interest. Any changes in the Comprehensive Feasibility Study must be evaluated for changes in affordability, value for money, and risk transfer.

~ Obtain revised approval from the Higher Committee if any changes to assumptions in the Comprehensive Feasibility Study are made.

~ Carry out a second Pre-Qualification exercise if the project assumptions have been changed and if a revised approval from the Higher Committee has been obtained.


~ If the Comprehensive Feasibility Study is not revised, carry out the Pre-Qualification exercise again, with a wider circulation and relaxed requirements for qualification to attract a suitable number of bidders.

~ Evaluate the current market conditions and current project tenders in the region, which may have gained bidders attention and preference over the project being offered in Kuwait.

Investors eligible to Participate in Bidding Consortia

Private Investors: All private local and foreign Investors (including companies listed on the Kuwaiti Stock Exchange, those not listed, and foreign companies), other than investors that have been sanctioned by the Kuwaiti Government (including Ministries, Departments, or Public Entities) or have been found guilty in any court of law for fraud or corruption-related crimes or restricted from participation due to a State policy, should be eligible to participate in the Pre-Qualification process.

Not-for-profit entities: Not-for-profit organizations are established under different laws in various jurisdictions and are called by various names, including company, trust or association of persons. Usually their income or assets are not distributable to its members or office bearers. These organizations are not ideal as investors or operators on a PPP Project, as their funding is usually dependent on various donors or governments. It is recommended that the RFQ documents would list such entities as being non-qualified for participation.

Public Entities: A basic aim of the PPP Law is to have Kuwait benefit from private sector innovation, expertise, efficiency, and financing; to sharing risks between the public and private sector; and to linking private sector remuneration with its performance. In principle, therefore, the use of Public Entities as financiers, equity participants, or subcontractors runs contrary to the principle of risk transfer in a PPP. Agreements formed between Public Entities are not true PPPs, but a different form of procurement. International best practice regards participation by Public Entities in an investor consortium to a PPP as uncompetitive and as skewing the risk profile of the project for the government.

However, there may be situations where a Public Entity that is a financial institution has a role to play in financing PPPs. They may have greater risk tolerance than private sector financial institutions, and be able, for example, to provide longer-term debt. It is also possible that a Public Entity can participate as a subcontractor. However, it should be ensured that no single bidder has an unfair advantage over others. All other forms of Public Entity participation should be explicitly excluded in the RFQ.

Conflicts of Interest:

The principle regarding conflict of interest is that all real or potential situations of conflict of interest should be strictly avoided. The following approaches should be followed to avoid such conflicts:

~ Transaction Advisor, Public Entity, KAPP, and the Higher Committee: All employees and members of the Transaction Advisor and their firms, the Public Entity, KAPP, Competition Committee or the Higher Committee are prohibited from participating in, advising or having any interest in any bidding consortium. Doing so will nullify the process of the bidding.


~ Advisors and lenders: To prevent conflict or potential conflict of interest among project advisors, lenders, and sponsors, no advisor to any consortium, or member of a consortium should fulfill the role of arranger, underwriter, or lead bank to the consortium.

~ Consortium members: No member (investor, Investor’s financial advisor, lender) of any consortium should be a member of, or in any way participate or be involved in (directly or indirectly), with another consortium at any stage of the procurement process. However, the restriction can be lifted for specific projects at the discretion of the Higher Committee for:

� any specialist supplier, if the restriction leads to a severely limited number of consortia;

� any noncore service provider or general supplier that is not a consortium member; and

� any commercial entity whose role is strictly limited to lending money or advancing credit to the bidding consortium.

5.4 PREPARATION, APPROVAL, AND DISTRIBUTION OF THE RFQ DOCUMENTS

5.4.1 PREPARATION OF RFQ DOCUMENTS

The RFQ document must allow prospective bidders to present appropriate information about themselves. It must also clearly set out the RFQ evaluation criteria and processes. Any special requirements of the Public Entity must be clearly stated, and individualized RFQ provisions must be developed for each PPP. The RFQ documents package, including its advertisement, should be prepared by the Transaction Advisor, reviewed by the relevant Public Entity, and approved by KAPP and the Higher Committee.

5.4.1.1 Contents of the Advertisement of the RFQ

The advertisement of RFQ should include the following information:

~ the Name(s) of the Public Entity (ies) concerned in the project;

~ an overview of the project and its purposes;

~ the required expertise for Qualification;

~ the contracting system and duration;

~ the fees for receiving the Qualification papers, if the Higher Committee has decided to impose such a fee; and


~ the time limit and the location of submitting the Qualification applications, and the relevant postal or email address.

It is to be noted that, in accordance with the Executive Regulations, the duration for submitting the Qualification applications shall not be less than (15) fifteen days following the date of the announcement in the Official Gazette, unless the process of Post-Qualification is being used.

Further, in accordance with the Decree No. 1 of 2015 regarding issuing the Executive Regulations of the IWPP Law (Law No. 39 of 2010) and its modifications, the project announcement specifications for IWPP Projects are listed below:

1 | Detailed information about the project, including the project's specifications, description of its different elements, project location, features and the services available on the site.

2 | Description of any services to be provided through the project and their specifications, their quantitative and qualitative standards and any indicators set for the project performance.

3 | Description of the land area designated for the project and its main price or usufruct, together with describing any other assets which the public authority or any other body affiliated to the State shall provide to the project and whether a consideration will be received.

4 | The form of the agreement that governs the relation between the board and the investor, together with its duration in accordance with the provisions of the law.

5 | The manner of getting the qualification request documents.

6 | Description of the cash consideration for getting the qualification request document.

7 | The method of submitting qualification requests, which may also be submitted through a secure means of electronic communication which provides the necessary confidentiality.

8 | The deadline for submitting qualification requests.

9 | The list of documents and data required to be submitted by the companies wishing to be qualified.

5.4.1.2 Contents of the RFQ Document

The RFQ document should include the following information:

~ disclaimer;

~ terms and conditions of issuance of the RFQ;


~ purpose of issuing the RFQ;

~ information about the project:

� a description of the project, including information as to the nature of the project, its main components, the proposed site, and any special expertise required for the implementation of the project;

� general information on the project’s area, its characteristics, and available services;

� land issues, including the area of land allocated for the project, and its rent and usufruct rights;

� a list of any other assets to be provided by the Public Entity or any other State entity, stating any fees to be collected and ways of calculation;

� defined performance parameters;

� defined legal requirements and statutory regulations related to the PPP;

� identified financing requirements and issues;

� identified revenue parameters, as available; and

� summary of the envisaged risk transfer.

~ Public Entity requirements for consortium membership;

~ procurement process;

~ stages and timelines;

~ clarification processes and briefing notes;

~ instructions to respondents;

~ format of submissions, including compulsory forms of response;

~ manner, date, and time of submission;

~ rules regarding late submissions;

~ status and composition of respondents;

~ disclosure of legal processes underway that affect bidding consortia;


~ grounds for disqualification;

~ bidder/consortium information requests covering:

� proposed consortium composition and structure (with roles of the members clearly spelled out);

� current workload of consortium members;

� skills and experience of consortium members and subcontractors;

� strength of the covenant among consortium members, subcontractors, and lenders;

� financial and market standing;

� equity, ownership, and directorship;

� commitment and capacity to meet the project timetable;

� ability to raise debt and equity and to provide security;

� project management capability;

� risk management capability;

� demonstration of understanding key project demands/complexities;

� previous relationship(s) with the Government; and

� quality assurance systems;

~ process of dealing with changes to the composition of consortia;

~ approach to the PPP and integration of deliverables;

~ the evaluation process, including methodology and evaluation criteria;

~ any concession fees the investor may have to pay;

~ the method of calculating fees to be paid to the investor by the Public Entity and/or the beneficiaries (or calculation of tariff to be paid by end-users) in return for any services delivered;


~ details of Bid Bond or Performance Bond required; and

~ the method of filing a grievance.

5.4.1.3 Consortium Formation and Evaluation Instructions

Where a consortium of several companies submits a Qualification application, the consortium shall assign a leader to represent the consortium members, in conformity with official proxies. The consortium leader shall satisfy the expertise conditions and other terms that shall be set out in the RFQ. When evaluating the Qualification applications submitted by consortia, the qualifications of each member of the consortium should be studied, and it should be taken into consideration whether or not the members jointly satisfy the Qualification standards and requirements. The Qualification application shall be studied considering the role of each member of the consortium, in conformity with its suggested tasks, including design, construction, installation, operation, development, maintenance, rehabilitation, or finance, consistent with the nature of the project and the arrangements between the consortium members, and in compliance with the terms of the RFQ. Consortium members shall not have the right to apply for Qualification within another consortium, without the prior approval of KAPP. Qualified consortium members may ask KAPP for permission to transfer from one consortium to another, or to create a new consortium, provided that the new consortium is compliant with the terms of the RFQ.

5.4.2 APPROVAL OF RFQ DOCUMENT

The draft RFQ documents prepared by the KAPP (with the assistance of the Transaction Advisor) in collaboration with Public Entity should be submitted to KAPP for preliminary approval and then referred to the Higher Committee for final approval.

5.4.3 ADVERTISEMENT AND DISTRIBUTION OF RFQ DOCUMENT

After approval of the RFQ document, the advertisement of the RFQ should be distributed by KAPP through the following:

~ broadcasting outlets;

~ the Official Gazette;

~ at least two Kuwaiti daily newspapers, both in Arabic and English;

~ other local and international media that are suitable having regard to the nature of the project; and

~ the KAPP website.


Press statements can also be issued. The IWPP Law (Law No. 39 of 2010) also states that the announcement of the invitation to submit qualification requests must be published in the Official Gazette as well as in some international and local newspapers and specialized magazines if this is considered necessary.

The timeframe for submitting the RFQ applications shall not be less than (15) fifteen days following the date of the announcement in the official gazette, except in the case of Post-Qualification transactions.

In addition to advertisements, the parties who submit Expressions of Interests must also be invited in writing to submit Pre-Qualification Application Documents. An open briefing session for potential bidders to introduce the Project and to stimulate private sector interest may also be conducted. Any such public briefings should be careful not to present any information not contained in the RFQ document. Depending on the size of the project, local and international ‘road shows’ may also be conducted to stimulate private sector interest.

The fee for obtaining the Pre-Qualification application documents is to be decided by the Higher Committee, which can determine the fee amount with reference to the following:

~ the cost of developing the Pre-Qualification application document;

~ the cost of printing the Pre-Qualification application document;

~ the cost of evaluating the Pre-Qualification documents submitted; and

~ the cost of making the announcements for the Pre-Qualification stage.

In order to encourage parties to obtain the Pre-Qualification application documents, the fee for obtaining the Pre-Qualification application documents is usually kept low; the cost of printing is a good reference for setting it. However, an additional fee may be charged for submitting Pre-Qualification documents, which could be decided with reference to the cost of evaluating them. In addition to reimbursing the expenses of the Public Entity/KAPP, this would also ensure that only serious bidders submit Pre-Qualification documents. All interested parties wishing to acquire the RFQ documents would have to submit a letter expressing power of authorization to purchase the package, as well as sign a confidentiality agreement regarding the contents of the package.

The participants for the RFQ stage may issue request for clarifications (RFC) regarding the information within the RFQ documents through the documented channels for communication with the Competition Committee and KAPP. All queries and answers shall be circulated to all participants within the duration set in the RFQ documents for issuing RFCs and submission of the applications for qualification. Certain bidder-specific queries shall only be replied directly to the specific inquiring entity, and such RFCs and answers will need to be considered part of the RFQ documents and the submitted applications for qualifications.


5.5 PRE-QUALIFICATION DOCUMENTS AND APPROVAL OF PRE-QUALIFIED PARTIES

5.5.1 RECEIPT OF PRE-QUALIFICATION DOCUMENTS

The Competition Committee shall receive all the Pre-Qualification application documents without opening the envelopes and promptly update the list of applicants. Pre-Qualification applications shall be submitted to KAPP by a competent person authorized to submit the Pre-Qualification application for the party it represents, and KAPP shall make the necessary arrangements for receiving the Pre-Qualification applications, and keeping them safe. Pre-Qualification applications shall not be opened before the meeting of the Competition Committee for this purpose.

Pre-Qualification application documents should be opened in the presence of the Competition Committee, KAPP and the Transaction Advisor, and the contents of the documents recorded.

5.5.2 EVALUATION OF THE PRE-QUALIFICATION DOCUMENTS

The Competition Committee reviews the Qualification applications submitted by the prospective bidders, based on the criteria, methodology, and relative weight of each factor as stated in the RFQ. Evaluation criteria must be based on the information requested from the applicants and must be included in the RFQ to focus investor responses and eliminate unnecessary information. The evaluation should be done in two steps:

Compliance check: The Transaction Advisor should prepare a checklist of documents required to be submitted in the RFQ and should note for each applicant whether all documents required have been submitted in the manner prescribed. Applications not prepared in the proper way as instructed shall be deemed non-compliant.

Qualification check: The Transaction Advisor should prepare an evaluation form for each applicant showing categories and subcategories of various evaluation criteria. The detailed criteria will vary from project to project. The evaluation could be done either qualitatively, using “good,” “adequate,” or “poor” for each category and sub-category, or quantitatively, by allocating numbers from 1 to 10 for each category and subcategory.

Each evaluation category should be assigned appropriate weighting on a project-by-project basis. Typically, the main areas for evaluation would include:

~ the applicant’s capability and strength:

� proposed applicant composition and structure;

� skills and experience of the consortium members and key subcontractors:


• design

• construction

• operations

• maintenance

• advisors

• suppliers;

� strength of the covenants between consortium members and with key subcontractors;

� financial and market standing; and

� ability to raise debt and equity and to provide security;

~ execution capability:

� commitment and capacity to meet the project timetable;

� project management capability;

� current workload of consortium members;

� quality assurance systems;

� risk management capability; and

� past track record on similar projects;

~ project awareness

� demonstration of understanding of the project’s key demands and complexities.

5.5.3 APPROVAL OF PRE-QUALIFIED INVESTORS

After the Competition Committee has reviewed the applications submitted by the investors, it submits to KAPP a report summarizing the results of the evaluation of the Qualification applications, and listing both the parties approved for participating in the next phase of the tender process and the disqualified parties, with the reasons of such exclusion with their detailed evaluation scores, if applicable.


After examining the report from the Competition Committee, KAPP submits the report to the Higher Committee, along with KAPP’s recommendations in regard to the Qualification applications.

5.5.3.1 Communications with Pre-Qualified Bidders

After the Higher Committee approves the Pre-Qualification of bidders, KAPP shall inform, as soon as possible, both the unsuccessful and Pre-Qualified bidders, by a communication in writing to the addresses specified in their applications, and KAPP shall also publicly announce the list of Pre-Qualified bidders in the Official Gazette and the local newspapers and identify them on the KAPP website.

5.6 PREPARATION AND APPROVAL OF THE REQUEST FOR PROPOSALS (RFP)

5.6.1 PREPARATION OF THE REQUEST FOR PROPOSAL

The Competition Committee (with the assistance of the Transaction Advisor) should develop the Request for Proposals (RFP) having regard, amongst other matters, to the relevant provisions of the Executive Regulations. The RFP package must be submitted to the Department of Legal Advice and Legislation and the Public Entity for review and approval. KAPP and the Competition Committee would then raise the RFP package along with the drafted advertisements for the Higher Committee for approval. To assist the Higher Committee, KAPP provides a memo including an executive summary of the RFP document and the evaluation criteria.

After approval of the RFP document, the advertisement of the RFP should be distributed by KAPP through the following:

~ broadcasting outlets;

~ the Official Gazette;

~ at least two Kuwaiti daily newspapers, both in Arabic and English;

~ other local and international media that are suitable having regard to the nature of the project; and

~ the KAPP website.

Press statements can also be issued. Law No. 39 of 2010 also states that the announcement of the invitation to submit qualification requests must be published in the official gazette as well as in some international and local newspapers and specialized magazines if this is considered necessary.


5.6.1.1 Overview of the Contents of the RFP

The RFP needs to be an effective two-way communication tool between the Competition Committee and the bidders. Therefore, the RFP must communicate project information and the Competition Committee’s requirements to bidders, and set out how bidders must communicate their proposals to the Competition Committee. The contents must be customized on a project-to-project basis.

A RFP will normally include six sections with the following elements (described more fully below):

1 | General Information to Bidders, including a detailed description of the project

2 | Instructions to Bidders

3 | Terms of Reference:

� the essential minimum technical and financial requirements that bidders must meet;

� the service specifications and Key Performance Indicators;

� payment mechanisms and penalty regimes;

4 | Model Agreement Documentation:

� a copy of the draft PPP Agreement and Shareholders agreement

� Land Lease Contracts, if any

� the Letter Agreement

� Step-in and Substitution Agreement

� Confidentiality Agreement

5 | Technical, Legal and Financial Information Required from Bidders

6 | Bid Evaluation Methodology:

� the criteria to be used for evaluation of the bids; and

� other bid formalities.

All RFPs also typically includes some appendices including: Conflict of Interest policy, the PPP Law and its Executive Regulations, studies, reports, schematics, etc.


5.6.1.2 General Information to Bidders

Description of the Project. The RFP must provide a detailed description of the project, including specifications; components; initial quantity estimates, if applicable; site information; and the characteristics and available services in the geographical area. The RFP must also communicate the Public Entity’s desired and envisaged outcomes for the project.

Land and Asset Details. The RFP must clearly state the area of land allocated for the project, its basic price and any associated usufruct rights; a list of any other assets to be provided by the Public Entity or any other agency of the State, stating the charges to be collected, if any, and method of calculation; and any fees the investor may have to pay for such rights or assets.

Disclosure of Unsolicited Proposal. The RFP must clearly state whether the project is being procured as a result of an Unsolicited Proposal, identify the Unsolicited Proposer if applicable, and state that a Comprehensive Feasibility Study has been conducted by the Unsolicited Proposer and has been accepted by the Higher Committee. The RFP must also quantify and disclose the bidding advantages which the Unsolicited Proposer will receive based on whether the project is considered an Initiative or a Distinguished Project subject to Article 20 of the PPP Law. The PPP Law states that, if the Higher Committee deems the project to be an Initiative, then the Unsolicited Proposer shall be reimbursed the costs of the Comprehensive Feasibility Study plus 20% of these costs (to a maximum of KWD 200,000) (see Section 4.3.1 of the Guidebook); receive an advantage of 5% over the value of the best proposal unless the implementation of the project is to be undertaken through a Public Joint Stock Company, and a maximum 10% share allocation in the public joint stock company. The allocation of such percentage is determined by Higher Committee. If the Higher Committee considers it a Distinguished Project, then the Unsolicited Proposer will only be reimbursed for the costs of the Feasibility Study plus 10% of those costs or 100,000 KWD, whichever is less.

External Framework. This part of the RFP should explain the regulatory, physical, political, and social environment in which the project is to take place.

Project Framework. This part of the RFP sets out the Public Entity’s view of the PPP and how it should be structured. Without being prescriptive, the Project Framework sets out the Public Entity’s view of the nature of the envisaged contracting parties. These will differ according to the anticipated type of PPP and its likely financing structure.

Project Assets. This part of the RFP sets out which assets are to be owned by the Project Company and which are state-owned assets allocated to the project for the duration of the Project Agreement, as well as any assets added thereto during the term of the project (see Section 6.2, below).

Procurement Framework and Timelines. This part of the RFP outlines the procurement processes and timelines. Governing legislation and regulations should be spelled out, with a statement as to the project’s compliance with these requirements to date. The processes must be comprehensively described, including any parallel processes, such as securing approvals and consents.


5.6.1.3 Instructions to Bidders

This part of the RFP provides a formal list of requirements, which all bidders must comply with. This will advise bidders on:

~ how to make a bid, the required number of sealed envelopes and their content, and where to submit the bid (in this regard, the Higher Committee may approve, according to its determined procedures, the submission of bids by electronic communication means that have the necessary confidentiality conditions)—it should be noted that all bids must be submitted in two separate envelopes: a technical envelope and a financial envelope, unless otherwise specified in the RFP;

~ the time allowed to bidders: there is a direct correlation between the time allowed for preparing bids and the quality of the bids, and bidders should, therefore, be given adequate time to conduct their due diligence, prepare all required documentation for pre-qualification, prepare proposals, and coordinate with financial institutions and subcontractors, so that the proposals are robust; the Executive Regulations have specified certain minimum timeframes and they do not prohibit a longer timeframe – accordingly, decisions in this regard should be made on a case-by-case basis, weighing the complexity levels of each project; for pre-qualification applications, the minimum number of days stipulated is 15 (Article 14 of the Executive Regulations), and for bid submissions the recommended minimum number of days is 90 days (Article 23of Executive Regulations);

~ the value of the Bid Bond that shall be paid in Kuwaiti Dinars, in the form of a certified check or a letter of guarantee issued or approved by a bank authorized to conduct business in Kuwait; however, it should be noted that if any bank or financial institution is a part of the investor consortium, then a certified check or a letter of guarantee issued by such bank or financial institution will not be acceptable;

~ the prescribed period of validity of bids and the mechanism for extending that period of validity;

~ the rules regarding the submission of financial offers in the Kuwaiti official currency;

~ the documents and information that bidders shall attach to their proposals;

~ the documentation required from any bidding consortium, including a copy of the Consortium Contract, certified by the official authorities, and the name of the consortium representative with a copy of the proxy authorization;

~ the value of the Performance Bond required from bidders, which shall be submitted in the form of a prescribed letter of guarantee issued or approved by a bank authorized to conduct business in Kuwait, the date for submission of the bond following the election of the winning bidder, its validity, and its extension mechanism;


~ the tax exemption list which is set out according to the nature of the project and should be approved by the Higher Committee and included in the PPP agreements; and

~ any other necessary conditions, considering the nature of the project and best international practices.

Requirements Related to Third Parties. It is frequently the case that a PPP project will involve third parties, such as a municipality or a utility. Third party relationships require communication among related parties during bidding, and a clear, specific third-party agreement after all issues are decided. The RFP should advise bidders of these requirements, preferably with examples of the types of agreement to be drafted.

Data Room. The RFP should advise bidders of the arrangements that have been made for accessing the data room containing information regarding the project. The Competition Committee should make available in the data room as much information as possible to facilitate the bid process, but should not warrant the validity of the information; rather, all information should be verified by the bidders. This is a crucial element of risk transfer, and has implications for the PPP. RFP provisions for the data room should be carefully drafted to make it clear that there are no warranties on the information unless the Public Entity has decided to the contrary based on a careful consideration of Value for Money.

Environmental and Social Impact Assessment (ESIA) Data. The RFP should provide information on all ESIA processes to be carried out, and set out the requirements for the work to be performed by the Project Company.

Bidder Due Diligence. The RFP should emphasize the importance of bidder due diligence before bid submission. Any unverified assumptions by a bidder at submission stage will delay financial closure and may well jeopardize the entire procurement process. Since very little, if any, project information will be warranted by the Competition Committee, the Public Entity or KAPP, bidders’ due diligence must be thorough and must include a host of technical, financial, and legal due diligence, and the procurement timetable in the RFP should reflect this. In addition, the RFP should set out the arrangements for site visits by the bidders.

Defined Terms. The RFP must clearly list all the definitions used throughout the documents. This is to ensure clarity. The definitions must be the same as those used in the draft PPP Agreement.

5.6.1.4 Terms of Reference

Essential Minimum Requirements

It is necessary to define the minimum specifications that can be expected from a bid for it to meet the predefined project objectives, as established in the Comprehensive Feasibility Study. Accordingly, the RFP should normally set out at least the following minimum requirements.

Technical Requirements: including all essential technical components throughout the lifecycle of the service, and the minimum operational requirements.


Legal Requirements: including the Public Entity’s requirements for the types of participant in the consortium, bidder details, term sheets or draft first-tier subcontracts.

Financial Requirements: including a demonstration of affordability, risk assumption, funding by the investors, loan term sheets, and minimum insurance requirements.

Price Requirements: including information on availability payments/tariffs/user charges etc., and share purchase prices.

These minimum requirements will establish what constitutes a compliant bid. Bids that do not meet these requirements will be rejected during the evaluation process. However, the requirements must not stifle innovation or be so onerous that otherwise solid bids are eliminated unnecessarily.

Disclosure of Affordability

A statement of affordability at the Request for Qualification stage sets out the amount of money the Public Entity is willing to pay (capital contributions and unitary payments) or the amount the end-user would be likely to pay (or can afford to pay). Disclosure of affordability to the bidders has both advantages and disadvantages; the decision should be made on a case-by-case basis after careful consideration. The greatest benefit of disclosure is that it reduces the risk of unaffordable proposals, encouraging bids that are focused on achieving maximum Value for Money. In the absence of a common understanding of the affordability constraints, bids will be extremely varied and evaluation will be difficult. Correspondingly, the disadvantage of disclosure is that competition on price is likely to be more limited and may not result in receiving the lowest expected bids.

Land Allocation

The PPP Law and its Executive Regulations stipulate the following with respect to land allocation:

~ In the event that the project is being implemented on State-owned property, the term of the agreement, and the value and term of the usufruct right over the land shall be determined in advance in the Terms of Reference, and the term of the usufruct right over the land shall be aligned with the investment's term. In such case, the value of the usufruct right shall be evaluated in accordance with the nature of the project, its usage and the Comprehensive Feasibility Study.

~ Any request to allocate land for the project should be included by KAPP in the recommendation to approve the tender submitted to the Higher Committee.

~ The Request for Proposals shall include the project’s land surface, if any, the value of its use, and any assets thereon or that will be provided by the Public Entity to the Project Company, and whether any sum will be paid in return for their use.

The Comprehensive Feasibility Study will have involved detailed investigations into the status of any land claims, servitudes, long leases, and constraints, as well as investigations into geotechnical conditions, existing


contamination, utility service availability and capacity, and the environmental and heritage status of the land. The Public Entity and KAPP should be proactive in obtaining all necessary filings and approvals to avoid long delays later. Land issues are also at the forefront of the bidders’ minds: they want certainty in regard to their use of the land over the period of the PPP. Information on land issues should be given to bidders in the tender documents.

Existing Public Entity Assets

In cases where existing Public Entity assets are to be incorporated into the PPP Project, bidders should be provided access to all information on the assets, including their conditions and their maintenance records. Existing Public Entity assets are a separate risk category, and bidders may be unwilling to accept performance and availability risk if they do not have access to detailed information on which to base their due diligence.

Asset Replacement and Disposal

Upon expiry of the agreement's term, the ownership of the project and facilities shall be transferred to the State, along with all its components at no cost or compensation, excluding the assets owned by the Investor as set out in the agreements, which shall not be transferred to the State or which may be transferred to the State for a specified price or compensation. The agreement shall regulate the liquidation/termination of the project and its transfer to the State.

Service Specifications

The service specifications are a further refinement of the services determined in the Feasibility Study. All the outputs required to provide the service should be specified in the RFP. These service specifications will form the basis of Service Level Agreements (SLAs), which are schedules to the PPP Agreement and will specify the services to be performed by the Project Company (or, in particular circumstances, by the Public Entity). At the RFP stage, there should be draft SLAs for all service elements. Some requirements may be blank because the bidders are required to populate them in accordance with the service specifications; the remainder will be set out by the Public Entity. The requirements being filled in by bidders will typically allow bidder variation, unless that particular requirement is set as an essential minimum requirement. The following guidelines illustrate possible approaches for specifying the PPP services and facilities:

Input specifications. Nearly all projects will have some input specifications but, in a PPP project, these should be minimized. It is essential to identify these up front and classify them separately in the RFP, because where the Public Entity has specific requirements for a facility that it will take over at the end of the PPP Agreement, it may require an aspect of the project to be created in a specific way. However, input specifications should be kept to a minimum, as they may adversely affect operational efficiency and/or the design of the facility. All input specifications create constraints on bidders, so it is necessary to carefully consider their appropriateness before including them in an RFP.

Output Specifications. Services and facilities specifications are generally expressed as outputs and outcomes. For PPP projects, a good set of output specifications encourages the achievement of value for money, innovation, risk transfer, whole life asset performance and an effective linkage of performance criteria to the payment


mechanism. However, too many complex KPIs, which are difficult to monitor, measure and implement, can be counterproductive. Very rigid specifications could hinder innovations and not allow appropriate risk allocation. To mitigate these pitfalls, it is imperative that output specifications need to be aligned with the nature of the PPP project that is being undertaken. Also, foreseeable changes in circumstances should be addressed by some pre‐agreed framework to facilitate negotiation.

Condition of Asset Specifications. The condition and value of assets at the end of the project term is of great importance to the Public Entity. As the assets will revert to the Public Entity, they must be in a specified condition, which dictates replacement and maintenance cycles as well as financial assumptions such as depreciation. The condition is normally expressed as “remaining life” or “already utilized life,” as determined by industry norms or as agreed between the Public Entity and the Project Company in the PPP Agreement.

The RFP should set out objective standards that are measurable and consistent with best practice, making extensive use of specifications applicable to all standard components of the project. These could be construction specifications and standard operational requirements (e.g. ISO standards). It is important to select appropriate standards with caution, based on suitability for the project, industry usage, etc.

Key Performance Indicators: The performance measurements should be mentioned in the RFP and should be objective and measurable. The RFP and the PPP Agreement should define:

~ detailed Key Performance Indicators (KPIs) that set the standard of performance required;

~ the method of monitoring and measuring performance against the defined KPIs;

~ what performance information will be required, how it is to be collected, and by whom;

~ the Public Entity’s rights to carry out audits or spot checks;

~ when performance measurement will commence;

~ how the results of the performance measurement will be reported and acted upon;

~ the consequences of poor performance and repeated poor performance; and

~ any updates on the contract management process.

Payment Mechanisms and Penalty Regimes

Where relevant, the procurement documents must clearly set out the structure of the payment mechanism. Payments to the investor can be in the form of availability payments (also known as a ‘Unitary Payments’) from the Public Entity, volume payments (i.e. a ‘User Fee’), or a combination of the two. Each has different characteristics. Unitary Payments from the Public Entity provide greater certainty to the Investor than User Fees because they do not require the investor to assume demand or collection risk. They also allow the Public Entity to manage


performance better by making deductions for nonperformance by the investor. However, a Unitary Payment structure means that the Public Entity has an ongoing direct liability to pay the Unitary Payment throughout the term of the concession. On the other hand, User Fees are susceptible to demand and collection risk and, as such, investors will typically be more cautious when bidding on projects where revenues are based on User Fees. This may potentially reduce the VfM of the project and, in some cases, an investor may require the underwriting of demand risk by the Government.

In cases where the Public Entity or another state agency is purchasing services from the Project Company and is paying a Unitary Payment10, the RFP must detail the payment mechanism, which should include information on the following issues:

~ an appropriate indexation to respond to inflation;

~ a mechanism for penalizing partial or complete failure of the availability and performance of the service, by means of penalty deductions; and

~ a mechanism for dealing with changes to service requirements.

5.6.1.5 Model Agreements

Article 25 of the Executive Regulations stipulates a minimum number of agreements that form the PPP contract, which includes the following:

1 | The PPP Agreement.

2 | The Land Lease Agreement, if any.

3 | The Deed of Covenant (also known as the Letter Agreement): After the approval of the Higher Committee on adopting the recommendation to choose an investor as a winner, the investor will be required to sign, with the concerned Public Entity and with KAPP, the Deed of Covenant, to which the agreed Contract Documentation is attached. However, such documents, except for the Confidentiality Agreement, shall not produce any legal effects or be binding to the State, until the conditions precedent to contracting have been satisfied, as stipulated in the Deed of Covenant. (Executive Regulations Definition and Article 45)

4 | The Step-in and Substitution Agreement: This is a combination of the Lender’s Step-in Agreement (which gives the lender the right to step into and continue the contractual relationships of the sponsors in the event of termination of the PPP Agreement) and the Substitution Agreement (which is the agreement by the contracting investor to replace the contracting investor with another investor with the same or better qualifications, and on the terms of reference on which the Project was based, for the completion of the PPP Agreement). It is executed between three parties- the Public Entity, the Project Company and the security agents of the Lenders.

10 Sometimes referred to as a “Performance Payment,” an “Availability Payment,” or an “Off-Taker Payment.”


5 | The Confidentiality Agreement: Under this agreement, the bidders, KAPP and the Public Entity all agree to keep the exchanged information for the implementation of the contract confidential, which shall be signed before receiving the documents of the RFP and remain in effect till the time of formation of the Project Company.

The RFP must include a draft PPP Agreement (and related agreements, such as the Power Supply Agreement, Power Purchase Agreement in a power generation project) and other agreements mentioned above, which allows for highly structured bidder inputs. The draft PPP Agreement and other associated agreements should be developed carefully by the Transaction Advisors, considering international best practices.

It should be noted that KAPP is not a party to any of the agreements except the Deed of Covenant and Confidentiality Agreement.

In particular, the Public Entity should consider the following issues:

~ warranties that may be required from the Investor in connection with any intellectual property included in the project assets (for instance, when the Project Company is required to provide an Information and Communications Technology system in a hospital).

~ the various kinds of liabilities against which the Public Entity should seek to be indemnified;

~ whether there are any circumstances peculiar to the project which would justify the Public Entity granting indemnities to the Project Company;

~ whether the Public Entity should reserve the right to exercise control over the employees of the Project Company; and

~ the Public Entity’s need to use the intellectual property of the Project Company during any Public Entity step-in period and/or after the termination of the PPP Agreement.

The RFP should also highlight the specific areas where bidders are being asked or allowed to provide input or comments on the draft PPP Agreement and the associated agreements.

Additionally, Article 26 of the Executive Regulations sets out the following mandatory elements in the PPP Agreement:

~ the subject of the agreement;

~ the term of the agreement including the Construction Term and the Investment Term;

~ the commitment to develop the project;

~ the identification of the services and the cost accrued thereon;


~ declarations, guarantees and undertakings;

~ operation proceedings (meetings between the Project Company and Public Entity during the course of the operation);

~ testing and method for evaluation;

~ the operation of the project;

~ accounting method and the currency for payments;

~ insurance arrangements;

~ reports and records;

~ the assignment;

~ events allowing the termination of the agreement without any notification or judicial order;

~ the liquidation of the project and the termination of the agreement for public interest;

~ the basis for indemnification;

~ the approved language of the agreement;

~ dispute resolution methods;

~ the usufruct right of any in-kind assets provided by the state;

~ the technical, environmental, financial and economic terms of the project;

~ security and safety conditions; and

~ any other terms and conditions determining the relationship between the parties and their obligations.

5.6.1.6 Technical, Legal and Financial Information Required from Bidders

The RFP must clearly set out all information required from bidders as to the technical, financial and legal

The RFP should ask for at least the following information and commitments from bidders:

~ A full disclosure of the makeup of the bidding consortium, including sponsor, and parent companies.

1 0 0 K U WA I T P U B L I C - P R I VAT E PA R T N E R S H I P P R O J E C T S

~ All technical aspects, including all relevant service details. Bidders should be required to prepare the Service Level Agreements (SLAs) that will be part of the PPP Agreement. Where the Public Entity has not specified SLAs as essential minimum requirements, they must respond to the service and standard specifications in the RFP. To simplify the process of preparation, the SLAs should be in prescribed schedules to the draft PPP Agreement as well as in the main body of the bidders’ proposals. The form and substance of the SLAs will vary from project to project, but the Public Entity and its Transaction Advisor must take great care in developing service specifications into their final form in the draft PPP Agreement.

~ Level of financing commitment. The bidders should be asked to provide information as to who will provide the private finance and as to how firm is the commitment to fund debt and equity. The level of required funding commitment will be determined, to some extent, by the quality of the RFP and the Feasibility Study. Proposals that are noncommittal on financing will likely result in protracted negotiations.

~ Corporate governance arrangement. The bidder’s commitment to corporate governance should be demonstrated with a presentation of a detailed corporate governance plan for the Project Company as well as include copies of Shareholding Agreements of the Holding Company (“HoldCo”). The members of the consortium form a HoldCo so that, at a later stage, the HoldCo can become a shareholder in the Project Company, along with the other shareholders of the Project Company i.e. the Public Entities and Kuwaiti Citizens/KAPP.

~ Financial structure. The RFP must require bidders to submit financial models with adequate details that allow the Competition Committee to thoroughly analyze the proposal in detail. The response from bidders will depend on the nature of their approach to funding. Corporate finance will be provided from the balance sheet of a private company, while project finance will utilize limited-recourse debt funding to a special purpose vehicle. Regardless of the differences, the Competition Committee will need sufficient information to be able to analyze the funding structure and to determine whether it can be provided and sustained throughout the project. Bidders must demonstrate in their bids how the interest rate risk will be managed by means of hedging arrangements and how their interest rate hedging arrangements, if any, will achieve value for money.

~ Security requirements. The RFP should clearly stipulate the type as well as the amount of any security that will be required from the winning bidder, and request that each bidder cost this security as a separate component of its total bid price. This should include security against late service commencement and for maintenance obligations.

~ Contents of the financial models. Critical information is contained in bidders’ financial models, and the RFP should specify the format in which this information is to be shown, to allow the Competition Committee to compare a bidder’s model with the Comprehensive Feasibility Study model as well as other bidders’ models. The checklist below needs to be carefully refined for each project. Each financial model must:

� be presented in electronic and hard copy formats and be compatible with a specified software program;

� be accompanied with a thorough and detailed explanation of the model and how to operate it;

� disclose clearly all macro, micro, and general assumptions;

1 0 1P R O J E C T P R O C U R E M E N T

� have a base date as specified in the RFP—as the value of money changes, the RFP must set a specific point in time which is common to all bids;

� be presented on a monthly basis for the development period, and thereafter on a semiannual basis;

� provide annual summaries for each year through to the expiry of the PPP Agreement;

� present all required data in nominal, real, and net present value (NPV) terms (using the discount rate specified in the RFP;

� provide the bidding consortium structure, or corporate project structure, in detail;

� provide a detailed source and application of funds table for the project, including capital expenditure, total operating and maintenance (including replacement) costs, and a detailed breakout of all revenue assumptions and calculations, whether from unitary payment or through user charges;

� provide details of amounts to be paid to the Public Entity for land allocated to the project or usufruct rights, or any other State-owned entity for assets allocated by any of them to be used in the project, and to the Public Entity for the legal rights to carry out the project, either as a specified sum or a percentage of earned profits;

� provide the financing structure of the project, including types and proposed levels of debt and equity; a financing plan and financing assumptions schedule identifying all sources, amounts, and application of finance; conditions, terms, base costs, margins, and fees;

� provide the likely equity input of each member of the consortium, with the percentage of total equity it represents;

� provide equity and shareholders’ loan details, which should include: the source of funds, the amount of funds which shareholders are prepared to commit, and the timing of their contributions—alternatively, in a corporate finance structure, a full set of financial statements for the companies providing funding must be provided;

� provide the cost of debt in a project finance structure or a ring-fenced corporate finance structure, clearly detailing the level of fees and margin, the basis for and factors comprising these fees, including a debt schedule for each credit facility, a drawdown schedule, interest paid, fees, and repayment schedules;

� provide the basis and costs of proposed interest rate hedging arrangements;

� provide the inflation assumptions;

� identify any foreign-denominated goods or services, and provide the foreign currency exposure, hedging strategies, and exchange rate computations;


� provide the basis for capitalization of interest;

� provide a comprehensive and detailed explanation of all tax treatment assumptions;

� provide all the key output ratios and return categories;

� provide balances of all reserve accounts and insurance structures;

� provide forecast balance sheets, profit and loss, and cash flow statements;

� calculate the net present value (NPV) of real revenues using the discount rate specified in the RFP;

� calculate the projected internal rate of return (IRR) before financing and tax, in both real and nominal terms;

� calculate real and nominal return on equity as compensation to reflect the base case return on equity for the entire duration of the PPP Agreement;

� provide sensitivity analyses of capex, opex, interest rates, grace periods of principal repayment, maturity of debt, inflation, devaluation of Kuwaiti Dinars and currency treatments;

� indicate the basis and cost of risk pricing; and

� for project finance PPPs, also set out the proposed debt to equity ratio, annual debt service coverage ratios (DSCR), loan life coverage ratio (LLCR), and project life coverage ratio (PLCR).

5.6.1.7 Evaluation Methodology

The RFP should stipulate broad categories of evaluation rather than detailed scoring methodologies or point allocations, since the latter lead to proposals being tailored to the evaluation, not to the best value for the project. The number of points allocated to each category or subcategory should not be disclosed in the RFP. The process and evaluation methodology should, however, be set out so that bidders have the assurance of an auditable process with checks and balances.


The RFP should specify that the technical and price elements of the bid will each be scored out of 100 points. The scores achieved will be integrated into the bidder’s overall score, using a simple mathematical weighted average formula: A *(technical score/100) + B* (financial score/100) = C

where:

A is the weighting for technical (between 50% and 70%);

B is the weighting for financial (between 30% and 50%); and

C is the total score achieved by the bidder.

For the purposes of applying this formula, “technical” refers to all project factors under evaluation other than the financial. The alternative technical and price weightings will vary from project to project, determined during the Comprehensive Feasibility Study and the preparation of the RFP. In all cases, the technical bid should carry more weight than the price bid.

Minimum evaluation categories under the technical and financial elements are set out below. Suggestions are given for further subcategories that need to be refined on a project-to-project basis. The evaluation will also consider the overall integrated solution offered by each bid.

A. Technical Considerations

Technical considerations during the development phase:

~ extent, quality, safety, cost effectiveness, functionality, and innovation of designs;

~ level of design and robustness of cost estimates, including long-term planning if future expansions or developments are required;

~ impact on social and biophysical environment and compliance with environmental legislation;

~ deliverability and time schedules;

~ integration of design, development, and operations with a clear commissioning program; and

~ the quality management systems proposed by the bidder.

Technical considerations during the delivery phase:

~ the extent to which proposed performance targets and measurement systems exceed minimum specifications;

~ the operating methodology;


~ the quality and type of proposed services to end-users- and a long-term marketing/commercial growth plan for revenue-generating PPPs;

~ the extent to which the bidder’s asset management and maintenance practices support the project objectives;

~ the quality of proposed management structure, staffing, systems, and practices;

~ the quality of safety plans, including use of proven technologies;

~ integration of the project with existing services;

~ the quality of the management systems proposed by the bidders;

~ compliance with environmental legislation;

~ compliance with the Public Entity’s monitoring and reporting requirements;

~ the ease of project operation, without or with minimal, easily surmountable, complications; and

~ the overall quality of services, installations, and facilities to be provided by the project, their conformity with specifications and performance indicators required in the RFP, and measures to maintain that quality.

B. Legal Considerations

The legal considerations include:

~ the robustness of the bidders’ SPV structures;

~ are bidders’ responses or representations in the proposal reflected in their structures and shareholders’ agreements;

~ the level of commitment of each consortium member to the consortium, and the equity participation of each member; and

~ the mark-ups (i.e. the proposed amendments) of the draft PPP Agreement (and other relevant contracts, for instance, fuel supply contract in a power project) and the risk impacts of the proposed mark-ups.

C. Price (or Financial Bid):

This is distinct from the financial aspects of the proposal (see below) which are part of the Technical Bid. The financial aspects (covered above) relate to how and on what terms the Project Company is going to raise funds, the appropriateness of cost assumptions, and the quality of financial risk mitigation strategies. In contrast, the Price or Financial Bid broadly refers to the cost of the project to the Public Entity (or any other State agency)


and the users. It includes the fee for land usage rights and subsidies. The Executive Regulations require that the Price or Financial Bid be taken into account as a distinct element in the evaluation of bids, including the following considerations:

~ end-user prices/tariffs expected to be shouldered by beneficiaries of any services or products provided by the project for the duration of the PPP Agreement;

~ amounts to be paid by the Public Entity to the Project Company over the duration of the PPP Agreement in return for services provided, if applicable;

~ amounts to be paid to the Public Entity by the Project Company over the duration of the PPP Agreement for land rent (usufruct rights), or to the Public Entity or any other State-owned entity for assets provided by either entity for use in project execution and operation, as applicable; and

~ any amounts to be paid by the Project Company for granting the right to execute and operate the project, whether a fixed amount or a percentage of the Project Company’s expected profits.

Other Financial Considerations:

~ total project cost in relation to the affordability constraints;

~ the realism of operating and capital expenditures, including an assessment of whether the quality management systems have been costed in the financial model;

~ the cost effectiveness of services, installations, and facilities to be provided by the project, as compared to the financial bid;

~ the robustness of the financial proposals, including their sensitivity to changes in operating and maintenance costs, currency fluctuations, inflation, interest rates, and cash flow profiles;

~ the robustness of the financing structure;

~ the level and nature of equity in the financing structure;

~ the level of commitment demonstrated by the debt and equity providers and the terms and conditions linked to the provision of the financing;

~ the level of risk assumed, and deviation from the terms of the RFP;

~ the cost, level, and nature of the proposed insurance coverage; and

~ the risk profile proposed by bidders, which should be tested in relation to the nature and extent of the risk, the likelihood of risk and its mitigation.


Overall integrated solution:

In practice, there will be a different sub-evaluation team (i.e. a subcommittee of the Competition Committee) that will be conducting due diligence in their specific areas (technical, legal, financial, and so on) and providing inputs to the formal evaluation structures to allow them to take more informed decisions. However, at the end of the process the Competition Committee must ask the question “Do all the components of the proposal add up to a single integrated solution capable of delivering value for money to the Public Entity?” In other words, is what is being said in the technical section properly costed in the financial section? Is the risk structure that the bidder says it will undertake properly reflected in the legal (contract mark-up) section?

5.6.2 APPROVAL OF THE REQUEST FOR PROPOSAL

A complete draft of the RFP document, including the draft PPP Agreement, must be submitted by KAPP to the Higher Committee for approval, once the approval of the Department of Legal Advice and Legislation has been obtained. The RFP shall not be distributed to Pre-Qualified bidders until such approvals have been obtained.

5.6.3 IMPORTANT CONSIDERATIONS FOR MANAGING THE BID PROCESS

5.6.3.1 Anti-Corruption

Due to their size and complexity, PPP projects are at considerable risk of being affected by corrupt activity, or at least by the perception that corrupt activity is present. The Competition Committee must sign off on an anticorruption policy for the project, with clear requirements and processes for dealing with such activities. The procurement plan and the bid processes must have the built-in safeguards of disclosure, a code of conduct, structured oversight, and internal and external audit.

5.6.3.2 Disclosure

All members of the Competition Committee, and the Transaction Advisor, must disclose any potential conflict between their personal and family interests and those of the project. This disclosure must be evaluated by the General Director of KAPP. An appropriate response must be formulated and implemented, such as removal of the official from any position where the conflict of interest could affect a decision.

5.6.3.3 Code of Conduct

All the members of the Competition Committee, and the Transaction Advisor, must sign a code of conduct that requires compliance with a range of ethical requirements in the best interests of the project. All Pre-Qualified bidders must also sign a similar code of conduct which is an international best practice. In addition, there should


be Terms of Reference drawn up for the members of the Competition Committee, so that they are fully aware of their rights and responsibilities, and know the scope of their activities.

5.6.3.4 Internal and External Audit

It is essential to provide for an internal and external audit of the bid process by appointing an independent auditor. The actual bid process should be evaluated against the procurement plan set out to ensure that all processes were properly followed. This is essential from the perspective of ensuring transparency and good governance practices, and the emphasis should be on compliant processes. Auditing the process of evaluating the proposals submitted by the bidders is of utmost importance to avoid any subsequent complaints . In practice, SAB does the external audit at the preferred bidder stage.

5.6.3.5 Prohibited Suppliers

The Government of Kuwait should maintain a list of prohibited suppliers of goods and services. These sanctioned companies are not allowed to compete for Government business, including PPPs, for prescribed periods of time. Where necessary, the RFP should also state the approved vendors of technologies or materials as stated from the Public Entity to be qualified to be supplied in the project.

5.6.3.6 Security Environment

It is essential to include in the procurement plan a security plan to prevent all forms of industrial espionage. The plan should include protection of document confidentiality, secure meeting rooms, and similar measures.

5.6.3.7 Bidders’ Conferences

The Competition Committee should convene one or more Bidders’ Conferences, during which Pre-Qualified bidders may ask questions and offer comments in respect of the RFP. All Bidders’ Conferences must be conducted according to predetermined written rules, and must be recorded. This should also be done when conducting a two-stage bidding process and the committee, in this situation, may request a meeting with individual bidders to discuss and clarify the initial bids.

5.6.3.8 Questions from Bidder and Notes to Bidders

In addition to questions asked during the Bidders’ Conferences, bidders may also submit questions, in writing, to the Competition Committee. Answers to bidders on confidential questions related to their proprietary technical solutions should be provided only to that bidder; all other answers should go to all bidders, together with the question. While any clarifications from/to bidders will be documented as part of their bids, such clarifications


may or may not constitute an amendment to the bid. The bidders are to abide by the set duration for submission of questions and receive clarifications before the submission of the bid.

The Competition Committee may also issue Notices to Bidders, to communicate decisions or notify bidders of any changes to the RFP.

5.6.3.9 Changes in Consortia during Bidding

In many instances, consortia formed in response to an RFQ may change during the bidding stage. This may be more acceptable to the Competition Committee than a complete withdrawal of a consortium, provided the consortium maintains its qualifications at least to the same level as before the change, and is subject to Competition Committee approval. A consortium change is never allowed without written consent from the Competition Committee, and the substance of a bid already submitted cannot be changed.

The process for change in consortia should be set out in the RFP, as described below:

~ the consortium advises the Competition Committee of the proposed change, in writing, with full details of the reason for the change, the parties involved, and the impact on the consortium;

~ the Competition Committee, applies the same RFQ evaluation criteria to reassess the consortium, using (where possible) the same evaluation processes; the required standard is that the changed consortium should score at least the same number of points as it scored during Pre-Qualification;

~ if approved, the Competition Committee advises the consortium in writing; and

~ if not approved, the Competition Committee advises the consortium in writing and may give it a certain amount of time to propose an alternative. Failing this, the consortium is disqualified.

5.6.3.10 Bidder Due Diligence

Bidder due diligence requires time, access to the project site and existing facilities, and the products of the Public Entity’s own due diligence (given without warranty). Communication protocols for due diligence must be defined in the RFP. These must specify how and when such access and communication should take place. Where access is restricted, this must clearly be stated.

5.6.3.11 Bid Validity Period

Bidders will set a bid validity period on their proposals. The Competition Committee should also suggest an indicative period in the RFP to guide bidders.


5.7 BIDDING

The Article of the PPP Law that is most relevant in respect of the bidding process is Article 9:

“In exception to Law No 37 of 1964 on Public Tenders, the executive regulations shall regulate - in addition to the provisions required under this Law - the procurement and award procedures; the rules and procedures for the submission of proposals and their technical and financial evaluation and the competent authority to undertake such evaluation; the procedures for opening the envelopes and the essential documents that shall be submitted within each envelope and the pre and post qualification; the authority competent to undertake the qualification process and resolve objections as to its decisions; the procedures and the deadlines; and the rules and procedures of competitive dialogue.”

The relevant Articles of the Executive Regulations are as follows:

Article 31: INVITATION FOR SUBMISSION OF PROPOSALS

The Authority in collaboration with the Public Entity shall invite the qualified Investors to collect the project’s procurement documents and to submit their proposals. The invitation shall be made through publication in the Official Gazette and at least two Kuwaiti dailies in both Arabic and English and other local or international media as may be deemed necessary as per the nature of the project, as well as through publication on the website of the Authority, as the Authority deems appropriate in this regard.

The invitation for submission of proposals shall include the following:

1 | The deadline for the collection of the project’s procurement documents.

2 | The relevant Public Entity(ies) that will enter into the PPP Agreement and the appendices thereto.

3 | The Investment Term.

4 | The location of the project stating whether it is being implemented on State-owned land.

5 | The fees due and the method of collection of the project’s procurement documents, after signing the confidentiality agreement.

6 | The deadline for submission of proposals indicating the date and hour which shall be no less than ninety days after the date of publication of the invitation in the Official Gazette, as well as the method and place for submission.

7 | The incentives and tax and custom exemptions granted for the project.

The proposals may be submitted by electronic means of communication which support the necessary confidentiality provided the prior approval of the Higher Committee thereon.


Article 32: CLARIFICATIONS WITH REGARDS TO THE PROJECT’S PROCUREMENT DOCUMENTS

The Authority may, in collaboration with the Public Entity, request clarifications from the bidders with respect to their request for qualification or proposals and that in connection with any inquiry or ambiguity it might find in a proposal. It may as well, in any stage of the procurement, request information, data and additional documents confirming the ability of the Investor to implement the project. Such clarifications or documents provided by the Investor in this regard shall constitute an integral part of its proposal.

The Investors may submit inquiries with regards to the terms of qualifications and competition in accordance with the conditions and limitations set in the qualification documents and project procurement documents.

Article 33: AMENDMENT OF THE TERMS OF REFERENCE

The Authority may, in coordination with the Public Entity, amend the procurement documents before the deadline set for the submission of proposals and provided the qualified Investors are granted a sufficient time for the preparation of their proposals.

Such amendments shall be issued through an addendum signed by the director of the Authority and approved by the Higher Committee in light of the proposal of the Competition Committee. The Authority shall invite the qualified Investors that have purchased the procurement documents to collect such addendum without any fee. Such addenda shall form an integral part of the procurement documents. In all cases, all such amendments shall not prejudice the acquired rights of the qualified Investors.

Article 34: PROCUREMENT OF THE PROJECT IN TWO STAGES

The Higher Committee may, based on the recommendation of the Authority, decide to procure the project in two stages in accordance with the nature and requirements thereof, and conduct a Competitive Dialogue at the intermediary bid-submission of the process in order to obtain clarifications in relation to the elements of the technical and financial offers presented during this stage. In the second stage, final proposals shall be submitted.

Shall the project be procured in two stages, the Authority in coordination with the relevant Public Entity must, during the first stage, prepare the procurement documents provided they include the following:

1 | General information regarding the project, its specifications, standards and performance indicators or requirements for financing or its specific basic contractual arrangements and any other information as the Authority deems necessary.

2 | The obligation for the Investor to submit its suggestions with regards to its mark-up/annotations/observations made on the project’s documents, to be reviewed by the Competition Committee and taken as guidance during the stage of preparation of the final project procurement documents.


3 | The initial offers shall not include any information or financial data regarding competitive prices to be offered by the Investor. The offers submitted at this stage shall be limited to the technical, legal, environmental and general financing issues as well as topics permitted under the Terms of Reference.

Upon receipt of the initial offers and the review and study thereof, the Authority may invite the Investors that have presented their offers to undertake a Competitive Dialogue with them with regards to their proposed comments made to the project’s elements and the initial terms for its procurement. In case the aforementioned invitation to the Investors is made, the Investors must all be granted an equal opportunity/duration for discussion.

The Authority, in coordination with the Public Entity, shall review the characteristics of the project and the proposed standards and performance indicators, the financing arrangements and the contractual terms as well as any other matter for which a Competitive Dialogue has been undertaken, in order to specify those that comply with the public interest, in preparation for making appropriate amendments to the project’s final procurement documents to be prepared by the Competition Committee as per the procedures set under the Law, its Executive Regulations and the Guidebook. The Authority must review and study such amendments and prepare appropriate recommendations thereon to be presented to the Higher Committee in order to consider approval thereof as the project’s procurement documents.

Article 35: MODULE OF THE PROPOSAL SUBMITTED BY THE INVESTOR

Taking into consideration the nature of the PPP Project, the proposal shall be submitted in the form of separate envelopes as stated in the procurement documents. In case of post-qualification, the proposal must include the request for qualification in a separate envelope. The proposal must mainly include the following:

1 | The appointment of a legal representative for the qualified single investor or for the qualified consortium comprising more than one investor, with the appointment of a representative for the consortium based on official proxies made by the consortium members for their representation during the qualification proceedings, along with a certified copy of the agreement entered into between the members of the qualified consortium.

2 | The technical offer must include:

A | The proposed technique and technical method for the provision of the public service or the implementation of the project’s structure as per the project’s procurement documents.

B | The suggested arrangements with regards to the design and implementation of structural works required to achieve the project’s objectives and the provision of required supplies and equipment for that purpose.

c | The proposed time schedule for the implementation of the project.

d | The specialized technical and administrative units for the implementation and operation of the project, and the main subcontractors which are proposed to be hired for the implementation of the works.


E | Information, data and proposed method to comply with the standards for protection of the environment, safety and security.

3 | The financial offer, must include:

A | The expected costs for the preparation of designs and the establishment, operation and maintenance of the project.

B | The cost of financing the project and the sources of any such financing.

c | The project's estimated investment return.

d | The financial costs incurred by the State in light of the adopted formulae for the award of the project.

Article 36: RECEIPT OF PROPOSALS AND THEIR SAFEKEEPING

Proposals must be submitted to the Authority by the person entitled to represent the submitting entity. The Authority shall make all the necessary arrangements to receive the proposals comprising the offers and ensure the safekeeping thereof. The proposals shall not be opened until the convening of the Competition Committee for this purpose.

The proposal shall comprise the technical bid, the financial bid and the bid bond of the Investor in accordance with the provisions of the Law and as per the project’s procurement documents, as well as a request for qualification in case of Post-qualification.

Bidders may not withdraw or amend their proposals after the final deadline for the submission of proposals; however, prior to the final deadline they may withdraw from the competition or present an alternative offer in a new envelope stating thereon that this is a new proposal and provided the submission thereof follows the same method specified for submission of offers and is prior to the final deadline for submission of offers.

Article 37: EVALUATION OF OFFERS

The Competition Committee shall undertake the evaluation of the technical proposals based on the standards and weights stated in the project’s procurement documents, prior to reviewing the financial offer.

A proposal that does not include a bid bond as stated in the procurement documents shall be rejected.

The evaluation of the technical offer must conform to the following:

1 | Provisions for technical safety included in the offer, including the technology to be used and techniques complying with the terms specified in the project’s procurement documents.

2 | Conforming to the environmental standards specified under the procurement documents.


3 | Evidence of the quality of the services and facilities to be implemented and provided through the project and their conformity with standards and performance indicators specified under the Terms of Reference.

4 | The extent to which suitability between the main components of the project have taken into consideration the provisions of the technical offer and the financial offer.

5 | Feasibility of the proposed time schedule for the implementation of the project and the effects of such schedule.

The Competition Committee shall submit a report with respect to the evaluation of the technical offers along with its recommendations to the Authority for approval thereof. The Authority shall notify the Investors whose technical offers were approved and those who were rejected. The latter may submit a grievance as to this before the Grievance Committee in accordance with the terms and conditions provided for under Chapter Ten of these Executive Regulations.

Article 38: SESSION FOR OPENING FINANCIAL ENVELOPES

The Competition Committee shall arrange a public session to open the financial envelopes for the offers submitted by the Investors. The qualified Investors that have submitted their offers in connection with the project being tendered shall be invited. A representative of the relevant Public Entity(ies) shall also be invited to attend the session.

The Committee immediately at the beginning of the public session shall confirm the attendance and ensure the safekeeping of the financial envelopes, and it shall prepare a report with regards to the same. The financial envelopes shall be opened in alphabetic order of the bidders’ names. The value of each proposal shall be read out and shall be recorded in a schedule made for this purpose. In case of inclusion of several values within the same proposal, the highest value shall be retained, without prejudice to the Authority’s right to exclude/reject such proposal in accordance with the terms of the project’s procurement documents.

Article 39: DETERMINATION OF THE SUCCESSFUL INVESTOR

The Competition Committee must prepare a report in connection with the evaluation of the technical and financial offers in light of the conclusions made during the public session in preparation for the submission thereof to the Authority, including its recommendation for the appointment of the Preferred Investor and the subsequent Investor in terms of preference among the submitted proposals.

The Authority shall specify in light of the recommendation presented by the Competition Committee the Preferred Investor as being the provider of the best proposal in accordance with the Terms of Reference based on which the project is being procured. The Authority must notify the concerned Investor and the Public Entity of the Investor that was determined as being the Preferred Investor in order to proceed with the negotiations with it.

The Authority must also notify the other Investors who passed the financial proposals phase of their ranking. The Authority shall keep the bid bond of the Preferred Investor and the subsequent Investor in the ranking and it may release the bid bonds of the other Investors unless it decides to keep them until the appointment of the Successful Investor or the expiry of the duration of the submitted bonds or their refusal to renew their bonds or the extension thereof as per the terms provided for under the project procurement documents.


Article 40: SUBMISSION OF ONE PROPOSAL

In case of submission of only one proposal or if the other proposals were invalid because they were in breach or they did not conform/comply with the terms for participation in the competition, the Competition Committee must prepare a report in this respect and submit it to the General Director of the Authority in preparation for the presentation of the same before the Higher Committee along with the recommendation he deems appropriate. The Higher Committee may decide to approve the sole offer or to reprocure the project or to undertake amendments it deems appropriate in the project’s procurement documents or it may cancel the investment opportunity without any liability whatsoever.

Article 41: PROCEEDINGS IN CASE OF EQUALITY BETWEEN THE TWO BEST OFFERS

In case of two equal offers where each forms the best offer as per the terms of the competition, the proposal presenting/including a better technical offer must prevail whenever the technical offer has weight in the formulae used for the award of the project.

Otherwise, the bidders may be requested based upon the recommendation of the Authority and the approval of the Higher Committee to submit two new financial offers, within the limits of their submitted offer, in new envelopes. A public session must be held for the opening thereof, to which the submitters of the two offers must be invited. The value of the offers must be read out during the session. The Competition Committee shall prepare a report in this respect to be submitted to the Authority in preparation for the submission thereof to the Higher Committee to issue its decision in this respect without prejudice to the Higher Committee’s right to cancel the competition or to re-procure the project without any liability whatsoever.

5.7.1 ROLE OF THE COMPETITION COMMITTEE

Notwithstanding the prominent role of KAPP and the Higher Committee during the bidding process, it should be noted that the Executive Regulations envisage that the tendering process shall be managed by the Competition Committee. This committee is constituted separately for each project, by decision of KAPP and subsequent approval of the Higher Committee. Each Competition Committee is to comprise both selected employees from KAPP and representatives of the Public Entity (or Public Entities) involved in the project. Apart from the examination and preparation of relevant project documentation, the Competition Committee is tasked with the critical task of evaluating the technical and financial bids received during the tendering of a project.

5.7.2 BIDDING PROCESS WITH POST-QUALIFICATION

Procurement procedures are divided into those with a phase of Pre-Qualification and those with Post-Qualification. The arrangements for bidding process with Pre-Qualification are set out above. In the case of a bidding process with Post Qualification, the following arrangements apply.

The same conditions that are relevant for Pre-Qualification (as detailed above in Sections 5.5.3 to 5.5.5) apply in the case of Post-Qualification. One procedural difference, however, is that, in addition to the technical and


financial proposals submitted in response to a RFP, bidders will also have to submit the required Qualification documents in a third and separate envelope. This envelope containing the qualification request must be opened and evaluated first and a list of qualified applicants is then submitted to the Higher Committee for approval. After the list has been approved, the Competition Committee can then proceed with the opening and evaluation of the technical and financial proposals.

5.8 COMPETITIVE DIALOGUE PROCESS (PURSUANT TO ARTICLE 34 OF THE REGULATIONS)

Alongside the bidding process with Pre-Qualification and bidding process with Post-Qualification as detailed above, the Executive Regulations also provide for a third procurement methodology. This further option is detailed in Article 34 and essentially entails the carrying out of a competitive dialogue in a first phase, then to be followed by the actual bidding stage as a second phase, in accordance with the procedures described above. It is in the Higher Committee’s discretion to decide to tender a project in two phases upon the recommendation of KAPP and if the nature of project suggests this approach as appropriate. This may be the case in exceptional circumstances where large and complex projects are concerned, in which case it may not be possible for the competent Public Entity to accurately determine the project’s specifications, standards, performance indicators, financial arrangements, or terms of the PPP Agreement. If the need for a competitive dialogues process becomes apparent during project preparation, this should be clearly identified in the Comprehensive Feasibility Study, which would also set out the respective Procurement Plan.

However, most projects will not need to undergo this extended process and the decision to pursue this route should not be taken lightly, not least since a respective bidding in two phases is costly both for the Public Entity and for bidders, and it will likely delay the development of the envisioned project.

In case the project is tendered in two phases, the request for initial bids to be issued by the Competition Committee should clearly state that a competitive dialogue process/bidding in two phases is being conducted. It should also be explicitly stated that proposals submitted in response to this call will not be used for the purposes of evaluation but, instead, to receive suggestions for the project’s specification to finalize the actual RFP. In the same vein, the specific areas in which the Competition Committee needs input from potential bidders should also be stated. At a minimum, the request for initial bids should, therefore, include the following:

~ all information that the Competition Committee can provide in terms of the project’s specifications, its performance standards, financing requirements, basic contractual arrangements as well as any other relevant information;

~ an outline of all those areas for which the Competition Committee deems inputs/suggestions by prospective bidders to be necessary to develop the RFP; and


~ the condition that initial offers are not to include any specific financial proposal and should be limited to the technical, legal, environmental, or general financing matters on which the Competition Committee is seeking guidance.

Although the Executive Regulations do not specify the manner of submitting, receiving and evaluating bids in the context of a competitive dialogue, the same procedures as under regular bidding processes (i.e. with Pre-Qualification or Post-Qualification) should apply for the purposes of ensuring fairness and transparency throughout this process. Accordingly, the Competition Committee should make the necessary arrangements for receiving the envelopes containing the bids from investors and should likewise publish a list of all those participating in the tender. After examination of all initial bids, the Competition Committee may then invite the investors to participate in a one-on-one competitive dialogue in regard to their suggestions for the project’s specifications. In doing so, all investors need to be granted equal opportunity and time for participating in these discussions. The Competition Committee then must make a decision as to which of the initial offers (potentially further discussed/clarified during the competitive dialogues) complies best with the public interest in the context of the proposed project and responds best to the needs as identified in the request for initial bids. In accordance with this ‘best’ initial bid, the Competition Committee will subsequently finalize the actual RFP and submit it for approval and/or amendment by the Higher Committee. Provided approval is granted, a request for final bids (based on the finalized tender documentation) would then be issued and the bidding process would thereafter follow the same rules and procedures as outlined above. It is to be noted that this process would minimize and reduce bidders’ comments and proposed modifications to the forms of the project agreements or the technical requirements.

5.9 CONTRACT FINALIZATION

The Articles of the PPP Law that are most relevant regarding contract finalization with the preferred bidder are as follows:

Article 10:

“The Authority or the Successful Investor shall establish the Project Company, with the main purpose of implementing the announced project and to which all the Successful Investor’s rights and obligations shall be transferred. […]”

Article 11:

“Any Consortium which is awarded a project […] shall establish one or more consortium company(ies) in accordance with the laws of the State of Kuwait and according to the needs and requirements of the project. The Partnership Agreement may not be entered into until such consortium company(ies) has been established. When a public joint stock company is required to be incorporated, the consortium company shall own the shares allocated to the Investor in such company […] and all the rights and obligations of the Successful Investor shall be transferred thereto.”


Article 17:

“Negotiations may be carried out with the Preferred Investor for certain clarifications and details regarding the technical and financial requirements, however, such negotiations may not include any contractual terms considered non-negotiable according to the Terms of Reference. No modification may be allowed regarding the technical and financial criteria according to which the proposals were evaluated.

Should the negotiations with the Preferred Investor be unsuccessful, the investor(s), based on their ranking order, shall be invited to negotiate on the same basis until a final agreement is reached with one of them […]. The Public Entity shall not resume negotiations with any investor with whom negotiations were ended pursuant to the provisions of this paragraph. […].”

The relevant Articles of the Executive Regulations are the following:

Article 42: THE NEGOTIATION WITH THE PREFERRED INVESTOR

The Authority shall invite the Preferred Investor to negotiate the offer it has submitted along with the details and clarifications thereon and its reservations to the project’s procurement documents.

The Authority shall specify in the invitation the topics that shall be negotiated and term of such negotiation. The Competition Committee, under the supervision of the Authority shall handle negotiations with the Preferred Investor, and it may seek assistance of professionals, experts and consultancy firms, whether local or foreign, with which the Authority may enter into agreements to perform its works/duties.

In all cases, the negotiations shall not address any contractual terms deemed in the invitation for submission of proposals as being non-negotiable or as Material Deviations according to the project’s procurement documents. No amendments may be undertaken with respect to the technical and financial terms and conditions upon which the proposals have been evaluated. The negotiations may not lead to an amendment in the competition terms presented to the Preferred Investor, or relieve it from its liabilities in accordance with the provisions of the Terms of Reference under the risk allocation schedule specified in the project’s procurement documents.

The minutes of negotiations shall be recorded in a report to be signed by the Investor and the negotiating parties; any clarifications or details made by the Preferred Investor in this respect shall be considered an integral part of its offer.

Article 43: FAILURE OF THE NEGOTIATIONS

Should the negotiations fail to reach a final agreement with the Successful Investor with respect to the agreement’s documents, the Authority must notify the Investor of the suspension of the negotiations and will request from it the provision of its final position in writing of the best offer that it can provide, and such offer will be presented to the Higher Committee to issue its decision in this respect along with the Authority’s recommendations thereon.


Should the offer be rejected or should the Preferred Investor fail to submit the required offer within the period provided, negotiations must be terminated with it, subject to the approval of the Higher Committee.

After the lapse of the grievance duration of the decision for suspension of the negotiations, the Authority shall invite the other bidder or bidders as per their ranking to negotiate in order to reach a final agreement with one of them with respect to the terms of the agreement and the settlement thereof.

The Authority may not resume the negotiations with any of the bidders with whom negotiations were terminated and it may not negotiate with two bidders or more at the same time. It also may not waive for the benefit of the subsequent Preferred Investor a condition that was a point of disagreement with the former Preferred Investor.

In all cases, the Higher Committee may decide to cancel the investment opportunity and re-procure the project.

Article 44: AWARD OF THE COMPETITION

The award of the competition is in all cases subject to the approval of the State Audit Bureau in accordance with Article (31) of the Law. The procurement documents and the offer of the Preferred Investor shall all be presented to the State Audit Bureau, as well as any the minutes of any negotiations undertaken with it and the final terms agreed upon, taking into consideration the duration of validity of the bid bond.

After obtaining the approval of the State Audit Bureau, the Authority in collaboration with the Public Entity shall draft a comprehensive report on this matter for submission before the Higher Committee along with the Authority’s recommendations for approval of the Successful Investor and inviting it to sign the Letter Agreement.

Article 45: LETTER AGREEMENT

If an agreement is reached with the Preferred Investor, and after the approval of the Higher Committee of the recommendation for the nomination thereof as Successful Investor, the latter shall be invited to sign with the relevant Public Entity and the Authority a Letter Agreement enclosed to the agreement’s documents that has been agreed upon. Such documents, except for the Confidentiality Agreement, shall not be effective and shall not produce their legal effects and be binding to the State until the fulfillment of the conditions precedent for contracting stated under the Letter Agreement.

After the signature of the Letter Agreement, the Authority shall return the bid bonds to the bidders, except for the second Investor ranked subsequent to the Preferred Investor, until the signature of the PPP Agreement with the Successful Investor or the lapse of the duration of validity of the bid bond provided in the second Investor’s offer and its refusal to extend it.

Article 46: INVITATION TO SIGN THE PPP AGREEMENT

The Successful Investor and the relevant Public Entities shall start the process required to execute the terms of the Letter Agreement in preparation for the signature of the Partnership Agreement as approved by the Higher Committee.


Should the Successful Investor be a consortium, it shall establish one or more Consortium Companies in accordance with the project’s requirements and the laws of the State of Kuwait and based on what was agreed in the Letter Agreement. Each member of the consortium must fulfill all requirements requested by the Authority or the Public Entity such as certified official documents proving its ownership of the shares of the company that has been established, whether directly or indirectly, taking into consideration the guarantees provided by the Successful Investor to the State.

In case of projects with a Total Cost not exceeding (60) sixty million Kuwaiti Dinar or the projects excluded(exception) exempted according to the provisions of Article (16) of the Law, the consortium company may enter into the PPP Agreement directly and implement the project.

In other cases, where the establishment of a Public Joint Stock Company is required for the project, the Successful Investor shall acquire through the Consortium Company or companies the shares allocated to the private sector.

The relevant Public Entity shall sign the Agreement Documentation including mainly the final PPP Agreement and the land lease agreement, if any, and the Substitution Agreement for the substitution of the Investor should it fail to perform its obligations. In the case of nomination of several Public Entities for the project, it is permissible to provide the other Public Entities with a specific addendum of the terms of agreement in accordance with the nature of their competences and contractual tasks resulting from the project, to be signed by such entities.

The rights and obligations of the Successful Investor shall be transferred to the consortium company or the Project Company as the case may be. The Authority shall notify the relevant Public Entity for the project in this respect in order to establish the date for signature of the Agreement Documentation and to invite the Project Company to the signing thereof.

Article 47: PROCEEDINGS IN CASE OF WITHDRAWAL OF THE SUCCESSFUL INVESTOR OR ITS FAILURE TO SIGN

If the Successful Investor withdrew or abstained from signing the Letter Agreement or the Agreement Documentation, or if it fails to provide the required final bond, or establish the Consortium Company or the Project Company or if it refrained from subscribing to the shares of the Public Joint Stock Company allocated to it upon the establishment, the Authority shall present a report to the Higher Committee in this respect along with the recommendation it deems appropriate. The Higher Committee may issue a decision inviting the next-ranked Investor to negotiate with it in order to reach a final agreement as per the terms and proceedings undertaken with the former prior Investor.

Article 59: ESTABLISHMENT OF THE CONSORTIUM COMPANY

The successful consortium that was awarded a PPP Project shall establish one or more consortium company(ies) in accordance with the laws of the State of Kuwait according to the needs and requirements of the project.


In case of establishment of a public joint stock company, the consortium company shall acquire the shares allocated to the Investor in the public joint stock company procured in accordance with the provisions of the Law and all the Successful Investor’s rights and obligations shall be transferred thereto.

PPP Agreement Negotiation

Following identification and notification of the preferred bidder (as well as those bidders that were not selected), KAPP will invite the preferred bidder for negotiations to reach final agreement/finalize the PPP Agreement. In doing so, the envisioned duration of the negotiation as well as the matters to be addressed should be specified. These might include discussion of any proposed modifications to or reservations expressed vis-à-vis certain clauses of the PPP Agreement, which are not material in their nature, as made by the preferred bidder in its bid. It should be noted, however, that neither contractual terms considered non-negotiable according to the RFP nor the technical and financial criteria according to which the bidders’ proposals were evaluated may be amended. While the Competition Committee (under the supervision of KAPP and the assistance of the Transaction Advisor) is to lead the negotiations with the preferred bidders, it will be advisable to involve legal advisors as well as other required technical experts (as mentioned in Article 42 of the Executive Regulations). This will support both the professional conducting of negotiations as well as their successful conclusion to culminate in the awarding of the PPP Agreement, concluding the procurement phase, and starting implementation.

Nonetheless, it should be borne in mind that the Competition Committee, KAPP and the Public Entity on the one hand, and the preferred investor on the other hand will have different perspectives on the negotiations stage. While the latter will seek to reduce its risk and increase its margins, the public sector parties will want to reduce their costs, minimize the risks allocated to the Public Entity and to maximize the value of the services provided through the project. It will therefore be essential to be thoroughly prepared for the negotiation phase. Considerations to be taken into account by the Competition Committee in its preparations may include the following points:

~ outlining the objectives of the negotiations with the preferred bidder;

~ preparing a schedule for starting and concluding the negotiations within the bid validity period:

~ establishing a negotiation team (including members of the Competition Committee, legal advisors as well as other technical experts as needs);

~ anticipating the preferred bidder’s positions and interests;

~ designing a detailed negotiation plan, predefining certain positions (fallback, alternative and no-go positions);

~ reviewing the RFP to identify items stated as non-negotiable;

~ specifying issues to be discussed as well as the suggested approach to their resolution;

~ identification of matters that may be easily resolved in order to establish a collaborative process:


~ requesting the names/positions of each person on the preferred bidder’s negotiation team;

~ appointing an assigned drafter to keep track of the evolving contractual documentation;

~ assigning of recording minutes in respect of negotiated points and resolutions; and

~ establishing a preliminary schedule for signing the PPP Agreement.

In case of failure to reach a final agreement with the preferred bidder, KAPP will submit the last best offer of that bidder to the Higher Committee. Should this final offer not be deemed acceptable (or should the preferred bidder have refrained from submitting a last offer), negotiations may be terminated, upon the Higher Committee’s approval. Following the end of the period granted for filing an objection in accordance with the grievance procedure provide for under the PPP Law and the Executive Regulations, the Competition Committee may then invite the second ranked bidder for negotiations in order to reach agreement on the contractual documentation. Alternatively, it is in the Higher Committee’s discretion to cancel the procurement process altogether and to retender it. Should negotiations proceed with the bidder(s) according to their rankings as assigned during the evaluation stage, discussions may not be conducted concurrently with two or more bidders and negotiations that have been terminated may not be resumed with the same bidder.

Contract Signing

In case an agreement is achieved with the preferred bidder (or negotiations are concluded with the second-ranked or next highest-ranked bidder), the Department of Legal Advice and Legislation’s approval needs to be sought on any amendments that have been introduced to the PPP Agreement relative to the version on which the Department had been consulted during preparation of the RFP. Subsequently, both the State Audit Bureau’s approval as well as the subsequent approval of the Higher Committee to accept the respective bidder must be obtained. If these approvals are granted, the winning bidder will be invited to sign the Deed of Covenant (Letter Agreement) with the concerned Public Entity11. While the PPP Agreement will be attached to the Deed of Covenant, the PPP Agreement will only become effective once the conditions precedent as set out in the Deed of Covenant have been satisfied.12

The further process and timeline of implementing the terms of the Deed of Covenant and signing of the relevant project agreements (most notably the final PPP Agreement) will then vary depending on whether the project’s value does not exceed 60 million KWD or is a project that falls under Article 16 of the PPP Law13. If the value is less than 60 million KWD, the successful bidder may establish a Project Company (required in case the successful bidder is a consortium) and proceed to sign the PPP

11 Following its signing, KAPP is to return the Bid Bond provided by bidders, except for those provided by the second-ranked bidder and the preferred bidder until signing of the Partnership Agreement with the winning bidder or the expiry of the bond provided by the second-ranked bidder and its refusal to extend the same.

12 Details in regard to returning the Bid Bond are set out in Article 45 of the Executive Regulations.13 This concerns the procurement of certain development projects of a special nature and whose total cost as estimated in the Comprehensive

Feasibility Study does not exceed 250 million KWD. In such cases, the Council of Ministers may, upon the Higher Committee’s pro-posal, issue a justified decision for such a project to follow the same rules as stipulated for projects whose total cost does not exceed 60 million KWD.


Agreement and implement the project directly. In all other cases (i.e. where a project’s value exceeds 60 million KWD), a Public Joint Stock Company must be established for the project. Matters pertinent in this scenario, in particular the incorporation of a Public Joint Stock Company, are discussed below in Section 5.10.

5.10 SALE OF SHARES OF PUBLIC JOINT STOCK COMPANY

The Articles of the PPP Law that are most relevant concerning Public Joint Stock Companies are the following:

Article 12:

“The Authority, in collaboration with the Public Entity, shall procure the PPP Projects in which the Total Cost does not exceed sixty million Kuwaiti Dinar (60 million KWD) through Competition between Investors willing to invest in the project in compliance with the provisions of this Law and the Successful Investor shall establish the Project Company.”

Article 13:

“A Partnership Project with a Total Cost exceeding sixty million Kuwaiti Dinar (60 million KWD) shall be procured in a Competition between Investors willing to invest in the project. The Authority shall establish a public joint-stock company following the procurement of the project and selection of the Successful Investor, and shall distribute its shares as follows:

1 | A percentage of shares no less than six percent (6%) and no more than twenty-four percent (24%) shall be allocated to the Public Entities entitled to acquire such shares.

2 | A percentage of shares no less than twenty-six percent (26%) of the shares shall be allocated to the Successful Investor for subscription in accordance with this Law, taking into account the percentage of shares allocated to the Initiative proposer under Article 20 of this Law.

3 | Fifty percent (50%) shall be allocated for subscription through an initial public offering to living Kuwaitis listed in the register of the Public Authority for Civil Information on the date of the invitation to pay the price of the shares in compliance with the provisions of the following Article.”

Article 14:

“The Authority shall subscribe to the shares allocated to Public Entities and Kuwaitis, [..] unless the Higher Committee decides that the Public Entity shall subscribe directly to the shares of the company. […] Upon full operation of the project, the Authority shall:

1 | Invite the Public Entities and Kuwaitis on behalf of whom the Authority subscribed to pay the price of such subscription to the State, including the nominal value of the shares and the issuance fees, without any further amounts; the invitation shall be made in the Official Gazette and Kuwaiti media channels determined in the


decision to issue the invitation, in accordance with the procedures and method provided for in the executive regulations of this Law, provided that the subscription price is paid within sixty (60) days from the first day of the month following the month in which the invitation for subscription was issued.

2 | The shares shall be transferred in the names of each of the Public Entities and Kuwaitis who paid the price of the shares allocated to them upon the crediting and collection of such value. Public Entities and citizens shall be deprived from their right to the shares for which they have not paid the price within the period prescribed by this Article.”

Article 15:

“The Authority shall offer the shares for which the price has not been paid within the period prescribed by the previous Article, as well as the fractional shares resulting from the distribution process, for sale based on their market value to Public Entities, the Investor or on the stock market, as the Authority deems fit. […] If the shares could not be sold in accordance with the terms of the previous paragraph, then, such shares shall remain registered in the name of the Authority on behalf of the State until disposal thereof.”

The relevant Articles of the Executive Regulations are as follows:

Article 60: ESTABLISHMENT OF A KUWAITI PUBLIC JOINT STOCK COMPANY

The Successful Investor shall establish the Project Company for the PPP Project with a Total Cost not exceeding (60 m KWD) sixty million Kuwaiti Dinars.

Following the procurement of the project and the selection of the Successful Investor, the Authority undertakes the establishment of a public joint stock company for the PPP Project of a Total Cost exceeding (60 m KWD) sixty million Kuwaiti Dinars, and shall notify the Ministry of Commerce and Industry of the commercial name chosen for the company, and determine the company’s capital. The shares of the company shall be distributed as follows:

1 | A percentage of no less than six percent (6%) and no more than twenty-four percent (24%) shall be allocated to the Public Entities entitled to acquire shares.

2 | A percentage of shares no less than twenty-six percent (26%) of the shares shall be allocated for subscription by the Successful Investor in accordance with the Law and the Executive Regulations, taking into account the percentages indicated under Article 20 of the Law allocated to any Initiative proposer.

3 | Fifty percent (50%) shall be allocated for subscription through an initial public offering to living Kuwaitis listed in the Public Authority for Civil Information’s register on the date of the invitation to settle the price of the shares in compliance with the provisions of the Law and its Executive Regulations.


Article 61: ESTABLISHMENT PROCEEDINGS

The establishment of the public joint stock company and the consortium company—if any—shall be subject to the provisions of Decree Law No 25 of 2012 issuing the Companies Law and its amendments as well as applicable laws and the proceedings adopted by the Ministry of Commerce that do not contradict with the provisions of this Law.

Article 62: AUTHORITY’S SUBSCRIPTION METHOD

The Authority shall communicate with the Public Entities that have shown interest in investing in the projects procured by the Authority, in order to determine the number of shares to which the Public Entities are willing to subscribe for from the shares allocated to Public Entities as per the Law and the Authority shall establish a public joint stock company for the implementation of the projects.

The Authority shall, in all the cases prescribed for under the Law for subscription on behalf of the Public Entities, subscribe to the shares allocated to such entities according to the percentages agreed under the memorandum of association and the shareholders agreement of the public joint stock company of the value of the shares as signed by the founders. The shares shall be registered under the name of the Authority with a note indicating their allocation to the Public Entity that requested their acquisition in accordance with the information memorandum when distributed as per the provisions of the Law.

The Authority shall ensure that the Successful Investor or the consortium company—as the case maybe—has settled the subscription value of the percentages allocated to it of the share prices it has been awarded in the public joint stock company allocated for Public Entities.

After the completion of the establishment proceedings, and the convening of the general assembly, and the preparation of the prospectus, the Authority shall subscribe on behalf of Kuwaitis in the percentage agreed upon in the memorandum of association and the shareholders agreement of the public joint stock company of the shares’ value allocated to Kuwaitis. The Authority shall supervise the full contribution of the company’s capital in accordance with the terms agreed in the memorandum and articles of association between the paid capital and the authorized capital.

Article 63: TRANSFER OF SHARES

Upon full operation of the project, the Authority shall ensure the full authorized capital contribution and shall evaluate it in accordance with the actual costs of establishment. The authorized capital of the public joint stock company may not be modified except with the prior approval of the Higher Committee based on the recommendation of the Authority, in anticipation of the invitation to the Public Entities and Kuwaitis for the settlement of the value of the their allocated shares.

In case of approval of the Higher Committee, the Authority shall undertake the following:

1 | Invite the Public Entities and Kuwaitis on behalf of whom subscription was undertaken to settle the value of such subscription to the State, including the nominal value of the shares and the issuance fees, without any further amounts; the invitation shall be made in the Official Gazette and Kuwaiti media determined in the decision to


issue the invitation. The invitation shall state the aggregate amount that shall be paid for each share as well as the place and the acceptable means for settlement and the final deadline for payment, provided that the settlement of the subscription value is made in a period not exceeding sixty days as of the first day of the month following the month in which the invitation for subscription was made.

2 | The shares shall be transferred in the names of each of the Public Entities and Kuwaitis who settled the value of the shares allocated to them upon the settlement and receipt of such amounts in accordance with the aggregate price to be paid for each share, in the place of settlement and according to the specified settlement method and within the period prescribed in the invitation.

The Clearing Agency shall issue receipts indicating the ownership of shares in collaboration and coordination with the competent authorities.

Public Entities and Kuwaitis shall be deprived from their right to subscribe for shares for which they have not settled the value within the prescribed periods and according to the terms stated in the invitation.

Article 64; UNSETTLED SHARES

The Authority shall offer the unsettled shares within the period prescribed by the previous Article, as well as the fractions of shares resulting from the distribution process, for sale at market value to Public Entities other than the Public Entities deprived from their subscription right in accordance with the previous Article or to the Investor or through an offering on the stock market, as the Authority deems appropriate. The surplus over the nominal value of the shares resulting from their sale shall be transferred to the State’s public treasury.

If the shares could not be sold in accordance with the terms of the previous paragraph, then, such shares shall remain registered in the name of the Authority on behalf of the State until disposal thereof.

The Authority shall have all the shareholders’ rights relating to the shares it has subscribed to whether during the establishment and until the transfer of such shares or thereafter for the shares for which the value has not been settled. The ownership and the subscription by the Authority to the shares of the company or its management on behalf of third-parties shall not lead to considering the assets of the company as public assets in accordance with Law No 1 of 1993 regarding the protection of public assets.


5.10.1 INCORPORATION OF PUBLIC JOINT-STOCK COMPANY

As mentioned above, projects with a total cost exceeding 60 million KWD require the establishment of a Public Joint-Stock Company by KAPP following the procurement of the project and selection of the Successful Bidder. The following shareholding structure is prescribed both under the PPP Law and the Executive Regulations:

~ no less than 6% and up to 24% of shares are to be allocated to Public Entities entitled to acquire such shares;

~ no less than 26% (and up to 44%, depending on the respective allocation to Public Entities) of shares are to be allocated to the Successful Bidder (which, if it is a consortium, will be incorporated in the form of a HoldCo, as noted above in Section 5.6.1.6), provided that 10% of the allocation to the successful bidder may be offered to the proponent of an Initiative, pursuant to Article 20 of PPP Law; and

~ 50% of shares shall be allocated for subscription through an initial public offering to Kuwaiti nationals listed in the register of the Public Authority for Civil Information.

The RFP document should detail the set percentage provided for the bidder and the allocated percentage provided for the Public Entities that are allowed to invest into the project.

Apart from a change in share allocation as compared to the Old Law14, it should also be noted that the definition of total project cost is now based on the capital expenditure for the project15, which may have the effect of reducing the calculated value of a project for the purposes of determining if the threshold of 60 million KWD applies.

The incorporation of the Public Joint-Stock Company will be subject to the stipulations of the Companies Act (Decree-Law No. 25 of 2012) and its amendments. In this context, KAPP must prepare Articles of Incorporation (that may contain provisions to give management control to HoldCo) and a Shareholder Agreement between the different shareholders in the Project Company (HoldCo, Public Entities and Kuwaiti Citizens/KAPP). KAPP shall also apply for a Cabinet Decree to formally incorporate the Public Joint-Stock Company (following publication of the Decree in the Official Gazette).

5.10.2 PROCESS OF TRANSFER OF SHARES

Notwithstanding the aforementioned share allocation, it is initially KAPP that will subscribe to the shares assigned to the Public Entity and to Kuwaiti nationals, unless the Higher Committee decides that the former are to subscribe directly to the shares of the Public Joint-Stock Company. Only once the project has become fully operational will KAPP invite the Public Entity and Kuwaiti nationals to subscribe to part or all of the shares allocated to them. The invitation will be made in the Official Gazette and Kuwaiti media channels and subscriptions may be made within a period of 60 days counted from the first day of the month following the month in which the invitation was issued. In this regard, the transfer of shares of shares to Kuwaiti nationals would be conducted in accordance with provisions of Law 15 of 1960 and Kuwait Stock Exchange regulations.

14 For a comparison of the share allocation between the Old PPP Law and the PPP Law, see the table in Section 2.3.1, above.15 As defined under Article 1 of the PPP Law as well as under Article 11 of the Executive Regulations; see also Section 4.2.2.4, above.


Any remaining shares, which have not been subscribed to following the above processes, shall be offered by KAPP for sale based on their market value to Public Entities, the private investors in the Project Company or on the stock market, as KAPP sees fit (Article 15 of the PP Law and Article 64 of the Executive Regulations)16. Any such shares will remain registered in the name of KAPP on behalf of the State until their disposal. This is different from the arrangements under Article 5 of the Old Law which provided that, if the Kuwaiti public did not subscribe to part of or all of the shares offered for transfer, then those shares, or the unsubscribed parts, had to be auctioned to potential private investors.

5.10.3 ROLE OF KAPP AS TEMPORARY SHAREHOLDER

As noted above, KAPP will initially act as a temporary shareholder in the Public Joint-Stock Company starting from its incorporation until the transfer of shares to Kuwaiti nationals is conducted and the Public Entity is invited to subscribe to the shares allocated to it after the commercial operation date of the project. KAPP shall dispose those shares that are not subscribed to by eligible Kuwaiti citizens pursuant to the provisions of Article 64 of the Executive Regulations.

5.10.4 TENDER PROCESS FOR INVESTOR SHARES

While the tender process for projects whose total costs exceed 60 million KWD is essentially conducted in the same way as detailed in Sections 5.5.7 to 5.5.9, a few specific characteristics apply, since the bidding process now also entails the percentage of shares to be allocated to the successful bidder (26% to 44%, depending upon the decision of the Higher Committee). Accordingly, one additional document that will form part of the RFP for such projects is the draft Shareholders Agreement and draft Articles of the envisioned Public Joint-Stock Company.

In regard to negotiation and finalization, the principle remains that the highest-ranked bidder will be invited to enter into negotiations for the purposes of reaching final agreement on and signing the contractual documentation. However, when the successful bidder submits the amount due according to his financial bid, the portion equivalent to the nominal value of the shares allocated to it will be used to capitalize the public joint stock company. At this point, the shares of the successful bidder will be listed in accordance with the requirements of the Companies Law and the incorporated Public Joint-Stock Company may subsequently move to the financial close of the project.

5.10.5 EQUITY RATE OF RETURN FOR CITIZEN SHAREHOLDERS

In respect of shares held by both Kuwaiti nationals and Public Entity in the public joint stock company, it should be noted that these are unlikely to entail any specifically guaranteed return on equity. This is

16 The process for the actual transfer of shares that have been subscribed to is set out as part of Article 63 of the Executive Regulations.


due to the fact that, even though bidders are to set out the expected investment return of the project as part of their financial proposal,17 which would be expected to be disclosed as part of the transfer of shares, there is no legal consequence if the actual returns fall short of those projections.

17 See Section 6.7.2.1 as well as Article 35(3)(c) of the Executive Regulations.

1 2 9

CHAPTER

6

PROJECT FINANCING ISSUES

Most PPP projects will be financed by an Investor using a combination of equity (in the form of cash and/or Equity Bridge/Shareholder Loans) and debt (e.g. bank loans, bonds etc.) on a limited recourse or ‘project finance’ basis. Therefore, it is important that the Public Entity ensures that the project is ‘bankable’ i.e. that lenders are willing to lend to the project on reasonable terms and conditions based on the project documentation and risk allocation therein.

6.1 EQUITY BRIDGE/SHAREHOLDER LOANS

Instead of injecting equity in the form of cash, the investor may be allowed, subject to the agreement of the relevant stakeholders including the Public Entity, to inject equity in the form of an Equity Bridge Loan and/or a Shareholder Loan.

An Equity Bridge Loan is a loan that is borrowed from commercial banks by the Project Company and typically has a tenor that matches the construction period. The intention is that, at the end of the construction period, the loan is repaid using funds injected by the investor. To mitigate the risk that the Project Company is unable to repay the loan in full at the end of construction, the Equity Bridge Loan lenders typically require a corporate guarantee from the investor or a Standby Letter of Credit. Alternatively, the investor can inject equity in the form of a Shareholder Loan. For the avoidance of doubt, any equity injected in the form of a loan will not be treated as debt under the various PPP agreements and the loans must be fully subordinated.

6.2 SECURITY

The Project Company may not sell or mortgage the land on which the project is established, since under Kuwaiti law all land is owned by the State. However, the Project Company can mortgage or provide security on any project assets that it owns. In this context, it is important that the PPP Agreement


clearly states which of the project’s assets are considered to be privately owned, such that they can be pledged, and which are public assets and cannot be pledged. The Project Company may also grant security over the payments due under the PPP Agreement. In addition, the investor can pledge its shares in the Project Company to the lenders, subject to the approval of the Higher Committee. The Pledge Agreement may allow the lenders to acquire or sell the shares to a new investor, subject to the approval of the Higher Committee.

6.3 REFINANCING

The Project Company can refinance the debt in accordance with the terms of the PPP Agreement, and subject to the approval of the Higher Committee. Any approval will be based, amongst other considerations, on whether the terms and conditions of the refinancing adversely impacts the project compared with the terms and conditions of the original financing. The PPP Agreement should indicate whether there is to be a sharing of any refinancing gains between the Project Company and the Public Entity.

6.4 TIMETABLE TO FINANCIAL CLOSE

The PPP Agreement should stipulate a reasonable timetable for Financial Close, taking into account precedent transactions, feedback from the investor and lenders, the complexity of the project and the ability of the investor and lenders to maintain the costs as indicated in the bid and satisfy the various conditions precedent to Financial Close.

6.5 TERMINATION PAYMENTS

The PPP Agreement will normally provide for a termination payment equivalent to a certain percentage of the debt in a situation where the project agreement is terminated by the Public Entity due to a default by the Project Company. The level of termination payment (typically less than 100%), is set to ensure that the lenders are incentivized to address any potential default issues in a timely manner.

1 3 1

CHAPTER

7

OTHER CONTRACTING ISSUES

7.1 KUWAITIZATION REQUIREMENTS

Kuwaitization requirements pertain to the obligations of the Project Company, under the PPP Agreement, to employ Kuwaiti nationals, in order to provide them with training, employment, and skills in developing, constructing, operating and managing complex infrastructure projects.

The degree of Kuwaitization must be balanced by the necessity that the project provides value for money and can operate efficiency. Accordingly, the minimum Kuwaitization requirements will be different from project to project, depending on the level of skills required.

7.2 HANDOVER BONDS

Handover bonds and retention funds are a mechanism for the Public Entity to be assured that the project will be handed back in an appropriate condition, including with any technical manuals or guidance, software and hardware, and other necessary assets. Whether the Public Entity requests one of these or both, is a matter to be decided by the Public Entity, and shall be specified in the RFP and the PPP Agreement.

7.3 BIDDING RESTRICTIONS

Article 35(13) of the PPP Law envisages that PPP Agreements may include provisions that restrict the ability of the Project Company to implement other PPP projects and are subject to Higher Committee approval. However, such provisions should not restrict the right of investors to bid on future PPP projects in Kuwait.

1 3 3

CHAPTER

8

PROJECT IMPLEMENTATION AND MONITORING

The following articles of the PPP Law pertain to project implementation and monitoring:

Article 6:

“The Authority shall collaborate and cooperate with the Public Entities for the implementation of PPP Projects in compliance with the provisions of this Law, and shall carry out the following:

6 | Set out approaches to follow up and evaluate the performance of approved PPP Projects.

11 | Develop PPP Projects programs and follow up on their completion and issue necessary decisions in relation thereto.

12 | Compile and submit a semi-annual report on PPP Projects to the Higher Committee for its approval, prior to the Minister of Finance presenting the same to the Council of Ministers.

13 | Follow up on the implementation of PPP Agreements and work on overcoming implementation obstacles in collaboration with the entity under which the project is subjected.

Article 19:

The Higher Committee may approve the termination of the agreement at the request of the Authority or the Public Entity for reasons based on public interest, provided that the Higher Committee justifies its decision and demonstrates the benefits of such termination and provides an estimate of the fair compensation to be paid to the Contracting Investor in accordance with the PPP Agreement.


Article 29:

PPP Projects and the agreements thereof shall be subject to the provisions of this Law and its executive regulations, as well as the provisions of applicable laws in the State of Kuwait, provided they do not contradict with the provisions of this Law. The agreement shall regulate the mechanism for dispute resolution in relation to its interpretation or its implementation. Kuwaiti courts shall be the competent authority to examine all the disputes arising from the implementation of the provisions of this Law. In exception to the Emiri Order issued by Law No. 12 of 1960, and based on the Higher Committee's approval, disputes arising between the contracting Public Entity and the Investor may be settled through arbitration.

Article 30

At the end of PPP Agreements, the Authority shall assess the project to determine the return to the State or to the Investor, as the case may be, and the Higher Committee shall undertake the following:

1 | The Higher Committee shall task the Authority in collaboration with the relevant Public Entity to procure the management or the management and development of projects transferred to the State, in accordance with the provisions of this Law, one year prior to such transfer, through Competition according to the nature of the project.

2 | Announced project documents shall include its audited balance sheets for the last three (3) years.

3 | The project management contract term in the new agreement may not exceed ten (10) years.

In case of a management and development agreement comprising project renovation or introduction of modern operating systems or introduction of new assets to increase the efficiency of the provided service or improve it or reduce its costs, the term of the agreement shall not exceed twenty (20) years.

The Terms of Reference shall identify the development criteria and the appropriate terms of each agreement on case-by-case basis.

4 | The executive regulations shall set out the specific rules for the re-procurement and the award proceedings. Priority for awarding shall be given to the Investor offering the best proposal to the State in accordance with the Terms of Reference of the project provided it satisfies all the requirements set forth in those terms. The Investor whose agreement has expired shall be given an advantage of five percent (5%) over the best proposal in case it participates in the Competition. Such advantage shall be ten percent (10%) if the Investor whose agreement has expired was a public joint stock company. The executive regulations shall establish a schedule stating the appropriate percentages that are consistent with the nature of Partnership Projects and the value of capital invested in them.

In all cases, the Investor commits – at the expiry of the term of the agreement – to return the project to the State, according to the agreed conditions as per the Partnership Agreement.

1 3 5P R O J E C T I M P L E M E N TAT I O N A N D M O N I T O R I N G

This Article shall not prejudice the right of the State to manage the project or manage and develop it directly or terminate the activity thereof.

Article 31:

PPP Agreements executed in accordance with the provisions of this Law, including consultancy agreements, shall be subject to ex ante and ex post auditing of the State Audit Bureau according to rules of supervision set forth in Law No 30 of 1964.

The Higher Committee shall define the annual accounting rules and procedures for the Authority. The Authority shall have one or more financial auditors, appointed by decision of the Minister of Finance for the fiscal year of the appointment, and determining their fees in relation thereto.

Article 33:

The Minister of Finance shall present to the Council of Ministers an annual report on all the projects that have been executed or implemented in accordance with the provisions of this Law, and shall send a copy of such report to the National Assembly.

A drawing showing the location, the surface and borders of the contracted land shall be attached to the report of each of the aforementioned projects in the previous paragraph, whenever the project is implemented on State-owned land.

The Minister shall also indicate in his report the extent to which the Contracting Investor (Project Company) is committed to the agreement’s terms and the breaches it committed – if any – and the actions taken by the government in this regard.

The relevant ministers shall provide the Minister of Finance with all the data, documents, files and information he requires in connection with PPP Projects that have been executed with their ministries for the preparation of the report.

8.1 CONTRACT MANAGEMENT PROCESS

Achieving a project’s objectives depends on both the public and private sectors executing their respective duties under the PPP Agreement which governs the relationship between the Project Company and the Public Entity until the expiry of the PPP Agreement. Its terms provide for the competences, obligations, and responsibilities of the parties. It is therefore important to understand the relationships among all parties, as each may have individual goals that could affect consistency of delivery if not managed properly.

The contract management role commences on the award of the PPP Agreement and extends to the end of the operating period. Contract management structures should be put in place at the procurement stage, to ensure that those involved are familiar with the details of the project and the PPP Agreement. A full-time Contract Manager must be appointed by the Public Entity to lead this process. This should be a well-trained individual with experience in PPP Projects. His or her principal responsibility will be to monitor the project’s outcomes,


outputs, service levels, schedules, and risk allocation. The Contract Manager must have sufficient budget to establish a Project Management Unit (PMU) consisting of qualified and experienced staff and equipment. The Contract Manager should have clearly defined roles and authority to manage the PMU and monitor the progress of the project.

8.2 PERFORMANCE MONITORING

The Contract Manager’s focus during the construction phase will be on monitoring quality and timescales during the development of the project. During the operational phase, the Contract Manager will focus on ensuring the availability of the asset, compliance with appropriate environmental standards, authorization of payments (if any), dispute resolution mechanisms, management of change, and the handback of the asset at the end of the project’s duration. In the event of underperformance, there should be provisions for payment penalties, and ultimately for the termination of the PPP Agreement.

The performance measurements as stated in the PPP Agreement should be objective and measurable. The PPP Agreement should define:

~ detailed Key Performance Indicators (KPIs) that set the standard of performance required;

~ the method of monitoring and measuring performance against the defined KPIs;

~ what performance information will be required, how it is to be collected, and by whom;

~ the Public Entity’s rights to carry out audits or spot checks;

~ when performance measurement will commence;

~ how the results of the performance measurement will be reported and acted upon;

~ the consequences of poor performance and repeated poor performance; and

~ any updates on the contract management process.

The PMU must provide regular performance monitoring reports, at least every six months or at a frequency specified by KAPP, which shall include, but not be limited to, a report on the items noted above, along with any violations, Kuwaitization status reports supported by official documents, and any past or ongoing obstacles to the implementation of the project.

The PMU must provide regular performance monitoring reports, at least every six months or at a frequency specified by KAPP, which shall include, but not be limited to, a report on the items noted above, along with any violations, Kuwaitization status reports supported by official documents, and any past or ongoing obstacles to the implementation of the project.


In addition, Article 41 of the PPP Law sets out specific requirements for payments to the Project Company during implementation of the PPP Agreement. Pursuant to this provision, “the Project Company shall not start receiving any monetary amounts for the sale of products or the provision of services according to the performance level provided for in the agreement until the issuance of a certificate from the party set forth in the PPP Agreement approving the quality of the works, products and services made available, unless the terms of the PPP Agreements state otherwise.” Accordingly, both the Contract Manager and PMU will have to ensure that they coordinate in this context with either the Public Entity or any other party that has been appointed for the purposes of issuing the above-mentioned quality certificate.

8.3 REVIEW PROCESSES

The project will be subject to independent reviews and submission of reports to relevant institutions. The Public Entity will lead the review processes in coordination with KAPP. Some of the required reviews and reports include:

TABLE 8.1: Overview of Required Reviews and Reports

Title Timing Responsible Party

Preferred Bidder Report At the end of the procurement process Competition Committee for SAB approval

Project Close-Out Report Financial Close Competition Committee

Post-Project Review At the end of the construction period Public Entity

Performance ReviewsWithin one year of commencement of service and thereafter at periodic intervals as specified by KAPP

Public Entity

Handover ReportWhen the project is concluded and assets are handed back to the State

Public Entity

The Preferred Bidder Report (PBR): The PBR should be compiled by the Competition Committee and reviewed and approved by KAPP, and subsequently submitted for approval to the State Audit Bureau of Kuwait, as soon as possible after the conclusion of negotiations with the Preferred Bidder. The PBR should contain:

~ a brief description of the project;

~ a list of project participants and their respective responsibilities;

~ a checklist of all the technical, legal and financial documents produced and of the key events and decisions taken during the procurement process;

~ details of the procurement process; and

~ cost estimates at various stages in the procurement process and the final contract price.


Project Close-Out Report (PCR). Approval of the PCR indicates an understanding and formal agreement that the project has reached financial close. By signing this deliverable, KAPP and the relevant Public Entity or Entities agree that all administrative, financial, and logistical aspects of the procurement and financing of the transaction have been concluded, executed, and documented as described in the PCR. The PCR should contain:


~ all contractual agreements;

~ a list of all consortium members;

~ a description of the Project Company’s shareholding structure;

~ information regarding the Project Company's available capital;

~ a detailed time schedule for the development and construction phases;

~ projected total project costs;

~ the projected annual payments to be made by the Public Entity (or the tariffs to be paid by end-users); and

~ the projected Internal Rate of Return.

Once the PCR is signed, a KAPP member of the Competition Committee and or Project Procurement Department should submit the Report to the Project Implementation and Monitoring Department.

Post-Project Review (PPR). The PPR should be produced after the completion of construction of the works. It should be prepared by a person (normally an independent auditor through the Public Entity) not directly involved in the management of the project. The purpose of the PPR is to provide details of the final costs (with estimates of claims outstanding) and an assessment of the performance of the different parties to the project.

The PPR should include the following:


~ an outline of the project history with key decisions/events highlighted;

~ a variance analysis of the final outturn costs of the project compared against initial estimates and the final contract price;

~ an analysis of the time taken to complete different stages of the project compared with projections;


~ reports of the settlement of any outstanding claims and the making of final payments (this information should be used by the Public Entity to update the variance analysis in the PPR and will also be used by KAPP for reporting purposes); and

~ any non-compliance issues during the construction phase.

Performance Reviews. See Section 8.2 for details.

Handover Report. This report captures details of all the activities carried out towards the successful handover of the project and the status of adherence with the timelines set out in the PPP Agreement. It should contain the following:

~ activities/procedures followed during the operation phase of the project;

~ management structures;

~ a final list of assets created for the project, along with technical manuals detailing their workings;

~ a list of all records and documentation relevant to the project, including all technical maintenance records and financial records;

~ information on the transfer of skilled and unskilled workforce to the Public Entity, specifying information on the Kuwaiti employment status, if applicable;

~ plans to ensure no public inconvenience/service disruptions at all stages of the handover process; and

~ any additional payments, to either the Project Company or the Public Entity, associated with the handover process.

8.4 DISPUTE RESOLUTION

The legal basis for the settlement of disputes is an important issue in PPP projects. Private parties (investors, lenders, and contractors) feel encouraged to participate in such projects when they are confident that any disputes can be resolved fairly and efficiently. A wide range of dispute settlement mechanisms should be available in order to avoid court cases that may be lengthy and costly. These may include dialogue, mediation (possibly by a third-party expert), and arbitration. Consideration should also be given to establishing a Dispute Resolution Board, in the form of a panel to assist with the prevention and early resolution of disputes.

It is important that the settlement mechanisms are consistent with international best practices, particularly when large-scale investments from the foreign private sector are expected. Foreign investors, for example, will seek recourse to international arbitration as a final option (which is provided for by the Law in Article 29). See Annex B.9 for suggested wording on drafting this contractual provision.


8.5 RENEGOTIATION REQUESTS

In order to keep the integrity of the procurement process intact, renegotiations should only be considered in exceptional circumstances e.g. through change orders or under a change in law or force majeure situation. Most issues should be dealt with under the terms of the PPP Agreement. Generally, the Public Entity should not entertain renegotiation requests from a Project Company.

8.6 TERMINATION

The PPP Agreement may be terminated early due to a number of reasons, including:

1 | Conditions precedent to contract effectiveness not being met

If the conditions precedent to contract effectiveness (including, typically, reaching financial close) are not met by the date set out in the PPP Agreement, and a waiver or an extension is not agreed, the PPP Agreement will automatically terminate.

2 | Event of default of the Project Company

Events of default of the Project Company may include various instances of non-performance under the PPP Agreement, such as payment delays, delays in achieving operations, abandonment, failure to remedy defects, or bankruptcy. Events of default may have cure periods, which must be carefully designed. If the cure period is too long, then the service delivery and performance of the project may be disrupted, but if the cure period is too short, then the PPP Agreement may be terminated unnecessarily, with increased costs for all parties. If the cure period passes and the event of default is still occurring, that will trigger termination procedures, which may include termination payments being made to the Project Company according to a pre-set formula, in exchange for the asset (see Section 6.5 on this topic).

3 | Event of default of the Public Entity

Events of default of the Public Entity relate to the non-performance of the Public Entity’s obligations under the PPP Agreement, such as non-payment of any amounts due to the Project Company. As above, triggering an Event of Default will usually result in a cure period, the expiry of which without any cure will trigger termination procedures, including termination payments.

4 | Prolonged Force Majeure or Material Adverse Government Action

The PPP Agreement may also be terminated for prolonged force majeure (i.e. events that are beyond the control of any one party, such as storms, floods, earthquakes, etc.) or a Material Adverse Government Action (MAGA) which is beyond the control of the Public Entity. As with events of default, the procedure is usually that, after a certain length of time, if the event is still occurring, the PPP Agreement will be terminated and


appropriate payments (according to a formula in the PPP Agreement) will made by the Public Entity to the Project Company.

5 | Termination due to Public Interest

Article 19 of the PPP Law allows for the PPP Agreement to be terminated by the Higher Committee (at the recommendation of KAPP or the Public Entity), provided there is justification and fair compensation is provided to the Project Company..

If the PPP Agreement is not terminated early, the handover at the end of the term is generally governed by the handover procedures within the PPP Agreement, and the contract would be re-tendered or the asset will return to the Public Entity (see below).

8.7 CONCESSION EXTENSION

Article 30 of the PPP Law and Article 65 of the Executive Regulations pertain to the end of a concession. At least two years before the end of the PPP Agreement, KAPP shall, in cooperation with the Public Entity, evaluate the project (using consultants if required) to determine whether the project should be re-tendered, revert to the state Public Entity or be decommissioned, and shall make a recommendation to the Higher Committee.

The Higher Committee shall then issue a decision on the process to be followed. If the project is to be re-tendered (whether for the future management of the project or for management and additional development), the process should be undertaken one year before the end of the current PPP Agreement and awarded before the expiry of the current PPP Agreement. The incumbent Project Company shall be granted a preferential right to be awarded the project, in case of its participation in the competition, according to the following proportions:

TABLE 8.2: PPP Concession Extension

Type of Project company, whose PPP Agreement has expired Proportion

Projects for which no Public Joint Stock Company is constituted 5% of the best bid

Projects for which a Public Joint Stock Company is constituted 10% of the best bid

8.8 HANDBACK PROCEDURES

Handover procedures are the procedures to ensure that the project, and all the Project Company’s ownership and interest in the project, is handed back to the Public Entity at the time of expiry of the PPP Agreement in good operating condition, with the required documentation and knowledge needed for the Public Entity or another investor to manage and operate the asset. The procedure may include an inspection, testing, and remedial works to ensure that the asset is in good condition.


ANNEX A: RISK ALLOCATION IN PPPs: SAMPLE RISK MATRICES

This Annex A presents two sample risk allocation matrices, taken from the Global Infrastructure Hub (GI Hub) 2016 Report on Allocating Risks in Public-Private Partnership Contract (a complete copy of which is available at https://ppp-risk.gihub.org/ ).

As noted in Section 4.2.2.4 of this Project Guidebook, a risk allocation matrix is to be developed by the Public Entity for each PPP transaction, for the purpose of determining the proper allocation of all risks associated with the project.

The two sample risk allocation matrices presented in this Annex A deal, respectively, with a Water Desalination Project and a Container Port Project. Additional information on the sample projects is contained on the first page of each of the two respective risk allocation matrices.

The sample risk matrices were developed by the GI Hub as global guidance tools. Each matrix presents a list of individual risks, grouped by category. The matrices also present recommendations as to the typical allocation of each risk, as between the public and private parties to a PPP transaction, and this includes recommendations as to when a risk is typically shared by both parties. An explanation of the proposed allocation is also given.

In addition, the sample risk matrices also present information on the mitigation of each risk, and possible Government Support Arrangements. This approach is considered good practice when preparing a PPP risk allocation matrix.

It is important to note that, as a tool to be used in various countries, the sample risk matrices discuss the different allocation arrangements that typically exist in emerging markets, as opposed to developed countries with extensive PPP experience. Again, explanations of these different allocation arrangements in developed and emerging markets are provided.

On this basis, the following sample risk matrices should be used by Public Entities only for general guidance. These two samples are simply illustrations of the risk allocations that are normally found worldwide in, respectively, Water Desalination projects and Container Port projects. Each PPP project in Kuwait will, however, require its own individual analysis of the appropriate risks, and risk allocations, for that project.

1 4 3A N N E X A : R I S K A L L O C AT I O N I N P P P S : S A M P L E R I S K M AT R I C E S

Additional sample risk matrices can be found on the website of the Global Infrastructure Hub, at https://ppp-risk.gihub.org/. That website also provides a glossary of the terms used in the sample risk matrices, as well as a forum for an online discussion of issues concerning risk allocations in PPP transactions.

RISK MATRIX FOR A WATER DESALINATION PROJECT

~ New desalination plant as a BOOT project where the water is sold to a state owned single buyer

~ Assumes that the procuring entity identifies the site on which the project will be built

~ Project scope may include associated infrastructure, such as water pipelines and electricity transmission, and, if necessary, generation facilities

~ Technology may include two main technologies, reverse osmosis or distillation (main sub-technologies comprising MSF and MED). Technologies are usually specified by the procuring entity but do result in different technological risks for the project, for example RO technology is more susceptible to seawater quality including blooms of algae such as red tide

~ Key risks

� Construction risk

� Resource or input risk

� Disruptive technology risk


TABLE A1.1: Risk Matrix for a Water Desalination Project

Risksdescription Variable

Allocation Mitigation Government Support Arrangements Market comparison Summary

Category Public Private Shared Rationale Measures issues

Land purchase and site risk

The risk of acquiring title to the land to be used for a project, the selection of that site and the geophysical and hydrological conditions of that site.

Planning permission.

Access rights.

Security.

Heritage.

Archaeological.

Pollution.

Latent defects.

Developed X The Contracting Authority bears the principal risk for ensuring that the required land interests in the site designated for the project are available as it has selected the site. The land interests may be provided by the Contracting Authority, if it has or has acquired the relevant land rights, or a third party landowner who has agreed to grant the relevant land rights. As the project will be transferred to the Contracting Authority at the end of the agreed term, the land rights are usually granted to the project under lease or similar arrangements.

Land arrangements will need to extend to those required for water pipelines and other utilities (for example if significant electricity connection or generation works are required). Some responsibility for these may sit with the Private Partner if they are dependent on project design.

The Private Partner will be responsible for assessing the adequacy of the site designated by the Contracting Authority and the land rights granted (including any associated easements and access rights) and any restraints that the designated site may impose on the design (such as the overall layout and proposed foundation solution) and construction of the project (including access routes to the site and available laydown areas).

That said, there will be some areas where risk of site conditions will be shared with the Contracting Authority.

The Contracting Authority would generally be responsible for pre-existing contamination, archaeological finds or fossils and manmade substructures, to the extent not already known or providing relief for the impacts on

The Contracting Authority should undertake detailed ground, environmental and social assessments and should disclose such information to the Private Partner as part of the bidding process.

The Contracting Authority should allow access to the Private Partner during the bidding process to carry out its own surveys of the site and any existing assets or constructions.

The Contracting Authority should, to the greatest extent possible, ensure that it has a complete understanding of the risks involved in securing the site and the site constraints that may impact on the construction and operation of the facility.

The Contracting Authority should also manage any indigenous land rights issues that may impact on the use of the site.

The Contracting Authority may need to use its legislative powers to secure the site (e.g. through expropriation/ compulsory acquisition).

Even where you have a legally clear site, Government enforcement powers may be needed to properly secure the site for the project. There may be historic encroachment issues that the Private Partner cannot be expected to deal with.

Examples include the need to manage the relocation of people (e.g. the removal of informal housing or businesses) and continued efforts to manage the social and political impact of the project on and around the site.

Land rights and ground conditions in developed markets are typically more established and risks can be mitigated with appropriate due diligence with relevant land registries and utility records.


TABLE A1.1: Risk Matrix for a Water Desalination Project







Access rights.

Security.

Heritage.

Archaeological.

Pollution.

Latent defects.

Developed X The Contracting Authority bears the principal risk for ensuring that the required land interests in the site designated for the project are available as it has selected the site. The land interests may be provided by the Contracting Authority, if it has or has acquired the relevant land rights, or a third party landowner who has agreed to grant the relevant land rights. As the project will be transferred to the Contracting Authority at the end of the agreed term, the land rights are usually granted to the project under lease or similar arrangements.

Land arrangements will need to extend to those required for water pipelines and other utilities (for example if significant electricity connection or generation works are required). Some responsibility for these may sit with the Private Partner if they are dependent on project design.

The Private Partner will be responsible for assessing the adequacy of the site designated by the Contracting Authority and the land rights granted (including any associated easements and access rights) and any restraints that the designated site may impose on the design (such as the overall layout and proposed foundation solution) and construction of the project (including access routes to the site and available laydown areas).


The Contracting Authority would generally be responsible for pre-existing contamination, archaeological finds or fossils and manmade substructures, to the extent not already known or providing relief for the impacts on

The Contracting Authority should undertake detailed ground, environmental and social assessments and should disclose such information to the Private Partner as part of the bidding process.

The Contracting Authority should allow access to the Private Partner during the bidding process to carry out its own surveys of the site and any existing assets or constructions.




Even where you have a legally clear site, Government enforcement powers may be needed to properly secure the site for the project. There may be historic encroachment issues that the Private Partner cannot be expected to deal with.







the project. The Contracting Authority may also accept responsibility for unknown geotechnical conditions although this may be limited to certain types of conditions and will be restricted to conditions that were not reasonably foreseeable based on site surveys performed or which should have been performed by the Private Partner.

The Private Partner may be required to perform site surveys to provide a baseline report to demonstrate pre-existing site conditions.

The Private Partner may be expected to satisfy itself as to the status of any existing assets proposed to be used in the project or of any existing assets which have been identified and require such assets to be removed or relocated.




Access rights.

Security.

Heritage.

Archaeological.

Pollution.

Latent defects.

Emerging X Regardless of whether the land is Government land or private land, the Contracting Authority would generally be responsible for obtaining the relevant land rights for the developer to access and use the land—this is sometimes in the form of an usufruct agreement.

If, as is sometimes the case, the land for the project (particularly in the case of distribution or transmission pipelines) does not have any title deeds, the Contracting Authority will be required to arrange for a contractual licence to use the land. The Private Partner and their lenders are generally comfortable with these arrangement, although such an interest will not be registrable.

The Private Partner will be responsible for assessing the adequacy of the site designated by the Contracting Authority and the land rights granted (including any associated easements and access rights) and any restraints

The Contracting Authority should undertake detailed ground, environmental and social assessments and should disclose such information to the Private Partner as part of the bidding process. The Contracting Authority may also commence the environmental impact assessment process during the bid phase to speed up an often very protracted process. The Contracting Authority should allow access to the Private Partner during the bidding process to carry out its own surveys of the site and any existing assets or constructions.


The contract between the Contracting Authority and the Private Partner should also address specific relief in relation to ground conditions (including contamination).


Typically, the Contracting Authority will be required to manage a range of different interests and stakeholders in relation the land rights being provided over a designated site area.

Examples include efforts to manage the social and political impact of the project on and around the site. This can be a particularly sensitive issue in an emerging market.

Land rights and ground conditions (in particular reliable utilities records, and land charges) in emerging markets may be less certain than in developed markets where established land registries and utility records exist. Lenders and sponsors often have to become comfortable with wholly contractual land rights (registered only through the notarisation process).

In the absence of legislation in emerging markets, indigenous land rights issues and community engagement can be managed by the Contracting Authority through the adoption of IFC Safeguards for the project, particularly in order to ensure international financing options are available to the project. See comments on “Environmental and Social Risk” for a desalination plant project in emerging markets.





the project. The Contracting Authority may also accept responsibility for unknown geotechnical conditions although this may be limited to certain types of conditions and will be restricted to conditions that were not reasonably foreseeable based on site surveys performed or which should have been performed by the Private Partner.






Access rights.

Security.

Heritage.

Archaeological.

Pollution.

Latent defects.

Emerging X Regardless of whether the land is Government land or private land, the Contracting Authority would generally be responsible for obtaining the relevant land rights for the developer to access and use the land—this is sometimes in the form of an usufruct agreement.

If, as is sometimes the case, the land for the project (particularly in the case of distribution or transmission pipelines) does not have any title deeds, the Contracting Authority will be required to arrange for a contractual licence to use the land. The Private Partner and their lenders are generally comfortable with these arrangement, although such an interest will not be registrable.

The Private Partner will be responsible for assessing the adequacy of the site designated by the Contracting Authority and the land rights granted (including any associated easements and access rights) and any restraints

The Contracting Authority should undertake detailed ground, environmental and social assessments and should disclose such information to the Private Partner as part of the bidding process. The Contracting Authority may also commence the environmental impact assessment process during the bid phase to speed up an often very protracted process. The Contracting Authority should allow access to the Private Partner during the bidding process to carry out its own surveys of the site and any existing assets or constructions.


The contract between the Contracting Authority and the Private Partner should also address specific relief in relation to ground conditions (including contamination).


Typically, the Contracting Authority will be required to manage a range of different interests and stakeholders in relation the land rights being provided over a designated site area.

Examples include efforts to manage the social and political impact of the project on and around the site. This can be a particularly sensitive issue in an emerging market.

Land rights and ground conditions (in particular reliable utilities records, and land charges) in emerging markets may be less certain than in developed markets where established land registries and utility records exist. Lenders and sponsors often have to become comfortable with wholly contractual land rights (registered only through the notarisation process).

In the absence of legislation in emerging markets, indigenous land rights issues and community engagement can be managed by the Contracting Authority through the adoption of IFC Safeguards for the project, particularly in order to ensure international financing options are available to the project. See comments on “Environmental and Social Risk” for a desalination plant project in emerging markets.





that the designated site may impose on the design (such as the overall layout and proposed foundation solution) and construction of the project (including access routes to the site and available laydown areas).


The Contracting Authority would generally be responsible for pre-existing contamination, archaeological finds or fossils and manmade substructures, to the extent not already known or revealed by site surveys, either by dealing with such finds or providing relief for the impacts on the project. The Contracting Authority may also accept responsibility for unknown geotechnical conditions although this may be limited to certain types of conditions and will be restricted to conditions that were not reasonably foreseeable based on site surveys performed or which should have been performed by the Private Partner.



Environ-mental and social risk

The risk of the existing latent environmental conditions affecting the project and the subsequent risk of damage to the environment or local communities

Developed X The Private Partner will have primary responsibility to manage the environmental and social strategy across the project, however existing environmental conditions which cannot be adequately catered for or priced (such as intake water contamination) may be retained by the Contracting Authority.

The Contracting Authority should conduct the necessary initial due diligence in order to ascertain the environmental fitness of the site and disclose all known environmental issues to the Private Partner.

The Private Partner would also be required to carry out a full site investigation and the Contracting

The Contracting Authority will need to take meaningful steps both before and during the project to manage social impacts of construction and operation.

Investors and lenders may expect to see a plan to see how these aspects are dealt with.

Environmental scrutiny is increasing even in developed markets, as both Private Partners and Contracting Authorities have come under increasing burdens to develop sound environmental and social risk management plans before construction begins.





that the designated site may impose on the design (such as the overall layout and proposed foundation solution) and construction of the project (including access routes to the site and available laydown areas).


The Contracting Authority would generally be responsible for pre-existing contamination, archaeological finds or fossils and manmade substructures, to the extent not already known or revealed by site surveys, either by dealing with such finds or providing relief for the impacts on the project. The Contracting Authority may also accept responsibility for unknown geotechnical conditions although this may be limited to certain types of conditions and will be restricted to conditions that were not reasonably foreseeable based on site surveys performed or which should have been performed by the Private Partner.





Developed X The Private Partner will have primary responsibility to manage the environmental and social strategy across the project, however existing environmental conditions which cannot be adequately catered for or priced (such as intake water contamination) may be retained by the Contracting Authority.

The Contracting Authority should conduct the necessary initial due diligence in order to ascertain the environmental fitness of the site and disclose all known environmental issues to the Private Partner.

The Private Partner would also be required to carry out a full site investigation and the Contracting








Authority will be required to review all environmental plans prepared by the Private Partner, to ensure that such plans will be adequate to appropriately manage the risks of the project.



Emerging X The Private Partner will have primary responsibility to manage the environmental and social strategy across the project, however existing environmental conditions which cannot be adequately catered for or priced (such as intake water contamination) may be retained by the Contracting Authority.

The Contracting Authority should conduct the necessary initial due diligence in order to ascertain the environmental fitness of the site and disclose all known environmental issues to the Private Partner. In light of these investigations, the contract between the Contracting Authority and the Private Partner will generally provide for the allocation of environmental and social risk

The Private Partner would also be required to carry out a full site investigation and the Contracting Authority will be required to review all environmental plans prepared by the Private Partner, to ensure that such plans will be adequate to appropriately manage the risks of the project.

The Contracting Authority will need to take meaningful steps both before and during the project to manage social impacts of construction and operation. The Contracting Authority will often be required to manage a range of different interests and stakeholders in relation these issues. The Contacting Authority is unlikely to be able to provide any warranty in relation to these issues.

International lenders and development finance institutions are particularly sensitive about environmental and social risks, as a result of their commitment to the Equator Principles. They will look very closely at how these risks are managed at both private and public sector level and this scrutiny is helpful to mitigate the risks posed by these issues.

Design risk

The risk that the project has not been designed adequately for the purpose required.

Feasibility study.

Approval of designs.

Changes to design.

Developed X The Private Partner will have principal responsibility for the adequacy of the design of the facility and its compliance with the functional/performance specification provided by the Contracting Authority.

The Contracting Authority will retain the design risk to the extent that the design is dependent on interconnections for which the Contracting Authority retains responsibility, such as the required output flow and pressure for the water delivery pipe.

The Contracting Authority will generally provide minimum functional/ performance specifications and require compliance with applicable legal requirements and good industry practice standards. This allows for private sector innovation and efficiency gains in the detailed design.

The Contracting Authority should take time to ensure that the minimum functional/ performance specifications will provide a facility that will meet the Contracting Authority’s expectations on transfer of the facility to the Contracting Authority at the end of the project.

A design review process will allow for the Contracting Authority to review and comment on the Private Partner’s detailed design; however, the review process should not be construed as a reduction or limitation of the Private Partner’s overall liability or its general freedom provided that the minimum functional/ performance specifications are met.

Developed market water desalination projects benefit from stable resource availability and defined design standards which allow for increased innovation and efficiency gains.





Authority will be required to review all environmental plans prepared by the Private Partner, to ensure that such plans will be adequate to appropriately manage the risks of the project.



Emerging X The Private Partner will have primary responsibility to manage the environmental and social strategy across the project, however existing environmental conditions which cannot be adequately catered for or priced (such as intake water contamination) may be retained by the Contracting Authority.

The Contracting Authority should conduct the necessary initial due diligence in order to ascertain the environmental fitness of the site and disclose all known environmental issues to the Private Partner. In light of these investigations, the contract between the Contracting Authority and the Private Partner will generally provide for the allocation of environmental and social risk

The Private Partner would also be required to carry out a full site investigation and the Contracting Authority will be required to review all environmental plans prepared by the Private Partner, to ensure that such plans will be adequate to appropriately manage the risks of the project.

The Contracting Authority will need to take meaningful steps both before and during the project to manage social impacts of construction and operation. The Contracting Authority will often be required to manage a range of different interests and stakeholders in relation these issues. The Contacting Authority is unlikely to be able to provide any warranty in relation to these issues.


Design risk


Feasibility study.


Changes to design.

Developed X The Private Partner will have principal responsibility for the adequacy of the design of the facility and its compliance with the functional/performance specification provided by the Contracting Authority.


The Contracting Authority will generally provide minimum functional/ performance specifications and require compliance with applicable legal requirements and good industry practice standards. This allows for private sector innovation and efficiency gains in the detailed design.

The Contracting Authority should take time to ensure that the minimum functional/ performance specifications will provide a facility that will meet the Contracting Authority’s expectations on transfer of the facility to the Contracting Authority at the end of the project.

A design review process will allow for the Contracting Authority to review and comment on the Private Partner’s detailed design; however, the review process should not be construed as a reduction or limitation of the Private Partner’s overall liability or its general freedom provided that the minimum functional/ performance specifications are met.

Developed market water desalination projects benefit from stable resource availability and defined design standards which allow for increased innovation and efficiency gains.





Design risk


Feasibility study.


Changes to design.

Emerging X The Private Partner will have principal responsibility for the adequacy of the design of the facility and its compliance with the functional/performance specification provided by the Contracting Authority.


The Contracting Authority will require compliance with applicable legal requirements and good industry practice standards.

The Contracting Authority will also provide functional/performance specifications, which can often be more prescriptive than the Private Partner may anticipate. The Contracting Partner will often prevent supplies being sourced from certain jurisdictions.

The Contracting Authority should take time to ensure that the functional/performance specifications will provide a facility that will meet the Contracting Authority’s expectations on transfer of the facility to the Contracting Authority at the end of the project.

A design review process will allow for the Contracting Authority to review and comment on the Private Partner’s detailed design; however, the review process should not be construed as a reduction or limitation of the Private Partner’s overall liability or its general freedom provided that the minimum functional/performance specifications are met.

In emerging markets, the functional/performance specifications provided by the Contracting Authority (as well as design oversight) can often stifle private sector innovation and efficiency gains in the detailed design.

Emerging market water desalination projects may be particularly dependent on power availability, which has implications for the Private Partner’s ability to meet the Contracting Authority’s anticipated availability and output requirements in order to meet its water supply obligations.

Construc-tion risk

Labour dispute.

Interface/project management.

Commissioning damage.

IP right breach/infringement.

Quality assurance standards.

Defective material.

Latent defects.

Subcontractor disputes/insolvency.

Cost overruns where no compensation /relief event applies.

Developed X The Private Partner assumes project management risk unless certain work is dependent on Contracting Authority work/related infrastructure work being completed in which case risk could be shared.

The Private Partner takes labour dispute risk unless such labour disputes are political in nature or, in some jurisdictions, nationwide.

The Private Partner also takes Subcontractor insolvency risk or the risk of a dispute with its Subcontractor causing delay.

The Private Partner takes the risk of IP right infringement.

The Private Partner is required to design and construct to good industry practice standards and may be required to comply with or develop other quality assurance

It may be difficult for the Private Partner to mitigate these interface risks solely through contractual risk allocation, as the financing cost/lost revenue impact is typically very high compared to the individual component parts of the project that can affect this. Ensuring that the programme for completion of the works has sufficient float periods for all critical stages and that parties are incentivised to work together to achieve the common deadlines may be more effective strategies.

The Contracting Authority may have a critical role to play at stages of the construction, testing and commissioning process in terms of ensuring that any rights that it has to comment on design development and testing results does not adversely delay the project.

Similarly the Contracting Authority may need to take responsibility for delays caused by failure of public bodies to issue necessary consents in good time.

The Contracting Authority may seek to enter into direct IP arrangements with the designer/manufacturer to ensure it retains necessary IP rights in the event of Private partner IP infringement.

In developed markets risk is considered manageable through robust pass through of obligations to credible and experienced subcontractors and by appropriate timetable and budget contingency.





Design risk


Feasibility study.


Changes to design.

Emerging X The Private Partner will have principal responsibility for the adequacy of the design of the facility and its compliance with the functional/performance specification provided by the Contracting Authority.


The Contracting Authority will require compliance with applicable legal requirements and good industry practice standards.

The Contracting Authority will also provide functional/performance specifications, which can often be more prescriptive than the Private Partner may anticipate. The Contracting Partner will often prevent supplies being sourced from certain jurisdictions.

The Contracting Authority should take time to ensure that the functional/performance specifications will provide a facility that will meet the Contracting Authority’s expectations on transfer of the facility to the Contracting Authority at the end of the project.

A design review process will allow for the Contracting Authority to review and comment on the Private Partner’s detailed design; however, the review process should not be construed as a reduction or limitation of the Private Partner’s overall liability or its general freedom provided that the minimum functional/performance specifications are met.

In emerging markets, the functional/performance specifications provided by the Contracting Authority (as well as design oversight) can often stifle private sector innovation and efficiency gains in the detailed design.

Emerging market water desalination projects may be particularly dependent on power availability, which has implications for the Private Partner’s ability to meet the Contracting Authority’s anticipated availability and output requirements in order to meet its water supply obligations.

Construc-tion risk

Labour dispute.





Defective material.

Latent defects.







The Private Partner is required to design and construct to good industry practice standards and may be required to comply with or develop other quality assurance

It may be difficult for the Private Partner to mitigate these interface risks solely through contractual risk allocation, as the financing cost/lost revenue impact is typically very high compared to the individual component parts of the project that can affect this. Ensuring that the programme for completion of the works has sufficient float periods for all critical stages and that parties are incentivised to work together to achieve the common deadlines may be more effective strategies.


Similarly the Contracting Authority may need to take responsibility for delays caused by failure of public bodies to issue necessary consents in good time.







programs or standards.

The Private Partner will generally have an obligation to rectify defects/defective work. There may be some sharing of risk in respect of latent defects (for example, in existing assets or where due to the nature of the site it is not reasonable to expect the Private Partner to assess this risk prior to contract award.).

The Private Partner takes risk of cost overruns where no compensation or relief event regime applies.

Construc-tion risk

Labour dispute.





Defective material.

Latent defects.



Emerging X The Private Partner assumes all construction risks, save for possibly extreme forms of labour disputes which can be construed as risk assumed by the Contracting Authority in certain circumstances or force majeure etc.

The concession agreement will typically address construction risk as part of the termination regime.

These risks can be mitigated through various means, including ensuring that the Private Partner has the requisite experience in the sector (demonstrated over a lengthy period) and obtaining appropriate security to the risk of non-performance (for example, parent company guarantees, performance bonds and letters of credit).

These mitigants can be instigated through the tendering, tender evaluation and due diligence process and by way of the security provisions in the relevant documentation.

The concession agreement will also include limited rights to extend completion date(s), the right to terminate if the plant is not operational by a nominated longstop date (except if caused by a Government risk event) and step in rights for the Contracting Authority.

The Contracting Authority (and the lenders) will have inspection, review and approval rights in relation to the design and the manufacture, installation and erection of plant and materials on and off the site.

The Contracting Authority may provide time and cost relief in relation to certain types of extreme forms of labour disputes and also to step-in and take over responsibility for the project in certain circumstances.

In emerging markets, the Contracting Authority often has the right to step into the project to remedy chronic or emergency situations and also to engage a replacement contractor to rectify, remedy or address any issues, during the construction (and operation) phase.

Comple-tion (including delay and cost overrun) risk

The risk of commissioning the asset on time and on budget and the consequences of missing either of those two criteria.

Developed X The Private Partner will bear principal responsibility for delay and cost overrun risk.

The principal risk arising out of delay will be the loss of expected revenue, the ongoing costs of financing construction and extended site costs.

Given the integrated nature of the water desalination facility, the Private Partner is best placed to provide all procurement, construction and commissioning

The Contracting Authority may wish to implement a sectional completion process to enable the facility to commence the supply of desalinated water before the end of the construction period for the entire facility. This will also enable the Private Partner to begin receiving payment for its design and construction services once sections of the project are substantially completed and to mitigate its exposure to delays that would otherwise impact the entire facility.

The Contracting Authority may have a critical role to play at stages of the construction, testing and commissioning process in terms of ensuring that any rights that it has to comment on design development and testing results do not adversely delay the project.

The Contracting Authority will generally allow for certain relief events, delay events or force majeure events where delays or cost overruns have arisen from either the fault of

In developed markets, enforcement of construction deadlines and budgets may be easier as the Private Partner will typically have more experience of the market and reliable resources.





programs or standards.



Construc-tion risk

Labour dispute.





Defective material.

Latent defects.



Emerging X The Private Partner assumes all construction risks, save for possibly extreme forms of labour disputes which can be construed as risk assumed by the Contracting Authority in certain circumstances or force majeure etc.

The concession agreement will typically address construction risk as part of the termination regime.

These risks can be mitigated through various means, including ensuring that the Private Partner has the requisite experience in the sector (demonstrated over a lengthy period) and obtaining appropriate security to the risk of non-performance (for example, parent company guarantees, performance bonds and letters of credit).

These mitigants can be instigated through the tendering, tender evaluation and due diligence process and by way of the security provisions in the relevant documentation.

The concession agreement will also include limited rights to extend completion date(s), the right to terminate if the plant is not operational by a nominated longstop date (except if caused by a Government risk event) and step in rights for the Contracting Authority.

The Contracting Authority (and the lenders) will have inspection, review and approval rights in relation to the design and the manufacture, installation and erection of plant and materials on and off the site.

The Contracting Authority may provide time and cost relief in relation to certain types of extreme forms of labour disputes and also to step-in and take over responsibility for the project in certain circumstances.

In emerging markets, the Contracting Authority often has the right to step into the project to remedy chronic or emergency situations and also to engage a replacement contractor to rectify, remedy or address any issues, during the construction (and operation) phase.



Developed X The Private Partner will bear principal responsibility for delay and cost overrun risk.


Given the integrated nature of the water desalination facility, the Private Partner is best placed to provide all procurement, construction and commissioning

The Contracting Authority may wish to implement a sectional completion process to enable the facility to commence the supply of desalinated water before the end of the construction period for the entire facility. This will also enable the Private Partner to begin receiving payment for its design and construction services once sections of the project are substantially completed and to mitigate its exposure to delays that would otherwise impact the entire facility.


The Contracting Authority will generally allow for certain relief events, delay events or force majeure events where delays or cost overruns have arisen from either the fault of

In developed markets, enforcement of construction deadlines and budgets may be easier as the Private Partner will typically have more experience of the market and reliable resources.





of the entire facility. This is generally managed through the engagement of a single EPC contractor or EPC consortium.

The Private Partner will be expected to demonstrate that the facility is substantially complete and meets the minimum performance levels before it is given permission to enter into commercial operation. Water desalination projects require detailed commissioning and testing regimes to ensure that the facility meets the output, water quality, efficiency and environ mental requirements set by the minimum functional/performance specifications.

If additional interconnection facilities are required for the project (such as a new substation to supply electricity or extensions to the water transmission network), construction of these additional facilities may also be included within the Private Partner’s scope of responsibility, transferring the risk of delays and cost overruns in the construction to the Private Partner. Subject to relevant regulatory framework, ownership and responsibility for operation and maintenance of these facilities may be transferred to the Contracting Authority on completion of construction and commissioning, subject to the Private Partner’s defect rectification obligations during the prescribed warranty period. Separate testing and taking over requirements are generally set out for connection facilities transferred to the Contracting Authority on completion.

If associated infrastructure and interconnection facilities are the responsibility of the Contracting Authority, these will need to be the subject of a firm timetable with relief/compensation for the Private Partner for delay.

This can help increase cash flow during construction, reduce the Private Partner’s financing costs, reduce the Private Partner’s contingencies for delay within construction costs and minimise risk of delays impacting the Contracting Authorities ability to satisfy water demand. Financial penalties and liquidated damages can help enforce construction deadlines.

The combination of (i) incentives or penalties for timely completion and (ii) the implementation of a “longstop date” (a date which is pegged to a prescribed time period after the scheduled completion date) will create the necessary tension to incentivize timely completion while allowing the Private Partner a reasonable amount of time to meet its contractual responsibilities in spite of delays before the Contracting Authority can terminate the project.

If the Contracting Authority is responsible for providing or procuring any interconnection facilities, the Contracting Authority should ensure that those facilities are procured in good time.

the Contracting Authority, or no-fault events.

Similarly, the Contracting Authority may need to take responsibility for delays caused by the failure of public bodies to issue necessary consents in good time.





of the entire facility. This is generally managed through the engagement of a single EPC contractor or EPC consortium.

The Private Partner will be expected to demonstrate that the facility is substantially complete and meets the minimum performance levels before it is given permission to enter into commercial operation. Water desalination projects require detailed commissioning and testing regimes to ensure that the facility meets the output, water quality, efficiency and environ mental requirements set by the minimum functional/performance specifications.

If additional interconnection facilities are required for the project (such as a new substation to supply electricity or extensions to the water transmission network), construction of these additional facilities may also be included within the Private Partner’s scope of responsibility, transferring the risk of delays and cost overruns in the construction to the Private Partner. Subject to relevant regulatory framework, ownership and responsibility for operation and maintenance of these facilities may be transferred to the Contracting Authority on completion of construction and commissioning, subject to the Private Partner’s defect rectification obligations during the prescribed warranty period. Separate testing and taking over requirements are generally set out for connection facilities transferred to the Contracting Authority on completion.


This can help increase cash flow during construction, reduce the Private Partner’s financing costs, reduce the Private Partner’s contingencies for delay within construction costs and minimise risk of delays impacting the Contracting Authorities ability to satisfy water demand. Financial penalties and liquidated damages can help enforce construction deadlines.



the Contracting Authority, or no-fault events.








Emerging X The Private Partner will bear principal responsibility for delay and cost overrun risk.


Given the integrated nature of the water desalination facility, the Private Partner is best placed to provide all procurement, construction and commissioning of the entire facility. This is generally managed through the engagement of a single EPC contractor or EPC consortium.

The Private Partner will be expected to demonstrate that the facility is substantially complete and meets the minimum performance levels before it is given permission to enter into commercial operation. Water desalination projects require detailed commissioning and testing regimes to ensure that the facility meets the output, water quality, efficiency and environmental requirements set by the minimum functional/performance specifications.

If additional interconnection facilities are required for the project (such as a new substation to supply electricity or extensions to the water transmission network), construction of these additional facilities may also be included within the Private Partner’s scope of responsibility, transferring the risk of delays and cost overruns in the construction to the Private Partner. Ownership and responsibility for operation and maintenance of these facilities will be transferred to the Contracting Authority on completion of construction and commissioning (or following a limited operation period), subject to the Private Partner's defect

The Contracting Authority may wish to implement a sectional completion process to enable the facility to commence the supply of desalinated water before the end of the construction period for the entire facility. This will also enable the Private Partner to begin receiving payment for its design and construction services once sections of the project are substantially completed and to mitigate its exposure to delays that would otherwise impact the entire facility. This can help increase cash flow during construction, reduce the Private Partner’s financing costs, reduce the Private Partner’s contingencies for delay within construction costs and minimise risk of delays impacting the Contracting Authorities ability to satisfy water demand. Financial penalties and liquidated damages can help enforce construction deadlines.

The combination of (i) incentives or penalties for timely completion and (ii) the implementation of a “longstop date” (a date which is pegged to a prescribed time period after the scheduled completion date) will generally create the necessary tension to incentivize timely completion while allowing the Private Partner a reasonable amount of time to meet its contractual responsibilities in spite of delays before the Contracting Authority can terminate the project.


The Contracting Authority may also require the right to step-in and assume the responsibilities of the Private Partner in certain limited circumstances. This right is rarely exercised. The Contracting Authority may also require a ‘look forward’ termination test to ensure that it can


The Contracting Authority will generally allow for certain relief events, delay events or force majeure events where delays or cost overruns have arisen from either the fault of the Contracting Authority, or no-fault events.


In emerging market desalination projects, there is increased risk of delays arising from unanticipated challenges in construction and unreliable resources. The Contracting Authority will need to be prepared to enforce its rights to manage the consequences of a failure by the Private Partner to meet the construction milestones. The management of completion risk is typically addressed by having either: (i) a scheduled completion date (with attached liquidated damages for delay) followed by a fixed period for operation under the water purchase agreement commencing on the actual completion date, or (ii) the scheduled construction period forming part of the fixed operation period (with extensions for certain events such as force majeure). With the latter scenario, in emerging markets, the Contracting Authority may attempt to additionally impose delay liquidated damages on the Private Partner. However, this decision should always be assessed against the likelihood that genuine out-of-pocket costs will actually be incurred for such delay, so as to avoid unnecessary contingency being built into the project.





rectification obligations during the prescribed warranty period. Separate testing and taking over requirements are generally set out for connection facilities transferred to the Contracting Authority on completion.


pre-emptively terminate the concession agreement if significant delay is anticipated.

Perform-ance/price risk

The risk that the asset is unable to achieve the output specification metrics and the price or cost of doing so.

Developed X The Private Partner bears the risk of achieving the performance specification such as water quality specifications and guaranteed water capacity.

The Contracting Authority bears the risk of enforcing the regime and for ensuring that the output specification is properly tailored to what the Private Partner can deliver.

The onus falls upon the Contracting Authority to draft attainable standards based on relevant market data and requirements and policy objectives. Performance based on reliability, demonstrated water capacity and water availability, can be measured against pre-determined schedules or standards.

The relevant project documents will contain clear key performance indicators, output specifications, appropriate financial damages for non-performance and transparent reporting requirements. In developing the outputs needed, and the desired performance levels at which the service should be undertaken, the Contracting Authority focuses on the precise service it wishes to procure and refines the performance regime (constituted by acceptance standards and tests, performance tests, performance standards and intake water quality requirements) with the bidders during the bid phase. These performance levels, once negotiated, constitute a key element of the risk transfer mechanism.

Penalty deductions from Capacity Payments for de-rating and outages are included in the concession agreement to support achievement of the performance standards.

Where certain performance indicators cannot be met due to actions by the Contracting Authority or unforeseen circumstances, the Private Partner may be eligible to seek relief and/or compensation.

In developed markets formulation of appropriate specifications and the private sector’s ability to manage performance to those specifications will be more manageable.





rectification obligations during the prescribed warranty period. Separate testing and taking over requirements are generally set out for connection facilities transferred to the Contracting Authority on completion.


pre-emptively terminate the concession agreement if significant delay is anticipated.



Developed X The Private Partner bears the risk of achieving the performance specification such as water quality specifications and guaranteed water capacity.


The onus falls upon the Contracting Authority to draft attainable standards based on relevant market data and requirements and policy objectives. Performance based on reliability, demonstrated water capacity and water availability, can be measured against pre-determined schedules or standards.




In developed markets formulation of appropriate specifications and the private sector’s ability to manage performance to those specifications will be more manageable.







Emerging X The Private Partner bears the risk of achieving the performance specification such as water quality specifications and guaranteed water capacity.


Consideration needs to be given to the ability of the Private Partner to achieve the necessary performance levels given the nature of the project and the emerging market in which it will be based.

The onus falls upon the Contracting Authority to draft attainable standards based on relevant market data and requirements and policy objectives. Performance based on reliability, demonstrated water capacity and water availability, can be measured against pre-determined schedules or standards

The Private Partner (and the lenders and their technical advisers) will carefully review the proposed output specification in order to ensure that it is achievable. The Private Partner will test the proposed output specification during the bid clarification period (and sometimes even during the negotiation period post-bid submission).




For emerging markets, particularly in the case of market first projects, the preparation of attainable standards by the Contracting Authority is complicated by the lack of relevant and/or historical market data.

Resource or input risk

The risk that the supply of inputs or resources required for the operation of the project is interrupted or the cost increases.

Developed X The main input or resource required for a desalination facility is seawater. The Contracting Authority generally bears primary responsibility in the event that intake water is contaminated. The other main input or resource required for a desalination facility is power. The Contracting

The Private Partner may be incentivized, through a sharing mechanism, to achieve certain efficiencies in energy consumption throughout the concession period.

Where certain performance indicators cannot be met due to contaminated intake or shortage of water, the Private Partner may be eligible to seek relief and/or compensation.

The cost of power is generally a pass-through cost with the Contracting Authority bearing the cost of any adjustments in the price, subject to

Developed markets generally do not experience market volatility to the extent of emerging markets, and resource availability is less of a concern, however energy costs may still vary significantly over the course of project that must be accounted for.







Emerging X The Private Partner bears the risk of achieving the performance specification such as water quality specifications and guaranteed water capacity.


Consideration needs to be given to the ability of the Private Partner to achieve the necessary performance levels given the nature of the project and the emerging market in which it will be based.

The onus falls upon the Contracting Authority to draft attainable standards based on relevant market data and requirements and policy objectives. Performance based on reliability, demonstrated water capacity and water availability, can be measured against pre-determined schedules or standards

The Private Partner (and the lenders and their technical advisers) will carefully review the proposed output specification in order to ensure that it is achievable. The Private Partner will test the proposed output specification during the bid clarification period (and sometimes even during the negotiation period post-bid submission).




For emerging markets, particularly in the case of market first projects, the preparation of attainable standards by the Contracting Authority is complicated by the lack of relevant and/or historical market data.



Developed X The main input or resource required for a desalination facility is seawater. The Contracting Authority generally bears primary responsibility in the event that intake water is contaminated. The other main input or resource required for a desalination facility is power. The Contracting

The Private Partner may be incentivized, through a sharing mechanism, to achieve certain efficiencies in energy consumption throughout the concession period.

Where certain performance indicators cannot be met due to contaminated intake or shortage of water, the Private Partner may be eligible to seek relief and/or compensation.

The cost of power is generally a pass-through cost with the Contracting Authority bearing the cost of any adjustments in the price, subject to






Authority typically bears the primary responsibility to ensure an uninterrupted supply of power to the facility. The price of electricity or gas is often a pass-through cost.

any energy usage efficiency sharing mechanism.



Emerging X The main input or resource required for a desalination facility is seawater. If the Contracting Authority is responsible for providing seawater, then the Contacting Authority will generally bear primary responsibility in the event that intake water is contaminated. If the Private Partner bears responsibility for procuring seawater, then the Private Partner will general bear primary responsibility in the event that the intake water is contaminated.

The other main input or resource required for a desalination facility is power. The Contracting Authority typically bears the primary responsibility to ensure an uninterrupted supply of power to the facility. The price of electricity or gas is often a pass-through cost.

The Private Partner may be incentivized, through a sharing mechanism, to increase efficiencies in energy consumption throughout the concession period.

In emerging markets, the Private Partner is generally unable to pass any cost increases through to an end user.

Where the Contracting Authority bears the risk of providing seawater, certain performance indicators cannot be met due to contaminated intake or shortage of water, the Private Partner may be eligible to seek relief and/or compensation.

The cost of power is generally a pass-through cost with the Contracting Authority bearing the cost of any adjustments in the price, subject to any energy usage efficiency mechanism.

Emerging markets are generally more susceptible to contamination events and electricity and water availability may be less reliable.

Demand risk

The availability by both volume and quality along with transportation of resource or inputs to a project or the demand for the product of service of a project by consumers/users

Developed X In the majority of developed world desalination projects, demand risk will be taken by the Contracting Authority with the Private Partner remunerated on an availability basis. Water resource risk is also likely to be borne by the Contracting Authority.

The Contracting Authority should do a full assessment of demand as part of the project feasibility study to ensure that the plant is appropriately sized.

As the Contracting Authority will be retaining demand risk, it will need to ensure that it is comfortable (both politically and economically) with demand forecasts.

In developing markets, the Contracting Authority should have access to various data sources to develop accurate consumption forecasts, such that the Contracting Authority is well placed to manage potable water demand.

Demand risk


Emerging X The default position for desalination projects in emerging markets is that the Contracting Authority is a monopoly off-taker and will guarantee the purchase of all water output. Water resource risk is also likely to be borne by the Contracting Authority.



For emerging markets, particularly in the case of market first projects, the preparation of demand profiles by the Contracting Authority is complicated by the lack of relevant and/or historical market data.

The high incidence of delayed project execution in emerging markets means that demand forecasts are often out-dated by project completion. Regimes for plant expansion are often drafted into the concession agreement in order to facilitate quick and efficient project expansion.





Authority typically bears the primary responsibility to ensure an uninterrupted supply of power to the facility. The price of electricity or gas is often a pass-through cost.

any energy usage efficiency sharing mechanism.



Emerging X The main input or resource required for a desalination facility is seawater. If the Contracting Authority is responsible for providing seawater, then the Contacting Authority will generally bear primary responsibility in the event that intake water is contaminated. If the Private Partner bears responsibility for procuring seawater, then the Private Partner will general bear primary responsibility in the event that the intake water is contaminated.

The other main input or resource required for a desalination facility is power. The Contracting Authority typically bears the primary responsibility to ensure an uninterrupted supply of power to the facility. The price of electricity or gas is often a pass-through cost.

The Private Partner may be incentivized, through a sharing mechanism, to increase efficiencies in energy consumption throughout the concession period.

In emerging markets, the Private Partner is generally unable to pass any cost increases through to an end user.

Where the Contracting Authority bears the risk of providing seawater, certain performance indicators cannot be met due to contaminated intake or shortage of water, the Private Partner may be eligible to seek relief and/or compensation.

The cost of power is generally a pass-through cost with the Contracting Authority bearing the cost of any adjustments in the price, subject to any energy usage efficiency mechanism.

Emerging markets are generally more susceptible to contamination events and electricity and water availability may be less reliable.

Demand risk


Developed X In the majority of developed world desalination projects, demand risk will be taken by the Contracting Authority with the Private Partner remunerated on an availability basis. Water resource risk is also likely to be borne by the Contracting Authority.



In developing markets, the Contracting Authority should have access to various data sources to develop accurate consumption forecasts, such that the Contracting Authority is well placed to manage potable water demand.

Demand risk


Emerging X The default position for desalination projects in emerging markets is that the Contracting Authority is a monopoly off-taker and will guarantee the purchase of all water output. Water resource risk is also likely to be borne by the Contracting Authority.



For emerging markets, particularly in the case of market first projects, the preparation of demand profiles by the Contracting Authority is complicated by the lack of relevant and/or historical market data.

The high incidence of delayed project execution in emerging markets means that demand forecasts are often out-dated by project completion. Regimes for plant expansion are often drafted into the concession agreement in order to facilitate quick and efficient project expansion.





Mainten-ance risk

The risk of maintaining the asset to the appropriate standards and specifications for the life of the project.

Incorrect estimates and cost overruns.

Developed X As owner and operator of the facility until its transfer to the Contracting Authority at the end of the project, the Private Partner will have responsibility for meeting the maintenance requirements defined by the Contracting Authority during the bidding process (for example, for reverse osmosis technologies specific requirements may be included for operation and maintenance agreements with third parties demonstrating relevant expertise and/or for membrane supply arrangements) and/or in the water purchase agreement. In addition to specific maintenance requirements imposed by the Contracting Authority, the Private Partner will be responsible for maintaining the facility so as to meet the contractual levels of availability and output required to secure its revenue stream.

The Private Partner generally assumes the risk of all maintenance, including periodic and preventative maintenance, emergency maintenance work, work stemming from design or construction errors and rehabilitation work.

Maintenance events affecting the availability of the facility are generally scheduled by agreement with the Contracting Authority and scheduled maintenance may be prohibited during seasons of peak demand.

The Contracting Authority generally retains the risk of certain events impacting the project (such as political risk and regulatory/change in law risk), in which case the Contracting Authority may be required to provide relief to the Private Partner for the impacts on the project of additional maintenance required by those events (including the additional costs of maintenance), but responsibility

The Contracting Authority should take time to ensure that the water purchase agreement properly defines the maintenance obligations on the Private Partner to ensure that the facility is properly maintained throughout the life of the project, to ensure that the facility is in a satisfactory condition in the event of early termination or on expiry of the agreement, at which point the facility will be transferred to the Contracting Authority. The Contracting Authority should also consider whether any long-term services or supplies should be secured for the facility.

Subject to the requirements of the Private Partner’s financing parties, the Contracting Authority should consider specific requirements in relation to the use of property damage insurance to reinstate the facility.

Adequate performance by the Private Partner will be further enforced by ensuring that the payment mechanism reflects the Private Partner’s ability to meet the contractual levels (in volume and quality) of availability and output and by including termination triggers for material performance shortfalls.

There may also be specific transfer provisions providing for the condition of the facility to be assessed during the last few years of the project. The Private Partner will then be required to carry out any remedial work necessary to ensure that the facility meets the required standards on the date of transfer to the Contracting Authority at the end of the project.

Generally speaking, the Contracting Authority’s role is limited to defining minimum maintenance requirements and ensuring that these are met.

The Contracting Authority may be required to maintain interconnections with the facility, such as the water transmission system.

In developed markets, the involvement of the Private Partner in the operation and maintenance of the project provides several benefits by incentivizing greater care and diligence by the Private Partner in the construction phase to ensure the operational life of the facility and that operation and maintenance considerations are appropriately considered in the design of the facility.





Mainten-ance risk



Developed X As owner and operator of the facility until its transfer to the Contracting Authority at the end of the project, the Private Partner will have responsibility for meeting the maintenance requirements defined by the Contracting Authority during the bidding process (for example, for reverse osmosis technologies specific requirements may be included for operation and maintenance agreements with third parties demonstrating relevant expertise and/or for membrane supply arrangements) and/or in the water purchase agreement. In addition to specific maintenance requirements imposed by the Contracting Authority, the Private Partner will be responsible for maintaining the facility so as to meet the contractual levels of availability and output required to secure its revenue stream.



The Contracting Authority generally retains the risk of certain events impacting the project (such as political risk and regulatory/change in law risk), in which case the Contracting Authority may be required to provide relief to the Private Partner for the impacts on the project of additional maintenance required by those events (including the additional costs of maintenance), but responsibility

The Contracting Authority should take time to ensure that the water purchase agreement properly defines the maintenance obligations on the Private Partner to ensure that the facility is properly maintained throughout the life of the project, to ensure that the facility is in a satisfactory condition in the event of early termination or on expiry of the agreement, at which point the facility will be transferred to the Contracting Authority. The Contracting Authority should also consider whether any long-term services or supplies should be secured for the facility.

Subject to the requirements of the Private Partner’s financing parties, the Contracting Authority should consider specific requirements in relation to the use of property damage insurance to reinstate the facility.





In developed markets, the involvement of the Private Partner in the operation and maintenance of the project provides several benefits by incentivizing greater care and diligence by the Private Partner in the construction phase to ensure the operational life of the facility and that operation and maintenance considerations are appropriately considered in the design of the facility.





for performance of the maintenance remains with the Private Partner.

The Contracting Authority may retain the maintenance risk associated with the infrastructure connecting with the facility, such as the water delivery pipe taking water from the facility’s delivery point.

Mainten-ance risk



Emerging X As owner and operator of the facility until its transfer to the Contracting Authority at the end of the project, the Private Partner will have responsibility for meeting the maintenance requirements defined by the Contracting Authority during the bidding process (for example, for reverse osmosis technologies specific requirements may be included for operation and maintenance agreements with third parties demonstrating relevant expertise and/or for membrane supply arrangements) and/or in the water purchase agreement. In addition to specific maintenance requirements imposed by the Contracting Authority, the Private Partner will be responsible for maintaining the facility so as to meet the contractual levels of availability and output required to secure its revenue stream.



The Contracting Authority generally retains the risk of certain events impacting the

The Contracting Authority should take time to ensure that the water purchase agreement properly defines the maintenance obligations on the Private Partner to ensure that the facility is properly maintained throughout the life of the project, to ensure that the facility is in a satisfactory condition in the event consider specific requirements in relation to the use of property damage insurance to reinstate the facility.





In emerging markets, the involvement of the Private Partner in the operation and maintenance of the project secures the expertise of the Private Partner for the life of the project, in addition to incentivizing greater care and diligence by the Private Partner in the construction phase to ensure the operational life of the facility and that and that operation and maintenance considerations are appropriately considered in the design of the facility.





for performance of the maintenance remains with the Private Partner.


Mainten-ance risk



Emerging X As owner and operator of the facility until its transfer to the Contracting Authority at the end of the project, the Private Partner will have responsibility for meeting the maintenance requirements defined by the Contracting Authority during the bidding process (for example, for reverse osmosis technologies specific requirements may be included for operation and maintenance agreements with third parties demonstrating relevant expertise and/or for membrane supply arrangements) and/or in the water purchase agreement. In addition to specific maintenance requirements imposed by the Contracting Authority, the Private Partner will be responsible for maintaining the facility so as to meet the contractual levels of availability and output required to secure its revenue stream.



The Contracting Authority generally retains the risk of certain events impacting the

The Contracting Authority should take time to ensure that the water purchase agreement properly defines the maintenance obligations on the Private Partner to ensure that the facility is properly maintained throughout the life of the project, to ensure that the facility is in a satisfactory condition in the event consider specific requirements in relation to the use of property damage insurance to reinstate the facility.





In emerging markets, the involvement of the Private Partner in the operation and maintenance of the project secures the expertise of the Private Partner for the life of the project, in addition to incentivizing greater care and diligence by the Private Partner in the construction phase to ensure the operational life of the facility and that and that operation and maintenance considerations are appropriately considered in the design of the facility.





project (such as political risk and regulatory/change in law risk), in which case the Contracting Authority may be required to provide relief to the Private Partner for the impacts on the project of additional maintenance required by those events (including the additional costs of maintenance), but responsibility for performance of the maintenance remains with the Private Partner.


Force majeure risk

The risk that unexpected events occur that are beyond the control of the parties and delay or prohibit performance.

Developed X Force majeure is a shared risk and there will be a fairly well-developed list of events that entitle the Private Partner to relief.

Typical events could include:

- natural force majeure events, which typically can be insured (e.g. lightening, fire, earthquake, tsunami, flood, cyclone, or other natural calamity/act of God, epidemic or plague, accidents or explosions etc.), and

- other force majeure events which typically cannot be insured (often described as ‘political force majeure’ events) (e.g. war within the jurisdiction, strikes/protest, terrorism, riots etc.).

The Private Partner will generally be entitled to an extension of time (but sometimes only over an agreed threshold) and additional costs only in the event of a political force majeure, but an extension of time only in the event of a natural force majeure.

Force majeure events occurring during construction will also cause a delay in revenue commencement. The ability of the Private Partner to bear this risk for events of ‘political force

Project insurance (physical damage and loss of revenue coverage) is the key mitigant for force majeure risks that cause physical damage.

On availability based projects, the risk of disruption as a result of no-fault events could be mitigated by relaxing the performance thresholds (e.g. paying the Private Partner for actual water availability during the force majeure event and relieving it from any penalties for consequent inability to perform).

In some jurisdictions, the project may be subject to abatement but not excused from non-performance/breach.

Generally speaking, where parties are unable to agree on a way forward following a force majeure event, an amount of compensation should continue to be payable by the Contracting Authority to the Private Partner in order to service the Private Partner’s debt obligations during the course of the event. Where the project is terminated, in some jurisdictions the Contracting Authority may be required to fully compensate the Private Partner for debt owed to the lenders. Whether the debt will be kept whole in such a scenario, will be a key area of focus for prospective lenders as part of their initial credit assessments.

On developed market transactions, the Contracting Authority typically compensates the Private Partner, only for its outstanding debt (but not for its expected rate of return) for termination arising from a “natural” force majeure.





project (such as political risk and regulatory/change in law risk), in which case the Contracting Authority may be required to provide relief to the Private Partner for the impacts on the project of additional maintenance required by those events (including the additional costs of maintenance), but responsibility for performance of the maintenance remains with the Private Partner.


Force majeure risk


Developed X Force majeure is a shared risk and there will be a fairly well-developed list of events that entitle the Private Partner to relief.


- natural force majeure events, which typically can be insured (e.g. lightening, fire, earthquake, tsunami, flood, cyclone, or other natural calamity/act of God, epidemic or plague, accidents or explosions etc.), and

- other force majeure events which typically cannot be insured (often described as ‘political force majeure’ events) (e.g. war within the jurisdiction, strikes/protest, terrorism, riots etc.).


Force majeure events occurring during construction will also cause a delay in revenue commencement. The ability of the Private Partner to bear this risk for events of ‘political force


On availability based projects, the risk of disruption as a result of no-fault events could be mitigated by relaxing the performance thresholds (e.g. paying the Private Partner for actual water availability during the force majeure event and relieving it from any penalties for consequent inability to perform).

In some jurisdictions, the project may be subject to abatement but not excused from non-performance/breach.

Generally speaking, where parties are unable to agree on a way forward following a force majeure event, an amount of compensation should continue to be payable by the Contracting Authority to the Private Partner in order to service the Private Partner’s debt obligations during the course of the event. Where the project is terminated, in some jurisdictions the Contracting Authority may be required to fully compensate the Private Partner for debt owed to the lenders. Whether the debt will be kept whole in such a scenario, will be a key area of focus for prospective lenders as part of their initial credit assessments.

On developed market transactions, the Contracting Authority typically compensates the Private Partner, only for its outstanding debt (but not for its expected rate of return) for termination arising from a “natural” force majeure.





majeure’ will be limited, and the Contracting Authority will typically have to bear the risk after a certain period of time or level of loss has been exceeded.

During the operation period, the impact of the force majeure will depend on whether the force majeure is ‘natural’ or ‘political’. In the event of natural force majeure, the Private Partner would be entitled to the tariff to the extent of its availability. In the event of a political force majeure event, the Private Partner would be entitled to the tariff on the basis of the availability of the plant as tested by the last availability test.

In the event of a prolonged force majeure event, the Contracting Authority would generally have the right to terminate. The Private Partner would generally expect to receive more equity return than for termination

Force majeure risk


Emerging X Force majeure is a shared risk and there will be a fairly well-developed list of events that entitle the Private Partner to relief.


- natural force majeure events, which typically can be insured (e.g. lightening, fire, earthquake, tsunami, flood, cyclone, or other natural calamity/act of God, epidemic or plague, accidents or explosions etc.), and - other force majeure events which typically cannot be insured (often described as ‘political force majeure’ events) (e.g. war within the jurisdiction, strikes/protest, terrorism, riots etc.).



On availability based projects, the risk of disruption as a result of no-fault events could be mitigated by relaxing the performance thresholds (e.g. requiring a lower level of availability without incurring performance penalties).

See comments on the risk of uninsurability for a Desalination Plant projects in emerging markets.

On emerging market transactions, the Contracting Authority often does not provide any compensation for termination arising from a “natural” force majeure, on the grounds that this should be insured. In the event of prolonged force majeure, the Contracting Authority will be entitled to terminate.





Force majeure events occurring during construction will also cause a delay in revenue commencement. The ability of the Private Partner to bear this risk for events of ‘political force majeure’ will be limited, and the Contracting Authority will typically have to bear the risk after a certain period of time or level of loss has been exceeded.

During the operation period, the impact of the force majeure will depend on whether the force majeure is ‘natural’ or ‘political’. In the event of natural force majeure, the Private Partner would be entitled to start receiving the tariff to the extent of its availability. In the event of a political force majeure event, the Private Partner would be entitled to start receiving the tariff on the basis of the availability of the plant as tested by the last availability test.

In the event of a prolonged force majeure event, the Contracting Authority would generally have the right to terminate. The Private Partner would generally expect to receive more equity return than for termination for a ‘natural’ force majeure event.

Exchange and interest rate risk

The risk of currency fluctuations and or the interest rate over the life of a project

Developed X Currency fluctuations and interest rate fluctuation risks will generally be borne by the Private Partner.

The Private Partner would look to mitigate this risk through hedging arrangements under the Finance Documents, to the extent possible in that market.

The Contracting Authority is not expected to assist the Private Partner in mitigating such risks.

However, in some circumstances the Contracting Authority may seek to retain interest rate risk if it feels it can bear the risk more efficiently than the private sector.

In developed markets, the risk of currency fluctuations and interest rates is generally not substantial enough to require the Contracting Authority to provide support.



Emerging X The Contracting Authority would specifically prohibit the Private Partner from claiming additional costs in the event of general currency and interest rate fluctuations, although certain elements of the tariff may be adjusted for fluctuations between the local currency and USD (e.g. in de-pegging scenario).


In certain countries, this may not be possible due to exchange/interest rate volatility or due to the lack of hedging markets for pegged currencies.

As the tariff will be paid in local currency, the Contracting Authority may retain the risk of devaluation of the local currency to the extent that such devaluation impacts on the economic viability of the project (due to the need to pay for foreign currency imports and service foreign currency debt).

In emerging markets, the risk of currency fluctuations is often a key bankability issue. Issues of convertibility of currency and restrictions on repatriation of funds are also bankability issues upon termination in emerging markets.





Force majeure events occurring during construction will also cause a delay in revenue commencement. The ability of the Private Partner to bear this risk for events of ‘political force majeure’ will be limited, and the Contracting Authority will typically have to bear the risk after a certain period of time or level of loss has been exceeded.

During the operation period, the impact of the force majeure will depend on whether the force majeure is ‘natural’ or ‘political’. In the event of natural force majeure, the Private Partner would be entitled to start receiving the tariff to the extent of its availability. In the event of a political force majeure event, the Private Partner would be entitled to start receiving the tariff on the basis of the availability of the plant as tested by the last availability test.

In the event of a prolonged force majeure event, the Contracting Authority would generally have the right to terminate. The Private Partner would generally expect to receive more equity return than for termination for a ‘natural’ force majeure event.



Developed X Currency fluctuations and interest rate fluctuation risks will generally be borne by the Private Partner.




In developed markets, the risk of currency fluctuations and interest rates is generally not substantial enough to require the Contracting Authority to provide support.



Emerging X The Contracting Authority would specifically prohibit the Private Partner from claiming additional costs in the event of general currency and interest rate fluctuations, although certain elements of the tariff may be adjusted for fluctuations between the local currency and USD (e.g. in de-pegging scenario).


In certain countries, this may not be possible due to exchange/interest rate volatility or due to the lack of hedging markets for pegged currencies.

As the tariff will be paid in local currency, the Contracting Authority may retain the risk of devaluation of the local currency to the extent that such devaluation impacts on the economic viability of the project (due to the need to pay for foreign currency imports and service foreign currency debt).

In emerging markets, the risk of currency fluctuations is often a key bankability issue. Issues of convertibility of currency and restrictions on repatriation of funds are also bankability issues upon termination in emerging markets.





Insurance risk

The risk that insurance for particular risks is or becomes unavailable.

Developed X Where risks become uninsurable there is typically no obligation to maintain insurance for such risks.

If an uninsured risk event occurs, the parties may agree to negotiate in good faith risk allocation going forward, while allowing for the termination of the project if an agreement cannot be reached. The Contracting Authority may choose to assume responsibility for the uninsurable risk, while requiring the Private Partner to regularly approach the insurance market to obtain any relevant insurance.

If the uninsured risk is fundamental to the project (e.g. physical damage cover for major project components) and the parties are unable to agree on suitable arrangements, then the Private Partner may need an exit route (e.g. termination of the project on the same terms as if it were an event of force majeure) if it cannot reinstate the project on an economic basis.

As part of the feasibility study the Contracting Authority and Private Partner should consider whether insurance might become unavailable for the project given the location and other relevant factors.

The Contracting Authority may need to consider whether it stands behind unavailability of insurance, in particular where this has been caused by in-country or regional events or circumstances.

In developed market transactions, as neither party can better control the risk of insurance coverage becoming unattainable and insurance coverage should be less volatile than for emerging markets, this is typically a shared risk. However, in some developed jurisdictions uninsurable risk may remain with the private sector.

Where the cost of the required insurance increases significantly, the risk is typically shared by having either an agreed cost escalation mechanism up to ceiling or a percentage sharing arrangement—this allows the Contracting Authority to quantify the contingency that has been priced for this risk.

In circumstances where the required insurance becomes unavailable, the Contracting Authority is typically given the option either to terminate the project or to proceed with the project and effectively self-insure and pay out in the event the risk occurs.

Insurance risk


Emerging X Where risks become uninsurable (i.e. not available on commercially reasonable terms in the international insurance market) there is typically no obligation to maintain insurance for such risks.

If an uninsured risk event occurs, the Private Partner will typically have to bear this risk, although sometimes the Contracting Authority becomes the insurer of last resort.

If the uninsured risk is fundamental to the project (e.g. physical damage cover for major project components) then the Private Partner may need an exit route (e.g. force majeure termination) if it cannot reinstate the project on an economic basis.

As part of the feasibility study, the Contracting Authority and Private Partner should consider whether insurance might become unavailable for it given the location and other factors relevant to the project.


On emerging market transactions, the Contracting Authority typically does not take the risk of uninsurability arising on the project, although there are good grounds to say that it should do so if the Private Partner has no protection for the consequences of a natural force majeure that becomes uninsurable.





Insurance risk







In developed market transactions, as neither party can better control the risk of insurance coverage becoming unattainable and insurance coverage should be less volatile than for emerging markets, this is typically a shared risk. However, in some developed jurisdictions uninsurable risk may remain with the private sector.

Where the cost of the required insurance increases significantly, the risk is typically shared by having either an agreed cost escalation mechanism up to ceiling or a percentage sharing arrangement—this allows the Contracting Authority to quantify the contingency that has been priced for this risk.

In circumstances where the required insurance becomes unavailable, the Contracting Authority is typically given the option either to terminate the project or to proceed with the project and effectively self-insure and pay out in the event the risk occurs.

Insurance risk


Emerging X Where risks become uninsurable (i.e. not available on commercially reasonable terms in the international insurance market) there is typically no obligation to maintain insurance for such risks.

If an uninsured risk event occurs, the Private Partner will typically have to bear this risk, although sometimes the Contracting Authority becomes the insurer of last resort.

If the uninsured risk is fundamental to the project (e.g. physical damage cover for major project components) then the Private Partner may need an exit route (e.g. force majeure termination) if it cannot reinstate the project on an economic basis.

As part of the feasibility study, the Contracting Authority and Private Partner should consider whether insurance might become unavailable for it given the location and other factors relevant to the project.


On emerging market transactions, the Contracting Authority typically does not take the risk of uninsurability arising on the project, although there are good grounds to say that it should do so if the Private Partner has no protection for the consequences of a natural force majeure that becomes uninsurable.





Political risk

The risk of Government intervention, discrimination, seizure or expropriation of the project.

Developed X The Contracting Authority will bear responsibility for political events outside the Private Partner’s control, and the Contracting Authority will be responsible should it fail to continually provide the Private Partner with the license and access to the system and surrounding lands necessary to allow the Private Partner to fulfill its obligations.

The Contracting Authority will outline certain political events as delay events, compensation events excusing causes (relief from payment deductions) that involve a breach of obligations or interference by the Contracting Authority with the project.

This type of issue will typically lead to a termination event where the Contracting Authority will need to stand behind debt and equity.

The type of political risk events that occur in developed markets are likely more subdued and less drastic than emerging markets. As such, political risk insurance is not typically obtained.

Political risk


Emerging X The Contracting Authority typically bears responsibility for political events outside the Private Partner’s control.

This concept may include any act or omission of any Government entity which may have a material adverse impact on the Private Partner’s ability to perform its obligations and/or exercise its rights under the concession.

The Private Partner would expect not only compensatory relief but also an ability to exit the project if the political risks continue for an unacceptable duration.

The Contracting Authority will need to ensure that other Government departments keep in line with the project objectives and will need to actively manage the various stakeholders in the project to achieve this.

This type of issue will typically lead to a termination right for the Private Partner and the Contracting Authority will need to stand behind debt and equity.

Investors and commercial lenders may also be able to cover themselves by use of political risk insurance, leaving this risk to be managed by the insurer against the Contracting Authority.

Regulat-ory/change in law risk

The risk of law changing and affecting the ability of the project to perform and the price at which compliance with law can be maintained.

Change in taxation.

Developed X The risk of change in law sits mostly with the Contracting Authority but there will be a degree of risk sharing in the following manner:

The Private Partner will be kept whole in respect of changes in law which are: (i) Discriminatory (to the project or the Private Partner) (ii) specific (to the water sector or to PPP projects in the jurisdiction) or (iii) general change in law affecting capital expenditures. A change in law is often subject to a de minimis threshold before the Private Partner is entitled to compensation

The Private Partner will not be compensated for general changes in law that only affect operational expenditure or taxation (i.e. affect the market equally). Changes in law will always entitle the Private Partner to a Variation where this is

The Private Partners’ entitlement to relief may be subject to minimum thresholds.

Past concession models (including that developed in the UK) used to require the Private Partner to assume, and price for, a specified level of general change in law capex risk during the operational period, before compensation would be paid. The UK Government ultimately decided that this allocation did not represent value for money and reversed this position. Some countries which adopted the SOPC model had already taken this approach. Accordingly, the Contracting Authority should be mindful of how it will fund these changes should they arise. The regulation of water pricing for consumers may impact on the extent and timing of ultimate pass through to end users.

In developed markets change in law risk is likely to be of less concern to Private Partners, although Private Partners will still expect protection against discriminatory change in law and, in some jurisdictions, general change in law which has material cost impact.





Political risk


Developed X The Contracting Authority will bear responsibility for political events outside the Private Partner’s control, and the Contracting Authority will be responsible should it fail to continually provide the Private Partner with the license and access to the system and surrounding lands necessary to allow the Private Partner to fulfill its obligations.




Political risk


Emerging X The Contracting Authority typically bears responsibility for political events outside the Private Partner’s control.

This concept may include any act or omission of any Government entity which may have a material adverse impact on the Private Partner’s ability to perform its obligations and/or exercise its rights under the concession.



This type of issue will typically lead to a termination right for the Private Partner and the Contracting Authority will need to stand behind debt and equity.


Regulat-ory/change in law risk


Change in taxation.


The Private Partner will be kept whole in respect of changes in law which are: (i) Discriminatory (to the project or the Private Partner) (ii) specific (to the water sector or to PPP projects in the jurisdiction) or (iii) general change in law affecting capital expenditures. A change in law is often subject to a de minimis threshold before the Private Partner is entitled to compensation

The Private Partner will not be compensated for general changes in law that only affect operational expenditure or taxation (i.e. affect the market equally). Changes in law will always entitle the Private Partner to a Variation where this is

The Private Partners’ entitlement to relief may be subject to minimum thresholds.

Past concession models (including that developed in the UK) used to require the Private Partner to assume, and price for, a specified level of general change in law capex risk during the operational period, before compensation would be paid. The UK Government ultimately decided that this allocation did not represent value for money and reversed this position. Some countries which adopted the SOPC model had already taken this approach. Accordingly, the Contracting Authority should be mindful of how it will fund these changes should they arise. The regulation of water pricing for consumers may impact on the extent and timing of ultimate pass through to end users.

In developed markets change in law risk is likely to be of less concern to Private Partners, although Private Partners will still expect protection against discriminatory change in law and, in some jurisdictions, general change in law which has material cost impact.





necessary to avoid an impossible obligation. If this cannot be achieved the Private Partner will typically be entitled to terminate as if a Contracting Authority breach had occurred.

Regulat-ory/ change in law risk


Emerging X The risk of change in law sits with the Contracting Authority. The Private Partner will be entitled to claim for any increased costs and in relation to delay arising from a change in law.

A change in law is generally specifically defined and may include:

(i) any law coming into effect after the effective date, or existing law being modified after the effective date; (ii) any required Private Partner consent being terminated or the introduction of conditions upon renewal which materially adversely affect the Private Partner; (iii) the unjustified refusal to grant a permit and (iv) a change in the grid code or water code.

The Contracting Authority will need to ensure that various Government departments keep the project in mind when passing new laws to ensure that the Private Partner is not inadvertently affected.

The various Government departments that may impact on the project should therefore be cognisant of the risk allocation in the project when passing laws and regulations that may have an impact on it.

Some projects may also provide for a stabilisation clause that entrenches certain legal positions (such as the current tax regime) against any future changes in law. This may require a level of parliamentary ratification of the concession agreement.

However, the stabilisation method is generally not favoured by Governments or NGOs (e.g. because of the concept of Private Partner immunity from updates to environmental laws, for example).

In emerging markets:

(a) the Private Partner is likely to have a greater level of protection from changes in law to reflect the greater risk of change (including both likelihood and consequences) and in order to attract investors to the project. In that way, the Contracting Authority would be expected to assume more change in law risk than compared to a project in a developed market;

(b) the Private Partner does not generally have to prove that it could have anticipated the change in law, provided that it occurred after an agreed base date; and

(c) changes in the environmental, safety and health law which are no more onerous than those prevailing internationally and changes in the exchange rate between local currency and USD are often specifically excluded as changes in law. This reflects both the Contracting Authority’s expectations about the Private Partners (i.e. as international developers, contractors and operators) and the developing nature of legislative reform in these areas.

Inflation risk

The risk that the costs of the project increase more than expected.

Developed X Inflation risks during construction are typically borne by the Private Partner, while inflation risks during the concession term will typically be primarily borne by the Contracting Authority.

On availability-based projects, during the concession term, the availability payment will typically include both a fixed component (where debt has been hedged) and a variable component that will include an escalation factor that accounts for rises in costs as defined by the consumer price index.

The Private Partner will look to be kept neutral in respect of both international and local inflationary costs through an appropriate inflation uplift or tariff adjustment regime.

The payment mechanism incorporates indexation for inflation costs by incorporating the consumer price index into the monthly payments.

In developed markets, inflation is typically minimal and does not experience fluctuations to the extent of emerging markets.





necessary to avoid an impossible obligation. If this cannot be achieved the Private Partner will typically be entitled to terminate as if a Contracting Authority breach had occurred.

Regulat-ory/ change in law risk


Emerging X The risk of change in law sits with the Contracting Authority. The Private Partner will be entitled to claim for any increased costs and in relation to delay arising from a change in law.

A change in law is generally specifically defined and may include:

(i) any law coming into effect after the effective date, or existing law being modified after the effective date; (ii) any required Private Partner consent being terminated or the introduction of conditions upon renewal which materially adversely affect the Private Partner; (iii) the unjustified refusal to grant a permit and (iv) a change in the grid code or water code.





In emerging markets:

(a) the Private Partner is likely to have a greater level of protection from changes in law to reflect the greater risk of change (including both likelihood and consequences) and in order to attract investors to the project. In that way, the Contracting Authority would be expected to assume more change in law risk than compared to a project in a developed market;

(b) the Private Partner does not generally have to prove that it could have anticipated the change in law, provided that it occurred after an agreed base date; and

(c) changes in the environmental, safety and health law which are no more onerous than those prevailing internationally and changes in the exchange rate between local currency and USD are often specifically excluded as changes in law. This reflects both the Contracting Authority’s expectations about the Private Partners (i.e. as international developers, contractors and operators) and the developing nature of legislative reform in these areas.

Inflation risk



On availability-based projects, during the concession term, the availability payment will typically include both a fixed component (where debt has been hedged) and a variable component that will include an escalation factor that accounts for rises in costs as defined by the consumer price index.

The Private Partner will look to be kept neutral in respect of both international and local inflationary costs through an appropriate inflation uplift or tariff adjustment regime.







Inflation risk


Emerging X Inflation risk is typically borne by the Contracting Authority by way of tariff adjustment in operation phase.

On availability-based projects, the availability payment will typically include both a fixed component (where debt has been hedged) and a variable component (to reflect variable financing costs and variable inputs such as labour and chemicals).

The Private Partner will look to be kept neutral in respect of both international and local inflationary costs through an appropriate inflation uplift or tariff adjustment regime


The fluctuation of inflationary costs is a greater risk in emerging markets than it is in developed markets and the Private Partner’s expectation will be that this risk is borne and managed by the Contracting Authority during the concession term.

Indexation for inflation is typically linked to local (sometimes in conjunction with an international) consumer index. In emerging markets, local consumer index lack independence and are sometimes manipulated by the Government for fiscal and social reasons.

Strategic risk

Change in shareholding of Private Partner.

Conflicts of interest between shareholders of Private Partner.

Developed X The Contracting Authority wants to ensure that the Private Partner to whom the project is awarded remains involved.

Any bid will be awarded on the basis of the Private Partner’s technical expertise and financial resources and for this reason the sponsors of the Private Partner should remain involved in the project.

The Contracting Authority will limit the Private Partner’s shareholder’s ability to change their shareholding for a period (i.e. there is typically a lock-in for at least the construction period) and thereafter may impose a regime restricting change in control without consent or where pre-agreed criteria cannot be met.

The tender documentation should set out proposals for any restrictions on the shareholders of the Private Partner.

In developed markets the Private Partners’ desire for certainty of involvement of key participants will need to be balanced with the private sector’s requirements for flexibility in future business plans, particularly in the equity investor markets.

Strategic risk



Emerging X Bids are awarded on the basis of Private Partner’s technical expertise and financial resources. The Contracting Authority wants to ensure that the sponsors, particularly founding sponsors, to whom the project is awarded remains involved (for sometimes up to 7 years after commercial operation).

The Contracting Authority will typically enter into a shareholders’ agreement or founders’ agreement with the Private Partner. Often Government entities will take a shareholding in the project company. In some jurisdictions, there is an obligation on the project company to offer a certain percentage of its shares to the public via an initial public offering.

Contracting Authority will limit Private Partner’s ability to change shareholding for a period (i.e. lock-in for construction period).

Pre-tender proposal should set out proposals for governance of Private Partner.

In emerging markets, the lock in periods and conditions are typically more restrictive and longer than in developed markets.





Inflation risk


Emerging X Inflation risk is typically borne by the Contracting Authority by way of tariff adjustment in operation phase.

On availability-based projects, the availability payment will typically include both a fixed component (where debt has been hedged) and a variable component (to reflect variable financing costs and variable inputs such as labour and chemicals).

The Private Partner will look to be kept neutral in respect of both international and local inflationary costs through an appropriate inflation uplift or tariff adjustment regime


The fluctuation of inflationary costs is a greater risk in emerging markets than it is in developed markets and the Private Partner’s expectation will be that this risk is borne and managed by the Contracting Authority during the concession term.

Indexation for inflation is typically linked to local (sometimes in conjunction with an international) consumer index. In emerging markets, local consumer index lack independence and are sometimes manipulated by the Government for fiscal and social reasons.

Strategic risk







In developed markets the Private Partners’ desire for certainty of involvement of key participants will need to be balanced with the private sector’s requirements for flexibility in future business plans, particularly in the equity investor markets.

Strategic risk



Emerging X Bids are awarded on the basis of Private Partner’s technical expertise and financial resources. The Contracting Authority wants to ensure that the sponsors, particularly founding sponsors, to whom the project is awarded remains involved (for sometimes up to 7 years after commercial operation).

The Contracting Authority will typically enter into a shareholders’ agreement or founders’ agreement with the Private Partner. Often Government entities will take a shareholding in the project company. In some jurisdictions, there is an obligation on the project company to offer a certain percentage of its shares to the public via an initial public offering.

Contracting Authority will limit Private Partner’s ability to change shareholding for a period (i.e. lock-in for construction period).

Pre-tender proposal should set out proposals for governance of Private Partner.

In emerging markets, the lock in periods and conditions are typically more restrictive and longer than in developed markets.





Disruptive technol-ogy risk

The risk that a new emerging technology unexpectedly displaces an established technology.

Developed X The technology will usually be specified by the Contracting Authority in the minimum functional specification.

The Contracting Authority should do a full assessment of relevant technologies as part of the project feasibility study to ensure that the selected technologies are appropriate to the conditions of the project and market tested.

The Private Partner will often be encouraged to identify any issues with the selected technology during the bid phase and to submit an alternate bid based on alternative technology.

The concession contract will usually contain a variation clause (if permitted by local law) which would provide for both Contracting Authority and Private Partner-proposed variations to the minimum functional specification.

As these types of projects utilise very specialised technology, requirements for the Private Partner to take on obligations to take advantage of, or use, new technology are unlikely.

Disruptive technolo-ogy risk


Emerging X The technology will usually be specified by the Contracting Authority in the minimum functional specification.


The Private Partner will often be encouraged to identify any issues with the selected technology during the bid phase and to submit an alternative bid based on alternative technology.


In emerging markets, this risk is not typically addressed in the project documents. Contracting Authorities often seek alternative bids in order to consider alternative technology proposals. As project implementation and execution are often delayed in emerging markets the risk of technology change could be considered higher than in developed markets.

Early termin-ation (including any comp-ensation) risk

The risk of a project being terminated before the expiry of time and the monetary consequences of such termination

Developed X The level of compensation payable on early termination will depend on the reasons for termination and typically for:

(1) Contracting Authority default—the Private Partner would get senior debt, junior debt, equity and a level of equity return;

(2) Non-default termination—the Private Partner would get senior debt and equity return; and

(3) Private Partner default—(a) Where the project cannot be retendered (due to political sensitivity or a lack of interested parties) the Private Partner would typically be entitled to an amount equal to the adjusted estimated fair value of future payments, less the costs of providing the services under the project/ concession agreement. (b) Where the project can be retendered, the Private Partner would be entitled to the amount that a new private partner would pay for the

A key mitigant is to make sure the termination triggers are not hair triggers and that there are adequate well-defined routes for each party to remedy any alleged default.

The lenders will require direct agreements/tri-partite agreements with the Contracting Authority giving the lenders step-in rights in the case of the Contracting Authority calling a default termination or in the event of the Private Partner being in default under the loan documentation. The lenders would typically be given a grace period to gather information, manage the project company and seek a resolution or ultimately novate the project documents to a suitable substitute concessionaire.

Early termination compensation is well defined and political risk insurance is not typically obtained due to a lesser risk of the Contracting Authority defaulting on its payment obligations.







Developed X The technology will usually be specified by the Contracting Authority in the minimum functional specification.


The Private Partner will often be encouraged to identify any issues with the selected technology during the bid phase and to submit an alternate bid based on alternative technology.


As these types of projects utilise very specialised technology, requirements for the Private Partner to take on obligations to take advantage of, or use, new technology are unlikely.

Disruptive technolo-ogy risk


Emerging X The technology will usually be specified by the Contracting Authority in the minimum functional specification.


The Private Partner will often be encouraged to identify any issues with the selected technology during the bid phase and to submit an alternative bid based on alternative technology.


In emerging markets, this risk is not typically addressed in the project documents. Contracting Authorities often seek alternative bids in order to consider alternative technology proposals. As project implementation and execution are often delayed in emerging markets the risk of technology change could be considered higher than in developed markets.






(3) Private Partner default—(a) Where the project cannot be retendered (due to political sensitivity or a lack of interested parties) the Private Partner would typically be entitled to an amount equal to the adjusted estimated fair value of future payments, less the costs of providing the services under the project/ concession agreement. (b) Where the project can be retendered, the Private Partner would be entitled to the amount that a new private partner would pay for the








remaining term of the concession, less any costs incurred by the Contracting Authority during the retendering process.

It is common for the senior debt to be guaranteed as a minimum in every termination scenario (other than Private Partner default) and for rights of set-off below that figure to be restricted.



Emerging X The Contracting Authority can face the following risks on expiry or termination of the concession period:

(a) uncertainty about the type and timing of transfer of the plant (either back to the Contracting Authority or to a replacement Private Partner);

(b) re-delivery of poor condition or out-of-specification facilities;

(c) receiving inadequate compensation for non-performance and early termination (if applicable);

(d) inability to obtain the benefit of supply/manufacturer warranties; and

(e) other related political and public relations issues.

The level of compensation payable on early termination will depend on the reasons for termination.

(1) Private Partner right to terminate, such as for (a) non-payment of capacity and output payments for typically between 30-60 days; (b) nationalisation or expropriation of the plant; (c) prolonged events of Government action or inaction/Government/buyer risk events which continue for 365 days (unless the Contracting Authority elects to continue making capacity payments).

The Private Partner will typically receive full repayment of senior debt, and a fixed rate of return on equity contributions and an amount based on future predicted cash flows plus termination costs.

The Contracting Authority should ensure that there is no uncertainty about the Private Partner’s obligations at the end of the concession period (due to expiry or termination).

These matters can be addressed in the concession agreement and should deal with redelivery obligations, compensation (either on a net book value or present market value basis), access to warranties and guarantees and transfer of operation and maintenance know-how.

A further key mitigant is to make sure the termination triggers are not hair triggers and that there are adequate well-defined routes for each party to remedy any alleged default.

The covenant risk of the Contracting Authority may require a guarantee from a higher level of Government (e.g. the Ministry of Finance) to guarantee the level of compensation payable on termination.

The lenders will require direct agreements with the Contracting Authority giving the lenders step-in rights in the case of the Contracting Authority calling a default termination or in the event of the Private Partner being in default under the loan documentation. The lenders would typically be given a grace period to gather information, manage the project company and seek a resolution or ultimately novate the project documents to a suitable substitute concessionaire.

In emerging markets, there may also be sovereign guarantees which support the Contracting Authority’s payment obligations.

Political risk insurance may be available and is likely to be sought to cover the risk of the Contracting Authority or Government guarantor defaulting on its payment obligation.





remaining term of the concession, less any costs incurred by the Contracting Authority during the retendering process.

It is common for the senior debt to be guaranteed as a minimum in every termination scenario (other than Private Partner default) and for rights of set-off below that figure to be restricted.



Emerging X The Contracting Authority can face the following risks on expiry or termination of the concession period:

(a) uncertainty about the type and timing of transfer of the plant (either back to the Contracting Authority or to a replacement Private Partner);

(b) re-delivery of poor condition or out-of-specification facilities;

(c) receiving inadequate compensation for non-performance and early termination (if applicable);

(d) inability to obtain the benefit of supply/manufacturer warranties; and

(e) other related political and public relations issues.

The level of compensation payable on early termination will depend on the reasons for termination.

(1) Private Partner right to terminate, such as for (a) non-payment of capacity and output payments for typically between 30-60 days; (b) nationalisation or expropriation of the plant; (c) prolonged events of Government action or inaction/Government/buyer risk events which continue for 365 days (unless the Contracting Authority elects to continue making capacity payments).

The Private Partner will typically receive full repayment of senior debt, and a fixed rate of return on equity contributions and an amount based on future predicted cash flows plus termination costs.

The Contracting Authority should ensure that there is no uncertainty about the Private Partner’s obligations at the end of the concession period (due to expiry or termination).

These matters can be addressed in the concession agreement and should deal with redelivery obligations, compensation (either on a net book value or present market value basis), access to warranties and guarantees and transfer of operation and maintenance know-how.

A further key mitigant is to make sure the termination triggers are not hair triggers and that there are adequate well-defined routes for each party to remedy any alleged default.

The covenant risk of the Contracting Authority may require a guarantee from a higher level of Government (e.g. the Ministry of Finance) to guarantee the level of compensation payable on termination.


In emerging markets, there may also be sovereign guarantees which support the Contracting Authority’s payment obligations.






(2) Contracting Authority right to terminate, such as for (a) when commercial operation date is not achieved within a certain period from scheduled commercial operation (generally 200 days); (b) wilful default and material ault; (c) failure to remedy defects;

(d) failure to pay LDs; (e) reduction of average availability of the plant; (f ) termination of desalination licence or land rights; prolonged (typically 365 days) events of Government action or inaction/Government/buyer risk events.

The Private Partner will receive full repayment of senior debt only.

(3) prolonged force majeure

The Private Partner will receive full repayment of senior debt, equity contributions less equity dividends and termination costs. If the relevant force majeure event is ‘political’, then the Private Partner will also often be entitled to a capped equity return.

It is common for the senior debt to be guaranteed as a minimum in every termination scenario, and for rights of set-off below that figure to be restricted. While it may seem that project lenders are therefore not significantly exposed to a project default, they would not typically have the right to call for a termination in these circumstances (i.e. the Contracting Authority has a discretion as to whether to terminate), and so they are still motivated to make the project work to recover their loan if the Contracting Authority chooses not to exercise its termination rights.

In some emerging markets, the Private Partner is contractually prohibited from terminating in the certain circumstances.


RISK MATRIX FOR A CONTAINER PORT PROJECT

~ A new container terminal port project, developed as a DBFO transaction

~ Emerging market is based on a concession in Senegal

~ Key risks

TABLE A1.2: Risk Matrix for a Container Port Project





The risk of acquiring title to the land to be used for a project, the selection of that site and the geophysical conditions of that site.


Access rights.

Security.

Heritage.

Archaeological.

Pollution.

Latent defects.

Developed X The Contracting Authority bears the principal risk as it is best placed to select and acquire the required land interests for the project.

That said, there may be some areas where risk will be shared with the Private Partner. Whilst the Contracting Authority may be able to secure the availability of the corridor, the suitability of the corridor may be dependent on the Private Partner’s design and construction plan.

The Contracting Authority would generally be responsible for providing a “clean” site, with no restrictive land title issues, and existing utilities and contamination. Existing assets proposed to be used in the project should also be fully surveyed and warranted.

The Contracting Authority will normally hand over the site to the Private Partner in an “as-is” condition. The Private Partner may take the risk for dealing with adverse conditions revealed by surveys regarding unforeseeable subsoil risks.

Where it is not possible to fully survey prior to award risk will be allocated to Contracting Authority, or shared.

The Contracting Authority should undertake detailed ground, marine, environmental and social assessments and should disclose such information to the Private Partner as part of the bidding process. Such assessment should consider any easements and covenants, etc. that may encumber the land

The Contracting Authority should, to the greatest extent possible, ensure that it has a complete understanding of the risks involved in securing the site and the site constraints that will impact on the construction and operation of the system.


Prior to awarding the tender the Contracting Authority could (through legislation and a proper consultation process) limit the ability for potential land right owners or neighbouring properties and trades to raise claims on the land and/or for injurious affection.

The Contracting Authority may need to use its legislative powers to secure the site (e.g. through expropriation/compulsory acquisition).

Even where you have a legally clear site, Government enforcement powers may be needed to properly secure the site for the private sector. There may be historic encroachment issues that the Private Partner cannot be expected to deal with.


The Contracting Authority may be required to provide additional site security/assistance during operations to manage this risk.



~ Environmental and social risk

~ Demand risk

~ Force Majeure risk

TABLE A1.2: Risk Matrix for a Container Port Project







Access rights.

Security.

Heritage.

Archaeological.

Pollution.

Latent defects.

Developed X The Contracting Authority bears the principal risk as it is best placed to select and acquire the required land interests for the project.

That said, there may be some areas where risk will be shared with the Private Partner. Whilst the Contracting Authority may be able to secure the availability of the corridor, the suitability of the corridor may be dependent on the Private Partner’s design and construction plan.

The Contracting Authority would generally be responsible for providing a “clean” site, with no restrictive land title issues, and existing utilities and contamination. Existing assets proposed to be used in the project should also be fully surveyed and warranted.

The Contracting Authority will normally hand over the site to the Private Partner in an “as-is” condition. The Private Partner may take the risk for dealing with adverse conditions revealed by surveys regarding unforeseeable subsoil risks.

Where it is not possible to fully survey prior to award risk will be allocated to Contracting Authority, or shared.

The Contracting Authority should undertake detailed ground, marine, environmental and social assessments and should disclose such information to the Private Partner as part of the bidding process. Such assessment should consider any easements and covenants, etc. that may encumber the land



Prior to awarding the tender the Contracting Authority could (through legislation and a proper consultation process) limit the ability for potential land right owners or neighbouring properties and trades to raise claims on the land and/or for injurious affection.













Access rights.

Security.

Heritage.

Archaeological.

Pollution.

Latent defects.

Channel dredging.

Emerging X The Contracting Authority bears the principal risk as it is best placed to select and acquire the required land interests for the project.

The Contracting Authority would generally be responsible for providing a “clean” site, with no restrictive land title issues, and existing utilities and contamination either dealt with or fully surveyed and warranted. Existing assets proposed to be used in the project should also be fully surveyed and warranted. The Private Partner may take some risk for dealing with adverse conditions revealed by surveys but other unforeseeable ground risks (e.g. archaeological risks) are likely to need to be held by the Contracting Authority.

On brownfield port projects the Contracting Authority may take the risk in all or part of the existing port infrastructure handed over to the Private Partner prior to commencement of any expansion to ensure a certain minimum standard is achieved.

Over the term of the concession the Contracting Authority may be required to continue to provide supporting infrastructure work such as ensuring that the channels are dredged and maintained at the required depth and that connecting roads, railways and utilities continue to be provided.

The Contracting Authority should undertake detailed ground, marine, environmental and social assessments and should disclose such information to the Private Partner as part of the bidding process.



Prior to awarding the tender the Contracting Authority could (through legislation and a proper consultation process) limit the ability for potential land right owners or neighbouring properties to raise claims on the land.





Land rights and ground conditions (in particular reliable utilities records, and land charges) in emerging markets may be less certain than in developed markets where established land registries and utility records exist.

In the absence of legislation in emerging markets, indigenous land rights issues and community engagement can be managed by the Contracting Authority through the adoption of IFC Safeguards for the project, particularly in order to ensure international financing options are available to the project.



Developed X The Private Partner will have primary responsibility to accept the project site in an “as is” condition, subject to Contracting Authority’s disclosure of relevant matters, and manage the environmental and social strategy across the project, as well as obtaining all required licenses, permits and authorizations as necessary.

Existing environmental risks of the site prior to the Private Partner’s

The Contracting Authority should conduct the necessary due diligence in order to ascertain the environmental fitness of the site and disclose all known environmental issues to the Private Partner.

The Contracting Authority will be required to review all environmental plans put forth by the Private Partner, to ensure that such plans will be adequate to appropriately manage the risks of the project.

Lenders will expect to see a plan to











Access rights.

Security.

Heritage.

Archaeological.

Pollution.

Latent defects.

Channel dredging.

Emerging X The Contracting Authority bears the principal risk as it is best placed to select and acquire the required land interests for the project.

The Contracting Authority would generally be responsible for providing a “clean” site, with no restrictive land title issues, and existing utilities and contamination either dealt with or fully surveyed and warranted. Existing assets proposed to be used in the project should also be fully surveyed and warranted. The Private Partner may take some risk for dealing with adverse conditions revealed by surveys but other unforeseeable ground risks (e.g. archaeological risks) are likely to need to be held by the Contracting Authority.

On brownfield port projects the Contracting Authority may take the risk in all or part of the existing port infrastructure handed over to the Private Partner prior to commencement of any expansion to ensure a certain minimum standard is achieved.

Over the term of the concession the Contracting Authority may be required to continue to provide supporting infrastructure work such as ensuring that the channels are dredged and maintained at the required depth and that connecting roads, railways and utilities continue to be provided.

The Contracting Authority should undertake detailed ground, marine, environmental and social assessments and should disclose such information to the Private Partner as part of the bidding process.



Prior to awarding the tender the Contracting Authority could (through legislation and a proper consultation process) limit the ability for potential land right owners or neighbouring properties to raise claims on the land.





Land rights and ground conditions (in particular reliable utilities records, and land charges) in emerging markets may be less certain than in developed markets where established land registries and utility records exist.

In the absence of legislation in emerging markets, indigenous land rights issues and community engagement can be managed by the Contracting Authority through the adoption of IFC Safeguards for the project, particularly in order to ensure international financing options are available to the project.



Developed X The Private Partner will have primary responsibility to accept the project site in an “as is” condition, subject to Contracting Authority’s disclosure of relevant matters, and manage the environmental and social strategy across the project, as well as obtaining all required licenses, permits and authorizations as necessary.

Existing environmental risks of the site prior to the Private Partner’s



Lenders will expect to see a plan to








acceptance of the site that have not been disclosed or within the knowledge of the Private Partner prior to commercial close will be deemed to be the responsibility of the Contracting Authority.

Social risks, insofar as they may involve indigenous groups, will be the responsibility of the Contracting Authority.

The Contracting Authority may also need to retain responsibility for social impacts which are unavoidable from the development of the project (e.g. compensation for expropriation of indigenous land rights and/or relocation of urban communities/businesses).

see how these aspects are dealt with and that these comply with the Equator Principles (if applicable to the project).

Certain investors, such as DFIs, will have their own requirements for environmental and social plans. In particular in relation to noise pollution and will require that these are provisions in agreements that will lead to remediation or mitigation.

Environmental risk extends to the impact of the wider project including issues such as the location in which dredging spoil is to be dumped and the wider impact of the project on marine life and wildlife. Projects in the United Kingdom and Australia have faced substantial opposition and costs in addressing and mitigating these risks.



Emerging X The Private Partner will have primary responsibility to manage the environmental and social strategy across the project, however existing environmental conditions which cannot be adequately catered for or priced may need to be retained by the Contracting Authority.

The Contracting Authority may also need to retain responsibility for social impacts which are unavoidable from the development of the project (e.g. compensation for expropriation of indigenous land rights and/or relocation of rural or urban communities/businesses).



Lenders will expect to see a plan to see how these aspects are dealt with and that these comply with the Equator Principles (if applicable to the project).

Certain investors, such as DFIs, will have their own requirements for environmental and social plans. In particular, in relation to noise pollution and will require that these are provisions in agreements that will lead to remediation or mitigation.

Environmental risk extends to the impact of the wider project including issues such as the location in which dredging spoil is to be dumped and the wider impact of the project on marine life and wildlife. Projects in the United Kingdom and Australia

Government will need to take meaningful steps both before and during the project to manage social impacts of construction and operation.



In particular, on emerging market port projects the impact on local subsistence fishing communities will need to be managed by the Contracting Authority.





have faced substantial opposition and costs in addressing and mitigating these risks.

Design risk


Feasibility study.


Changes to design.

Developed X The Private Partner will have principal responsibility for adequacy of the design of the system and its compliance with the output/performance specification.

The Contracting Authority may retain some design risk in certain aspects of the system or related works, depending on how prescriptive the Contracting Authority is in the output specification.

If the output specification is too prescriptive the Private Partner’s ability to warrant the fitness for purpose of its design solution may be impacted, and the Contracting Authority will to that extent share in the design risk.

If the project is being integrated into existing infrastructure, the Private Partner’s ability to warrant the fitness for purpose of its design solution may be impacted (in that it will not be able to warrant defects in the existing infrastructure that may impact performance).

The Contracting Authority will often broadly draft the Private Partner’s design and construction obligations to satisfy the output specifications and ensure compliance with applicable legal requirements and good industry practice standards. This allows for private sector innovation and efficiency gains in the design.

A design review process will allow for increased dialogue and cooperation between the Contracting Authority and the Private Partner, however the mutual review process should not be construed as a reduction or limitation of the Private Partner’s overall liability.

Developed market port projects benefit from stable resource availability and defined design standards which allow for increased innovation and productivity gains. The quality of the information provided by the Contracting Authority and limited ability to verify such data can also hinder the Private Partner’s ability to unconditionally take full design risk.

Design risk


Feasibility study.


Changes to design.

Emerging X The Private Partner will have principal responsibility for adequacy of the design of the port infrastructure.

Since the Private Partner is usually taking the majority of the economic risk on the project, the Private Partner would wish to limit the rights of the Contracting Authority to object to the proposed design or any changes to it when these would materially change the long-term interests of the Contracting Authority when the infrastructure is returned.

Where the projects are proposed by Private Partners on an unsolicited basis there is likely to be little input from the Contracting Authority in the design of the project.

However, where there is existing port infrastructure, competing ports in the same country or where the port is being procured for a particular industry (e.g. oil and gas terminals) the Contracting Authority may have more interest in defining the output specification.

Construc-trion risk

Labour dispute. Interface/project management.


IP right breach/infringement


It may be difficult for the Private Partner to mitigate these integration risks solely through contractual risk allocation, as the financing cost/lost revenue impact is typically very high compared to the individual component parts of the project that

The Contracting Authority may have a critical role to play at stages of the construction, testing and commissioning process in terms of ensuring that any rights that it has to comment on design development and testing results does not adversely






have faced substantial opposition and costs in addressing and mitigating these risks.

Design risk


Feasibility study.


Changes to design.

Developed X The Private Partner will have principal responsibility for adequacy of the design of the system and its compliance with the output/performance specification.

The Contracting Authority may retain some design risk in certain aspects of the system or related works, depending on how prescriptive the Contracting Authority is in the output specification.

If the output specification is too prescriptive the Private Partner’s ability to warrant the fitness for purpose of its design solution may be impacted, and the Contracting Authority will to that extent share in the design risk.

If the project is being integrated into existing infrastructure, the Private Partner’s ability to warrant the fitness for purpose of its design solution may be impacted (in that it will not be able to warrant defects in the existing infrastructure that may impact performance).

The Contracting Authority will often broadly draft the Private Partner’s design and construction obligations to satisfy the output specifications and ensure compliance with applicable legal requirements and good industry practice standards. This allows for private sector innovation and efficiency gains in the design.

A design review process will allow for increased dialogue and cooperation between the Contracting Authority and the Private Partner, however the mutual review process should not be construed as a reduction or limitation of the Private Partner’s overall liability.

Developed market port projects benefit from stable resource availability and defined design standards which allow for increased innovation and productivity gains. The quality of the information provided by the Contracting Authority and limited ability to verify such data can also hinder the Private Partner’s ability to unconditionally take full design risk.

Design risk


Feasibility study.


Changes to design.

Emerging X The Private Partner will have principal responsibility for adequacy of the design of the port infrastructure.

Since the Private Partner is usually taking the majority of the economic risk on the project, the Private Partner would wish to limit the rights of the Contracting Authority to object to the proposed design or any changes to it when these would materially change the long-term interests of the Contracting Authority when the infrastructure is returned.

Where the projects are proposed by Private Partners on an unsolicited basis there is likely to be little input from the Contracting Authority in the design of the project.

However, where there is existing port infrastructure, competing ports in the same country or where the port is being procured for a particular industry (e.g. oil and gas terminals) the Contracting Authority may have more interest in defining the output specification.

Construc-trion risk



IP right breach/infringement


It may be difficult for the Private Partner to mitigate these integration risks solely through contractual risk allocation, as the financing cost/lost revenue impact is typically very high compared to the individual component parts of the project that

The Contracting Authority may have a critical role to play at stages of the construction, testing and commissioning process in terms of ensuring that any rights that it has to comment on design development and testing results does not adversely







Defects.






The Private Partner is required to design and construct to good industry practice standards and may be required to comply with or develop other quality assurance programmes or standards.



can affect this. Ensuring that the programme for completion of the works has sufficient float periods for all critical stages and that parties are incentivised to work together to achieve the common deadlines may be more effective strategies.

delay the project.

Similarly, the Contracting Authority may need to take responsibility for delays caused by failure of public bodies to issue necessary consents in good time.


Construc-tion risk





Defects.


Cost overruns where no compensation/relief event applies.

Emerging X The Private Partner assumes project management risk unless certain work is dependent on Contracting Authority work/related infrastructure work being completed in which case risk could be shared (see comments on supporting infrastructure obligations).




The Private Partner is required to design and construct to good

It may be difficult for the Private Partner to mitigate these integration risks solely through contractual risk allocation, as the financing cost/lost revenue impact is typically very high compared to the individual component parts of the project that can affect this. Ensuring that the programme for completion of the works has sufficient float periods for all critical stages and that parties are incentivised to work together to achieve the common deadlines may be more effective strategies.



In an emerging market context, the dynamics may be different if the lenders have a significant underwrite of their senior debt.

Late completion is most often addressed as lost opportunity for revenue by the Private Partner.

There will also be a longstop date for completion.






Defects.






The Private Partner is required to design and construct to good industry practice standards and may be required to comply with or develop other quality assurance programmes or standards.



can affect this. Ensuring that the programme for completion of the works has sufficient float periods for all critical stages and that parties are incentivised to work together to achieve the common deadlines may be more effective strategies.

delay the project.



Construc-tion risk





Defects.


Cost overruns where no compensation/relief event applies.

Emerging X The Private Partner assumes project management risk unless certain work is dependent on Contracting Authority work/related infrastructure work being completed in which case risk could be shared (see comments on supporting infrastructure obligations).




The Private Partner is required to design and construct to good

It may be difficult for the Private Partner to mitigate these integration risks solely through contractual risk allocation, as the financing cost/lost revenue impact is typically very high compared to the individual component parts of the project that can affect this. Ensuring that the programme for completion of the works has sufficient float periods for all critical stages and that parties are incentivised to work together to achieve the common deadlines may be more effective strategies.



In an emerging market context, the dynamics may be different if the lenders have a significant underwrite of their senior debt.

Late completion is most often addressed as lost opportunity for revenue by the Private Partner.

There will also be a longstop date for completion.





industry practice standards (including the ISPS Code) and may be required to comply with or develop other quality assurance programmes or standards.





Developed X The Private Partner will bear principal responsibility for delay and cost overrun risk, and will typically manage this through the engagement of a suitable EPC contractor.

The principal risk arising out of delay will be the loss of expected revenue, the ongoing costs of financing construction, holding costs of other contractors and extended site costs.

The Private Partner is best placed to integrate complex civil works, the delivery and commissioning of rolling stock, despatching and operations, and preventative and lifecycle maintenance to ensure a reliable and punctual service for an efficient price. This may be managed through a single EPC joint venture or by the Private Partner managing a series of works, supply and operation/commissioning contracts.

The Private Partner will be expected to demonstrate adequate system performance before it is given permission to operate the system.

The Contracting Authority may wish to implement a multi-staged completion process to ensure the Private Partner begins receiving payment for its design and construction services once significant components of the project are substantially completed. This can help increase cash flow during construction, reduce the Private Partner’s financing costs and incentivize the phasing of construction works in order to ensure critical components are completed on time. Financial penalties and liquidated damages can help enforce construction deadlines.


The Contracting Authority may also consider the inclusion of a look forward test to trigger a default if an independent party certifies that


The Contracting Authority may allow for certain relief events, delay events or force majeure events where delays or cost overruns have arisen from either the fault of the Contracting Authority, or no-fault events.


In developed markets, enforcement of construction deadlines and budgets may be easier as the Private Partner will typically have more experience and reliable resources.





completion will not be achieved by the longstop date.



Emerging X The Private Partner will bear principal responsibility for delay and cost overrun risk, and will typically manage this through the engagement of a suitable EPC contractor.


A key integration risk on port projects is the procurement and installation of cranes and other goods handling machinery. These may be provided by an operator or through long term leasing arrangements and may sit outside the EPC contractor’s scope.

It may be difficult for the Private Partner to mitigate these integration risks solely through contractual risk allocation, as the financing cost/lost revenue impact is typically very high compared to the individual component parts of the project that can affect this. Ensuring that the programme has sufficient float periods for all critical stages and that parties are incentivised to work together to achieve the common deadlines may be more effective strategies.



An additional concern for the Private Partner to manage in the context of delays will be whether the Private Partner will breach any minimum throughput guarantee owed to the Contracting Authority (see performance risk section).


The risk that the asset is able to achieve the output specification metrics and the price or cost of doing so.

Damage pollution accidents.

Meeting handback requirements

Health and safety vandalism.

Equipment becoming prematurely obsolete.

Expansion.

Supporting infrastructure.

Marine services.

Throughput guarantees.

Developed X The Private Partner bears the risk of meeting the performance specification.

However, the Contracting Authority is responsible for enforcing the regime and for ensuring that the output specifications are properly tailored to what the Private Partner can deliver. Consideration needs to be given to the ability of the Private Partner to achieve the necessary performance levels, and the appropriateness of metrics given the nature of the project.

Where certain performance indicators cannot be met due to actions by the Contracting Authority or unforeseen circumstances, the Private Partner may be eligible to seek relief or compensation.

In developed markets, the Contracting Authority should have access to various data sources to develop realistic and attainable performance specifications and models.





Emerging X The Private Partner bears the risk of meeting the performance specification and any throughput guarantees it provides.


The Private Partner may be able to enter into service level agreements with the relevant Government entities which will be providing the required Governmental services at the port.

A failure by the relevant Government entity to comply with these service level agreements should entitle the Private Partner to relief under the port concession.


The Contracting Authority may be required to upgrade the road or rail network servicing the port.

In emerging markets the Contracting Authority’s ability to provide the appropriate infrastructure support upgrades presents a particular challenge.

In addition, where there the project is in competition with an existing port operated by the port authority there may be issues in the level of service





completion will not be achieved by the longstop date.



Emerging X The Private Partner will bear principal responsibility for delay and cost overrun risk, and will typically manage this through the engagement of a suitable EPC contractor.


A key integration risk on port projects is the procurement and installation of cranes and other goods handling machinery. These may be provided by an operator or through long term leasing arrangements and may sit outside the EPC contractor’s scope.

It may be difficult for the Private Partner to mitigate these integration risks solely through contractual risk allocation, as the financing cost/lost revenue impact is typically very high compared to the individual component parts of the project that can affect this. Ensuring that the programme has sufficient float periods for all critical stages and that parties are incentivised to work together to achieve the common deadlines may be more effective strategies.



An additional concern for the Private Partner to manage in the context of delays will be whether the Private Partner will breach any minimum throughput guarantee owed to the Contracting Authority (see performance risk section).





Health and safety vandalism.


Expansion.


Marine services.


Developed X The Private Partner bears the risk of meeting the performance specification.

However, the Contracting Authority is responsible for enforcing the regime and for ensuring that the output specifications are properly tailored to what the Private Partner can deliver. Consideration needs to be given to the ability of the Private Partner to achieve the necessary performance levels, and the appropriateness of metrics given the nature of the project.


In developed markets, the Contracting Authority should have access to various data sources to develop realistic and attainable performance specifications and models.





Emerging X The Private Partner bears the risk of meeting the performance specification and any throughput guarantees it provides.


The Private Partner may be able to enter into service level agreements with the relevant Government entities which will be providing the required Governmental services at the port.

A failure by the relevant Government entity to comply with these service level agreements should entitle the Private Partner to relief under the port concession.


The Contracting Authority may be required to upgrade the road or rail network servicing the port.

In emerging markets the Contracting Authority’s ability to provide the appropriate infrastructure support upgrades presents a particular challenge.

In addition, where there the project is in competition with an existing port operated by the port authority there may be issues in the level of service





Health and Safety Vandalism.


Expansion.


Marine Services.


Consideration needs to be given to the ability of the Private Partner to achieve the necessary performance levels given the nature of the project and the emerging market in which it will be based. In particular, Private Partners typically want freedom in how they operate the port.

In emerging markets the surrounding hinterland infrastructure (road and rail networks) required to support the project is of particular importance to the Private Partner and will be a retained Contracting Authority risk to the extent that it impacts on the successful implementation of the project.

A failure by the Contracting Authority to upgrade and maintain the supporting infrastructure in a manner which enables it to deal with any increased traffic from the port will impact on the Private Partner’s ability to process throughput at the port and will adversely affect berthing times and the efficiency of the project.

Likewise, the inability of the Contracting Authority to provide or procure the provision of the required marine services (pilotage, towage, port traffic control) which form the exclusive domain of the port authority will impact on the Private Partner’s ability to perform.

Finally, the Contracting Authority is required to ensure the efficient provision of the necessary customs control, immigration control and quarantine (human and animal) functions at the port.

The Contracting Authority may also set key performance indicators (e.g. in relation to the gross number of crane movements per hour or set conservation periods for full, empty or transhipment containers) in relation to the operation of the port.

provided to the project by the port authority which would need to be addressed in the project documents.



Developed X The Private Partner bears the principal responsibility to ensure an uninterrupted supply of inputs/resources for the project and to manage the costs of those inputs.

The Contracting Authority will be allowed to monitor the supply of required resources, and may allow for the Private Partner to substitute resources if necessary.

The Private Partner may be incentivized, through a sharing mechanism, to increase efficiencies in

Monthly payments to the Private Partner may include certain calculations that could alleviate uncontrollable cost increases due to increases in energy costs that would otherwise be borne by the Private Partner.






energy consumption throughout the concession period.



Emerging X The Private Partner bears the principal responsibility to ensure an uninterrupted supply of inputs/resources for the project and to manage the costs of those inputs.

There may be specific instances where the Private Partner may need the share this risk with the Contracting Authority, such as availability of energy supply, or reliance on local source materials where these may be affected by labour disputes, embargoes or other political risks.

Time and cost risks are normally passed on to contractors.

The Contracting Authority may need to stand behind the cost risk for certain inputs, or at least underwrite the Private Partner’s financing for these costs.

Emerging markets are generally more susceptible to market volatility and major cost variations.

Demand risk


Developed X

Demand risk


Emerging X In emerging markets the Private Partner typically takes the full demand risk on port projects.

On certain robust projects the Private Partner may also need to give minimum throughput guarantees in relation to the number of TEUs processed per month.

The Contracting Authority’s inefficient provision of marine services, insufficient maritime infrastructure maintenance or insufficient channel dredging may impact on the port users’ demand for the project.

Accordingly, it is common for Contracting Authorities to be required to guarantee certain levels of protection against competing ports (within a particular distance or time envelope) and to guarantee the punctual and adequate provision of certain supporting services.

Competition from competing port facilities in-country (whether new or existing) is a major risk.

See guarantees referred under “mitigation."

In particularly robust emerging market projects the Private Partner may need to provide a minimum throughput guarantee subject to compliance by the Contracting Authority with its maintenance and supporting infrastructure obligations.

Mainten-ance


Increased maintenance costs due to increased volumes.


Developed X The Private Partner will have principal responsibility for meeting the appropriate standards regarding maintenance as set out in the output specifications defined by the Contracting Authority.

The Private Partner generally assumes the overall risk of periodic and preventative

The Contracting Authority should take time to ensure that the output specification properly defines the maintenance obligations on the Private Partner to ensure that the system remains robust in the event of early termination or expiry of the agreement. There will be requirements that will need to be met by the Private Partner on hand back and a

In developed markets, the involvement of the Private Partner in the operation, maintenance and rehabilitation of the project provides several benefits by incentivizing greater care and diligence by the Private Partner in the construction phase, and increasing the useful life of the infrastructure.





energy consumption throughout the concession period.



Emerging X The Private Partner bears the principal responsibility to ensure an uninterrupted supply of inputs/resources for the project and to manage the costs of those inputs.

There may be specific instances where the Private Partner may need the share this risk with the Contracting Authority, such as availability of energy supply, or reliance on local source materials where these may be affected by labour disputes, embargoes or other political risks.

Time and cost risks are normally passed on to contractors.

The Contracting Authority may need to stand behind the cost risk for certain inputs, or at least underwrite the Private Partner’s financing for these costs.

Emerging markets are generally more susceptible to market volatility and major cost variations.

Demand risk


Developed X

Demand risk


Emerging X In emerging markets the Private Partner typically takes the full demand risk on port projects.

On certain robust projects the Private Partner may also need to give minimum throughput guarantees in relation to the number of TEUs processed per month.

The Contracting Authority’s inefficient provision of marine services, insufficient maritime infrastructure maintenance or insufficient channel dredging may impact on the port users’ demand for the project.

Accordingly, it is common for Contracting Authorities to be required to guarantee certain levels of protection against competing ports (within a particular distance or time envelope) and to guarantee the punctual and adequate provision of certain supporting services.

Competition from competing port facilities in-country (whether new or existing) is a major risk.

See guarantees referred under “mitigation."

In particularly robust emerging market projects the Private Partner may need to provide a minimum throughput guarantee subject to compliance by the Contracting Authority with its maintenance and supporting infrastructure obligations.

Mainten-ance




Developed X The Private Partner will have principal responsibility for meeting the appropriate standards regarding maintenance as set out in the output specifications defined by the Contracting Authority.

The Private Partner generally assumes the overall risk of periodic and preventative

The Contracting Authority should take time to ensure that the output specification properly defines the maintenance obligations on the Private Partner to ensure that the system remains robust in the event of early termination or expiry of the agreement. There will be requirements that will need to be met by the Private Partner on hand back and a

In developed markets, the involvement of the Private Partner in the operation, maintenance and rehabilitation of the project provides several benefits by incentivizing greater care and diligence by the Private Partner in the construction phase, and increasing the useful life of the infrastructure.





maintenance, emergency maintenance work, work stemming from design or construction errors, rehabilitation work, and in certain project model instances, work stemming from implementing technological or structural changes.

The Contracting Authority may retain the responsibility of performing certain soft services (e.g. cleaning, security, minor management services, etc.) where economical.

reserve account or bonding may be required to be provided by the Private Partner as security for its obligations.

The primary role of the Contracting Authority is to properly define the output specifications and level of services required of the Private Partner.

Adequate performance by the Private Partner can be further enforced by ensuring that the payment mechanism considers quality and service failures. The Contracting Authority will be allowed to adjust payment to the Private Partner based on meeting or failing to meet certain performance standards. There may also be other remedies such as warning notices and right to replace subcontractors.

Mainten-ance risk




Maintenance of surrounding non-project maritime infrastructure.

Maintenance dredging.

Emerging X The Private Partner will have principal responsibility for maintaining the port infrastructure to the appropriate standards set out in the output specification defined by the Contracting Authority.

Where there is integration of the system into existing infrastructure, the Contracting Authority may need to retain the maintenance or latent defect risk of some of the existing assets and fit for purpose standards appropriately adjusted.

The Contracting Authority however will often be responsible for maintaining the access channels (including maintenance dredging), turning circle and docking zones.

The Contracting Authority will also usually be responsible for maintaining the related equipment used in the provision of marine services (and procuring replacement or additional equipment where required).

The Contracting Authority should take time to ensure that the output specification properly defines the handback obligations on the Private Partner to ensure that the port infrastructure remains robust in the event of early termination or expiry of the agreement.

Failure to get the output specification right for the project effectively transfers the maintenance risk back to the Contracting Authority.

The Contracting Authority should ensure that the port authority is capable of fulfilling its maintenance obligations (i.e. by ensuring it has adequate funds and capacity to do so).

The Contracting Authority may be required to guarantee and proactively manage the maintenance of the existing maritime infrastructure that integrates with the project.

In emerging market port projects, there is typically a greater focus on the obligations of the Contracting Authority in relation to the upgrade and continued maintenance of the supporting hinterland infrastructure as well as on the port authority’s ability to provide the marine services and maintain the related maritime infrastructure.

Failure by the Contracting Authority to do so will impact on the efficiency of the port (especially in relation to vessel berth and cargo dwell times) and will ultimately impact on the Private Partner’s ability to effectively implement the project.

In emerging markets, inefficient port operation impacts the competitiveness of the project and is a major concern for Private Partners.

Improving efficiency can lower total transaction costs and will boost the competitiveness of a project.

Force majeure risk

The risk that unexpected events occur that are beyond the control of the parties and delay or

Developed X Force majeure is a shared risk and there will be a fairly well developed list of events that entitles the Private Partner to relief.


Generally speaking, where parties are unable to agree on a way forward following a force majeure event, after a number of months of continuous

On developed market transactions, the Contracting Authority typically compensates the Private Partner, only for its outstanding debt (but not





prohibit performance. Typical events include (i) war, armed conflict, terrorism or acts of foreign enemies; (ii) nuclear or radioactive contamination; (iii) chemical or biological contamination; (iv) pressure waves caused by devices traveling at supersonic speeds; or (v) discovery of any species-at-risk, fossils, or historic or archaeological artefacts that require the project to be abandoned.

Force majeure events occurring during construction will also cause a delay in revenue commencement. The ability of the Private Partner to bear this risk for uninsured risks will be limited, and the Contracting Authority will typically have to bear the risk after a certain period of time or level of cost has been exceeded.

During operation, the impact of the force majeure may require relief from KPI penalties or an element of temporary reduction or suspension of concession fee payments may be required.

The risk of disruption as a result of no-fault events could be mitigated by relaxing the performance thresholds (e.g. requiring a lower level of acceptable service, which then allows the Private Partner to take the risk of a certain number of day-to-day adverse events typical to a project of this nature but without incurring performance penalties).

If the effect of the force majeure event is to reduce the revenues of the Private Partner, then the amount of the variable concession fee should be rateably reduced. However, it will be a matter of negotiation as to whether any fixed concession fee should continue to be payable in full.

force majeure either party should be entitled to terminate the concession contract. If the Contracting Authority does not want the concession contract to be terminated, then the Contracting Authority shall pay the Private Partner the actual additional cost of continued operating and an amount of compensation in order to service the Private Partner’s debt obligations during the course of the event.

Whether the debt can be fully serviced in such a scenario prior to the possible time for termination, will be a key area of focus for prospective lenders as part of their initial credit assessments.

Where the project is terminated by either party, the Contracting Authority will normally be required to compensate the Private Partner fully for debt owed to the lenders.

for its expected rate of return) for termination arising from a “natural” force majeure.

Force majeure risk


Emerging X Force majeure is a shared risk and you would expect to see a fairly well developed list of events that entitle the Private Partner to relief.


- natural force majeure events, which typically can be insured (e.g. fire/flooding/storm etc.), and

- force majeure events which typically cannot be insured (e.g. strikes/protest/epidemics)


Termination payment for prolonged force majeure may differ depending on the type of force majeure. Lenders will expect to see debt covered by Contracting Authority and/or insurance payments.

In emerging markets, some projects do not provide any protection for natural force majeure events, even if insured leaving lenders exposed to termination.



Developed X The Private Partner would look to mitigate this risk through hedging arrangements under the Finance Documents, to the extent possible or necessary in that market.

Exchange and interest rates risks are typically not accounted for beyond the Private Partner’s own hedging arrangements.



In developed markets, the risk of currency fluctuations and interest rates is not substantial enough to require the Contracting Authority to provide support.







Emerging X The Private Partner would look to mitigate this risk through hedging arrangements under the Finance Documents, to the extent possible in that market.

In certain countries, this may not be possible due to exchange/interest rate volatility.

Some of the cost risk can be managed by passing the risk through to the port users by way of adjustments to the tariff, but the ability to do this may be limited.

It is therefore common for the Private Partner to look for the right to charge the port tariffs in USD or other hard currency rather than local currency.

As revenue may be collected in local currency the Contracting Authority may need to retain the risk of devaluation of the local currency to the extent that such devaluation impacts on the economic viability of the project (due to the need to pay for foreign currency imports and service foreign currency debt) or alternatively provide the necessary dispensations/ approvals to allow tariffs and project accounts to be denominated in hard currency.

In emerging market port projects, the devaluation of local currency beyond a certain threshold may be a trigger for non-default termination. Alternatively, it could trigger a “cap and collar” subsidy arrangement from the Contracting Authority. Issues of convertibility of currency and restrictions on repatriation of funds are also bankability issues upon termination in emerging markets.

Insurance risk




If the cost of insurance increases above specified amounts this increased cost may be shared by the parties.



The Contracting Authority may need to consider whether it stands behind unavailability of insurance, in particular where this has been caused by in-country or regional events or circumstances or an act or threat of terrorism.

In developed market transactions, as neither party can better control the risk of insurance coverage becoming unattainable, this is typically a shared risk.

Where the cost of the required insurance increases significantly, the risk is typically shared by either having an agreed cost escalation mechanism up to ceiling or a percentage sharing arrangement - this allows the Contracting Authority to quantify the contingency that has been priced for this risk.

In circumstances where the required insurance becomes unavailable, the Contracting Authority is typically given the option to either terminate the project or to proceed with the project and effectively self-insure and pay out in the event the risk occurs.

Insurance risk


Emerging X Where risks become uninsurable there is typically no obligation to maintain insurance for such risks.

If an uninsured risk event occurs, the Private Partner will typically have to bear this risk.

If the uninsured risk is funda-

As part of the feasibility study the Contracting Authority and Private Partner should consider whether insurance might become unavailable for it given the location and other factors relevant to the project.


On emerging market transactions, the Contracting Authority typically does not take the risk of uninsurability arising on the project, although there are good grounds to say that it should do so if the Private Partner has no protection for the consequences of





mental to the project (e.g. physical damage cover for major project components) then the Private Partner may need an exit route (e.g. force majeure termination) if it cannot reinstate the project on an economic basis.

a natural force majeure that becomes uninsurable.

Political risk


Public sector budgeting.

Developed X The Contracting Authority will bear responsibility for political events outside the Private Partner’s control, and the Contracting Authority will be responsible should it fail to continually provide the Private Partner with the license and access to the system and surrounding lands necessary to allow the Private Partner to fulfil its obligations.




Political risk



Emerging X The Contracting Authority typically bears responsibility for political events outside the Private Partner’s control (which will include ensuring that there are sufficient funds to meet any Contracting Authority payment obligations).

This concept may include any “material adverse Government action” (broadly speaking any act or omission of any Government entity which has a material adverse impact on the Private Partner’s ability to perform its obligations and/or exercise its rights under the concession) and may also include a specific list of events of a political nature such as expropriation, interference, general strikes, discriminatory changes in law, as well as more general uninsurable events such as risks of wars/riots/embargoes etc.



This type of issue will typically lead to a termination event where the Contracting Authority will need to stand behind debt and equity potentially with a Government guarantee.






mental to the project (e.g. physical damage cover for major project components) then the Private Partner may need an exit route (e.g. force majeure termination) if it cannot reinstate the project on an economic basis.

a natural force majeure that becomes uninsurable.

Political risk



Developed X The Contracting Authority will bear responsibility for political events outside the Private Partner’s control, and the Contracting Authority will be responsible should it fail to continually provide the Private Partner with the license and access to the system and surrounding lands necessary to allow the Private Partner to fulfil its obligations.




Political risk



Emerging X The Contracting Authority typically bears responsibility for political events outside the Private Partner’s control (which will include ensuring that there are sufficient funds to meet any Contracting Authority payment obligations).

This concept may include any “material adverse Government action” (broadly speaking any act or omission of any Government entity which has a material adverse impact on the Private Partner’s ability to perform its obligations and/or exercise its rights under the concession) and may also include a specific list of events of a political nature such as expropriation, interference, general strikes, discriminatory changes in law, as well as more general uninsurable events such as risks of wars/riots/embargoes etc.



This type of issue will typically lead to a termination event where the Contracting Authority will need to stand behind debt and equity potentially with a Government guarantee.






Regula-tory/change in law risk


Change in taxation.


The Private Partner will be kept whole in respect of changes in law which are: (i) Discriminatory (to the project or the Private Partner) (ii) Specific (to the port sector or to PPP projects in the jurisdiction) or (iii) general change in law affecting capital expenditures. A change in law is often subject to a de minimis threshold before the Private Partner is entitled to compensation

The Private Partner will not be compensated for general changes in law that only affect operational expenditure or taxation (i.e. affect the market equally). Changes in law will always entitle the Private Partner to a Variation where this is necessary to avoid an impossible obligation. If this cannot be achieved the Private Partner will typically be entitled to terminate as if a Contracting Authority breach had occurred.

Change in law risk that is retained by the Private Partner may be mitigated by indexation provisions (on the basis that general changes in law will affect the market equally and should be reflected in general inflation).

Change in law risk may also be mitigated where there is an ability to pass back changes in the tariff charged on the project.

Some projects only permit the Private Partner to claim relief for general changes in law occurring after completion of construction. This approach may be justified if the country's legal regime ensures that the prevailing legal regime at the start of construction is fixed until the works are complete (i.e. does not operate retrospectively to projects in progress).



Change in taxation.

Emerging X The Contracting Authority typically bears principal responsibility for changes in law post-bid/post-contract signature.

There may be a degree of risk sharing with the Private Partner and there may be certain risks that the Private Partner is expected to bear alongside the remainder of the market.

The Private Partner would look to be kept whole in respect of changes of law which have a material adverse effect on the economic equilibrium of the concession.

Where the parties are unable to agree how to reasonably take into account the effects of the change in law so as to re-establish the economic equilibrium the Private Partner will have a right to





In emerging markets, the Private Partner is likely to have a greater level of protection from changes in law to reflect the greater risk of change (including both likelihood and consequences) and in order to attract investors to the project. In that way, the Contracting Authority would be expected to assume more change in law risk than compared to a project in a developed market.







Change in taxation.


The Private Partner will be kept whole in respect of changes in law which are: (i) Discriminatory (to the project or the Private Partner) (ii) Specific (to the port sector or to PPP projects in the jurisdiction) or (iii) general change in law affecting capital expenditures. A change in law is often subject to a de minimis threshold before the Private Partner is entitled to compensation

The Private Partner will not be compensated for general changes in law that only affect operational expenditure or taxation (i.e. affect the market equally). Changes in law will always entitle the Private Partner to a Variation where this is necessary to avoid an impossible obligation. If this cannot be achieved the Private Partner will typically be entitled to terminate as if a Contracting Authority breach had occurred.

Change in law risk that is retained by the Private Partner may be mitigated by indexation provisions (on the basis that general changes in law will affect the market equally and should be reflected in general inflation).

Change in law risk may also be mitigated where there is an ability to pass back changes in the tariff charged on the project.

Some projects only permit the Private Partner to claim relief for general changes in law occurring after completion of construction. This approach may be justified if the country's legal regime ensures that the prevailing legal regime at the start of construction is fixed until the works are complete (i.e. does not operate retrospectively to projects in progress).



Change in taxation.

Emerging X The Contracting Authority typically bears principal responsibility for changes in law post-bid/post-contract signature.

There may be a degree of risk sharing with the Private Partner and there may be certain risks that the Private Partner is expected to bear alongside the remainder of the market.

The Private Partner would look to be kept whole in respect of changes of law which have a material adverse effect on the economic equilibrium of the concession.

Where the parties are unable to agree how to reasonably take into account the effects of the change in law so as to re-establish the economic equilibrium the Private Partner will have a right to





In emerging markets, the Private Partner is likely to have a greater level of protection from changes in law to reflect the greater risk of change (including both likelihood and consequences) and in order to attract investors to the project. In that way, the Contracting Authority would be expected to assume more change in law risk than compared to a project in a developed market.





terminate (typically on a Contracting Authority default basis).

Inflation risk




Inflation risk


Emerging X Inflation risk is typically borne by the Private Partner and transferred to the port users.

The Private Partner retains the risk of the impact on demand caused by any increases in the tariffs.

The Private Partner will accordingly need the ability to increase the port tariffs, but this ability may often be subject to regulation (as tariff-raising is likely to be a sensitive political issue), and so the Private Partner may need additional Contracting Authority support.

This risk may be mitigated to some extent where the Private Partner has the right to collect the tariffs in hard currency, which more closely matches project expenditure / financing.

Support may be needed e.g. to ensure tariffs can be levied in foreign currency and/or to ensure swift and reliable convertibility of local currency, as well as expatriation of project revenues.

If tariff increases are subject to regulation, then this creates uncertainty. The Private Partner may be able to get the Contracting Authority to stand behind any shortfalls in tariff increases which the Private Partner anticipates making (e.g. to ensure that USD inflation was covered as a minimum).

Strategic risk







Strategic risk



Emerging X The Contracting Authority wants to ensure that the Private Partner to whom the project is awarded remains involved.


The Contracting Authority will limit the Private Partner’s shareholder’s ability to change their shareholding for a period (i.e. there is typically a lock-in for at least the construction period and in some cases for up to the first 15 years of operations).


In particular, any incoming shareholder will need to have the

In emerging markets, there is typically more restriction on any change of control in the Private Partner given the riskier nature of emerging market projects.





requisite financial capacity and technical expertise to be a sponsor in a port operating company.


The risk that a new emerging technology unexpectedly displaces an established technology used in the port sector.

Developed X This risk is unlikely to be passed to the Private Partner as technology is unlikely to be a major component of the project.

Obligation on the Private Partner to provide service which seeks for continuous improvement for minor changes. Obligation to operate in accordance with best industry practice may also impose some obligation on Private Partner to take on improvements in technology.

Major changes would require a variation.

Typically, not dealt with in detail in developed markets.



Emerging X This risk is unlikely to be passed to the Private Partner as technology is unlikely to be a major component of the project.



Typically, not dealt with in detail in emerging markets.

Early termina-tion (including any compen-sation risk)





(3) Private Partner default—(a) Where the project cannot be retendered (due to political sensitivity or a lack of interested parties) the Private Partner would typically be entitled to an amount equal to the adjusted estimated fair value of future payments, less the costs of providing the services under the project/concession agreement. (b) Where the project can be retendered, the Private Partner would be entitled to the amount that a new private partner would pay for the remaining term of the concession, less any costs incurred by the Contracting Authority during the retendering process.

It is common for the senior debt to be guaranteed as a minimum in every termination scenario, and








requisite financial capacity and technical expertise to be a sponsor in a port operating company.



Developed X This risk is unlikely to be passed to the Private Partner as technology is unlikely to be a major component of the project.



Typically, not dealt with in detail in developed markets.



Emerging X This risk is unlikely to be passed to the Private Partner as technology is unlikely to be a major component of the project.



Typically, not dealt with in detail in emerging markets.






(3) Private Partner default—(a) Where the project cannot be retendered (due to political sensitivity or a lack of interested parties) the Private Partner would typically be entitled to an amount equal to the adjusted estimated fair value of future payments, less the costs of providing the services under the project/concession agreement. (b) Where the project can be retendered, the Private Partner would be entitled to the amount that a new private partner would pay for the remaining term of the concession, less any costs incurred by the Contracting Authority during the retendering process.

It is common for the senior debt to be guaranteed as a minimum in every termination scenario, and








for rights of set-off below that figure to be restricted. While it may seem that project lenders are therefore are not significantly exposed to a project default, they would not typically have the right to call for a termination in these circumstances, and so they are still motivated to make the project work to recover their loan if the Contracting Authority chooses not to exercise its termination rights.



Emerging X The level of compensation payable on early termination will depend on the reasons for termination and typically for:

(1) Contracting Authority default—the Private Partner would get senior debt, equity and a level of equity return;

(2) Non-default termination—the Private Partner would get senior debt and equity; and

(3) Private Partner default—the Private Partner would typically get a payment that is a function of the input cost of the project (construction value/book value) or the outstanding senior debt (in some cases there may even be a return of unamortised equity/subordinated debt).

In many emerging markets, it is common for the senior debt to be guaranteed as a minimum in every termination scenario, and for rights of set-off below that figure to be restricted. While it may seem that project lenders therefore are not significantly exposed to a project default, they would not typically have the right to call for a termination in these circumstances, and so they are still motivated to make the project work to recover their loan if the Contracting Authority chooses not to exercise its termination rights.


The covenant risk of the Contracting Authority may require a guarantee from a higher level of Government to guarantee the level of compensation payable on termination.


In emerging markets, there may also be sovereign guarantees which support the Contracting Authorities payment obligations.



ANNEX B RECOMMENDED PPP CONTRACTUAL PROVISIONS, WITH GUIDANCE NOTES

This Annex B is intended to provide KAPP and respective Public Entities with an analysis of, and drafting guidance for, specific ‘recommended’ provisions that are typically included in PPP agreements and that have formed the basis of many successfully procured PPP transactions around the globe.

Prior to reviewing the contractual provisions and guidance notes set out in the following Sections, it should be noted, however, that the circumstances of each individual PPP project will ultimately shape and determine the drafting of the concrete PPP agreement as well as related agreements. Given the complex nature of PPP transactions and that extensive due diligence – with the assistance of qualified legal, financial and technical specialists – needs to be undertaken by both the public sector and private parties before concluding PPP agreements, the contents of this Annex B should simply be regarded as a suggested starting point and one of many inputs for KAPP and the Public Entity to consider when devising and negotiating the terms of a specific PPP agreement.

B.1 FORCE MAJEURE

B.1.1 GUIDANCE NOTES

B.1.1.1 Key Aspects

Force Majeure essentially refers to events or circumstances which:

A | are beyond the control of the contracting parties; and

B | make it impossible for one Party to fulfill all or a material part of its contractual obligations (i.e. they are prohibitive in nature as far as contractual performance is concerned).

The aim of Force Majeure provisions in a PPP agreement is to allocate the financial and timing consequences of Force Majeure events between the public authority, such as KAPP, (the Contracting Authority) that enters into the PPP agreement with a private company (the Private Partner). The starting assumption for both parties should be that the risk of a Force Majeure event occurring is shared because it is outside both parties’ control and neither is better placed than the other to manage the risk of such occurrence or its consequences.

2 2 5A N N E X B R E C O M M E N D E D P P P C O N T R A C T U A L P R O V I S I O N S , W I T H G U I D A N C E N O T E S

While the provisions are typically drafted mutually, the affected party is often most likely to be the Private Partner and this raises some important issues for the Contracting Authority, including:

A | what events qualify as Force Majeure events;

B | whether and how the Private Partner should be compensated as a result of a Force Majeure event (e.g. for increased costs and/or loss of revenue);

c | whether and for how long key milestones under the PPP agreement should be deferred as a result of a Force Majeure event;

d | whether the Private Partner or the Contracting Authority should be relieved from its obligations to perform under the PPP agreement and from the related consequences (e.g. the risk of termination due to default); and

E | whether the PPP agreement should be terminated if a Force Majeure event persists for a significant period of time and what termination compensation should be paid, if any.

To qualify as a Force Majeure event, the definition may also require that an event was not foreseeable, or if it was foreseeable that it could not reasonably have been avoided. Practice varies between jurisdictions and may depend on underlying legal concepts or the nature and extent of the agreed list of Force Majeure events. Section B.1.2 provides sample language both including and excluding the concept of foreseeability.

B.1.1.2 Relationship to Other Types of Events

In a traditional commercial contract, for example between two private sector entities, shared Force Majeure risk would typically include “acts of God” such as natural disasters and epidemics (often referred to as “natural Force Majeure”), as well as “political” events such as general strikes, nationalisation and a public sector refusal to grant licenses (often referred to as “political Force Majeure”).

In a long-term PPP agreement, where one of the parties is a public sector entity, there is close scrutiny of the type of political force majeure events which may arise during the life of the PPP agreement and how each risk should be allocated. Deciding whether the risk should be borne by the Contracting Authority alone, shared by the parties, or borne by the Private Partner as a commercial risk may in practice be difficult. It will inevitably depend on the situation in the relevant jurisdiction, the type of event being considered and the level of contingency that the Private Partner would price into its bid to cover the risk if allocated to it. For example, while it is usually accepted that the type of political risk which should lie wholly with the Contracting Authority includes deliberate acts of state such as outright nationalisation of the PPP project, the position as regards war events will depend on the jurisdiction concerned. If any kind of civil or external war event is highly unlikely, the Private Partner may be comfortable with the risk being treated as a shared Force Majeure risk and any contingency it prices


into its bid will be relatively low. In more volatile jurisdictions where the war risk is high, however, the Private Partner may not be prepared to bear any risk at all (or alternatively would price such a high contingency into its bid that the PPP agreement may prove very expensive or even unaffordable). In this instance, such events may be more appropriately treated as Contracting Authority risk, or looked at more individually.

If there are political risk events to be allocated solely to the Contracting Authority, it is likely that these events will require separate treatment in bespoke provisions. In this Annex B, events in this category are treated as “Material Adverse Government Action” (“MAGA”) events. They are given separate treatment in their own contractual provision and are in discussed in more detail in Section B.2, Material Adverse Government Action.18 Alternatively, where Private Partners accept that the type of political risks likely to arise are limited, these can be dealt with through the Force Majeure shared risk provisions, together with separate provisions dealing with specific events for which risk is allocated either to the Contracting Authority (such as Contracting Authority breach of contract and Change in Law) or to the Private Partner.19

There is no right or wrong approach and the fundamental principle remains the same – risks should be allocated to the party best able to control and/or manage them and the PPP agreement should address them in the clearest way possible.

B.1.2 CONTRACTUAL PROVISION

B.1.2.1 Drafting Option 1: Open-ended catch-all definition, including concept of foreseeability

Definition of Force Majeure Event

1 | In this PPP Contract, a “Force Majeure Event” means any event or circumstance or combination of events or circumstances:

A | beyond the reasonable control of the Party affected by such event, circumstance or combination of events or circumstances (the “Affected Party”);

B | which was not foreseeable or, if foreseeable, could not have been prevented or avoided or overcome by the Affected Party having taken all reasonable precautions and due care;

18 This type of approach is seen, for example, in certain African power projects (such as the International Finance Corporation's Zambia Scaling Solar Programme).

19 This approach appears to have been chosen for the Energy Conversion and Water Purchase Agreement concluded for the Az-Zour North Phase I Power Generation and Water Desalination Plant (as concluded in December 2013) as well as the draft Energy Conversion and Water Purchase Agreement, as included in RFP for the Az-Zour North Phase II Independent Water and Power Project. Under both of the agreements, political events as well as Change in Law are captured as a separate type of event (“Government Risk Event”) which is encompassed as part of the general Force Majeure provision.


c | which directly causes the Affected Party to be unable to comply with all or a material part of its obligations under this PPP Contract; and

d | which is not the direct result of a breach by the Affected Party of its obligations under this PPP Contract or, in respect of the Private Partner, under any other Project Agreement. [obligations should include compliance with Applicable Law]

2 | Force Majeure Events include but are not limited to the following circumstances, provided that they meet the criteria set forth in Clause 1.1(1) above:

A | plague, epidemic and natural disaster, such as but not limited to, storm, cyclone, typhoon, hurricane, tornado, blizzard, earthquake, volcanic activity, landslide, tsunami, flood, lightning, and drought;

B | fire, explosion, or nuclear, biological or chemical contamination (other than caused by the negligence of the Private Partner, its contractors, or any subcontractor, supplier or vendor);

c | war (whether declared or not), armed conflict (including but not limited to hostile attack, blockade, military embargo), hostilities, invasion, act of a foreign enemy, act of terrorism, sabotage or piracy, [in each case occurring outside the Country];

d | civil war, riot rebellion and revolution, military or usurped power, insurrection, civil commotion or disorder, mob violence, act of civil disobedience, [in each case occurring outside the Country];

E | radioactive contamination or ionising radiation, [occurring outside the Country]; or

F | general labour disturbance such as boycotts, strikes and lock-out, go-slow, occupation of factories and premises, excluding similar events which are unique to the PPP Project and specific to the Private Partner or to its sub-contractors, [and occurring outside the Country].

Consequences of Force Majeure Event

3 | If a Force Majeure Event has occurred, the Affected Party shall be entitled to relief from its obligations under the PPP Contract if it meets the requirements of Clause (4) below.

4 | To obtain relief under Clause (3) above, the Affected Party must:

A | as soon as practicable, and in any event within [ ] (•) business] days after it became aware that the Force Majeure Event has caused or is likely to cause breach of an obligation under this PPP Contract, give to the other Party a notice of its claim for relief from its obligations under

List of events to be negotiated for the specific project circumstances, taking into account also whether certain political risks should be treated separately as Material Adverse Government Action or not.


the PPP Contract, including (i) satisfactory evidence of the existence of the Force Majeure Event, (ii) full details of the nature of the Force Majeure Event, (iii) the date of occurrence; (iv) its likely duration; and (v) details of the measures taken to mitigate the effect of the Force Majeure Event.

B | within [ ] (•) business] days of receipt of the notice referred to in clause (a) above, give to the other Party full details of the relief claimed, as well as information on all actions being taken by the Affected Party to mitigate the consequences of the Force Majeure Event;

c | demonstrate to the other Party that:

i. the Affected Party, and its contractors, could not have avoided such occurrence or consequences by steps which they might reasonably be expected to have taken, without incurring material cost;

ii. the Force Majeure Event directly caused the need for the relief claimed;

iii. the relief claimed could not reasonably be expected to be mitigated by the Affected Party, including recourse to alternate sources of services, equipment and materials and construction equipment, without incurring material cost; and

iv. the Affected Party is using all reasonable endeavours to perform its affected obligations under this PPP Contract.

5 | If the Affected Party has complied with its obligations under Clause (4) above, then it shall be excused from the performance of its obligations under this PPP Contract to the extent it is prevented, hindered or delayed in such performance by reason of the Force Majeure Event.

6 | [If information required under Clause (4) above is provided after the dates referred to in that clause, then the Affected Party shall not be entitled to any relief during the period for which the information is delayed.]

7 | The Affected Party shall notify the other Party as soon as practicable after the Force Majeure Event ceases or no longer causes the Affected Party to be unable to comply with the applicable obligations under this PPP Contract. Following such notification this PPP Contract shall continue to be performed on the terms existing immediately prior to the occurrence of the Force Majeure Event.

This period of time needs careful consideration—notice should be timely but allow the affected party a reasonable time to fully develop a mitigation strategy.


Termination due to Prolonged Force Majeure

8 | If a Force Majeure Event subsists for a continuous period of more than [180-360 calendar] days, either Party may in its discretion terminate this PPP Contract by issuing a written termination notice to the other Party which shall take effect [thirty (30) calendar] days after its receipt. If, at the end of this [thirty (30)]-day period, the Force Majeure Event continues, the PPP Contract shall be terminated pursuant to clause [insert reference to the clause governing termination] and the Private Partner shall be entitled to the compensation set out under clause [insert reference to Compensation on Termination for Force Majeure clause].

B.1.2.2 Drafting Option 2: Exhaustive list of specific events, no concept of foreseeability20

Required Definition

“Force Majeure Event” means the occurrence after the date of the PPP Contract of:

A | war, civil war, invasion, armed conflict, terrorism or sabotage; or

B | nuclear, chemical or biological contamination unless the source or the cause of the contamination is the result of the actions of or breach by the Private Partner or its sub-contractors; or

c | pressure waves caused by devices travelling at supersonic speeds,

which directly causes either Party (the “Affected Party”) to be unable to comply with all or a material part of its obligations under this PPP Contract.

Consequences of Force Majeure

1 | No Party shall be entitled to bring a claim for a breach of obligations under the PPP Contract by the other Party or incur any liability to the other Party for any losses or damages incurred by that other Party to the extent that a Force Majeure Event occurs and it is prevented from carrying out obligations by that Force Majeure Event. For the avoidance of doubt (but without prejudice to Clauses 1.1(5) or 1.1(7)) below, the Contracting Authority shall not be entitled to terminate this PPP Contract for a [insert defined term for Private Partner Default] if such [Private Partner Default] arises from a Force Majeure Event.

2 | Nothing in Clause (1) above shall affect any entitlement to make deductions or any deductions made as a result of [insert reference to clauses addressing pricing and payment mechanism] in the period during which the Force Majeure Event is subsisting.

20 The concept of foreseeability has not been included as part of the Force Majeure provisions in the Energy Conversion and Water Purchase Agreements mentioned in footnote 19.


3 | On the occurrence of a Force Majeure Event, the Affected Party shall notify the other party as soon as practicable. The notification shall include details of the Force Majeure Event, including evidence of its effect on the obligations of the Affected Party and any action proposed to mitigate its effect.

4 | As soon as practicable following such notification, the Parties shall consult with each other in good faith and use all reasonable endeavours to agree appropriate terms to mitigate the effects of the Force Majeure Event and facilitate the continued performance of the PPP Contract.

5 | If no such terms are agreed on or before the date falling [120] days after the date of the commencement of the Force Majeure Event and such Force Majeure Event is continuing or its consequence remains such that the Affected Party is unable to comply with its obligations under this PPP Contract for a period of more than [180] days, then, subject to Clause (6) below, either Party may terminate the PPP Contract by giving [30] days' written notice to the other Party.

6 | If the PPP Contract is terminated under Clause (5) above or Clause (7) below:

A | compensation shall be payable by the Contracting Authority in accordance with [insert reference to Compensation on Termination for Force Majeure clause]; and

B | the Contracting Authority may require the Private Partner to transfer its title, interest and rights in and to any [insert defined term of relevant Project assets] to the Contracting Authority.

7 | If the Private Partner gives notice to the Contracting Authority under Clause (5) above that it wishes to terminate the PPP Contract, then the Contracting Authority has the option either to accept such notice or to respond in writing on or before the date falling [10] days after the date of its receipt stating that it requires the PPP Contract to continue. If the Contracting Authority gives the Private Partner such notice, then:

A | the Contracting Authority shall pay to the Private Partner the [insert defined term for availability payment] from the day after the date on which the PPP Contract would have terminated under Clause (5) above as if the [insert defined term for the service] was being fully provided; and

B | the PPP Contract will not terminate until expiry of written notice (of at least [30] days) from the Contracting Authority to the Private Partner that it wishes the PPP Contract to terminate.

8 | The Parties shall at all times following the occurrence of a Force Majeure Event use all reasonable endeavours to prevent and mitigate the effects of any delay and the Affected Party shall at all times during which a Force Majeure Event is subsisting take all steps in accordance with industry good practice to overcome or minimise the consequences of the Force Majeure Event.

For example, if the Force Majeure Event occurs during the construction phase, the parties could agree that relevant milestone dates are postponed by such time as is reasonable, taking into account the likely effect of the delay.


9 | The Affected Party shall notify the other Party as soon as practicable after the Force Majeure Event ceases or no longer causes the Affected Party to be unable to comply with the applicable obligations under this PPP Contract. Following such notification, the PPP Contract shall continue to be performed on the terms existing immediately prior to the occurrence of the Force Majeure Event.

B.2 MATERIAL ADVERSE GOVERNMENT ACTION


The concept of “Material Adverse Government Action” (or “MAGA”), is applicable to contracts, such as PPP agreements, where one of the parties is a public sector entity, or government. MAGA events typically:

A | delay or prevent the private sector party from performing its contractual obligations; and/or

B | have a material adverse financial impact on the private sector party; and

c | are within the public sector entity/government's control or are best managed by the public sector entity/government as compared to the private party,

and, therefore, the risks associated with such events are typically allocated to the public sector entity/government. Because of the potential impact of MAGA events on the Private Partner's ability to perform its contractual obligations and be paid, the Private Partner and its Lenders will carefully assess the risk of such events occurring and will expect any significant MAGA risks to be identified. The purpose of a MAGA clause is therefore to allocate certain agreed types of political risk to the Contracting Authority, address the consequences of such risks occurring and provide the Private Partner with appropriate relief and compensation.

As described in Section B.1.1.1, MAGA events are also referred to as “political risk” or “political force majeure.” The dividing line between political risk (which is allocated to the Contracting Authority) and certain commercial risks (which the Private Partner is expected to take or share) is, in practice, likely to be a difficult one to draw. It is usually accepted that MAGA events include war related events within the relevant country, as well as deliberate acts of state such as outright nationalisation or expropriation of the PPP project (including creeping expropriation, which is often carried out indirectly and over a period of time) and a declaration of a moratorium on international payments and restrictions on currency conversions into foreign exchange. MAGA may also include failures by the Contracting Authority or other public entity to grant licenses or comply with certain obligations.

Even where included, MAGA provisions may be structured differently as political risks will vary between jurisdictions. For example, some Contracting Authorities may choose to address events such


as Change in Law and Contracting Authority default in separate provisions, while others will include them in the MAGA provisions.21

In this Annex B, MAGA events can be clearly contrasted with Force Majeure events as the risk of their occurrence is allocated entirely to the Contracting Authority and they are given separate treatment in their own contractual provision.


Definition of Material Adverse Government Action

1 | For the purposes of this PPP Contract, “Material Adverse Government Action” means any act or omission by the Contracting Authority or any relevant public authority [define if necessary] or event set out in Clause (1) below, which occurs during the term of this PPP Contract and which (i) directly causes the Private Partner to be unable to comply with all or some of its obligations under the PPP Contract and/or (ii) has a [Material] Adverse Effect] on its [costs or revenues] [insert defined terms].

2 | For the purposes of Clause 0 above any act or omission shall mean and be limited to the following circumstances:

A | failure of any relevant public authority to grant to the Private Partner or renew any permit or approval that is required for the purposes of the Private Partner's proper performance of its obligations and/or enforcement of its rights under this PPP Contract, in each case within the required timeframe under [Applicable Law], except where such failure results from the Private Partner's non-compliance with [Applicable Law];

B | any act of war (whether declared or undeclared), invasion, armed conflict or act of foreign enemy, blockade, embargo or revolution, [occurring inside [name of country]];

c | radioactive contamination or ionising radiation, [originating from a source in [name of country]];

21 See footnote 1120 in terms of how both Force Majeure and MAGA events are treated under Energy Conversion and Water Purchase Agreements recently concluded/procured in Kuwait.

Where possible, undefined materiality qualifications should be avoided to minimise the risk of dispute.If "material adverse effect" drafting is used it is advisable to define it by reference to a specified monetary impact.

Define Applicable Law with care if also used in other contexts such as Change in Law.

Drafting subject to the position adopted in this respect in the Force Majeure provisions.


d | any riot, insurrection, civil commotion, act or campaign of terrorism, [occurring inside [name of country]];

E | any strike, work-to-rule, or go-slow which is not primarily motivated by a desire to influence the actions of the Affected Party so as to preserve or improve conditions of employment by the Affected Party, [occurring inside [name of country]];

F | expropriation, compulsory acquisition or nationalization by any relevant authority of any asset or right of the Private Partner, including any of the shares in the Private Partner;

G | any act or omission of any relevant authority adversely affecting the legality, validity, binding nature or enforceability of this PPP Contract; and

h | [add any event specific to the PPP Project such as the construction of certain competing infrastructure (e.g. a free road adjacent to the PPP tolled road) or a pollution event].

Consequences of Material Adverse Government Action

3 | If a Material Adverse Government Action occurs, the Private Partner (i) shall be excused from the performance of its obligations under the PPP Contract to the extent that it is prevented, hindered or delayed in such performance by reason of the Material Adverse Government Action and (ii) shall be entitled to compensation under this PPP Contract, in each case subject to and in accordance with the provisions of this Clause [whole clause].

4 | To obtain relief pursuant to Clause (3) , the Private Partner must:

A | as soon as practicable [and in any event within [•] business days] after the Private Partner becomes aware that the Material Adverse Government Action has occurred, give to the Contracting Authority a notice of its claim for payment of compensation and/or relief from its obligations under the PPP Contract, following which the Parties shall consider in good faith any option to mitigate the impact of the Material Adverse Government Action;

B | within [•] business days of receipt by the Contracting Authority of the notice referred in Clause (3)(a) above, give full details of (i) the Material Adverse Government Action and (ii) any Estimated Change in Project Costs and/or loss of revenue claimed and/or delay and/or any breach of the Private Partner's obligations under this PPP Contract,

Insert reasonable time period, e.g. seven business days.

Insert reasonable time period given the level of detail required to be specified in full.

Drafting subject to the position adopted in this respect in the Force Majeure provisions.


c | demonstrate to the Contracting Authority that:

i. the Private Partner could not avoid such occurrence or consequences by actions which it might reasonably be expected to have taken without incurring [material] costs;

ii. the Material Adverse Government Action was the direct cause of the Estimated Change in Project Costs and/or loss of revenue and/or delay and/or breach of the Private Partner's obligations under this PPP Contract;

iii. time lost and/or relief from the obligations under the PPP Contract claimed, could not be mitigated or recovered by the Private Partner; and

iv. the Private Partner is using reasonable endeavours to perform its affected obligations under the PPP Contract.

5 | If the Private Partner has complied with its obligations under Clause (3) above, then the Contracting Authority shall:

A | compensate the Private Partner for the Estimated Change in Project Costs as adjusted to reflect the actual costs reasonably incurred [and loss of revenue];

B | give the Private Partner such relief from its obligations under this PPP Contract as is reasonable for such Material Adverse Government Action; and if the Material Adverse Government Action occurs during the [insert defined term for Construction Period] and causes a delay in achieving the [insert defined term for scheduled services commencement date], such date shall be postponed by such time as is reasonable

6 | [In the event that information is provided after the dates referred to in Clause (3) above, then the Private Partner shall not be entitled to any extension of time, compensation or relief from its obligations under this PPP Contract in respect of the period for which the information is delayed.]

7 | If the Contracting Authority and the Private Partner cannot agree on the extent of any compensation, delay incurred, or relief from the Private Partner's obligations under this PPP Contract, as applicable, or the Contracting Authority disagrees that a Material Adverse Government Action has occurred, the Parties shall resolve the matter in accordance with Clause [insert reference to dispute resolution clause].

Termination due to Prolonged Material Adverse Government Action

8 | If a Material Adverse Government Action subsists for a continuous period of more than [180-360 calendar] days, a Party may in its discretion terminate this PPP Contract by issuing a written

Drafting to reflect whether the Contracting Authority has continued paying the Private Partner through this process.


termination notice to the other Party which shall take effect [thirty (30) calendar] days after its receipt. [If, at the end of this [thirty (30) calendar]-day period, the Material Adverse Government Action continues,] the PPP Contract shall be terminated pursuant to Clause [insert reference to clause governing termination] and the Private Partner shall be entitled to the compensation set out under clause [insert reference to Compensation on MAGA termination clause].

B.3 CHANGE IN LAW


All contracting parties must operate within the law and so must factor the cost, time and any other implications of complying with applicable law into the performance of their contractual obligations. Over a long term contract, such as a PPP agreement, changes in law may be introduced which were unanticipated at the outset of the contract. In this context, the Private Partner assesses how it will carry out its obligations under the PPP agreement and what price it will charge based on detailed due diligence of the circumstances known to it at the time of bidding, including the existing legal environment.

An unexpected change in law may make the Private Partner's performance of its contractual obligations wholly or partially impossible, delayed or more expensive. Some changes in law could, for example, entail significant expenditure if additional capital works are required (e.g. to meet new safety or environmental standards or to provide mandatory disabled access) and may also reduce full performance of the service while implemented. Similarly, additional taxes may be levied.

It is therefore market practice for PPP agreements to contain provisions expressly allocating the risk of certain changes in law which occur after a specified date (typically linked to when the Private Partner's pricing is set) and which satisfy certain criteria as regards foreseeability. They also address how the consequences of changes in law are to be managed. They do not (and cannot) prevent changes in law, enactment of which is the prerogative of the relevant governing entity. Change in law provisions generally provide the Private Partner with relief from contractual breach to the extent compliance with the new law affects the Private Partner's ability to perform its obligations and also set out how any resulting costs of compliance or necessary changes to the PPP agreement’s scope are treated.

There are several approaches to allocating change in law risk but the ability for a Contracting Authority to share change in law risk with the Private Partner will essentially depend on the risk of legislative or regulatory volatility in the jurisdiction and sector concerned, as well as the maturity of the market. The extent to which any resulting increased costs can be passed on to third party users will also be relevant.


Apart from allocating all risks to the Contracting Authority and a scenario where all risks are borne by the Private Partner (the latter being highly unusual), Section B.3.2 sets out the following two approaches 22

A | Basic risk sharing by the Private Partner (as outlined in Section B.3.2.1 Drafting Option 1): A minimum cost threshold is defined, generally on a yearly basis, below which the Private Partner will not be compensated.

B | More developed risk sharing (compare Section B.3.2.2 Drafting Option 2): Over the last two decades, a more developed approach to sharing change in law risk has been seen in some jurisdictions and has become part of standardised contract templates. This is based on the following risk allocation: Discriminatory Changes in Law, Specific Changes in Law, General Changes in Law requiring capital expenditure in operating period and any other Changes in law.


B.3.2.1 Drafting Option 1: Protection Against All Changes in Law

REQUIREd dEFINITIONS

Applicable Law

means any [decree, resolution, law, statute, act, decision, ordinance, rule, directive (to the extent having the force of law), order, treaty, code or regulation or any interpretation of the foregoing by a relevant authority having jurisdiction over the matter in question, as enacted, issued or promulgated by any relevant authority, in each case applicable in [insert jurisdiction in which the PPP Project is located]; [Drafting to be adapted for the relevant jurisdiction—any reference to amendments, modifications, extensions, replacements or re-enactments must not cut across Change in Law definition]

Change in Law

means, after the [Setting Date,] any of the following events (this date could be a period of time before bid submissions but is usually no later than the bid date):

1. the enactment of any new Applicable Law;

2. the repeal, modification or re-enactment of any existing Applicable Law; and/or

3. a change in the interpretation or application of any Applicable Law,

which

i. adversely affects (i) the ability of a Party to comply with its obligations under the PPP Contract or (ii) [the Base Case Equity IRR]; and

ii. was not [published as a draft law] in the [insert applicable publication source for legislation] or in effect at the Setting Date. [ Adapt as appropriate for "in the public domain"]

Definition and limbs will need to tie in with the definition of Applicable Law to avoid argument or circularity and will also need to reflect the law making process in the relevant jurisdiction.

Estimated Change in Project Costs

means the aggregate of any estimated increase in construction costs, operating costs and financing costs less the aggregate of any estimated reduction in construction costs, operating costs and financing costs.

22 As detailed in footnote 1120, a different approach has been chosen for recent Energy Conversion and Water Purchase Agreements concluded/procured in Kuwait and under which Change in Law is not treated separately but has been included as part of “Government Risk Events” under the Force Majeure provisions.


Occurrence of a Change in Law

1 | If a Change in Law occurs or is shortly to occur, then any Party may, within [thirty (30) business] days starting from the day it was aware (or should have been aware) of the Change in Law, notify the other Party to express an opinion on its likely effects, giving details of its opinion of:

A | any necessary change to the terms of this PPP Contract including any necessary Contracting Authority variation;

B | whether relief from compliance with obligations is required;

c | whether any deadline under the PPP Contract should be postponed;

d | any (positive or negative) estimated change of revenue that will directly result from the relevant Change in Law;

E | any (positive or negative) estimated change in the costs of the PPP Project that will directly result from the Change in Law; or

F | any capital expenditure that is required or no longer required as a result of a Change in Law.

2 | As soon as practicable and in any event within [thirty (30) business] days after receipt of any notice from the affected Party, the Contracting Authority and the Private Partner shall discuss and agree the matters referred to in Clause (1) above and any ways in which either Party can, if applicable, mitigate the effect of the Change in Law, including, in relation to the Private Partner:

A | providing evidence that the Private Partner has used reasonable endeavours (including (where practicable) the use of competitive quotes) to oblige its sub-contractors to minimise any increase in costs and maximise any reduction in costs;

B | demonstrating how any capital expenditure to be incurred or avoided is being measured in a cost effective manner, including showing that when such expenditure is incurred or would have been incurred, foreseeable Changes in Law at that time have been taken into account by the Private Partner;

c | giving evidence as to how the Change in Law has affected prices charged by any similar businesses to the PPP Project; and

d | demonstrating that any expenditure that has been avoided on account of the Change in Law has been taken into account in the amount which in its opinion has resulted or is required under Clauses (1)(e) or (1)(f) above.

The variations process will be dealt with under a different clause.


provided that if the Parties cannot agree on the effects of the Change in Law, the matter shall be referred for determination in accordance with clause [insert reference to the dispute resolution clause].

Consequences of a Change in Law

3 | If the Parties have followed the procedure set out under Clauses (1) and (2) above, then:

A | the affected Party shall be excused from the performance of its obligations under the PPP Contract to the extent it is prevented, hindered or delayed in such performance by reason of the Change in Law;

B | if the Change in Law has occurred before the services commencement date, the scheduled services commencement date shall be postponed to take into account the effect of such Change in Law; and

c | the Parties shall agree on the amount and payment of any compensation to reflect the Estimated Change in Project Costs as adjusted to take into account the actual increase or reduction in costs reasonably incurred as a result of the Change in Law, [provided that no compensation shall be made in relation to a Change in Law under this clause unless the claiming Party can demonstrate that the aggregate impact of all Changes in Law that have occurred during [ insert relevant period in time, e.g. calendar year] exceeds [insert amount]].

4 | If the notice and relevant information are not provided within the period referred to under Clause (1) above, the affected Party shall not be entitled to any compensation or relief from its obligations under the PPP Contract in respect of the period for which the information is delayed.

Termination due to a Change in Law

5 | If a Change in Law:

A | results in the Private Partner not being able to achieve the [insert defined term for services commencement date] within [•] months after the [insert defined term for scheduled services commencement date]; or

B | prevents a Party from performing its material obligations under this PPP Contract for a period of [•] consecutive days; or

c | results in performance of the PPP Contract being illegal and such illegality cannot be remedied by a Contracting Authority variation,

Delete proviso if no materiality threshold is to be included.


either Party may in its discretion terminate this PPP Contract by issuing a written termination notice which shall take effect [thirty (30) calendar] days after receipt of such termination notice. If, at the end of this [thirty (30)] day period, the Change in Law continues, the PPP Contract shall be terminated pursuant to clause [insert reference to the clause governing termination] and the Private Partner shall be entitled to the compensation set out under clause [insert reference to Change in Law termination payments clause].

B.3.2.2 Drafting Option 2: Protection against Discriminatory and Specific Changes in Law and Changes in Law in the operating period requiring capital expenditure

REQUIREd dEFINITIONS (SEE ALSO dEFINITIONS UNdER OPTION 1)

Capital Expendituremeans any expenditure which is treated as capital expenditure in accordance with generally accepted accounting principles in [insert Country] from time to time.

Discriminatory Change in Law

means a Change in Law, the terms of which expressly [affect][apply to]:

A. the PPP Project and not to similar projects; and/or

B. the Private Partner [or its sub-contractors in their capacity as such] and not to other persons; and/or

C. parties undertaking PPP Projects and not other persons.

General Change in Law

means a Change in Law which is not a Discriminatory Change in Law or a Specific Change in Law.

Qualifying Change in Law

means:

A. Discriminatory Change in Law;

B. Specific Change in Law; or

C. General Change in Law which comes into effect during the [insert defined term for operating period] and which involves additional capital expenditure for the PPP Project.

Specific Change in Law

means any Change in Law which specifically refers to (i) the provision of [services the same as or similar to the services provided under the PPP Contract - define] and/or (ii) the holding of shares in companies whose main business is providing [services the same as or similar to those provided under the PPP Contract - define].

Qualifying Change in Law

1 | If a Qualifying Change in Law occurs or is shortly to occur, then either Party may, within [thirty (30) business] days starting from the day it was aware (or should have been aware) of the Qualifying Change in Law, notify the other Party to express an opinion on its likely effects, giving details of its opinion of:

A | any necessary change in the obligations of the Private Partner;

B | whether any changes are required to the terms of this PPP Contract to deal with the Qualifying Change in Law including any necessary Contracting Authority variation;

The variations process will be dealt with under a different clause.


c | whether relief from compliance with obligations is required, including the obligation of the Private Partner to achieve any contractual deadline and/or meet any contractual performance requirement during the implementation of any relevant Qualifying Change in Law;

d | any (positive or negative) change of revenue that will directly result from the relevant Qualifying Change in Law;

E | any (positive or negative) estimated change in the costs of the PPP Project that will directly result from the Qualifying Change in Law; or

F | any capital expenditure that is required or no longer required as a result of a Qualifying Change in Law taking effect during the operation period of this PPP Contract,

2 | As soon as practicable and in any event within [thirty (30) business] days after receipt of any notice from the affected Party, the Contracting Authority and the Private Partner shall discuss and agree the issues referred to in Clause (1) above and any ways in which either Party can, if applicable, mitigate the effect of the Qualifying Change in Law, including, in relation to the Private Partner:

A | providing evidence that the Private Partner has used reasonable endeavours (including (where practicable) the use of competitive quotes) to oblige its sub-contractors to minimise any increase in costs and maximise any reduction in costs;

B | demonstrating how any capital expenditure to be incurred or avoided is being measured in a cost effective manner, including showing that when such expenditure is incurred or would have been incurred, Changes in Law at that time have been taken into account by the Private Partner;

c | giving evidence as to how the Qualifying Change in Law has affected prices charged by any similar businesses to the PPP Project; and

d | demonstrating that any expenditure that has been avoided on account of the Qualifying Change in Law has been taken into account in the amount which in its opinion has resulted or is required under Clauses (1)(e) or (1)(f) above,

provided that if the Parties cannot agree on the effects of the Qualifying Change in Law, the matter shall be referred for determination in accordance with clause [insert reference to the dispute resolution clause].


Consequences of a Qualifying Change in Law

3 | If the Parties have followed the procedure set out under Clauses (1) and (2) above, then:

A | the affected Party [i.e. the Private Partner] shall be excused from the performance of its obligations under the PPP Contract to the extent it is prevented, hindered or delayed in such performance by reason of the Qualifying Change in Law;

B | if the Qualifying Change in Law has occurred before the services commencement date, the scheduled services commencement date shall be postponed to take into account the effect of such Qualifying Change in Law; and

c | the Parties shall agree on the amount and payment of any compensation to reflect the Estimated Change in Project Costs as adjusted to take into account the actual increase or reduction in costs reasonably incurred or obtained as a result of the Qualifying Change in Law, [provided that no compensation shall be made in relation to a Qualifying Change in Law under this clause unless the claiming Party can demonstrate that the aggregate impact of all Qualifying Changes in Law that have occurred during [ insert relevant period in time, e.g., calendar year] exceeds [insert amount].

4 | In the event that the notice and relevant information are not provided within the periods referred to under Clause (1) above, the affected Party shall not be entitled to any compensation or relief from its obligations under the PPP Contract in respect of the period for which the information is delayed.

Termination due to a Qualifying Change in Law

5 | If a Qualifying Change in Law:

A | results in the Private Partner not being able to achieve the [insert defined term for services commencement date] within [•] months after the [insert defined term for scheduled services commencement date]; or

B | prevents a Party from performing its material obligations under this PPP Contract for a period of [•] consecutive days;

c | results in performance of the PPP Contract being illegal and such illegality cannot be remedied by [a Contracting Authority] variation,

either Party may in its discretion terminate this PPP Contract by issuing a written termination notice which shall take effect [thirty (30) calendar] days after receipt of such termination notice. If, at the end

Delete proviso if no materiality threshold is to be included.


of this [thirty (30)] day period, the Qualifying Change in Law continues, the PPP Contract shall be terminated pursuant to clause [insert reference to the clause governing termination] and the Private Partner shall be entitled to the compensation set out under clause [insert reference to Change in Law termination payments clause].

B.4 TERMINATION PAYMENTS


B.4.1.1 Key Aspects

In commercial contracts where compensation on termination for specific reasons is not addressed specifically, the parties will rely on the chosen dispute resolution method for determining the amount of any damages should termination occur. In certain contracts, rather than relying on general law, there may be a need to agree upfront the level of compensation payable if termination events occur for specific reasons. This is the case for PPP agreements where market practice has shown that lenders are not prepared to lend to PPP projects without reasonable assurance that they will be repaid. In carrying out their detailed due diligence, lenders are keen to ensure that their debt is protected on any early termination of the PPP agreement, regardless of fault and without having to rely on lengthy and potentially uncertain legal proceedings to determine the level of compensation. Equity investors, similarly, will want to expressly protect their equity investment in circumstances where termination occurs through no fault of their own or of the Private Partner.

Although legal proceedings may ultimately result in termination compensation being payable by the Contracting Authority, it is the level of certainty provided by express contractual provisions which is key for lenders in agreeing to commit funding to the PPP project. Termination payments are therefore a key element of the risk allocation in a PPP agreement and are essential in achieving a bankable project.

The grounds for termination and the consequent payments can be complex. They are included in the PPP agreement to give both parties certainty as to the mechanics and effects of termination. This in turn enables the lenders to price their debt based on a lower risk profile as regards repayment risk, which in turn feeds though into the price bid by the Private Partner for the PPP agreement.

B.4.1.2 Principles for the Calculation of Termination Payments

The amount payable to the Private Partner upon early termination of the PPP agreement will depend on the grounds on which it is terminated, so it is important for the Contracting Authority—in close consultation with its legal advisors—to understand the different rationale in each case. Section B.4.2. below deals with the following:


A | Compensation on Contracting Authority Default, MAGA, Change in Law or Voluntary Termination: In these cases, market practice is that the Private Partner should be fully compensated by the Contracting Authority as if the PPP agreement had run its full course. This reflects the principle that these categories of termination event are considered a Contracting Authority risk and responsibility. It also reflects the likely position should the Private Partner instead have to sue for damages on these grounds under general law. There are two “full” compensation methods which the Contracting Authority will need to consider:

i. Book value compensation: this is based on the investment costs the Private Partner incurs in building the PPP project. Third party costs would be added on top. This method is not as commonly used.

ii. Financing-based compensation: this is based on the financing for the PPP project (e.g. senior debt (whether in the form of bank or bond finance), subordinated debt and equity), again with third party costs on top. This approach is more common across the PPP market and is the recommended approach in Section B.4.2.

B | Compensation on Private Partner Default Termination: In the case of termination by the Contracting Authority on the grounds of Private Partner default, market practice is that the PPP agreement should expressly provide for some amount of compensation. While this may at first seem at odds with the reason for termination, there is in fact some strong justification, including that the Contracting Authority could otherwise benefit by unjust enrichment (e.g. taking a built asset without having paid for it), and that the Private Partner will likely have to price more risk into its bid and therefore the Contracting Authority will be paying more in the ordinary course of the PPP agreement even though termination on these grounds may never happen. In addition, the Private Partner still usually loses its equity investment and the return on its equity which is its main driver for undertaking the PPP project in the first place.

Although market practice is to pay compensation on Private Partner default termination, the Contracting Authority needs to choose a method which does not result in overly generous compensation. The options are outlined below:

i. Debt-based compensation (compare Section B.4.2, clause (2)): The Private Partner (or in reality the lenders) is compensated based on the amounts payable under the senior finance documents bank or bond. This approach is most commonly seen in emerging markets and PPP projects where the Contracting Authority is the sole source of revenue for the Private Partner (such as a hospital or prison).

One major drawback of this method is that lenders have limited incentive to ensure that the project performs or to step in to save it. To counter this risk, the level of compensation usually is a percentage of the total outstanding debt (and not the full amount). This is commonly referred to as a “haircut,” though it should be noted that taking the risk of a haircut may not


be acceptable to lenders in all circumstances and will depend on a variety of factors (such as the specific country and sector, in which the PPP project is conducted).

ii. Market value: Where the PPP market is sufficiently liquid and there is a reasonable prospect of the PPP agreement being retendered, the fairest approach is to calculate the compensation payable to the Private Partner by reference to the market value of the PPP agreement, as determined by a tendering procedure. The fall-back position if there is no liquid market, or if the Contracting Authority chooses not to go down this route for any reason, is that the compensation payment is calculated on the basis of the estimated value that would have been obtained in a retendering, as determined by an independent, third-party appraiser.

iii. Book Value: Although seen in some European jurisdictions, the calculation of compensation payments based on book value is not the recommended approach in this Annex B as the result may not accurately reflect the reality of the sums owed

c | Compensation on Force Majeure Termination: As discussed in Section B.4.1, Force Majeure is essentially considered a shared risk which is reflected in calculating respective compensation upon termination. In this case, the risk is shared by virtue of the Contracting Authority being liable for a less than full compensation payment and having the right to take over the relevant asset, while the Private Partner loses any return on its equity investment (i.e. the profit element which will have been at the heart of its decision to bid for and undertake the PPP project in the first place) and possibly some of its invested equity. The potential consequences will incentivise both parties to find a solution to a prolonged Force Majeure before termination occurs.


The provisions relating to the calculation of termination payments are generally set out in a Schedule to the PPP agreement.


Bondsmeans the [•] bonds due [•] of the Issuer, issued at [Financial Close], in the aggregate principal amount of [•].

Distribution

means a Change in Law, the terms of which expressly [affect][apply to]:

A. the payment of a distribution by the Private Partner (whether directly or indirectly) to its Shareholders;

B. any dividend, charge, fee or other distribution (or interest on any unpaid dividend, charge, fee or other distribution) (whether in cash or in kind) declared, paid or made on or in respect of share capital (or any class of share capital) in the Private Partner;

C. the redemption, repurchase, defeasance, retirement or repayment of any share capital of the Private Partner, including in connection with any merger or consolidation, or any resolution to do so.



Initial Equitymeans, as at the Termination Date, the initial equity investment disbursed by the Shareholders plus any such other equity contributions approved by the Contracting Authority, less the Distributions paid by the [Private Partner] to its Shareholders as at the Termination Date.

Issuermeans [insert company name, registered number and country of registration]. [assuming Issuer is different entity to Private Partner]

IRR means internal rate of return.

Lossesmeans all damages, losses, liabilities, costs, expenses (including legal and other professional charges and expenses), and charges whether arising under statute, contract or otherwise, internal costs or demands.

Make-Whole Payment

means:

A. in relation to termination of the PPP Contract under Clause [•] (Termination on Contracting Authority Default) [Change in Law] [MAGA], the Make-Whole Payment to be made pursuant to and in accordance with Condition [•] of the Bonds;

B. in relation to termination of the PPP Contract under Clause [•] (Voluntary Termination), the modified Make-Whole Payment to be made pursuant to and in accordance with Condition [•] of the Bonds; and

C. in relation to termination of the PPP Contract in any other circumstances, zero.

NPV means net present value.

Original Base Case

means the financial model agreed between the Parties dated [ ] for the purpose of amongst other things calculating [insert defined term of availability payment in a "user pays" model /Equity IRR etc] [as attached at [Schedule [ ] ], as updated from time to time in accordance with the terms of this PPP Contract.

Outstanding Senior Debt

means the sum of: [ ]

the total amount outstanding at the Termination Date to the Lenders

A. the total amount outstanding at the Termination Date to the Lenders under any Senior Finance Documents and accrued but unpaid interest and including default interest; plus

B. any winding-up costs, prepayment charges [(including any Make-Whole Payments)] [except on termination for Force Majeure or Private Partner Default], costs of terminating any hedging arrangements or other breakage costs, payable by the Private Partner [or the Issuer] to the Lenders as a result of a prepayment of sums due under the Senior Finance Documents, or, in the case of early termination of interest rate hedging arrangement, as a result of termination of the PPP Contract, subject to the Private Partner[, the Issuer] and the Lenders mitigating all such costs [unless the amount, or the formula for determining the amount of such costs is fixed in advance under the terms of the relevant Senior Finance Documents];

less (without double counting):

i. all credit balances held on any bank accounts held by or on behalf of the Private Partner [and/or the Issuer] on the Termination Date;

ii. all amounts (including net hedge termination payments) payable by the Lenders to the Private Partner as a result of a prepayment of amounts outstanding under the Senior Finance Documents or termination of the PPP Contract; and

iii. all other amounts received or due to be received by the Lenders on or after the Termination Date and before the date on which compensation is payable by the Contracting Authority to the Private Partner as a result of enforcing any other rights that they may have.



Senior Finance Documents

means the finance documents entered into between the Lenders and the Private Partner for the purpose of financing the PPP Project, including [insert defined terms for relevant [loan agreements][bond financing documents to include bond trust deed, subscription agreement (terms and conditions of the bond) and security documents].

Sub-Contractor Breakage Costs

means the value of Losses that have been or will be reasonably and properly incurred by the Private Partner as a direct result of the termination of the PPP Contract, but only to the extent that:

A. the Losses are incurred in connection with the PPP Project and in respect of the provision of services or the completion of works, including:

i. any materials or goods ordered or sub-contracts placed that cannot be cancelled without such Losses being incurred;

ii. any expenditure incurred in anticipation of the provision of services or the completion of works in the future;

iii. the cost of demobilisation including the cost of any relocation of equipment used in connection with the PPP Project; and

iv. redundancy payments;

B. the Losses are incurred under arrangements and/or agreements that are consistent with terms that have been entered into in the ordinary course of business and on reasonable commercial terms, excluding loss of profits calculated over a period which is longer than [one (1) year] after the Termination Date; and

C. the Private Partner and the relevant sub-contractor have each used their reasonable endeavours to mitigate the Losses.

Subordinated Finance Documents

means any agreements under which the Shareholders make subordinated debt available to the Private Partner.

Termination Datemeans the date on which the PPP Contract terminates in accordance with Clause [insert relevant clause number].

Compensation on Contracting Authority Default, Material Adverse Government Action, Change in Law or Voluntary Termination

1 | If this PPP Contract is terminated for (i) Contracting Authority Default in accordance with Clause [insert], (ii) Material Adverse Government Action in accordance with Clause [insert], (iii) Change in Law in accordance with Clause [insert] or (iv) Voluntary Termination in accordance with Clause [insert], the Contracting Authority shall pay the Private Partner an amount equal to the sum of:

A | Outstanding Senior Debt; plus

B | redundancy payments for employees of the Private Partner that have been or will be reasonably incurred by the Private Partner as a direct result of termination of this PPP Contract; plus

c | any Sub-Contractor Breakage Costs; plus

Delete (iii) and (iv) if not contemplated in the PPP agreement.


d | [select from Option (1)(a), (1)(b), or (1)(c) below depending on the required valuation method for the payments due to the equity party]

• Option 1(a): an amount which, when taken together with any Distributions paid, interest paid and principal repaid under the Subordinated Finance Documents on or before the Termination Date, taking account of the actual timing of such payments, results in a real IRR on the share capital subscribed and amounts advanced to the Private Partner under the Subordinated Finance Documents equal to the Base Case Equity IRR; or

• Option 1(b): the aggregate amount for which the share capital of the Private Partner and the receivables arising under Subordinated Finance Documents could have been sold on an open market basis, under the assumption that there is no default by the Contracting Authority, that no Material Adverse Government Action or Qualifying Change in Law has occurred, that the sale is on a going concern basis and that no restrictions exist on the transfer of the share capital; or

• Option 1(c): the NPV of forecast Distributions and interest to be paid and principal to be repaid under the Subordinated Finance Documents as at the Termination Date, based on the Original Base Case, each amount discounted back at the Base Case Equity IRR from the date on which it is shown to be payable in the Original Base Case to the Termination Date.]

Compensation on Private Partner Default Termination

2 | If the Contracting Authority terminates this PPP Contract for Private Partner Default in accordance with Clause [ ], the Contracting Authority shall pay to the Private Partner a compensation amount equal to [ ] % of Outstanding Senior Debt.

Compensation on Force Majeure Termination

3 | If this PPP Contract is terminated for Force Majeure in accordance with Clause [ ], the Contracting Authority shall pay the Private Partner an amount equal to the sum of:

A | Outstanding Senior Debt, if any; plus

B | Initial Equity and any outstanding principal under the Subordinated Finance Documents as at the Termination Date [less any Distributions or subordinated debt interest payments already made]; plus

c | redundancy payments for employees of the Private Partner that have been or will be reasonably incurred by the Private Partner as a direct result of termination of this PPP Contract, plus

d | any Sub-Contractor Breakage Costs.


B.5 REFINANCING


Given the long term nature of PPP agreements, over time there will be changes in market conditions, as well as developments in the project itself, which will affect its risk profile, and the Private Partner may want to change the terms of or replace its financing accordingly. In some jurisdictions it may not even be feasible to put in place long term financing at the outset and refinancing is therefore a necessity for the Private Partner after the initial funding period.

The result of a refinancing may be that the Private Partner's debt costs are reduced, resulting in greater revenue and in turn a higher equity return—this is typically called “refinancing gain.” The PPP market has increasingly acknowledged that it would not be fair for the Private Partner to enjoy the entire benefit of refinancing gain where it is not entirely responsible for the availability of the improved financing terms. This is particularly important from the Contracting Authority's perspective given the use of public funds to pay for PPP projects. Any change in financing terms may also impact other provisions in the PPP agreement that reference the financing terms, such as termination payments for which the Contracting Authority may be liable.

Without specific provisions in the PPP agreement, the Contracting Authority will have limited or no ability to share in any refinancing gain received by the Private Partner and the position as regards other contractual terms (such as termination payments) may be unclear. Not all refinancings lead to gains that should be shared, however, and refinancing provisions also typically clarify the circumstances which are exempt.


The principle of sharing refinancing gain has developed over time out of the experience of early PPP markets such as the UK. For a detailed approach see the UK PF2 Guidance23 and the Infra Australia PPP Guidelines24. The following drafting is broadly based on concepts they define.

23 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/207383/infrastructure_standardisation_of_con-tracts_051212.PDF.

24 https://infrastructure.gov.au/infrastructure/ngpd/files/Volume-3-Commercial-Principles-for-Social-Infrastructure-Dec-2008-FA.pdf and https://infrastructure.gov.au/infrastructure/ngpd/files/Volume-7-Commercial-Principles-for-Economic-Infrastructure-Feb-2011-FA.pdf.



Base Case Equity IRR

means the Equity IRR set out in the Original Base Case.

Distribution

means whether in cash or in kind, any:

A. dividend or other distribution in respect of share capital;

B. reduction of capital, redemption or purchase of shares or any other reorganization or variation to share capital;

C. payments under any Subordinated Finance Documents; and

D. the receipt of any payment, contractual arrangement, transfer of asset and other benefit which is not received in the ordinary course of business and on reasonable commercial terms.

Equity IRRmeans the projected blended internal rate of return to the Shareholders and any of their affiliates over the entire PPP Contract period, having regard to Distributions made and projected to be made.

Exempt Refinancing

A. any Refinancing fully contemplated in the Original Base Case;

B. a change in taxation or in accounting treatment;

C. the exercise of rights, waivers, consents and similar actions which relate to day to day administrative and supervisory matters, and which are in respect of: breach of representations and warranties or undertakings;

i. breach of representations and warranties or undertakings;

ii. movement of monies between the project accounts in accordance with the terms of the Senior Finance Documents;

iii. late or non-provision of information, consents or licenses;

iv. approval of revised technical and economic assumptions in relation to the Financial Model;

v. failure by the Private Partner to obtain any consent by statutory bodies required by the Senior Finance Documents; or

vi. voting by the Lenders and the voting arrangements between the Lenders in respect of the levels of approval required by them under the Senior Finance Documents;

D. any sale of shares in the Private Partner by the Shareholders.

E. [any ordinary market dealings in bonds.]

The Private Partner may wish to extend this definition to clarify that changes to certain documents or other types of circumstance will be exempt (e.g. a mini perm refinancing scenario). This should be considered on a case-by-case basis to reflect the particular circumstances of the PPP project.

Financial Modelmeans the financial model [provided by the Private Partner as part of its bid/agreed between the Parties prior the date of the PPP Contract] and as amended from time to time.

Net Present Valuemeans the aggregate of the discounted values, calculated as of the estimated date of the Refinancing, of each of the relevant projected Distributions, in each case discounted using the Base Case Equity IRR.

Pre-Refinancing Equity IRR

means the Equity IRR calculated immediately prior to any Refinancing, but without taking into account the effect of such Refinancing and using the Financial Model as updated (including as to the performance of the PPP Project).

Qualifying Refinancing

means any Refinancing that will give rise to a Refinancing Gain greater than zero that is not an Exempt Refinancing.



Refinancing

means:

A. any amendment, variation, novation, supplement or replacement of any Senior Finance Documents;

B. the grant of any waiver or consent, or the exercise of any similar right under any Senior Finance Documents;

C. the creation of or granting of any form of benefit or interest in the Senior Finance Documents, or the creation or granting of any rights or interest in any contracts, revenues or assets of the Private Partner whether by way of security or otherwise; and

D. any other arrangement having been put in place by any person which has an effect similar to any of (a) to (c) above or which has the effect of limiting the Private Partner's ability to carry out any of (a) to (c) above.

Refinancing Gain

means a positive amount equal to (A-B) - C, where:

A = the Net Present Value of Distributions, as projected immediately prior to the Refinancing (taking into account the effect of the Refinancing and using the Financial Model as updated (including as to the actual past performance of the PPP Project) so as to be current immediately prior to the Refinancing) to be made to each Shareholder or affiliate over the remaining term of the PPP Contract following the Refinancing;

B = the Net Present Value of Distributions, as projected immediately prior to the Refinancing (but without taking into account the effect of the Refinancing and using the Financial Model as updated (including as to the actual past performance of the PPP Project) so as to be current immediately prior to the Refinancing) to be made to each Shareholder or affiliate over the remaining term of this PPP Contract following the Refinancing; and

C = any adjustment required to raise the Pre-Refinancing Equity IRR to the Base Case Equity IRR.

Delete "C" if there are reasons not to agree this.

Subordinated Finance Documents

means any agreements under which the Private Partner's Shareholders make subordinated debt available to the Private Partner.

Refinancing

1 | The Private Partner shall promptly provide the Contracting Authority with full details in relation to any contemplated Refinancing, which shall include the proposed changes to the Financial Model, a justification of the assumptions on which it is based, the proposed contractual documentation and any other information that the Contracting Authority may reasonably request in relation to that Refinancing.

2 | The Contracting Authority shall, at all time, have unrestricted rights to audit the Financial Model used (or proposed to be used) in relation to a Refinancing.

3 | The Private Partner shall obtain the Contracting Authority's prior written consent in relation to any Qualifying Refinancing.

The Contracting Authority should approve these agreements as a condition precedent to the entry into effect of the PPP agreement and any subsequent amendment and/or additional document which would fall under this definition.


4 | The Contracting Authority shall be entitled to receive a [fifty per cent (50%)] share of any Refinancing Gain in a Qualifying Refinancing. [Adapt in accordance with agreed sharing mechanism]

5 | [The Parties shall act in good faith in relation to any Refinancing or proposed Refinancing (including the manner of calculation of the Refinancing Gain and of payment of the Contracting Authority's share of the Refinancing Gain in a Qualifying Refinancing)].

6 | The Contracting Authority shall have the right to elect to receive its share of any Refinancing Gain in a Qualifying Refinancing as:

A | a lump-sum payment which amount shall not exceed the relevant Distribution made on or about the date of the Refinancing and shall be due on the date immediately after the date of the relevant Distribution;

B | [an increase of any fee payable by the Private Partner to the Contracting Authority over the remaining PPP Contract period/or a reduction of the availability payment to be paid by the Contracting Authority to the Private Partner over the remaining PPP Contract period]; or

c | a combination of both].

7 | The Private Partner shall pay, on behalf of the Contracting Authority, all reasonable costs of external advisors appointed by the Contracting Authority in relation to a Refinancing or potential refinancing and the calculation of a Refinancing Gain [drafting also to reflect deduction of costs from any Refinancing Gain prior to calculating the amount to be shared if not already factored into the Refinancing Gain formula].

B.6 LENDERS’ STEP-IN RIGHTS

B.6.1 KEY ASPECTS

Most PPP projects are financed on a “limited recourse” basis under which third party lenders loan funds to the Private Partner based on an analysis of the projected cash flows generated under the PPP agreement. As the PPP agreement is usually the sole source of revenue (or basis for revenue in the case of projects where the Private Partner provides a service to users and generates revenue by charging them for this service, e.g. some toll roads) for debt repayment, the prospect of the Contracting Authority terminating for Private Partner default is of significant concern for lenders, particularly if the termination occurs before the asset has been completed and the service commenced. This is because

This will not be required in most civil law governed PPP agreements as good faith obligations are implied.

Drafting to be adjusted to fit the payment structure.


even where a termination payment will be made by the Contracting Authority, the amount may not cover the entire debt amount and so lenders are incentivised to get the PPP agreement back on track so that debt can be repaid as scheduled and in full.

One way lenders therefore seek to protect themselves against this scenario is to negotiate step in rights, i.e. their rights to step into the shoes of the defaulting Private Partner under the PPP agreement. Step in rights are typically enshrined in an agreement between the lenders and the Contracting Authority, often called a “direct agreement” or, in some jurisdictions, a “consent agreement.” The direct agreement will entitle the lenders to be alerted to a potential termination and to take steps to prevent it by rectifying the problem. From the Contracting Authority's perspective, its interest in completing the infrastructure and ensuring adequate service provision and the lenders' interests in achieving the same outcome are aligned.

In a PPP context, direct agreements are executed not only in relation to the PPP agreements but also in relation to further project agreements. In the latter case, both the lenders and the Contracting Authority may have separate direct agreements with the Private Partner's project agreement counterparties (i.e. its main sub-contractors) to ensure that the counterparties grant them similar opportunities to rectify defaults by the Private Partner under the project agreements before the counterparties may terminate and also to ensure the counterparties' continued performance This Section focuses on lenders' step in rights in respect of the PPP agreement.

B.6.2 FORM OF DIRECT AGREEMENT/GOVERNING LAW

Some jurisdictions have developed standard template provisions which must be used by Contracting Authorities and lenders (e.g. the South Africa PPP Guidelines25 and the UK PF2 Guidance). The direct agreement is usually executed on the same date as the PPP agreement and lenders will typically require an executed direct agreement as a condition precedent to drawdown under the senior finance documents. From the Contracting Authority's perspective, it is preferable to have agreed on the form of the direct agreement in advance at the time of bid and under competitive tension, so that it is not introduced or re-negotiated post award of the PPP agreement. This is expressly provided for in Articles 22 and 25 of the Executive Regulations whereby the “Replacement Contract” (allowing for the replacement of the original Private Partner in case of its default) forms part of the requisite contractual documentation under the RFP. Further formal requirements to be satisfied in this context are outlined in Articles 49 and 50 of the Executive Regulations. Accordingly, a replacement of the Private Partner under the PPP agreement needs the approval of the Higher Committee following a request of KAPP, the supervising Public Entity or the lenders. In regard to the latter scenario, i.e. a requested step-in by lenders, Article 50 of the Executive Regulations, particularly requires them to nominate a new private partner for whose obligations under the project agreements they are to remain responsible.

25 http://www.ppp.gov.za/Legal%20Aspects/Standardised%20PPP%20Provinsions/National%20Treasury%20PPP%20Practice%20Note%20No%201%20of%202004;%20Standardised%20PPP%20Provisions;%20First%20Issue;%2011%20March%202004_1.pdf.


Finally, and given that the operation of the direct agreement can affect the Private Partner’s rights and obligations under the PPP agreement as well as the Contracting Authority’s, it is recommended that the Private Partner should also be party to the direct agreement to acknowledge and consent to its terms. It is also advisable for the governing law of the direct agreement and the PPP agreement to be consistent.

B.6.3 SUMMARY OF MAIN PROVISIONS

A direct agreement should typically include the following main provisions (or their equivalent under the laws of the relevant jurisdiction):

~ mutual obligations on the parties to notify each other, respectively, of (a) a Private Partner default under the PPP agreement which could allow the Contracting Authority to terminate the latter and (b) key events under the senior finance documents which could impact the Contracting Authority (e.g. such as an event of default or acceleration of debt);

~ a standstill period, pursuant to which the Contracting Authority will undertake to notify the lenders of its intention to terminate the PPP agreement, and will commit not to terminate the latter for a given period of time (nor to terminate any related agreements);

~ appointment of the lenders' nominee to “step in” and become jointly liable with the Private Partner to perform the PPP agreement and cure any breaches which gave rise to the Contracting Authority's right to terminate (and to “step out”);26

~ consent to the assignment of the PPP agreement and related receivables to the lenders, as well as consent to assignments to insurers and guarantors upon payment of claims; and

~ Lenders' right to novate the Private Partner's rights and obligations under the PPP agreement to a substitute private partner of their choice (subject to the consent of the Contracting Authority and/or to any reasonable and objective criteria) and the Contracting Authority’s obligation to enter into a new direct agreement with the lenders to the new Private Partner on substantially equivalent terms.27

As indicated above, the terms of the direct agreement are normally not outlined in the PPP agreement (although the agreed form may be appended to the PPP agreement28) which is why this Annex B does not include proposed drafting.29

26 Subject to Articles 49 and %0 of the Executive Regulations in the Kuwaiti legal context.27 Subject to Articles 49 and %0 of the Executive Regulations in the Kuwaiti legal context.28 As was done for the Energy Conversion and Water Purchase Agreements recently concluded/procured in Kuwait mentioned in foot-

note 19.29 For further information and sample drafting from a more established PPP market, please see the South Africa PPP Guidelines and

the UK PF2 Guidance (compare footnotes 24 and 25).


B.7 CONFIDENTIALITY AND TRANSPARENCY


Transparency and disclosure is a high priority for PPP projects as the Contracting Authority is a public sector entity or agency. It has become increasingly common for Contracting Authorities to require a presumption in favour of transparency and disclosure in PPP agreements to ensure that information on PPP projects, PPP agreements and related documents can be shared by them, to the fullest extent possible, with the public at large. Multiple factors have influenced this development. The main drivers in the PPP context are to reduce the risk of corruption, increase private sector involvement in infrastructure investment, increase public confidence and awareness and achieve value for money. As with any infrastructure project, PPP projects may also involve social and environmental, public interest and human rights considerations, and these are additional factors in favour of enhanced transparency and disclosure.

Given commercial sensitivities as well as public interest-related limitations, however, transparency and disclosure obligations in a PPP agreement are typically subject to a number of exceptions in order to protect commercially or otherwise sensitive information relating to the parties, the PPP agreement and the PPP project.30 In most cases it is the Private Partner who has the most information to protect as it will not want its competitors to gain access to information which could give them a commercial advantage. However, the Contracting Authority may also wish to keep certain information confidential, for example if the PPP agreement is in the defence sector. In some jurisdictions (e.g. in the EU), there are also data protection obligations which apply to the parties and which are likely to be addressed in a specific clause.


The following sample drafting is based on the UK PF2 Guidance model, and can be viewed as representing a good balance between protecting the Private Partner's commercially sensitive information and complying with the Contracting Authority's legal obligations (and policy aspirations) as regards greater public transparency. A similar approach is followed in the Infra Australia PPP Guidelines and the South Africa PPP Guidelines31.

Public Relations and Publicity

1 | The Private Partner shall not by its directors, officers, employees or agents, and shall procure that its sub-contractors shall not, communicate with representatives of the press, television, radio

30 For example, in the Energy Conversion and Water Purchase Agreements recently concluded/procured in Kuwait (as mentioned in footnote 19) a distinction is drawn between “confidentiality” and ‘required disclosure”.

31 Compare footnotes 14, 24 and 25.


or other communications media on any matter concerning the PPP Contract without the prior written approval of the Contracting Authority.

2 | The Private Partner may not represent the views of the Contracting Authority on any matter, or use the name of the Contracting Authority in any written material provided to third parties, without the prior written consent of the Contracting Authority.

Publication of the PPP Contract in the public domain

3 | The Parties agree that the provisions of this PPP Contract [and insert any other relevant documents defined as the Project Agreements] shall, subject to Clause (7), not be treated as Confidential Information and may be disclosed without restriction and the Private Partner acknowledges that the Contracting Authority, subject to Clause (7), is entitled to:

A | publish this PPP Contract [and some of the Project Agreements] on a website; and

B | publish (on the internet or otherwise) a summary of the PPP Contract [and the Project Agreements and any associated transaction document] which shall include (i) the terms and conditions of the PPP Contract [and the Project Agreements and any associated transaction document] and (ii) any document or information arising out of or connected to the PPP Contract [and the Project Agreements and any associated transaction document], including performance of the PPP Contract [and the Project Agreements and any associated transaction document].

4 | The Parties agree that Base Case Equity IRR information shall not be treated as Confidential Information and the Private Partner acknowledges that the Contracting Authority intends to publish such information on a website.

5 | The Parties agree that information in respect of any direct or indirect change in ownership which has actually taken place shall not be treated as Confidential Information.

Confidentiality

6 | For purposes of this PPP Contract, Confidential Information means:

A | information (however it is conveyed or on whatever media it is stored) the disclosure of which would, or would be likely to, prejudice the commercial interests of any person, trade secrets, commercially sensitive intellectual property rights and know-how of either Party, including all personal data and sensitive personal data; and

B | the sub-set of Confidential Information listed in Column 1 of Part I Commercially Sensitive Contractual Provisions and Column 1 of Part II Commercially Sensitive Material of Schedule [insert reference to the Commercially Sensitive Information Schedule] in each case for the


period specified in Column 2 of Parts I and II of such Schedule (“Commercially Sensitive Information”).

7 | Clause (3) above shall not apply to Confidential Information which shall, subject to Clause (9) below, be kept confidential for the periods specified in Schedule [insert reference to the Commercially Sensitive Information Schedule].

8 | The Parties shall keep confidential all Confidential Information received by one Party from the other Party relating to this PPP Contract [and any Project Agreements] or the PPP Project and shall use all reasonable endeavours to prevent their employees and agents from making any disclosure to any person of any such Confidential Information.

9 | Clauses (6) and (8) above shall not apply to:

A | any disclosure of information that is reasonably required by any person engaged in the performance of their obligations under the PPP Contract for the performance of those obligations;

B | any matter which a Party can demonstrate is already, or becomes, generally available and in the public domain otherwise than as a result of a breach of this Clause [Confidentiality];

c | any disclosure to enable a determination to be made under Clause [insert reference to Dispute Resolution clause] or in connection with a dispute between the Private Partner and any of its sub-contractors;

d | any disclosure which is required pursuant to [insert reference to legislation containing public disclosure obligations] as well as any other statutory, legal (including any order of a court of competent jurisdiction) or Parliamentary obligation placed upon the party making the disclosure or the rules of any stock exchange or governmental or regulatory authority concerned;

E | any disclosure of information which is already lawfully in the possession of the receiving Party, prior to its disclosure by the disclosing Party;

F | any provision of information to:

i. the Parties' own professional advisers or insurance advisers; and/or

ii. the Lenders or the Lenders' professional advisers or insurance advisers or, where it is proposed that a person should or may provide funds (whether directly or indirectly and whether by loan, equity participation or otherwise) to the Private Partner to enable it to carry out its obligations under the PPP Contract, or may wish to acquire shares in the Private Partner

Consideration should also be given to having a general provision for the disclosure of information that is 'required in the public interest'. See also Clause (9)(j)(ii)(ii).


in accordance with the provisions of this PPP Contract to that person or their respective professional advisers but only to the extent reasonably necessary to enable a decision to be taken on the proposal; and/or

iii. international or bilateral financial institutions involved in the PPP Project as Lenders, political risk insurers or guarantors.

iv. any rating agency which may be engaged to provide a rating or rating assessment in relation to any Senior Debt.

G | disclosure by the Contracting Authority of information relating to the design, construction, operation and maintenance of the PPP Project and such other information as may be reasonably required for the purpose of conducting a due diligence exercise, to any proposed new private partner, its advisers and Lenders, should the Contracting Authority decide to retender the PPP Contract or undertake any market testing;

h | any registration or recording of the required permits and property registration required;

I | any disclosure of information by the Contracting Authority to any other relevant authority or their respective advisers or to any person engaged in providing services to the Contracting Authority for any purpose related to or ancillary to the PPP Contract; or

J | any disclosure for the purpose of:

i. the examination and certification of the Contracting Authority's or the Private Partner's accounts;

ii. any examination pursuant to [insert reference to any auditing obligations for public contracts] of the economy, efficiency and effectiveness with which the Contracting Authority has used its resources;

iii. complying with a proper request from either Party's insurance adviser, or insurer on placing or renewing any insurance policies; or

iv. (without prejudice to the generality of Clause (d) above) compliance with [insert reference to any laws requiring disclosure (e.g. environmental laws)]].

10 | When disclosure is permitted under Clause (9) above, other than Clauses (9)(b), (d), (e), (h) and (j), the Party providing the information shall ensure that the recipient of the information shall

Many jurisdictions require audit reports to be prepared in respect of transactions to which a Contracting Authority is a party. Where applicable, this provision should also address the issue of public disclosure of these audit reports. See also Clause (9)(d).


be subject to the same obligation of confidentiality as that contained in this PPP Contract. [The Private Partner shall expressly inform any person to whom it discloses any information under this Clause [Confidentiality] of the confidentiality restrictions set out in this Clause [Confidentiality] and shall procure its compliance with the terms of this Clause [Confidentiality] as if it were party to this PPP Contract and the Private Partner shall be responsible for any breach by any such person of the provisions of this Clause [Confidentiality].]

11 | Where the Private Partner, in carrying out its obligations under the PPP Contract, is provided with information relating to [end users], the Private Partner shall not disclose or make use of any such information otherwise than for the purpose for which it was provided, unless the Private Partner has obtained the prior written consent of that [end user] and has obtained the prior written consent of the Contracting Authority.

12 | On or before the expiry date, the Private Partner shall ensure that all documents or computer records in its possession, custody or control, which contain information relating to [end users] including any documents in the possession, custody or control of a sub-contractor, are delivered up to the Contracting Authority.

13 | The provisions of this Clause [Confidentiality] are without prejudice to the application of [insert any relevant law governing official secrets or national security information].

SchEdULE [•]: Commercially Sensitive Information Part I: Commercially Sensitive Contractual Provisions

commercially Sensitive contractual Provisions For a period ending on date below

SchEdULE [•]: Commercially Sensitive Information Part II: Commercially Sensitive Material

commercially Sensitive contractual Provisions For a period ending on date below


B.8 GOVERNING LAW AND DISPUTE RESOLUTION


This Section B.8.1 discusses the importance of governing law and dispute resolution considerations and provisions in PPP agreements. As explained further below, the choice of governing law determines the substantive law that will be applied to determine the rights and obligations of the parties under the PPP agreement. This includes resolution of disputes arising out of the latter. However, the choice of governing law does not determine the means by which any dispute will be resolved; for example, whether this is by a court of a particular country, or by arbitration. This must be specified in the dispute resolution clause in the PPP agreement. For example, the parties might select English law as the governing law of the PPP agreement, and international arbitration as the means of dispute resolution. This would mean that any dispute arising out of the PPP agreement would be resolved by an arbitral tribunal applying English law.

B.8.1.1 Governing Law

PPP agreements should contain an express choice of governing law. The system of law specified in the governing law provision governs most aspects of the PPP agreement, e.g. its interpretation and validity. The objective of a governing law clause is to achieve certainty (insofar as it is possible to do so) between contracting parties as to the nature and scope of their respective rights and obligations.

The Contracting Authority typically wishes to choose the domestic law of its own jurisdiction32 as the governing law of the PPP agreement, but the parties should be aware of the factors which typically influence choice of governing law, including:

A | non-legal preferences, such as market acceptability, familiarity and convenience, relative cost;

B | avoidance of a detailed investigation into an unfamiliar system of law;

c | commercial orientation, stability and predictability of the chosen legal system;

d | insulation of the contract from legal changes in a counterparty's country (e.g. local legislation imposing a moratorium on foreign obligations). This is often one of the most important reasons for the choice of an external (foreign) system of law for investors. In PPP agreements however, this is typically addressed through change in law or MAGA provisions.

E | a desire to coincide the governing law with the dispute resolution forum (i.e. the courts which will hear any dispute arising in connection with the contract);

32 Indeed, PPP agreements in the Kuwait context typically prescribe Kuwaiti law as the governing law as was done, e.g., in the Energy Conversion and Water Purchase Agreements mentioned in footnote 19.


F | language;33

G | the desire for a single body of law to apply to the PPP agreement and each of the project agreements (which will facilitate consolidation in a single forum); and

h | local law may prohibit or restrict a government entity from contracting under an external (foreign) law. Local law advice may need to be sought to clarify the position if a Contracting Authority is considering this approach.

Governing law clauses are generally straightforward to draft. The selection should be clearly specified in the PPP agreement, usually next to, or as part of, the Dispute Resolution provision (see Section B.8.2).

B.8.1.2 Dispute Resolution

As explained above, the governing law provision determines what system of law governs any dispute arising out of the PPP agreement, but a dispute resolution provision is then needed to determine what forum will apply that law to resolve any such dispute and, in the case of arbitration, the procedure pursuant to which such dispute will be heard and resolved.

All PPP agreements should include a dispute resolution clause to provide as much certainty as possible about where and how disputes will be resolved. Such a clause aims to ensure that parties stick to the agreed mechanism and helps reduce the risk of their wasting time and costs arguing about where a claim can be heard. A good dispute resolution clause will also reduce the risk of duplicative proceedings being commenced, and irreconcilable decisions being issued, by different courts or tribunals. These clauses may be called “jurisdiction clauses,” “choice of court” or “forum selection” clauses.

Given that disputes under PPP agreements are likely to have some form of financial impact on the Private Partner and the choice of forum can impact enforceability of the respective decision, the inclusion of a workable dispute resolution clause is a key element in any assessment of the bankability of the PPP project by the Private Partner. A dispute resolution provision in a PPP agreement typically specifies:

A | the governing law of the PPP agreement (if not specified in a different clause);

B | an obligation to attempt to reach a quick and amicable settlement34;

c | a provision for the resolution of specific technical disputes by an independent expert35;

33 Compare Article 39 of the PPP Law prescribing PPP agreements Arabic to be drafted in Arabic language (while drafting in a foreign language is subject to the approval of the Higher Committee).

34 As foreseen in the Energy Conversion and Water Purchase Agreements recently concluded/procured in Kuwait (as mentioned in footnote 19).

35 For example, the Energy Conversion and Water Purchase Agreements recently concluded/procured in Kuwait (as mentioned in foot-note 19) stipulate expert determination by a Third-Party Engineer in case of technical disputes.


d | a recourse to either (a) the courts that will have jurisdiction to determine the dispute36 or (b) international arbitration37 to finally determine all disputes not informally resolved or resolved by expert determination. An arbitration clause should specify the “seat” of arbitration and usually also incorporates by reference institutional procedural rules. It may also set out certain bespoke procedural rules to govern the arbitration process and joinder and consolidation provisions in the event the dispute concerns multiple related contracts and/or multiple parties and where arbitration selected;

E | an obligation to continue performance of the PPP agreement during the resolution of the dispute;

F | where appropriate a waiver of sovereign and other immunities and consent to enforcement and execution; and

G | the allocation of costs.


Governing Law

1 | This PPP Contract and any non-contractual obligations arising out of or in connection with it, are governed by and shall be construed in accordance with the laws of [country].

Dispute Resolution

2 | If any dispute arises out of or in connection with this PPP Contract including any dispute concerning any non-contractual obligations arising out of or in connection with it (a “Dispute”) it shall be resolved in accordance with this Clause [ ].

3 | Either Party may by notice in writing to the other Party, at the address for sending of notices under this PPP Contract and in a manner provided by Clause [ ], give notice that a Dispute has arisen (“Notice”). The Notice shall set out brief details of the nature of the Dispute.

36 See Article 29 of the PPP Law which stipulates that Kuwaiti courts have jurisdiction to determine a dispute, but which also allows for arbitration if the Higher Committee gives its approval for the dispute to be resolved by that means.

37 For illustration purposes, Drafting Option 2 (as set out in Section B.8.2 below) is based on a choice of the Rules of Arbitration of the International Chamber of Commerce which have also been chose for the above-mentioned Energy Conversion and Water Power Purchase Agreements. The sample drafting will need review/adaptation when using an alternative institution's rules.

Careful consideration should be given to the governing law selected in any PPP agreement, as this determines the legal system whereby the rights and obligations under the PPP agreement will be determined. A well-established and predictable system of law should be selected. Split governing law clauses should be avoided as they can result in complications. Investors may be concerned if the Contracting Authority's national law is selected because they may fear that the local law may change in a way that adversely affects their interests.


Negotiation

4 | The Parties shall attempt to settle any Dispute referred to in a Notice by good faith negotiation. Each party shall be represented in any negotiation by that party's [CEO/a person with authority to settle the Dispute]. Such negotiation shall take place within fifteen (15) days of the delivery of the Notice. Any negotiations shall be confidential and shall be conducted without prejudice to the rights of the parties in any future proceedings.

5 | Nothing in [Clause (4)] will prejudice the right of a Party to seek urgent injunctive or declaratory relief or other urgent relief in respect of a Dispute.

Expert Determination

6 | Any Dispute arising out of or in connection with Clauses [insert reference to every clause where a Dispute is considered a Technical Dispute] (a “Technical Dispute”) which is not resolved amicably in accordance with Clause [reference], shall be resolved in accordance with Clauses [ ]. In any other case, the Dispute shall be resolved in accordance with Clauses [reference to Jurisdiction or International Arbitration clause as appropriate].

7 | A Technical Dispute shall be referred, at the request of either party, to an independent expert for determination. The Parties shall agree on the appointment of the expert and shall agree with the expert the terms of his/her appointment. If the Parties are unable to agree on the identity of the expert, or if the person proposed is unable or unwilling to act, then, within [seven] days of either Party serving details of a suggested expert on the other or the proposed expert declining to act, either Party shall then be entitled to request that an expert be appointed by [the ICC] on the application of a Party. All costs of and associated with the request for the appointment of an expert by the [ICC] shall be borne equally between the Parties.

8 | The expert appointed may be an individual, partnership, association or body corporate and shall be generally recognised as an expert in [specify field] and shall have [X] years of experience in that field.

The clause could alternatively provide for a two stage negotiation process, with senior representatives only being required to be involved at the second stage.

An alternative approach is to list individual experts on an agreed list and select from that list. However, the selection of individuals at the transaction stage may be a time consuming distraction at a stage when the parties are trying to complete the deal. Further, when a dispute arises there is a risk the experts identified may not be available or may be conflicted, especially in a long term PPP agreement.


9 | The expert shall act on the following basis:

A | [on his/her appointment, the expert shall confirm his/her neutrality, independence and the absence of conflicts in determining the Technical Dispute] / [no person shall be appointed as an expert who at the time of appointment (or at any time before he/she gives his/her determination under such appointment, is a director, officeholder, employee or [ ] of [ ]];

B | the expert shall act as an expert and not as an arbitrator;

c | the expert's determination shall (in the absence of manifest error) be final and binding on the Parties and not subject to appeal;

d | the expert shall decide the procedure to be followed in the determination in accordance with this PPP Contract [and in consultation with the Parties] [and shall be requested to make his/her determination in writing, with reasons, within [30] days after his/her appointment or as soon as practicable thereafter];

E | any amount payable by one Party to another as a result of the expert's determination shall be due and payable within [seven] days of the expert's determination being notified to the Parties or as specified within the determination;

F | any action required by the expert determination shall be implemented within [14] days following the expert determination being notified to the Parties or as specified within the determination;

G | the expert may, if he/she thinks fit, award interest at the rate of [ ] on any amount which is determined to be payable (excluding costs) by one Party to the other from the date of [the Notice] referred to in Clause [ ];

h | the costs of the determination, including the fees and expenses of the expert (but excluding the Parties' own costs which shall be borne by the Party incurring those costs), shall be borne equally by the Parties.

I | The expert determination and all matters connected with it shall be held in complete confidence by each of the Parties and shall not be disclosed to any other person except:

i. to the auditors and to the legal advisors of that Party to whom the confidentiality obligations set out in this agreement shall extend; or

ii. that Party is under a legal or regulatory obligation to make such a disclosure, but limited to the extent of that legal obligation; or

Parties should consider whether they want to provide that the expert may not be connected with any particular companies or organisations due to the possibility of conflicts arising.


iii. to the extent that it is already in the public domain (other than as a result of a Party's breach of this agreement); or

iv. with the prior written consent of the other Party to this agreement [such consent not to be unreasonably withheld].

10 | The Parties agree to take all reasonable steps to make their employees and agents aware of the terms of [Clause (9)(i)] and to instruct them to observe those terms.

11 | If the Parties fail to agree:

i. whether or not a Dispute is a Technical Dispute within fifteen (15) days of service of the Notice;

ii. whether the Expert's Determination was in manifest error or fraudulent; or

iii. whether a Party has failed to implement fully the Expert's Determination,

then the matter shall be resolved in accordance with Clauses [reference to Jurisdiction or International Arbitration clause as appropriate].

Option 1: Jurisdiction [delete if choosing arbitration—Option 2]

12 | The courts of [ ] shall have exclusive jurisdiction to determine any Dispute and any matter provided by Clause [(11)]. The Parties irrevocably submit to the courts of [as above] and agree not to argue they are an inconvenient forum.

Option 2: International Arbitration [delete if choosing court jurisdiction—Option 1]

12 | Any matter provided by Clause [(11)] and any Dispute which is not a Technical Dispute and has not been resolved amicably between the Parties in accordance with Clause [(4)] shall be referred to and finally resolved by arbitration pursuant to the Rules of Arbitration of the International Chamber of Commerce (“ICC Arbitration Rules”) which are deemed incorporated by reference into this PPP Contract.38

13 | The number of arbitrators shall be three (3) appointed in accordance with the ICC Arbitration Rules (the “Arbitral Tribunal”).

38 For illustration purposes, Option 2 drafting is based on a choice of the ICC Rules. It will need review/adaptation when using an alter-native institution's rules.

Broadly, this means that only the chosen court is competent to take jurisdiction over disputes, although this is usually subject to certain standard exceptions. It may be preferable to have certainty as to which courts will have jurisdiction by identifying the chosen court in this way. Other options exist and specific advice should be sought.


14 | The arbitrators shall be fluent in [English and other relevant language]. The language of the proceedings shall be [English] and all documents submitted in such proceedings shall be in [English or accompanied by a certified English translation].

15 | The seat of arbitration shall be [insert choice]. [This agreement to arbitrate is governed by and shall be construed in accordance with the laws of [country].]

16 | The Parties undertake to keep confidential all awards in any arbitration, together with all materials in the proceedings created for the purpose of the arbitration and all other documents produced by another Party in the proceedings not otherwise in the public domain - save (i) with the permission of the Arbitral Tribunal or (ii) to the extent that disclosure may be required of a Party by legal duty or regulatory obligation or to protect or pursue a legal right, or to enforce or challenge an award in bona fide legal proceedings before a state court or other judicial authority.

17 | The Arbitral Tribunal shall issue a reasoned award in writing and shall endeavour to do so within [sixty (60) calendar] days from the date of the close of the arbitration hearing. The award of the Arbitral Tribunal shall be final and binding upon the Parties from the date it is made.

18 | Judgment on the award of the Arbitral Tribunal may be entered and enforced by any court of competent jurisdiction.

19 | Unless otherwise determined by the Arbitral Tribunal, the Arbitrators' fees and associated institutional costs shall be split equally between the Parties.

Consolidation

20 | In order to facilitate the comprehensive resolution of related disputes, in the event that more than one arbitration is commenced under this PPP Contract and under [add related agreements], (the “Related Agreements”), the Private Partner and the Contracting Authority consent to the consolidation of arbitrations as follows:

A | For the purposes of the Rules, the arbitration agreement set out in this PPP Contract and the arbitration agreement contained in each Related Agreement shall together be deemed to be an arbitration agreement that binds each Party to this PPP Contract and each party to each Related Agreement.

Consider if this is potentially too restrictive.

The seat of arbitration is key and requires careful consideration. It should be noted that arbitral hearings can physically take place in another location than the seat of arbitration. If the place of hearings (the venue) is important for the Parties, it should be agreed upon at an early stage of negotiations.

The parties may wish to add a provision specifying the law applicable to the arbitration agreement. To keep matters simple, it is often helpful to specify the same law as for the seat.


B | Any party to this PPP Contract or any Related Agreement may, in accordance with the ICC Arbitration Rules, be joined to any arbitration commenced under this PPP Contract or any Related Agreement.

c | In accordance with the ICC Arbitration Rules, Disputes may be resolved in a single arbitration together with Disputes (as defined in any Related Agreement) arising out of any such Related Agreement.

d | Pursuant to Article 10(a) of the ICC Arbitration Rules, the Parties agree to the consolidation of any two or more arbitrations commenced pursuant to this PPP Contract and/or the arbitration agreement contained in any Related Agreement into a single arbitration, as provided for in the ICC Arbitration Rules.

E | Each Party waives any objection, on the basis that a Dispute has been resolved in a manner contemplated in this Clause [ ], to the validity and/or enforcement of any arbitral award made by an arbitral tribunal following the Dispute being resolved in that manner.

Continuing Obligations

21 | Performance of this PPP Contract shall continue during arbitration proceedings or any other Dispute resolution mechanism pursuant to this Clause [ ].

BOX B.1: ENFORCEMENT OF ARBITRAL AWARDS

The State of Kuwait is committed to the enforcement of arbitral awards under the New York Convention for any dispute arising under a PPP Agreement, and reaffirms the binding nature of the arbitration clause and the enforcement of arbitral awards.

To reflect this, PPP Agreements in Kuwait contain the following provision:

Each of the Parties hereby agrees to submit any dispute arising from or in connection with this Agreement to arbitration as set out in clause (…) (Dispute Resolution) and not to prevent, delay, hinder, or in any other way obstruct the submission of any dispute to arbitration.

Each of the Parties hereby unconditionally and irrevocably agrees for now and hereafter, to accept any award rendered by the arbitral tribunal as set out in clause (…) (Dispute Resolution) and any judgment entered thereon by a court of competent jurisdiction as final and binding.

The New York Convention will be defined in the Definitions section of the PPP Agreement as follows:

“New York Convention” shall mean the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958.

There may be circumstances in which a provision along these lines would not be appropriate. (e.g. if the PPP project is not time critical and/or the dispute is fundamental)


SCHEDULE 1 — FURTHER DRAFTING OPTIONS

In addition to the informal negotiation provision included in the above sample drafting, clause (4), the parties may decide to include some or all of the informal dispute resolution provisions below. For illustration purposes, the drafting is based on a choice of the ICC Rules. This drafting will need review/adaptation when using an alternative institution's rules.

Option 1—Mediation

1 | If the Parties are unable to negotiate the settlement of a Dispute referred to in a Notice within [15] Business Days of the date of the Notice (or such further period as is agreed in writing between the Parties before the expiry of that [15] Business Day period), [either/any] Party may refer the Dispute to mediation by notice in writing to the other [Party/Parties] [at the address given for the sending of notices under this agreement at Clause [reference] (Notices), and in a manner provided for in that Clause] (a “Mediation Notice”). If a Party refers a Dispute to mediation in accordance with this Clause [Mediation] [both/all] Parties to the Dispute shall be obliged to follow the procedure below.

2 | The mediation shall be conducted by a single mediator who shall be appointed by agreement in writing between the Parties. If the Parties are unable to agree on the identity of a mediator within [five (5)] Business Days of the date of the [Mediation Notice], or if the mediator agreed by the Parties is or becomes unable or unwilling to act, the mediator shall be appointed by [the ICC] on the application of [either/any] Party.

3 | The mediation shall be conducted in [place] and in the English language under the [ICC Mediation Rules]. Each Party shall be represented at the mediation by an individual with authority to settle the Dispute.

4 | Save for the purposes of implementing and/or enforcing a written legally binding settlement agreement or as otherwise required by law, the mediation shall be conducted without prejudice to the rights of the Parties in any future proceedings.

5 | The costs of the mediation, including the fees and expenses of the mediator (but excluding each Party's own costs, which shall be borne by the Party incurring those costs) shall be borne equally by the Parties, unless otherwise agreed in writing.

Contracting Authorities may choose to concede immunity from suit waiver language because as a matter of applicable law such immunity is deemed to be waived, for example because it is a commercial transaction. Specialist legal advice should be sought.

Option 1 may be useful to encourage informal resolution at an early stage in the dispute.


Option 2—Escalation to a panel of senior representatives

1 | As soon as is practicable after the effective date of this agreement, the Contracting Authority and the Private Partner will establish a panel of senior representatives of the Parties. The Senior Panel will meet and attempt to resolve informally any Disputes referred to the Senior Panel by notice for resolution (“Senior Panel Notice”).

2 | The Senior Panel will comprise [four members], [two] appointed by each of the Contracting Authority and the Private Partner. Each Party is entitled to terminate the appointment of a representative designated by it to the Senior Panel and to appoint a replacement.

3 | The representatives on the Senior Panel will be duly authorised to make decisions on behalf of, and to bind contractually, the Party appointing such representative in relation to the Dispute referred for determination.

4 | [At any meeting the Senior Panel may, by unanimous resolution, elect to appoint a mediator to assist them in resolving a Dispute on such terms as they may then agree.]

5 | The Senior Panel must meet and attempt in good faith to resolve any Dispute referred to the Panel by negotiations within [fifteen (15) business] days of the date on which the Senior Panel Notice was delivered. If the Senior Panel fails to meet within this timeframe, and no extension is agreed by Parties then either Party may submit the Dispute to arbitration or in the case of a Technical Dispute, an expert in accordance with Clause [Expert Determination].

6 | Senior Panel Notices convening meetings of the Senior Panel will specify the nature of the Dispute.

7 | Meetings of the Senior Panel will be held in [insert name of City or address] unless otherwise agreed by the Parties.

8 | The quorum of any Senior Panel meeting will be [at least one representative of each of the Contracting Authority and the Private Partner]. If a quorum is not present within 30 minutes after the time appointed for commencement of the meeting, that meeting will be adjourned to a time, day and place agreed upon by the representatives of both Parties. In the event there is no agreement concerning the adjourned meeting or there is no quorum at the adjourned meeting, either Party may submit the Dispute to arbitration in accordance with Clause [Arbitration] or in the case of a Technical Dispute, an expert in accordance with Clause [Expert Determination].

9 | The Senior Panel will attempt to resolve the Dispute within [ten (10) business] days, following the date on which the Senior Panel initially convenes pursuant to Clause (5), above. If the Senior Panel is unable to resolve the Dispute within that period, either Party may immediately submit the Dispute to arbitration or expert determination as required pursuant to Clause [Expert Determination] or Clause [Arbitration].

Option 2 is often seen in construction disputes, but can add costs and delay final resolution.


10 | At any meeting of the Senior Panel, voting on any decision relating to the Dispute will be by unanimous resolution, with each representative having one vote. Duly passed resolutions of the Senior Panel will be final and contractually binding on the Contracting Authority and the Private Partner provided that they are in writing and signed by all members of the Senior Panel.

11 | If the Dispute is not resolved by amicable settlement between the Parties or through a resolution by the Senior Panel, as evidenced by the signing of its written terms, within [thirty (30) calendar] days of delivery of the Senior Panel Notice provided in Clause (1) above], any Party may submit the Dispute to arbitration in accordance with Clause [Arbitration] or in the case of a Technical Dispute to an expert in accordance with Clause [Expert Determination].

Option 3—Disputes Review Board Clause

1 | Failing an amicable settlement on a Dispute that is not a Technical Dispute pursuant to CLAUSE [insert reference to the amicable settlement clause] above within [thirty (30) calendar] days of the receipt of the notice provided therein, any such Dispute shall be referred by either Party for resolution by the dispute review board (“Dispute Review Board”) in accordance with this Clause [ ].

2 | The Parties hereby agree to establish a Dispute Review Board in accordance with the Dispute Board Rules of the International Chamber of Commerce (the “ICC Dispute Board Rules”), which are incorporated herein by reference.

3 | The Dispute Review Board shall be comprised of three (3) members, each of whom shall be fluent in [English] with professional experience in the matters with respect to contractual obligations in projects similar to the PPP Project, appointed in accordance with the ICC Dispute Board Rules.

4 | All Disputes arising out of or in connection with this PPP Contract shall be submitted, in the first instance, to the Dispute Review Board in accordance with the ICC Dispute Board Rules. For any given dispute, the Dispute Review Board shall issue a recommendation in accordance with the ICC Dispute Board Rules.

5 | If any Party fails to comply with a recommendation when required to do so pursuant to the ICC Dispute Board Rules, the other Party may refer the failure itself, without having to refer it to the Dispute Resolution Board, to arbitration in accordance with Clause [insert reference to the arbitration clause]. A Party that has failed to comply with a recommendation when required to do so pursuant to the ICC Dispute Board Rules shall not raise any issue as to the merits of the recommendation as a defence to its failure to comply without delay with the recommendation.

If any Party sends a written notice to the other Party and the Dispute Review Board expressing its dissatisfaction with a recommendation, as provided in the ICC Dispute Board Rules, or if the Dispute Review Board does not issue the recommendation within the time limit provided in the ICC Dispute

Option 3 is often seen in construction disputes, but can add costs and delay final resolution.


Board Rules, or if the Dispute Review Board is disbanded pursuant to the ICC Dispute Board Rules, the Dispute shall be finally settled under arbitration in accordance with Clause [insert reference to the arbitration clause].

SCHEDULE 2—ASSESSING WHETHER THE PRIVATE PARTNER MIGHT HAVE RECOURSE TO AN INTERNATIONAL INVESTMENT AGREEMENT

The parties should consider whether the Private Partner may, in addition to its contractual rights, at some point have recourse to an international investment agreement (“IIA”), which could be either a Bilateral Investment Agreement (“BIT”) (of which more than 3,000 have been signed globally), a multilateral investment treaty (such as the Energy Charter Treaty) or the investment chapter in a Free Trade Agreement (“FTA”). These IIAs provide investors with a number of substantive protections against State measures, such as arbitrary and discriminatory treatment, expropriation without adequate and prompt compensation or failure to provide fair and equitable treatment and full protection of security. The majority of IIAs also provide investors with the right to refer investment disputes to binding arbitration against the host State in which they have invested.

If the home States of the Private Partner and the Contracting Authority are both parties to an IIA, the Private Partner might, under certain circumstances, be able to bring claims for breaches of substantive protections set forth in the respective IIA, and which relate to the PPP agreement, under the arbitration mechanism established in the IIA. Very often, the mechanisms envisaged in this respect will be arbitration under the rules of the United Nations Commission on International Trade Law (UNCITRAL), arbitration under the International Centre for Settlement of Investment Disputes (ICSID) or the ICSID Additional Facility Rules (an additional set of arbitration rules that apply to the settlement of disputes that do not meet the jurisdictional requirements set forth under the ICSID Convention).

It is important to note that generally the right to bring a claim pursuant to an IIA exists independently of, and may be in addition to, any contractual claims under the PPP agreement.