How to Structure PPP Contracts

“A well-designed PPP Contract is clear, comprehensive and creates certain roles and responsibilities for the contracting parties.”

To achieve this;

► a set of incentives,

► a set of penalties,

should be articulated for the potential actions of the parties.

1   Performance Requirements 

The quality and the volume of the services that is expected from the private party should be clearly defined under the PPP Contract.

Key Performance Indicators (KPIs) have to be identified in the contract. Performance is assessed in terms of outputs, rather than inputs in PPP Contracts.

Below mentioned components should be stated in the contract.

Clear targets regarding the performance and the output.

Ways of monitoring the performance.

The consequences of the poor performance.

Step-in Rights

2   Payment Mechanism

The procedures, sources and formulas regarding the private sector payment should be clearly defined under the PPP Contract.

Below mentioned components should be stated in the contract.

User Charges

Government Payment ► Usage Based ► Availability Based ► Upfront Subsidies

Bonuses and Penalties

3   Adjustment Mechanism

Being long term and complex projects, it is impossible to state all the future possibilities under the contract.

Hence, PPP Contracts should have flexible structures to deal with the changing circumstances.

Below mentioned components should be stated in the contract.

Service Requirements Related Changes

Tariff or Payment Mechanism Related Changes

Refinancing

4   Dispute Resolution Procedures

The resolution methods of the contractual disputes should be clearly defined under the PPP Contract.

The nature of PPP projects creates a large area for the occurrence of disputes. Resolution of disputes effectively and in a short time period prevents the interruption of services.

Below mentioned dispute resolution mechanisms can be used.

International Arbitration

Panel of Experts

Mediation and Conciliation

Litigation

5   Notice of Claim

The circumstances which bring the early termination and the consequences of the early termination should be clearly defined under the PPP Contract.

Below mentioned components should be stated in the contract.

Contract Terms and Asset Handover

Provisions for Early Termination

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