Given their complexity, PPP projects have several types of contracts. Some of these contracts govern the project development phase (e.g. raising funds, construction) and some govern the operational phase (e.g. service delivery obligations).
Pre-development agreements are usually entered into by two or more companies that have agreed to undertake a feasibility study and other early development activities in relation to a proposed project. As the arrangements between the parties may not be sufficiently developed to warrant a formal shareholders’ agreement, this document can conveniently deal with such matters as initial decision-making and allocation of tasks in relation to investigating a particular project or proposal. Typically, the agreement would be for a limited duration and would be quite specific about the scope of the proposed arrangements and the terms upon which a party could withdraw from the arrangements. It would also deal with appointment of advisers, cost sharing, confidentiality and restrictions on competing against one another, and other matters.
Governments, lenders, and/or investors may require the project sponsors to guarantee project completion by a specified date. The main reason for these guarantees is to shift completion risk to the sponsor and avoid cost overruns / delays and claims against the public sector. It also allows the lenders to avoid having to conduct a costly and time-consuming due diligence exercise on the construction plans of the project. The Construction Guarantee can take several forms, such as requiring (i) the sponsor to pay a fixed sum of money in liquidated damages to the public sector in case construction is not completed within the committed time and/or (ii) the sponsor to provide a letter of credit / construction bond from a bank.
For projects that are implemented through a SPV with two or more investors, these parties usually regulate the relationship between them by entering into a Shareholders Agreement (also called a Joint Venture Agreement). A Shareholders Agreement deals with items such as:
- Establishment of a PPP Company (SPV)
- Injection of share capital;
- Funding of the PPP Company;
- Voting requirements for particular matters;
- Resolution of disputes;
- Dividends policy;
- Management of PPP Company; and
- Disposal of shares and pre-emption rights.
In some cases the shareholders enter into a support agreement with the PPP Company itself to perform certain services, sometimes at the request of lenders or government. This Shareholders Support Agreement contains a number of commitments that are required from the shareholders with respect to the project development, such as:
- Provide PPP Company management and technical assistance
- Secondment of shareholder employees for a limited basis;
- Materials and other assets to be provided;
- Short-term loans, bridging finance, guarantees, and other short-term financial support.
Shareholders are often paid in cash or through equity for these services.
The Concession Agreement deals with the detailed terms and conditions on which the project is awarded and broadly covers:
- Scope of Work
- Period of Contract
- Construction period
- Payment or revenue terms on which contract is to be granted
- Obligations of the PPP service provider and sponsoring authority
- Process of handing over of site to PPP service provider
- Monitoring and supervision details
- Safety and environmental requirements
- Support and incentives to be given by the sponsoring authority
- Operations & Maintenance requirements
- Force majeure and Termination arrangements
- Dispute resolution mechanism, and
- Other terms and conditions relevant to the project.
The Construction Contract covers the construction works to be performed to build and/or rehabilitate the PPP project. It is normally a fixed price turnkey contract. The works may be performed by a third-party construction company or one of the project sponsors, if they have the required corporate expertise and resources.
Governments and/or investors have an interest in ensuring that the project sponsors inject the equity they have committed. This is typically done through an Equity Support Agreement, also called an Equity Subscription Agreement, which is provided to lenders. In this agreement, the sponsors will agree to inject equity – in the form of share capital or subordinated loans or combination of both – at a specific time, which in turn becomes part of the sponsor’s financial plan and the lenders’ base case financial model.
Letters of Comfort can also be supplied between parties to add assurance that a contracting party will fulfil its obligations. For example, a parent company may provide a Comfort Letter on behalf of its subsidiary that it will provide the subsidiary with the necessary resources to fulfil the contract, or another part of government provides a Letter of Comfort to project sponsors that it will carry out certain actions or refrain from others over a particular timescale. It is important for the parties to be clear at the outset on the extent to which a letter of comfort is intended to be legally binding.
The Loan Agreement is entered into between the borrower (i.e. the SPV in a project finance arrangement) and the project lenders. It regulates the terms and conditions upon which the project loans are drawn down and which items of project expenditure may be funded by these the loans. The agreement contains the usual provisions relating to representations, covenants, and events of default found in other syndicated loan agreements. There will usually be provisions relating to repayment of principle and interest, the timing of dividend payments, and the capitalisation of interest during the construction period or until project revenues come on stream. Subordinated loans, such as mezzanine financing, will also have their own Project Loan Agreements.
This agreement between the lenders and the public sector party gives the lenders the right, but not the obligation, to step in and replace the SPV Contractor when the project is in danger of being terminated because of default by the contractor. They will then try to rescue the project and restore the project cash flows to allow the repayment of the outstanding debt. The agreement covers the process of Step In and the liabilities of the lenders prior to, and after, the Step In.