Planning and Negotiating PPPs An International Legal Perspective

Planning and Negotiating PPPs: An International Legal Perspective Day Two, Thursday 12 th May 2011 Jean-Paul Gauthier Dep. Sec. General, WEPZA; MD, Locus Economica LLC AFZA Convention 2011, Dar es Salaam

Confused as to what a PPP is? BOT Build-Operate-Transfer BBO Buy-Build-Operate BLT Build-Lease-Transfer BOO Build-Own-Operate BOOM Build-Own-Operate-Maintain BOOT Build-Own-Operate-Transfer BT Build-Transfer BTO Build-Transfer-Operate DBFOM Design-Build-Finance-Operate-Maintain DOO Design-Own-Operate DOT Develop-Operate-Transfer LDO Lease-Develop-Operate ROO Rehabilitate-Own-Operate ROT Rehabilitate-Operate-Transfer TOT Transfer-Own-Transfer EOT Equip-Operate-Transfer DB Design-Build DBB Design-Bid-Build DBFO Design-Build-Finance-Operate DBOM Design-Build-Operate-Maintain DBOT Design-Build-Operate-Transfer DBM Design-Build-Maintain DBFM Design-Build-Finance-Maintain Asset Capitalization Developer Finance Divestiture Lease Maintenance Agreement Management Contract Service Contract Turnkey Delivery 2

PPP: A Definition A PPP is a contractual agreement between a public agency and a private sector entity, through which the assets and skills of each party are shared in delivering a facility or service to the general public, as well as in the risks and rewards of the delivery of this facility or service. 3

PPPs: The Basic Construct Regulator Customers 4

PPP Partnering Principles § Two or more parties share assets, skills, risks, and rewards associated with project development and operation § Private sector seeks to make a return commensurate with risk taken on § Public sector seeks to achieve public policy objectives § Public partner needs to monitor private sector partners 5

4 Basic Types of PPP 6

DBFO / Concession Structure (SEZ) Gov. Authority Direct Agreement Land Lease Project Agreement Shareholders Financial Institutions Financing Agreement Developer/ Operator Shareholders Agreement (SPV) Tenant Leases Construction Company Sub Developers Tenants Subcontractors e. g. design engineers, architects, builders Subcontractors e. g. maintenance firm, facilities services 7

Typical JV Legal Instrumentation 8

Legal Agreements Made Simple Project Instrumentation § Master Project / Concession / Developer Agreement § Financing Agreement / Loan/s § Security Instrument/s § Subcontracts (Construction, Operation, Maintenance, Services…) § [Feed stock Contract/s] § End-User Contract/s (Tenant Leases, Off-take Contracts. . . ) SPV Instrumentation 9

Risk Mitigation

Complex Financial Flows 11

5 Stages of a PPP Infrastructure Project 12

Illustrative Risks & Solutions at the Operation Stage 13

Mitigating Risk Through PPP “Contract Networks” 14

Risk Management in Project Contracts § Clear definition of assets § Clear definitions of roles and responsibilities of parties § Periodic testing/benchmarking and re-pricing mechanisms or Phased Development Options § Liability caps § Insurance / Bond / Contingency Fund requirements § Step-in rights § Subrogation rights § Legal Stability Clause § Contract and Legal Primacy 15

UP-STREAM FINANCIAL AND ECONOMIC MODELING 16

Modeling required before to decide on the PPP structure Summary Market Study and 10 -year Land Uptake Forecast, specifying the sources of the investment and resulting cumulative land uptake. Investment and land uptake should be based both on an annual incremental and annual cumulative projections of the number of firms expected with sector-based assumptions regarding necessary space in square meters for each firm’s investment. Construction years should be separated from the operational years, and clearly indicate options projections. The study and forecast should be developed under three scenarios: i) optimistic; ii) pessimistic; and, iii) conservative. Summary economic analysis of the zone’s expected long term contribution to the national economy Financial feasibility study, demonstrating anticipated sources of finance and an acceptable Internal Rate of Return, calculated from the beginning of year 1 of the acquisition of the land lease, encompassing the construction years, and 10 years from operational start-up. 17

Legal Due Diligence: Take your time, Do it Once, Do it Right! § Market Risk § Secure/Disposable Assets (Sureties) § Equity Caps § Environmental and Social Impact Assessments § Transaction Risk § Considered/Transparent Procurement § Developer Track Record Verification § Suitable legal Transaction Advisors § Operating Risk § Performance Guarantees § Don’t overly focus on the transaction! 18

Case Study: Abu Dhabi HCSEZ

Background § HCSEZ is the apex organization in Abu Dhabi charged with development, operation and regulation of SEZs and related infrastructure. § ICAD was publicly developed and operated. Although fully leased, there were no cost-recovery objectives or delivery; development was heavily subsidized and its operation consumed considerable resources. Recognition that HCSEZ cannot and should not replicate the ICAD model § Bearing. Point hired to restructure HCSEZ operations, enhance its capabilities, refocus it on the promotion of private zones, and assist in the prioritization, development and implementation of priority projects. Under a management contract, we are providing a world-class management team to manage HCSEZ for a period of five years. 20

Abu Dhabi HCSEZ Development initiatives HCSEZ Basic Material Zone Special Tourism Zone Medical City Science & Technology Complex (Laboratories) Industrial City Al Ain Agro-Industrial & Agro Research Zone Petrochemical Zone Industrial City Close to Dubai (Al Maha) Industrial City Abu Dhabi (ICAD Phase I) Pharmaceutical Cluster ICAD Phase II Military Industrial City ICAD Other Phases Food & Beverage Cluster Airport Logistics Hub Free Zone & Financial Services Business Park O&G Services Complex Automotive Cluster Military Training Zone Others 21

HCSEZ Approach to PPP HCSEZ needed to act quickly to realize its program implementation objectives 1. HCSEZ builds backbone infrastructure 2. HCSEZ builds-out its infrastructure responsibilities in phases, linked to market up-take 3. HCSEZ goes to market to determine interest of private zone developers as sub- or master developers. 4. Based on market feedback, HCSEZ structures modified DBFO PPP as follows: § transfers to developer responsibility for backbone infrastructure § continues build-out of on-site infrastructure, and then transfers responsibility § continues with limited built-to-spec buildings, and then transfers responsibility 5. HCSEZ & Developer negotiate final PPP contract 22

The Project Agreement

Standard PPP Project Contract Clauses § Services to be provided / Performance Standards § Duration (Commencement, Critical Dates, Expiry/ Termination/ Release) § Contributions (Assets, Capital, Payments) § Performance Monitoring (Events, Acceptances, Measurement Methods) § Liability & Limitations § Warrantees (Due Diligence, Latent Defects…) & Exclusions § Delivery Protections (Performance Bonds, Parent Company Guarantees, Security, Insurance, Long-Stop Date, Access, Step-in Rights) § Assignment / Change of Ownership / Subcontracting § Early Termination/ Suspension (Events, Force Majeure, Compensation/ Relief/ Prorating & Valuation) § Breach, Rectification, Damages & Indemnities § Disclosure, Information, Confidentiality, IPR § Dispute Resolution (Law, Language, Jurisdiction, Forum) 24

Key Elements in SEZ Concession Agreement (Suleimaniya SCA, Iraq) § Objectives, Summary Description of Proposed Development & Project: What is the Deal? § Relevant Economic Development Plans, Context, and Legal & Regulatory Structure in place § Government Commitments § Role of the Developer § Property, Site and Surrounding Areas, with Description § Agreement to Lease (Payment of Rental Price and Charges, Transfer of the Land / Delivery of Possession, Land Use) § Duration § Limitations and Restrictions (Amalgamation, Activities Pursuant to Approved Plans, Restrictions on Use, Multiple Developers, Alienation of Developer Interests and Rights) § Covenants of Concessionaire (Access, Liability for Damage and Indemnity for Events on Site, Insurance, Constitution of the Concessionaire and Other Conditions Precedent) § Expiry, Extension or Renewal of Contract, and Survival of Obligations § Termination (Default Events, Cause, Rescission, Consequences, Whole Rights and Remedies Upon Rescission, Survival of Obligations, Force Majeure) § Breach (Consequences, Payments, Forfeiture of Performance Bond/Security) § General Provisions (Notices, Authorized Representatives, Time of the Essence, Cumulative Rights and Remedies, Agreement Binding on Successors, Permitted Assigns, Agreement Supersedes Previous Agreements) § Dispute Resolution, Governing Law, Arbitration 25

Additional SEZ Concession Terms and Conditions Fixed – Land ownership and residual rights to all buildings – Site planning requirements and standards – Minimum land lease rate – Minimum land absorption rate – Minimum level of developer equity investment – Regulatory regime and monitoring/control procedures Variable (subject to negotiation with the Private Partner) – Land lease rate above minimum – Land absorption rate above minimum – Level of developer equity above minimum – Cost to end-users (tenants) – Expected returns 26

Recap

PPP Legal “Rules of Thumb” Fundamental Rules § PPPs require sound legal underpinnings § Begin with preparation of adequate documentation and a clear understanding of developers/users requirements § Private sector can enter at different stages depending on strategic goals/objectives § Models and transaction structures are nearly unlimited § Specifications, Specifications (the Public Interest!) Key Factors in deciding on specific PPP approach § Market (Developers, Users) § Asset Capitalization / Expected Returns § Terms and Schedules for Ro. I § Public Interest § Level of Certainty (Long-term Trends) § Capacity to Contract / Supervise 28

Final Thought: Sound PPP Frameworks are not enough… You also need: § An underlying market capable of paying for the infrastructure services § Skills and capacity to develop and monitor PPPs § Soft enablers for infrastructure developers § Open investment framework § Development planning flexibility § Incentives § Long-term development horizon 29

Acknowledgements Adrian Rouse, Deloitte Consulting LLP David Spira, Deloitte Consulting LLP Kishore Rao, Deloitte Consulting LLP Julien Galant, IFC Jim O’Gara, AECOM International 30