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Key features of public-private partnership agreement

October 28, 2020
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Public-Private Partnership Agreement

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This article is written by Harshit Shekhar, pursuing a Certificate Course in Government Contracts, Tender Management and Regulations from Lawsikho.com.

Abstract

The Kernel of any project taken up by the government makes the government responsible for such projects. Public Private Partnership not only brings capable stakeholders into play, it also is an egalitarian opportunity for companies, contractors & various other professionals to grow. It is important to mention that both the government & private parties are at partnership through contract for the project at hand. Responsibilities cannot be bequeathed just on the shoulders of private parties; the government is accountable in the way along. 

The Contract between private party & the government is often a long-term contract, private party is provided with ownership rights or important control rights to be able to operate & maintain the assets & project in toto. An agreement is a contract, when valid in the eyes of law. Certain rights & corresponding duties are vested on the parties to such a contract. They are bound by the statutory obligations set upon them. A breach of contract could result in paying damages to the aggrieved party or specific performance of the service agreed upon. 

Importance of PPP

PPP is acquainted with a better administration, an improved infrastructure, a road map, several parameters for its functioning, nourished quality, compliance in technology as per international or national standards, superior quality of inputs are used, better financial accounting, a fixed budget, efficiency, generation of employment & revenue. 

Today’s India is a vast & diverse economy providing for better opportunities & market for PPPs. There are various kinds of PPP structures which are used for management & operation of projects. The vital need for any project of a high scale is finance. The core advantage of PPP is access to finance that the private entities bring with them. The organizational transparency with governmental administration provides a key to keep a check & balance on the project. The logical aspect of PPP is that an industry or a private entity is not functioning just for the welfare of people at large- what intrigues these entities is gain. The government has the constitutional obligation to look out for the welfare of its citizens, while revenue is needed by both private & governmental institutions for the upkeep of the project & investments. PPP helps strike equilibrium. Designing & monitoring PPP contracts is a complex task at hand. 

Any agreement with the government by a private entity in reference to PPP(s), depends on the bidding criteria, the private entity has to fulfil certain technical & financial criteria to eye an agreement with the government. Every kind of procurement has a type of bid. After the private entity is able to capture the bid, the government enters into a contract, setting forth each other’s obligations & rights. The type of transaction of either goods or services ultimately influences the clauses of the agreement. Various government regulatory authorities, PSUs & statutory bodies etc. enter into different types of PPP through an agreement, after a mutual consent & understanding of the subject-matter

In economics, demand-supply is a vital core concept of any market. These PPPs allow bridging the gap between demand & supply through financial support provided by the private entities. 

Analysis

The remodelling of privatisation in the era of globalisation had to go through backlashes, leading to the institution of PPP models. PPP agreements must look & include various provisions to safeguard the positions of the parties with rights, obligations & liabilities mentioned therein.

A PPP agreement sets the standard to be observed in the form of obligations & rights by the parties to such an agreement. There are different kinds of chapters & clauses pertaining to different sections of the agreement. These chapters, sections & clauses deal with different parts of the project each supporting & catering to the needs of different aspects of the project. The agreement has annexures & schedules attached to it for providing detailed insight into few specific matters related to the project. As per the standard operating procedure– 

  1. Agreement needs to be executed on relevant stamp papers.
  2. Agreement has to be signed by a person with the authority to do so. Authority is established through power of attorney or articles of the company.
  3. Agreement has to be signed in presence of witnesses required as per the practice. Also, that the bid that was submitted in case of projects where invitation to bid was issued, has to be kept as security till the execution of the agreement.

 There are different modes of PPP, which are prima facie

  1.  Management Contracts
  2. Lease Contracts
  3. Concession Agreements
  4. Build Operate and Transfer & its types

The draft of a PPP Agreement shall constitute of following sections & chapters

  1. Terms of the agreement
  2. Survival
  3. Conditions to be satisfied by the parties
  4. Consequences of non-fulfilment of conditions
  5. Contract performance guarantee
  6. Renewal of contract performance guarantee
  7. Supply of Goods/ Services
  8. Damages
  9. Billing and payment
  10. Letter of Credit
  11. Force Majeure
  12. Duty to perform and Duty to mitigate
  13. Reliefs
  14. Event of default and termination
  15. Change in law
  16. Assignment
  17. Dispute Resolution
  18. Miscellaneous provisions- waiver, third party beneficiaries, confidentiality, affirmation, taxes & duties
  19. Exit management plan

As we are aware of the fact that the Ministry of Corporate Affairs, to facilitate in the infrastructure development a major criteria to judge the development standard, indulges more into concession agreement based projects. But the crucial point to focus upon in a PPP model is that of finance. 

The financial clauses are of utmost importance. The whole project depends on the flow of cash and investment. If we take for example a BOT (build operate transfer) model agreement, it is the obligation of private parties to get finances, either through equity or through debt. The financial clause protects the parties especially the procurer, as it prepares the base for submission of security until the project is executed. A concession agreement provides the private player with numerous rights under their sleeves. This includes the right to operate, right to manage, right to collect user charges, etc. 

Agreement as an instrument marks the date on which the project is to be initiated to the date where it shall be terminated & private players shall exit the project by transferring the operations & management to the government or as per the arrangement between the service provider & the procurer. Further, that in cases of construction projects – de commissioning in cases of emergency is an essential section which the PPP agreements tend to cater to, creating a safe environment for the user & for the purpose of the project. Through the agreement, the parties decide as to who shall be the supervisor of the project. This caters to the need of inspection & supervision of the quality of the project. The private party has to notify the procurer about the financial close & to enable such provisions, it is best to incorporate clauses in PPP agreements. The clauses to verify different documents related to the project implementation by the procurer keeps the private players in check as to the quality of the project. Engineering procurement and construction documents, financial documents, operation and maintenance documents are all inspected by the procurer for review of the project. This authority is enabled by the provisions enabled under such agreements.

It provides to the procurer an upper hand, in case if the project is not completed by the date mentioned for termination of the project, the concessionaire has to pay some damages at the rate fixed in such cases by the procurer, until the completion or by the time such defect continues. These are few instances which provide light to the features & importance of PPP agreement.

Conclusion

In a PPP project, there are various stakeholders & parties involved to undertake the project. It includes third parties which come into contract and provides services to the concessionaire or the private party. In order to keep things in track, it becomes essential for the procurer of the service to supervise & identify the obligations and rights of the concessionaire in the agreement. In case of default, based on the clauses so mentioned under the agreement, resources are undertaken to resolve the conflict or to compensate either of the parties, as per the case in matters of breach of contract. 

The most important aspect of any project is conflict management. It is essential that any dispute between the parties is resolved & for which the essential aspect is conflict management. The focus under the conflict management under a PPP agreement is that disputes are reduced in number of occurrences. Incorporating an effective dispute resolution scheme is essential in PPP agreements. 

The essential stage is that of transfer of the project to the procurer after the completion of the project or the date of transfer of operations, as per the case. This agreement makes it far easier to assess & map the exit plan for the concessionaire and the private party from the PPP model. The progress is supervised & monitored as per the provisions of the agreement and the procedure set forth before-hand in the agreement, which facilitates better results from the project. 


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