PROJECT AGREEMENT CHECKLIST

The Private Party must have adequate tenure or rights over the site from which it will be providing services. In a privately financed PPP project, the Private Party will often own the project assets (the infrastructure) and provide services to Government or to the public from the project assets. Whether the Private Party will own the site upon which the project assets are constructed, or will hold the site under a lease from Government for the duration of the concession, will depend on the nature of the project Whatever the ownership position, the Private Party will need appropriate tenure to enable it to carry out its obligations under the Project Agreements. If inadequate tenure interferes with the Private Party's ability to carry out its obligations, the transfer of risk will be prejudiced.

Government must ensure that it has (and, where appropriate, members of the public have) adequate rights of access to the site and the project asset The appropriate rights for Government will depend on the nature of the project, but will range from inspection and audit rights, (where the Private Party is responsible for providing services directly to the public) to the right to access and use the facilities at all times (where Government will be carrying out core services from the facilities).

The Project Agreements will require the Private Party to take full completion and commissioning risk. Assumption of these risks includes the responsibility to ensure that the infrastructure is designed and constructed in such a way that it supports the services which the Private Party is required to provide, that it is able to commence service provision at the agreed time, (this will be particularly crucial in a project for an educational facility, where commencement is scheduled for the beginning of the academic year) and that it can continue to provide the services to the required standards and within the agreed pricing structure.

The Project Agreements should define:

• the output requirements and any constraints within which those requirements must be achieved (in the output specification);

• procedures for changing the service requirements;

• procedures for commissioning and service commencement;

• consequences of late service commencement;

• audit procedures required to assure Government that delivery is proceeding on schedule; and

• information to be provided to Government during the design and construction process.

Mechanisms to maintain quality of service

A variety of mechanisms may be incorporated into the Project Agreements to encourage continuity and quality of supply. These include:

• benchmarking of services or supply in terms of price and/or quality against other market participants or through market testing;

• revenue sharing triggered when revenue reaches a defined level;

• requiring a specific maintenance program or a maintenance regime;

• requiring a completion certificate and performance tests or demonstrations to ensure integration and quality of the service or supply;

• requiring compliance with relevant standards or industry code; where incentive payments may be offered if the quality of service is delivered above the relevant standard;

• imposing financial penalties and/or deductions from service payments if supply fails;

• compensation for costs incurred in the event that a service or supply is not provided; and

• right to terminate for certain events of default.

"Hard" Services

The Private Party will be responsible for maintenance of the infrastructure during the Operating Phase. The precise maintenance requirements should not be prescribed in the Output Specification, but the required outcomes of the maintenance program should be clearly stated. The key outcome during the Operating Phase is the provision of services to the required standards. If the infrastructure is to be handed over to Government at the end of the Operating Phase, it may be necessary to provide for a survey before expiry and for a retention fund as incentive for good maintenance in the later years.

"Soft" Services

Wage costs comprise the majority of the cost of providing soft services. These can be difficult to predict over a long contract period, and it is therefore common to provide for periodic benchmarking and, if necessary, market testing of these costs - generally every three to five years.

Performance Monitoring

The principle responsibility of the Private Party is to provide services to the required standards to meet the Output Specification. Required standards must be reasonable and achievable. The Project Agreements will contain a range of measures to address sub-standard performance (indicated below). It is imperative that the Agreements also provides an objective process for measuring performance.

The Project Agreements should define:

• the standard of performance required;

• the method of monitoring and measuring performance against that standard, for example, the Key Performance Indicators to be used;

• how performance will be monitored, and those responsible for the measuring;

• Government's rights to carry out audits or spot checks, if the
Private Party will carry out the regular performance measurement;

• when performance measurement will start, and whether, for example, there will be an initial "settling in" period;

• how the results of the performance measurement will be reported and acted upon; and

• the consequences of poor performance.

Mechanisms to monitor performance may include periodic reports or meetings, examination of financial data, and inspections.

If the mechanism of performance measurement is untested, or if the benchmark for the required performance standard is untried, it may be appropriate to include a procedure for review of the performance measurement mechanism after an initial period of operation.

Price and payment mechanism

The pricing and payment mechanism specified in the Project Agreements is the primary tool for enforcing the allocation of service delivery risk to the Private Party. Full payment will be made for full service delivery to the required standards, but any shortfall in performance can be reflected in abatements in payment.

Payment to the Private Party will typically be a single, unitised payment. Depending on the nature of the project, payment may be based on any or all of:

• services delivered;

• functional availability of facilities;

• usage; or

• outcomes.

Where payment is based on service standards, availability, (which will itself contain criteria to be met for functional availability to be achieved) or outcomes, substandard performance will result in abatement of payments until the required level of performance is attained. This abatement may be a direct response where there is a material shortfall in performance (or a minor shortfall in a critical area such as safety), or an indirect response in the case of minor faults where no immediate action will be taken. Instead, the cumulative effect of mi nor faults will be measured and, at a given point, trigger a major fault, with a corresponding effect on payments.

Circumstances exist where it is appropriate to base payment on usage alone, so as to provide incentive for a larger volume output at the expense of other factors. For a road project, for example, payment may be based on a combination of usage and safety standards or outcomes

Changes in service specification

Given the long-term nature of PPP contracts, it is inevitable that botli circumstances and Government's needs will change over time. The Project Agreements should seek to maintain the balance between flexibility and certainty by:

• identifying current service requirements in output terms that do not presuppose a particular, familiar method of performing the service;

• incorporating specific procedures, and possibly pricing schedules, for dealing with changes that can be anticipated from the outset;

• including procedures for the Private Party to propose a change, at its own cost, where it sees scope for innovation;

• allowing Government to require changes, either during the design and construction phase, (although the need for these should be rare) or during the operating phase, and setting out procedures for transparent costing of those changes; and

• where Government-initiated changes will involve capital expenditure, (such as construction of new infrastructure) detailing the options for payment. This will give the Private Party the first option to raise finance for the additional work, and provide for Government to fund the work if the Private Party cannot.

Intervening events and force majeure

The Project Agreements should define the various categories of intervening events, including force majeure, and identify the consequences flowing from each event category. In view of the differing allocations of risk between the various events, the definitions should have been considered during the Risk Allocation stage.

It may be appropriate to include a Material Adverse Effect regime in the force majeure provisions, as the chosen method of sharing the risk of force majeure (see the Risk Management Supporting Document, Section 12). In addition, the insurance provisions of the Project Agreements should address the consequences of force majeure.

The Project Agreements must provide that no relief will be offered in respect of intervening events where their effect could have been, but was not, avoided or mitigated by the exercise of reasonable standards of care.

Insurance

As a general rule, since the basic design, construction, commissioning and service delivery risks are allocated to the Private Party, it is the Private Party who will be required to bear the majority of the insurances under the Project Agreements. If an insured event occurs, the insurance proceeds should be sufficient to ensure that the Private Party can continue to provide the services. However, particularly in a changing insurance market, Government should consider the best value for money options for each project - in some cases the cost of insurance may not be commercially viable when compared with the cost of one party assuming the risk on a self-insured basis.

Insurance may be a factor in the allocation of some risks, such as force majeure. The Private Party may, for example, be required to bear the risk of insurable force majeure risks, with only the uninsurable risks being treated as true events of force majeure.

Within the Project Agreements it should be recognised that some risks, although insurable at the commencement of the project, may become uninsurable (or not insurable at commercially viable rates) during the course of the project. It will not be possible to define precisely how such a situation may be resolved, but the parties will have to agree to negotiate the appropriate resolution n. A Material Adverse Effect regime may be of assistance in these circumstances.

Where the project asset from which the services are to be provided is destroyed or damaged as a result of force majeure or another insured event, Government will expect to have the proceeds of insurance applied to reinstatement. The financiers may seek to argue that the project is beyond rescue, and that the proceeds should instead be used to pay out the project debt. Government should avoid this approach, although it may wish to retain the right to decide at the time how the proceeds should be applied.

Government Step-in

Continuity of service to the pub lit: is critical to any PPP project. In the unlikely event that the Private Party is simply unable to provide continuity of service, Government will be entitled to exercise the right of step-in. The Project Agreements must allow Government to take over performance of all or some of the services if such action is necessary to prevent or mitigate a material threat to the environment. to public health or to the safety of people or property. In some cases Government may also require step-in rights to guarantee continuity of an essential service or discharge of a statutory duty.

Government's right to step in may arise out of a default by the Private Party under the Project Agreements, or in the absence of default, as a result of external circumstances to which Government is better placed to respond than the Private Party.

The Project Agreements should:

• clearly define the circumstances under which Government may step in;

• provide, where possible, for notice to be given by Government to the Private Party prior to step-in, even if it is verbal notice followed by written notice;

• ensure that Government, upon step-in, has the necessary rights to enable it to perform the necessary services;

• require the Private Party to provide necessary assistance and cooperation to Government;

• define how the costs of step-in will be met (generally by the Private Party if the step-in results from its own default and by Government if there has been no Private Party default);

• describe the effect of step-in on the rights (including the right to payment of the service charge) and obligations of the Private Party; and

• provide for Government to step out once the situation has been resolved.

Although Government must have the right to step in where the need Arises out of the Private Party's default, the right of step-in should not be viewed as a remedy for default. Step-in is intended to provide immediate short-term relief in an emergency situation. If the Private Party is in default, then, the procedures and remedies for default in the Project Agreements should be followed, unless Government is in a position to affect an immediate cure.

Default and remedies

The Project Agreements should contain a variety of remedies available to the parties in the event of default. The primary aim of these remedies should be to maintain continuity of services to the public. While it is important to ensure that the remedies are adequate, it is equally important to ensure that they appropriate to the scale of the default. If there is a "hair trigger" response overreaction to minor defaults, the contract is unlikely to be bankable.

The majority of operational defaults should be dealt with under the performance measurement, leading to non-payment or abatement of service payments. Operational defaults will only require remedy if they are severe or persistent. For example, Government may wish to retain the right to order removal and replacement of an individual sub-contractor who is shown to be particularly prone to performance faults. As noted above, a Government right of step-in may be used to remedy an immediate material problem, but should not be viewed as a long-term remedy for default. The ultimate remedy for Government is termination, but as a general rule, this right should only be exercised when all other options have failed.

The Private Party's events of default and Government's remedies will generally include the following:

• failure to meet a milestone date (for example, the date for commencement of services) or abandonment of the project will entitle Government to issue a notice of termination;

• insolvency of the Private Party will entitle Government to issue a notice of termination;

• when the effect of one disastrous episode or cumulative episodes of shortfalls in performance lead Government to abate service payments beyond a specified amount then the Government will be entitled to issue a notice of termination;

• if a breach which is not itself material becomes a persistent breach. Government will be entitled to issue a notice of termination;

• if a breach capable of remedy has a Material Adverse Effect on the project. Government may issue a notice requiring the Private Party to remedy the breach; if the breach is not remedied, Government will be entitled to issue a notice of termination;

• compensation for default or liquidated damages may be appropriate in some circumstances.

Given that the primary purpose of these remedies is to uphold the provision of services to the public, allowance should be made in the Project Agreements for the Private Party to prevent or mitigate a default by making alternative arrangements for the temporary provision of services; for example, by using other facilities for a period of time.

The Private Party will also expect to have access to remedies if Government is in default under the Project Agreements.

Termination

A notice of termination issued by Government will generally be issued subject to the terms of the financiers' direct agreement. A period of time should be allowed for the financiers to step in and 'rescue' the project, to allow continuity of service to the public. If the financiers are unsuccessful, they and/or the Private Party should be required to cooperate during the transition to Government. Government may choose to exercise its rights to take over any properly performing sub-contracts, where appropriate.

The Project Agreements must address the financial consequences of termination. Where termination follows the Private Party's default, Government should be entitled to recover the costs it incurs as a result of the default and termination. Whether any compensation will be payable to the Private Party, or its financiers, will generally depend on the status of the project assets. If the assets are to be returned to Government, some form of compensation, based on fair market value, may be appropriate.

Dispute resolution

Disputes will inevitable arise during the course of the project :the key is to develop a partnering relationship and establish a dispute resolution process sufficiently and establish a dispute as they occur , and to prevent them escalating into major disputes. Most project Agreement should contain a graduated ,three or four stage process, including some or all of the following options:

• discussions between the parties;

• Fast-track resolution process;

• Committee or dispute resolution board;

• Expert determination;

• Mediation or conciliation(i.e., alternative dispute resolution); or

• Arbitration or courts.