The Commercial Framework is the key mechanism of the alliance contract which:
aligns the commercial objectives of the NOPs with the project objectives of the Owner and the investment objectives of the government;
should encourage and drive the NOPs to achieve the performance levels required by the Owner's VfM Statement; and
ensures the Owner is equipped to address any poor performance by the NOPs.
The NOPs' primary objective will be to achieve an attractive profit from the project for their shareholders. On the other hand, the Owner's objectives will be to deliver the requirements set out in the Owner's VfM Statement at a fair price.
Along with the framework for joint management and collaborative decision making, developing the optimum Commercial Framework is a foundation for alliance success; it should provide all Participants with an imperative to meet their behavioural commitments, and balance both the price and non-price objectives for the project. The Owner should ensure that the Commercial Framework is structured to target the achievement of the VfM outcomes required for the specific project, and to manage the associated risks.
The proposed Commercial Framework for the project should be developed by the Owner and be included in the tender documents (i.e. the Request for Proposal--RFP) issued to industry. However, it should be expected that the Commercial Framework will be further developed through discussion and negotiation with the NOPs as part of the selection process. The final agreed Commercial Framework will then be incorporated in the PAA.
The process for developing the Commercial Framework is set out below:
• understand the generic Commercial Framework37 of alliance contracts; its purpose, mechanics and challenges;
• clearly identify the specific project objectives, risks and challenges outlined in the Business Case and the Owner's VfM Statement;
• tailor the generic Commercial Framework to reflect these project specific objectives and the prevailing commercial environment; and
• issue the proposed Commercial Framework with the tender documents (i.e. the RFP) and encourage the NOPs to provide innovative responses to enhance the Commercial Framework (in the same manner as technical innovation is encouraged).
| Owner's VfM obligations are no different under an alliance contract The Owner's public interest obligations to negotiate good terms under an alliance contract are no different to its obligations under a traditional contract. It is important to establish a commercial and legal framework to achieve the Owner's specific objectives for the project, and then put that framework to the market, inviting commercial and technical responses and innovation from Proponents. The Owner should not postpone the creation of the Commercial Framework until the selection process or after the NOPs have been selected. |
| Commercial alignment at the organisational and individual level The NOPs' obligations to their shareholders are to optimise profits while minimising risk. These profit expectations and risk appetite are set by the NOPs' corporation not by the alliance. A distinction should be made between aligning NOPs with the Owner at a company level and aligning individuals within the alliance. Unless the individuals are personally aligned with alliance outcomes, it is a risk to the alliance overall. This may be exacerbated by issues in remuneration, bonuses, job security, etc. |
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