The government is rarely a party to any of the contracts between the project company and its various sub-contractors. There is an argument that since the project company has assumed the responsibility for the construction and operation of the facility, the government need not concern itself with the dealings between the project companies and its various sub-contractors. It just needs to ensure that the obligations imposed on the project company under the concession agreement are being met.
Nevertheless the government needs to assume a monitoring role in relation to the project, though without unnecessary and unwarranted interference. The government should request copies of the EPC agreement, the O&M agreement, any supply agreement and insurance policies, including any notices and amendments. The government should be concerned with these agreements because:
• in the case of BOTs, the infrastructure to be constructed will transfer to the government at the end of the concession period;
• the public will pay for the infrastructure of the project through tariffs (or taxes if the government provides subsidies), and therefore good value needs to be ensured. The contractor often has an equity interest in the project company, and therefore the government needs to ensure that the EPC agreement is provided on an arms' length basis;
• the government may be guaranteeing, directly or indirectly, the performance or construction of the infrastructure facility to the project company's lenders; and
• the contractor, the operator or the supplier may be a sponsor to the project and the terms of providing services to the project company may not be at arms' length.
The government should ensure that the EPC agreement, the O&M agreement, any supply agreement and insurance policies:
• are consistent with and reflect the terms of the concession agreement;
• are at arms' length commercial terms;
• the construction and operation of the project complies with laws and regulations;
• the operator is required to maintain the facility to an acceptable standard (this usually means scheduled and preventative maintenance as specified intervals);
• on the transfer of the facility to the government at the end of the concession period, the infrastructure facility is in an operational condition; and
• on the transfer of the facility to the government at the end of the concession period, the assets transferred includes the necessary licence, for example software to operate the facility, is also transferred.