The PPP contract typically defines the contract term, and arrangements for any hand back of project assets to the government. The most common approach is for the government to choose the contract term, in the draft contract, as the best estimate of the time needed for the private party to achieve its required return, at reasonable tariffs or payment levels. A second option, with a similar result, is to define tariffs or annual payments, and enable the contract length be determined by bidders as one of the key bid variables. This approach was used, for example, in Mexico's toll road program, where concessions were awarded to the bidder offering the shortest term [#98].
A third alternative is to let the length of the concession be determined endogenously, as described by Kerf et al [#169, page 83], by inviting bids on the basis of the least present value of revenue (LPVR). This means the concession terminates when that value is reached-the higher the traffic, the sooner the concession terminates. This approach was set out by Engel, Fischer and Galetovic [#73] as a way to manage the risk of fixed-term concessions, and has been used for toll roads in Chile and Colombia.
Kerf et al [#169, pages 81-82] and Iossa et al [#159, pages 73-78] both describe the trade-off between a shorter concession term-enabling the government to go back to the market to re-tender the concession-against the disincentive this can create for concessionaires to invest, particularly towards the end of the concession.
Given this disincentive, PPP contracts need to clearly define the approach to transition of assets and operations at the end of the contract. This typically includes defining how quality of the assets will be defined and assessed, whether a payment will be made on asset handover, and how the amount of any payment will be determined. It can be particularly challenging to define handover standards at the start of a long-term contract. The following resources describe some possible approaches:
• The World Bank's toolkit for PPPs in Roads and Highways [#282, Module 5, Stage 5] section on hand back of facilities at contract end describes how asset standards at hand back can be defined in terms of the remaining useful life of different parts of the asset
• Australia's standard commercial principles [#15, pages 120-124] specify use of an independent assessor, appointed near the end of the contract term, to assess the quality of the assets, and define the required 'handover condition'
• The United Kingdom's standard PFI contract [#234] requires inspection around 2 years before the end of the contract, on the basis of which any work required to bring the facility up to the required standard is specified. Fee payments may be withheld by the contracting authority and released only when the required work is carried out
• EPEC Guide to Guidance [#83, page 42] describes how bonds or guarantees can be used to ensure asset quality at handover.