Key contractual protections to mitigate the risk of deterioration in the asset condition prior to handback in a PPP contract are set out below. These protections are not addressed in detail in this reference tool, as they should be considered carefully when agreeing the PPP contract (which is not the focus of this reference tool). The protection mechanisms relevant to the PPP contract and project in question should be well understood and utilised to protect the interests of the Procuring Authority.
• PPP contracts should have a clear and well-defined asset handback standards to leave less room for the Project Company to hand back an asset in a substandard condition.
• Requiring the establishment of a contingency fund for any maintenance requirements after handback. Here the Procuring Authority will retain money (or security, such as a letter of credit) that can be used to complete required maintenance after handback. If there is no additional maintenance required, the money will be repaid to the Project Company, thus incentivising the Project Company not to 'sweat the asset'.
• The Project Company can be required to hand back the project to the Procuring Authority in a condition that would meet the handback standards as defined in the PPP contract for a specified period (e.g. five years after handback).
It is worth noting that very few PPP projects have reached the expiry date for some of these handback provisions to become effective. In other words, unlike other provisions of PPP contracts, the application of certain handback mechanisms is still largely uncharted territory from a global practice perspective.
EXAMPLE Maintenance reserve account For the Zaragoza Tramway project in Spain, the Project Company is required to pay 5% of its availability payments into a 'Reserve Account', which will be used to pay for any additional maintenance activities that are required leading up to handback. For more information, see the Zaragoza Tramway Case Study. |