In an effort to promote standardization and expedited negotiation of contracts for Public-Private Partnerships (PPPs), the World Bank Group introduced the 2017 Edition of the Guidance on PPP Contractual Provisions.

The Guidance provides both sample language for contracts as well as commentaries to explain legal options. While the Guidance provides improved and more detailed advice as compared with the 2015 version, it continues to emphasize the preferences and requirements of the private sector partner without commensurate consideration of the perspective of the government.

In response, the following comments on the Guidance are offered by the Heinrich Boell Foundation to help ensure that PPP contracts achieve an appropriate balance between investor rights, on the one hand, and the rights of the government and people, on the other.

In addition to initial overarching observations, comments are offered on each of the sections addressed by the Guidance; namely:

1. Force Majeure

2. Material Adverse Government Action

3. Change in Law

4. Termination Payments

5. Refinancing

6. Lenders’ Step-In Rights

7. Confidentiality and Transparency

8. Governing Law and Dispute Resolution

9. Bond Financing and Corporate Financing

The Guidance will be featured in the First African Roundtable on Infrastructure Governance, sponsored by the World Bank Group, African Development Bank (AfDB), International Monetary Fund (IMF), OECD and others, to be held in Cape Town on November 2-3, 2017.

---

Overarching Comments

First, the Guidance does not allocate the risk of PPPs between governments and private investors in a balanced manner. Rather, it places disproportionate risk on governments (referred to as the “Contracting Authority” in the Guidance). Although this may result in better pricing for governments on the front end, the true project costs are in some cases simply being loaded onto the back end. For instance, this would be the case if governments are forced to compensate investors for certain disruptions or delays in project caused by events beyond the government’s control.

Risks for the government and the general population could rise in the case of mega-PPPs, not only due to the magnitude of investments, but also because they are more prone to cost and schedule overruns and benefit shortfalls than smaller projects. In addition to those risks, governments may also provide the private investor with guarantees (e.g., minimum revenue guarantees) and other commitments that trigger burdensome financial obligations for the government in the long-term.

When risks are disproportionately allocated to the public sector, gains tend to be privatized and losses socialized. In such circumstances, governments may be required to take on additional debt or to divert resources from essential economic and/or social services to compensate the private partner when risks materialize. Such dynamics fuel inequality and even social unrest.

Second, under the Guidance’s recommended drafting language, if a government changes the law as part of a bona fide, non-discriminatory effort to regulate environmental and social issues in the public’s interest, this  may trigger a duty to compensate the private partner. In most instances, such an outcome would be contrary to international jurisprudence. The duty to compensate would also have a “chilling effect” on changes in law that might otherwise be highly desirable, or even required by international law. For example, achieving the goals of the Paris Climate Agreement will require substantially strengthened legislation in almost all countries, such as legislation on fossil fuel subsidies or carbon pricing, incentives for renewable energies, or requirements for performance standards in order to ensure resilience to extreme climate or weather events. Such legislation might be discouraged by PPP contracts that follow the advice of the Guidance, as it may negatively affect investor returns and therefore could trigger claims for compensation by the host government.

Third, the Guidance encourages governments to enter into various contractual provisions that potentially restrict their ability to carry out important governmental functions, yet it does not address related social and environmental concerns that are of import to society. For example, the introductory section on “PPPs in Context” should note the importance of environmental and social impact assessments (ESIAs) and human rights impact assessments (HRIAs), and the need to allocate responsibility between the parties to a PPP for the identification, avoidance, mitigation, and management of the environmental and social impacts of their projects. Relatedly, governments could be advised to consider the capability of potential PPP partners to manage environmental and social/human rights risk in order to strengthen governments’ ability to meet their own environmental and human rights obligations and to minimize the risk that the project encounters delays and shut-downs. The “PPPs in Context” section should also offer guidance on climate change, a subject that is addressed only in a single sentence in a footnote despite the recognition in World Bank reports that climate change risks, mitigation and adaptation issues have become critical to infrastructure projects and should be expressly addressed in PPP contracts.

Indeed, the Guidance misses the opportunity to underscore the potential of PPPs to make contributions to sustainable development. While it focuses on the legal and regulatory environment that promotes private sector investment and risk allocation, the Guidance fails to mention the role of infrastructure in promoting sustainable development. Where it does mention environmental and human rights considerations, it does so in relation to risks of negative impacts. While ‘doing no harm’ is a crucial component of sustainable infrastructure, the Guidance must also address how sustainable infrastructure helps countries realize their national sustainable development visions and goals, including environmental and social sustainability, climate resilience, and local economic development.

As a final overarching comment, we note that the Guidance excludes the possibility of the participation of governments in PPPs as shareholders or partners. Instead, the Guidance assumes that the project company (the Private Partner) would be wholly owned by the private sector. While that is one model for PPPs, governments of developing and emerging market countries should have the option to participate in the ownership of the relevant project companies. To exclude that possibility is to deny governments the potential benefits of equity ownership, while potentially putting more onerous financial commitments on governments than they otherwise would be required to undertake. (For example, government obligations to compensate lenders, bondholders, and redundant employees if the private investor exits the project – as currently envisioned in the Guidance’s sample drafting language – would not be necessary if, with the exit of the private investor, the government has the right to assume full ownership and continued operation of the project company.) In any case, a wholly privately-owned project company structure is not necessary to provide the project company with significant benefits, such as tax concessions, currency exchange guarantees, and guarantee of the ability of the private party to bring in personnel to manage and operate the project. In fact, the entire structure of a wholly privately-owned project company appears to encourage maximum private participation in PPPs, and to place the maximum risk on the host government while removing any significant risk from the private participants in PPPs.

---

• Additional detailed comments can be found in the markup of the Guidance: Annotated Guidance on PPP Contract Provisions (pdf)
  

• Key Messages on the World Bank Group’s 2017 Guidance on PPP Contracts