ModelXcel.com: Martin, thanks for agreeing to share with us your insights and experiences. Before we get into it, can you tell us a bit about your background and experience in the legal field, especially in relation to PPP projects?
Martin Schaefer: Of course. It’s a pleasure to spend this time with you. As for my background, I think it is somewhat non-traditional in that I came to study law (in the US) later than most lawyers, after having been in the general construction project management and consulting field for some years. As well, I have a business and finance undergraduate degree. One might surmise that this set me up well for a career in infrastructure development, project-finance, PPPs, etc., but I think every good legal practitioner in this area really hones his or her skills on-the-job, so to speak, regardless of prior knowledge and experience.
What initially drew you to specialize in the legal aspects of PPP projects?
Post licensure (qualification) as an attorney, and after a short stint in general practice, I became an in-house contracts attorney for a US-based consulting engineering and EPC contracting firm operating world-wide, largely in the power generation and petrochemical fields. This was my first exposure to highly technical, complex projects being implemented on a project-financed basis. After several years there I took a similar position and role in another US-based company, this time an OEM in the water/wastewater sector, also operating world-wide, that was just beginning a foray as a developer of large-scale project-financed, build-own-operate projects, with sovereigns (or their agencies) and municipalities as clients and counterparties. (In the early aughts, the term Public-Private Partnerships, or PPPs was not so much used.) My prior experience with project-finance concepts, project structures and the attendant contractual requirements proved a good fit. So, I wasn’t so much drawn to it as it was a natural progression or outgrowth from what I had been doing.
What are the key factors that have driven the global growth of PPPs in recent years?
Frankly, I think many of the drivers are largely the same now as they were 20 – 25 years ago. The host country or state needs a public service to serve its people (power generation, seawater desalination, wastewater treatment, district cooling, toll road, what have you?), but has insufficient and/ or underdeveloped resources, whether that be financial, technical, industrial base, etc., in order to implement it on its own. In other words, this is risky business. Let’s let those private actors and companies with appropriate experience and track records take most of the risk in financing, constructing and operating these assets. But there are other drivers too, we can look at places like India or Saudi Arabia, where population growth and the sheer demand for public services has outstripped the ability of the state to keep up, even though there may be sound and robust financial, technical and other resources within those jurisdictions. As well, we are seeing that climate change can quickly and drastically impact the infrastructure needs of a country—especially in regards to water scarcity and wastewater treatment in coastal locations. And the switch to greener technologies and processes in infrastructure (e.g. renewable energy) has also occasioned the growth in PPPs.
What are the most significant benefits and challenges associated with PPPs from your perspective?
Well, from a host country perspective, some of the significant benefits are 1) freeing up in-country capital and human resources to be put toward other important societal needs, 2) learning how to do such projects later, on its own, by observing and being a hands-on participant in the project, and 3) technology transfer (assuming assets transfer to the host at the end of term). Of course, the challenge for the developer is to balance the state’s oversight needs against the developer’s need to operate unencumbered (within contractual bounds) in development, construction and operations, all while relying on state cooperation for various events and requirements along the way. When that balance is struck right, then the Partnership aspect of a PPP rings truly.
How do PPP legal frameworks and regulations differ across different regions and sectors? Are there any common themes or best practices that you’ve observed?
To answer those questions in any level of detail would require more time and space than we have here. But let me say, broadly, that the longer a region (say, the Gulf) has had experience developing common- or traditional-type projects (say, power and water), the more similar the PPP structures (from state administrative/legal set-up to tendering processes to state oversight and/or level of participation) seem to be across the varying states within. I think this is driven to a large extent by 1) “how did our similarly situated neighbor do it successfully”, and 2) international lender- and agency-driven requirements in and for specific regions. When we look at some places where there is less of a PPP history (say, across the industrializing countries of the Global South), where more localized financing is going to be necessary, we sometimes see a more divergent set of schemes and approaches. Of course, every state or municipality is going to have its own quirks and requirements based upon its legal and governance systems, but, in my view, “best practice” is not to try to reinvent the wheel.
What are the common legal challenges faced during the development and implementation of PPP projects?
If we are talking about a state developing a PPP program, I would say the biggest challenge is getting a legislature to approve a hands-off approach, allowing a ministry and various authorities to go about their business of tendering, awarding and shepherding projects without interference from lawmakers. Developers and lenders are looking for certainty in the framework, including such things as tender award challenges and project dispute resolution mechanisms.
What are some important legal considerations in structuring a PPP?
Generally, and following from my last answer, transparency and fairness throughout the process is essential. However, legal considerations are going to differ depending upon the nature of the PPP project. Is it a build-own-operate (BOO), Build-Own-Operate Transfer (BOT), or Design-Build-Operate (DBO) scheme? A state may (or will) come to realize that a proposed PPP program or individual project requires the creation of new laws and/or the amendment of existing ones in order to make it attractive to developers, investors and lenders alike. There are so many issues to consider. To identify just a few important matters in the overall legal landscape: 1) Host state Companies Law requirements concerning such things as: in-country sponsors and/or partnering; protections afforded by limited liability vehicles; project company board composition; director/manager majority/supermajority voting; 2) Banking laws concerning use and holding of non-state currencies, off-shore accounts, currency convertibility, and earnings retention requirements; 3) asset securitization constructs and processes; and 4) the sovereign guarantee framework. And then, whatever the project delivery scheme, contract drafters of concession agreements (or similar primary contracts) and related project documents produced by the state must implement particular and unambiguous language consistent with the local law, allocating risk appropriately and fairly.
What are the critical steps involved in successfully developing and executing a PPP project?
Because I might otherwise be compelled to write a book on the subject, I will limit this answer to the perspective of the developer’s legal practitioner during the tender phase: 1) thoroughly understanding tender documents and their requirements; 2) clarifying ambiguities in the tender documents; 3) performing due-diligence on the host country legal framework; 4) identifying all manner of contractual and legal risks and communicating those to one’s project team; 5) retaining and effectively utilizing experienced local counsel to assist with the foregoing and later matters such as company formation, asset securitization, etc.; 6) retaining international project-finance counsel if and as appropriate to the size and type of project at the appropriate time; 7) reviewing and advising on tender submission documents prior to submission. This should provide a firm foundation for a project team to carry on post award.
How can governments and private sector partners effectively collaborate to ensure the success of a PPP project? Is there a balancing of interests at the heart of it?
Yes, indeed, in my view. And I think it starts with each treating the other as potential partners right from the start of tendering. This means taking a non-adversarial approach in communications and information flow. Nothing to hide here. This can only redound to the benefit of a project after award.
What role does risk allocation play in PPPs, and how can it be managed effectively? How do you ensure that contracts balance the interests of both public and private partners?
The old adage generally applies: Those best able to bear the risk should do so. But “best able to bear” should involve an analysis of: 1) is it in or under a party’s control? 2) does that party stand to benefit economically from taking the risk; and 3) is that party able to defray or transfer the risk or its consequences (e.g. through insurance and/or contractual pass-through/flow-down mechanisms with third parties). Of course, in a case such as force majeure, there is no fault attributed and no ability to control by either party. Presumably (and more often than not), it’s a shared risk. Both parties then suffer; the state gets no service and the private party gets no payment. The appropriate contractual remedy here is the stand-still for a period of time, with resumption (or termination rights) thereafter. As for managing risk, especially in the context of force majeure, the key here would be transparent communication between parties.
Can you share some examples of successful PPP projects or contracts and what made them effective?
It is interesting to think back on a number of projects in which I have been involved as developer (or equity) deal-counsel that have been deemed objective successes, as well as the subjective ways that I (in part) account for that. I think some of the matters and themes we have already discussed come into play here. Without getting into specifics, I can relate the following. In an early first-of-kind-in-country wastewater BOT in Kuwait, the concession contract itself was quite rudimentary by current standards. Yet, through concerted interface with local counsel concerning laws in place at the time, it was understood that those laws satisfied many of the “what happens if” concerns that the contract did not address. In this case, though, it certainly helped to have all local financing. I contrast this with another BOT wastewater project, this in Abu Dhabi. Here the local authority had put together a splendid team of legal, technical and other advisors to develop tendering and project documentation so replete and comprehensive that there was little left to ponder in terms of risks, responsibilities, rights, liabilities, etc. Of course, there was still negotiation, but the framework never changed and the parties proceeded with clear vision and understanding throughout. In another project, a BOO seawater desalination project in North Africa, which was also a first-of-kind-in-country, the concession contract was not so developed as in the Abu Dhabi project, but more so than the Kuwait project. However, the local legal framework and regulations were not so well adapted to the task. A huge boost to getting this project to the finish line was the involvement of a state-owned company as minority equity partner.
What lessons can be learned from these cases, both in terms of successes and challenges? And what advice would you give to legal professionals who are new to working on PPP projects?
Project opportunities come in all stripes. They always will. Attractiveness of investments, ease of conducting business, sophistication of contracting parties, the local legal landscape, risk assessments, etc. will vary by project, by jurisdiction and over time, as will the appetite and tolerance for risk by states, developers and lenders. The lesson for the legal practitioner operating in this area (new or otherwise), I think, is to not count on the next project being anything like the last one. The challenge is to adapt to the situation at hand and help chart a course and find solutions for the discreet problems that will inevitably be encountered along the way.
How do you see the future of PPPs evolving? What new trends or innovations do you anticipate?
It is difficult to predict. We are currently in a sustained high interest rate environment. This has a quashing effect on tariff- or rate-based PPP projects, as end-user payments may not fully support the high price of borrowing (and investor return requirements) that is reflected in bid tariff pricing. Might we see more projects with host government subsidies? Perhaps. We are also in a heightened era of geopolitical conflict world-wide and increased active hostilities in a number of regions. The resulting limitations, interruptions or uncertainty of fuel supply, rare earth resources and other goods occasioned by this can have major impacts on the viability of certain types of projects in certain places. Will host governments have to step up to bear these risks as political risk insurers decline to cover certain regions and types of events? Again, perhaps.
What are some of the most valuable lessons you’ve learned from your experience with PPPs?
If I can answer a slightly different question instead: What are some of the most rewarding experiences you’ve had from your experience with PPPs? It would be the human element. Working with and across the table from some of the brightest and best in the legal, business, financial and technical communities. Solving problems in order to bring to fruition services necessary for the benefit of humanity. And doing so with good cheer and humor (at least most of the time).
Is there anything else you would like to share about the role of legal professionals in PPP projects?
Winning and then successfully negotiating and implementing a PPP project requires a concerted and sustained effort by all involved. The legal professional, whether his or her client is a developer, government entity or lender, is but a part of a larger team striving toward that goal. I have noticed that successful practitioners generally seem to engender cooperation among disparate parties, employ good listening skills and demonstrate patience, flexibility and an open mind in problem-solving. They know the landscape, they clearly see the destination, and they understand the roles and capabilities of others as they themselves undertake the role of the experienced guide in getting them there.
Martin Schaefer is an infrastructure project development and project-finance attorney with a world-wide practice based in Boston, MA in the USA. He would welcome any comments and inquiries and can be reached at mgslaw@verizon.net.
