PPP conversations #8 with Bataan Gov. Abet

PPP Conversations #7 with Center for Global Best Practices

Dissecting PPP contracts #2: Preambulatory clauses

Pardon the fancy word. Preambulatory clauses is just another term for whereas clauses. Simply, it is the introduction or preliminary statement to the main contract. This columnist first encountered this term in his legal forms class sometime in 1987 while he was in law school.

Like the Preamble in the Constitution, this cluster of clauses in a public-private partnership (PPP) contract defines the rationale or context, sets the background and provides the why of the arrangement. Even if, by themselves, the clauses do not create rights and obligations, they are important and relevant when interpreting provisions of the contract.

PPP preambulatory clauses may cover the following matters:

 (1) Mandate of the agency. The preambulatory clauses follow the statement of the parties. However, this statement does not mention the authority or mandate of the government agency in pursuing PPP as a development strategy or in implementing a particular PPP engagement. Stakeholders reading the contract would better appreciate the project by knowing the agency.

(2) The need for the project. Part of the background of executing a PPP contract is why the parties entered into such a partnership for a specified project or activity. The need would typically be couched as a gap, inadequacy or failure, such as lack of access to water or power. An exhaustive discussion of this need is not embedded in the PPP contract but is contained in the study for the project.

Dissecting (and understanding) PPP Contracts No. 1: The Step-in Rights

When a government agency and a private-sector proponent (PSP) enter into a formal, often, long-term arrangement, the ultimate aim is to provide a public service. So it would be to the best interest of everyone, parties and nonparties alike, project lenders included, if the contract will be operative up to the time the stated period expires.

However, as history will teach us, glitches, to put it mildly, occur midstream. Public-private parnertship (PPP) contracts have been terminated, guarantees called upon, traffic projections become useless, tariff adjustments not realized, and the PSP performs below par.

In the latter instance, the “step-in” rights provision may be invoked. The insertion of step-in rights provisions, or protective or intervention schemes is a security mechanism, which provides comfort to stakeholders.

(1) Who steps out? The PSP is the one who steps out. In which case, the PSP, depending on the type of nonperformance, can no longer continue being the operator, builder or service provider.

What the PACT?!

In public-private partnerships (PPPs), there are the two “PACTs”. The first one refers to the arrangement itself and the second one pertains to the manner by which the parties to the arrangement are determined.

Every PPP project must be embodied in a pact or formal agreement. The parties to a PPP—the public entity and the private-sector proponent (PSP)—consensually enter into a
contractual arrangement.

The PPP contract discusses the role of each party, the nature of the project and its performance targets, the appropriate PPP modality, and the contractual obligations and contributions. This pact governs the present and the future of the partnership, i.e., what happens after the effectivity date.

What the first pact does not cover, but is mentioned in the whereas or preambulatory clauses, is another pact. The second pact refers to the past or the necessary antecedents and prerequisites that led to the execution of the first pact. The legality of the PPP, the first pact, is determined, among others, through the legality of the process by which the PSP is chosen. In order to be valid, the selection of the PSP must comply with four core requirements—the P-A-C-T—where P stands for Public Advantage, A for Accountability, C for Competition and T for Transparency.

• Public Advantage. The PSP selection process is anchored on the purpose of PPPs. All PPPs must advance the true north of all development initiatives, i.e., the public good. The procedure cannot be dissociated from the substance. The “P” is the tie that binds the “A”, “C” and “T”.