With legal counsel, the Heinrich Boell Foundation prepared this submission to the World Bank Group's consultation on its draft Report on the 2016 Edition of its "Recommended PPP Contractual Provisions". It cautions that the draft "Contractual Provisions" put an inordinate level of risk on governments (with potential fiscal consequences); obstruct the state's "right to regulate" in the public interest (for instance, to protect the environment and human rights); prefer international (rather than domestic) settlement of disputes; and fail to adequately promote contract transparency.
12 June 2017
SUBMISSION TO THE WORLD BANK GROUP
Subject: The G20 Compact with Africa and our Summary Comments on the World Bank Group's 2016 Draft Report on Recommended Public-Private Partnerships Contractual Provisions
The attached Summary of Comments was prepared by our legal team. This submission is in addition to the two track-changed versions of the contractual provisions and related commentary we sent to you both during and after the consultation period on the “Draft Report on Recommended Public-Private Partnerships (PPP) Contractual Provisions.”
We note with concern not only that the G20 Finance Ministers and Central Bank Governors welcomed the “Recommended PPP Contractual Provisions” but also that the paper, “The G20 Compact with Africa” by the AfDB, IMF, and WBG (March 2017) envisions an ambitious roll-out of the “PPP Contractual Provisions” as described in paragraphs 77 and 78.
In this roll-out, the G20 could play a key role. Specifically, “The G20 Compact with Africa” states that “the G-20 could encourage its member countries (and through them their respective national development agencies) as well as other MDBs to work together with the WBG on socializing the standard clauses through the organization of dedicated events and on their actual implementation/use in projects.” If taken up by African governments in their ongoing infrastructure projects, the “Recommended PPP Contractual Provisions” can potentially lock in unbalanced risk allocation that favors investors’ interests over those of the government and citizens for two or more decades. For this reason, we request urgently that the Bank integrate the Foundation's comments and concerns into its updated version of the “Recommended PPP Contractual Provisions.” In their current form, the “Recommended PPP Contractual Provisions” do not give due consideration to the potential pitfalls of PPPs nor do they address how governments may seek to avoid such pitfalls.
Moreover, the draft “Recommended PPP Contractual Provisions” put a disproportionate level of risk on governments. We are of the view that the draft should balance the interests of the Bank’s client countries and their citizens, on the one hand, and private investors, on the other. Such a balance would help fulfil the Bank’s mission of mobilizing finance and knowledge for the benefit of its client countries.
We believe that fair allocation of risk between the contracting parties and fiscal transparency are mutually reinforcing. Unless there is a fairer allocation of risks, governments are likely to shy away from making all costs and contingent liabilities transparent, and to resist requests for transparent budgeting, even if the World Bank urges it. Fiscal transparency (on and off-budget) is imperative for PPP success. (According to the IMF, the case of Portugal is a cautionary tale wherein the buildup of substantial off-balance transactions for capital spending related to PPPs represented 15 percent of GDP in cumulative investment at 2012 prices.)
Furthermore, the draft “Recommended PPP Contractual Provisions” constrain, to a greater degree than International Investment Agreements, the state’s ability to regulate in the public interest. In this regard, they are inconsistent with the G20 Principles on Crowding In Private Sector Finance, which state:
“…MDBs have also developed standardized and wholesale solutions to reduce transaction costs for private investments and create a pipeline of commercially viable, bankable projects; and worked to deepen local financial and capital markets whenever possible and improve domestic supervisory financial regulation. MDBs will further enhance these efforts whenever the country demands it and the projects allow it, without compromising project quality and the achievement of the Sustainable Development Goals (SDGs). Sustainability and resilience considerations will also de-risk investments in infrastructure by ensuring long-term value."
In our view, it is necessary for the state to regulate in the public interest to achieve the SDGs and ensure long-term value to both society and investors. As Laura Tuck, World Bank Vice President for Sustainable Development, wrote in her blog on infrastructure, “...how can we sustain development gains if projects can’t adjust to long-term shifts in demography, technology, or in socioeconomic and environmental climates?” A Contracting Partner, e.g., a government, must have the “right to regulate” to ensure that there are appropriate responses to such shifts.
In the run-up to the G20 Summit, including the G20 Africa Partnership Conference today and tomorrow, we hope that the balance of interests – between investors and citizens – becomes clearer. Should any questions arise about our comments, please contact Nancy Alexander at Nancy.Alexander@us.boell.org
Bastian Hermisson, Executive Director
Jürgen Zattler, German Executive Director, World Bank
Ludger Schuknecht, BMF
Holger Fabig, BMF
Tafadzwa Pasipanodya, Foley Hoag LLP
Barbara Unmüßig, President, Heinrich-Böll-Stiftung
Nancy Alexander, Heinrich-Böll-Stiftung North America
Dennis Snower, Institut für Weltwirtschaft an der Universität Kiel, T20 Co-Chair
Dirk Messner, Deutsches Institut fur Entwicklungspolitik, T20 Co-Chair
Jürgen Maier, Forum Umwelt und Entwicklung, C20 Steering Committee
Klaus Schilder, Misereor, C20 Steering Committee
Yao Graham, Third World Network - Africa
Elizabeth Sidiropoulos, SAIIA
Mzukisi Qobo, Professor, University of Johannesburg
Robert Stumberg, Harrison Institute on Public Law and Diplomacy, Georgetown Law School
Maria Jose Romero and Jesse Griffiths, Eurodad
Luiz Vieira, Bretton Woods Project
Motoko Aizawa, InfraActiv
Larry Beeferman, Harvard Law School
Zoe Reiter, Transparency International
Summary Comments on the Draft Report on Recommended PPP Contractual Provisions
First, governments may lack the fiscal capacity to both fulfill their financial guarantees and commitments to their private partners in major PPPs and to sustain essential social services. The potential for this to occur is particularly high under the PPP framework promoted by the World Bank because, as will be discussed in more detail below, the draft Recommended PPP Contractual Provisions (the Draft Report) do not allocate fairly the risk of PPPs between governments and private investors.
Second, several studies have shown that PPPs frequently do not provide additional resources to the public sector because they conceal the Contracting Authorities’ potential liabilities under the PPP and create major incentives for corruption.
Third, during the life of the project, changes in law as a consequence of bona fide, non-discriminatory efforts by governments to regulate environmental and social issues in the public’s interest may trigger a duty to compensate the private partner under the contract clause. In many instances, such an outcome would be contrary to international jurisprudence.
Fourth, the Draft Report encourages governments to enter into various contractual provisions that potentially restrict their ability to carry out important government functions without addressing the related social and environmental concerns that are of import to society. For example, the introductory section of the report on “PPPs in Context” should note the importance of environmental and social impact assessments (ESIAs) and/or human rights impacts 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 project. 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 human rights obligations and to minimize the risk that the project encounters delays and shut-downs. The “PPPs in Context” section should also address climate change, a subject that is entirely absent from the Draft Report despite the recognition in World Bank reports that climate change risks, mitigation and adaptation issues have become critical to infrastructural projects and should be expressly addressed in PPP contracts.
As a final overarching comment, the Draft Report -- and in particular its comments on p. 11 and PPP structure chart on p. 12 and its sample drafting language -- excludes the possibility of the participation of governments in PPPs as shareholders. Instead, the entire tenor of the Draft Report is that the project company, termed the "Private Partner," would be wholly owned by the private sector. While that is one model for PPPs, developing and emerging economy governments should have the option, and may prefer, 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 putting more onerous financial commitments on governments than they would be required to undertake. In addition, a wholly privately-owned project company format is not necessary to provide the project company with significant benefit, such as (without exclusion) concomitant government risk as an equity owner and government tax concessions, currency exchange guarantees, and the guarantees 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 designed to place the maximum risk on the host government and remove any significant risk from the private participants in PPPs.
The following provides our summary comments on the sections of the Draft Report that address the specific legal provisions of the model PPP Contract:
Section 1: Force Majeure
The Draft Report’s sample drafting language on force majeure generally reflects the prevailing understanding of the concept. However, the Draft Report’s commentary on the subject tends to encourage Contracting Authorities to take on a greater burden of risk for unforeseeable events than is normally observed in practice or required under international law. For example, the commentary’s suggestion that civil strife and war events need not be treated as force majeure is clearly at odds with international jurisprudence and most PPP contracts reviewed, which treat them as force majeure events.
Moreover, the Draft Report’s commentary unduly favors the Private Partner in its analysis of the effects of an invocation of a force majeure event. It repeatedly suggests, for example, that the Contracting Authority compensate the Private Partner for lost revenue and costs incurred during the occurrence of a force majeure event. The recommendation of such compensation is inconsistent with a basic principle underlying the concept of force majeure, namely, that losses lie where they fall and parties bear their own costs and damages in the case of a force majeure event.
The Draft Report’s commentary on force majeure could also be strengthened by highlighting other key aspects of the concept. One example is the important qualification that neither party to a PPP Contract is permitted to invoke the force majeure clause if it directly caused or produced the situation in question. Another is that in some jurisdictions, parties to a contract cannot derogate from force majeure provisions in the law because such provisions are deemed to enshrine public order considerations.
Neither the force majeure section, nor any other section in the Draft Report addresses climate risk. Climate risks can be defined as meteorological, hydrological and/or climatological events that result in extreme weather, such as storms, floods, landslides, extreme temperatures, droughts and wildfires. It is widely recognized that as a consequence of climate change, the frequency and severity of extreme events is increasing, and events that were once considered unforeseeable or rare are becoming more common. As noted in World Bank publications, it is of critical importance that PPP partners study and allocate climate risks because of the significant negative impacts climate events can have on the physical and economic performance of infrastructure. Those publications provide detailed examples and explanations of the various ways in which PPP partners can allocate climate risks in their contracts, including through insurance policies and variable force majeure provisions with the capacity to re-allocate climate risks as climate change events become more frequent. We highly recommend that the World Bank draw from such expert analyses and include commentary and draft language concerning climate risk allocation in their Recommended PPP Contractual Provisions.
Section 2: Material Adverse Government Action
The Draft Report’s commentary and sample drafting language on material adverse government action (“MAGA”) do not account for the fact that events that could be characterized as MAGA under the recommended PPP contractual provisions may constitute legitimate exercises of state authority and police powers to regulate such matters as public health and safety and the environment. Similarly, many jurisdictions allow a Contracting Authority to vitiate benefits owed under a PPP Contract on grounds of public policy, such as underlying bribery, corruption, or fraud, which the commentary also does not consider. It is recommended, therefore, that any definition of MAGA in the recommended PPP contractual provisions expressly exclude such bona fide exercises of police powers, and authorize the Contracting Authority to cease or diminish payment when the Private Partner has acted in contravention of public policy. Doing so ensures, for example, that any risks associated with such conduct remain with the Private Partner, which would, presumably, have already factored them into its cost-analysis and pricing.
We also note that the Draft Report’s commentary and sample drafting language on MAGA unduly place the risk of war, civil strife, riots, terrorism, and strikes on the Contracting Authority. As discussed in the section addressing force majeure above, the norm under international law and in practice is to characterize these events as force majeure events, thereby sharing the risks of their occurrence between the contracting parties. The Draft Report should be revised to ensure its recommendations do not encourage Contracting Authorities to incur greater risks and costs in PPPs than are reasonable from a legal or business perspective.
Section 3: Change in Law
As with the Draft Report’s commentary and sample drafting language on MAGA, the section on change in law does not adequately consider legitimate exercises of the host State’s police powers in matters such as public health, safety, and the environment. In particular, Option 1 of the sample drafting language model improperly and inadvisably seeks to restrain the Contracting Authority’s police powers and ability to meet its international legal obligations concerning the environment and human rights by protecting the Private Partner against all changes in law. Such language could also infringe upon governments’ right to regulate to mitigate and adapt to climate change. Governments should be encouraged to strengthen laws that manage climate risks, rather than be penalized for introducing them. Given that it is common for PPP contract terms to exceed twenty years, it should be expected that governments will change their legal frameworks, in particular with regard to the environment, human rights and other social issues.
Indeed, the U.N. Guiding Principles on Business and Human Rights (“UNGPs”) highlight governments’ existing international legal duty to respect rights themselves and to protect against adverse human rights impacts by third parties through effective policies, legislation, regulations and adjudication. Additionally, under the UNGPs, businesses have a responsibility to respect human rights in their business activities including in their value chains. Given that PPPs in various sectors raise the risk of severe human rights impacts, it would be helpful for the Draft Report to mention the UNGPs.
In our view, it is inappropriate for the World Bank to promote contract clauses that enable investors to demand compensation if a government exercises its rights and fulfills its obligations to regulate in the public interest in this way. Doing so is not only counter-productive to the PPP project in the long run, but it is likely to lead to disputes. Moreover, such change in law clauses are unlikely to be permitted to operate at the expense of the State’s police powers, especially (but not exclusively) where the governing law of the PPP contract is the law of the Contracting Authority.
For these reasons, the Draft Report should not recommend risk allocation approaches resulting in the Contracting Authority bearing all the risk of change in law. Only a developed risk sharing approach, as reflected in Option 2 of the sample drafting language, amended to account for legitimate exercises of the host State’s police powers by excluding them from the definition of “General Change in Law,” is viable in the long run and fair between the parties.
Section 4: Termination Payments
The absence of any accommodation for a PPP in which both the private sector and the Contracting Authority (or other governmental entity) are shareholders is particularly noticeable in the Draft Report's commentary and sample drafting language regarding termination payments, which would be formulated in a significantly different manner in instances in which there is a governmental shareholder. We strongly recommend that the World Bank include in its final report alternative sample drafting language in the event of a government equity position in the project company. If the World Bank is resistant to including alternative draft language that would accommodate governmental shareholding in the "Private Partner," that absence of alternative drafting language should be prominently noted in Section 4, with commentary on how the sample drafting language would need to be changed for PPPs in which the government does participate as a shareholder.
The termination payment provisions also do not take into account that any termination payments to Lenders should be made directly to the Lender, and not to the Private Partner. Otherwise, there is an unacceptable risk that such payment would not flow onward to the Lender, to the detriment of the project's viability post-private participation. In addition, termination payments to bondholders and fixed rate lenders should only be required in instances in which bonds and such loans are impaired or they are, respectively, redeemed early or accelerated by their terms.
The sample drafting language also leaves out certain key factors in determining termination payments, including factors that are recognized in the commentary. For example, insurance proceeds received or to be received by the Private Partner or its shareholders should be deducted in determining the relevant termination payments; Option 1(c) in paragraph 1(d) of the sample drafting language should take into account the Private Partner's pre-termination performance; and the deductions set forth in Section 4.3.3 of the commentary should be reflected in the correlative provisions of the sample drafting language.
Section 5: Refinancing
As noted under the heading "Realising Value Refinancing" in Section 5.1.3 of the Draft Report, the refinancing section focuses on circumstances in which "PPP Project developments [are] positive," and the sample drafting language reflects only that situation. As also noted in the commentary, however, there may be instances in which refinancing is sought to rescue the PPP from default, which could be attributable to one of the parties. Because the sample drafting language does not take that scenario into account, the section should prominently caution that different PPP Contract language than that provided, including a revised financial allocation that takes into account a party's fault for changed financing provisions, would be needed in a rescue or other negative-impact refinancing situation.
Given that any refinancing could have an impact on amounts payable to or by the Contracting Authority (and to or by users, in the case of "user pays" PPPs), the sample drafting language should be revised to require the Contracting Authority's written consent to any refinancing, not just refinancing that would result in a gain. Likewise, the sample drafting language should require the Contracting Authority's written agreement to any amendment of the Financial Model after the one approved as part of the winning bid (or if there is no agreed Financial Model prior to conclusion of the PPP Contract, the agreed Financial Model included in the contract). In addition, to guard against situations in which the Private Partner may not take the initiative to explore refinancing to achieve refinancing gains, the Contracting Authority should be empowered to require the Private Partner to do so, and the Private Partner should have a correlative obligation to act on such a request. Finally, for present purposes, the sample drafting language only contemplates the allocation of financial gains between the Private Partner and the Contracting Authority, and should be revised to accommodate "user pays" PPPs, in which financial gains should be shared with users.
Section 6: Lenders’ Step-In Rights
The commentary on Lenders' step-in rights generally accommodates Contracting Authority (and the Lender) concerns in a situation in which the Private Partner is in default. Section 6.2.4 of the commentary should be strengthened, however, by acknowledging that the timing and duration of step-in must take into account user concerns (as well as those of the Contracting Authority and the Lender). Specifically, Lender step-in rights are triggered where a PPP project has fallen into distress due to the Private Partner's poor performance, to the detriment of users of the project's services (e.g., toll road users, consumers of electricity and other services from energy PPPs). Thus, to ensure that users are not forced to endure lengthy project dysfunction, the deadlines for a Lender to decide whether to step-in, and if it does step in, to step out (either after achieving proper operation and management of the PPP project or, if it fails to do so, by turning the project over to the host government) should be as short as possible.
Several factors should also be added to the type of provisions to be included in a Direct Agreement, in Section 6.3 of the commentary. Those factors include: (1) pre-agreement on what entity would serve as the "Lenders' 'nominee'" for immediate step-in and, if that entity is no longer available at step-in, agreement on how a replacement "Lenders' 'nominee'" would be selected; (2) a requirement that, before serving, the "Lenders' 'nominee'" and, later, the substitute private partner agree in writing to perform the PPP Contract; and (3) a right for the Contracting Authority to step-into the Lender's place, and the Lender (and/or its "nominee") to exit, under defined circumstances.
Section 7: Confidentiality and Transparency
For reasons that the World Bank has recognized in its 2016 Disclosure Framework, the Draft Report’s commentary and sample drafting language related to confidentiality and transparency should establish the publication and disclosure of PPP project information as the preferred default. In particular, promoting transparency with regard to PPP projects is a critical means of ensuring that the scaling up of PPP projects that the World Bank seeks to promote globally observes fiscal transparency and does not exacerbate significantly the problems of corruption that already exist in public contracting. The disclosure of various kinds of project information such as government guarantees and financial support provided to the project also helps ensure that PPP projects withstand public scrutiny as to their true costs and benefits to the public.
The Draft Report’s commentary on confidentiality and transparency should, therefore, recommend that, except with regard to specific and limited confidential or commercially sensitive details, information related to PPP projects and government guarantees and/or other financial support for the project should be disclosed to the public. It should also explain in more detail the benefits to the public and to various stakeholders of greater transparency in PPP contracting and project information. Where important public resources or services are at issue, the publication of project information and expansive disclosure should be required under the model PPP contract, even if local legislation does not require such disclosure.
In line with our recommendations on the Draft Report’s commentary on confidentiality and transparency, we also recommend that the scope of information that is considered confidential in the Draft Report’s sample drafting language be narrowed significantly. The sample drafting language should also clarify that confidential information can simply be redacted from the relevant PPP documents in order to enable the disclosure of the non-confidential contents of those documents.
Section 8: Governing Law and Dispute Resolution
The Draft Report’s commentary and sample drafting language on governing law and dispute resolution appropriately identify many of the concerns and considerations relevant to parties to a PPP. Nevertheless, that section could be revised in various ways to better explain to Contracting Authorities how they might benefit from one option versus another. As with other sections of the Draft Report, the tendency has been to emphasize the preferences and requirements of the Private Partner without commensurate consideration of the perspective of the Contracting Authority. As reflected in our detailed mark-up of the Draft Report, the dispute resolution section could make several recommendations that would enable its model dispute resolution clause to address various pressing concerns with the investor-state dispute settlement system such as transparency of the proceedings, procedural efficiency, and conflicts of interest in arbitrator selection.
The Draft Report helpfully includes a section on informal or alternative dispute resolution mechanisms such as negotiation, mediation and external disputes boards. This kind of dispute resolution could prove particularly helpful for resolving disputes concerning climate change. Given the reality of climate change, parties to a PPP should be prepared for the possibility of encountering many differences and disputes regarding climate impacts throughout the life of the project. The parties could avoid incurring high litigation and arbitration costs by contemplating in their contracts a means of periodically communicating and assessing any evolving climate risks that might affect their project, as well as, amicably and expeditiously resolving disputes arising therefrom.
With regard to the governing law of the model PPP Contract, the Draft Report’s commentary and sample drafting language reflect a bias against the application of the local law as the PPP Contract’s governing law. This is unfounded. PPP contracts commonly provide for local law as their governing law for several reasons, not least of which is that such contracts implicate important domestic public policy issues that are best understood within the local legal framework. Moreover, licenses issued by the Contracting Authority (or other governmental entity) for a PPP project will almost certainly be governed by local law. Adopting local law as the governing law thus leads to a consistent approach and simplifies the resolution of disputes. For these reasons, the Draft Report’s sample drafting language should recommend local law as the contract governing law.
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 The Bank’s apparent unwillingness to provide assurance of support for such transparency led to a boycott of the consultation on the “Recommended PPP contractual provisions” by 115 trade unions and civil society organizations.
 “Portugal: Selected Issues Paper,” IMF Country Report No. 13/19 January 2013, p. 80.
 Laura Tuck and Julie Rozenberg, “Embracing Uncertainty for Better Decision-Making,” 3 October, 2016.
 PPIAF and World Bank Group, Climate Risks and Resilience in Infrastructure PPPs: Issues to be Considered (Mar. 2016)
 For example, World Bank Group and PPIAF, Emerging Trends in Mainstreaming, Climate Resilience in Large Scale, Multi-sector Infrastructure PPPs (Jan. 2016); PPIAF and World Bank Group, Climate Risks and Resilience in Infrastructure PPPs: Issues to be Considered (Mar. 2016)