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

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

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For each public-private partnership (PPP), there is a contract that establishes the rights and responsibilities of the contracting parties – the government and the private partner – and allocates risks to each party. In infrastructure PPPs intended to deliver public services to citizens, it is crucial that there is a balance of risks, rights and responsibilities between parties. An appropriate balance can help ensure that the interests of a private partner to maximize profits to its shareholders do not impinge upon the ability of a government to serve the public interest. The public interest includes obligations to provide universal access to affordable infrastructure services and otherwise help achieve sustainable development goals, including those pledged in the Paris Climate Agreement, to reduce greenhouse gas emissions and adapt to climate change.

The World Bank Group recently published its 2017 Edition of the Guidance on PPP Contractual Provisions (the Guidance). By setting forth recommended contractual provisions, the Guidance is expected to speed up or facilitate the conclusion of PPPs. At the request of the Heinrich Boell Foundation, the law firm of Foley Hoag LLP reviewed the Guidance to determine whether the contractual provisions recommended by the World Bank Group achieve an appropriate balance between contracting parties, and adhere to common practices and international law. A summary of the legal analysis of Foley Hoag is available here.

The legal analysis found that the Guidance does not take an equitable approach to balancing public and private interests. In attempting to achieve its overriding objective of promoting PPPs, the Guidance neglects the long-term and legitimate interests of developing countries. As a result, the World Bank Group’s client countries and their citizens are potentially ill-served by the Guidance. In particular, the disproportionate risk placed on governments (defined in the Guidance as ‘Contracting Authority’) could cause governments that adhere to it to increase fiscal deficits and indebtedness, while stripping them of their power and duty to protect their citizens and the natural environment. The Guidance does not adequately alert governments to these risks.

The Guidance even ignores the prospect of the government having an equity stake in the project company, which is a common practice. Shutting out the government allows maximum private participation in PPPs and places maximum burdens on the host government.

For the most part, the Guidance lacks meaningful advice on the fiscal, economic, environmental and social sustainability dimensions of PPPs. To address this gap, the Heinrich Boell Foundation and the International Institute for Sustainable Development are currently working on a companion piece on PPPs and sustainable development that would supplement the legal analysis presented here.

The World Bank Group plans to promote the Guidance in borrowing countries to facilitate the process of designing and negotiating PPP contracts. The first of such roll-out of the Guidance will take place at the African Roundtable on Infrastructure Governance in South Africa in November, convened by the World Bank Group, African Development Bank, Global Infrastructure Hub, the OECD and others, and involving the PPP units of African governments that are participating in the G20 Compact with Africa and the Programme for Infrastructure Development in Africa or PIDA.[1] Work in other regions will follow. 

According to the World Bank Group, the Guidance is a living document that can reflect changes and updates as needs arise. The World Bank Group should reflect the comments from Foley Hoag’s legal analysis in the next update of the Guidance and prior to the World Bank Group’s promotion of the Guidance to and training of any agency of the World Bank Group’s borrowing countries. In due course, the World Bank Group should also consider how to incorporate fiscal, economic, environmental and social dimensions of sustainability in PPP contractual provisions, including climate change, environmental and social considerations. 

The Guidance puts the interest of the private partner ahead of the public interest in many ways, including by:

  • Recommending that the risks of war, civil strife, strikes, riots, and terrorism be placed on the Contracting Authority, which could require that the government compensate the private partner. This is inconsistent with international jurisprudence.
  • Restricting the right of sovereign governments to regulate in the public interest (e.g., to provide universal, affordable infrastructure services; reduce greenhouse gas emissions in keeping with obligations under the Paris Agreement; or protect labor and human rights) by recommending that governments protect private partners against costs of compliance with changes in law.
  • Failing to urge governments to make an unequivocal commitment to transparency of PPP project information, PPP contracts, and fiscal commitments (on and off-budget).
  • Reflecting a bias against local law as the governing law for PPP contracts and a preference for foreign or international adjudication over local/national adjudication without addressing the drawbacks of investor-state dispute settlement (ISDS).

1.Force Majeure / Material Adverse Government Action: Government Should Not Bear the Risks of Disruption from Conflict, Strikes and Climate-Related Events

A force majeure provision is a contract provision that allows a party to suspend or terminate the performance of its obligations when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible. The term, which is French for ‘superior force’, typically refers to unforeseen events, such as war, conflict and natural disaster. A party to a contract that is unable to fulfill its contractual obligations due to a force majeure event is usually absolved from liability. Losses lie where they fall, and parties bear their own costs and damages.

Contrary to such principles underlying force majeure, the Guidance steers the Contracting Authority to bear more risks for the benefit of the private partner. For example, commentary in the Guidance that war, civil strife, riots, strikes, and terrorism need not be treated as force majeure is clearly at odds with international jurisprudence. Instead, the Guidance’s commentary and suggested drafting language categorize such disruptive events as material adverse government action (MAGA), and place the risk of their occurrence on the Contracting Authority. 

The Guidance is also overly protective of private interests when it recommends that the Contracting Authority compensate private partners for lost revenue and costs due to events that the Guidance itself classifies as force majeure events. This is inconsistent with the basic principles underlying the concept of force majeure.

As extreme weather events become increasingly common, it is imperative that PPP contracts identify and allocate risks related to them. However, the Guidance has no advice for contracting parties in this respect.

2.Change in law: Need to Uphold the Government’s Sovereign Right to Regulate in the Public Interest

Host states have legitimate legislative and regulatory powers to promote public and occupational health and safety, labor standards, and environmental protection. They also have international obligations on environmental protection, climate change, and human rights, among others, which must be translated into strong domestic law. The Guidance improperly and inadvisably suggests that the government/Contracting Authority protect the private partner from all future changes in law, and compensate it for any costs of compliance with changed law. Given that PPP contracts typically last for two decades or more, the effect of such a drastic restraining provision (also known as a “stabilization clause”) is either that the state must refrain from changing any relevant law for the duration of the long-term contract, or that it pays a penalty for exercising its right and duty to regulate to advance its laws to protect such matters as human rights and the environment.

Once considered indispensable in investment contracts, change in law provisions currently tend to limit the protection of investors to very specific situations (e.g., changes in law that are discriminatory or that target the private partner). Leading PPP laws, such as those of the UK and South Africa, do not support the outdated approach to change in law that the World Bank Group continues to promote today. Notably, notwithstanding its progressive PPP law, South Africa has managed to attract private partners for its infrastructure projects.

3.Confidentiality and Transparency: Need for an Unequivocal Presumption in Favor of Transparency

Transparency in PPP projects promotes fiscal accountability (for example, transparency and accountability for contingent liabilities taken on by the government to support the PPP project) and deters corruption in public contracting. The World Bank Group is well-aware of the imperative of transparency; yet, the Guidance’s commentary and sample drafting language related to confidentiality and transparency falls short of requiring the publication and disclosure of PPP contacts and project information (including environmental and social information). The Guidance does not clearly state that PPP contracts and government guarantees or other financial support for the project must be disclosed to the public, regardless of what the governing law of the PPP contract provides. In addition, the scope of information deemed confidential in the Guidance’s sample drafting language is excessively broad and overly protective of the private partner.

4.Governing Law and Dispute Resolution: Need to Articulate Benefits of Applying Local Law and Drawbacks of ISDS

The Guidance’s commentary and sample drafting language on governing law dissuades governments from applying local law as the law that governs the PPP contract without explaining how the Contracting Authority might benefit from applying its local law rather than a foreign law to the PPP arrangement. As with other sections of the Guidance, it enumerates the needs and preferences of private partners on choice of governing law, without commensurate consideration of the perspective of the Contracting Authority.

The dispute resolution section does not make recommendations that would enable PPP dispute resolution clauses to address various pressing concerns with the ISDS system. These include transparency of the proceedings, procedural efficiency, and conflicts of interest in arbitrator selection, which help ensure that the system does not unfairly benefit the investor at the expense of the government and its citizens.

[1] The G20 Compact with Africa, A Joint Report by the African Development Bank, IMF and World Bank Group, March 2017, pp.25-27. Available from: http://www.bundesfinanzministerium.de/Content/EN/Standardartikel/Topics/Featured/G20/2017-03-30-g20-compact-with-africa-report.pdf;jsessionid=83DB314C67965D9740AFAD8515D0D9CF?__blob=publicationFile&v=2

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