Different Types of Contracts for Infrastructure Projects
Private-public partnerships are a common mechanism used while creating infrastructure projects. In general, a public-private partnership involves a joint venture between a government body and a private corporation. However, there are several different ways in which it is possible for these two types of companies to collaborate. In some types of contracts, the government bodies play a dominant role, whereas, in other types of contracts, the private parties play a dominant role. In this article, we will list down the types of contracts which are commonly used as well as their features.
Operation and Maintenance Contracts
Operations and Maintenance contracts are a very common mechanism used in infrastructure projects. Under this mechanism, the facility to be maintained is owned by the government. The private party is given periodic contracts in order to maintain these facilities in proper working condition. There are multiple ways in which this arrangement is carried out. For instance, in one type of arrangement, the government could provide a fixed fee to a contractor in exchange for maintaining the facilities. On the other hand, there are leasing contracts, in which the government leases the facility out to a private party. Hence, the government receives a fixed sum as revenue from the project. The private party is then given the right to collect money from the general public when they use the facilities.
From a private party’s point of view, the risk involved in this project is minimal. This is because all the money and the assets which are going to be used in the project belong to the government. However, this also means that the government is the dominant counterparty, and hence, they have maximum control over the project’s operation as well as its finances.
In many parts of the world, the infrastructure already exists. However, with the passage of time, it has become old and worn out. The revamping and rehabilitation of such infrastructure projects require a lot of capital to be invested upfront. Governments all over the world are generally short of money. As a result, such projects end up getting delayed.
Rehabilitation contracts offer a great mechanism to ensure that these projects do not get delayed and that no additional burden is added to the government’s finances. Under these contracts, the government cedes control of a publicly owned asset for a predefined period of time. In return, the private party invests money in order to rehabilitate the asset. Normally, a rehabilitated asset creates greater cash flow. The private party is then entitled to this increased cash flow for the next few years.
In this type of contract also, the government is still the dominant party. This is because they own the asset and, therefore, the majority stake in the project.
Build Operate Transfer Contracts
Build operate transfer are Greenfield contracts. In these types of contracts, the private party is the dominant party. This is because, in such contracts, the government provides the land required to construct the project. However, the design, construction, and management of the project have to be done by the private party. These contracts are generally awarded because the private parties have certain skill sets that the government does not! Hence, the government is more dependent upon the private party.
Also, in most cases, the private party has to invest their own money to begin the project. Only after the project has reached certain milestones does the government disburse funds. Hence, the private party’s money is locked in the project for some time. It would, therefore, be fair to say that the risk associated with build operate transfer contracts is also higher.
Lastly, government and private parties collaborate using divestiture contracts. Under this contract, the government sells out its resources completely. Hence, if a government has land where they want a bridge to be developed, they would sell the land to a private party on the condition that the bridge is developed within a given time span. In many cases, the government simply sells its assets without any terms and conditions attached. This usually happens when the government is under a lot of debt and needs funds to pay back their loans. Alternatively, it could also be a way to reduce the focus on non-core areas and use the proceeds to increase focus on the core areas.
Here, the private party is the dominant player since they have a lot of freedom and autonomy. Also, since they have to invest their money in the project, the private party has to take a great deal of risk.
The above four contractual arrangements are mere representations of a broad spectrum of contracts that are used in public-private partnerships. However, the basis remains the same, the party which takes the most risk also gets the most control over the project.
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- Managing Revenue Risks in an Infrastructure Project
- Cost Overruns in Infrastructure Projects
- Causes for Cost Overruns in Infrastructure Projects
- Third-Party Risks in an Infrastructure Project
- Vendor Finance in Infrastructure Projects
- Securitization in Infrastructure Finance
- Leasing in Infrastructure Finance
- Strategic Use of Land in Infrastructure Financing
- Usage of Collateralized Debt Obligations (CDO) in Infrastructure Finance
- Infrastructure Investments in Renewable Energy
- Should the Government be an Equity Partner in Infrastructure Projects?
- Lifecycle of Public Private Partnership (PPP) Projects
- Payment Mechanisms in Public-Private Partnerships
- Adjustment Mechanisms in Publich-Private Partnership (PPP) Contracts
- Early Termination of a Public Private Partnership