Putting it in Writing
Demystifying infrastructure project documentation

By Brad McLellan and Dan Ferguson, partners with WeirFoulds LLP

Infrastructure projects typically involve agreements between the public and private sectors. These agreements contain provisions that differ from those in more traditional contracts entered into by the public sector with the private sector for the provision of work or services. For example, infrastructure projects, particularly public-private partnerships, may have a Concession Agreement, a Design-Build Agreement, an Operation, Maintenance and Management Agreement, and perhaps a Ground Lease.

The term of a Concession Agreement can range from 30 to 99 years. The private sector entity that contracts with the public sector in a Concession Agreement is often a single-purpose entity. It is important for both parties to draft the "Definitions" section of the Concession Agreement carefully. Much of what is contained in the balance of the Concession Agreement is driven by what is contained in the Definitions. Also, many of the specifications relating to the design, construction, operation and maintenance of project assets during the term of the Concession will be contained in Schedules to the Concession Agreement. Problems can arise where the public sector and private sector do not pay enough attention to the details contained in such Schedules.

The public sector, the private sector and project lenders will be very concerned about default, termination, and step-in provisions in the Concession Agreement. It is important to carefully set out what rights the lender has to step in and, potentially, step out in the event that there is default by the private sector concessionaire under the Concession Agreement.

One of the difficulties faced by the public sector, private sector and lenders in negotiating Concession Agreements is trying to anticipate what might arise during the term of the Concession Agreement and how to deal with what might arise. Sometimes, parties will agree to revisit the Concession Agreement after five to seven years to determine whether, on a good faith basis, the parties need to negotiate changes to the Concession Agreement to deal with unanticipated matters.

In Design-Build and Operating Agreements, risk allocation is critical and must be undertaken prior to the negotiation and settlement of the contracts. Optimal risk allocation takes place where risks are allocated among the parties who are best able to manage them in the most cost-effective way. It is important for all parties to realize that optimal risk allocation does not necessarily mean all of the risks are pushed on to the private sector, something that can result in higher project costs.

One of the important risks to be allocated between the parties in project documents is the risk of environmental contamination or other adverse site conditions. Often, this risk remains with the public sector, which usually owns the property. The private sector will bear the risk of environmental contamination that results from the operation of the project assets during the term of the concession. Similarly, the delivery of the project on time and on budget is a risk that usually lies with the private sector. The private sector will want to include appropriate force majeure clauses in the project contracts, so that the private sector does not bear complete risk with respect to project delivery on time and on budget.

Performance and service risk are also best handled by the private sector. Many infrastructure projects contain complex incentives and disincentives for performance goals being reached or missed during the term of the concession. In some cases, it is very difficult to set the goals and requirements at the time the contract is entered into and, in such cases, the project documents need to be flexible enough to set out a process to revisit these goals, requirements, incentives and penalties.

In infrastructure projects, unique insurance issues often arise. In some cases, contractors cannot obtain coverage for the amount or the periods required by the public sector, or at least not at a reasonable cost. The public sector may be able to include project risks under its existing insurance coverage.

Sometimes, Design-Build Agreements are separated from Operation, Maintenance and Management Agreements, but this split can cause conflicts of interest between the private sector participants responsible for each of these contracts. Finally, it is helpful to the public sector if the private sector consortium undertaking the project is mindful of the need for efficient and cost-effective results throughout the project when negotiating and drafting the Design-Build Contract and the Operation, Maintenance and Management Contract.

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