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Sector: State Highway  |  Module 2: Work through the PPP process

Managing asset transfer at the end of the PPP

Contract closure happens at the end of the PPP life when the contract reaches its end date. The required activities at this time depend on whether or not the project involves assets that will be handed back to the public Sponsor:

  • If the PPP mode does not involve transferred assets (eg, a management contract, or a BOO) the contract closure process simply requires the termination of the contract
  • If the PPP mode requires asset transfer to the Sponsor (eg, in a BOT) then contract closure requires greater preparation and is itself subject to compliance standards and monitoring.

For PPPs that have asset transfer, the critical management issue is ensuring that the assets are up to the agreed standard. Since the concessionaire will soon be handing the assets over it won’t receive benefits from its maintenance costs and so its incentive is to skip these costs. For this reason, as a PPP with asset transfer nears the end of its lifetime there is a risk that the concessionaire will allow maintenance standards of the assets to slip. The Sponsor then faces the risk that the condition (and therefore the value) of the transferred assets will be lower than expected.

In developing the Concession Agreement the aim should be to create the correct incentives for the concessionaire to maintain the assets to the agreed standard, and to provide the Sponsor with the information it needs to check that standards have been met.

The Concession Agreement should:

  • Clearly specify the standard required of the assets on the handover date
  • Lay out a process for monitoring the asset standards over a period leading up to the contract end date
  • Specify financial penalties for failure to meet the required standards.

The Sponsor should aim to avoid a situation where it only discovers at the very end of the contract that the asset condition is sub-standard. It is far better to identify early warning signs and improve maintenance before deterioration is allowed to take place. Prevention is the best cure.

Because assets can be allowed to deteriorate over a long period before the end of the contract it is important that the monitoring of the asset condition with regard to the standard required at the end date is ongoing well in advance of the contract end date.

The payment structure for the PPP may include a termination payment which would be conditional on the assets being to the agreed standard. If the standards had not been met then this payment could be withheld until repairs had been made or withheld entirely.

 

 

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