A Good Start for a Form P3 Agreement
In today’s economy, it is increasingly difficult for public entities to obtain sufficient funding to undertake infrastructure projects. As a result, where enabling legislation is in place, public entities in the United States have, in recent years, turned to the public-private partnership (“P3”) model. One of the challenges that can sometimes prevent the use of a P3 arrangement for a particular project is the significant transaction costs involved in such endeavors. With federal, state, and local governments using their own form agreements, a contractor often encounters an entirely new P3 agreement for each P3 project in which it is involved, resulting in significant expense reviewing and negotiating such agreements. As a result, the Engineers Joint Contract Documents Committee (“EJCDC”) recently prepared a standard form P3 agreement (EJCDC P3-508), which is the first one we have seen, to address this need in the marketplace.
The P3-508
The P3-508 was developed as a resource to assist public entities and private companies (referred to as concessionaires in the context of P3 agreements) interested in entering into a P3 agreement. It has the flexibility to allow the public entity to select specific construction, financing, operations and maintenance, and funding terms. It also allows for differences in enabling legislation and regulations. Consistent with many P3 agreements used by public entities over the years, it contemplates the utilization of numerous exhibits to support the main agreement. The P3-508 works with any type of design-build document, which is important because most P3 agreements are premised on a design-build arrangement. As a result, the P3-508 can be adapted to many different P3 arrangements.
Unlike most form agreements, the P3-508 does not contain fully developed clauses in all of its articles. Nevertheless, the P3-508 is helpful because it serves as a checklist, identifying many issues that the public entity and concessionaire should consider addressing in their particular P3 agreement.
For example, in Article 9, Revenue, Financing, and Taxes, the form provides a list of possible revenues that could serve as the concessionaire’s revenue stream. The form suggests identifying any limits to the revenue or sharing of fees and identifying when the revenue stream begins. It also prompts the user to identify whether there are any revenue guarantees by the public entity.
Similarly, in Article 17, Changes, the form identifies a number of possible “Relief Events,” entitling one party to seek adjustment to the financial terms of the agreement, milestones, or even the concession term. The form also proposes that users consider developing a risk allocation matrix as an exhibit, which allocates risk to the public entity, the concessionaire, or provides for shared risks.
The P3-508 also covers other traditional provisions such as the public entity’s grant of concession and concession term; the concessionaire’s responsibilities; design and construction; operations and maintenance; safety and security; representations and warranties; insurance and indemnity; and disputes.
There’s Still Work to Do
Despite providing a good starting point, the P3-508 does not (and cannot) address every situation. Further drafting will be required to fit your unique P3 project. For example, one important issue for both the contractor and its design-builder is the public entity’s level of involvement in the review of the design. Public entities with engineering departments that have traditionally been heavily involved in the preparation of designs as part of design-bid-build procurement may have a difficult time relinquishing control of the design process. However, unreasonable oversight of the design can delay the design and construction process. Such delays must be avoided given the concessionaire’s need to complete construction on time so that they can begin to receive the applicable revenues (tolls, availability payments, etc.) to repay loans, bondholders, and/or investors. Although the P3-508 contains some language, additional language is needed to minimize the potential of the public entity to delay the design. Specifically, language could be included to identify the person(s) involved in the public entity’s design review, the time allotted for such review, and the extent of such review.
Another key issue involves the financial security required of the concessionaire by the public entity. The P3-508 includes a provision for the concessionaire to provide payment and performance bonds, which the design-builder or lower-tier trades may be required to furnish. However, because many concessionaires are single-purpose entities, many public entities often require parent-company guarantees and/or letters of credit to secure the concessionaire’s obligations in the event of default, which may flow-down to the design-builder. Such provisions must be carefully reviewed, given the significant remedies that the guarantee and letter of credit provide.
In larger P3 agreements, concessionaires also should consider adding the use of dispute resolution boards (DRBs) to the P3-508. Given the importance of completing on time to obtain access to a revenue stream, the parties need at least interim decisions on claims/disputes during the course of performance. DRBs have been a successful approach to timely address disputes. DRBs typically are comprised of a panel of three people involved from the start of the project, who are available to assist in the resolution of claims on an expedited basis to keep the project moving. Although such panels can be costly, their worth can be justified by the overall money at stake in the P3 and the alternative cost of litigation.
Conclusion
P3 agreements are typically complex, lengthy agreements with many exhibits. If you are contracting with a public entity that does not have a history of P3 agreements and you have any input in the form of agreement, the P3-508 may be a good place to start and may reduce your transactional costs. However, even with the P3-508, you will still need counsel to assist with modifications that are tailored to your specific concession and will protect your rights. We can assist you with these important tasks.