Stages of Management of Contract

Refinancing refers to changing or replacing the existing lenders or terms on which debt obligations have been agreed between the IBE and its lenders. The IBE would have typically raised debt capital (such as bank loans, bonds etc.) for the project and would have equity of its shareholders as well. Where the IBE has taken the risk on the debt financing, it is generally entitled to rearrange it, though this is often subject to restrictions. Refinancing may include any or a combination of the following. Refinancing is important to the GCA if the PPP contract has a provision that any financial gains resulting from a refinancing will be shared with the GCA.

• type or source of debt (e.g., shifting from bank loans to bonds or different sources of financing)
• loan amount
• change in interest margin or debt pricing
• change in loan duration/debt maturity (tenor)
• payment or repayment terms
• hedging arrangements (e.g., to manage interest rate risk)
• change in amount of debt relative to equity (gearing ratio)
• a change in the security arrangements (e.g., share charges, project asset security etc.)
• change in repayment terms (including when capital is required to be repaid)
• change in lenders or debt providers
• change in other finance terms (e.g. loan covenants) and
• change in reserve account requirements (e.g., debt service reserve account)

In general, refinancing can shift the risk profile initially agreed upon between he GCA and the IBE, hence GCA approval may be required before proceeding with refinancing.

Variations in PPP contractual terms are inevitable especially due to their long tenors and can occur in any stage of the management of contract. The nature of such changes could either be trivial with little or no impact on project variables and on the GCA or the IBE or changes could have significant impact on both parties. Changes could be of any nature, for example: amendments in the rights or obligations of either party, or adjustments in project timelines or compensation structures etc. Change events call for effective management, regardless of whether they are anticipated or not. Variation management is one of the key areas of the contract administration function and needs to be a collaborative process between the GCA and the IBE. Variation management aims to ensure that a planned and coordinated approach is applied to deal with the changes impacting the project; to maintain original risk allocation unless redistributing risks is found to be beneficial for the GCA and the stakeholders, especially the community; and to retain or improve the originally projected VfM outcomes for the project. Day-to-day operational variation issues which have no material impact on the project variables are managed by the IBE. Any day-to-day variation which are likely to have a material impact on project variables such as project cost and delivery schedules are promptly notified to the management of contract team and steps taken accordingly to manage them.

A change in law or a sanction can have an impact on the IBE because it is required to adhere to the rules and regulations of the jurisdiction in which it operates and associated with for the project. Which party is required to pay any additional costs related to a change in law depends on the risk allocation agreed upon in the PPP contract. The PPP contract may set out the conditions under which a party can seek relief due to specific changes in law and it may also state which changes in law will not carry any entitlement to relief. Changes in law due to policy, law or regulation may materially change the IBE’s ability to meet its contractual requirements, and it will typically expect to be compensated. Such a change can be implemented through various mechanisms in a PPP contract such as a change in law claim or financial rebalancing, which can be managed through Independent Experts. On the other hand, there may be potential for the IBE to benefit from a change in law, i.e., compensation payments for change in law can flow in either direction.

Environmental, Social, and Governance (ESG) considerations for a PPP project are a set of standards that help to protect the environment, support the well-being of local communities in the project-affected area, ensure equitable and inclusive benefits, and promote project sustainability. During the planning, preparation, and transaction phases, early risk detection and proper planning to address risks help to avoid harm to the environment and communities (particularly women, people with disabilities, and indigenous groups) during management of contract. Addressing key social and environmental risks and sustainability is therefore an essential part of management of contract.

The institutionalisation of ESG practices holds strategic importance for Indonesia’s Ministry of Finance (MOF) to enhance the quality, inclusivity, accessibility, and sustainability of infrastructure investments in the long term. It helps to attract green and responsible financing, minimises environmental and social risks, and maximises long-term social and economic benefits. The Directorate General of Budget Financing and Risk Management, MOF, has developed the ESG manual and framework. ESG considerations are to be actioned by various project stakeholders – not just the signatories (GCA and IBE) to the contract. Stakeholders include the MOF, the GCA, Project Development Facility (PDF) implementers, Bappenas, the IBE, lenders and technical consultants. Specifically, the GCA refers to the MOF’s ESG manual and framework that includes the various tools to help address ESG considerations at all stages of the PPP lifecycle including management of the contract.

ESG considerations could be many. Examples: In the Conditions Precedent of a highways PPP contract, an IBE is obliged to obtain necessary approvals and permits (AMDAL) relating to environmental protectionand conservation, social impact assessment, inclusive stakeholder engagement, and social safeguards for vulnerable groups (of women, indigenous peoples, and people with disabilities). The GCA, in turn as part of its CP, facilitates the IBE to obtain necessary approvals and permits relating to environmental protection and conservation. Similarly, in a water sector PPP, the IBE’s CP may include all necessary permits, including environment and social impact assessment report. Akin to this, social issues could potentially arise during construction such as protests from communities due to risks arising during construction (such as displacement of communities, damage to cultural sites, or abuse and harassment of women and children from contracted workers). Negative social impacts can cause delays in construction, time overruns, or cost overruns and can have lasting negative social impacts that affect project success and sustainability in the long term. This is particularly the case if issues were not communicated and addressed in an appropriate language at an earlier stage (example: during CP or before commencement of construction, as may be applicable), or if a grievance addressal mechanism and procedures were not estahlished and communicated. Preventing and mitigating serious risks to the environment, public health, social cohesion, and safety (particularly for women, children, and vulnerable groups) is thus a cross-cutting concern across all stages of management of the contract, and the GCA may exercise step-in rights to prevent and mitigate such serious risks.

Force Majeure relates to the GCA’s or the IBE’s inability or inability of both to perform contractual obligations due to abnormal or unforeseeable circumstances/events that are not the fault of either party. Events are classified as

• Political
• Non-political and
• Natural Disasters.

Political events could include for example: war or invasion, terrorist attacks, civil unrest, revolution, riot, and/or embargoes or blockades. Non-political could include for example: acts of God, natural disasters, pandemics, fires, power outages, and/or transportation disruptions. Natural disasters could include for example: floods, landslides, cyclones, earthquake, volcanic eruptions, tidal wave, tsunami, and other severe weather conditions and geological challenges. Force Majeure is defined in the contract terms of all PPP contracts but newer undefined Force Majeure conditions may arise and be declared as ‘Force Majeure’ when they occur.

Three characteristics for an affected party to claim Force Majeure event or situation are

• The event is beyond reasonable control of the affected party
• The event could not be prevented or overcome by exercise of due diligence and good industry practice and
• The event has had adverse material impact on the affected party.

As mentioned previously, under the management of contract plan are key activities including service delivery monitoring, contract administration, and relationship management. Relationship management in turn includes effective issue management and efficient dispute resolution amongst others. Dispute resolution’ is the process of deliberation between contracting parties (GCA and IBE) which affects significant changes in the original contract and is likely to have a financial impact on contractual terms. Such changes are not provided for in the original contract. Dispute resolution can be of various forms such as negotiation, expert determination, mediation, conciliation, arbitration, and litigation. These forms have varying time and costs implications, different levels of binding on parties, and have their own specific features.

Early termination refers to the termination of a PPP contract prior to the scheduled end of its contract duration. A PPP contract and the applicable laws will set out the circumstances which could trigger termination. Termination can be triggered by events of default including serious breach of the GCA or the IBE of the provisions of the PPP contract. IBE default situations may include for example

• Material contract breaches – construction, service delivery, and unavailability & inability to correct service faults
• Financial default – inability to complete financial closure, make payments, inability to renew performance security, and/or insolvency
• Control breaches – change in ownership beyond what is allowed and
• Fraud/corruption.

GCA default situations may include, for example:

• Material default that has a material adverse effect on the IBE, e.g., not making available connecting infrastructure for a transport project
• GCA’s failure to make any payment as per terms and
• GCA repudiation (refusal to perform their part) of the contract.

In some cases, termination occurs on account of Force Majeure as well. Premature termination situations need to be well-thought through. Termination considerations include exceptional situations, in situations where corrective measures are not working, and ensuring that termination does not result in difficulty to citizens. The ultimate responsibility of termination lies with the GCA and some of the key matters that the GCA addresses during termination includes selecting and applying mechanisms for termination payments and transition arrangements.