Public Private Partnership (PPP) Legislation

Summary of Possible Best-Practice Issues for Mozambique’s Proposed Law on PPP and Megaprojects

Law / Regulation (Articles)

Nature of Law and Regulations Provision

Suggested Best Practice

Comment on Law and Regulations vs. Best Practice

A. Under-Specified Provisions

Law: Art. 1, 18, GlossaryRegulations: Art. 26-29, 54

Definition of PPP forms and contracting modalities.Three forms (only) specified:• Concession contract (Contrato de concessão) • Operating concession contract (Contrato de cessão de exploração) • Management contract (contrato de gestão)

Detailed listing and specification of a variety of PPP forms, covering projects:• Developing/using new facilities (“Greenfield PPP”): DBFO, BOT, BLT, etc.• Rehabilitating/using existing facilities: ROT, RLT, BROT, etc. • Where concessionaires own new/existing facilities: BOOT, BOO • Where concessionaires operate/maintain facilities : mgmt contracts, affermage

1. Law’s definitions of PPP forms are too general and do not convey breadth and flexibility of PPP solutions desired to encourage creativity and flexibility to meet wide range of different circumstances for project risk allocation.2, Law may eliminate certain common and useful PPP forms (BOOT, BOO) in which PPP company needs to have rights in ownership, either temporarily or indefinitely. (See below: “Rights in ownership for concessions”.)

Law: Art. 8, 17, 48Regulations: Art. 12, 16-22, 61-66

Tendering.Compulsory public tender is required for all projects including unsolicited ones. Phases of procedure for identifying and analyzing project opportunities and for evaluating proposals set forth.

Comprehensive description of all phases of tendering process steps:• Pre-selection• Request for proposals • Negotiation without competitive bidding • Unsolicited proposals • Award and review

1. Law seems less comprehensive in scope than UNCITRAL Model Legislative Provisions.2. Model Provisions seems more concise and organized with less overlap and a more streamlined sequence.3. Gaps in Law’s tendering process: pre-selection, robustness of evaluation criteria, negotiation absent competitive bidding, review procedures for unsuccessful bidder.

Law: Art. 10Regulations: Art. 14

Rights in ownership for concession. State (or public sector contracting entity) may retain all ownership rights in the PPP concession. But step-in rights envisaged in Regulations.

Inclusion of key provisions to facilitate debt financing in concessions, notably:• Concessionaires create rights in ownership in concession assets• Step-in rights for concession financiers

1. Ambiguity in concession ownership rights may limit a concessionaire’s ability to pledge and mortgage assets, including future income streams, thus constraining concession finance.2. Lack of ownership rights for concessionaire could make some PPP formulas (BOOT, BOO) unworkable.3. Clear and prominent statement of rights of concession financier (step-in rights) would strengthen Law.

Law: Art. 11-14Regulations: Art. 6-9

Institutional framework for oversight.Four parties are designated to monitor and supervise PPP project company: • Sectoral oversight (“tutela sectorial”) • Financial oversight (“tutela financeira”) • PPP Unit • Regulatory authorities

Structures and procedures designed to provide strong, clear and consistent administrative coordination for efficiency and transparency in:• Permitting and licensing• Supervision by regulators and other monitoring entities • Review of regulator/other entity decisions

1. Law’s complex and duplicative oversight structure has potential for creating great inefficiency and conflict.2. Strong centralized coordinating entity is lacking and PPP Unit may be too subordinate and weak to play desired administrative coordination role.3. Unclear/overlapping regulator-oversight responsibilities – and some omissions (e.g., review of regulatory decisions).

Law: Art. 42, 48, 51-52Regulations: Art. 55, 72

Termination.Circumstances under which a contract can be terminated or cancelled are left to the Council of Ministers to define, although violation of Law provisions can lead to termination by oversight entity in whose area violation occurs.

Explicit statement of rights and conditions of termination by:• Contracting authority• Concessionaire • Either party (by mutual consent) Explicit statement of principles underlying compensation at termination (or expiry)

1. Lack of specific overall termination framework governing termination, including recognition of concessionaire rights, introduces uncertainties that weaken Law.2. Provision for termination by oversight entity for concessionaire violation of Law (with no mention of right of recourse) risks arbitrary action and conflict.3. Absence of mention in Law of possible compensation at termination creates risks and uncertainties.

Law: Art. 54Regulations: Art. 74

Agreements already signed (“stabilization clause”).Renegotiation of already signed PPP agreements to be consistent with Law “is permitted” and all new project agreements are to be consistent with Law’s sharing of benefits and prevention of risks.

Clear stabilization clause: e.g., contracts signed prior to the Law are not subject to the Law, but can only be renewed, amended or extended in compliance with the Law.

1. Law introduces uncertainties that undermine stability of PPP framework, with potential adverse impacts on Mozambique’s investment climate and general attractiveness for FDI.

B. Over-Specified Provisions

Law: Art. 9Regulations: Art. 13

Duration of Contracts.Maximum lengths (concession contracts, 25 years; operating concession contracts, 20 years; management contracts, 15 years) with detailed subsidiary ceilings, all based on economic amortization of investments.

Maximum contract durations, but sufficient flexibility for contracting authority and concessionaire to negotiate a contract term in each case that is appropriate to the project in question.

1. Maximum contract durations may be adequate (for infrastructure), but subsidiary ceilings seem overly rigid and arbitrary and may hamper negotiation of effective PPP project risk allocations.2. Contract maximums and subsidiary ceilings may not fit mining, oil/gas and other natural resources.

Law: Art. 20Regulations: Art. 31

National ownership.Minimum 20% ownership in all PPP projects may (Law) / must (Regulations) be reserved for individual local investors, with Government facilitating ownership share distribution within 5 years of first profitable project year results. Foreign- financed PPP projects should consider opening ownership to local firms.

No specific PPP best practice regarding national participation in ownership in PPP projects.

1. Contradiction between Law and Regulation the framing the national ownership reservation must be resolved.2. National ownership requirement is not normally an issue for PPP legislation (South Africa’s BEE policies are a notable exception).3. Minimum 20% national participation share is restrictive (South Africa’s flexible BEE approach is more pragmatic). 4. National ownership requirements (restriction on foreign equity) are not generally a best-practice issue. 5. If national ownership rules are imposed, Government may well need to be major equity participant, providing capital and fulfilling requirements, at least temporarily.

Law: Art. 21Regulations: Art. 32

Concession award fee.Concession contracts/operating concession contracts are to pay award fees at contract signing between 5% and 10% of expected average annual after-tax profits, with exact payment rates set in relation to length of concession contract.

Concession award fees are not uncommon in PPP projects, but neither are they universal, and when applied, do not necessarily reflect any standard best-practice fee structures or payment formulas or levels.

Law: Art. 22-23Regulations: Art. 33-34

Concession/management contract royalties.Concessions/operating concessions pay royalties of 5%-10% of average annual after-tax profits (fixed) plus 5%-10% of gross receipts net of indirect taxes (variable). Management contracts pay royalties of 5%-10% of gross receipts net of indirect taxes. Exact payment rates are scaled to contract duration.

Concession royalty payments are often included in PPP projects, although subsidies (reverse royalties) are also common; when applied, royalties do not necessarily reflect any standard best-practice payment structures, formulas or levels.

1. Law/Regulations’ across-the-board requirements and formulas for payment of royalties by PPP projects are overly restrictive and probably excessive (especially when combined with concession award fees).2. Such royalties, when required, should reflect best-practice principles of flexibility in PPP arrangements, and would be established relative to the specific circumstances of a given PPP project under negotiation.

Law: Art. 26Regulations: Art. 38

Profits and dividends.Profits and dividends are to be distributed after the close of the fiscal year or other relevant PPP project accounting period.

No specific PPP best practice regarding distribution of profits and dividends and retaining earnings in PPP projects.

1. Law and Regulations are silent on the issue of retaining earnings in PPP projects, an option which is essential for good financial management.2. If Law and Regulations impede PPP project companies from retaining earnings, this outcome is too restrictive and should be amended.

C. Other Provisions Requiring Clarification

Law: Art. 3Regulations: Art. 3

Scope.All undertakings included within: • Public-private partnerships providing goods and services in the public domain • Megaprojects (investment of $500 mn, involving concessions in minerals, oil/gas and other natural resources, covered by Investment law/fiscal incentives regime) • Other business concessions in the public domain

Many PPP and concession laws tend to be narrower in scope – e.g., for privately financed infrastructure or social services – but some model legislation exists that is designed to simultaneously cover PPP arrangements in infrastructure, social services and natural resource activities.

1. Scope of Law and Regulations may be too broad and ambitious in Mozambique conditions, given vast differences in scale and nature of potential PPP activities in infrastructure, social services, and business operations in the public domain, versus Megaprojects.2. Options might be to (a) analyze likely impacts of universal application of Law/Regulations across all sectors and Megaprojects in terms of PPP project economics and Mozambique’s competitiveness for FDI, and (b) develop separate PPP legislation for Megaprojects.

Law: Art. 9, 43Regulations: Art. 13, 56

Extension and renegotiation.Concessions are not renewed but are re-competed upon expiry, although extension of concessions up to one-half initial contract duration is possible in certain limited circumstances, and after 5 years renegotiation is possible upon mutual consent to meet changing conditions.

PPP best practice often excludes concession renewal, but envisages extension and renegotiation under certain limited and well defined conditions.

1. Law and Regulations are broadly consistent with typical PPP legislation on issue of renewal, extension and renegotiation of concessions.2. In the absence of concession renewal option, upon concession expiry, provisions are needed to permit compensation for exiting concessionaires for possible unamortized residual value of investments to be transferred to new incoming concessionaires.

Law: Art. 44Regulations: Art. 55, 57

Performance guarantees.Performance guarantees are required for bidding and implementing concessions.

PPP best practice typically includes performance bonding, both in bidding and implementation stages.

1. Law and Regulations seem broadly consistent with typical PPP legislation on performance bonding issues.2. Details of bonding requirements are typically left to bidding documents and project agreements to specify.

Law: Art. 24Regulations: Art. 36

Foreign exchange earnings.PPP projects exporting or import substituting should have a positive impact on foreign exchange earnings and balance of payments.

No specific PPP best practice regarding foreign exchange and balance of payments effects in PPP projects.

1. Statement is more appropriate for policy declaration on PPP objectives, as no right or obligation is created under the Law/Regulations (except for regulatory authority and oversight entities to measure foreign exchange impacts).2. Provision should be excluded if it might be interpreted as a predicate for eventually restricting PPP project access and use of foreign exchange, thus creating uncertainties.