Public Private Partnerships
Our Associate, Hisham Almansoor unpacks key concepts of Public Private Partnerships.
Hisham Almansoor ([email protected]) – Associate
Public Private Partnerships (“PPPs”) are essentially a form of collaboration between government entities and private institutions with a view of financing, development, building and operation of projects, including but not limited to public transportation networks, parks, convention centers and more. PPPs offer a large range of benefits including the sharing of risks and rewards between the public and private sectors, the promotion of inward foreign investment, the utilisation of private sector expertise and innovation and the improvement to the quality of public services. Bahrain has harnessed the benefits of PPPs in different sectors. Naseej’s PPP with the Ministry of Housing, Diyar Al Muharraq housing, Bahrain Metro Project and the Ministry of Health’s National Health Information System exemplify the use of PPPs in the housing, transportation and health sectors. The proposed King Hamad Causeway between Bahrain and Saudi Arabia, which is in its early tender stages, will be a key development in the Kingdom’s infrastructure and roadway development. On 20 June 2022, Bahrain implemented Decision No. 30/2022 Issuing the Guide Regulating Partnerships between Public and Private Sectors (the “PPP Guide”) which provides further guidance in the context of PPPs over the previous legislation, being Decree Law No. 36/2002 Regulating Government Tenders, Bids, Procurements and Sales (the “Tender Law”). This article unpacks some of the key concepts of PPPs.
Scope of Application
The provisions of the PPP Guide apply to all partnership projects between government entities and the private sector and therefore do not apply to: (i) partnership projects between government entities and wholly state-owned companies, and (ii) projects of a military, security or confidential nature between the Bahrain Defence Force, the Public Security Forces, or the National Guard and the private sector, or the projects undertaken by such military or security entities which, due to public interest considerations, requires that the provisions of the Guide do not apply.
Initial and Performance Bond
Prior to winning the bid and securing the award, the bidding contractor is required to submit to the Tender Board alongside the bid an ‘initial bond’ as determined by the Board. A ‘bid’ refers to a set of declared procedures for selling or leasing the assets owned by the State, whether movable or immovable, to obtain the highest prices submitted by bidders.
In accordance with Article 2.2.3 of the PPP Guide, the initial bond shall not be returned if: (i) the bidder withdraws its proposal or amends it after the deadline for submission of proposals, (ii) the successful bidder fails to sign the Partnership contract, or (iii) the successful bidder fails to submit a performance bond. Under Article 28 of the Tender Law, the initial bond shall be refunded to the prospective investor(s) within seven (7) days from the date of submitting the performance bond by those who are awarded the tender.
After winning the bid and being successfully awarded the tender with the concerned government entity, the Awarded Investor is required under Article 2.4.5 of the PPP Guide and Article 76 of Decision No. 37/2002 Issuing the Implementing Regulations of the Tender Law (“IRTL”), to submit a ‘performance bond’, the amount of which is determined by the Tender Board, within ten (10) days from the date of receiving the Letter of Intent. As for contracts concluded with contractors abroad, the payment shall be within twenty (20) days. Subject to the Board’s approval, the period specified for submitting the performance bond in the two previous cases may be extended by a period not exceeding ten (10) days. If the Awarded Investor fails to submit such bond within the deadline, they are deemed to have withdrawn from the tender, and the Board may seize the initial bond and not refund the same.
Incorporation of a Company
In order to implement the PPP project, it is often a requirement that a Project Company be established in the corporate form specified by the Ministerial Committee. The Project Contract would specify the minimum capital for the Project Company and the procedures for obtaining the approval of the government entity on the Deed of Incorporation or any fundamental changes to the same.
Contract Execution and Duration
Once the award has been announced and communicated to all the concerned parties, a contract is produced typically under the Board’s Model Form of Contracts. This contract between the government entity and the Awarded Investor should be signed within a maximum period of thirty (30) days from the date of issuing the award decision in accordance with Article 54 (as amended) of the Tender Law.
Pursuant to Article 3.13 of the PPP Guide, the contract shall include a duration that does not exceed fifteen (15) years commencing on the date of its conclusion or the date specified by the concerned government entity in coordination with the Ministry of Finance. The contract may, with the consultation of the Ministerial Committee for Financial Affairs, be extended for an additional period in the event of: (i) disruption of operation due to circumstances beyond the reasonable control of either party to the contract, or (ii) suspension of the project for reasons related to the concerned government entity and beyond the control of the Project Company, (iii) and an increase in costs resulting from the concerned government entity’s needs that were not originally envisaged in the contract and the Project Company would not have been able to recover those costs without that extension.
Rights of Compensation to the Project Company
PPPs typically involve the execution of highly complex, costly and lengthy projects that may bear the risk of increases in implementation costs, which may not be foreseeable upon the conclusion of the Project Contract. The contract may provide for the compensation of the Project Company due to the amendment in the local laws or regulations that apply to the utility infrastructure or the service provided in the event that such amendment leads to a significant increase in the cost of implementing the contract or a significant decrease in the value of what the company received from this implementation compared to the implementation costs and its expected value. The Project Company may also be compensated in accordance with the provisions of the contract due to drastic changes in economic or financial conditions, or amendments to laws or regulations unrelated to the utility infrastructure if these occur after the conclusion of the contract and fall outside the control of the Project Company.
Assignment of the Contract
The Project Contract contains extensive contractual obligations on either party, however the parties may not, in accordance with Article 3.6 of the PPP Guide, assign the rights and obligations of the Project Company to a third party without the approval of the concerned government entity, the Ministry and the Board. The Project Contract may set out the precise conditions on the assignee, such as the provision of adequate guarantees and assurances to underpin its financial capabilities to sustain the implementation of the project.
Contract Termination
In accordance with Article 4.3 of the PPP Guide, the concerned government entity may, after consulting the Ministerial Committee, terminate the Project Contract if: (i) the Project Company is unable to carry out its obligations or it appears that it is not ready to implement them due to insolvency, breach or other reasons, or (ii) considerations related to the public interest, provided that the Project Company is compensated in accordance with the provisions of the contract.
PPP Disputes
The Bahrain Chamber for Dispute Resolution (“BCDR”), as established by Decree Law No. 30/2009 with Respect to the Bahrain Chamber for Resolution of Economic, Financial and Investment Disputes, is the competent body to settle disputes between the Project Company and concerned government entity, which shall be heard by arbitration. Although the Project Contract may provide for the settlement of disputes via arbitration outside the BCDR, said arbitration must take place in Bahrain. In respect of disputes between the Project Company and third parties (e.g., financiers, suppliers, contractors, etc), the company itself may determine the appropriate method of settling such disputes.
Concluding remarks
PPPs continue to enhance and attract investment in various sectors of the Kingdom’s economy. PPPs in the housing sector are perhaps the most prominent examples of the rewards of Bahrain’s PPPs to date as they enabled the Ministry of Housing to cater to the demand for social housing, and the upcoming Metro Project will hopefully introduce further benefits to the transportation sector to reduce traffic concerns in the Kingdom. PPPs are therefore beneficial to both private and public sectors in that they enable the prosperity of private entities whilst facilitating the growth and development of public infrastructure and utility, which ultimately benefits citizens and residents in Bahrain.
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