Professional Documents
Culture Documents
20: Hand Back
20.1 Introduction
As previously mentioned, PPP is a long‐term contract where a contractor is required to build and
manage an asset on behalf of the Authority for periods that may exceed 20‐30 years. Although the legal
ownership of the asset may be retained by the Public sector throughout the duration of the contract the
economic ownership of the asset lies with the service provider, the private sector partner.
The ownership of assets at expiry will be dictated by the contract. Assets will either:
fully or partially transfer to the public sector or
remain with the private sector.
If the assets return to the public sector, Authorities have four options:
sell the asset
tender out the service element to a new private sector provider,
operate the service in‐house, or
do nothing.
The Authority will need to assess whether the service provided under the PPP contract, will be required
at the end of the contract term. The continued need for the service and how it is to be delivered
depends on:
level of demand,
technological change
government policy
whether the PPP contract contains a restriction or penalty on future use of the asset.
Situations which require continuity of service, with the assets reverting to public sector ownership,
represent the greatest risk to government.
During the period of the contract the service provider is required to maintain the asset in accordance
with the Performance Requirements set out in the PPP contract. In the case of a government‐pays PPP
the service provider, the private sector must maintain the facility within the estimated cost profile that it
prepared as part of its tender and pricing strategy. The situation with regard to user pays is likely to be
more volatile as the service provider will need to maintain the asset within the actual income generated
and therefor will be dependent on meeting and potentially exceeding the demand profiles and income
estimates anticipated at the tender stage (as supplemented by any associated complementary revenue
support regime agreed with the Authority).
There is a danger therefore that as the contract reaches term the contractor may under‐invest in the
maintenance of the asset prior to exiting the agreement. This would be particularly the case where the
Author‐ Mr Maurice Diamond, AIMA Faculty
Only for private circulation to participants of AIMA‐World Bank Certificate program in Public Private Partnership
Private sector has already achieved or exceeded its required rate of return and the Private Sector is not
as incentivised to maintain the asset in compliance with the contract in order to receive further payment
or remuneration. It will also be less concerned about the condition of the asset in the medium to long
term as it does not benefit the Private Sector contractor.
On the other hand, the Authority wishes to accept or to receive an asset which is in good order and from
which (most probably) a service can continue to be delivered either directly by the Authority or by a new
contractor procured by the Authority to deliver the service.
The Authority could have a number of PPP projects that reach term within a short period of time in
which case it does not wish to have the burden of having to upgrade a number of assets within a short
period of time which has an impact on resource, budgets and potentially service availability.
With regard to PPP there is an implicit understanding between the Authority and the private parties that
the asset should revert to the Authority in good order at the end of the PPP contract term. However the
commercial reality is that the private sector investors wish to protect their potential return and
therefore there is a need to have a more formal procedure provided for within the PPP contract to
ensure that the condition of the asset is in good order at the time that it reverts to the Authority.
From the inception of Government Pays PPPs there have been specific provisions inserted into the PPP
contract to ensure the condition of the asset on return. The approach typically adopted has been to
identify key areas of potential concern with regard to such assets. For example a roof, and to require
that there is a scheduled certification of the life of that aspect or part of the asset, by an Independent
Engineer (IE) or Independent Certifier, in line with a timetable set out in the contract.
Prior to the end of the contract the IE/Independent Certifier will be required to inspect those parts of
the asset that have been identified in the original contract as being subject to this process. The
IE/Independent Certifier will be provided with a schedule or will create a schedule which lists the
relevant parts of the asset, the suggested indicators that will demonstrate compliance with the required
handback provision for example the quality and appearance of tarmac or cladding materials (if they are
the subject of this process).
The Independent Engineer is required on each inspection to provide a report confirming the condition of
the asset and the extent to which they consider that it is likely that the appropriate contractual
condition will be met. The process may require the Independent Engineer to re‐inspect one or more of
these items on one or more occasions prior to the handback and also following the handback in order to
confirm that the required standard has been achieved. There is a risk that if the initial asset condition
survey takes place too close to expiry, it may result in insufficient time to complete the identified
rectification work and resolve any disputes.
A short report is required for each individual inspection however a full report should be produced on the
first visit prior to handback, at handback and then subsequent to handback, in line with the minimum
residual lifespan provided for the asset in the original contract. For example if the PPP contract
Author‐ Mr Maurice Diamond, AIMA Faculty
Only for private circulation to participants of AIMA‐World Bank Certificate program in Public Private Partnership
provided that the roof of a hospital had to have a residual minimum lifespan of three years beyond the
date of handback the Independent Engineer would return at the three‐year point to confirm the
condition of the roof vis a vis the requirements set out in the contract.
As part of the final handback report, if the required residual condition of the relevant asset is found not
to have been met, the Independent Engineer should consider all contributing factors (s)he considers are
relevant to the condition of the asset and its failure to meet the minimum residual condition required by
the contract. For example if the Authority or a secondary PPP provider has been directly responsible for
failing to provide basic maintenance which had contributed to the failure, this should be stated.
It is important that the Independent Engineer is appointed jointly. Either party can appoint subject to
the terms of the contract There is however room for dissatisfaction with the independence of the
appointed individual or professional if the appointment is not a joint one and this may lead to an
increased likelihood of subsequent dispute. During the period of the PPP contract the Service provider
will be receiving payments from either Service users or the Authority.
One of the key principles of a PPP is that the maintenance risk is allocated to the Private Sector during
the bidding phase and therefore the condition of the asset should be maintained within the pricing
mechanism agreed at that time. It is therefore important for the Private Sector to have adequately
estimated the cost of maintaining different aspects of the asset in line with performance requirements.
This is a significant factor therefore in the Private Sector’s choice of materials and quality of build.
There is always a trade‐off between quality and price. The construction contractor will be seeking to
deliver an asset at lowest cost whereas the Facilities Management partner within the PPP will prefer an
asset of higher quality and lower ongoing maintenance and other running costs. It is this trade off that
has to be resolved and this is partly achieved by the Private Sector partners undertaking risk
management assessments for each of the build options.
The final design will have represented the optimal combination of quality versus costs in order to deliver
the performance required by the Authority. This should have represented the lowest risk adjusted
whole life cost (RAWLC) of the contract from the Private Sector’s perspective. The risk adjusted whole
life cost (capital, revenue, debt repayments and all other costs including a risk assessment) plus the
required margin equals the price to the Authority.
However, risk management is an art not a science and although the calculations for the risk‐adjusted
whole life cost will be based on tried and tested metrics this does not and cannot lead to certainty. For
example unanticipated deterioration could occur to the asset at any time, over the lengthy period and
due to external causes, for example changing weather conditions.
It is important for the Private Sector to account for the risks assessed in the calculation of the RAWLC
and to set up reserve accounts such that funds are available to undertake any maintenance. This should
occur at the outset of the contract, however there is some concern accross the public sector that, in
Author‐ Mr Maurice Diamond, AIMA Faculty
Only for private circulation to participants of AIMA‐World Bank Certificate program in Public Private Partnership
some cases, at contract term the contractor may be entitled to distribute any unspent reserve funds
retained for contingencies to shareholders rather than to commit the funds to required maintenance of
the property prior to the return of the asset to the public sector.
20.2 Process:
At a reasonable time prior to contract term, (a recent UK NAO report recommends a period of seven
years) the process for determining the future service provision needs to be started. The same UK NAO
report cites experience from expired PFI contracts suggesting that there is a risk that authorities
underestimate the preparation time. For example in 3 out of 15 expired contracts considered, The
Authorities stated that unforeseen events such as disputes caused additional challenges which impacted
on their scheduled expiry timelines.
The first stage is to create a team, representing the key professional skills required.
The team need to familiarise themselves with all relevant documentation, in particular they need to
read and understand the contract and any amendments and variations.
A business case then needs to be developed that considers the case for any continued service provision
from the same location and any other options for alternative service delivery. As part of this assessment,
the Authority will need to assess its need for the assets post‐expiry. If necessary, it may need to find
and utilise alternative or additional assets either through procuring, leasing or building new ones. This
can represent a considerable cost and take time to resolve.
The business case should of course consider a do‐nothing option as well as any wider socio‐economic
impacts including value for money assessments. If the case is made for continued service delivery, then
the procurement options such as in house or private sector delivery need to be considered.
The business case then needs to be approved by a sponsor and if appropriate, a procurement process
needs to commence. There have been a number of PPPs that have been approaching the end of their
contract periods where the Authority has failed to initiate this process in sufficient time for this process
to be followed without the public sector having to make interim provision by extending or entering into
a short‐term interim contract with the existing provider whilst determining future service delivery.
In considering future service delivery the Authority will need to consider the continuing resource
requirements of maintaining assets . If PPP assets are not returned in the stipulated condition they are
likely to require unplanned maintenance that will need to be contained within existing Authority
budgets. This could also impact on existing planned maintenance across the Authority’s assets.
20.3 Handover Provisions
Author‐ Mr Maurice Diamond, AIMA Faculty
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A PPP contract should include handover provisions which set out several rights and obligations for the
SPV and the Authority. Handback provisions should contain and include, for example:
• an asset register and condition of these assets at the end of the contract;
• procedures for identifying the amount, cost and responsibility for paying for any
rectification work;
• requirements for asset condition surveys and other inspections prior to handover, including
procedures for appointing and paying for a surveyor;
• the creation of a retention fund for rectification work identified in the asset condition
survey;
• the transfer of all relevant documentation to the authority, such as data on service users
(pupils, patients or prisoners), maintenance history, manuals, compliance reports and
manufacturers’ warranties;
• procedures outlining how knowledge and skills are to be transferred at expiry and the
treatment of employees;
• the treatment of confidential data; and
• details about the exit process and dispute procedures.
An absence of any of the above provisions represents a potential handover risk for authorities and
should be discussed with the SPV as early as possible. Where handover provisions are included they may
contain insufficient detail and be open to interpretation.
If there is any contractual ambiguity regarding the terms of handback and these cannot be resolved via
negotiations with the Private Partner the remaining option is to go through the formal disputes process.
The PPP contract will set out the formal procedure for handling disputes, as part of the Dispute
Resolution Procedure (DRP).
20.4 Retention funds and Performance bonds
In the event that the condition of the asset falls below the standard specified in the PPP contract it is
important for the Authority to have a mechanism to rectify the shortfall. Dispute Resolution and other
similar mechanisms may not be sufficient if the private party has no assets or ceases to exist beyond the
contractual term. Insurance claims may be difficult to establish particularly once the private company
ceases to exist.
One mechanism to address this is to require the Private Partner to establish a retention fund in the final
years of the contract. The Private Partner is required to make contributions to the fund at an agreed
level to be used in the event that rectification work is required. the Authority has the right to draw
upon this fund in the event that any required rectification work is not completed in accordance with the
Independent Engineer’s report. Any remaining balance will be paid out to the Private Partner. A concern
for the Authority is that the Private Partner may rely on this fund to meet their obligations regarding end
of term condition associated with handback, where the cost of undertaking the works are higher than
the amount in the fund. Thereby placing an additional unanticipated cost burden on the Authority.
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Only for private circulation to participants of AIMA‐World Bank Certificate program in Public Private Partnership
A second mechanism is achieved by including in the PPP contract a requirement that the Private partner
provide a performance bond. A performance bond protects the Authority against the risk that the
Private Partner fails to complete any rectification work required. In this event, the bond provides a level
of compensation to the Authority. The term for which the bond will be retained and its value will be
established following the initial full asset condition survey prior to handback
Author‐ Mr Maurice Diamond, AIMA Faculty
Only for private circulation to participants of AIMA‐World Bank Certificate program in Public Private Partnership