By Tawela Taona Msiska | Associate
Build Operate and Transfer [BOT] contracts are a mode of public-private partnerships [PPP] arrangements explicitly recognized and governed by statute in Malawi. The following is a discussion on the key players in BOT contracts and the regulatory environment for BOT contracts in Malawi.
Legal Framework for BOT Contracts in Malawi
The governing law for BOT contracts in Malawi is the Public-Private Partnerships [PPPs] Act [the Act]. It is provided that the implementation of public-private partnership arrangements listed in the Act may use BOT contracts as a mode of private sector involvement.
Key players in BOT contracts and its regulatory environment in Malawi are the Public-Private Partnership Commission [PPPC], the Minister of Finance [the Minister], and the Contracting Authority [CA]. Financial aspects of BOT contracts are subject to the Public Finance Management Act [PFMA] and the Reserve Bank of Act [RBM Act].
Specific Signing or Execution Formalities that apply to the Client [a Government Department/Party] to a BOT Contract
Section 29 of the Act provides for specific procedures that preceded the signing or execution of public-private partnership contracts [including BOT contracts if sections 25  [b] and 29 of the Act are read together]. A BOT contract may be concluded solely on the basis of a decision by the PPPC having secured clearance from the Minister and the consent obtained from the Minister to the final draft contract.
Where the PPPC has delegated its function to the CA, the CA shall submit to the PPPC for approval the final draft of the BOT contract, including all the annexes thereto, evaluation reports prior to reaching a decision on the selection of a Partner. PPPC must decide on the draft within 30 days of its receipt of the same. In other words, no Government Department or Party or indeed CA can sign or execute a BOT contract in Malawi without the specific approval and/or consent of and by the Minister and the PPPC.
Any Guarantee in favor of the Contractor from the Reserve Bank of Malawi that will ensure the Client will have available US Dollars to make payments to the Contractor on time
The relationship between RBM and Malawi Government is governed by sections 38 to 43 of the Reserve Bank of Malawi Act. Nothing in these sections suggests that RBM may guarantee anything for Malawi Government. Indeed, amongst the general powers and functions of RBM enumerated under section 26 of RBM Act, guaranteeing Malawi Government obligations is not provided for. The farthest the law goes is to oblige the Minister to consult with RBM on external debts in terms of interest and maturity. In short, the irrevocable guarantee is impossible to be issued by RBM.
The typical ways in which private counterparties get comfort around credit/payment risk when contracting with the Government or Government entities
There are several ways to mitigate credit and payment risks for the safety and comfort of the private counterparties. These include:
Creation of contractual obligations in the BOT contract that tie the CA to strict covenants, undertakings, and commitments. The suite of BOT documents should be wind and watertight on payment obligations and observance of payment timelines. The contract should stipulate monetary penalties for violation of payment obligations. The CA’s obligations in the event of default must be given a serious thought.
Sovereign [Government] Guarantee
Under the PFMA, the Minister may, with the consent of the cabinet, give a sovereign guarantee in writing. However, the Government may not always be willing to provide such a guarantee for a loan that is made to a BOT project company. This may be due to concerns regarding risk exposure to the contingent liabilities associated with such a guarantee.
Put and Call Option Agreement
An alternative to the sovereign guarantee would be a Put and Call Option Agreement [PCOA] or clause. In the PCOA, the Government would be given the option to purchase the subject matter of the BOT contract in the event of default. This way the value of an investment is disinvested at once out of Malawi so that hence after one does not suffer consequences of Government or CA’s default on the BOT contract.
Under the BOT Contract, fees are collected from the public for services offered and deposited in a collection account which is used to settle payments due to a Contractor. A collection account (known as Account Number One held by the Ministry of Finance- treasury) into an escrow account under common control of the parties to the BOT contract.
The Government of Malawi as a Client has never failed/ refused to honor past contractual arrangements similar to a BOT contract.
Any amendments to a BOT Contract should be done according to the Act. It is therefore assumed that the parties cannot amend the BOT contract without the prior approval of the PPPC and/or the Minister as the case may be. As long as the amendments or variations are done according to the Act, there are no restrictions under the Laws of Malawi in respect of amending or varying a BOT contract.