5. Legal issues
131 pdg Partnership for Democratic Governance
• A performance bond (or sometimes a performance guarantee) protects the government from non-performance and financial exposure should the contractor default on the contract. It is directly tied to the underlying contract and if the contractor is unable to perform the contract, the surety has responsibilities to the owner and contractor for project completion. In Liberia (Case Study 12, below), performance bonds have been used to control corruption and conflict. Sometimes they are used to protect the country from environmental damage, as in Indonesia, where the government requires mine operators to post a reclamation guarantee reflecting the value of the potential environmental damage the mining operation could cause. The amount of the guarantee is set at the estimated cost of repairing the damage
caused. The Indonesian government refunds the guarantee upon satisfactory performance by the operator (US EPA, 2004). • A payment bond, sometimes called a labour and pdg material bond, protects certain subcontractors, Partnership labourers and material suppliers against non-payfor Democratic Governance ment by the contractor. Generally, these claimants may seek recovery directly from the surety company under the payment bond. It also protects the government from these subcontractors asserting their right to sue the project for non-payment. • A maintenance bond guarantees against defective workmanship or materials for a specified period.
Case Study 12. New forest operations in Liberia
When the war ended in 2003, the UN Security Council began to work with the Government of Liberia on forest sector reforms that would ensure that logging would no longer fuel conflict. The Security Council insisted on these reforms before timber sanctions could be lifted. The Government of Liberia, assisted by the international community – especially the US Forest Service and the World Bank – examined all 70 companies that claimed to have concessions to log in Liberia. They found that for the last 20 years, previous administrations had granted overlapping concession areas and used contracts as a form of patronage to reward cronies. Further, it was discovered that not one single company actually had the legal right to log. In 2006, the first Executive Order of the new government established that all of these alleged contracts were null and void, and therefore they would not stand in the way of allocating new, legal contracts.
In June 2006, the Security Council acknowledged the new government reforms, which lifted the sanctions on timber. New logging contracts were awarded in 2008. A requirement included in the new logging contracts was that the operator must then post a performance bond worth a minimum of USD 25 000 (for timber sales contracts), USD 150 000 (for small forest management contracts), USD 250 000 (for large FMCs), or half of the expected government revenue (excluding land rent) for the first year, or a maximum of USD 1 million. Lessons learned: A performance bond requirement can protect the government from the risk of non-performance by a contractor and can help reduce patronage and corruption.
OECD PDG HANDBOOK ON CONTRACTING OUT GOVERNMENT FUNCTIONS AND SERVICES IN POST-CONFLICT AND FRAGILE SITUATIONS © OECD 2010