Don’t put PPPs into ‘cruise control’

24 Jul 18

Public private partnerships need to be managed actively and effectively throughout the life of the contract if value is to be realised, says Morag Baird of the Global Infrastructure Hub

web_truck_shutterstock_640832344.jpg

Truck_Shutterstock

Who does the heavy lifting when a PPP contract has been sealed? Photo: Shutterstock

 

Reaching financial close in a public private partnership (PPP) is often a moment of celebration. Champagne corks fly, congratulatory words are exchanged, and most of the people involved in negotiating the deal move on to the next big thing. But who is left to do the heavy lifting for the next two or more decades?

A key reason for proceeding with an infrastructure project as a PPP is to achieve value for money over the whole lifespan of the project. A PPP contract typically lasts for more than 20 years after procurement; through construction and operations. Without effective contract management, there is a real risk that even well-structured PPP contracts can end badly.

A common misconception exists where governments believe that they will need less capacity if they shift the risks and burden that comes with infrastructure projects to the private sector

Over the past year, the Global Infrastructure Hub, a G20 initiative, in partnership with Turner & Townsend, has been looking at a large sample of PPP projects that reached financial close between 2005-2015 to learn from the challenges faced and identify leading practices. The findings are presented in the newly created .

In summary, most of these projects are ongoing, with the prevalence of terminations found to be minimal. However, almost half are renegotiated within the first 12 years, and a formal notice of dispute was issued on a quarter of the PPPs studied (for which dispute data was available).          

Through our research, we found a number of key challenges and leading practices that are common to all the regions in the world:   

1. Resourcing and managing transitions—contract management tasks are typically complex and resource intensive, and governments need to employ adequate resources. For example, the transition from financial close to construction is inevitably a period of major change needing specific resources, while benefiting from continuity of knowledge sharing.      

2. Stakeholder management—by their very nature, infrastructure PPPs involve a vast array of interconnecting relationships. The success of any project depends on good engagement with end-users, businesses and the community, and this comes out very strongly in our detailed case studies. For example, we found that pressure to fast-track issues at early stages tended to cause significant delays down the track. In projects where we have data on cause of dispute, ‘environmental and social’ factors were cited as a cause in 17% of projects, and ‘land acquisition and settlement’ cited for 11% of projects.  

Relationship management and communication between the procuring authority (government) and the project company (private) is also an important topic, as well as communication between government agencies, and other infrastructure and utility providers. 

3. Performance monitoring—the procuring authority needs to closely monitor the performance of the project company to ensure that the service is being delivered as agreed.  Shared understanding of the key performance indicators (KPIs) should be established from the outset since parties may have an incentive to take advantage of ambiguous KPIs. Our research found that 20% of disputes involved KPIs or performance monitoring.

4. Renegotiation—our data found that 48% of projects were renegotiated within the first 12 years after financial close, with the highest rate of renegotiation being in the transport sector. Renegotiation can be necessary as a response to external changes and provide opportunity for better outcomes. However, they also have the potential to reduce transparency and jeopardise the credibility and efficiency of a competitive PPP procurement process, so should be limited and managed properly.       

5. Insolvency—Although insolvency of the project company itself was rare (3%), the insolvency of key contractors was relatively more common (7%). Governments must not only monitor the financial performance of the project company, but also the key contractors whose failure could have a serious impact on the project.  

While PPPs can play an important role in addressing the global infrastructure gap and in benefiting from the skillsets of both public and private sectors, it is important to recognise that they cannot be put in ‘cruise control’ after the jubilance of reaching financial close.

A common misconception exists where governments believe that they will need less capacity if they shift the risks and burden that comes with infrastructure projects to the private sector. This is false optimism and governments need to actively manage PPP contracts effectively. Ultimately, it is governments that will pick up the pieces if projects go pear-shaped.

  • MoragBaird
    Morag Baird

    senior manager, leading practices & policy, Global Infrastructure Hub

Did you enjoy this article?

Related articles

Have your say

Newsletter

CIPFA latest

Popular

Most commented

Events & webinars