8.1. Importance of Change Management

One of the common questions asked about PPPs is why, despite the great development of standardized PPP contracts, so many PPP contracts are varied or amended during their term. With standardization in all areas of PPP project development and implementation, why would any form of change or amendment to the PPP contract be required?

The most obvious answer is that it is impossible to predict the range of possible risks and to allocate these with precision over 20 years or more in a complex and changing environment. As such, the key to achieving long-term value from a PPP does not only lie in the pre-implementation phases, but also in how the balance of risk and rewards is established in the PPP contract so as to be able to survive significant changes over a long period of time — and to manage such changes in a structured manner that preserves the public benefit or Value for Money in the PPP.

There are many examples of PPP contracts that have been amended or renegotiated. Gausch (2004) cites a pervasive renegotiation of PPPs in Latin American countries, noting that it is likely that such renegotiation is also common in other jurisdictions, particularly ones where the PPP model is that of user-pays rather than government-pays PPPs.[22]

Yet, there are also many examples of projects that have performed better than expected. In this context, the equitable sharing in the so-called “upside” of PPP agreements is important in the context of the PPP projects being a form of publicly-owned social or economic infrastructure. Considerable effort has gone into the prescribed sharing of returns above a threshold limit, or even of refinancing to the benefit of the sponsors generating a refinancing gain share for the government (chapter 8.9.3).

Some critical lessons have been learned, for example, that the flexibility to amend contracts is very important, but so is the need to maintain public sector oversight over the change process to maintain the public benefit or Value for Money. Also, it is important to ensure that the risk allocation between the parties remains consistent (given the changes to the PPP contract) with that approved as part of the original PPP contract. In addition, if the government seeks too much flexibility in the contract, the risk of change may be unacceptable to bidders. If the government needs a very high degree of flexibility for change in the project, this suggests the project was not suitable to be a PPP in the first place.

As a result, the legislative framework in many countries describes the process of change of PPP contracts and permits in terms and reallocations of risk. Good practice requires that the changes take place in a structured environment. It also requires that the government applies the same level of diligence to changes as it did to its original decision to proceed with the PPP, particularly in cases of significant changes.

The PPP contract will set out the events in which the changes are allowed under the contract. It may not, however, specify all the logistical or administrative steps that need to be taken in order to agree or implement permitted changes. The government contract management procedures should set out the necessary logistical and administrative details, such as:

• The person to whom a request for a change must be sent;
• The person who will assess the impact of the proposed change;
• The persons authorized to agree to a change on behalf of the government and private partner; and
• The person responsible for overseeing and verifying the implementation of the change.

One key lesson learned has been to permit PPP contracts to enter into a stage of liquidation without the government stepping into the contract and rescuing the shareholders. Two examples of this occurred in New South Wales, Australia where lenders stepping in saw the shareholders replaced. The “let the market work” approach in the Cross City Tunnel[23] and the Lane Cove Tunnel[24] saw lenders step in and sell the concession through competitive bidding. An alternative approach would be for the government to renegotiate and rescue the shareholders, thereby creating a strong moral hazard. Nevertheless, if the PPP market is relatively undeveloped, there may not be other parties willing take over the project through such a process, and it may be necessary for the government to take step-in or default action to prevent a complete failure of the project.

Any intervention or renegotiation must therefore be based on a public benefit. In Australia, the relevant governments in the Reliance Rail and Southern Cross Station projects (see appendix A) were much more active in negotiating amended agreements to stave off termination and provide a public service or save dispute costs. However, they did so with a clear focus on the public benefit from the outcome.