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Establishing a PPP Framework

21.6.5 Manage the Contract – Construction Phase, Service Delivery and Hand-Back

Finally, having executed the contract, the PPP enters the final and longest “stage” – managing the contract throughout its operational phase. The challenge is to ensure the PPP provides Value for Money throughout the contract, not just at the Construction Phase. This typically requires ongoing management of the PPP.

Decision criteria

The PPP framework should ensure that the project is managed in such a way that if there are any issues with the project, they are communicated by the concessionaire to the implementing agency, and, if required, to relevant central government agencies. A strong operations team and governance mechanisms for reviewing performance and escalating issues (such as contract management frameworks, monitoring requirements, and risk management processes) will better equip the government to manage the PPP and make hard decisions, such as contract renegotiation or termination if needed. Governance mechanisms can also help the government agency to be a good working partner which private parties can have confidence.

A robust PPP framework and process should help to ensure that PPP contract agreements are designed to withstand unexpected events after contract execution, without a need for contract renegotiation. Sometimes, however, renegotiation rather than termination or abandonment may be preferable to preserve some of the benefits of the PPP. In these cases, the renegotiation process needs to be carefully managed by the government, with proper resources and a proper governance structure. The objective of renegotiation should be to secure an outcome that meets the objectives of the public sector better than would adherence to the original contract terms.

Contracts are sometimes renegotiated in order to prevent operators walking away. When a project is underway, it may become clear that the original terms and risk allocation are not always fully appropriate. When risk allocation can be adjusted while still achieving a net benefit when compared to the alternative of cancellation, renegotiation should be considered. Advisors may need to be re-engaged at this stage (an example of such a renegotiation is in Victoria, Australia, described in box 2.10).

BOX 2.10: Renegotiation of a Public Transport PPP in Victoria, Australia

In 1999, the state government of Victoria awarded five franchises for the operation of trams and commuter rail in Melbourne, and regional trains in the state of Victoria. These were user-pays operation and maintenance contracts coupled with an infrastructure lease and viability gap subsidy payments. The financial viability of the bids relied on significant growth in patronage and reduction in costs.

However, the growth and cost reductions were not fully realized. As a result, the operators started to lose money. The emerging problems were evident from regular reports filed with the government. The government did not take action on receiving the reports. It was only when the operators threatened to walk away that the government responded to the problem.

The total equity invested by the contractor was low relative to the expected losses, so the operators preferred to abandon the franchises, rather than endure the losses involved in trying to improve them. The government was faced with the possibility of having to take operations back into the public sector, which it did not want to do.

The government decided to renegotiate the contracts with the existing operators to enable them to continue to operate in the same way. The government originally expected total savings of A$1.8 billion (US $ 1.2 billion equivalent) over the life of the contract. While renegotiating the contract would increase the cost of the project, the overall net public benefit of the project was still positive.

Source: Ehrhardt and Irwin (2004) Avoiding Customer and Taxpayer Bailouts in Private Infrastructure Projects: Policy towards Leverage, Risk Allocation, and Bankruptcy World Bank Policy Research Working Paper 3274, April 2004.

Procedures and Institutional Responsibility

PPP contracts are typically managed by the relevant line agency. Central agencies will also need to be informed of emerging issues and risks. The PPP framework should set out how the line agency and relevant central agencies should communicate.

The framework will also need to specify how contracts should be completed or terminated. Refer to chapters 7 and 8 for details on managing the contract.

 

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