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Strategy Delivery and Commissioning

75.3. Reasons for Unsuccessful PPP Projects during the Construction Phase

Several studies show that some PPPs were cancelled during the Construction Phase due to the lack of or a poorly executed contract management function[17]. See table 7.4.

TABLE 7.4: Examples of Projects Cancelled during the Construction Phase

Project

Reason

Light Railway Transit (LRT) Project – the Metro Sul do Tejo (MST), Portugal

The project did not go beyond the first phase of construction. The reasons behind the cancellation were stated as an unclear risk-sharing mechanism, lack of supporting documents for contract management, no provision of contingency plans for emergencies, and a lack of expert personnel for complex contract management (Tavares 2014).

Domestic Terminal at Murtula Muhammed Airport, Nigeria

The project was initially awarded to Royal Sanderton Ventures Ltd. Due to a lack of significant progress after six months, the government decided to revoke Sanderton’s mandate and it was awarded to the second bidder, Bi-Courtney Ltd. The company faced challenges in securing financing and had to start construction without a long-term finance model. On the operations side, airlines were reluctant to move to the new terminal owing to its small size. There were also disputes by parties and claims of breach of contractual rights (Nigeria 2012).

Panagarh-Palsit Highway Project, India

The contract for the design, construction, operation, and maintenance was signed between the National Highways Authority of India (NHAI) and Gamuda-WCT in November 2001. The Construction Phase was completed five months behind schedule. The delay was caused by land availability issues and a change of scope orders. The Auditor General of India, on inspection, found consistent and major cracks, repairs, and deflections values. Ineffective structuring of the PPP agreement led to time overruns and insufficient quality (India 2012).

Lekki Toll Road Concession Project, Nigeria

The contract for the upgrading and maintenance of the Expressway was awarded to LCC. However, the project faced problems, such as protests by local communities who were against paying tolls, which led to tolling suspension. A need for strong contract management and stakeholder communication within the government team was addressed. There was also a need to set performance standards backed by penalty regimes in the contract in order to ensure better quality of roads (Nigeria 2012).

Historically, there are various other projects which have not achieved the desired outcomes during the Construction Phase. One was for an urban rail system. The project involved a strict deadline due to an international event that was to be held in the country. The project was to be completed in 30 months with commissioning having been scheduled for July 31, 2010. Construction of the project took longer than expected. The government allowed for a one month extension to August 31, 2010 for the commencement of operations, as there had been a delay on its part in handing over some of the stations. The line was denied a statutory safety clearance after a two-day inspection in the last week of September 2010. The inspector found that false ceilings, emergency staircases and exit points, ticket counters, electrification work, software, and signalling were incomplete. Having missed the deadline, the government required the payment of compensation for the system not being operational and the consequent loss of income.

The Robert Bain[18] study presents an interesting statistical representation of PPP construction risks. It highlights that the main reasons behind PPP construction budgeting and scheduling problems are those represented in figure 7.6 below:

 

FIGURE 7.6: Construction Risks relating to Budget and Schedule

 

Nearly 25 percent of all responses within the Bain study point to the cause for Construction Phase problems for PPP projects being the government, either directly or indirectly. Respondents went to some length to emphasize that their comments were not restricted to countries new to PPPs. This survey showcased how a number of PPP problems stem from a government’s lack of ‘buy-in’ to the concept of PPPs. The lesson from this is that governments need to put in place good contract management as recommended in this PPP Certification Guide.

Examples of ways in which the government had aggravated the construction of PPP projects can be summarized in table 7.5 below.

TABLE 7.4: Issues relating to Government Involvement during Construction

Capability

The government did not possess the experience, technical skills, or resources to manage its obligations associated with a long-term, active partnership with private sector providers.

Traditional thinking

The government tried to manage the PPP as it had previously managed conventional design and build contracts, including use of amended design and build contracts in an adversarial ‘them versus us’ environment.

Preparation

The government failed to define a clear output specification to complete enabling works, secure land, and grant permits or approvals.

Expectations

The government’s expectations of who is responsible for what, and what has to be delivered (by when) failed to match the understanding by the private sector.

Process

The government failed to establish streamlined, transparent procedures for daily liaison with its private sector partners. The bureaucracy was slow and resistant, and projects were laboured by extended negotiation periods and delays in achieving sign off.

Oversight

There were existing deficiencies in the government’s project supervision and control procedures, which could not be cured simply by moving from traditional procurement to PPPs.

Change

The government pushed for scope or specification changes, or variations, with limited regard for cost or time implications, or in the absence of contractual clarity about how such changes should be accommodated.

There are three main attributes of PPP project success or failure: the completion of the project within budget, on schedule, and to the required specifications.

In general, some projects suffer from a degree of construction cost overrun. The more common reasons reported for construction cost overruns include over-aggressive bidding, variations, particularly high specifications demanded from the government, and disputes surrounding the scope of work. In the context of disputes, two respondents pointed to the fact that complications can arise when the primary construction contractor is also part of the Special Purpose Vehicle (SPV).

Generally, this is regarded as a useful project characteristic as it incentivizes the contractor to perform. However, in distressed cases, a key shareholder may be reluctant to claim against credit support instruments (such as performance or completion guarantees) which they, themselves, are providing. Independent adjudication would appear to have a place in cases in which ownership/control and contractual/business interests conflict.

Some projects experience overruns by months, or even years. This is usually due to the miscommunication of the parties with respect to the roles and responsibilities of the parties, that is, the hand-over of the site.

A key issue in the context of a budget overrun is identification of who should pay for the construction budget overrun. In traditional procurement, this responsibility has fallen on the government; this is a procurement characteristic that PPPs (their risk allocation and use of fixed price contracts) are specifically designed to address. In terms of shifting this responsibility to the private sector, PPPs appear to have been particularly successful.

Many specification-related problems are reported to have stemmed from the use of unclear or ill-defined specifications or scopes of work from the outset. Yet other reported problems are linked to PPP projects that incorporated sophisticated technologies (such as those employed in water or waste treatment). Road projects have performed relatively well compared to other sectors, probably because road projects are at the lower end of the technology spectrum.

These examples emphasize that planning and good practice contract management are exceptionally important for project success, specifically when dealing with cost, schedule, and final specifications (design).

 

[17] Sources: Tavares, S.A. (2014), The Contract Management in Public-Private Partnership, https://fenix.tecnico.ulisboa.pt/downloadFile/395144992772/Resumo%20alar... Infrastructure Concession Regulatory Commission, Federal Government of Nigeria (2012); PPP Project Case Studies, http://ppptoolkit.icrc.gov.ng/ppp-project-case-studies/

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