6.1. Main Stages of the Construction Phase

The following key activities typically occur during the Construction Phase of a PPP.

• The private partner must establish itself on site and obtain the necessary permits and clearances to enable it to carry out the construction works;
• The private partner must finalize the design for the construction works;
• The construction works must be carried out; and
• The completed infrastructure must be commissioned and handed over to the operational team.

6.1.1. Project Site Set Up and Permits Clearance

In the majority of PPPs that involve construction of infrastructure, the government will make land (sometimes with existing buildings and infrastructure located thereon) available to the private partner. During the project term, the private partner will manage the operation and maintenance of the land and infrastructure.

In the Appraisal Phase, the government should have commissioned a thorough investigation by appropriately qualified experts of all property rights in, and all title and land use restrictions attaching to, the land (and any improvements thereon). This is done to ensure that the project will not be jeopardized due to a late discovery of a third party claim to the land or a land-use restriction that could delay or prevent the construction of the project or interfere with the private party’s possession of the land. If it has followed good practice, the government will have also undertaken the necessary land acquisition from legitimate residents and managed the relocation of any other occupants. Depending on the location of the site and the nature of the project, the government may also have had to construct an access road and ensure the availabilities of utilities at the site.

The government should then have required the bidders to conduct a thorough investigation of the proposed project site, including any existing buildings or infrastructure located thereon and site conditions. The site condition investigation should include surveys of the climatic, hydrological, hydro-geological, ecological, environmental, geo-technical, archaeological, and paleontological conditions at the project site. The scope and extent of such an investigation will depend on the complexity of each bidder’s design and engineering proposal for the works to be erected at the project site.

These actions of the government prior to contract award will have ensured that both parties are well aware of land-related issues and risks.

Problems with regard to the chosen sites and the conditions can and do emerge during the Construction Phase. One of the more common issues is the timely hand-over of the site to the private party and its construction sub-contractor. For projects with a single site, it is recommended that the government ensure the site is available and handed over immediately after the contract is signed. This will ensure that at least land hand-over related disputes are avoided.

Site availability is more complex in projects with extensive land requirements over a large number of distinct properties. These include projects involving roads, rail, pipelines, and transmission lines. Although hand-over of a single continuous stretch of land is ideal, it is not always possible. In cases where it is not possible, the government must ensure that it does not subject itself to disputes and claims from the private partner.

A report by NAO (2014) discusses some of the challenges that can occur during the construction phase on the example of a PPP waste project in Surrey, United Kingdom (UK)[19]. The Surrey contract had not been able to secure planning permission. First, an issue occurred where a planning application for a site in Redhill failed because Surrey County Council’s Planning Committee rejected it, and the second planning consent for a site at Capel was subsequently reversed following a judicial review.

Land hand-over processes must be detailed in the PPP contract. Importantly, the obligations of both parties to mitigate the effects of late land hand-over must be explicitly stated in the contract. There are examples of claims by a private partner to a transport PPP contract because a single stretch of land was not available, and consequently all construction work ceased until the land was handed over. In reality, a sensible work-around plan could have been agreed with minimal losses of time and money to both parties.

6.1.2. Project Design

The design phase of the project will inevitably go through the stages, from the conceptual design right through to the final design, specified to carry out the construction works as per the PPP contract.

The responsibility of obtaining any consents relating to the design, construction, engineering, technical, and installation specifications put forward by the private partner (such as any building consent and any record of decision regarding Environmental Investigation Approvals [EIAs] required) should be borne by the private party. Since the private partner bears the design and construction risks in the project, it should also assume the responsibility for identifying and obtaining all design and construction related consents. Otherwise, these risks will be transferred back to the government.

The private partner must also allocate adequate time in its works program for the obtaining of all such consents. In cases where the delays are inevitable in the obtaining of such consents, they should not delay the progress of the PPP itself. Instead, this can be dealt with through alternative mechanisms (such as relief events), to the extent that such delays are not attributable to any fault on the part of the private partner or its sub-contractors.

Design proposals submitted by the private partner at the bid stage are typically conceptual in nature. However, the government should have satisfied itself during its evaluation of the private partner’s bid and the negotiations on the PPP contract (and in any event prior to the signature date) that the private partner’s design proposals included in its bid will achieve the required output specifications as set forth in the RFP.

The private partner must be solely responsible for the design. The government should have a right to review the design and advise the private partner of any areas of non-compliance with the contract. The contract may prohibit the private partner from proceeding with construction until the government gives its approval to move forward following its review of the design.

However, the government should not have rights of approval in respect of the design that would amount to acceptance by it of any errors or inadequacies in the design. In this way, the government reassures itself that the design and construction is in accordance with the output specification (and the construction prescriptions if any), but the private partner remains responsible for the achievement of the output specification and for any failure of the design. If the government approves the design, the private partner could argue that the government has accepted the risk that the design might not, in the future, enable the private partner to meet the output specification. Similarly in this situation, risks related to life-cycle costs may revert back to the government.

6.1.3. Project Construction

Construction, in general, can take many forms of delivering the final product. It is not uncommon for the construction contractor to split the work into phases or smaller packages in order to achieve its milestones. In this case, the construction contractor will often tender individual work packages out to sub-contractors. However, the main contractor will retain responsibility for the quality of all work and for coordination of sub-contractor activities.

During the construction works, there are many issues to consider but the most important points are as follows.

• Have appropriate quality requirements and a duty of care been imposed on the contractor?
• Is there any assurance that defects identified in the inspected works will be remedied?
• Is there a defects liability period and, if so, for what period?
• Does the contract draw any distinction between different aspects of the work, for example between engineering and civil works?
• Has the design been addressed appropriately?
• Is the project schedule optimistic or realistic?
• In the case of a dispute, what are the procedures that would be implemented?

The activities during the construction works are numerous, but the most work intensive period is in the middle of the phase where all of the work packages are delivered. It is in this stage of the project that many sub-contractors would be involved. As a result, it is particularly important to pay attention to sequencing, lead times for the material delivery, and any time-sensitive legislative compliance matters which can disrupt the program.

6.1.4. Commissioning and Hand-Over to the Operations Team

Before the asset is formally handed over to the operations team, there are certain steps that need to be carried out by the independent certifier or engineer (or construction inspector or engineer)[20] (see section 0 below) on behalf of the government. These activities include the testing of an asset (see section 7.3.3 below) and issuing the completion certificate.

When dealing with the testing of an asset, the PPP contract should set out the requirements for notification that an asset is ready for inspection by the independent certifier. It should require the private partner to give the independent certifier access to the site in order to observe the tests and examine the asset, and it must include any documentation that will aid as evidence to the results of the performance tests.

If the performance tests for the readiness of an asset fail, the private partner must remedy such defects in order to obtain the completion certificate.

The completion certificate is issued by the independent certifier (or by the authority on the basis of the evidence reported by the Construction, Engineering and Inspection engineer in some countries) and is contractual evidence that the Construction Phase is complete. Once it is issued, there is typically a process whereby the independent certifier, the authority or the private partner (depending on the nature and needs of the project) issues a certificate or authorization for the availability of the infrastructure and commencement of services. This is known in many jurisdictions as the “service commencement date” or the “operating commencement date”.

In some projects, the completion certificate and availability or service commencement authorization may respond to a two-stage approach with a provisional acceptance of works (or provisional completion certificate) that allows for entering into operations provided that:

• the project has been substantially completed;
• Operations can commence under appropriate safety standards; and
• Only a list of minor defects or non-compliances of minor relevance have been detected (usually referred to as the “punch list”) and these don’t prevent service commencement.

The “punch list” items are allowed to be resolved within a certain time (which will entitle the private partner to receive the definitive authorization).

The government should generally not seek to impose pre-service commencement milestones in the construction/development phases or otherwise accept the delivery of the works in stages prior to service commencement, as this may reverse the prescribed allocation of risk.

In projects that are partly funded by means of a capital contribution by the government, it may be necessary to provide for the achievement of construction milestones when capital contribution payments will be made to the private partner. This may affect the risk transfer as the government is inserting itself into the method of construction of the private partner. Where this is done on the basis of improved financial efficiency of the project, the terms of such milestone payments must be carefully crafted and must show overall Value for Money.

In certain PPPs, it may be appropriate to have service commencement despite incomplete construction. In this case, the government must ensure that the private partner always remains incentivized (through the payment mechanism) to complete the outstanding works. In certain PPPs it may be feasible to have phased-in service commencement (that is, different buildings or sections or different pieces of plant and equipment being brought into service at different milestones in the PPP). In these situations, an appropriate phasing-in of the revenue stream or the use of penalties for late completion may be justified. In such cases, the government may either stipulate that full service commencement will only be achieved when all phases in the project reach the required output specification level, which would incentivize the private partner to bring them all up to the required output specification levels as quickly as possible or stipulate that partial service commencement will be achieved as each phase reaches the output specification level for the services provided.