7.1. Understanding Monitoring (performance and risk monitoring)

Performance monitoring may be defined as an assurance role played by the government (primarily through the contract management team although other affected agencies and departments may also be involved) where assurance is obtained that the private partner has:

· Adequate systems, policies, procedures, and resources in place to perform the specific performance-related obligations set out in the PPP contract (the output specification);

· A functional quality assurance system in place to do self-monitoring; and

· Achieved the required outputs to meet the specification.

Performance monitoring does not mean managing the task for the private partner or approving the method by which the output is achieved. Neither does it mean leaving the performance management entirely to the private partner. There are a number of reasons for this. First, the incentive for the private partner is to achieve financial efficiency over the period of the PPP contract and not the whole life-cycle of the asset created. In large infrastructure projects, this can create a misalignment of incentives, where the private partner may seek to reduce construction costs and incur increased operational or maintenance costs over a concession period that is substantially less than the life of the assets. Given a choice, the government would prefer a higher capital investment that meant a lower life-cycle cost. A second reason relates to the Operations Phase when the private partner will incur penalties for poor performance. An unmonitored self-reporting performance management system might result in penalties not being applied.

The contract management team must undertake a range of regular monitoring tasks during the Construction Phase, including:

· Monitoring against the schedule;

· Monitoring against the scope (and any agreed variations);

.  Monitoring performance and compliance with applicable laws and regulations;

· Quality control and materials monitoring;

· Daily relationship monitoring with the private partner; and

· Stakeholder reporting and management.

But performance is not the only area or task to be monitored. During the Construction Phase, risk management will be one of the most important functions of the contract management team. The team will need to monitor and, where appropriate, manage the project risks contractually allocated between the parties, inherent risks borne by the government, project risks not contractually allocated, and also the management of risks and threats associated with changes to the PPP contract.

The framework for performance monitoring will be set out in each PPP contract. It will establish the output specification, the private partner’s performance management reporting requirements, and the penalty regime that applies in cases of non-performance. It will also set out roles for the government and rights of, for example, audits that can be exercised by the government or lenders to the private partner.

7.1.1. Approach to Performance Monitoring

The approach to performance monitoring differs in both the Construction and Operations Phases. During the Construction Phase, the performance must be monitored mainly to ensure that the facilities provided reflect the PPP contract, that work progresses properly through commissioning according to the schedule, and other contract obligations are being met. Performance monitoring during the operations phase will, however, be focused on the quality or level of achievement of the service performance requirements, especially on the service standards or target levels of services. In both cases, monitoring actions are needed so as to prepare (detect) and manage contract changes and risk events. See box 7.6.

In the Operations Phase, the focus is on the delivery and availability of the services in accordance with the output specification. The two approaches require different resources. Typically, the Construction Phase has a range of independent parties who are required to report on the achievement of program milestones and compliance with the specification. These will include the independent engineer or certifier and the lender’s agent.

The Operations Phase relies on the self-reporting of the private partner and the oversight and assurance systems applied by the government. In the Operations Phase, the performance monitoring is often linked to the penalty regime (be they actual financial penalties or some form of accrual of points that could lead to a termination).

7.1.2. Roles and Responsibilities of the Government during the Construction Phase

The government should carefully consider the resources that it will require following contract signature, but prior to the asset becoming operational. In addition to the contract management resources, the team is likely to include the expertise outlined in table 7.6.

7.1.3. Roles and Responsibilities of the Independent Certifier

In many jurisdictions (and most of the common law jurisdictions), the PPP contract provides for the hiring of an independent certifier (sometimes called the Independent Engineer) who is an expert in terms of the type of the project. This person will be responsible for certifying that, in his/her professional opinion, the Construction Phase and the Commissioning Phase have been satisfactorily completed in compliance with the PPP contract. A certifier is also responsible for issuing a certificate that starts the Operations Phase and the right of the private partner to collect or receive revenue from users or the government.

The decisions of the independent certifier are of great commercial importance to both the private partner and the government. As such, the independent certifier must be beyond the influence of either party. This is normally achieved by appointing a company with the appropriate expertise (dependent on the type of project) and a reputation for fairness and impartiality.

The independent certifier should have a duty of care to both the private partner and the government and may even be jointly appointed. In many cases, the independent certifier is identified and agreed to by both parties, and paid for by the private partner. The PPP contract should protect the independent certifier in that it should clearly stipulate that the fact that the independent certifier is paid by the private partner in no way derogates from its fiduciary duty to act impartially.

The primary function of the independent certifier is to inspect and monitor the work, attend any performance testing during commissioning, advise the private party of any items that in the independent certifier’s opinion require rectification, and finally, when satisfied, to issue the certificate permitting operation.

In performing its functions, the independent certifier does not in any way accept any risk in relation to the design, construction, fitting, installation, or commissioning of the construction works.

In some jurisdictions (particularly common law jurisdictions), the independent certifier is given quasi-judicial powers to make decisions that are binding on the parties, or even to act as part of the dispute resolution processes. In other jurisdictions, the independent certifier acts in a purely advisory capacity on any matter outside of the direct duty of certifying completion. In this case, the decisions of the independent certifier are subject to review. It therefore makes sense, in the PPP contract, to explicitly limit the powers of the independent certifier to certification in the Construction and Commissioning Phases.

As noted in section 6.1.4, in some other jurisdictions (mostly civil code countries), the certification role is performed by the Construction, Engineering and Inspection engineer who is contracted by the authority and formally reports to it.