For a PPP to be successful, the government must protect and maximize VfM throughout the preparation and implementation process and the life of the contract. A failure to achieve the expected VfM constitutes a project failure.
Success in managing the PPP process is achieved by avoiding project failure risks occurring or minimizing their consequences (that is, in essence, effective risk management). This means that:
- The project is the right project (that is, an optimal VfM project option is selected and is properly prioritized with respect to other possible projects);
- PPP is the right delivery model for the project (that is, the PPP process is likely to deliver a better VfM outcome than traditional project methods); and
- The project is appraised/prepared, structured and managed to minimize adverse impacts on cost, time, scope and quality.
Project failure may be more or less severe depending on the moment of time it occurs and the severity and consequences of the failure.
The project (in the broad sense of the word) may fail within two main stages: before the contract is signed at commercial close (for example, the project is cancelled and not tendered out, being tendered there are no responsive bids, or being awarded the contract is not signed) and after the contract is signed (that is, during the life of the contract). Reaching the contract signature under conditions foreseen in the RFP does not mean that the PPP has succeeded, as the project contract may fail during the course of its life.
There are two main categories of project failure (in terms of consequences) during preparation and tender.
- The project process is suspended and the project is re-defined (either in full, changing the project’s scope and starting again on the appraisal process; or partially, refining some characteristics of the project in terms of scope or business terms/contract structure); and
- The project’s process is definitively cancelled, at least as a PPP.
A decision part way through the process not to proceed with a project as a PPP is not a negative issue or decision, as this is precisely the purpose of a progressive appraisal and preparation.
The more advanced in the process, the higher the loss suffered. This is the ultimate reason for advocating a step-by-step, progressive process together with progressive approvals (“gateway process”) as advised and described throughput this PPP Guide. The worst situation and highest impact (before contract signature) is the cancellation of a project after the tender has been launched; this will impact the PPP reputation of the procuring country/government in addition to the loss of time and resources.
After the parties have entered into the contract, there are also two grades of failure (in terms of consequences).
Absolute contract failure: A situation in which the government has to rescue the contract or re-tender it. This may be for two main reasons, sometimes interconnected or possibly overlapping.
- Contractor/private partner in serious default; and
- Contractor/private partner (the project company or SPV) enter into bankruptcy.
Relative project-failure: This refers to situations in which VfM is partially lost, and the project contract does not achieve the originally expected VfM.
This may occur in a number of circumstances: performance is below expectations and the contract is not capturing the loss of the value of the service, or the contract has provided an unexpected benefit to the private partner that should have been at least partially captured by government or users. There can also be unforeseen circumstances where government has to assume part or all of the loss, but the risk event is not properly provided for in the contract creating an unbalanced situation, or the government is not duly prepared (in budgetary terms) to afford the compensation due under the contract.