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PPP Introduction and Overview

18.2. Threats to a Sound Process Management

A project may fail for many reasons. A good number of them are naturally related to the PPP characteristics and even to the essence of the project itself. Many risks which can affect a project are unavoidable (typically force majeure, and a broader category sometimes known as unforeseen circumstances). But the contract should be ready to tackle those situations in the most effective and efficient manner. PPP as a tool (or the PPP contract as defined or structured) fails when it does not properly allow the parties to deal with such circumstances; this creates unbalanced situations or produces early contract terminations that could otherwise have been avoided. Not all project failures are necessarily failures of PPP as a tool – in fact, for some failures, the cause of the failure would have an equal or greater negative impact if the project was traditionally delivered than if it were a PPP.

Even the contract itself may be the source of risks or problematic situations. This is what it is sometimes defined as the “contract risk”.

Many project failures have their ultimate origin in defects in the identification, assessment and preparation (appraisal) of the project, poor structuring and poor management of the tender process, or poor contract management (which is also related to preparation, as the contract management strategy has to be considered when the contract is drafted and appropriate provisions incorporated into the contract).

These reasons for project failure belong to or are identified with a potential lack of a proper PPP process management during the different stages of the process, from identification to tender, and contract management thereafter.

The ultimate cause of poor management of the process is a lack of transaction management capacity, which in this case demands on a number of highly specialized skills and capabilities that have to be balanced with the highly complex nature of this type of procurement. Experienced advisors alone are not a solution (although their support is highly recommended for appraising, preparing, structuring and supporting the tender process – see chapter 3.14). The government and its procuring authorities need to develop in-house skills. Building up this capacity, maintaining it, taking advantage of the experience, and retaining the talent are all challenges for the government[110].

This and other risks threatening the success of the project are those typical of any project management process (see box 1.30). They can only be avoided through sound project governance (as introduced in section 5.5).

BOX 1.30: Common Project Management and Governance Factors that may Compromise the Project Outcome in a PPP (as in any government project)

  • Lack of management capacity and proper skills (lack of skilled resources and lack of funds to hire advisors);
  • Lack of continuity/frequent changes in the project team;
  • Lack of clear project ownership and leadership;
  • Failure in taking and managing decisions (insufficient delegation of powers, external interference);
  • Lack/absence of a champion;
  • Lack of an “independent” or unconflicted advocate;
  • Lack of proper quality control mechanisms;
  • Failures in stakeholder identification;
  • Failure to communicate (inside, outside, to the public — raising acceptance and managing resistance, and to investors);
  • Failure to ensure that the project matches the government´s strategic objectives or changes in the government objectives; and
  • Political rush and unrealistic time scales.

It is difficult to provide a universally valid shortlist of the main sources of project failure. However, especially in the case of EMDEs, a common source of failures for PPP projects is the lack of time for a solid project preparation and analysis of risks. PPP projects occur in contexts that are typically full of political pressures. In countries lacking experience with these projects, the presence of "players" who do not behave strictly according to the rules and who expect to get some advantage through influence and/or shortcuts is common, and this needs to be addressed to avoid the failure of projects.

There are a number of additional factors that may exacerbate project failure risks. Most of them are related to the absence of a proper PPP framework, or relate to failures of governance, something which can be mitigated by developing and implementing a proper PPP Framework.

A list of risk factors related to failures of governance or an absence of a framework and its consequences are explained below;

  • The lack of a standardized process for the identification and preparation of projects, as well as for structuring and launching them, under a “gateway process” will exacerbate the risk of project failure;
  • A complex and unclear institutional framework will make stakeholder management difficult and may create contradictory directions and changes in decisions;
  • The lack of an institutional organization will make it more difficult to retain knowledge and experience, leading to a loss of talent;
  • Absence of a fiscal management framework and long-term fiscal management approach (controlling a country’s aggregated exposure to PPPs) may produce unexpected conflicts in project implementation and termination of a PPP process even after announced;
  • The lack of clear policy guidelines regarding the objectives of PPPs may produce political conflicts and changes in decisions. This can destroy the perception of political commitment and the stability of the government’s approach to PPPs;
  • In the absence of an appropriate PPP framework, a ministry that believes that it can shift the costs to other sectors within the government may pursue PPP transactions in excess of what is affordable or what represents Value for Money. Similarly, a ministry that does not directly bear project-related risks may not be sufficiently diligent to ensure that the private sector bears an appropriate level of risk;
  • In the absence of an appropriate PPP framework, individual agencies may operate within “silos”, with little information sharing or co-operation with other agencies. In a silo situation, agencies with related functions may not be able to coordinate their activities sufficiently to make PPPs happen;
  • Without a proper framework that incorporates the appropriate information disclosure provisions[111], transparency will suffer and this will harm private interest, public acceptance, and political commitment. As a result, this may increase corruption and create a vicious circle;
  • Without the mechanisms to audit the process (external quality controls and checks, audit of the tender process in terms of transparency and equality) and programs (including information disclosure but also ex-post audit mechanisms), the accountability of the government will not be traceable; and
  • In general terms, without a framework and a policy that incentivizes sound long-term planning and the creation of PPP programs, the government will not capture the full benefit of the PPP tool and will risk losing the interest of the PPP market (see section 9.4).

Section 9 introduces the rationale behind the framework concept, its main components and manifestations, and how a framework is necessary for proper management of the PPP tool as a strategic element of infrastructure policy. Chapter 2 is dedicated solely to discussing the matter of PPP frameworks and explains all the above mentioned issues related to frameworks, programs, and more.

 

[110] See Paving the way (WEF, 2010) section 2.2, and The challenge of building and sustaining skills.

[111] Information disclosure is a cross-cutting issue that affects the entire process cycle (pre- and post-procurement) and many aspects of the framework (for example, fiscal management, quality audit/ex-post audit). Disclosure also affects or is of interest to various stakeholders, such as the private sector, the general public, the legislature, and so on. Disclosure can be reactive and proactive, the latter being a significant challenge and the focus of improvement in mature PPP markets. Box 1.28 in chapter 2 includes an extensive summary of information disclosure frameworks. The PPP Reference Guide also discusses this matter in section 2.5.1.

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