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PPP Introduction and Overview

18.3. Examples of Project Cancellation due to Improper Process Management [112]

8.3.1. Arising during Pre-Tender and Tender Phases

The following are common examples of poor management during the pre-signature phase of the project process that reflect errors and risks of project failure (to be regarded as a non-exhaustive list).

The appraisal may conclude that the project should be aborted as a PPP because it was not properly screened or its economic sense was poorly assessed.

Examples:

  • The cost-benefit analysis in the Appraisal Phase provides negative results or much poorer results than those in the Identification Phase because a CBA was not previously done or was done on the basis of overly optimistic assumptions; and
  • The CBA results are poor due to a change in the project scope because it was not properly developed and confirmed in the Identification Phase.

A project is aborted/abandoned before launching the tender because it was not properly assessed during appraisal or it was not properly prepared.

Examples:

  • Legal limitations or obstacles regarding land availability for a hospital were not properly assessed or detected in appraisal;
  • Utility services in a tramline project were not properly assessed, and before launch there was evidence of a relevant lack of information availability;
  • There is evidence that the project may not be affordable or is not feasible under the previously defined affordability assumptions; and
  • Significant changes are made to the project scope, so the project costs assessment becomes invalid or too optimistic. This invalidates the financial feasibility, CBA, and affordability assessments.

The tender is cancelled or suspended (after launching the tender) because some due diligence issues were supposed to be solved during tender or before contract signature, but there is evidence they will not be. The tender is cancelled or suspended because the project-tender is challenged by the general public, civil organizations or political parties.

Examples:

  • Utilities allocation information is poor and needs more time than expected;
  • Agreements with other public administrations (for example, municipal government agreement within certain transportation sectors) cannot be finalized or are not sufficiently advanced;
  • Project information was not made public in time to receive suggestions and comments; and
  • Any other risk or obstacle was not detected during appraisal.

There are no offers. No bidders submit a qualifying bid.

Examples:

  • The project, or the contract as designed, was not financially or technically feasible[113];
  • The tender was launched without advanced notice of the project being provided to the market;
  • The RFP response period was too short and/or the RFP response period would have required any bidders to work over a known holiday period; and
  • The tender was launched at a time when there was a perception that the government was not complying with its obligations under other similar PPP contracts.

The project contract is awarded but is not executed (signed) because of a competitor challenge over the administrative decision, or the successful bidders refuse to sign the contract due to some lack of preparation of the project.

Financing is not closed (when not requested as a precedent condition) due to unresolved problems of preparation.

Examples:

  • A necessary right of way was supposed to be available, but it is not; and
  • There is a risk that environmental permits will not be approved due to the procuring authority failing to manage the process properly.

8.3.2. Arising during the Life of the Contract

Construction is delayed because of a lack of due diligence preparation by the government concerning the risks and responsibilities it assumes under the contract.

Example:

  • Extraordinary delay in construction due to absence of availability of the right of way required for the project.

Contract default by the private partner because of a poor contract structure and/or tender management.

Examples:

  • Contractual default because of a lack of capacity. The bidding consortium’s capacity and experience was not properly assessed during the tender process;
  • Default due to inability to perform because the winning consortium’s bid was too aggressive. The tender was not properly structured to avoid or detect overly aggressive or overly optimistic offers;
  • Default due to the private partner’s inability to meet minimum performance service requirements as a result of the government setting unrealistic performance requirements; and
  • Default due to the contract transferring risks to the private partner that they cannot manage.

Contractor insolvency.

Example:

  • The private party becomes insolvent as it finds the project is not feasible due to poor appraisal (for example, the traffic forecast was too optimistic).

Delays or termination for breach by grantor.

Examples:

  • The government cannot afford payments due to budgetary restrictions which were not properly considered when approving the project (affordability analysis);
  • The government cannot afford contingency payments as these were not properly assessed in appraisal; and
  • The government fails to adequately perform other works that interface with the private party’s works under the PPP contract. For example, where the government is responsible for the civil works for a rail project, and the private sector under a PPP contract is responsible for the rail systems, rolling stock and operations.

Other minor project failures/loss of  Value for Money (VfM).

Examples:

  • There may be project failures consisting of costly disputes originating from an unclear risk allocation; and
  • Performance requirements in the PPP contract may be poorly developed and consequently impossible to measure or enforce in practice.

 

[113] Optimism bias or simply a lack of appropriate analysis is one of the most common reasons for cancelling  projects, including PPPs. See Cost Overruns and Demand Shortfalls in Urban Rail and Other Infrastructure, Bent Flyvberg, Transportation Planning and Technology, vol. 30, no. 1, February 2007, pp. 9-30.

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