Private partner profit motives are frequently cited as a failure of the public-private partnership (PPP) approach. But those profit motives are also part of the fundamental make up of the PPP approach and why it has the potential to deliver better outcomes for the public.
By focusing on profit, bidders in a competitive process will aim to find innovative ways to deliver the service required by a government over a long period (of 20 or more years) in the most cost-effective manner encompassing both construction and operations.
The focus of governments needs to be on carefully setting the right incentives, selecting the right private partner, and effectively managing that relationship so that high-quality services are delivered over the long term.
During construction and operations, understanding the drivers of the private partner can mean that a common vision can be created, boosting cooperation and helping to avoid surprises. Although the parties may have different—and sometimes conflicting drivers—they are ultimately delivering the same project and a collaborative approach is important.
The achievement of common goals depends, to a large extent, on how well the relationship between the parties is managed. Poor relationship management can have significant knock-on effects.
The relationship between the procuring authority and the project company is key to the success of any PPP.
Specific challenges are discussed in other blogs in this series, including KPIs and payment deductions in blog 3, claims and scope changes in blog 6 and disputes in blog 8.
The core messages for all of these challenges are centered around:
- effective communication
- a focus on a collaborative approach
- avoiding using contractual provisions in an inconsistent or unfairly punitive manner.
As an example, a short-term financial gain through enforcing payment mechanisms in an excessively punitive manner typically does not lend itself to a positive outcome in the long term. Neither does ignoring the KPI requirements over some years, and then expecting to enforce them at a later stage without challenges.
The guidance in the GI Hub’s PPP Contract Management Tool also discusses the interests of the associated private partners that are not the project company. For example, construction subcontractors, operations subcontractors, lenders and equity investors.
A project company in a PPP arrangement is typically what is referred to as a special purpose vehicle (SPV) set up to manage a specific asset. The SPV relies on subcontracts for construction and operations, as well as experience and oversight from equity investors and lenders. The interests of these additional parties also needs to be considered.
Two other areas addressed in the PPP Contract Management Tool as challenges during construction and operations are project company changes of ownership and refinancing.
It is not uncommon that the equity investors of a project company ask for changes of ownership, or that project company’s refinance their debt. Our data highlights that 18 percent and 15 percent of projects go through changes of ownership or refinancing respectively.
Change of ownership
A typical example of where a project company may request a change in ownership (i.e. a change in an equity investor) is in the case where an equity investor is also the construction contractor. The contractor/investor may wish to exit a project following completion of the construction period, and after some time of successful operations has passed.
Freeing themselves of the project allows them to bid on and invest in another PPP project in procurement that needs to be built.
Provided a new equity investor does not adversely affect the project, it may also be in the government’s interests to allow the construction contractor/equity investor to sell out of its equity position.
Refinancing refers to changing or replacing the existing lenders or terms on which debt obligations have been agreed between a project company and its lenders. Changed market conditions and/or the advancement of a project can lead to a situation where more favourable financing terms become available (e.g. interest rates become lower).
This can be due to improvements in the market itself (e.g. a financial crisis recedes), or changes in the PPP project (for example, construction has completed, and the project has established a pattern of successful operations).
Like a change of ownership, a refinancing can also benefit a government. For example, the procuring authority in the InterCity Express Programme Case Study in the UK requested a refinancing of the project company due to a change in the available financing terms and financial gains achieved were shared between the government and private parties.
In order to manage changes of ownership and refinancing effectively and timely, governments need to dedicate appropriate resources to assess the impact of such potential changes.
This was the case in the Brabo 1 Light Rail Case Study in Belgium where external financial advisors were used to manage a refinancing.
The GI Hub’s full guidance on managing the relationship between the government and private partners is available in Section 3.3 (Stakeholder management) and changes of ownership and refinancing in Section 3.6 (Change of ownership) and Section 3.7 (Refinancing) of the PPP Contract Management Tool.
The next blog will be on claims and scope changes, a reality for almost any PPP contract.