Written by Jack Handford, Principal Advisor

The participants of the second Regional Roundtable on Infrastructure Governance held in Côte D’Ivoire last week reinforced the need for good governance across all stages of infrastructure delivery. The Regional Roundtable was the second of its kind, with the first held in South Africa in November 2017. 

 

This year, it brought together representatives from governments, the private sector, multilateral and international organisations, and other development partners in the region for a discussion on practical solutions to the governance challenges impeding successful infrastructure delivery.

 

With a growing focus on attracting private sector investment into infrastructure and utilising the Public-Private Partnership (PPP) model, good governance must now extend beyond strategic planning, pipelines and transparency.  The preparation and procurement of complex PPP contracts, as well as the monitoring of those contracts to ensure the right level of service delivery, must also be included in governance structures to ensure a project’s success.

 

The Global Infrastructure Hub’s (GI Hub) leading practices team has developed two key tools to assist governments in the delivery of quality infrastructure:

 

  • the PPP Contract Management Tool; and
  • the PPP Risk Allocation Tool.

 

Both tools were well received when presented in Cote D’Ivoire last week by the GI Hub’s Jack Handford at the Regional Roundtable. The PPP Contract Management Tool will be launched in July 2018, and the PPP Risk Allocation Tool was launched in 2016.  It is freely available at ppp-risk.gihub.org.

 

The structuring, procurement and delivery of quality PPPs are important to the success of those projects, but the focus needs to be on the delivery of the public service. Just like a home builder needs to be monitored to ensure they are not cutting corners with materials or quality, so too does a private sector partner that is delivering millions or billions of dollars of public infrastructure. The monitoring requirements of a government are amplified when using a PPP model as the contract is not just for the delivery of an infrastructure asset, but for the delivery of a service over a long period of time.

 

Having a well-resourced and effective government team to manage a PPP contract is an essential part of ensuring quality service delivery and value for money. PPP contracts are complex arrangements and often the team that structured and negotiated the contract is not the same team  tasked with managing it during construction and operations. Governments which are new to delivering infrastructure using the PPP model can often underestimate the resources required to effectively manage the PPP contract.

 

A lack of resourcing, know-how or good governance in the management of a PPP contract can lead to several issues:

 

  • the risk allocation agreed at financial close (and the value for money assumed) can be altered through renegotiation and/or waiver of rights;
  • claims can be made against a government for failure to comply with the terms of a PPP contract;
  • disputes and wasted resources in the resolution of disputes can occur due to adversarial approaches or a lack of an understanding of the PPP model.

 

Avoiding  these issues and managing other circumstances that arise during construction and operations is specifically what the GI Hub’s PPP Contract Management Tool is designed to address. The tool covers additional circumstances including team set-up and training, transitions, performance monitoring, claims, insolvency and termination, and others. The tool is informed by primary data on 250 projects globally showing the prevalence of these issues and 25 case studies on practices adopted by governments in managing them. It will be available in July 2018.

 

The preparation and structuring of good PPP projects before and during procurement is an area that receives a lot of attention, though many countries and regions are still developing a model that works for them. The allocation of risk between the government and the private partner is at the centre of every PPP transaction. A deep understanding and the appropriate application of risk allocation principles are what determine whether a PPP project will be bankable, competitive and sustainable.

 

Risks should be allocated to the party best able to manage them (both in terms of effect and likely occurrence). This is a phrase that is widely accepted, but its application in reality is complex and never easily agreed. Allocating risks to the party best able to manage them is at the heart of what can make the PPP model efficient and deliver value for money to governments.

 

A PPP contract that aims to transfer risks to the private partner that it cannot manage will mean one of two things:

 

1) the relevant organisation, or its financiers, will simply refuse to bid on the project, meaning less competition (or no bidders at all) and higher costs for the government; and

 

2) the relevant private partner will charge an excessive ‘risk premium’ for the risk it is unable to manage, again ending in higher costs for the government.

 

Considering these challenges, the GI Hub developed its PPP Risk Allocation Tool which highlights leading practices on the allocation of risks in typical PPP transactions, along with related information on mitigative measures and typical government support arrangements. The tool provides additional guidance to governments that wish to develop a pipeline of bankable, competitive and sustainable PPP projects in the transport, energy, water and waste sectors.

 

The PPP Risk Allocation Tool was launched in 2016 and is freely available at ppp-risk.gihub.org. The GI Hub will update the tool in 2018 and expand it to include social infrastructure projects including social housing, schools and hospitals.

 

Good governance depends not only on strategic planning, pipelines and transparency, but also on the governance surrounding specific models used to deliver infrastructure, including the PPP model. Tools like the GI Hub’s PPP Contract Management Tool, the GI Hub PPP Risk Allocation Tool and other tools developed by the World Bank and others are key to the sustainable delivery of not only quality physical infrastructure, but also its maintenance to ensure the delivery of quality public services for end users.

 

The GI Hub will continue to deliver tools on infrastructure topics where a need for guidance has been identified and is currently looking into the delivery of more socially inclusive infrastructure and what governments can do to better prepare quality infrastructure projects for tendering.