PPP Transactional Capabilities Research Report - 25 August 2014 - POC additions

Delivering successful Public Private Partnerships: transaction skills and capabilities for public officials and agencies in APEC economies

Delivering successful Public Private Partnerships:

transaction skills and capabilities for public officials

and agencies in APEC economies

Commissioned research report for the Australian APEC Study Centre, RMIT University

Prepared by: Paul O’Connor, Sessional Lecturer and Doctoral Candidate,

School of Property, Construction and Project Management, RMIT University

Contents ................................................................................................................................................................ 1

Delivering successful Public Private Partnerships: transaction skills and capabilities for public officials

and agencies in APEC economies ............................................................................................................ 2

Abstract ............................................................................................................................................... 3

Acknowledgements ............................................................................................................................. 3

Introduction to this report .................................................................................................................. 4

What this report is aiming to achieve ................................................................................................. 5

Skills and competencies needed for Public Officials in APEC economies ........................................... 8

Effectively leveraging consultants, experts, and technical advisors ................................................. 11

Managing the complexities of a lengthy procurement process ....................................................... 16

Transacting optimal outcomes for the public and private sectors ................................................... 22

Legal issues for PPPs ......................................................................................................................... 25

Developing and managing a PPP contract ........................................................................................ 29

Selecting the right project, transacting the right deal ...................................................................... 37

Previous capacity building efforts for Public Officials in APEC economies ....................................... 43

Report Summary and Recommendations ......................................................................................... 46

Appendix 1: PPPs and their political economy context .................................................................... 49

References ........................................................................................................................................ 58

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Abstract This report is written to provide a ‘how to’ guide for senior public officials to implement successful

Public Private Partnerships (PPP). It has a specific focus on Asia Pacific Economic Cooperation (APEC)

economies and describes better practice approaches and techniques that can assist public officials in

the development and deployment of PPP transactional skills.

In line with the emerging nature of PPPs, much of this work is drawn from practice-based

observations, with some linkage to broader procurement and project development theory. This

report attempts to compile and synthesise the key elements of the practice-based literature and

align it with key skills and attributes that public officials need to deploy when developing PPPs.

Acknowledgements This report was primarily researched, authored and compiled by Mr Paul O’Connor, Sessional

lecturer and doctoral candidate at the School of Property Construction and Project Management,

RMIT University, with assistance provided by:

Mr Richard Foster of Foster Infrastructure Pty Ltd, who provided expert input in relation to

legal issues for PPPs and managing PPP contracts

Dr James Harley, School of Property Construction and Project Management, Associate of

RMIT University, who researched issues regarding procurement and project selection

Mr Nofel Wahid of the Australian APEC Study Centre, who provided access to relevant

official materials and research papers, and contributed analysis of previous capacity training

in APEC economies

Mr Phani Nadminty, an RMIT University student, who provided general research assistance

to the author on the use of consultants, experts, and technical advisors.


Introduction to this report This report is a key research input for a broader series of capacity building efforts across the Asia

Pacific Economic Cooperation (APEC) economies, funded by the Australian Government, under the

Partnership’s for Development Program (GPFD) facility.

The Australian APEC Study Centre at RMIT University’s College of Business, was successful in its

proposal to the Australian Government to conduct a multi-year program of research, training and

dialogue activities to support capacity building efforts, with a particular focus on the role of Public

Private Partnerships (PPP) in public infrastructure development and delivery.

This report is written to fulfil the Year 1 (2013-14 FY) requirement to conduct “Baseline research to

identify progress made and gaps in work in regional fora such as APEC in measures to promote the

development and financing of infrastructure PPPs”.

In line with the title Delivering successful Public Private Partnerships: transaction skills and

capabilities for public officials and agencies in APEC economies this report has focused on the linkage

between successful outcomes for PPPs, and the required high order skills and competencies that

need to be developed for public officials and public agencies in APEC economies.

The method used to conduct the baseline research involved a review of a broad range of published

documents from governments and other official sources, a scan of relevant academic literature, a

review of previous training program materials, as well as expert practitioner input.

The remainder of this report is structured into the following focus areas:

Specific skills and competencies needed for a successful PPP

Effective leveraging of consultants, experts and technical advisors

Managing the complexities of a lengthy procurement process

Transacting optimal outcomes for both the private and public sectors

Legal issues for PPPs

Developing and managing a PPP contract

Selecting the right project and transacting the right deal

Previous capacity building efforts for Public Officials in APEC economies

The key concepts and findings from these sections are then synthesized into a summary that

provides a range of recommendations in response to the identified capacity issues.


What this report is aiming to achieve APEC leaders are promoting the use of the PPP model for infrastructure projects in part to relieve

the burden on public finances, as well as to accelerate economic and social development.

Public infrastructure projects tend to be large, complex and long term and therefore require

significant public resources to be dedicated to their design, construction, operation and monitoring.

Partnerships with the private sector can significantly improve the resource mix that can be brought

into project development and financing.

Although finance available to the private sector is generally more expensive than finance available to

governments, PPPs can be beneficial when private investors bring more specialised experience and

skills than do public sector infrastructure operators to manage, construct operate and manage

financial risks.

The success of a PPP will depend on whether private investors can sufficiently contribute

operational, management, capital market and due diligence skills that more than offset the

increased financing costs available to private investors.

The effectiveness of PPPs also depends upon good project selection, sufficient user demand,

sensitivity to local community concerns and appropriate design specification and management.

The infrastructure deficit and its impact on growth and living standards

Multilateral organisations such as the United Nations, World Bank and the Asian Development Bank

(ADB) have attempted in recent years to quantify the optimal demand for infrastructure in

developing economies.

Demand projections vary from $130 billion to $600 billion annually.

The ADB has estimated the total requirements for infrastructure finance in Asia and the Pacific

averages more than $250 billion per annum. East and South Asia have the highest requirements for

infrastructure investment finance at $125 billion and $76 billion, respectively. Southeast Asia,

Central and West Asia, and the Pacific will require $42 billion, $12 billion and $0.5 billion,

respectively. (Asian Development Bank 2008)

Socio economic development pressures in APEC economies

Although PPPs are not the only policy or procurement solution to addressing APEC’s infrastructure

challenge and, in some cases, may not be the best answer, they do have the potential to make a

significant contribution.

Economies within the region are successfully using the PPP model to deliver infrastructure projects.

In 2009-2010, despite the impact of the global financial crisis, there was more than US$8.5 billion of

infrastructure investment made through PPPs across Australia, Japan, Singapore, the Republic of

Korea, and Vietnam. (APEC 2010)


In the region’s emerging economies, investment in infrastructure is essential to support the

development of the manufacturing, resources and services sectors to enable countries to drive

efficiencies and productivity and maintain long-term economic growth.

The shortfall in investment in infrastructure is widely recognised in the region, with many developing

countries emphasising such investment as a priority within their national development plans.

However, infrastructure development remains an expensive and complex undertaking, and the costs

of continuous upkeep and improvement are high. Investment can be risky and constraints on public

financing remain significant. (Economist Intelligence Unit and Asian Development Bank 2011)

In the face of such challenges, countries have adopted strategies to capitalise on private-sector

financing and expertise to build and operate infrastructure assets. Those that have developed robust

and efficient institutions and processes for working with the private sector, such as the UK, Canada,

Australia, Korea and the Philippines have successfully used PPPs to bridge the financing gap and

drive infrastructure projects.

Role of the State in infrastructure projects

A more traditional concept of the public sector has come under increasing strain over the last

several decades. The idea that national governments are the major actors in public policy and that

they are able to influence the economy and society through their actions now appears to be in

doubt. (Peters and Pierre 1998)

PPPs enable a blending of public and private resources–this blending creates connections between

actors in both government and the private sector. This in turn allows each side to use resources that

would not otherwise be available to them if they were working separately. The utilisation of PPPs

indicates the willingness of government operating within the governance framework to develop

alternative means of making and implementing these changes. (Peters and Pierre 1998)

Private financing of public services has produced clearer objectives, new ideas, better

planning, and the incentives of wider competitive tendering. (…) Private financing has

produced better-defined contracts, better contract management, and design innovation. At

the strategic level, it broadens the horizons of public procurement, and effectively commits

contractors to long-term contacts. (Spackman 2002)

The PPP modality as an innovative win-win for the public and private sectors

In addition to mobilizing private capital to augment or substitute scarce public capital, PPPs can

generate significant time and cost savings at the project level. The UK Treasury has reported that

70% of non PPP projects were delivered late, compared to 20% of PPP projects, and 73% of non-PPP

projects were over budget compared to only 20% of PPP projects. (Asian Development Bank 2008)

In Australia, PPP projects have been observed to generate project cost savings of 30.8% and were

completed on average 3.4% ahead of time, whereas traditional public sector projects were

completed 23.5% behind time. (Raisbeck, Duffield et al. 2010)

Emerging markets have viewed such developments with interest, and they have been experimenting

with various modes of private-sector engagement with uneven success.


Ongoing fiscal limitations, poor feasibility assessments and regulatory barriers have caused delays in

the execution of projects, while concerns about financial viability, oversight and poor service

delivery have arisen once contracts have been signed. (Economist Intelligence Unit and Asian

Development Bank 2011)

While the private sector has emerged as a significant player in financing, building and operating

infrastructure assets across Asia, the potential of PPPs to drive much-needed investment and

efficiency gains has not been fully realised in many countries.

To ensure success, public sector project planning and selection, as well as implementation capacity,

needs to be improved. Public officials and agencies involved in PPPs need to develop a broad array

of skills and behaviours that will enable them to successfully transact PPPs and move forward with

the innovation and good results that are likely to be achieved.

The private sector also has a role to play in conducting due diligence and fostering competitive

markets. Private sector advisers and technical experts will continue to play an important role in

enhancing and supporting the public sector in its PPP evolution.


Skills and competencies needed for Public Officials in APEC economies Emerging APEC economies, particularly in Asia, face many challenges in successfully implementing

PPPs.

Only a small number of PPP projects have been completed in recent years, mainly because emerging

APEC economies are not moving through the evolutionary stages of building a successful PPP

market.

Capacity building and knowledge sharing can help to address this problem, and there have been a

wide range of conferences and courses offered in the region over recent years.

In line with this capacity building effort, the level of conceptual understanding of the issues involved

in delivering PPP projects within the region is perceived to be quite high. Significant political will

exists within emerging economies to move forward in developing PPP markets. There is also a

relatively broad awareness of the benefits of PPPs, including lower operational costs, design

innovation and capital market development.

What is often missing is staff in PPP units who have ‘hands on’ experience at negotiating and

delivering PPP projects. There is also an understandable concern among Ministers, and

others with ‘sign-off’ responsibility on major PPP projects, about where they can go to

receive impartial advice on complex PPP issues. (APEC 2010)

A typical skill set needed by a public official involved in PPPs can be summarised in the following

table:

Technical/’Hard’ skills: Experiential/’Soft’ skills:

Design and concept development

Economic appraisal/evaluation

Engineering and facilities

Finance and accounting

Risk assessment, allocation and transfer

Legal

Governance

Negotiation

Stakeholder management

Creativity and curiosity

Oversight of multidisciplinary teams

Media and public affairs

Not all these skills will be resident in one person all the time so there needs to be a focus on

fostering individuals who have the capability to oversight and work with others who have deeper

experience in particular skill sets.

How an effective Public Official manages the PPP model and transactions

In line with the above personal attributes and skills that a public official needs to have access to

oversighting an effective PPP agency, there are a range of behaviours that need to be displayed

when implementing a PPP project.

These can been summarised as follows:

Governance skills. A PPP is a highly complex endeavour for the public sector and

requires high order governance skills to develop an effective range of control and


monitoring apparatus. Effective decision making and escalation protocols need to be

developed early so that the government level decision makers and PPP implementation

bodies can be kept fully abreast of key matters arising.

Good matching of people and skills to tasks. A PPP requires a multidisciplinary approach

to many distinctly technical tasks and roles, so the team needs to be diverse and skilled

to handle this broad array of effort. This may mean that individuals will need to be

seconded from line agencies, and perhaps the private sector, to augment or insert skills

that are not readily identifiable or available within the existing public sector employee

pool.

Clarity of expected outcome from the PPP. The expected outcomes and benefits from

the PPP project need to be clearly articulated and constantly reinforced during all stages

of project development.

Network and stakeholder skills. Many internal and external stakeholders will be

involved in a PPP and public officials needs to be primarily ‘outward’ facing rather than

‘insular’ when engaging with the community and the market.

Working effectively with the private sector. An ongoing challenge for a public official

will be the constant exposure to better paid and better resourced private sector

representatives who may try to influence and capture the agenda to suit their own

financial motives, requiring the public sector to adopt a respectful, but not overly cosy,

relationship with bidders.

Probity behaviours. PPPs are lucrative transactions, and many individuals on the private

sector side will earn a personal bonus, success fee or equity stake if their bid is

successful. Some may be tempted to offer bribes or engage in soft corruption, which

means that officials need to be trained to a high standard in probity conduct. Other

specific measures may also need to be put in place to mitigate these risks, such as anti-

corruption declarations, probity advisors and probity auditors.

Commitment to due process. Both the private and public sectors face high upfront

transaction costs when developing or bidding for a PPP, so it is important for the process

to be well defined and stable before any work commences. Unnecessary changes to

requirements or political interventions during the bidding process can radically change

cost estimations and design concepts. Attempts to amend a PPP contract after signing

could also trigger sovereign risk issues and need to be very carefully managed.

Diligent project and resource management. The budget for a public sector PPP project

team is usually quite large, in line with the various technical inputs and up front

development work that will need to done to get the project ready for market. As such, a

realistic approach to resourcing is required.

Specialist PPP agencies – how do they function and what support can they provide?

It is vital that the procuring body (i.e. a government) has the necessary expertise to ensure a strong

understanding of project costs against project benefits, as well as the capability to develop and

manage within a suitable commercial framework. (APEC 2010)

A PPP unit is an operational body that is responsible for negotiating and implementing PPPs within a

jurisdiction. PPP units usually operate in partnership with relevant line public sector agencies (such

as the transport, health or education agencies) in relation to specific PPP procurements.


According to the ADB (2008) a specialised PPP unit should be able to:

develop standard contracts

develop bid evaluation frameworks based on value for money (VFM) principles

develop procedures for accepting solicited and unsolicited bids

create a project pipeline

develop expertise and procedures for negotiating contracts

create an independent supervisory mechanism to ensure probity of transactions

procure land, and address resettlement and environmental impacts

create capacity in Government agencies to monitor and enforce PPP contract provisions, and

over time, identify ways to facilitate access to local currency finance from banks and capital

markets.

PPP units are often embedded within central budget agencies, such as a finance ministry, because

large and complex PPP contracts often have inherent fiscal risks, including long-term liabilities and

contingent liabilities, which are of keen interest to a finance ministry, but which may be of less

concern to line agencies with a core focus on physical infrastructure delivery.

In addition to these types of units, in a recent report to APEC Finance Ministers, the Australian

Treasury (2009) proposed consideration of PPP ‘Centres of Excellence’ as a platform to develop,

deliver and manage PPP projects in the APEC region.

The concept of establishing regional ‘Centres of Excellence’ as hubs for sharing information and

experience on PPP procurement policy and implementation is designed to encourage financiers and

contractors to work across many economies.

Governments would also be supported by such centres by receiving unbiased policy advice and

building up the capacity of government officials responsible for developing and executing a PPP

program, as well as creating a platform for public and private sector players to connect and

showcase potential PPP projects.

Conclusion

To be successful in the context of transacting a PPP, a public official needs to deploy a wide range of

skills and competencies.

Not all of these skills will be required for each project, and they can’t always be resident in just one

person.

It is important for public officials to recognise this challenge up front and seek to build a

multidisciplinary and experienced team that can consciously embrace these challenges.


Effectively leveraging consultants, experts, and technical advisors The role of advisors and contractors in the design, management and delivery of PPPs

For a PPP project, it is quite common that project teams will not have all the skills required for

project preparation, procurement and management.

This gap in skills creates a need for external advisors. The main role of external advisors is to add

value to the project by giving sound advice in their area of expertise. Different types of advice is

needed from different types of advisers, including technical advisors, legal advisors, financial

advisors and if required, an environmental advisor. (PPIAF 2009)

In both developed and undeveloped PPP markets, it is normal for the government to appoint

external advisors to provide advice on the key transactional, technical, financial, commercial and

legal aspects of the project.

Whilst fees are payable to advisors, it is generally accepted that the specific expertise they are able

to provide is not available within the public sector and that this expertise is essential to the delivery

of successful outcomes. For economies that lack a PPP agency, advisors’ expertise should be relevant

to the economy.

The expected roles of different advisors are described below:

Transaction Advisor – Many jurisdictions partner with a private sector advisory firm (on retainer) or

hire an experienced specialist contractor to provide transaction advisory services during the

development and procurement phases of a PPP project. This advisor can provide a wide variety of

services ranging from supporting the market solicitation and bid assessment process, to assisting

with the research and drafting of key documents required during the development phase.

An experienced transaction adviser is invaluable, as they should have already been through a

number of PPP bids and can help public officials avoid common pitfalls, and provide specialist

support as required.

Technical Advisor - Technical advisors can advise on technical aspects of the project, including

scoping construction and operating requirements, assessing likely costs, and evaluating suitability of

the bidders’ proposed technical solutions.

Technical advisors may carry out site inspections to identify technical issues and provide support by

giving expert advice on technical solutions. A technical adviser drafts the desired outcome of the

project and makes sure that technical matters align with project objectives.

Technical advisors can also work in conjunction with financial advisors to develop payment

mechanisms. (PPIAF 2009)

Legal Advisor - The legal advisor can advise on legal aspects of the procurement, including drafting of

the contract documents and providing advice in relation to any related legal matters, especially in

relation to approvals.

Legal advisors provide support by developing project contracts and documents in relation to legal

aspects of the bid such as land ownership, projects assets and interface agreements. Legal advisors


prepare legal and contractual prerequisites for submission of bids and ensure that these

requirements are met by the bids.

Legal advisors also review and advise on all legal and contractual solutions throughout the

procurement phase and provide support in resolving any legal issues associated with the project.

(PPIAF 2009)

Legal matters for PPPs are discussed in detail later in this report in the sections titled ‘Legal issues for

PPPs’ and ‘Developing and managing a PPP contract’.

Financial/Commercial Advisor - Commercial and financial advisors can advise on all commercial and

financial aspects of the project, including developing the commercial principles and framework for

risk transfer, developing the payment structure, evaluating the viability of funding solutions, and

assessing value for money.

The primary role of a financial advisor is to support the financial aspects of the project such as

financial modelling, considering different options and liaising with various financial institutions.

Financial advisors prepare the financial components of bidding documents and ensure that these

requirements are met by bidders.

Financial advisors also review and advise on funding and taxation aspects of all financial proposals

throughout the procurement phase. Financial advisors also provide support to understanding and

resolving any commercial and financial issues that may emerge during the PPP project development.

(PPIAF 2009)

Environmental Advisor (if required) - Environmental advisors identify the likely impact of the project

on the environment and the risks associated with it. Mitigation of such risks and environmental

impacts are considered by environmental advisors during the design phase of the project. (PPIAF

2009)

Governance and oversight of advisors and contractors

So that they can provide the best possible advice, it is very important for professional advisors to

understand the objectives of a PPP which can be only made possible by accessing the public agency’s

planning, development and management processes. In other words, it is important to “bring them

inside the house” and involve advisors in all aspects of the project.

Regular meetings need to be held with advisors to review their performance and to discuss the

issues they face. Meetings are also crucial to enable advisors to account for their work in the project.

Apart from meetings, another important requirement for advisors is to sign-off various stages of a

project as they proceed to the next stage making sure that all stage requirements are fulfilled and

the proposals are deliverable. Any objections raised by advisors should be formally recorded.

During initial stages of planning, project teams should budget the cost of advisors according to the

complexity of the advice. Even though advisors may seem costly, it is vital to secure sufficient

resources to gain their expertise.

When contracts are signed, advisors may receive part of their fees but it is crucial to keep in mind

that an advisor’s interest in closing the deal may not always align with the project’s objectives,


especially during initial stages of project development. For this reason, it is wiser to pay advisors

when they deliver their work. (PPIAF 2009)

Paying for advisors can be costly. Many donor agencies provide an external source of funds for hiring

advisors. Donors can also provide expertise in the hiring process that governments can use to ensure

that they choose appropriate advisors.

The ‘advisory pyramid’

The PPIAF (2001)has set out an advisory pyramid that details the different types of advisors and their

tasks in the PPP. It identifies four core skills sets that it considers likely to be required:

Economic – knowledge of economics especially around regulation, pricing and incentives

created by different market and industry structures

Financial – knowledge of the process of introducing the private sector, the sale or lease

of infrastructure assets and the impact of reform decisions on the ability to attract

private finance

Legal - knowledge of both the local legal framework and best international practice in

the drafting of legislation and contracts

Technical – knowledge of the engineering, operational and other technical aspects of the

infrastructure sector in questions, including the ability to divide assets both horizontally

and vertically.

Figure 1: The advisory pyramid- transaction, economic, financial, legal, design and other technical

support

Source: PPIAF (2001). Toolkit: A Guide for Hiring and Managing Advisors for Private

Participation in Infrastructure. Washington DC, World Bank


The advisory pyramid above illustrates the roles and tasks of various advisors in a PPP. The advisors

need to be able to satisfy a diverse range of skills and competencies, and while these will change

depending on the circumstances of the project, the four main skill sets remain.

As illustrated in Figure 1, the transaction support component of the PPP advisory team is at a high

level, and has an overarching role in comparison to the other various ‘bottom up’ technical inputs.

This type of support is critical to members of the PPP implementation team, particularly the PPP

Project Director.

The PPP Project Director

For many PPP projects, a specialist dedicated project director will need to be appointed as the ‘lynch

pin’ key person to oversee and coordinate the complex range of activities that are generated before

and during the PPP procurement and transaction process.

A more developed jurisdiction may have an experienced and skilled practitioner on staff who is

available to be appointed to this role, however, this means that their other official duties will need

to be re-allocated while they work solely on the PPP project for 2-3 years.

However, due to a lack of this specialist skillset within the bureaucracy, many PPP projects hire a

capable external contractor to perform the role of Project Director. Typically, these people are either

former senior public officials who have worked closely on previous PPP projects, or previous

technical advisors (e.g. from legal, finance, design or engineering backgrounds) who have gained and

demonstrated their relevant PPP experience.

The salary for this type of person can often be double or triple what a public official would cost, so

the cost versus value of an internal versus external resource needs to be carefully weighed up.

In the case of some APEC economies, the nascent and emerging nature of the PPP market will

require a project director to not only have excellent project level skills, but also have experience and

sensitivity in regard to the ongoing socio economic development and reform agenda that sets the

context for PPPs.

A person in this role will often need to have a greater than usual focus on educative, influencing and

negotiation activities to maximise the success of their PPP transaction.

Conclusion

Project teams can benefit greatly from advisors from the initial stage of project development

through all stages of procurement.

A strong advisory team will contribute to the chance of the PPP project becoming a success. The role

of advisors will have an impact on whether potential investors decide to invest, and their

involvement can build confidence in the process.

They do this through:

demonstrating the existence of transparent and fair selection processes from an early stage

attracting advisors with a strong reputation, and


introducing a well-designed PPP program. (PPIAF 2001)

Overall, the benefits of quality advice should outweigh the cost of bringing advisors onto the project.


Managing the complexities of a lengthy procurement process Governance and process definition

PPPs bring many organisational and institutional challenges for the public sector. They are complex

in nature, and require different types of skills than are usually resident in the bureaucracy.

For PPPs to work well, they require effective and functioning institutions with transparent, efficient

procedures, as well as accountable and competent public and private sectors–in other words, PPPs

need good governance environments. (United Nations Economic Commission for Europe 2008).

Governance is about ensuring effective management and accountability and transparent processes.

Understanding the many facets of governance including direction, practice and outcomes, is a

matter of observing and interpreting the process through which it evolves and identifying the

relative authority and role of the myriad actors involved the process. (Peters and Pierre, 1998)

In Australia, most public infrastructure is still procured using traditional methods such as Construct

Only, Design and Construct, and Managing Contractor (Clayton Utz 2013).

PPPs are used to drive value for money outcomes. This defines the type of project that is suitable for

a PPP and in turn focuses governance on ensuring that value for money can be achieved.

Australia has seen many different governance arrangements put in place for PPP projects. Some

have been procured by the government agency that will be the eventual customer, whilst others

have been procured by specific authorities established for the sole purpose of delivering the project.

(Clayton Utz 2013).

In Australia, there is a preference for more centralised procurement authorities–an agency that

facilitates the development of public sector expertise and provides opportunities for lessons to be

learned throughout the process. This model can also be effective in making sure that procedures are

in place to bring sufficient oversight.

This enables government to “learn-by-doing” whilst also appreciating the greater contractual and

project complexities that develop during the PPP lifecycle.

Large procurements present issues around the scale of the task and the interconnection between

different agents within the procurement process. (Kettl 2000)

Appropriate levels of accountability and the development of a defined and repeatable process for

governance are essential when delivering large scale projects. Lengthy procurement processes offer

up new challenges in the way that projects are managed and coordinated.

Governments must not only consider and develop new strategies to manage programs and

processes, they must also build capacity to do so effectively.

For example, it is widely accepted within the UN system that there is a need to increase the capacity

of government at all levels to successfully implement PPPs.(United Nations Economic Commission

for Europe 2008)


The UN (2008) has set out six core principles for good governance:

• Participation – the degree of involvement of all stakeholders • Decency – the degree to which the formation and stewardship of the rules is

undertaken without harming or causing grievance to people • Transparency – the degree of clarity and openness with which decisions are made • Accountability – the extent to which political actors are responsible to society for

what they say and do • Fairness – the degree to which rules apply equally to everyone in society; and • Efficiency – the extent to which limited human and financial resources are applied

without waste, delay or corruption prejudicing future generations. Setting realistic timeframes

Timeframes need to be set which reflect both the stages and processes contained within the

procurement approach. PPPs should set a roadmap for implementation to enable the full suite of

project outcomes to be described and planned.

It is important to set out a timetable that is realistic and also includes those tasks that will be

undertaken by advisors and consultants. (PPIAF 2009)

Governments and their bureaucracies need to appreciate that where new skills are required for

example negotiating, contracting and financing skills, this development process should also be

factored into timelines. (United Nations Economic Commission for Europe 2008)

A project undertaken over too short a time frame runs the risk of generating inappropriate

outcomes. A bottom-up approach may be preferred, where the duration of the tasks are aggregated

to provide total duration for the project.

This serves the dual purpose of scheduling advisors, whilst also removing the overt influence of

political drivers. PPIAF also distinguishes between setting the timetable for the wider reform

associated with the PPP model, and the timetable that the project (and associated advisors and

consultants) are working towards, taking into consideration the time, cost and effort in bringing

advisors and consultants into different stages of the project.


Figure 2: A generic process map for the PPP modality

Source: Asian Development Bank (undated). Public–Private Partnership Handbook.


Commercial and legal expertise to support the process

PPPs can follow a variety of structures and contractual formats, however all incorporate three key

characteristics (Asian Development Bank undated):

A contractual agreement which define the roles and responsibilities of the parties

Sensible/optimal risk-sharing among the public and private sector partners

Financial rewards to the private party, commensurate with the achievement of pre-specified

outputs.

Thus, in designing a PPP process and selecting a form of PPP, it is important to consider the policy

environment; the legal, regulatory, and institutional frameworks; financing requirements and

resources of the sector; and political constraints and stakeholder concerns. (Asian Development

Bank undated)

The ADB recommends that PPPs be informed by a sector diagnostic that provides a realistic

assessment of the current sector constraints. Specifically, the diagnostic would cover:

Technical issues

Legal, regulatory and policy frameworks

Institutional and capacity status

Commercial, financial and economic issues.

In particular, the legal diagnostic should cover the following:

Applicable laws, and existing regimes to assigning authority and set performance standards

Oversight arrangements, regulatory bodies, regulations

Major sector institutions and government entities related to the sector

Tariff and subsidy policies and arrangements

Existence and applicability of legally mandated service quality standards

Natural resource safeguards and management requirements important to sector

performance

Environmental and health regulations

Relevant labour laws and regulations

Limitations on foreign ownership/sector participation, foreign exchange restrictions, and

limitations on repatriation of profits i.e. foreign investment laws.

Dispute Resolution Boards (DRB) are effective mechanisms to minimise or ideally avoid disputes that

may arise from large infrastructure projects. These boards usually comprise independent people

appointed by the owner and contractor to assist to resolve any issues that may arise through the

project.

These representatives will require a broad range of skills and experience with similar projects,

whether they are in project management, engineering or legal fields, to enable expertise in resolving

the issues that might are brought before them. (Clayton Utz 2013)

Because of the long term nature of PPPs, partners should seek to avoid litigation as it can be

potentially fatal to the spirit of partnership. (Quick 2003)


Investors in PPPs need predictability and security in legal frameworks, which can often mean fewer,

simpler and better rules need to be developed. In addition, the legal framework needs to take

account of the beneficiaries and empower them to participate in legal processes, protecting their

rights and guaranteeing them a fair hearing in decision making. (United Nations Economic

Commission for Europe 2008)

Effective use of a central PPP unit to streamline effort

A PPP unit acts as the ‘orchestra conductor’, coordinating PPP activities that may involve multiple

stakeholders and interested parties. These stakeholders could be the finance minister and other

ministers, a budget management department, sectoral agencies, other government stakeholders,

industry (such as construction companies and financiers), private advisers and consultants, the

media and political interests.

The PPP unit must ensure that ministers, procurement agencies and other government departments

involved in PPPs are all playing in tune, paying different levels of attention to the needs of different

players at different times.

PPP units may also coordinate the actions of domestic institutions in various aspects and stages of

the infrastructure project cycle, such as:

planning, regulation and financial matters

being represented on project steering committees and working groups

providing expert commercial advice

identifying and addressing policy issues, and maintaining the integrity of PPP projects

monitoring budgetary issues

facilitating approvals by relevant ministers.

In order to undertake these roles, PPP agencies need staff with significant financial and transactional

skills.

Managing expectations of internal and external parties

Developing and maintaining strong communication channels throughout the project is critical to

ensure stakeholders, both internal and external to the project, are kept well informed. Continual

consultations provide formal and informal dialogue between parties, while also allowing for issues or

concerns to be raised or escalated if required.

Community consultations are especially important in garnering initial support for the project, and

checking that their expectations are being managed through the lifecycle of the project.

The early involvement of all stakeholders in the PPP process helps develop an enabling environment.

Stakeholders may provide invaluable information on points of concern, performance expectations

and potential risks.

It is important that stakeholders are consulted genuinely and consistently during the PPP’s

development. These consultations should extend to potential bidders and partners of the project to

ensure clarity of the message about what is expected from the project, and the roles of all groups.


This is especially important at the design phase, to ensure that the design and specifications does

not include an unrealistic combination of features that are unappealing to prospective bidders. As

such, collecting informal feedback from the market during the preparation stage is critical. (Asian

Development Bank 2008)

Conclusion

Lengthy procurement processes bring their own specific challenges and issues that need to be

predicted up front and dealt with by effective and well defined processes.

It is particularly important to document the expected process to be followed from the outset, and

avoid unnecessary or last minute interventions from political or bureaucratic interests.

Feasibility studies are a useful vehicle to provide detailed preliminary analysis of the PPP context and

likely capability and interest of potential market respondents, as well as help governments gain a

good understanding of the specific project challenges of the proposed PPP.


Transacting optimal outcomes for the public and private sectors For most governments the potential to achieve greater “value for money” from a PPP compared to

other procurement and delivery models is an important, if not primary, factor in the decision to

implement an infrastructure project as a PPP.

Definitions of “value for money” vary, however, the UK Treasury defines the concept as follows:

“Value for Money (VFM) is the optimum combination of whole-of-life costs and quality (or

fitness for purpose) of the good or service to meet the user’s requirements”.

Value for money approaches

Grimsey and Lewis (2005) note that there is an acceptance amongst public service project managers

that there are six main determinants of value for money, being:

1. risk transfer

2. the long-term nature of contracts (including whole-of-life cycle costing)

3. the use of an output specification

4. competition

5. performance measurement and incentives

6. private sector management skills.

Of this list, competition and risk transfer are seen to be the most important.

It follows that to achieve value for money:

• projects should be awarded in a competitive environment

economic appraisal techniques, including proper appreciation of risk, should be rigorously

applied, and risk should allocated between the public and private sectors so that the

expected value for money is maximized

• comparisons between publicly and privately financed options should be fair, realistic and

comprehensive.

Broadly speaking, a PPP may provide value for money compared to traditional procurement models

if the advantages of risk transfer combined with private sector incentives, experience and

innovation—in improved service delivery or efficiencies over the project life-time—outweigh the

increased costs of contracting and financing. (World Bank Institute and Public-Private Infrastructure

Advisory Facility 2013)

This raises challenges for policy-makers: how should they assess the value for money of different

procurement and delivery options—that is, carry out “value for money (VFM) analysis”— and how

should they use the results of this analysis in PPP decision-making?

Key elements of a successful PPP

Although stakeholders adopt different criteria for success in PPP projects, there is a consensus about

factors which lead to the successful implementation of these projects.


Most of the success factors identified relate to the procurement and development phases rather

than the operational phase. This is partly because PPP projects are complex to set up and also

because most experience to date has occurred in the procurement phase rather than the

subsequent operation of facilities.

The success factors include:

• a robust business case, demonstrating the need for the project and its long-term financial

viability

• a well drafted output specification, establishing the quantity and quality of

infrastructure/services to be provided over the period of the contract

• consultation with end-users to ensure that their needs are properly reflected in the output

specification and inform the detailed design of facilities

• a balanced performance measurement system coupled with clear and appropriate risk

transfer, to ensure that the service provider is incentivised to deliver the project and operate

facilities to suit the needs of end-users

• commitment and adequate resourcing of projects by awarding authorities

• involving financiers at an early stage, to ensure their criteria for funding can be met and to

avoid abortive negotiations.

High level accounting treatments and concepts for PPPs

Some commentators argue that PPPs are a ‘stealthy new privatisation agenda’ (Hodge and Greve

2010) while others claim that the core motivation for most PPP projects is a shortage of government

funds which requires the participation of the private sector. Officer (2004, p24) argues that:

“The shortage of government funding might suggest that the government has a higher

opportunity cost of capital than the private sector. In reality, it is usually due to the political

inability of the government to ‘sell’ the need for further finance by way of taxation or debt

raising to fund the project.”

A further claim is that PPPs are used as a means to fund projects “off-balance sheet” and avoid

public reporting of public debts or liabilities. Maguire and Malinovitch (2004) note that this

approach was prevalent in Victoria in the late 1980s up until 1992:

“At the time, the key reason behind the use of PPPs was an overriding concern to achieve off-

balance sheet financing which would not be caught within the global limits set by the

Australian Loan Council. The PPPs of that era resulted in financing arrangements with the use

of private investment having no impact on the nature of service-delivery arrangements.”

However, these criticisms of early approaches to the PPP model have not been borne out by the

reality of recent transaction history. In his review of Victoria’s PPPs, Fitzgerald (2004) found that

“the policy focus in recent times is represented as moving from a focus on overcoming fiscal

restraints and Australian Loan Council limitations, through a focus on increasing the extent

of private participation to stimulate growth and efficiency, to one of achieving value for

money in the public interest”.


In general, the ‘off balance sheet’ argument has been solved by modern international accounting

practice which requires that a PPP arrangement should usually be recorded as ‘on balance sheet’,

with the contingent liability of future payments to the private party offset against the emerging

asset that will transfer to the State at the end of the contract.

This approach to accounting for a PPP gives visibility of future commitments amortised over long

contract periods, without increasing the short term debt overhead exposure of a jurisdiction, as the

cost of borrowing is recorded in the private sector accounts (as they are the entity contributing the

equity and risk capital to deliver the PPP infrastructure asset).

Beyond this, there is a broader question about whether service payments are correctly assessed

against service standards. Although these payments are material to the PPP contract, the contract

management regime that is put in place for the PPP defines the quantum of payments (or

abatements) for the private sector.

Fundamentally, this means that future payments by the state to the private sector are fully

contingent upon performance against the general contract requirement (i.e. not triggering default

provisions) and delivery of specified services as defined by the payment mechanism and service

standards in the contract.

Mutual value proposition arising from the concession over the long term

Most forms of PPP involve a contractual relationship between the public and private parties (for

example, a concession).

The long-term nature of these contracts can create a strong long-term mutuality of interest: they

differ from traditional (input-based) procurement contracts, under which the client government will

often be tempted to micro-manage the decisions of project implementation and so carry much of

the associated risk.

Contractors seldom miss the opportunity to increase their prices, which are linked to inputs, and so

this style of contract is often associated with a short term “claims culture.”

Early evidence of operational contracts in more mature PPP programs shows that in many cases the

parties recognize this mutuality of interest without adversely affecting the mechanisms in the formal

contract that determines performance.

Conclusion

Value for money considerations need to remain key at all time during a PPP negotiation and

contract. Value for money doesn’t equate to lowest price and it’s important to analyse any proposal

holistically against all desired outcomes, over time.

A focus on harnessing the private sector’s innovative ideas via an output (quality) rather than input

(quantity) focussed specification is a core positive attribute of PPPs and needs to be constantly

reinforced.

The private sector and public sector each have different needs and expected outcomes from a PPP

and this needs to be understood and fairly resolved to the best mutual interest of each party.


Legal issues for PPPs Overview

PPP projects need to be supported by an enabling environment that is firmly embedded in the legal

structure of the implementing country. In many (but not all) legal systems, a key aspect is the

existence of PPP enabling legislation, such as a concession law that can be readily applied to PPPs.

PPPs are also affected by a wide range of other laws, such as sector specific regulatory regimes.

Public sector officials responsible for PPP projects should ensure that they have access to

appropriate legal advice. This includes not only advice on the PPP contract itself, but also advice on

the wide range of other legal issues that may arise in the development and implementation of a PPP

project.

The need for appropriate legal advice continues throughout the life of the PPP contract.

PPP Enabling Legislation

Many countries undertaking PPP projects have put in place PPP enabling legislation (World Bank

Institute and Public Private Infrastructure Advisory Facility 2012 p. 116):

Whether a PPP law is needed or beneficial typically depends on the country’s legal and

administrative systems. In civil law countries, a law is commonly used to empower

government to enter PPP contracts, and to resolve other limitations in existing administrative

law that may constrain how PPP contracts can be structured or managed. In common law

countries, a law is often not required to legally enable the government to enter into PPP

contracts. Nonetheless, many common law countries adopt PPP laws to address

inconsistencies between the proposed PPP policy and existing laws. In certain cases, PPP laws

are designed to limit the discretion of the executive branch of government in implementing

PPPs and to bolster accountability and credibility of the government’s commitment to PPPs,

on the basis that a policy may not be as strictly followed as a law.

The key issues that should be addressed in PPP enabling legislation include:

the types of PPPs that may be undertaken (legislation should not be unduly prescriptive, as

different types of PPPs are suited to different projects)

the sectors in which PPPs may be undertaken

the government approval processes applicable to PPPs.

In addition, the following issues should be addressed in the PPP enabling legislation if they are not

adequately addressed in existing laws:

the rights of private sector financiers to take security over the project assets

the ability of government to enter into direct agreements with project financiers to govern

their respective rights in relation to the project (private sector financiers may be unwilling to


finance the project if there is not a clear acknowledgement from government of their

security rights and their rights to “step-in” to the project if a financial default occurs)

rights in respect of foreign investment in PPPs

the dispute resolution processes that will apply to any disputes under the PPP contract

(including, where necessary, a direction that any litigation in relation to the PPP contract will

be dealt with through the civil courts rather than the administrative courts).

Public officials responsible for PPP projects should ensure that an appropriate legal enabling

environment is in place before a tender process is commenced.

Other Laws Affecting PPPs

A large number of laws, other than the PPP enabling legislation, will affect a PPP project in some

way. For example, PPPs often deal with the supply of essential services in monopoly (or near-

monopoly) conditions, subject to a sector regulatory regime that sets service standards and tariffs

(World Bank Institute and Public Private Infrastructure Advisory Facility 2012).

The sector regulatory regime may apply to both PPP and non-PPP service delivery in that sector.

Other laws that commonly affect PPP projects include environmental and land use planning laws,

land acquisition laws, taxation laws and foreign investment regulations.

Public officials responsible for PPP projects should ensure that all appropriate laws are considered,

and where necessary expert legal advice is obtained, throughout the development and delivery of

the PPP project.

Selecting Legal Advisers for PPP Projects

PPPs are large and complex contracts and, as indicated above, a wide range of laws must be

considered. Although governments may employ their own internal lawyers, these lawyers will often

not have the detailed PPP expertise or the resources to develop and advise on the complex legal

documentation involved in a PPP. In addition, it is not always possible to secure the services of a

single legal adviser with the full range of expertise relevant to the project.

Even in countries with extensive experience in PPPs, it is not unusual for government to engage

more than one law firm to advise government on the project, or to engage an external law firm to

provide PPP specific expertise while relying heavily on internal government lawyers in relation to

other issues such as matters of administrative law affecting the project.

Public officials responsible for PPP projects should carefully consider the range of legal expertise and

resources required for their projects, and should ensure that appropriate legal advisers are engaged

to advise government.

PPP Contracts as a Risk Allocation Tool

An important function of a PPP contract is to allocate risks between the parties. The private party’s

key obligations under the contract are expressed in terms of outputs, and payments to the private

party are dependent upon delivery of these outputs. It is implicit that risks associated with the


inputs and activities required to deliver those outputs are risks allocated to the private party, except

to the extent that the PPP contract explicitly states that particular risks are allocated to government.

The drafting of the PPP contract must therefore occur with an understanding of the intended risk

allocation, and the PPP contract should include a “catch-all” clause that has the effect of allocating

to the private party any risks that are not expressly dealt with elsewhere in the contract.

Public officials responsible for PPP projects should require their legal advisers to “sign off” on the

PPP contract, confirming that the contract will be legally effective to put in place government’s

proposed risk allocation.

Concept of PPPs as an ‘incomplete’ contract

PPP contracts are known as incomplete contracts (World Bank Institute and Public Private

Infrastructure Advisory Facility 2012 p.163):

Because PPPs are long-term, risky, and complex, PPP contracts are necessarily incomplete—

that is, they cannot fully specify what is to be done in all future states of the world. This

means the PPP contract needs to have flexibility built in, to enable changing circumstances to

be dealt with as far as possible within the contract, rather than resulting in re-negotiation or

termination.

The aim of PPP contract design is therefore to create certainty where possible, and bounded

flexibility where needed—thereby retaining clarity and limiting uncertainty for both parties.

This is typically done by creating a clear process and boundaries for change.

PPPs bring a need to deal with the problem of interpretation of output specification or incomplete

contracts. When contracts are incomplete, ‘there is always a risk of opportunistic behaviour’ but

‘there are transaction costs for writing complete contracts’ (Boukendour 2007 p. 723–4).

Hensher and Stanley (2008 p. 6) have also argued that ‘incompleteness and negotiation gives both

parties the opportunity to suggest changes (variations) that move towards efficient and effective

delivery’.

Developing a good working relationship or a ‘spirit of partnership’ is therefore seen as means of

facilitating negotiations, reducing the uncertainty in the bargaining process and preventing disputes.

(Robinson and Scott 2009).

For public officials involved in PPP transactions, the key consequences of the incompleteness of PPP

contracts are:

A PPP contract cannot be regarded as a "set and forget" arrangement. Public officials must

ensure that government monitors the private sector’s compliance with the contract, and

must also ensure that government meets its obligations under the contract.

Governments should have the awareness and capability to negotiate variations to PPP

contracts throughout their life in order to facilitate more efficient and effective service

delivery. The negotiation of variations must be carefully managed to ensure that they deliver


value for money for government and are not used by the private sector as a means of

obtaining a better private sector outcome at the expense of government or the community.

Governments should proactively develop good working relationships with their private

sector partners. The relationship should not override the contractual obligations of the

parties, but should provide open and honest channels of communication to facilitate the

delivery of the expected contractual outcomes and implementation of potential

improvements through the variation process.

These matters are not purely legal issues, and are discussed further in the next section ‘Developing

and managing a PPP contract’. Public officials responsible for PPP projects should make sure that

they have access to appropriate legal advice throughout the life of the contract to ensure that

government’s management of these issues is in accordance with the parties’ legal rights and

obligations.

Conclusion

A wide variety of legal issues affect PPP projects. Proper understanding and management of these

issues is essential to ensure successful outcomes. Public officials responsible for PPP projects should

ensure that appropriate legal enabling environment is in place before a tender process is

commenced, that all appropriate laws are considered and, where necessary, expert legal advice is

obtained, throughout the development and delivery of the PPP project.

They should carefully consider the range of legal expertise and resources required, and should

ensure that appropriate legal advisers are engaged to advise government. While the legal workload

may be highest during the tender process, public officials should ensure that they have access to

appropriate legal advice as required throughout the life of the PPP contract.


Developing and managing a PPP contract Overview

The PPP contract is at the centre of the public-private partnership, defining the relationship between

the parties, their respective rights and responsibilities, allocating risk, and providing mechanisms for

dealing with change (World Bank Institute and Public Private Infrastructure Advisory Facility 2012).

Public sector officials who are responsible for PPP projects should ensure that they allow adequate

time and secure adequate resources to draft a PPP contract that is appropriate for their specific

project. In some circumstances, it may be preferable to develop a standard PPP contract for use

across a number of difference projects.

The contract is often developed further after interaction and negotiation with bidders. Public

officials need to ensure that, during this dialogue process, value for money is not undermined as a

result of the contract being altered in favour of the private sector.

The need for careful management of the PPP contract continues throughout its lifecycle.

At the outset, the contract contains a payment mechanism linked to an output specification.

Together, these provide a commercial incentive for the private sector to deliver the outputs desired

by government. However, to ensure that these outputs are in fact delivered, public officials must

actively monitor the private sector's performance under the contract.

Public officials must also carefully manage any variations or modifications under the PPP contract

over its life, and any unexpected events that affect the project.

Drafting the PPP contract

The initial drafting of the PPP contract is usually led by the government’s legal advisers. However,

the content of the PPP contract is not purely legal in nature.

For example, the contract will typically include technical specifications (which may be developed by

public officials or by consulting engineers on behalf of the government) as well as commercial

elements such as a payment mechanism or tolling regime (which may be developed by the

government’s financial advisers).

Public officials must check that all of the different areas of expertise have provided appropriate

input into the development of the contract and that the legal advisers take responsibility for

ensuring that the complete package of contractual documentation is properly integrated and will be

legally effective.

The term of the PPP contract

PPPs involve long-term commitments, often in the order of 30+ years. Breaking a PPP contract early

can be expensive, as counterparties will be entitled to be compensated for the return they would

have derived from the contract. Accordingly, government should not contract for a term longer than

it can sensibly commit to. (Clayton Utz 2013)


The appropriate term of the PPP contract should be considered early in the contract’s development,

as the selection of an appropriate term can influence other aspects of the contract such as the

specification and the payment mechanism. The selection of the appropriate term is a key issue for

government, and public officials should not leave this question for their legal advisers to determine.

In determining the appropriate term of the PPP contract, the issues that public officials should

consider include:

Any legal restrictions upon the term of the contract (for example in the relevant PPP

law).

Analysis of the long-term need for the infrastructure and for flexibility at particular

points in the life of the infrastructure.

Life-cycle costs associated with the infrastructure - these are the significant maintenance

and refurbishment costs required at particular points in the life of the infrastructure,

such as the resurfacing of a road or the refurbishment of air conditioning equipment in a

building. The term of the PPP contract should be long enough to include major life-cycle

cost expenditures so that the private sector will be incentivised to consider those costs

when bidding for the project.

The impact of the term of the contract upon the availability of finance.

The ability of the private sector to forecast cost and risks over the term of the contract.

Developing and using a standard PPP contract

If a government will be undertaking PPP projects on a regular basis, it may be useful to develop a

‘standard’ PPP contract. The benefits of standard PPP contracts include:

lower transaction costs for government – while there is an initial cost in developing the

standard PPP contract, this may be offset by lower transaction costs in future projects

faster procurement times for government – the availability of a standard PPP contract

may reduce the amount of time required to develop documentation prior to going to

tender

lower transaction costs for the private sector – if the standard contract has been

developed with appropriate stakeholder consultation and to provide a balanced risk

allocation, the private sector may be able to more efficiently review and gain comfort

with the terms of the contract, and the need for negotiation of specific terms may be

reduced

greater market interest in and competition for PPP projects – a standard contract may

provide clarity and transparency of the terms on which a government will enter into PPP

projects, which in turn may increase the appetite of the private sector to bid for projects

on competitive terms.

These benefits must be weighed against the disadvantages of using standard PPP contracts, which

include:

a standard contract may not be appropriate for all situations or all sectors


a standard contract may stifle ongoing innovation in commercial terms and risk

allocation applied to PPPs, and may make it more difficult for contracts to be adapted to

changing economic or market circumstances

it may not be viable to develop a standard contract if the government does not have an

ongoing pipeline of PPP projects.

If the government does choose to develop a standard PPP contract, it is vital that there is extensive

consultation with stakeholders in relation to the terms of the contract, including consultation with

construction companies, infrastructure financiers and infrastructure operators.

If a standard contract is developed, the responsible public officials should ensure that there is

appropriate consultation in relation to its terms, and that there is flexibility in its use so that it can be

adapted to different sectors and changing circumstances over time.

Public officials responsible for ongoing PPP programs should carefully weigh up the benefits and

disadvantages of developing standard contracts.

Interaction with bidders and negotiating the PPP contract

In some countries, the PPP contract is issued with the government’s tender documents and cannot

be changed (World Bank Institute and Public Private Infrastructure Advisory Facility 2012). In these

circumstances, public officials must ensure that the contract appropriately balances the rights and

obligations of the parties, otherwise the project may be unattractive to the private sector and there

may be few or no bidders.

In other countries, PPP contracts can be changed as a result of interaction with bidders during the

transaction process (World Bank Institute and Public Private Infrastructure Advisory Facility 2012).

This may include providing an opportunity for bidders to comment on the terms of the contract,

exchanging successive drafts of the contract that reflect each party's position, or via direct face-to-

face negotiation between the government and one or more bidders.

Best practice principles that should be applied by public officials when negotiating PPP contracts

include:

there should be no "one-on-one" negotiations – there should always be at least two

members of the government project team present to ensure that one person’s

recollection and record of events can be corroborated

agreed positions should be documented, either directly into the PPP contract itself, or in

another form that will later provide the drafting instructions for the lawyers to update

the PPP contract

government should carefully analyse any proposed changes to the terms of the contract,

establish whether the changes offer value for money to government or users of

infrastructure, and document this analysis

government should understand its "walk away point" or back up plan – that is,

government should know what is, or what is not, an acceptable value for money

outcome from the negotiations, and should be willing to break off negotiations if a value

for money outcome is not possible.


While negotiation will generally result in government’s legal advisers making changes to the legal

documentation for the project, negotiation is not purely a legal process. The issues that must be

negotiated may include commercial, financial, technical and operational issues, as well as purely

legal issues. It is therefore not always appropriate for government’s legal advisers to lead the

negotiations on behalf of government.

Public officials responsible for the negotiation of PPP contracts should carefully consider who is the

most appropriate person to lead negotiations. This may be a legal adviser, a commercial adviser, the

government’s project director or another person specifically engaged as the government’s lead

negotiator.

Government should take a strategic approach to negotiation. The particular approaches available

will depend upon a variety of factors, and will be heavily influenced by the applicable PPP law and

procurement rules.

Operationalising performance standards

In PPPs, services are specified in terms of payment for a specified output, on which performance can

be measured, and which are linked to quality and timing of delivery. This contrasts with the

conventional approach to public procurement that is based on predetermined funding of inputs.

It is crucial that the outputs that will be required for delivery of a particular service are clearly

defined at the outset.(APEC 2010)

It can be difficult to make the transition from specifying inputs to specifying outputs. Public sector

officials responsible for the development of PPP contracts should ensure that adequate attention is

paid to the development of the specification, ensuring that it is expressed in output terms.

One of the critical elements of any PPP project is the payment mechanism. For the private sector,

the payment mechanism is important for its key role in distributing funds and in determining return

on investment. The payment mechanism is also important to the public sector as a tool for managing

performance. (APEC 2010)

Public sector officials responsible for the development of PPP contracts should ensure that the

payment mechanism is appropriately linked to the output specification, so that it provides an

appropriate incentive for performance by the private sector.

Monitoring and enforcing performance over the life of the concession/contract

Once the contract has been signed, value for money in a PPP project depends crucially on

performance monitoring to provide incentives for improvement and to ensure that service delivery

is in accordance with the output specification. However, the effectiveness of performance

monitoring and the output specification cannot be fully assessed until the project becomes

operational.

There is a need to examine the role of the performance monitoring mechanism to ensure that ‘value

for money’ is achieved throughout the delivery of services. (Robinson and Scott 2009)


Public officials involved in the monitoring of PPP contracts need to perform their roles with this

‘value for money’ mindset. Generally, the private party should meet its obligations under the

contract, and the relevant government official should take appropriate action if this is not done.

However, as PPP contracts are incomplete contracts and cannot provide for every future

circumstance (see the previous section ‘Legal Issues for PPPs’), there may be circumstances where

strict enforcement of the contract is inappropriate.

For example, suppose a toll road contract included a requirement that the toll plaza be staffed 24

hours a day, but there was no traffic on the road because a bridge on an adjoining road (not part of

the PPP) had collapsed. During this time, there would be no adverse impact on road users or

government if the toll plaza was not staffed 24 hours a day, and the PPP contractor might therefore

request a relaxation of this requirement.

In these circumstances, a government official responsible for managing the PPP contract must strike

a balance between the need to preserve the ongoing integrity of the contract and the need to act in

a sensible and commercial manner in their dealings with the private sector.

It may be appropriate to agree to the contractor’s request for a relaxation of the contractual

requirement; however the official should seek appropriate legal advice as to how this relaxation can

be given without undermining the effectiveness of the contract in the future. This advice may, for

example, recommend that the official issue a written notice to the contractor advising that the

contractual requirement will be relaxed on this specific occasion, but that the contractor will be

required to comply with the requirement once the current circumstances have ceased to exist.

Some governments find it advantageous to procure the services of independent technical and/or

financial reviewers to monitor performance (Asian Development Bank undated). This may be in

addition to or instead of the role of public officials in a contract monitoring unit or regulator.

In some cases, the reviewer provides an independent assessment of the performance, which

provides credibility and support to the overall monitoring. In other cases, this contracted expertise

replaces the need to retain an ongoing regulatory function. In considering whether to utilize

independent reviewers to monitor performance, public officials should consider:

the benefits of having an independent party monitor performance – an independent

party may have greater expertise and may be perceived to be more objective and, as a

result, the parties to the PPP contract may be less likely to dispute the assessment of

performance

the disadvantages to government of having an independent party monitor performance

– these may include the cost of paying the reviewer, the risk that the reviewer may

interpret the performance specification in a way that differs from government’s

intention, and the need for government to monitor whether the independent reviewer

is doing the job they have been appointed to do.

While the majority of the obligations in a PPP contract are for the private sector party, these

contracts also impose obligations on government.


Public officials responsible for PPP contracts should ensure that a government’s obligations are

understood and appropriate processes and resources are in place to ensure that the government

delivers on those obligations.

External scrutiny of a PPP and access to private sector data

Many jurisdictions require that major transactions such as PPPs be scrutinised by Auditors-General,

or equivalent institutions.

It is very important that the right of external review by the State be explicitly documented in a PPP

contract. The right to review or audit should also bind the private party to provide access to data and

documents as required for the purposes of such a review.

The State should also reserve the right to spot check service standards and relevant private sector

data to verify that services and facilities are in fact being delivered as claimed by the private sector,

as paid for by the State.

Variations and modifications to the PPP contract over time

PPP contracts need to include provisions which enable government to direct the contractor to vary

the infrastructure, or associated services provided by the contractor, if the government’s

requirements change during the contract term, or if it wishes to reduce its spending (Clayton Utz

2013).

The PPP contract needs to have built in flexibility to enable changing circumstances to be dealt with

as far as possible within the contract, rather than resulting in re-negotiation or termination (World

Bank Institute and Public Private Infrastructure Advisory Facility 2012 p. 169). Government should, of

course, reimburse the contractor for all additional net costs, or loss of revenue, reasonably incurred

by the contractor as a result of a government-initiated variation (Clayton Utz 2013).

Government should also consider “pre-priced variations” for those variations that are likely and that

can be priced by bidders during the bidding process, subject to also considering the impact that this

might have on bidding costs (Clayton Utz 2013).

Key principles applicable to managing variations (and PPP contract management more generally) are

discussed by Infrastructure Australia (2011) in section 7 and appendix H, and the National Audit

Office (2008 pp. 20-21):

Understand the contract: government officials involved in management of the PPP

contract should ensure that they understand the contract. This is essential not only to

ensure that rights and obligations in relation to variations are being honoured, but also

to verify that a variation request is actually a change and not covered under the existing

agreement and pricing structures.

Adopt a strategic approach to variations: Government officials should adopt a strategic

approach to variations and control the flow of variations to avoid overstretching

resources on either the government or private party side of the contract. For example,

government can consider bundling similar variations together to reduce costs, or

planning a variation programme based on anticipated needs.


Ensure variation requests are clear and comprehensive: government officials involved

in requesting variations should provide their private sector partners with proper briefs

to make it clear what government wants done. This is especially important for larger,

more complex variations. For complex variations, government officials should consider

initially having informal non-binding discussions with the private party in order to better

understand the private party’s ability to implement the variation, prior to issuing a

formal variation request. These informal discussions can enable government to then

prepare a formal variation request that gives the private party the information it needs

to enable it to fully evaluate the variation and provide a detailed plan for its

implementation.

Establish clear and appropriate roles and responsibilities for requesting and assessing

variations: Government should ensure that appropriate officials involved in managing

the PPP contract have the authority to request and authorise variations, and that

officials who do not themselves have the authority to request variations understand this.

Potential variations should be assessed thoroughly by suitably experienced personnel,

who should consult with relevant stakeholders.

Maintain good record keeping practices: Government officials should keep good

records of the variations and payments made, and ensure that agreed variations are

clearly documented with the private party.

Maintain a spirit of partnership: Both government and the private party should comply

with their obligations under the PPP contract, but in doing so they can achieve better

outcomes by maintaining a spirit of partnership.

Managing Unexpected Events

From time to time over the life of a PPP contract, unexpected events may arise which will require

action from government beyond the day to day administration and monitoring of the contract. For

example:

the infrastructure may be damaged by a natural disaster

a major subcontractor of the private party may become insolvent or otherwise go out of

business

there may be a change in ownership of the private party to the PPP contract.

The PPP contract may not explicitly deal with every unexpected event. However, if appropriately

drafted, the PPP contract should contain "catch all" provisions that allocate any risks that are not

otherwise explicitly mentioned in the contract.

It should, therefore, be possible to deal with unexpected events within the existing contractual

framework. Public officials responsible for managing PPP contracts should ensure that such events

are not inappropriately used by the private sector as a means of opening up a renegotiation of the

contract.

Often, when an unexpected event arises, this results in a dramatic increase in the workload and the

complexity of the issues being dealt with by public officials responsible for managing the contract.


It may be necessary to procure legal, commercial and technical advice in relation to the issue and to

provide detailed briefings to senior decision-makers within government. Public officials responsible

for managing PPP contracts should ensure that they have access to the funds and additional

resources required if these circumstances occur.

Conclusion

Public officials play a number of key roles in the development and management of PPP contracts:

Public officials should ensure that the full range of relevant expertise and information is

brought together in the initial drafting of the PPP contract – while the drafting itself will

typically be led by the government’s legal advisers, the legal advisers themselves will not

necessarily have the full range of expertise or information required.

Public officials should have the final decision making role in respect of key commercial

issues, such as the term of the PPP contract – while public officials may rely on advice from

others in reaching their conclusions on these issues, ultimately it is government that is

entering into the contract and therefore it is government that must be satisfied that the

terms of the contract are appropriate.

Public officials should ensure that any contractual negotiations are led by an appropriately

skilled negotiator and are carried out in accordance with a clear negotiation strategy, in a

manner consistent with the relevant PPP law or procurement rules

Public officials should ensure that the performance of the contract, by both government and

the private sector, is carefully monitored and that any variations, modifications or

unexpected events are appropriately managed.


Selecting the right project, transacting the right deal Strategic project selection methods

PPPs are used to undertake infrastructure investment. Where private operators can reduce the costs

and/or improve the quality of infrastructure, PPPs can yield efficiency benefits.

By combining the construction and operation phase within a single contract, they can provide

greater incentives to better manage life-cycle costs than might arise under traditional

procurement. (Ergas 2012)

The benefits of using PPPs are potentially substantial. PPPs provide a means of mobilising funds to

reduce the backlog of investment required for infrastructure, which governments cannot self-

finance due to fiscal constraints.

Where there is a disconnect between the price the public is willing to pay and the price available

from the market, government can provide a solution. This solution can involve the government

contributing funding to the project or removing risks from it, thereby making it more attractive to

external investors. “A good understanding of the risks that parties are able to bear is essential for

designing well-structured projects.” (APEC 2011)

There are other ways that projects can have risks reduced or shared. This includes:

continually re-assessing the risk profile of projects in reference to traditionally acceptable

infrastructure risks carried by global banking institutions

continually reviewing risk allocation to ensure risks are carried by entities that are in the

best position to manage and mitigate them

formulating clear terms of reference for each project as a basis for further assessment of

risks by private sector partners and financial institutions, and

reviewing the timetable for the bidding process and benchmarking it to global best practices

to ensure these are realistic and workable and to encourage wide participation. (APEC 2011)

The Asian Development Bank (2014) also argues for the inclusion of some key ingredients when

developing a successful PPP.

These ingredients include:

having clear mandates and selecting projects that are based on value for money criteria

ensuring sufficient resources are available amongst key institutions

including enforceable regulations

having checks and balances in place to ensure the project is affordable

the presence of clear, transparent predictable and legitimate framework

a balanced risk allocation.

When selecting PPP projects, Kerali (2011) identifies several areas that should be considered as part

of the process. The first is that potential PPP projects should come from a public investment

program that includes a strategic long-term development plan.


Other projects may also be suggested by government agencies to be considered as part of the

scheme, some of which may come from the private sector (in the form of unsolicited bids) and as

such, should be carefully considered. Each project bid should be accompanied by an associated

feasibility study that should also include an economic evaluation.

After all the projects are combined and considered, the public sector projects form the ‘long’ list of

project candidates. (Kerali 2011)

Projects can also be prioritised based on the economic viability of the project. Where there are

several projects competing for funding or prioritisation, then Multi-Criteria Analysis (MCA) can be

applied – MCA criteria includes additional criteria such as capital requirements, financial viability,

risk assessment, and social and environmental impacts.

Conducting a cost benefit analysis for a PPP

A project viability assessment tool which is often used prior to committing to a PPP is a cost benefit

analysis. A cost benefit analysis aims to examine all known and predicted costs for the life of the PPP

and then assess those against all known and predicted benefits that the project will bring.

Some benefits may be intangible and difficult to monetise; however reasonable proxy measures

should be considered in these cases, (e,g. calculating avoided costs from a better maintenance

regime, or survey data showing service users’ willingness to pay for a particular amenity that the PPP

is likely to bring).

In the UK, HM Treasury’s ‘Green Book’ (2003) provides codified “guidance for public sector bodies

on how to appraise proposals before committing funds to a policy, programme or project”. This

approach is a comprehensive baseline for any analysis of the need for a project and the likely costs

and benefits. This analysis is documented in a project ‘business case’.

According to HM Treasury (2003), business cases can be broken down into five different aspects

which are interconnected but distinct (namely, the strategic, economic, financial, commercial and

management aspects of the case).

The Green Book’s ‘5 cases’ approach can be adapted to allow decision makers and other

stakeholders to understand whether PPP proposals:

• are supported by a robust Case for Change – the Strategic Case

• optimise Value for Money – the Economic Case

• are commercially viable – the Commercial Case

• are financially affordable – the Financial Case

• can be delivered successfully – the Management Case.

In Australia, the National PPP Guidelines (Infrastructure Australia 2011) recommend separating the

‘investment’ decision’ from the ‘procurement model’ decision (although from a timing perspective

they can occur concurrently or separately). While individual governments will have specific

processes, generally there is a staged decision-making process:

• governments will consider the investment decision based on the business case (or scoping

study or feasibility study as the case may be)


• following the investment decision, a government will consider the procurement method

decision based on a Procurement Options Analysis (which may or may not be part of the

business case).

Generally for PPP projects and many other projects, the Procurement Options Analysis should be

fully developed as part of the business case.

In terms of benefit cost ratios for PPPs, this level of analysis is usually conducted to support the

investment decision, however the data generated from that exercise should also give a preliminary

risk-adjusted net present cost financial analysis of the capital, maintenance, ancillary services and

residual value of the PPP.

This should fully cost the project to determine likely funding requirements and will form the basis of

the benchmark to be used for assessing bids. Data gathered from this process and the estimated

cash flows will also assist the evaluation of whether the project would constitute a commercially

viable business opportunity for a private party.

Finally, this analysis should help identify all material risks associated with the project, specifying the

external and project development risks for government, the project risks to be allocated to a private

party and those to be retained by government. This should include at least a preliminary view on the

cost to government of the risks which are to be built into the PPP bid assessment benchmark.

Feasibilities studies and reference designs

The World Bank (2009) sets out what it considers the rationale for drafting a feasibility study for a

prospective PPP, namely that it is undertaken to produce analysis and information to:

• Establish the technical characteristics of the project, demand, project capacity/size,

preliminary design of proposed facilities with their related capital and annual project costs

• Establish the social, environmental, economic and financial characteristics of each project

(including its attractiveness to the private sector), based on the projected project, its cost,

demand and impacts

• Determine the extent of government support (if required), possible PPP modalities and

project risks

• Prepare the business case for the project that encompasses all of the above information and

which, when presented together, provides a convincing and solid case to both the public and

private sectors as a basis for procurement from the private partner

• Include a draft contract for the project based on the characteristics of the project.

• Prepare a Request For Proposal that has sufficient data to allow the tenders to prepare

competitive technical and financial bids and which informs them at the time of bidding, how

such bids will be subsequently evaluated

• Provide data that allows the Government to negotiate and sign a PPP contract with

confidence.


Full feasibility studies should normally be prepared for all PPP projects selected for implementation.

For complex projects where some preliminary reports and/or data may already exist, an interim

study could be appropriate but does not replace the requirement to conduct a full feasibility study at

some stage.

Tender processes

Tendering is a phase of the procurement process in which government seeks to attract offers from

suitable suppliers and to select the one that offers best value for money in meeting its requirements.

Tendering is also a communication process in which the government client and prospective suppliers

work to ensure that they have a shared understanding of what is required.

Sound understanding of the requirements is critical to provide tenderers with certainty on which

they can plan and price offers where that is possible (and to provide other ways of settling the

outcome where it is not possible). (Department of Treasury and Finance Victoria 2007)

Tendering sets the foundations for the relationship in project delivery, desirably by introducing the

project teams on both sides before tender selection is finalised (subject to probity). The primary

tasks undertaken during the tendering phase are:

the procurement strategy developed for the business case is reviewed and refined

requirements are documented in greater detail

the evaluation team and evaluation criteria are established

the RFT is developed

the RFT is issued

tenders are evaluated

a contract is finalised, following negotiations and relevant approvals

processes are established for good contract management

The outcome of the tendering process is a commercial one, achieved through a process that is

formal and standard in government. However, tendering is not just a routine process and often

involves strategic considerations. These considerations can lead to a refinement of the procurement

strategy.

The tendering process needs to be tailored to the requirements, relationships with and within the

supplier market, and existing commercial realities. Such matters need to be analysed before

commencing a tendering process so that implications for the process and outcome are clearly

understood.

Selecting the right partner

The negotiation of PPPs is complex as the allocation of risks will vary on a project by project basis,

depending upon the particular circumstances.

Tender evaluation must be conducted rigorously to ensure a good outcome and to avoid process

problems (Department of Treasury and Finance Victoria 2007). It is therefore important to:

appoint a probity advisor and/or probity auditor


appoint suitably qualified evaluation team members, including external technical advisors, if

required

establish and follow a sound evaluation plan and probity plan

evaluate tenders in accordance with the evaluation criteria and the evaluation plan

Properly document decisions.

A tender evaluation plan should be developed to describe the evaluation and selection process. The

plan should reflect project risks and the overall goals of the evaluation process, which includes

achieving the best outcome and high standards of probity. The methodology and detailed processes

set out in the plan guide the evaluation of tenders to ensure consistency and probity.

Depending on the nature of the tender and whether there is a probity plan, the tender evaluation

plan may include:

the evaluation team, working groups and special advisors

evaluation criteria

the evaluation schedule

a process for handling questions

a process for assessing alternative proposals/non-conforming tenders

process for debriefing unsuccessful tenderers

process for holding briefings, interviews, site visits, visits to tenderers or reference sites etc.

(Issues including how the briefings and interviews will be scheduled, managed and recorded;

whether tenderers will be given an opportunity to present; whether there should be an

independent recorder; whether all evaluation team members are expected to attend all

interviews)

The longer the contract period, the higher the chance that major changes will arise. There is

therefore a greater reliance on established relationships to maintain the contractual bond in PPPs.

Relationship management can therefore be expected to be even more valuable in the PPP context;

however recent studies show that industry practitioners currently lack a general understanding of

concepts and applications of the factors inherent in relationship management.

The top four critical success factors for effective relationship management are commitment

of senior executives, defining the objectives, integration of the different divisions and a

multidisciplinary team. (Zou, Kumaraswamy et al. 2014)

It is important to maintain a competitive environment between tenderers until all significant

commercial issues are settled, so that the risks presented by a tender, including all significant

commercial issues, can be fully evaluated; and, that the preferred tender is clarified and contract

negotiations are finalised before the preferred tenderer is publicly advised and competitive tension

is released.

Contract management is the final stage in the PPP project cycle, and can extend for many years. It

requires the most input from Government, but is often neglected. It is important that the

contracting authority establishes appropriate mechanisms before signing the concession contract to:

Ensure compliance with laws and regulations


Ensure delivery of contracted services

Ensure asset management

Deal with performance variations

Maintain Value for Money

Handle and resolve disputes

Ensure proper transfer of ownership of assets at the end of the contract (Kerali 2011)

Conclusion

Selecting the right partner for a PPP goes beyond compliance with tender and procurement

processes – it requires a sense of joint focus on what the PPP is trying to achieve, as well as the long

term relationship that both parties will need to maintain over time.

Reference designs and feasibility studies help to better refine the concepts surrounding a PPP and

help identify and clarify issues at the planning rather than implementation stage.

The “long tail” of a PPP contract requires that the public sector has invested in a credible and

effective contract management regime to ensure that the performance of the private sector

matches the expectations of service users and maintains the future public sector asset in good

condition.


Previous capacity building efforts for Public Officials in APEC economies Asia-Pacific Infrastructure Partnership (APIP)

The APIP was established in 2010 with the aim provide a regional platform for governments, the

private sector and relevant international institutions, to frankly and objectively discuss complex

matters related to infrastructure facing each economy. It was established in collaboration between

the APEC Business Advisory Council (ABAC), the Asian Development Bank (ADB), the World Bank and

a range of interested private sector groups and academia.

Since 2011, when the APEC Finance Ministers adopted APIP as a policy initiative, it has undertaken

several dialogues between the private and public sectors in regional economies such as Indonesia,

Malaysia, the Philippines, Thailand, Viet Nam, Mexico and Peru. Those discussions have identified

the following key issues in determining the success of PPPs in infrastructure development in regional

economies.

Government coordination

Successfully undertaking PPP projects requires strong coordination between government central

ministries and line agencies, as well as national and sub-national levels of government with strong

engagement from municipal authorities and local stakeholders at the planning and delivery stage.

Establishing and managing this coordination process often requires establishing a lead PPP agency

with defined responsibilities and authority, with efficient and trusted relationships with line/support

agencies to ‘champion’ important projects from planning through to the development and delivery

stage.

Lead PPP centres have been established in a number of regional economies. A pilot PPP Centre has is

being established in Jakarta under the Indonesian Ministry of Finance, with support from the

Australian Government and endorsement from APEC Finance Ministers.

The PPP centre is intended to provide the Indonesian Government with the capability to assess and

develop a list of priority public infrastructure projects that are ready to receive private finance and

guide the successful execution of PPP projects. An APEC expert panel (see below) has been

established to advise the Indonesian Government on the establishment and operation of the Centre.

APIP is represented in the Experts Advisory Group.

The Australian APEC Study Centre at RMIT University is taking the lead in establishing an Urban

Infrastructure Network, which aims to involve private and public sector stakeholders in developing a

holistic policy framework to meet the infrastructure planning and development needs stemming

from rapid urbanisation in regional economies.

This capacity building work is a joint initiative between Australia and China, and is supported by the

APEC business Advisory Council (ABAC).

Collaboration with the private sector

Deep collaborative relationships between the public and private sectors, including experts from

industry and multilateral development banks is essential to building trust and confidence in the PPP

processes. Private sector contributions to project planning and development processes can enable


efficient and fair risk-sharing between the public and private sectors, which is important to deliver

value-for-money outcomes and generate public confidence in public agencies and their work.

It also enables information sharing and feedback mechanisms which are important to help the

private sector better understand the strengths and viability of projects in gearing up financing

needed to deliver projects.

Long-term financing

The importance of long-term, stable financing for infrastructure projects cannot be overemphasised.

The development of deep and liquid capital markets which rely on the use of appropriate financing

instruments is vitally important to facilitate the active participation of long-term institutional

investors, such as sovereign wealth funds (SWFs), insurance, wealth management and pension

funds, in financing infrastructure projects in regional economies.

In 2013, APEC Finance Ministers endorsed a proposal by ABAC to establish an Asia-Pacific Financial

Forum (APFF) which aims to promote regional financial market connectivity and development

through public-private sector collaboration in undertaking policy and regulatory reforms in regional

economies.

The APFF involves experts from the insurance and pension funds industry who are working towards

developing a set of policy recommendations aimed at facilitating insurance and pension fund

investment in long-term assets, such as infrastructure.

The Australian APEC Study Centre is undertaking a multi-year capacity building program to enhance

the regional investment environment by promoting greater transparency and predictability in

investment decision-making by capital exporting and recipient economies. More transparent and

predictable investment policy frameworks and their application can play a potentially important role

in facilitating cross-border investment activity by institutional investors such as SWFs, SOEs,

insurance and pension funds, especially in infrastructure investment.

PPP transactional capacity and skill development needs

Developing capacity amongst regional PPP centres to undertake PPP transactions, along with

addressing skills gaps in public agencies, is important to deliver successful PPP projects in regional

economies. Multilateral development banks such as the World Bank and Asian Development Bank

are playing an important role in providing technical advice and undertaking capacity building

activities in regional economies.

The Australian APEC Study Centre, with support from the Australian Government and ABAC, is

undertaking a multi-year capacity building and training program aimed at improving PPP

transactional skills and operational efficiency and performance of regional PPP agencies.

Furthermore, in 2013, ABAC in collaboration with the University of Southern California developed

the Enablers of Infrastructure Investment Checklist, a self-evaluation tool to help governments assess

and determine whether existing policies in regional economies promote or hinder private sector

participation in infrastructure development.


The checklist is structured under four overarching policy categories: (a) augmenting government

project planning and coordination mechanisms; (b) building a strong financial and financing

environment; (c) developing robust PPP mechanisms and frameworks; and (d) creating and

maintaining a strong investment environment to attract foreign direct investment.

In 2013n APEC Ministers adopted a multi-year plan on Infrastructure Development and Investment

(MYPIDI) and the establishment of an APEC PPP Experts Advisory Panel to assist member economies

in improving coordination and developing capacity to build bankable project pipelines through PPP

Centres.

Conclusion

The Asia-Pacific Infrastructure Partnership is an important ABAC initiative that has been quite

effective in recent years in assessing policy and institutional frameworks that have constrained PPP

infrastructure development and delivery in regional economies.

APIP dialogues involving policymakers, regulators, industry and MDB experts and academics in

emerging regional economies have identified greater government coordination and collaboration

with the private sector, along with easier access to long-term, stable financing and more

transactional capacity and skills development as important to undertake successful PPPs.


Report Summary and Recommendations Summary of key issues highlighted in this research report

This report has attempted to collect, distil and synthesise the key practical and theoretical literature

in relation to PPPs covered in this report.

In terms of the focus areas covered by the report, the following emerge as the ‘take away’ matters

to be dealt with when transacting a PPP:

Specific skills and competencies needed for a successful PPP

PPPs have more differences than similarities to traditional public sector infrastructure

procurement and delivery. These differences, and heightened technical complexity, require a

mix of high level skills and competencies. Not one person can possibly have all the skillsets - a

strong and experienced leader and a creative multidisciplinary team are essential for success.

Effective leveraging of consultants, experts and technical advisors

Just as the public sector team needs to be multidisciplinary, they also need to know when to

bring in advisors and experts who are specialists with deep knowledge of the technical

material that is often required as part of a PPP market solicitation. Advisors and experts cost

money, and are usually more expensive than internal staff, so PPPs need to have adequate

budgets to purchase this advice and effectively leverage it to achieve optimal value for

money outcomes.

Managing the complexities of a lengthy procurement process

PPP procurements are long, expensive and complex. A mature and well defined process

needs to be in place well before the bids are being examined. Last minute interventions or ad

hoc changes should be avoided at all costs to reduce delays, higher prices from bidders, and

unreasonable high transaction costs for potential bidders.

Transacting optimal outcomes for both the private and public sectors

Both the public and private parties have very different needs from a PPP transaction but

there are some areas of mutual overlap. The public sector needs to avoid capture by the

private sector and entering into overly cosy relationships; however a correct role delineation

needs to be tempered by good sense to ensure that the contract will be sustainable for both

sides over the long term.

Legal issues for PPPs

Public officials responsible for PPP projects should ensure that an appropriate legal enabling

environment is in place before a tender process is commenced, that all appropriate laws are

considered and, where necessary, expert legal advice is obtained, throughout the

development and delivery of the PPP project. Officials carefully consider the range of legal

expertise and resources required, and should ensure that appropriate legal advisers are

engaged to advise government.


Developing and managing a PPP contract

Public officials should have the final decision making role in respect to key commercial issues,

such as the term of the PPP contract. While the public officials may rely on advice from

others in reaching their conclusions on these issues, ultimately it is government that is

entering into the contract and therefore it is government that must be satisfied that the

terms of the contract are appropriate. The performance of the contract, by both government

and the private sector, should be carefully monitored so that any variations, modifications or

unexpected events are appropriately managed.

Selecting the right project and transacting the right deal

Selecting the right partner for a PPP goes beyond compliance with tender and procurement

processes –it requires a sense of joint focus on what the PPP is trying to achieve, since the

long term relationship between both parties will need to maintained over time. The long tail

of a PPP contract requires the public sector to have invested in a credible and effective

contract management regime to ensure that the performance of the private sector matches

expectations of service users and maintains the future public sector asset in good condition.

Previous capacity building efforts for Public Officials in APEC economies

The Asia-Pacific Infrastructure Partnership (APIP) is an important initiative that has been

effective in recent years in assessing policy and institutional frameworks that have

constrained PPP infrastructure development and delivery in regional economies.

Policymakers, regulators, industry experts and academics in emerging regional economies

have identified greater government coordination and collaboration with the private sector,

along with easier access to long-term, stable financing and more transactional capacity and

skills development, as very important pre-conditions to undertake successful PPP

transactions. The APEC Multi-Year Plan on Infrastructure Development and Investment

(MYIDI) was endorsed in 2013 to develop a framework to promote PPPs in the region.

Recommended areas for future focus

In terms of the APEC region there are number of key issues that need continued focus to make PPPs

a viable option for project delivery, to resolve existing infrastructure deficits and to be a catalyst for

increased socio-economic development.

Broadly these issues relate to:

Sovereign risk

o Governance-certainty, predictability and fairness reflected in proper legal processes

and contracts provide for sustainable long term PPP concessions

o Fiscal challenges-although PPPs can amortise expenses over time and smooth out

capital outlays, sponsoring governments need to be in a strong enough fiscal

position to be able to pay their liabilities when they fall due, allowing the private

sector to raise risk capital to implement the PPP


o Legal system/rule of law-rights and responsibilities in contracts need to be

enforceable in independent tribunals, and the property rights of the private sector

need to be given appropriate respect by the public sector party

Institutional issues

o Implementation roadblocks – there needs to be a capacity to proactively identify

future projects and publicise them to the market as a ‘PPP pipeline’

o Maturity of the public sector-there needs to be a capacity to work in a less

bureaucratic and agile manner when transacting a PPP which can be a challenge for

highly rigid and unreformed public administration systems

o Depth/experience of private sector- there needs to be a viable private sector to

raise the finance, design and build the project, operate and maintain the facility, as

well as a strong technical adviser market to assist the public sector as required.

Socio-economic matters

o demographic demand drivers-need to be measured and understood to make sure

that PPPs are matching an expected demand curve over the life of the project, as

well as delivering the right services in the right locations

o Pro-poor issues-capacity to pay by service users is a big issue for PPPs in developing

countries, and tariffs need to be set to allow equitable usage of the infrastructure,

which in turn may require a direct subsidy by the state in the short to medium term

o Intergenerational equity-liabilities from current borrowings should be evenly shared

across current and future generations, and the condition of facilities need to kept fit

for purpose right through the term of a PPP contract.


Appendix 1: PPPs and their political economy context

Locating PPPs in the political economy landscape

By Paul O’Connor

Since antiquity, civilisations have built social and economic infrastructure such as roads, ports,

temples and libraries as enduring symbols of their human, technological and economic achievement.

A testament to the durability of ancient public infrastructure can be seen in many remnant

examples, such as Egypt’s pyramids, Roman Empire-era viaducts and aqueducts across Europe and

the UK, China’s Great Wall, and the civic and religious complex of Cambodia’s Angkor Wat.

Public infrastructure is a key beneficial outcome of the economic activities of human society. Today,

public infrastructure is widespread and fundamental. It includes the power, water, energy, transport

and communication systems that sustain our lives. It also includes a wide array of social facilities and

resources such as schools, hospitals, universities, legislatures, courts, and prisons which assist with

the effective functioning of our societies.

Regan (2005, p14) describes a correlation between infrastructure investment and positive economic

outcomes (such as productivity and growth), better economic conditions and hence better living

standards.

Arguably, these positive correlations from public infrastructure are well understood by State actors.

Their ‘political calculus’ understands that economic growth, and improvement in living conditions

and social amenity as a proxy measure for the wealth, cohesion and security of society - the

conditions that are likely to keep a government in power. State actors understand the important role

that markets play in developing the economy specifically and society more broadly.

An examination of the role of the State in public infrastructure should also consider the role of the

market, and the important influence it has in economic activity, trade, and capital generation. This is

because, at face value, the only role of economic infrastructure is to facilitate the market and its

activities, which explains why the State often takes an active role in the planning, investment and

delivery of this type of infrastructure.

An ‘orthodox’ economic view of the role of infrastructure

More than 200 years ago, the economic thinker and philosopher Adam Smith considered the

competing challenge of individual utility (i.e. rationalist economic self–interest) versus the need for a

safe and functional society to foster stable market conditions (public utility). He proposed the

concept of an "invisible hand", an idea that an individual who "intends only his own gain," is, as it

were, "led by an invisible hand to promote…the public interest." (Smith 1776)

Smith’s ‘metaphysical’ (Kennedy 2009) concepts highlight the broader question for public

infrastructure of whether private individual actions are able to contribute effectively to broader or

collective actions.

In simplistic terms it raises the question of whether each farmer should build their own road to

market, or whether they should pool their resources and produce a common road - spontaneously


or via some governmental coercion or coordination – even though a person who did not contribute

to its cost, may end up using that road.

The laissez-faire view posed by Smith, has been championed by free marketeers but according to

Hardin (1968) Smith’s view has “contributed to a dominant tendency of thought that has ever since

interfered with positive action based on rational analysis, namely, the tendency to assume that

decisions reached individually will, in fact, be the best decisions for an entire society.”

Rothschild (1994) and Grampp (2000) further critique this ‘received wisdom’, and illustrate that

beyond the simplistic neo-liberal ‘laissez-faire’ view of the role of the State in economic affairs, there

is a more ‘rationalist’ argument for ‘the market’.

Pro-market and monetarist commentators such as the late Milton Friedman, have claimed that the

private sector was preferable over the State in order to nullify the phenomena of ‘crowding out’ of

private capital, and price distortions in the economy, caused by State participation in markets

(Friedman 1977).

The influence of this thinking on the economic ideologies of governments they pursue, has been

observed by Stillwell (2002) noting that “Increasingly, governments have asserted the need for more

market processes rather than ‘interventionist’ planning. (…) the core belief is that giving freer rein to

market forces will produce more efficient economic outcomes (…) to create the conditions for the

re-invigoration of free-enterprise capitalism.”

The logical extension of this orthodoxy only sees a desirable role for the State in infrastructure when

there is ‘market failure’ i.e. – when the market is either unable (due to capacity to fund high capital

costs) or unwilling (due to low return, or a competing entrenched monopoly) to deliver a ‘public

good’.

Goldsmith (1995) further points out that in recent economic history, “government was deeply

involved in creating the conditions for capitalism and in moulding a sustaining environment for

private enterprise. Despite the claims of contemporary laissez-faire ideology to the contrary, the

emergence and the maintenance of a capitalist economic system always depend, at least in part, on

an effective state”.

He further argues that “a society’s capital stock is infrastructure, the skeleton and the circulatory

system of the economy that allow goods and services to move to market. Roads, tunnels, harbours,

dams, sewers, telephone lines and the like are the physical foundation on which a community’s

economy is built and public services are delivered”. He highlights that the early railroads in the USA

were unable to be fully funded by the private sector, so public finance accounting for more than a

quarter of the investment by the Civil War, with Federal government land grants to the states and

railroad companies used as loan collateral and a direct funding source when sold (Goodrich 1965).

Another version of market failure, described as the ‘tragedy of the commons’ by Hardin (1968)

highlights a key flaw in laissez faire thinking. Individuals are focussed on self-interest (i.e. personal

wealth generation and utility) more than they are focused on wider public outcomes – meaning that

unregulated access to ‘free’ resources will eventually exhaust and consume the resource for wider

society. He also highlights that negative externalities (such as pollution discharge by private

produces) would continue to occur unless the State intervened with its coercive or taxing powers.


A further frame to assist with theoretical context of the economic role of the State in infrastructure

is Wolf’s (1998) concept of a ‘cardinal economic choice’ between governments and market. In Wolf’s

words, the problem of choice between the State or markets “would be easier if the choice were

between perfect markets and imperfect governments, or between perfect governments and

imperfect markets. In fact (…) the actual choice involves a compromise between imperfect markets

and imperfect governments.”

This ‘cardinal’ question may now be moot, however, having been answered by the raft of State

sector privatisations which have occurred across the world over the last 20 years or so.

Sturgess and Smith (2006) see these privatisations as the result of the State withdrawing from the

delivery of private products and services, rather than the private sector taking over public

infrastructure and services.

Their implication is that the role of the State has been clarified rather than radically changed,

particularly in regards to infrastructure, where the State has increasingly taken on a planning,

facilitation and regulation role, rather than as a direct financier, builder and operator (Smith 1999).

The economic orthodoxy concerning the role of the State is not static or settled. It has changed to

reflect the various social, economic and ideological reforms occurring across the world. Various

responses by governments to their role in infrastructure also largely reflects the prevailing ideologies

or systems of government of the time.

An ‘interventionist’ view of infrastructure

In converse to the private sector, the only real limit on the State’s ability to implement public

infrastructure is its capacity to raise taxes or public debt using the government’s tax and revenue

powers over its citizenry.

This means that a key economic driver of State delivered infrastructure is ‘capacity to fund’. This is

fundamentally different to the economically rational approach of the market – which is seeking a

return on investment or ‘capacity to earn’, and a return on risk or ‘capital growth’.

The economic philosophy of John Maynard Keynes, in vogue with industrialised economies from the

1930s to the late 1970s, identified that the special economic nature of the public sector meant that

it should take a lead role in regards to the economy and infrastructure projects. Keynes (1937)

argued that the State should spend public funds to stimulate the economy when there was a

downturn, and effectively deal with the ‘social evil’ of unemployment.

In his seminal writings, Keynes (1933) and (1937) expressed a strong view that this extra State

spending should be for beneficial social purposes, not just job creation purposes, preferring State

investment in infrastructure and assets over service delivery and recurrent expenditure. (Peacock,

Crabtree et al. 1993)

Stillwell (2002, p.256) aptly describes Keynes’ underlying argument: “A government can always

adjust the level and pattern of its own expenditure in order to pursue the goal of full employment. If

it spends more on building schools, hospitals, bridges, or railways, for example, that creates jobs for

construction workers. Those workers are then able to spend more on food, cars, and clothing, which


creates jobs for farmers and car and clothing manufacturers. The extra income leads to extra

spending, which then stimulates higher outputs and creates more jobs.”

In the modern era, the role of the State in infrastructure has undergone significant change and

reform since The Great Depression of the 1930s. In response to this severe economic downturn, the

State became more actively involved (even dominant) in infrastructure delivery, in order to provide

work for the unemployed masses, as well as to take the place of private capital, which had been

wiped out by speculative losses.

This process continued during WW2, as more industries and infrastructure networks were

nationalised as a consequence of an increase in the role of the State in economic affairs, mainly due

to the political, economic and social demands of a global war.

After the war, a massive rebuilding effort after the conflict for both the vanquished and the victors –

as well as a backlog of social infrastructure investment – maintained in the ‘50s and ’60s a high level

of effort and involvement by the State.

This dominant role of the State continued in many industrialised economies until the outbreak of the

“privatisation wars” from the 80s onward (Hodge 2003). In Australia, the battle fronts for these

‘wars’ were at the Local, State and Federal levels of government, with massive shedding of public

sector jobs due to the contracting out of services to the private sector, and privatisation of major

government utilities and trading enterprises.

Hodge (2003) comments that “this has been a rhetorical war, as well as one of contractualisation,

managerial reform and change. On the one side, privatisation supporters and reformers attack with

claims of inefficiency and service incompetence from government bureaucracies. On the other,

public sector defenders and privatisation critics counter with observations of private sector greed,

unethical behaviour and corporate failure.”

Although the Keynesian philosophy of counter cyclical stimulus and intervention has been

resurrected during the recent Global Financial Crisis, the underlying philosophy of direct State

intervention in the economy has lost its vogue, due to the bloated and unproductive State sectors

that deficit budgeting had allowed to flourish. (Pollitt 2002)

However, the continuing role of State investment in economic and social infrastructure bears out

some of the fundamental views of Keynes that the State can stimulate economic performance.

(Winch 1989) One point of difference is that there is now a strong focus on ensuring that the

investment can generate a positive economic effect, and minimise negative externalities (such as

congestion, pollution or price distortions.) (Parsons 1996)

Current pragmatic approaches to infrastructure delivery

Going beyond these examples of the role of the State in infrastructure, is the pragmatic reality of

current practice. In many industrialised economies, the role of the State in infrastructure cannot be

easily pigeon-holed into either a pro-market or pro-State ideology or orthodoxy.

For example in France, where the State has a long history of active involvement in social

infrastructure (schools, hospitals, universities), there is also a well-defined role for the private sector


in economic infrastructure (public transport, water, toll-roads). “Although water works facilities in

France are predominantly government-owned, private firms operate and manage most systems

under an array of contracting and leasing arrangements. Even when facilities have been owned by

private firms, direct competition has been of limited importance in the provision of many kinds of

infrastructure. But market discipline can arise from other sources. Privatization can get government

bureaucracies out of the business of performing entrepreneurial activities for which they may be

poorly suited. When market forces are weak, however, and important public interests are at stake,

strengthening government institutions may be a prerequisite for successful privatization.” (Jacobson

and Tarr 1999).

Likewise, in the UK, the Private Financing Initiative has given the private sector a role in the

financing, implementation, and delivery of economic and social infrastructure. (Broadbent and

Laughlin 2004), (Broadbent and Laughlin 2005)

The State of Victoria followed in the UK’s footsteps, by pursuing the Partnerships Victoria policy

(Department of Treasury and Finance Victoria 2011). This policy codifies the approach and role of

both the State and the market in complex and high-value social and economic infrastructure service

delivery projects. (Maguire and Malinovitch 2004) (English and Baxter 2008)

This pragmatic evolution of the role of the State from direct provider to strategic facilitator reflects

the continuing maturity of the economic system, as both markets and better resourced and capable

governments develop more sophisticated vehicles of investment and delivery. (Wilmoth 1990)

(English 2006)

New Public Management and PPPs

Broadly, the concept of New Public Management (NPM) describes the ongoing modernisation of the

public sector (particularly in the UK and Australia). (Jones, Guthrie et al. 2001) (Broadbent and

Laughlin 2005) (Barton 2009)

NPM sees the public sector as evolving and adopting private sector ‘managerial’ approaches to

‘doing business’ more efficiently and effectively (Pollitt and Bouckaert 2000). Contracting out and

the introduction of contestability of traditional public sector services has been a key part of the

movement (Lapsley 1999).

PPPs are seen as a further development of this contracting out trend into the field of public

infrastructure delivery (Hood 1995; English and Baxter 2008; English 2008). Hodge (1998) also has a

deeper concern that the ‘new language’ of PPPs may be masking a stealthy new privatisation agenda

that is proceeding the expense of the long term public interest (Hodge and Greve 2010)

There are also a number of high order conceptual issues that are discussed in the literature such as

understanding the appropriate role of government in PPPs (Officer 2004) (Fitzgerald 2004). The

length of the PPP contracts raise questions about flexibility over time once the service has been

procured (Sturgess 2004), plus the practical limits on being able to effectively manage these often

very long term contracts. (Quick 2003) (English and Guthrie 2006)

A further conceptual adjunct to the NPM discussion is Foucault’s discussion of ‘governmentality’, a

concept of a process whereby governments ‘shape’ their citizens to make them easier to ‘govern’ by


developing ‘technologies’(Lemke 2007). The emergence NPM movement and procurement vehicle

(such as PPPs) reflects many of Foucault’s ideas, however very little literature has directly explored

this more esoteric tangent to move beyond political economy or project literature to a more

philosophical position.

Context of PPPs - project typology and procurement

The scope of involvement of the private sector in infrastructure in Australia has grown and continues

to grow, particularly since a raft of microeconomic reforms were introduced from the mid-1980s

onwards by Federal and State governments of various political persuasions.

Examples of the contemporary opportunities for private sector involvement include:

Traditional “design and build” fixed price contracts

Alliance (risk sharing) construction contracts

Build-Own-Operate-Transfer schemes (BOOTs) and variants and

Public Private Partnerships (PPPs)

Of these general modes of private sector involvement, PPPs (an evolution of BOOTs) have become

the most controversial, as they are perceived by sceptics as a means to fund projects “off-balance

sheet” and avoid public reporting of public debts or liabilities.

Officer (2004, p24) argues that “the motivation for most PPP projects is a shortage of government

funding which requires the participation of the private sector (…) usually due to the political inability

of the government to ‘sell’ the need for further finance by way of taxation or debt raising to fund the

project.”

However, Fitzgerald (2004) in his review of Victoria’s PPPs found that “the policy focus in recent

times is represented as moving from a focus on overcoming fiscal restraints and Australian Loan

Council limitations, through a focus on increasing the extent of private participation to stimulate

growth and efficiency, to one of achieving value for money in the public interest”.

In particular, governments are interested in using private sector expertise to gain better outputs and

higher service quality. Another key driver is to monetise risk and transfer it to the party best able to

manage it (Duffield and Regan 2004; Hodge 2004) and better understand State costs via use of

market approximation analysis tools such as the Public Sector Comparator/Benchmark. (Quiggin

2004; Quiggin 2005)

Project types and their procurement drivers

As a procurement method, the discussion about PPPs exists within a wider literature related to

project typology (Shenhar, Dvir et al. 2001), which is often dominated by an ‘engineering’ view to

classify projects (Dvir, Lipovetsky et al. 1998). The NCTP (Novelty, Cost, Time, Pace) model is one of

the better known applications of this theory (Dvir, Sadeh et al. 2006).


Turner and Cochrane (1993) extended the typology literature by discussing a linkage between

procurement strategy and procurement choices, types of project, and the likelihood of project value

generation and success

Table 1: A typology concept for projects.

Project type Project type descriptor

Earth Engineering projects with well-defined goals and techniques in

industries such as construction, shipbuilding, aerospace and

manufacturing.

Water Project development projects with poorly defined methods, but well

defined goals. Delivery methods are fluid options, with the main focus

on the outcome.

Fire Application software projects, where the method is well defined, but

the goal is poorly specified. Realisation of the goal is often attempted

through use of a method, rather than fully specifying the outcome.

Air Research or organisational change projects, with poorly defined

methods and poorly specified goals. Can involve illusive outcomes over

the long term, or a requirement to link both tangible and intangible

outcomes to define success.

Source: (Turner and Cochrane 1993).

However, this typology is only useful to project leaders and stakeholders if they have a consensus

view about the type of project they are delivering, and are able to ‘intelligently design’ their

procurement choices in light of this understanding. Implicit in this argument is that a better designed

procurement and delivery approach for a project is more likely to maximise success and create more

value. (Walker and Rowlinson 2008)

Performance of PPPs in public infrastructure projects

In line with the discussion of PPPs as a procurement choice, the literature has also identified a

number of attributes of PPPs as projects that move them beyond the traditional win-lose contracts

into the domain of valuing quality outcomes and avoiding conflict (Black, Akintoye et al. 2000)

(Staples and Dalrymple 2006)

Importantly PPPs are not ‘relationship-based’ projects as they do not actively share risks or costs

(Davis and Walker 2008) nor do they aim for ‘best for project’, as pursued in Alliance projects

(Walker, Hampson et al. 2000; Walker, Hampson et al. 2002; Walker and Hampson 2003)

For PPPs the relationship is service outputs based (Regan, Smith et al. 2009) (Regan, Smith et al.

2011), with the mutual value proposition for both parties based on keeping the concession over the

long-term. (English 2006) (Grimsey and Lewis 2007) (Akintoye, Beck et al. 2003)


The positive track record of PPPs in Commonwealth countries, including Australia (Allen Consulting

Group 2007; Raisbeck, Duffield et al. 2010), has led to a number of multilateral agencies pursuing

PPPs as an effective infrastructure vehicle for developing economies.

The World Bank (2008), Asian Development Bank (ADB Institute 2008), APEC (APEC 2010) and OECD

(OECD 2006)advocate the procurement model for developing economies, even though the available

data on PPP success or performance is poor (Asian Development Bank 2008) or indicates immature

outcomes and process for successful implementation of the model (Economist Intelligence Unit and

Asian Development Bank 2011).

Most of these agencies claim to have a pro poor focus, however there is no evidence that project

design is being considered to deal with the end-users at the ‘bottom of the pyramid’ (Prahalad and

Hammond 2002; Prahalad 2010)

Performance outcomes for public sector projects

Professor Bent Flyvbjerg of Oxford University, and his collaborators (Flyvbjerg, Holm et al. 2002;

Flyvbjerg, Bruzelius et al. 2003; Flyvbjerg 2005; Flyvbjerg 2006; Flyvbjerg 2007; Flyvbjerg 2009) have

reached a number of uncomfortable conclusions about public sector project cost and time overruns:

there is evidence of consistently poor performance in public sector projects, with no noticeable

improvement trend over time.

This empirical data set is used to form a hypothesis that the poor results can only be explained by

systematic ‘delusion’ by project designers and estimators, ‘deception’ by project actors, and

‘optimism bias’.

Optimism bias is a human cognitive trait described by Kahneman and Lovallo (1993) that leads

humans to rely on ‘hope’ rather than ‘evidence’ when faced with difficult decisions. This concept

helps to explain why “rational” project managers become advocates of “irrational” forecasts, or fail

to comprehend data that contradicts their own view of project progress.

This is well demonstrated by the various failings of comprehension by engineers of unexpected data

points in the lead up to the Space Shuttle Columbia disaster (Starbuck and Milliken 1988). This

phenomena can also give decision makers an over optimistic view of risk and uncertainty (Hancock

2010), based on their own world view of achieving success against the odds, and thus leaving them

unprepared for “Black Swan” events (Taleb, Goldstein et al. 2009).

The business case for PPP projects

For public infrastructure, return on investment (ROI) is a complex construction as it uses a mixture of

tangible and intangible societal benefits which may accrue to political, economic, social and

environmental domains.

Many public sector projects are decided in a rationed capital environment of competing demands –

the key question isn’t always: “How much will society get back directly from this project?”, but

something more like, “What is the relative merit of spending on this project instead of all the other

societal demands that outstrip the limits of a finite budget?”


According to Crawford and Helm (2009) “Evidence of the capability to implement policy and change

and commitment to performance improvement are important aspects of governance for both

public- and private-sector organizations. Project management is valued as enhancing the ability to

consistently and predictably deliver results.”

Market involvement in infrastructure provision has the potential to in inject more discipline or

certainty regarding life cycle costs for asset maintenance and upgrade.

Typically, life cycle costs have not been well understood or funded in the public sector due to the

long-run timeframes that this forecasting involves, running counter to the short-term budgetary and

electoral cycles that dominate decision-making in Treasuries and ministerial suites about capital

funds allocation.

Longer term agreements with the public sector to maintain an infrastructure asset for its stated

purpose are a good way to mitigate the ‘short-termism’ of public sector budgeting, and political

actors.

Economic literature identifies that the private sector has a strong focus on cost control (due to the

profit motive) – so it is probably more likely to have an incentive to develop and deploy new

(preventative) maintenance technologies and thus extend the life of an asset to maintain its

productive capacity, and thus reduce ongoing maintenance inputs.

Intangible value for money

Grimsey and Lewis (2005) discuss the important issue of evaluating whether PPPs provide value for

money for the State over the long-term, as well as effectiveness of external scrutiny by State

Auditors-General (English 2007).

However, a monetary the value for money assessment would be incomplete if broader project

outcomes concepts such as sustainability (Silvius 2010) and Triple Bottom Line (Elkington 1997)

were not considered.

Further, in line with their role as a ‘political’ project to deliver a strategic outcome, PPPs often

produce ‘soft’ such as environmental (green start ratings) outcomes and social (architecture awards,

new public speaks) outcomes.

The PPP procurement approach has also helped to deal with the issue of intergenerational equity, or

in other words, ensuring that the liabilities entered into today do not compound or adversely affect

future generations. This is achieved by institutional financiers/investors pooling multi-generational

funds into long term, revenue generating and durable assets.

This approach matches of debt profiles to long-term infrastructure deals/concessions (Regan 2004),

enabling older generations to receive their share of income upon withdrawal or liquidation of

investment inputs (such as superannuation), while the ownership and underlying value of the asset,

as well as its revenue earning potential is transferred to a more recent generation of investors.


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PPP Transactional Capabilities Research Report - 25 August 2014 - POC additions

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