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FHWA > Programs > Office of Policy > Office of International Programs  > Public-Private Partnerships for Highway Infrastructure: Capitalizing on International Experience > Chapter 4

Chapter 4: PPP Project Contract Management and Operations

While PPP project identification, procurement, and delivery often receive substantial attention, the scan team quickly recognized the significance of the operating phase of any PPP arrangement. This is the period when the paying public uses the facility under private operation and determines whether it fulfills their expectations and needs. Indeed, PPPs can bring a customer focus to the facility, which in many respects differentiates it from other project delivery strategies— at least in the nations visited during the scan. When defining or scoping a PPP project, the primary focus in this seasoned international community is often on identifying and conveying the outputs desired. Project outputs are what customers focus on—reliable travel times, safe travel environment, comfortable ride, etc. Thinking first about what customers desire rather than developing a prescriptive definition of an asset is a major transition in practice. To do so requires beginning with the end in mind. In other words, defining and managing project user requirements and operational standards are integral to programming and procuring PPP projects.

This chapter examines practices for establishing performance measures that focus on desired project outcomes, managing the partnership with the private contractor during both the capital delivery and operations phases, and specifying handback provisions to make sure the facility is returned to the public sector in reasonable condition.

Performance Measures

Unquestionably, performance measures or key performance indicators (KPIs) are central to the most recent PPP projects observed in the nations the scan team visited. Each country uses KPIs to generate the outcomes it desires for its PPP projects, and they are the basis for incentives and penalties—primarily during a project's operations phase. In most cases, KPIs are used to define target performance levels, and KPI schedules specify formulas for calculating metrics or points that serve to determine whether these targets are being met.

For instance, Spain has used KPIs to manage safety, heavy vehicles, congestion, winter weather conditions, and toll collection times, as well as other elements. Table 7 provides examples of the metrics used. In some cases if the PPP contractor maintains or exceeds the level of performance specified for the majority of the contract term, the contract period is extended by a predetermined number of years. In this case, the incentive is back-loaded.

Table 7. Examples of KPIs in Spain.
KPI AreaMeasurement
SafetyA = N*108 / L*365*AADT
Where:
A = accident rate
N = number of accidents with victims
L = length of highway under management (km)
AADT = average annual daily traffic
The accident rate is compared with the previous year's rate; an increase results in a penalty, while a decrease results in a bonus of up to 5% of the annual service payment.
Heavy VehiclesIF at least 90% of the time during the first 35 years of concession, at least 35% of total heavy vehicle traffic in the corridor uses the highway AND at least 90% of the time during the first 35 years of concession, at least 40% of total heavy vehicle traffic use is at night, THEN the concession period is extended 1 year.
Winter Weather ConditionsRoad closure = €1,800/hour in fines
Tire chains required = €600/hour in fines

The United Kingdom has tied its KPIs for the M25 Motorway to its payment mechanism to the PPP contractor. The payment mechanism is comprised of the following potential adjustments:

  • Lane availability (principal element)
  • Route performance
  • Condition criteria
  • Safety performance
  • Unplanned events
  • Proactive management

Table 8 describes several of the adjustments possible.

In Victoria, the KPIs associated with the EastLink project focus on customer service, road maintenance, landscape and environment, and tolling accuracy. Failure to comply with KPIs can result in up to $17 million annually in deductions for the PPP contractor. Any deductions collected from the concessionaire will be distributed to EastLink's users rather than retained by the government, since the users are the ones not receiving the paid-for service.

Table 8. Adjustments to payment mechanism to M25 PPP contractor in the United Kingdom.
KPI AreaMeasurement
Lane AvailabilityDeductions for lanes closed
Deductions based on delay cost model
No deductions for:
Agreed closures on sections during widening
Core nighttime period
Incidents and accidents
Route PerformanceMonthly deduction or bonus
Assessment over specified routes
Condition CriteriaDeductions for:
Substandard carriageway
Lanes seriously affected by snow or ice
Loss of technology systems
Safety PerformanceAnnual deduction or bonus
Comparison of M25 with national safety trends
Proactive ManagementAnnual bonus
Assessment of commitment to agency objectives

Managing the Partnership

Given that the PPP contracts observed ranged from 25 to 50 years with the typical term from 30 to 40 years, the relationship between the public and private sectors is indeed a long-term one. This circumstance puts managing the partnership at the forefront. Clearly, the partnership arrangement most tangibly manifests itself in contract management practices.

These practices are split into the capital delivery and operations phases. During design and construction, all of the host nations employ an independent verifier who serves as an objective third party to administer (certify pay requests, etc.) and review (check compliance with requirements, make onsite visits, etc.) the project, as illustrated in figure 17. Payment policies for the independent verifier varied among countries. In most cases, the government and the PPP contractor share this cost. In one case, however, the PPP contractor covers this cost up to a threshold amount, above which the cost is shared. Since verifiers are often paid on a fee basis, the logic is that higher verification costs indicate inadequate performance by the contractor, so bearing this cost serves as an incentive.

While management of capital delivery is certainly important, the crux is contract management during the operations phase. This crystallized for the scan team when a department's representative (DR) in the United Kingdom briefed the team about his role and responsibilities as the Highways Agency's long-term contract manager. His knowledge and skills were clearly evident, as was his significance to maintaining the partnership with the private contractor as intended. Technically, the DR has three key roles: (1) performance monitoring, (2) financial monitoring, and (3) contract administration. On the surface, these appear similar to those of an owner's representative on a typical construction project. If one scratches below the surface, however, it becomes clear that the DR must carefully balance the relationship with the PPP contractor with the intended contract requirements, risk allocation, and service standards over a substantial time period. Moreover, the DR must do this with modest in-house support staff. The other countries visited have similar positions, such as the government delegate in Spain.

Chart showing the typical role of the independent verifier in a PPP project with boxes representing each party in the project. In the middle of the chart is the contractor, Thiess John Holland. Thiess reports to ConnectEast, which reports to SEITA, which reports to the Victorian Government. Reporting to Thiess are the subcontractors, designers, and tolling system supplier. Debt providers and Transfield Services are in boxes that link to the left side of the ConnectEast box. The independent reviewer box is on the right, with links to both SEITA and ConnectEast.
Figure 17. Typical role of independent verifier in PPP project.

Table 9 (see page 44) summarizes basic contract management roles, responsibilities, and examples during the operations phase. Certainly, performance monitoring is a critical responsibility of the contract manager. In the United Kingdom, if the PPP contractor is not in compliance with performance standards, the DR may take five levels of action:

  • Level 1: Comments and Observations The DR notifies the contractor in writing that certain requirements or standards are out of compliance.
  • Level 2: Nonconformance Report The DR files an official report on contractor noncompliance with requirements or standards.
  • Level 3: Remedial Notice The DR puts the contractor on notice that if compliance with requirements or standards is not achieved within a certain timeframe, penalty points will be assessed.
  • Level 4: Penalty Point Notice The DR files a report and the contractor is assessed penalty points for noncompliance.
  • Level 5: Warning Notice The DR informs the contractor of potential significant contractual actions that may occur; this may eventually trigger the government's step-in rights.13

Certainly, noncompliance issues are best handled quickly and with the least amount of disruption. To date, the United Kingdom has not had to proceed to Level 5 with any PPP contractor.

Aside from these aspects of operations contract management, a key aspect is recognizing who retains what risks and making sure the contract manager's actions do not inadvertently make the public sector liable for a risk allocated to the PPP contractor. The DR in the United Kingdom provided a good example. In the contract that he manages, the private partner is responsible for roadway availability during winter weather, so essentially the contractor bears the risk of keeping the roadway clear of snow and ice. During a particularly bad storm, the contractor was unable to get its snow removal equipment up a steep grade, so a portion of roadway had to be closed until the weather cleared. The contractor was penalized for this service failure. Later, harsh weather was forecast, and the PPP contractor consulted the contract manager on how to keep the same thing from happening again. Rather than prescribing what he thought the contractor should do, the contract manager first reminded the contractor that it was its responsibility to keep the roadway clear. Through a careful dialogue the contractor came to the conclusion that it should pre-position the snow-removal equipment near the crest of the steep grade. In the course of this fairly routine interaction, the DR did not step into the contractor's shoes and potentially expose the Highways Agency to any claims for cost due to DR directives.

Handback Provisions

Generally, handback provisions specify residual service lives expected at expiration of the contract period for different structures and components of a highway or roadway. For example, the United Kingdom's standard is that 25 percent of the asset life remains at handback. Handback processes described in project or concession deeds are not unlike the turnover practices at the end of construction. Generally, a series of joint inspections between the government and the contractor will occur to determine whether adherence to the specified level of maintenance and repair has been achieved. Provisions to remedy unsatisfactory conditions are typically detailed. For instance, the contract may require establishment of a program of actions with milestones to bring the facility up to the expected standard. "Example: Handover Provisions" shows example handover provisions in a recent concession deed.

Table 9. Basic contract management roles in operations period.
RoleResponsibilitiesExamples
Performance Monitoring
  • Formal audits
  • Site inspections
  • Spot checks
Spot checks
  • Traffic management
  • Pavement condition
Financial Monitoring
  • Traffic data
  • Deductions/bonuses
  • Monthly payments
  • Annual reconciliation
Annual reconciliation
  • Maintain records incrementally
  • Annual adjustments based on deductions or bonuses
Contract Administration
  • Liaison
  • Report
  • Records and data
Liaison
  • With PPP contractor
  • With third parties (customers, etc.)

The effectiveness of these provisions and the processes for their enforcement have yet to be tested in the countries visited, or the staff did not have direct experience with concessions that had previously expired. In New South Wales, however, the RTA is preparing for the return of the M4 Motorway in February 2010. The RTA began this process in 2007 to provide adequate time to address issues that may arise, particularly since the handover provisions of this early arrangement were not as robust as more recent provisions (see "Example: Handover Provisions"). An obvious concern is what asset management strategy the contractor will use to comply with the handback provisions. The handback provisions, however, are but one factor that influences the asset management approach. Another is the contract term. By and large, the host nations set the term so that at least one major renovation of most or all of the components will be necessary. Concerns about the contractor deferring maintenance and repair for as long as possible are mitigated somewhat by the KPIs established and by the contractor's interest in keeping customers—the roadway's users—satisfied with the service level they receive. Otherwise, the viability of the contractor's commercial enterprise could be at stake.

Example: Handover Provisions

15.13 Final Handover

  1. The Parties must, if required by STATE, carry out joint inspections of the Motorway and Third Party Works at a mutually convenient time:
    1. 3 years prior to the expiry of the Term; and
    2. 18 months prior to the expiry of the Term.
  2. Following each inspection under clause 15.13(a), the Parties will seek to reach agreement on:
    1. the maintenance and repair works required to achieve Final Handover;
    2. a programme for the carrying out of those works by the Company; and
    3. an estimate of the cost of carrying out those works.

      If the Parties fail to reach agreement on any of the matters referred to in this clause 15.13(b) within 20 Business Days after the date of the relevant joint inspection then STATE may refer the matters in dispute for resolution in accordance with clause 26.

  3. The:
    1. Company or the Trustee (as the case may be, having regarding to their respective obligations under the Deed) must carry out the works agreed or determined under clause 15.13(b) in accordance with the programme agreed or determined pursuant to clause 15.13(b); and
    2. Company must either:
      1. progressively deposit into an account opened by STATE in STATE's name with an authorised deposit-taking institution (within the meaning of the Banking Act 1959 (Cth)) (the "Escrow Account") 40% of all revenue collected by the Toll Collection System during the last 3 years or 18 months of the Term (as the case may be) until such time as the balance of the Escrow Account equals or exceeds 40% of the total estimated cost of the works (as agreed or determined pursuant to clause 15.13(b)); or
      2. provide to STATE an unconditional undertaking which complies with the requirements of clause 13.1 for an amount equal to 40% of the estimated cost of the works (as agreed or determined pursuant to clause 1 5.13(b)), as security for the performance of such works and the Company's or Trustee's other obligations under this clause 15.13.
  4. Subject to its rights to have recourse to the monies held in the Escrow Account, STATE must pay the balance held in the Escrow Account to the Company within 20 Business Days after the Date of Final Handover.
  5. As conditions precedent to Final Handover:
    1. there must be:
      1. no immediate repair work required to any part of the Motorway or the Third Party Works; and
      2. otherwise no Defects in the Motorway or the Third Party Works;
    2. the Company or the Trustee must transfer ownership to STATE or its nominee of all plant and equipment owned by them or in respect of which they have an option to acquire title and required for the O&M Work; and
    3. the Company must supply to STATE all spare parts and special tools necessary for the continued operation, maintenance and repair of the Motorway and the Third Party Works after the expiry of the Term for a period of 12 months.
  6. During the final 3 months of the Term, the Company must train STATE (or other) personnel as nominated by STATE in all aspects of the operation, maintenance and repair of the Motorway and the Third Party Works to a level of competency that will allow those personnel to manage, operate, maintain and repair the Motorway and the Third Party Works so that the obligations specified in clause 15.1 can be fulfilled after the expiry of the Term.
  7. It is a condition precedent to Final Handover that the training referred to in clause 15.13(f) be completed to the reasonable satisfaction of STATE.
  8. For a period of 12 months after the expiry of the Term, the Company must ensure that it has competent and experienced personnel available to consult with STATE on any aspect of the operation, maintenance and repair of the Motorway and the maintenance and repair of the Third Party Works where required by STATE.
  9. Within 60 Business Days after the expiry of the Term, STATE will make determinations as to "residual design life," as defined in section 10.3 of the Scope of Works and Technical Criteria, with respect to each:
    1. Asset Element of the Motorway and the Third Party Works referred to in section 5.2 of the Scope of Works and Technical Criteria and, subject to clause 15.13 (i)(ii), each Asset Item forming part of that Asset Element; and
    2. Asset Item or Asset Sub-Item of the Motorway and the Third Party Works specified in Appendix 20 to the Scope of Works and Technical Criteria, as at the expiry of the Term, using methodology for the determination which is consistent with relevant industry practice at the time which may include using:
    3. any technology used at the time for the purpose of making such determinations; or
    4. records kept by the Company and the Trustee during the Term as required by the Scope of Works and Technical Criteria.
  10. If STATE believes that the "residual design life" of an Asset Element, Asset Item or Asset Sub-Item or any part thereof is less than the "specified residual design life," as defined in section 10.2 of the Scope of Works and Technical Criteria for the relevant Asset Element, Asset Item or Asset Sub-Item, then STATE may give notice to this effect to the Trustee and the Company specifying:
    1. the extent to which it believes the "residual design life" is less than the "specified residual design life;" and
    2. the cost of the measures necessary to ensure that the Asset Element, Asset Item or Asset Sub-Item or any part thereof have a "residual design life" at least equal to the "specified residual design life."
  11. The Trustee and the Company may within:
    1. a reasonable time of receipt of STATE's notice under clause 15.13j); or
    2. in any event, 60 Business Days of receipt of STATE's notice under clause 15.13(j), carry out all necessary work to ensure that the "residual design life" of the relevant Asset Element, Asset Item or Asset Sub-Item or part thereof is equal to the "specified residual design life" for the relevant Asset Element, Asset Item or Asset Sub-Item:
    3. within and at such time as may be required by STATE;
    4. in accordance with the requirements of any relevant Authority;
    5. so as to minimise the impact on the use of the Motorway or the Third Party Works; and
    6. in a manner which causes as little inconvenience as possible to:
      1. users of the Motorway or the Third Party Works;
      2. users of any Service or access; and
      3. the adjacent community.
  12. If neither the Trustee nor the Company carry out the work referred to in clause 15.13(k) within the time specified, subject to clause 15.13(o), the Company must pay STATE (without limiting the provisions of clause 12) the cost determined by STATE under clause 15.13(i)(ii) as a debt due and payable by the Company to STATE.
  13. Compliance by the Trustee and the Company with clause 15.13(k) or by the Company with clause 15.13(1) is a condition precedent to Final Handover.
  14. In this clause 15.13, the terms "Asset Element," "Asset Item" and "Asset Sub-Item" have the same meaning as in the Scope of Works and Technical Criteria.
  15. Nothing in clause 15.13(1) will limit STATE's rights against the Company or the Trustee, whether under this Deed or otherwise according to law in respect of any Defect.



13 Step-in rights grant the government the contractual remedy to take over the contract from the service provider.

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