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.
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.
|Safety||A = N*108 / L*365*AADT|
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 Vehicles||IF 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 Conditions||Road 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.
|Lane Availability||Deductions 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 Performance||Monthly deduction or bonus|
Assessment over specified routes
|Condition Criteria||Deductions for:|
Lanes seriously affected by snow or ice
Loss of technology systems
|Safety Performance||Annual deduction or bonus|
Comparison of M25 with national safety trends
|Proactive Management||Annual 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.
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.
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.
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
13 Step-in rights grant the government the contractual remedy to take over the contract from the service provider.
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