Public-Private Partnerships – Are the Critics Right?
Updated: May 20, 2020
Back in January of this year (does anyone remember those carefree days before you-know-what), the Infrastructure Investor journal published an article with the provocative title: PPPs are in trouble. Is it time to bin them? In the article, it was noted that the volume of PPP transactions has stagnated – which is consistent with both the data in the latest annual report of the World Bank’s PPI Database (which deals with private infrastructure investment in low- and middle-income countries: https://ppi.worldbank.org/content/dam/PPI/documents/private-participation-infrastructure-annual-2019-report.pdf) and the anecdotal evidence from countries such as the UK, which has formally announced the end of its Private Finance Initiative program. As well, some high-profile private sector developers, such as SNC-Lavalin and Skanska, have indicated that they will be ending or significantly restricting their involvement with PPPs going forward.
Many of the public sector and private sector critics of the PPP model have focused on the perceived inflexibility of long-term PPP contracts, and their inability to adapt to unforeseen changes in circumstances – and this sentiment was being voiced even before we were confronted with the enormous ‘Black Swan’ of the global COVID-19 pandemic!
In response, there have been calls for new approaches to PPP contracting, with a view to establishing a different kind of relationship between the public and private contracting parties. In the Infrastructure Investor article, Maud de Vautibault of the Global Infrastructure Hub spoke of the need for “the public and private sector to work more collaboratively”, especially during the design phase of projects. In this context, she referred to the Australian experience with so-called “Alliance Contracting” – on which a useful note has recently been published by the CMS law firm, available at: https://cms.law/en/nld/publication/guide-to-contract-alliancing-in-construction.
Fundamentally, it all comes down to the issue of risk. Typically, PPP contract drafting has focused on risk allocation – beginning with a careful identification of the potential future threats to the viability of the project, followed by a negotiated allocation of the risks as between the contracting parties, based on the principle that ‘each risk should be allocated to the party best able to manage it’. But there are alternatives to this approach – such as the aforementioned Alliance Contracting model – which place much more emphasis on the concept of risk sharing.
There are, however, significant challenge with such collaborative arrangements. These include:
the nature of the alliance relationship means that governments need to exercise great care to select highly-trustworthy private sector firms, with the requisite collaborative (as opposed to adversarial) mindset – a requirement which significantly complicates public procurement processes;
given that an alliance contract is focused on dispute avoidance, there is a greater need for alternative forms of dispute resolution, such as mediation and the use of dispute boards, with which the contracting parties may not be familiar;
the collective assumption of risk will require innovative forms of insurance – in some jurisdictions, so-called “Integrated Project Insurance” policies are available to provide coverage for shared risks on a ‘blame-free’ basis, but these types of policies are not universally available, and can be costly; and
similarly, the use of an unorthodox form of contracting may complicate the availability of project financing – particularly if some of the financing is coming from a multilateral development bank or a similar institution with rules that do not contemplate such arrangements.
In my view, we are at a turning point in the story of public-private partnerships. Clearly, different approaches are needed, if we are to succeed in scaling-up the use of PPPs so as to meet the current and future needs of both advanced and developing economies. Those ‘different approaches’ will likely involve a greater focus on risk sharing (as opposed to risk allocation), and greater flexibility in our contract models. The post-pandemic world will be a time for fresh thinking – and a new approach to PPPs should be part of that agenda.
This blog is in a series that appears approximately every two weeks on this website. It has been written by Mark Moseley, the Principal of Moseley Infrastructure Advisory Services (Mark.Moseley@MMMInfra.com). Unless otherwise noted, the copyright in this blog is owned by Moseley Infrastructure Advisory Services. The blog is made available for use under a Creative Commons Attribution 3.0 Licence, whereby users are free to copy and redistribute the contents of the blog, if they give credit to the author, and clearly indicate any changes that have been made.
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