Put Away the Shredder! Can Dispute Boards Help with PPP Renegotiations?
A Presentation to the UK Branch of the Dispute Resolution Board Foundation
Recently, on 11 November 2020, I gave a ‘breakfast webinar’ presentation to the UK branch of the international Dispute Resolution Board Foundation, concerning the use of Dispute Resolution Boards (DRBs) on Public-Private Partnership transactions. In part, my presentation dealt with a paper which the Asian Development Bank (ADB) had asked me to prepare on creating ‘more collaborative’ PPPs (available at https://www.adb.org/publications/restoring-confidence-public-private-partnerships), in which I recommended the use of DRBs in PPP transactions, as a mechanism for fostering a greater sense of partnership between the public and private parties to PPP contracts.
During the breakfast webinar, I floated an additional argument for using Dispute Resolution Boards (which are also known as ‘Dispute Boards’ or ‘Dispute Adjudication Boards’) on PPP projects. The argument is that DRBs might well help to address a major area of concern with PPPs, namely the phenomenon of PPP renegotiations.
The Challenge of PPP Renegotiations
By definition, a renegotiation involves rewriting the terms of a PPP contract – as opposed to a mere change which takes place in accordance with an adjustment mechanism specified in the PPP agreement. As I indicated in another presentation I recently gave to the ADB (available at https://events.development.asia/learning-events/ppp-renegotiation-best-practices), such renegotiations happen with surprising frequency. According to the latest data from the Global Infrastructure Hub, somewhere between one-third and one-half of all PPP contracts are renegotiated at some point during the lifetime of the agreement.
The frequency of such renegotiations reflects the fact that PPP contracts are long-term and very complex, and that they often lack the flexibility to respond to unanticipated developments (such as a global pandemic). In any event, renegotiations can present significant problems – particularly for the government party in a PPP transaction – because of the difficulties which government authorities have in ensuring that a renegotiation complies with national procurement policies. Specifically, the government will want to make sure that the renegotiated contract still meets the test of achieving ‘value for money’. When a PPP contract is initially awarded, there is, normally, a competitive bidding process, such that the government can be confident that it has achieved good value. However, in a renegotiation, there is no such ‘competitive tension’ – the only parties at the table are the government and the incumbent private sector company.
Dispute Resolution Boards and PPP Renegotiations
Why are Dispute Resolution Boards relevant to the topic of PPP renegotiations? It is because of the way in which DRBs function. Usually, a DRB consists of a three-person panel of experienced individuals who are appointed when the contract first comes into force. The panel then visits the project site on a regular basis (perhaps every three months during the construction phase of the project), so as to resolve any disputes between the parties on an informal basis. More importantly, a skilled DRB is frequently able to anticipate situations which may lead to future problems, and work with the parties to take the steps necessary to avoid having those incipient problems evolve into actual disputes.
This approach to dispute resolution and, indeed, dispute avoidance, could well have a positive impact in regard to PPP renegotiations. According to the GI Hub data (see Chapter 4 of the report on Managing PPP Contracts After Financial Close, available at https://managingppp.gihub.org/), a significant number of renegotiation requests arise as a result of a private party encountering unanticipated increases in construction costs and/or a government party changing its policies, particularly in respect of the fees or tariffs to be paid by end-users of the infrastructure facility. Arguably, a DRB panel with the rights skillsets may be able to foresee serious problems arising from a project company’s handling of the construction phase and/or a proposed government policy change, and the DRB could then advise the parties, at an early stage, of the need to take corrective steps so as to avoid a future renegotiation.
In addition, if a renegotiation does become inescapable, the DRB panel may, conceivably, be able to provide some comfort – especially to the government party – that the new contract is fair and reasonable, and that it still constitutes ‘value for money’. If they were given the authority to do so, the DRB members – who would have familiarity with the project – could perform a function similar to that of the so-called “Technical Panel” created by the 2010 Concession Law in Chile, which is responsible for verifying that certain statutory conditions have been met before any proposed renegotiation is approved in that country.
Putting Away the Shredder
In short, carefully crafted Dispute Resolution Board provisions in PPP contracts could help to address some of the major concerns with PPP renegotiations. We may even be able to ‘put away the shredder’, and reduce the number of times we need to rewrite Public-Private Partnership agreements.
This blog is in a series that appears 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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