Maintaining value for money in the operational phase of PPP contracts Michael Burnett, Director, European PPP Forum, European Institute of Public Administration, OECD meeting of Senior PPP Officials, 18 February 2014 learning and development - consultancy - research EIPA 2014
Scope PPP contract management The challenge PPP contract management Common mistakes PPP contract execution What can go wrong PPP contract execution What to do if contracts go wrong PPP contract execution Examples of responses to challenges Contract execution Challenges in the new EU Directives
Introduction Michael Burnett Chartered Accountant (c.20 years working in public procurement) Assistant Director, KPMG Director, EIPA European PPP Forum (9 years) Member, European Commission Stakeholder Expert Group on Public Procurement since 2012 Member, Editorial Board, European Procurement and PPP Law Review since 2007
Contract management and the award process Clear specification of contract objectives (including KPIs, targets for KPIs and how measured) Robust performance management régime to verify if contract objectives being met Change protocols for planned/unforeseen change Contract conditions giving access to necessary information Means to verify continuing value for money (VFM) during contract Affordable exit strategy/enabling service continuity
Challenges in realising procured VFM Deals skilfully tendered and astutely negotiated by the public sector still have to be managed effectively: - Maintaining procured VFM when change needed - Combatting bargaining weakness when change needed - Combatting information asymmetry - Application of performance monitoring régime Important to have the right resources and skills in contract management team (economic operators will usually have more experience)
PPP contract management Common mistakes Failure to plan contract management during procurement phase The sigh of relief factor Failure to transfer procurement knowledge to contract management team Inadequate contract management resources Poor match to required skill set (e.g. training, past experience) Senior management switch off/demotivation of contract management team
PPP contract execution What can go wrong (1) Ineffective contract management is often a major cause of difficulties in contract execution BUT ALSO Procurement errors by Contracting Authority Demand forecast errors General economic shocks Force majeure event Mismanagement/under-resourcing by private partner Project-specific changes in economic circumstances
PPP contract execution What can go wrong (2) Legislative change (controllable/non-controllable) Technological change Professional practice change Public acceptance change Change of political control/orientation Collusion
PPP Contract execution Options if things go wrong Change contract in favour of private partner (e.g. length, scope, performance targets, payment amounts, payment flow, shift to partial or full availability basis, future revenue/refinancing guarantees, partial debt refinancing, hand-back terms, lower DSCRs subject to lender approval, other risk re-acceptance etc) Don t change and leave responsibility for recovery with private partner Rebalance the contract on the something for something principle Terminate the contract
Evaluating options if things go wrong Determine approach on case by case basis based on: Responsibility for specific contract issues arising Responsibility in original contract for risk materialising Partnering behaviour of private partner Scale of recovery needed Scope for change (affordable?, foreseen in contract review clauses? legally permissible?) Consequences of failure for public sector Balance of power
PPP Contract execution Options for rebalancing the contract Activate LGTT, Europe 2020 Project Bond Guarantees or other guarantee options (if relevant) Portfolio/territorial re-negotiation Compensating adjustments by SPV (e.g. more sponsor equity, new equity investor, acceptance of public sector equity/board representative in SPV, future public sector gain sharing, refinancing with gain sharing, future enhanced monitoring/certification/audit, future requirement for performance bond/sponsor parent company guarantees, earlier recovery of asset, lower user tariff, pass through of energy/insurance/sub-letting shared savings etc)
PPP contract execution Examples of responses to challenges (1) Example 1 NATS Causes of problem: General economic shock (September 11 th ) and over-optimistic demand forecasts (but NB also risks in initial financing structure of NATS) Nature and scale of problem: - Project company loan covenants in danger of being breached - Lenders threat to withdraw funding from project company - Investors unable to provide sufficient extra finance - Threat to functioning of UK Air Traffic Control system
PPP contract execution Examples of responses to challenges (1) continued Result: Need for short-term emergency funding facility of 60m ( 30 million from government, matching 30 million loan from NATS bankers) Financial restructuring (BAA as new private investor invested 65 million, government capital injection of 65 million, lower overall price cap, upside and downside volume risk sharing mechanism through price adjustments, planned cost reductions, significant replacement of bank debt by bond finance, less tight bank oversight, less onerous debt covenants, tighter monitoring of future distributions, safeguards re conflict on interest for new shareholder, no need for government takeover) No major financial shocks since refinancing, no further public finance needed and company has traded profitably in recent years
PPP contract execution Examples of responses to challenges (2) Example 2 London Underground PPP Cause of problem: Ineffective contract management by Contracting Authority and mismanagement by private partner (but NB also contract strategy errors by Contracting Authority) Nature and scale of problem (Part 1): One of the two private partners (Metronet) went into administration in 2007 (after cost overspends and threat by lenders to withdraw access to loan facilities) and the PPP Arbiter granted only 121 million of requested interim 551 million UP increase for 2007-08
PPP contract execution Examples of responses to challenges (2) continued Nature and scale of problem (Part 2): Three years later the other private partner (Tube Lines) requested 1.3 billion for additional expenditure for upgrades required compared to estimates of the PPP Arbiter Result: Termination of PPP and public sector takeover of Metronet and Tube Lines contracts In Metronet s case, public sector paid 1.7 billion to meet guarantee to lenders on early termination In Tube Lines case, public sector paid 310 million to acquire shares of project company and assumed 1.3 billion of project company s debt
PPP Contract execution Challenges in the new EU Directives Possibility to change contracts to greater extent/more easily and frequently to include additional works, services or supplies (Art.72(1)(b) Public Procurement Directive, Art.43(1)(b) Concessions Directive) - Removal of the unforeseen circumstances test - Removal of cumulative limit on total value - No limit on number/frequency of changes Step-in rights for lenders unambiguous? (Art.72(1)(d) Public Procurement Directive, Art.43(1)(d) Concessions Directive) Impact of legislative provisions on number of challenges?
European PPP Forum WEB SITE http://www.eipa.eu then search for PPP CONTACT DETAILS Mr Michael Burnett Director, European PPP Forum European Institute of Public Administration Maastricht, the Netherlands Tel +31-43-32 96 286 E-mail: m.burnett@eipa.eu Twitter: @eipappp