PPP contract management – Moving into operations, including managing KPIs and payment deductions

Disputes in public-private partnerships (PPPs) globally involving key performance indicators (KPIs) represent 20 per cent of all disputes, as highlighted in our data using a representative sample of projects from around the world. The data also highlights specific instances of disputes related to the testing and commissioning required at the end of the project’s construction period, including a project in the UK that went to court.

Managing the testing and commissioning phase of a PPP project, as well as effectively managing performance during operations, are important topics for governments and is the focus of this blog.

A fundamental characteristic of the PPP structure is the bundling of construction and operational obligations. This is different to traditional infrastructure procurement which typically involves separate government procurement of a construction contract and an operations contract.

The rationale is that by bundling the two scopes of work into a long-term PPP contract, private sector partners will build an asset that is able to be well-maintained over a long period in a more efficient manner.

For governments looking to adopt a PPP structure for the delivery of infrastructure, the end of construction will mean a transition period to the operational phase of the private partner’s obligations.

Testing and commissioning

Testing and commissioning occurs immediately prior to operations, so the procuring authority can be satisfied that the constructed infrastructure is complete and can deliver the required services to the level agreed.

Testing and commissioning is also relevant for traditional infrastructure procurement, though PPP structures can increase the tension involved as the private partner’s revenues typically don’t become available before completion.

Before the procuring authority provides sign-off, it should be satisfied that the quality of the asset matches its expectations. As well as pressure coming from a private partner, the pressure to reach completion may also be political in nature (such as a political agenda to open a road by a certain date).

Independent testers will be required to test against complex criteria. This process can take weeks or even longer.  Rushing the testing and commissioning phase can lead to the parties agreeing to move forward and commence operations with an extended list of defects (i.e. in effect an incomplete asset).

Incomplete work will inevitably cause issues down the track, so realistic timeframes must be agreed in PPP contracts, and pressures from political and private partners must be managed.

Early planning can assist in ensuring faster test sign off and a smooth transition from construction to operations. For example, the I-495 Express Lanes Case Study (based on a road project in the USA) highlighted the need for detailed planning and coordination to begin at least one year prior to operations.

Performance management and key performance indicators

Once in operations, it is typical for KPIs and payment mechanisms to be used to align the incentives of the parties. KPIs are developed around specific government objectives and the private partner will either be entitled to additional payments for good performance or reduced payments for poor performance.

Transferring demand risk in a user-pays PPP will similarly result in the alignment of incentives of the parties, because a reduction in service levels and user dissatisfaction can lead directly to a reduction in revenue.

However, it is important to consider this point thoroughly in practice. Not all reductions in service levels will affect revenue. For example, failing to perform long-term maintenance or failing to provide a safe working environment may not adversely affect the private partner’s short-term revenue. It can take a long time after the appearance of potholes on the shoulder of a road before road users look for less convenient alternatives.

Appropriate monitoring of KPIs and application of payment incentives is important even in user-pays PPP projects. The PPP Contract Management Tool suggests that governments should use KPIs and payment mechanisms to ensure that the project company is performing in accordance with the PPP contract, not as punitive measures. However, it is also qualified by the fact that governments should not take a soft stance.

Inconsistent application of payment incentives has the potential to damage the relationship between the government and the private partner. The approach taken by the procuring authority should be strict but fair.

KPI regimes can be extensive, detailed and complex. It is also important that governments dedicate the required resourcing to monitor KPIs. The procuring authority in the Zaragoza Tramway Case Study (based on a project in Spain) had four dedicated staff solely responsible for performance monitoring.

The internet of things and advances in automation and machine learning also open up opportunities for performance management. For example, compliance with a KPI associated with delays on a rail project can already be automatically generated through software to create efficiencies.

The GI Hub’s full guidance on the transition between construction and operations is available in Section 3.1 (Managing transitions) and performance monitoring and management in Section 3.2 (Performance monitoring) of the PPP Contract Management Tool.

The next blog will be on public stakeholder engagement, which is crucial at all stages of infrastructure delivery.