PPP contract management – Setting up the government team for the first transition, between financial close and construction

As highlighted in the first blog in this series, without a strong commitment from government—including adequate resourcing to properly manage a PPP contract during construction and operations—even the best projects can end badly.

The first major transition after financial close in a PPP transaction is the transition to construction. Financial close typically refers to the moment when lenders are satisfied that the conditions precedent have been satisfied and funds become available. Once initial funds are contributed, the private partner can enter the construction site to begin construction.

From a government’s point of view, because the transition occurs at the beginning of a project, its long-term success may be jeopardised if the transition is not managed properly. This blog will focus on a few key aspects of the first transition between financial close and construction:

• Setting up the government’s contract management team
• Preparing the team for construction commencement
• Managing land acquisition and resettlement    

Setting up the contract management team

The setup of a contract management team should be carefully planned. The skillset required after financial close is different from the transactional expertise needed to achieve financial close, and contract management teams often change substantially after financial close. However, it is beneficial for there to be some staff overlap between the two phases to allow for knowledge sharing and training.

Key to a successful transition from financial close to the start of construction is a well-equipped contract management team prepared and ready for the start of construction.

For example, key contract management staff may also be involved in the procurement process before financial close. This way, their understanding of the contract will be based upon the contract’s development through extensive negotiation.

To assist with knowledge transfer in the Barranquilla Airport Case Study (based on a project in Colombia), workshops were carried out by  Colombia’s National Infrastructure Agency’s (ANI) central knowledge teams and its consultants who structured the contract with new staff who joined the team after contract award.

When determining the size and structure of a contract management team, several factors should be taken into account, including the obligations and risks assumed by the procuring authority, and the overall project complexity.

There is no set formula for the size and structure of a procuring authority contract management team. For example, team size can vary from a couple of individuals to more than 50 dedicated staff.

Consideration should also be given to which skills are required within the team, and what expertise can be brought in using external advisors or other government departments.

Commonly, contract management teams will comprise a small number of permanent staff (fewer than 10, and often fewer than five), which will need to rely more on external expertise from other government agencies and/or external advisors.

Section 2.1 (Contract management team set-up) of the PPP Contract Management Tool provides several country specific examples of different approaches to contract management team set-up across Latin America, Asia and Europe.

It has become common practice in the context of PPPs for governments to establish dedicated PPP or industry specific bodies with specialised expertise. One project rarely exists in isolation, and centralising resources in this way can generate synergies across a program of several projects by sharing specialised professional expertise and functions so that they are available as needed (e.g. legal expertise).

Section 2.1 (Contract management team set-up) of the PPP Contract Management Tool provides two examples of centralised resourcing in the context of PPP contract management: the UK’s Waste Infrastructure Delivery Programme (WIDP) and Colombia’s National Infrastructure Agency (ANI).  

More broadly, it is imperative for an effective contract management team to have the right governance in place to ensure efficient and effective resolution of day-to-day issues, without the need for excessive approvals.

The focus for this blog post is on the contract management team, not broader governance arrangements, such as the existence of steering or other strategic committees. However, these topics are also important and detailed in Section 3.3 (Stakeholder management) of the PPP Contract Management Tool.

Preparing the contract management team for construction commencement

PPP contracts are complex and require active involvement from the government’s contract management team during the construction period. The team should have a thorough understanding of the contractual documentation, including the procuring authority’s rights and responsibilities, so that it can move quickly and avoid causing delays and other project issues for the project company.

Some key aspects of a procuring authority’s role under a PPP contract are to:

• Sign-off designs and construction programs
• Monitor performance and certify completed construction milestones
• Manage stakeholders
• Respond to claims and scope change requests
• Ensure enabling works are delivered

Other important aspects that require active management by the contract management team during construction are disputes, renegotiations and information management. For example, the data analysis section of the PPP Contract Management Tool indicates that 17 per cent of PPPs encounter a dispute in the first four years after financial close.  Further, 45 per cent of PPPs are renegotiated by their tenth year after financial close.

Many of these topics will be specifically detailed in the remainder of the blog series.

Managing land acquisition and resettlement

Land is integral to any infrastructure project. Land access can be particularly challenging for linear projects, such as road and rail projects and transmission line projects, and through densely populated areas.

The GI Hub’s PPP Risk Allocation Tool notes that procuring authorities generally bear the risk of acquiring the required land access and are best placed to select and acquire the required land interests for such projects, which often occurs before financial close. However, there can be political pressure to achieve financial close on a project before all the required land acquisitions have been completed.

The Gautrain Rapid Rail Link Case Study highlights this point. The project is in South Africa and, at the time, the procuring authority was under pressure to meet the 2010 FIFA World Cup deadline, which meant that work on land acquisition was not completed before construction. The project noted that challenges are not only due to non-supportive land owners, but relevant stakeholders will often have concerns over other issues such as environmental impact.

Where financial close is achieved before all required land acquisition has occurred, the PPP Contract Management Tool suggests that procuring authorities keep the project company informed of progress, so that any delays can be managed from a very early stage by both parties, including agreeing to changes in the construction schedule and compensation where appropriate.

This blog has highlighted several key aspects in the transition from financial close to construction of which government agencies responsible for managing PPP contracts should be aware. It highlighted the need for an effective contract management team to be established and for the benefit of some staff overlap between the two phases to facilitate knowledge transfer and training. It emphasised the active contract management role that a contract management team will be required to fulfil, including some of the key specific roles during construction. It also noted that governments will need to consider various aspects in deciding the size and expertise of a contract management team, including the nature of the project itself and access to external resources (such as a PPP unit). Finally, land acquisition was highlighted as an integral part of any infrastructure project which needs to be effectively managed.

The GI Hub’s full guidance on setting up the government’s contract management team and managing the transition between financial close and construction is available in Chapter 2 (Contract management team set-up and training) and Section 3.1 (Managing transitions) of the PPP Contract Management Tool.

The next blog, PPP contract management – Moving into operations, including managing KPIs and payment deductions, will focus on the second major transition between construction and operations. This transition involves another major change in the role of the contract management team, particularly in projects which include complex key performance indicators and payment deductions.

The purpose of this blog series is to highlight some of the interesting aspects of the PPP Contract Management Tool to facilitate discussion around those issues. PPP approaches and practices are constantly evolving, and it is important to debate interesting topics to develop better practices and help governments deliver higher quality PPP projects.