How to Restore Confidence in Public–Private Partnerships
Published: 23 November 2020
Contractual arrangements for PPP infrastructure procurement must be improved.
Public–private partnership (PPP) transactions are declining across the world at a time when infrastructure development is acutely needed to accelerate economic recovery. As shown in Figure 1, the Private Participation in Infrastructure (PPI) database reported a reduction in developing and emerging market PPP investment commitments in 2019 relative to 2018—a trend which began in 2012. This is also reflected in the Global Infrastructure Hub’s Infrastructure Monitor 2020 report.
The reasons for this decline are numerous. On the government side, there is a perception that PPPs are not delivering “value for money” as intended. On the private sector side, the risks associated with PPP transactions have become excessive and unpredictable. This is partly because parties are bound by long-term contracts and financing arrangements that are ill-suited in dealing with unforeseen situations, particularly in an era of unprecedented technological and social change. This sentiment was widespread even before the onset of the coronavirus disease (COVID-19) crisis, and concerns regarding the lack of flexibility in PPP contracts have been significantly exacerbated by the pandemic.
Figure 1: PPI Database Dashboard Data on PPP Projects, 1990-2019
Against this background, a recent ADB Governance Brief has recommended reforms to current PPP contracting practices, incorporating various alternative arrangements and taking into account the associated governance challenges, in order to "restore confidence" in PPPs.
Risk Allocation and Dispute Resolution
There are many reasons for the global decline in PPP activity. One of the key problem areas is the treatment of project risks—since risk allocation is at the very heart of every PPP transaction.
Frequently, the main points of friction in PPP projects are related to particular aspects of risk allocation. This friction has significantly contributed to the overall loss of confidence, in both the public and private sectors, in PPP transactions.
Approach to PPP dispute resolution is another key area where reforms should be considered, given the high frequency of time-consuming and relationship-destroying PPP disputes.
Typically, PPP contracts call for a tiered, or staircase, approach to resolving disputes between the public and private parties, with each step in the process being increasingly formal (see Figure 2). However, if the parties to a PPP do not swiftly address the disagreements that inevitably arise in complex contracts, their positions can quickly harden, driving them to the expensive, time-consuming and highly adversarial processes of arbitration and/or litigation.
Figure 2: Typical Dispute Resolution “Staircase”
Toward More Collaborative PPPs
In addressing these issues, the governance brief examined several alternative approaches to risk allocation and dispute resolution, which have been used for various types of infrastructure transactions in different regions of the world. These include Project Partnering, a mechanism used in the construction industry, whereby the parties sign a non-binding charter, which encourages them to cooperate in the achievement of the construction objective; and the more radical alternative of Alliance Contracting, under which the parties to the contract make a formal, binding commitment to share risks and rewards, under a “no blame” regime.
Other collaborative models were also reviewed, including a regulatory asset-based approach which relies on a regulator to monitor the private sector; and the use, in countries with a civil law tradition, of “economic stability clauses,” which can provide relief in the event of economic hardship. Arrangements whereby governments take equity participation in project companies, as is frequently the case in the Peoples Republic of China were also considered. So-called “early contractor involvement” models were also reviewed, including the European “competitive dialogue” process.
Hybrid PPP models which have been used in Asia—including arrangements whereby the government develops and finances projects through to the end of the construction phase, followed by the competitive tendering of an operations/maintenance concession—were also examined. This is the essence of the "Build, Build, Build" program initiated by the Philippines and India’s "Toll Operate Transfer" program, under which its National Highways Authority can "monetize" publicly funded existing toll roads, by offering 30-year tolling concessions to private sector operators.
The other alternative contracting arrangement examined is the experience of the construction industry with standing dispute boards, which prove to be an effective mechanism for efficient resolution and for preventing disputes from materializing.
Some of the alternative approaches may not be appropriate for PPPs in the Asian region. However, the final section of the brief does offer five specific recommendations, designed to address the current "loss of confidence" in PPPs, taking into account the experience gained with different contracting models.
- First, governments should consider targeted incremental changes to risk allocation arrangements in the direction of a more collaborative sharing of particular risks, especially those risks associated with unanticipated events.
- Second, governments should draft contracts that consistently provide for the use of dispute boards in PPP transactions to help promote a less-adversarial approach to dispute resolution.
- Third, PPP contracts between parties should include provisions that encourage and facilitate the proactive management of the relationship between the parties. These provisions would serve to reinforce the point that the parties are, indeed, entering into a long-term partnership.
- Lastly, more collaborative approaches to PPPs will necessarily require high levels of governance capacity in the public sector. This includes government officials within line ministries and central PPP units, plus finance ministry officials who deal with the fiscal arrangements for handling the contingencies associated with the projects. This point is closely related to the call for increased interdepartmental collaboration that has been made in the recently-released report of the ADB Independent Evaluation Department.
The PPP model of infrastructure procurement should not be discarded, but traditional PPP contractual arrangements must be improved. By these various means, it should be possible to "restore confidence" in PPPs and use them effectively to help close the global infrastructure gap.
This article is adapted from the ADB Governance Brief financed under the technical assistance for Strengthening Fiscal Governance and Sustainability in Public-Private Partnerships. The governance brief was prepared in coordination with Bruno Carrasco, chief of Governance Thematic Group, and Hanif Rahemtulla, principal public management specialist. Colin Gin, assistant general counsel, Vivek Rao, principal financial sector specialist, Joao Pedro Farinha Fernandes, principal financial sector economist, Sanjay Divakar Joshi, principal urban specialist, and Sanjay Grover, public financial management specialist, served as ADB peer reviewers alongside David Bloomgarden, ADB consultant specializing in PPP, as advisor and external peer reviewer.
Asian Development Bank (ADB). 2020. Restoring Confidence in Public-Private Partnerships. The Governance Brief. Issue 41.
ADB. 2020. ADB Support for Public-Private Partnerships, 2009–2019. Manila.
Global Infrastructure Hub. Infrastructure Monitor 2020.
World Bank. Private Participation in Infrastructure Database
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