CONSTRUCTION MANAGERS’ LIBRARY, Leonardo da Vinci: 2009-1-PL1-LEO05-05016

PPP PROJECTS IN
CONSTRUCTION

José Cardoso Teixeira

Arnab Mukherjee
Gavin Maxwell-Hart
Saleem Akram
Piotr R. Nowak
Paweł O. Nowak

Ascot, Guimaraes 2011

"This project has been funded with support from the European Commission under the Lifelong
Learning Programme. This publication reflects the views only of the author, and the Commission
cannot be held responsible for any use which may be made of the information contained therein."
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These manuals were developed within the scope of the LdV program, project number:
2009-1-PL1-LEO05-05016 entitled “Common Learning Outcomes for European
Managers in Construction” ("Model of certification and mutual recognition of
qualifications of construction managers and engineers - development of manuals for post-
graduate and supplementary studies"), Stage II. The project was promoted by the
Department of Construction Engineering and Management, Faculty of Civil Engineering
at the Warsaw University of Technology. Partners of the project were:
- Technische Universität Darmstadt (Germany)
- Universidade do Minho (Portugal)
- Chartered Institute of Building (Great Britain)
- Association of European Building Surveyors and Construction Experts (Belgium)
- Polish British Construction Partnership (Poland)

Within this part of the project the following manuals were developed:
M8: Risk Management (130)
M9: Process Management – Lean Construction (90)
M10: Computer Methods in Construction (80)
M11: PPP Projects in Construction (80)
M12: Value Management in Construction (130)
M13: Construction Projects – Good Practice (80)

The scope of knowledge presented in the manuals is necessary in activities of managers -

construction engineers, managing undertakings in conditions of modern market economy.
The manuals are approved by the European AEEBC association as a basis for recognizing
manager qualifications. Modern knowledge in the field of management in construction,
presented in the manuals, is one of prerequisites to obtain EurBE (European Building
Expert) cards, a professional certificate documenting the qualification level of a
construction manager in EU.
The manuals are designated for managers - construction engineers, students completing
postgraduate studies “Management in construction” and students completing construction
studies. Postgraduate studies are a recognized program, and graduates receive certificates
recognized by 17 national organizations, members of AEEBC.
The manuals were translated by Lingua Nova translation office.

More information:

www.leonardo.il.pw.edu.pl
www.psmb.pl
www.aeebc.org

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LIST OF CONTENTS

CHAPTER 1
INTRODUCTION ........................................................................................... 5

CHAPTER 2
THE PPP CONCEPT ..................................................................................... 11
2.1 THE CONCEPT .............................................................................. 11
2.1.1 The partnership ........................................................................ 13
2.2 ALLOCATION OF RESPONSIBILITIES ..................................... 17
2.3 LEGAL FRAMEWORK ................................................................. 18
2.3.1 The european commission guidance on ppp............................ 18
2.3.2 Legal issues in eu member states............................................. 20
2.3.3 PPP governance in eu member states ...................................... 27

CHAPTER 3
ADVANTAGES AND PITFALLS OF THE PPP SCHEME ...................... 30
3.1 GENERAL CONTEXT................................................................... 30
3.2 FOR THE PUBLIC SECTOR ......................................................... 31
3.2.1 Budgetary management ........................................................... 32
3.2.2 Better risk allocation ............................................................... 32
3.2.3 Exposure to private skills ........................................................ 33
3.2.4 Optimise whole-life design and costs ...................................... 35
3.2.5 Timeliness of services ............................................................. 37
3.2.6 Social and economic responsibility ......................................... 38
3.2.7 Summary ................................................................................. 38
3.3 FOR INVESTORS AND BANKS .................................................. 38
3.3.1 Ensuring revenues ................................................................... 39
3.3.2 Ensuring return ........................................................................ 39
3.3.3 Sources of project finance ....................................................... 40
3.4 FOR CONTRACTORS ................................................................... 42
3.4.1 Motivation for ppp contracts ................................................... 43
3.4.2 Accepting and managing construction risks ............................ 45
3.4.3 For operators............................................................................ 45

CHAPTER 4
RISK DISTRIBUTION AND MANAGEMENT IN PPPs .......................... 48
4.1 PURPOSE ....................................................................................... 48
4.2 APPROACH TO RISK MANAGEMENT IN PPPS ...................... 49

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CHAPTER 5
PPP SPECIFIC RISKS ................................................................................... 54
5.1 RISKS AT DIFFERENT PPP STAGES ......................................... 54
5.2 PREPARATION AND CONCEPTION ......................................... 56
5.3 TENDERING AND AWARDING ................................................. 57
5.4 DESIGN AND CONSTRUCTION ................................................. 58
5.5 OPERATION AND MAINTENANCE .......................................... 60
5.6 RISK ALLOCATION IN PPP PROJECTS .................................... 65
5.7 RISK REDUCTION ........................................................................ 67
5.8 RISK TRANSFER .......................................................................... 68
5.9 OPTIMAL ALLOCATION OF RISK ............................................ 69

CHAPTER 6
PPP PROJECT PROCEDURES ................................................................... 73

CHAPTER 7
CASE STUDIES .............................................................................................. 86
7.1 INTRODUCTION ........................................................................... 86
7.2 THE URBAN REHABILITATION SOCIETY OF PORTO –
PORTO VIVO, SRU ....................................................................... 87
7.3 REHABILITATION PROGRAMME OF MORRO DA SE........... 88
7.3.1 Porto and urban rehabilitation ................................................. 88
7.3.2 The rehabilitation plan of morro da se .................................... 90
7.3.3 The student residence project .................................................. 92
7.4 CONTRACTING MODEL ............................................................. 93
7.4.1 Tendering and contracting ....................................................... 93
7.4.2 Economic model ...................................................................... 95
7.4.3 Duties of the public partner ..................................................... 95
7.4.4 Duties of the private partner .................................................... 96
7.5 PFI CASE STUDY: SEVERN RIVER CROSSING, UK .............. 96
7.6 PFI CASE STUDY: FORTH VALLEY HOSPITAL, UK ............. 99
7.7 PFICASE STUDY UK: M6 TOLL ROAD..................................... 101

BIBLIOGRAPHY ........................................................................................... 105

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CHAPTER 1
INTRODUCTION

The advent of Public-Private Partnerships (PPP) is directly related to the revision

of the state role as a provider of public services. After the Second World War, the
state felt the need to invest in the re-construction of damaged infrastructures and
in the re-settlement of services, thereby reinforcing its position in the economy
through the constitution of major entrepreneurs in the public sector. Later, as the
financial capacity decreased, the state started fading out its direct intervention in
economic and social development, and progressively took the role of indirect
supporter of that development (Franco, 2007).

In the OECD countries in the 1980s, the state started to use privatisation,
outsourcing and concession schemes as a way of decreasing its direct
involvement and passing to the private sector the responsibility for providing
those services. Actually, privatisation has occurred in over 100 countries, most
notably in the former communist countries of central and Eastern Europe
(Akintoye et al., 2003) with the objective of recovering the market mechanisms
that had been lost during the previous years. Similarly, the objectives of public
service concession have been fostering the market mechanisms and reducing the
weight of the public sector in the economy.

Later in the 1990s public management theory started to argue that a good part of
the problems resulting from the market or coordination flaws could not be
resolved with the exclusive action of the public sector, but need the participation
of both public and private agents.

Simultaneously, most governments realised that the construction and operation of

modern infrastructures could no longer be financed by the traditional model, that
is, by using resources from taxes and various levies (e.g. fuel taxes, road user
charges). For the above reasons, a substantial development of PPPs has been
perceived in the countries of the European Union and OECD, as an alternative
approach to the classic forms of privatisation and public concession (Reis et al.,
2009). Actually, the recent disparity between the capacity to generate resources
and the demand for new facilities has forced governments to look for new
funding approaches and sources. In this context, the PPP scheme has been viewed
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as a structuring solution working complementary to public budgeting. But this

has also proved to be one of its main fragilities as the weaker European
economies have mitigated their present deficits by transferring the public
investment to privates in the short term while assuming heavy financial
commitments for the future.

In fact, while the PPPs were initially seen by governments as a way of launching
public investments without negative effects on the public debt in the short term
(by getting better value for money, removing the need for upfront capital
investment, balancing risk transfer and achieving greater accountability), they
became a new source of fiscal concern because they did not reveal self-
sustainability in many cases (Franco, 2007). Consequently, at the present time,
the option for running a specific project under a PPP scheme must take into
account the project specifics and be clearly matched against the benefits
generated. A PPP must be seen as one of several possible options for conducting
a public project and not as a solution to overcome the lack of public funds
to do it.

Essentially, a PPP may be defined as a contract arrangement based on the mutual

commitment between public and private organisations. It has to be stressed, first
of all, that the establishment of partnerships between public sector and other
entities is historical. Relevant examples of this can be found in the Portuguese
discoveries of the 15th and 26th centuries. Two historical examples from the
following centuries are the water distribution concession in France, granted to
Perrier in 1782 and the construction of the Suez Canal in 1858 (Grimsey &
Lewis, 2000). The latter is an interesting example of a PPP arrangement
comprising the design, building and operation (DBO) of the waterway. A specific
company, jointly owned by French and Egyptian stakeholders, was created for
that purpose; financing was granted by mixed European and Egyptian funds; the
contract was established for 99 years and then the ownership of the infrastructure
passed to the Egyptian government. There are plenty of other historical examples
where the public sector borrowed money from the private sector, mainly for
acquisition of infrastructures and services. For example, in the later part of the
nineteenth century many roads and railways in Europe and USA were developed
by using private funds under a concession approach.

PPPs are becoming increasingly commonplace in the world as an arrangement

between the public and the private sectors to finance, design, build, operate and
maintain public infrastructure or services (to the extent consented by the national
legal frameworks and public administration practices of each country). Following
the evolution of PPPs for infrastructure projects, the forms of contracts have also
changed, depending on the degree of risk allocated between partners, the amount
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of expertise required from each partner to negotiate the contract and the potential
implications for taxpayers. Geographically, PPPs have also spread significantly in
Europe and other countries (Australia and the United States) but have had little
impact in others (Canada, Japan, and South Africa).

The UK has been one of the first European countries to embrace and encourage
PPP projects. As early as 1986, the UK Government initiated its first PPP project
in the form of a PFI1 (Private Finance Initiative) approach and since then the total
spread and reach of PPP projects in different shapes and forms have encompassed
almost all the major public sector departments.

Prior to 1989 there were limits to the private finance in government activities and,
since 1981, these have been expressed as “Ryrie Rules”, which stated that a
project funded by the private sector:
a) should go ahead only if it could be demonstrated as more cost effective
than a comparable publicly funded project; and
b) should result in a corresponding reduction of public spending (although
this rule was subject to individual exceptions by ministers and was
abolished in 1989).

After initiation of the PPP projects in 1992 the first rule was further relaxed.
In 1999 the UK Government commissioned two separate but complementary
reviews on government procurement – one by Sir Peter Gershon and a second one
by Sir Malcolm Bates. The reports and findings of these two reviews formed the
basis of the UK Government’s policy on PPP.

The sectors which saw a massive surge of PPP projects include information
technology, health care, defence, education, transport (road – rail – air)
infrastructure, environmental management including waste management,
facilities management, housing, emergency services, leisure, prisons and street
maintenance including street lighting.

The stated aims of the government were to achieve better value for money,
removal of the need for upfront capital investment, balanced risk transfer and
greater accountability. However, many see the growth of the PPP projects as a
natural progression to the programme of privatisation that was undertaken in the
UK during the 1980s and 1990s.

1
A PFI is a scheme by which the public sector sets up a level of service and the private
operator provides the services in return for a charge. Under the PFI scheme, the public
sector has been able to finance projects over the term of the contract, often 20 to 30 years.
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By 2010 the total capital value of the PFI projects signed in the UK was £68bn,
with a public sector commitment to spend a further £215bn over the life of the
contracts.

After the first wave of PPP schemes implemented in the UK, they began
expanding through Europe2. Portugal is presently the European country with the
largest percentage of public projects developed under the PPP approach (TC,
2008). Beyond the UK and Portugal, various member states of the European
Union gained significant experience in the PPP scheme, namely, Ireland,
Germany, Greece, Italy, Czech Republic, Poland, Hungary, Spain, Finland and
the Netherlands, although different levels of development may be identified
(figure 1.1.), and different levels of contract complexity have been achieved
(Akintoye, Beck, & Hardcastle, 2003).

2
European Commission, through its grant mechanism, encouraged the adoption of PPP
arrangements for developing infrastructure projects in Portugal, Italy, Netherlands,
Greece and Ireland (Grimsey & Lewis, 2000).
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Table 1.1. Growth of PPP Projects in UK: 1986 – 1998

(Figures reflect the capital spending in years in which the contracts were signed)

Year Amount (in £m) Notable projects

1986 150 Dartford Bridge

1990 330 Second Severn Crossing

1992 324 Birmingham Northern Relief Road/Skye Bridge

1993 42 Royal Armouries Museum

1994 11 Lothian Forth Health Board/Northern NHS Trust

1995 862 London Underground Northern Line trains

1996 6064 Channel Tunnel Rail Link

1997 1500 Manchester Metrolink, MoD projects

1998 2679 NHS hospitals

Total 11962

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Figure 1.1. PPP Map (font: European Commission, 2005)

Regarding the type of projects in which they have been used, it can be said that
although PPPs initially fell upon the water and road sectors with concession toll
(clearly representing the financial return) there is a growing conviction that they
can be used to satisfy necessities in infrastructures and services of a large variety
of sectors. According to the EC Green Paper COM (2004), during the last decade,
the PPP phenomenon developed in many fields falling within the scope of the
public sector. The sectors which saw a massive surge of PPP projects are:
• Energy (power generation and supply, street maintenance including
street lighting);
• Transport (toll roads, light rail systems, bridges, tunnels, airports);
• Water (sewerage, waste water treatment and water supply);
• Telecommunications (telephones);
• Environmental management (waste management);
• Social infrastructure (leisure, hospitals, prisons, courts, museums,
schools and government accommodation).

The correct understanding of the meaning of a PPP, the characteristics that

distinguish it from other models of contract and the multiplicity of entities it
mobilises are essential factors for its adequate operation. These will be discussed
in the next chapters of this book.
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CHAPTER 2
THE PPP CONCEPT

2.1 THE CONCEPT

The concept of PPP is ambiguous, especially because of the large scope of

meaning in which it has been used, covering several types of contracts involving
the public sector. Various institutions are saying that it would be better to reduce
its range in order to clarify the difference between public traditional acquisitions
and privatisations. The definitions for different countries and organisations also
highlight distinctive emphases in accordance with their specific interests and
objectives. Figure 2.1. summarises four different definitions from four eminent
international institutions.

Figure 2.1. Definitions of PPP

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According to the definitions depicted in figure 2.1, it may be concluded that in

the scope of a PPP, the public and the private sectors work together in a project,
the main characteristic of which is the simultaneous focus on commercial and
social objectives. So, besides the difficulty in establishing a universal and
complete definition, Santos (2006) presents three characteristics considered
common to all PPPs:
• Long-term contract (usually 20 to 30 years) between the public and the
private sector for the provision of public services, with an adequate
division of risks;
• Risk allocation to the entity holding more ability, know-how, experience
and innovation to run it;
• Private sector participation goes beyond project financing (although
being the main investor) and brings to the partnership the management,
experience and innovation abilities for the project benefit.

Accordingly, PPPs are distinct from the traditional public procurement models.
The private partner is not paid for constructing a facility but rather for providing
services on investments realised during the construction phase. A key distinction
between PPPs and traditional procurement approaches is that the risks associated
with the ownership and operation of an asset are largely borne by the private
sector instead of the public sector. Thus, if the public purchaser is able to reduce
the overall whole life costs by adopting appropriate allocation and management
of risks incurred, then a PPP may offer a viable alternative to more traditional
forms of procurement or service provision.

The following characteristics also apply to projects conducted under a PPP

scheme:
• Funded with high levels of borrowed capital;
• Substantial initial capital spending recovered over the project life;
• Income sharing ruled by a contract.

Essentially, a PPP is a scheme usable by public entities for contracting services to

the private sector that has proved to be more efficient than the traditional
approaches in a number of ways. This is mainly because it caters for adequate
risk sharing between the contracting institution and the supplier, and allows for
matching payments and services delivered; i.e. it delivers the best “value for
money”.

However, the PPP will not always be the best possible approach for a given
project from the public sector point of view. Actually, a number of difficulties in
the past compelled the public sector to be more cautious than before when it

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comes to embarking on a PPP contract. Most governments now require that

before adoption, the adequacy of the PPP scheme must be strictly proved against
the traditional public contracting approach.

A tool that is frequently used for assessing this is the Public Sector Comparator
(PSC). The PSC is the estimated whole-of-life risk-adjusted cost of delivering the
project by the public sector, fully accomplishing the output specifications. It is
calculated by depicting the cost of the scheme if it were to be created and
managed wholly within the public sector and based on the assumption that all the
risks associated with the scheme are borne by the public purchaser. The PSC is
used to test whether private investment bids offer better value for money in
comparison with the most efficient form of public delivery. If the PSC is more
expensive than the private sector bid, this is an indication that the PPP scheme
will offer value for money. However, the public purchaser must still demonstrate
that the scheme is affordable; that it has the resources to commission and pay for
the scheme’s long-term operation. Because the client is typically committed by
contract to make payments over 30 years, affordability is a crucial issue.

It is important to note that the PPP concept varies in accordance to the attribution
package which will pass to the private sector that is agreed in the contract. In case
of equipment or public infrastructure, the concept which better reflects the PPP
spirit includes financing, conception, construction, operation/exploitation and
maintenance of the equipment or infrastructure. Partnerships involving the above
set of tasks are commonly named DBFO (Design, Build, Finance, Operate). Other
forms of PPP projects may include arrangements such as DBO (Design Built
Operate), JV (Joint Ventures), outsourcing and similar.

Finally, it is important to point out that a PPP is not self-sustainable by definition,

and that is why it does not substitute the other ways of concession, where the
need for self-sustainability remains. On the contrary, it must be compared to
alternative ways of concession and it should only be used if it proves better.
Self-sustainability is therefore a presupposition in the creation of a PPP, as
specified in the Portuguese legislation (article 6th 1c of the Decree-law 86/2003):
“… present to the private partnerships an expectation in obtaining adequate
compensation to the amounts invested and to the risk in which incurred”.

2.1.1 THE PARTNERSHIP

The most important issue in a PPP is the partnership but defining this is not an
easy task. A partner is “one of two or more persons contractually associated in a
joint principal business” and it means that partnerships are not dictated by desire

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or need, but often by the contract itself (NASCIO, 2006). However there is a key
distinguishing factor of PPPs: the transfer of risk between partners.

In the PPP context, a partnership is a commercial relationship between two

partners (a public entity and a private entity), whereby both parties share risks,
rewards and responsibilities for the success or failure of the deal. On the other
hand, the PPP is shaped by the action taken and partners involvment. That is why
PPPs depend of the personal ethics of the partners, their abilities, motivations and
objectives, the cooperation that they develop among them, the expectation created
by the partnership, the operation transparency, the complementary know-how and
skills of the partners, etc. All these factors influence the efficiency and
effectiveness of the partnership.

In the past, both public and private sectors have displayed a degree of inhibition
in respect of joining in common projects, as they have very different interests.
The possibility of contradictory objectives of the parties anticipates that PPP
structures may become very complicated. PPPs can take various forms and
include both collaborative (non-legal binding) or contractual (legally binding)
agreements (NASCIO, 2006). But the legal and financial environment
surrounding the cooperation between the partners is not clearly regulated and
there is an urgent need that it should be.

Obviously, a successful partnership can succeed only if “the top” of both the
public and private sector organisations commit to working together; however,
misunderstandings and conflicts may still develop between them. This may be
amplified as the partnership enlarges both from the public partner side (many
government departments represented, many other participating entities) and the
private partner side (usually organised within a consortium comprising a myriad
of company groups, e.g. financial institutions, infrastructure developers,
consultants, insurance companies, and so on). Figure 2.2. shows a typical PPP
structure for the development of an infrastructure project.

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Figure 2.2. Stakeholders for an infrastructure project conducted under a

PPP scheme

Establishing informal mechanisms which enable an opportunity for dialogue

between the public and the private sides can be a good tool to help smooth out
problems (United Nations, 2009). Equally important is to establish clear channels
of responsibility for the entities participating from the public sector thereby
demonstrating to the private partners that the state is fair3 when dealing with the
private sector.

3
International Monetary Fund (IMF) states that “widespread corruption in government
would be a serious obstacle to successful PPPs”
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More people will be affected by a partnership than just the public officials and the
private sector partner, for instance, service users, the press, affected employees,
public labour unions, relevant interest groups and, of course, tax payers. The
participation of the service users in the decision-making process may increase the
likelihood that actions taken or services provided by public agencies reflect more
adequately the public needs and that the benefits of the service provided are more
equitably shared. Indeed, there must be general public benefit4 from PPPs.
However, the way of achieving this may be difficult to put into practice. The
National Council for Public-Private Partnerships of USA states that the public
interest is fully assured through provisions in the contracts that provide for on-
going monitoring and oversight of the operation of a service or development of a
facility. In this way, everyone benefits; the government entity, the private sector
and the general public.

Problematic PPP relationships usually result from non-technical challenges that

arise in the working environment. Lack of executive and project leadership,
insurmountable communication issues, deficiencies in planning and undefined
processes can create barriers to collaboration. It is important to define the
objective of each group especially when many parties are involved in the project
and it is clear that some objectives may be conflicting very often. Table 2.1.
summarises the typical participating entities in a PPP and their chief objectives.

Table 2.1. Entities involved

(Font: Associação dos Industriais da Construção Civil e Obras Públicas do Norte
– AICCOPN, Portugal)

PARTICIPANTS OBJECTIVES
5
Public partner / Licensor Beginning of activity / service availability
Private partner Investment return
Financing institutions Credit repayment
Users Service availability

4
Benefits because of the following reasons: better allocation of tax-payer money;
efficiency gains achieved by the private sector and passed through to the end user through
decreased user fees; and better project quality and management.
5
The Portuguese law (Article 2nd of Decree-law nºo141/2006) states what public partners
may be, the State and state public entities, funds and autonomous services and public
entity businesses.
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2.2 ALLOCATION OF RESPONSIBILITIES

Allocation of responsibilities is a key issue for setting up an effective PPP.

Generally speaking, the tasks and risks assigned to each partner comprise the
responsibilities therein. Accordingly, under a PPP approach, the public and the
private sectors should agree on a collaborative framework for dividing and
assigning tasks and risks to each other, so that the outputs of the partnership will
exceed the mere sum of the outputs of each partner’s tasks and lead to “win-win”
results (Campos, 2005). However, the objectives of the partners are not the same.
In broad terms, the private partner aims for economic benefit (of the companies
involved in the consortium) whereas the objective of the public sector is
essentially social and affects several interest groups. More specifically, while the
best way to deliver the public sector objectives may be through the partnership of
public and private entities, the public sector retains the responsibility and
democratic accountability for:
• deciding between competing objectives;
• defining the selected objectives and then ensuring that they are delivered
to the standards required; and
• certifying that the general public interests are safeguarded.

In the case of PPPs introduced into public services, while responsibility for many
elements of service delivery may transfer to the private sector, the public sector
remains responsible for:
• deciding, as the collective purchaser of public services, on the level of
services required, and on the public sector resources available to pay for
them;
• setting up and monitoring safety, quality and performance standards for
those services; and
• enforcing those standards, taking action if they are not delivered.

Similarly, in the case of state-owned businesses, while PPPs bring the private
sector into the ownership and management of those businesses, the public sector
remains responsible for safeguarding public interest issues. This particularly
includes putting in place independent regulatory bodies, remaining in the public
sector, the role of which is to ensure that high safety standards are maintained,
and that any monopoly power is not abused.

In order to achieve the objectives of the public sector, the private partner is
expected to implement the appropriate technical knowledge and management
skills and to raise the necessary financial resources for developing the facility or
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providing the service contracted. Concerning the responsibilities of partners

involved in PPP arrangements, Portuguese law (article 5th of Decree-Law
141/2006) establishes that the private partner must deliver and manage the
activity contracted under the monitoring and control of the public partner, so that
the public interests underlying the contract are met.

Finally, efficient stakeholder management is critical to the effective development,

specification and delivery of all projects. Accordingly, the partner organisations
will be expected to place great importance on the development of healthy and
proactive relationships with stakeholders at the relevant stages of the project life
cycle.

2.3 LEGAL FRAMEWORK

2.3.1 THE EUROPEAN COMMISSION GUIDANCE ON

PPP
In general terms, there is no special legal or statutory framework for PPP
procurement. However, where applicable, European Commission (EC) public
procurement rules and in particular the EC Public Sector Procurement Directive
2004/18 in addition to the general EC Treaty principles have to be followed,
where relevant.

• European Commission PPP Green Paper: 2004

In April 2004 the European Commission issued a green paper entitled “On Public
Private Partnerships and Community Law on Public Contracts and Concessions”.
The term “public-private partnership” is not defined at the Community level.
Accordingly, there is no specific system governing PPPs under the Community
law, therefore the Green Paper analyses PPPs with regard to the Community law
on public contracts and concessions. In general, the term refers to forms of
cooperation between public authorities and the world of business which aim at
ensuring the funding, construction, renovation, management or maintenance of
an infrastructure or the provision of a service.

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PPPs that qualify as "public contracts" under the directives coordinating

procedures for the award of public contracts must comply with the detailed
provisions of those directives. PPPs qualifying as "works concessions" are
covered only by a few scattered provisions of secondary legislation; and PPPs
qualifying as "service concessions" are not covered by the "public contracts"
directives at all.

Nevertheless, all contracts in which a public body awards work involving an

economic activity to a third party (whether covered by secondary legislation or
not), must be examined in the light of the rules and principles of the EC Treaty
including, in particular, the principles of transparency, equal treatment,
proportionality and mutual recognition.

The aim of the Green Paper was to explore how procurement law applies to the
different forms of PPP developing in the Member States, in order to assess
whether there is a need to clarify, complement or improve the current legal
framework at the European level. It describes the ways in which the rules and the
principles deriving from Community law on public contracts and concessions are
applied when a private partner is being selected, and for the subsequent duration
of the contract, in the context of different types of PPP. The Green Paper also
asks a set of questions intended to find out more about how these rules and
principles work in practice, so that the Commission can determine whether they
are sufficiently clear and suitable for the requirements and characteristics of
PPPs.

• European Commission PPP Communication: 2005

Following the public debate on the PPP Green Paper, in November 2005 the
Commission adopted a Communication on PPPs and Community Law on Public
Procurement and Concessions. This Communication presents policy options with
a view to ensuring effective competition for PPPs without unduly limiting the
flexibility needed to design innovative and often complex projects.

• Guidance on institutionalised PPPs: 2008

In February 2008 the Commission adopted an Interpretative Communication on

the application of Community law on Public Procurement and Concessions to
Institutionalised Public-Private Partnerships (IPPP). The Communication explains
the EC rules to comply with when private partners are chosen for IPPPs.

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Depending on the nature of the task (public contract or concession) to be

attributed to the IPPP, either the Public Procurement Directives or the general EC
Treaty principles apply for the selection procedure of the private partner. The
Communication expresses the view of the Commission that under Community
law one tendering procedure suffices when an IPPP is set up. Accordingly,
Community law does not require double tendering — one for selecting the
private partner to the IPPP and another one for awarding public contracts or
concessions to the public-private entity — when an IPPP is established.

The Communication also states that as a matter of principle IPPPs must remain
within the scope of their initial object and cannot obtain any further public
contracts or concessions without a procedure respecting Community law on
public contracts and concessions. However, it is acknowledged that IPPPs are
usually set up to provide services over a fairly long period and must, thus, be able
to adjust to certain changes in the economic, legal or technical environment. The
Communication explains the conditions under which these developments could
be taken into account.

2.3.2 LEGAL ISSUES IN EU MEMBER STATES

Member States of the EU have adopted specific legal provisions for adequately
dealing with projects conducted under the PPP scheme. Two case studies are
presented below: the UK legal issues concerning the PPP/PFI6 schemes and the
Portuguese PPP legal framework.

Legal issues – UK
General issues

The legal aspects relating to the PPP projects, in the UK context , are perhaps best
explained through three different facets:
(1) Pre – 1997 government policies;
(2) Post – 1997 government policies; and,
(3) The European Commission guidance on PPP.

However, it is necessary to point out that apart from the EC guidance, there is no
specific legislation controlling PPP projects in the UK public sector; all the
different sectors have created their own terms of engagement for PPP projects,
6
There is a distinction between PFI (Private Finance Initiative, a UK term) and PPP,
which is not widely understood. PFI is only one type of PPP used in UK (Quick, 2006). A
PFI is a more specific and formal long-term partnership covering both the capital assets
and the services that jointly forms a project.
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with input and support from regulatory, legislative and executive authorities.
Although the first standard PFI contract was published in 1999, the different
sectors have developed their own forms of contractual arrangements to suit their
particular requirements.

In many sectors, there is non-statutory guidance which provides model

documentation and advice in relation to the PPP processes. Some of this
documentation is listed in the table below.
7
Table 2.2. Standard documentation for PPP/PFI arrangements

Standard Guidance Standardisation of PFI Contracts

(HMT Publications) Change Protocol Principles
Drafting Pack for Updating Contracts
Value for Money Assessment Guidance
Defence The MoD Project Agreement
Education School Standard Form PFI Contracts
(for BSF projects)
Housing Housing (HRA) Model Contract
ICT ICT Model Contract and Guidance
(OGC publication)
Waste Management WIDP Procurement Pack
(Waste Infrastructure WIDP Guidance Documents
Delivery Programmes)
Local Authorities Fire & Rescue & Police Service Guidance
Change Protocol
Social Care Guidance
Street lighting Procurement Pack and Model
Contract
Joint Services Guidance
Standardisation of Waste Management PFI
Contracts

Operational Task Force Contract Management Guide

7
Source: Partnerships UK 2010
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Following the enactment of the Public Contracts Regulations (2006 No. 5), the
use of the competitive dialogue procedure for PPP/PFI procurement is advised by
the government, with the negotiated procedure only to be used in exceptional
circumstances. It is to be noted that the competitive dialogue procedure does not
exist under the Utilities Contracts Regulations.

Pre – 1997 government policies

The PFI was initially slow to start. In 1993 and 1994 only three projects, which
involved over £5m of capital expenditure, were signed. A "Private Finance Panel"
was set up in 1993 and the UK government took a view that PFI should be
considered for any public sector project (the "universal testing rule"). In 1996 a
government inquiry considered a number of issues, including:
• whether PFI spending was extra or in substitution for government
spending;
• whether the private sector would be setting priorities between schemes;
• whether the implications for future public expenditure were being
suitably controlled;
• whether, and if so how, better value for money would be achieved;
• whether it was sensible to consider all projects for PFI;
• the specification of outputs and transfer of risks.

As a result of this, the government undertook that future spending implications of

PFI would be listed in the Financial Statement and Budget Report; stated that
value for money gains were expected from close integration of services with
design, better allocation of risks and the correct incentive structure; and identified
cases where PFI would not be appropriate.

At the beginning of the 1997 Parliament session, the new government abandoned
the "universal testing rule" and commissioned Sir Malcolm Bates to review the
system of PFI. As a result of accepting the recommendations of the review the
government abolished the Private Finance Panel and replaced it with a Treasury
Taskforce, consisting of two "arms":
(a) a policy arm, responsible for rules, procedure and best practice governing
PFI and PPPs, together with PFI-oriented staff training of public sector
employees; and
(b) a projects arm, to approve ("sign off") the commercial viability of all
significant projects before the procurement process began (by publishing
a contract notice in the EU Official Journal) and monitor them (and other
projects, where time and resources permitted) to ensure progress. The
Treasury later defined "significant project" as "big, high profile, highly

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replicable or ground breaking" and the Taskforce undertook to monitor

80 such projects. Local authority projects are signed off and monitored
by the Project Review Group, which is chaired by the Taskforce and also
contains representatives of the Public Private Projects Panel Ltd (the
"4Ps"), and an adviser to local government established by the Local
Government Association in April 1996.

The Bates Review recommended that individual departments should remain

responsible for their own PFI projects, and that departmental Private Finance
Units (PFUs) should be strengthened by the appropriate expertise. As a result, the
Taskforce Projects Arm was not expected to be needed indefinitely, and it was set
up with a life of two years (until late 1999).

Post 1997 government policy

As the initial term of the Taskforce came towards its end, the government
announced in November 1998 that Sir Malcolm Bates would conduct a second
review: the report was produced in March and published in July 1999. Its
principal conclusion was that centralised project support was still needed but that
the Taskforce Projects Arm should be replaced by a joint public-private sector
body, subsequently named Partnerships UK (PUK). The role of PUK is explained
in further detail below. Statutory arrangements for PUK are contained in the
Government Resources and Accounts Bill, which was enacted in 2000.

In parallel with the second Bates Review, the government asked Sir Peter
Gershon to examine civil procurement in central Government. This report was
also published in July 1999 and recommended that an Office of Government
Commerce (OGC) should be created within the Treasury. The Taskforce would
continue within the OGC, but with a "slimmed down projects capability".

The National Audit Office (NAO) had also been examining the early PFI projects
and producing a number of reports, which gave rise to corresponding reports by
the Committee of Public Accounts (PAC). Based on this work, the PAC produced
a general report drawing together its previous recommendations. The NAO had
also produced a report setting out the factors that it will take into account in
future assessments of PFI projects; particular emphasis was placed on the value
for money (VfM) obligation in all PPP projects.

In July 1999 the Treasury Taskforce appointed Arthur Andersen as consultants to

examine value for money aspects of those PFI projects where the delivery of
services and payments for them had begun. In addition, the Institute for Public

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Policy Research (IPPR) launched a Commission on Public-Private Partnerships in

September 1999, with the report being published in 2001.

In March 2000, the government restated its policy on PPPs and PFI in a document
entitled Public Private Partnerships: The Government's Approach. This policy
document stipulated the roles and responsibilities that public sector and private
sector were to abide by in terms of all PPP arrangements.

Legal issues – Portugal

General issues

The evolution of the legal framework of PPPs in Portugal is characterised by the

casual surfacing of legislative documents, in accordance with the needs felt in
each sector. In view of the legal void at the PPP level, the government has
adopted legal regimes especially designed for each project (or set of projects)
inspired by the concession model and traditional public procurement approaches
although introducing negotiation procedures in view of the contractual nature and
complexity of this type of project (T.C., 2008).

It became clear that the launch of PPPs in Portugal was initially pursued through
the fulfilment of various investment needs, with casuistic legislation being
produced by the government to match different sectors, since the legal
framework, applicable to every sector and types of partnerships did not exist. For
example:
• The legal framework of the concession programme that approved the
construction of several motorways, either in real and shadow tolls was
established in 1997: Decree law no 9/97 (toll concessions); Decree law
no 267/97 (non toll concessions or SCUTs8);
• For the environment sector (water, sewage and waste), the first laws
regarding PPP were brought forth in 1993/1994: Decree law no 372/93
(opens the access to the private sector); Decree law no 379/ 93 (defines
the legal regime); Decree law no 147/2005 (regulates the legal regime);
• The legal framework that launched the partnership programme in the
healthcare sector was presented in 2002: Decree law no 185/2002
(defines the principals and the instruments for establishing partnerships in
the healthcare sector). This supported the first hospital projects conducted
under a PPP scheme;

8
SCUT stands for “without costs for user (in Portuguese: “Sem Custos para o
UTilizador”)
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• For railroad passenger transportation, the framework legislation was

published in 1999.

Meanwhile the State Budgetary Framework published in 2001 (Law no 91/2001,

republished within the Law no 48/2004) imposed restrictions to multi-annual
expenditures, in order to control long-term financial risks that PPP projects
brought to the state accounts. Another obligation resulting from this law suit was
that the value for money should be demonstrated for all projects conducted under
a PPP scheme i.e. the evaluation of the economy, efficiency and effectiveness of
the partnership contract in comparison with the traditional public procurement
model for providing the same goals, without recurring to private financing and
management (the rule of the Public Sector Comparator).

Major guidelines

Regarding major guidelines, Portuguese law concerning PPPs accomplishes the

EC directives and procedures. Therefore, the Decree-law no 86/2003, applicable
to all the economic sectors (revoked and amended by the Decree-law no
141/2006) establishes that the essential goals of PPPs are the increase of
efficiency in the allocation of public resources and in the improvement of the
quality of services, driven by effective control systems enabling permanent
evaluation by the users and the public partner. Furthermore, regarding risk
sharing, it states that risk allocation should follow from the assessment of the best
possible capabilities to manage them, and that the contract should evidence the
effective transfer of risks to the private partner. So, preferentially, the public
entity should be responsible for supervising and monitoring the project
development, while operating, management and financing should be allocated to
the private partner.

Furthermore, this Decree-law defines the general rules applicable to the

conception, preparation, procurement, award, construction, operation, monitoring,
control and surveillance of projects conducted under a PPP scheme and defines
the basic features that the relationship between a public and private entity must
meet, in order to consider it a PPP. These features are:
1. Long-term continuous contract (minimum duration of three years);
2. The satisfaction of a collective need by the private partner;
3. Risk sharing between the public and the private entities;
4. Total or partial financing ensured by the private partner (PPP contracts
must be over 10 million euro public expenditure and 25 million euro total
investment);

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5. The private partner should assume a substantial part or all risks involved
in the operation stage.

According to the same Decree-law 141/2006, PPP arrangements can be organized

into two different types: contractual and institutionalised. Contractual PPPs
include diverse modes of association or collaboration between public needs and
private investments. Contracts assume the forms of: concession of public works;
concession of public services; continuous supply and provision of services; and
management and collaboration. The latter arrangement arises when the contract is
for the operation of an existing facility or infrastructure not belonging to the
public partner. Institutionalised PPPs include all forms of joint ventures involving
public and private stakeholders.

Beyond the major guidelines, several legal provisions have been published in
Portugal regarding specific sectors (environment, health, transportation), some of
them published after the Decree Law 141/2006.

The Code of Public Contracts

Further to the legal environment established by the Decree-law no 141/2006 and

the sector specific regulations, there are other legislation that should be attended
when launching PPP projects namely the Local Finance Law and the Code of
Public Contracts (Decree-law no 18/2008, changed by the Amendment
18A/2008). In fact, PPP contracts ought to be handled through public
procurement law because they involve public funds and the public partner is also
the awarding entity. The legal provisions are those resulting from the
transposition of the European Community Directives regarding the awarding
process for water, energy, transportations and postal services sectors, as well as
the rules regarding ordinary public procurement and contracting of works,
services and supplies. The Code of Public Contracts set up five distinct types of
procurement procedures that the contracting authority can select according to the
estimated contract value, the type of contract (public works, concessions, etc.),
the nature of the public entity (central government, municipality, public firm,
etc.), or special conditions (defence contracts, results of previous tender
processes, author protection rights, etc.): open tender, restricted tender with or
without previous publication of the contract notice, negotiated procedures and
competitive dialogue.

During the execution phase of projects conducted under a PPP scheme, the Code
of Public Contracts highlights the duty to inform, monitor, survey, analyse
contract changes and supervise the share of benefits, as well as monitor and
evaluate the private partner performance. Beyond this tight internal control PPPs
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are also submitted to the external scrutiny of the National Audit Court (NAC)
which has broad powers (political, jurisdictional and technical) of surveillance,
monitoring, control and auditing all spending of public money in Portugal.

2.3.3 PPP GOVERNANCE IN EU MEMBER STATES

The governance of the PPP scheme has been developed following different routes
within EU Member States. Two case studies are presented below: UK and
Portugal.

Partnerships UK

Partnerships UK (PUK) was a new public private partnership which would work
with both the public and private sectors to address the key weaknesses in the
PFI/PPP process. By working in partnership with the public sector, it would seek
to make the public sector a more effective client and ensure the best possible deal
for the public sector in privately financed investment programmes. In effect, it
was set up to enhance the public sector's "intelligent client" capability.

The aim of PUK is to deliver better value for money by working on the side of
the public sector. For a particular project, it would align itself with the public
sector procuring authority and inject more detailed examination of practical
considerations into the decision making process and drive forward the conclusion
of deals. In this way, and by making available its experienced development staff
and resources to assist with the development of projects, it would help
departments and other public sector organisations make a better job of procuring
and delivering PPP/ PFI deals.

PUK has no form of monopoly or guaranteed market but seeks to win business on
the strength of its offer. The government was confident that it would be good for
the public sector and the private sector alike:
• For the public sector, because its activities would boost the flow of
investment into the nation's infrastructure and help the public sector
achieve stronger value for money purchasing in PPP/PFI deals;
• For the private sector, because it would contribute to the creation of a
better flow of well-structured projects and bring about a long-awaited
reduction in the cost, delay and uncertainty experienced by bidders for
PFI projects.

By May 2010, over 920 projects had been overseen by PUK.

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In 2010, the UK Government set up a second unit, Infrastructure UK (IUK),

whose role is to provide a new strategic focus across a range of sectors. IUK
comprises HM Treasury's PPP policy team and Infrastructure Finance Unit and
the capabilities within PUK that support the delivery of major projects and
programmes. IUK advises government on the long-term infrastructure needs of
the UK and provides commercial expertise to support major projects and
programmes. It looks across all key infrastructure networks and both the public
and the private sectors to identify and address key cross-cutting issues. It is also
responsible for identifying and attracting new sources of private sector
investment in infrastructure; supporting HM Treasury in prioritising the
government's investment in infrastructure; and helping to build stronger
infrastructure delivery capability across government.

Parpublica, Portugal

Parpublica (created by the Decree-law no 209/2000) is the state entity responsible

for managing public assets. It acts on behalf of the Ministry of Finance regarding
several aspects of public corporate management over the public sector firms, and
the launching of projects through the PPP scheme. Anytime a sector minister or a
public entity wants to promote a project using a PPP approach, the first step is to
inform Parpublica, with the aim of providing technical support to the Ministry of
Finance regarding the project evaluation and procurement process. Moreover,
prior to launching the tendering procedure, the decision to embark on a PPP
(and the authorisation for the corresponding expenditure) is enforced jointly by
the Minister of Finance and the sector minister responsible for the project.

Parpublica must further integrate the committees nominated to proceed with the
process: the monitoring committee focusing on the technical aspects of the
project and the tendering committee regarding procurement issues. After the
contract is awarded the main goal of Parpublica is to monitor and control the
economic and financial aspects of the partnership and it should be informed of
any possible changes by the sector ministry.

General Financial Inspections

General Financial Inspection (IGF) is a public body depending on the Ministry of

Finance, created by the Decree Law no 205/2006. This is one of the most
important state departments regarding the internal control (expenditures and
revenues) of the public budget. IGF has a fundamental role in controlling PPPs.

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Supreme Court of Auditors

In Portugal PPPs are also submitted to the external scrutiny of the Supreme Audit
Court in accordance with the interpretation of article 2nd of the Law no 98/97,
which legitimises its broad powers (political, jurisdictional and technical) of
surveillance, monitoring, control and auditing of all spending of public money.
Therefore, using the recommendations of INTOSAI9 beyond the confirmation of
the project legality, the Supreme Audit Court audits project expenditure and
future budget commitments for the State, assesses the underlying motivations for
selection of the PPP approach, evaluates the efficiency of the use of public money
(the value for money of the partnership), compares the earnings achieved with the
traditional public procurement approach, analyses the transparency and validity
of the procurement process, looks at the efficiency and effectiveness for the
provision of public service and evaluates the environment and sustainability
aspects of the partnership.

GASEPC

GASEPC is an office department depending on the Ministry of Finance

(Secretary of Treasury) and it is devoted to the specialised control of the budget
and multiannual expending regarding public firms and PPP SPVs (Special
Purpose Vehicles) in order to increase efficiency, effectiveness and financial
sustainability of the state firms, as well as following up new financial
requirements for projects running under PPP schemes.

9
INTOSAI is the professional organisation of supreme audit institutions in countries that
belong to the United Nations or its specialist agencies.
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CHAPTER 3
ADVANTAGES AND PITFALLS OF THE
PPP SCHEME

3.1 GENERAL CONTEXT

International experience reveals that both the public authorities and the private
sector may benefit10 from participating in projects conducted under the PPP
scheme. Partnerships UK (PUK) states that PPPs are good both for the public
sector and for the private sector, mainly because:
• for the public sector because its activities would boost the flow of
investment into the nation's infrastructure and help the public sector
achieve stronger value for money by purchasing in a PPP/PFI deal;
• for the private sector because it would contribute to the creation of a
better flow of well-structured projects and bring about a long-awaited
reduction in the cost, delay and uncertainty experienced by bidders for
PFI projects.

Private sector organisations operate in a fluid and fast moving environment. If

they do not generate profitable business, they will not survive. Accordingly, the
reality of the private sector market-place exerts a powerful discipline on
management and on employees to maximise efficiency and take full advantage of
business opportunities as they arise. The PPP approach offers the private sector
the opportunity of finding the best approaches for delivering the facilities or
services demanded by the public sector and ensuring the best value for money for
taxpayers. Compared to the private sector, the public sector can be less equipped

10
Despite the potential benefits of public private partnerships, it should be noted that
these are not a universal panacea or the only means to deliver quality public services on a
value for money basis. It is important to encourage governments to prioritise and identify
realistic goals to ensure that public services are provided in a manner that is fair, safe,
affordable, and environmental sustainable.
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to challenge inefficiency and outdated working practices, and to develop

imaginative approaches to delivering public services and managing state-owned
assets. Moreover, the PPP scheme offers the private sector a number of
opportunities for diversification. This can never be fully replicated in the public
sector, since it has to conform with a multiplicity of policy objectives, and holds a
more risk adverse culture driven in part by the desire to safeguard taxpayers’
money.

The investment in infrastructures or in provision of public services allows for

indirect advantages for society in general, for people and companies: more well-
being for people and bigger earnings to others, more private investment and even
more tax benefits to the state. These are clearly issues of major importance to
many stakeholders and will be further discussed in the subsequent chapters.

3.2 FOR THE PUBLIC SECTOR

PPPs are an essential element of an emerging model of effective governance.

Actually, governments worldwide have increasingly turned to the private sector
to provide infrastructure services that were once delivered by the public sector.
The Green Book about Public Private Partnerships – COM (2004) 327 final –
presents the factors which justify the government attraction for PPPs:
• In view of the budget constrains confronting Member States, it meets a
need for private funding for the public sector;
• Desire to benefit more in public life from the know-how and working
methods of private sector;
• It is also part of the more general change in the role of the state in the
economy, moving from direct operator to organiser, regulator and
controller.

The benefits of the PPP scheme for the public sector are clear. A project can gain
in quality if the government consults the private sector at an early stage as the
best way of achieving a particular goal. The option for a PPP instead of the
traditional public procurement models presents several advantages which together
assure better value-for-money for public services (Marques & Silva, 2008).

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3.2.1 BUDGETARY MANAGEMENT

The lack of government funding to provide infrastructure assets and services
and/or the budgetary constraints have been the main reason for considering the
PPP option for a project (Reis, Fortuna, & Mariano, 2009). During periods of
slow growth, the public sector revenues are frequently not sufficient to meet
spending demands, necessitating painful spending cuts or tax increases.
Accordingly, in most countries governments consider the PPP as an attractive off-
budget mechanism for delivering infrastructure services and have promoted11
them as a part of their overall strategy. Under this perspective, the public sector
takes the role of client for public services using the funds provided by the private
sector. It allows increasing the investments in infrastructures without improving
its indebtedness (substituting the investment expenses by current expenses) and
additionally it can become an income source for the privates. By imposing a limit
to the necessity of public investment, the PPP scheme allows anticipating the
creation of projects, avoiding the necessity of waiting for the budget capacity and
freeing resources which will allow for other projects to be launched and/or to
cover other expenses. However, the lack of financial availability of the public
sector may not be considered as the main reason for deciding to promote a project
under a PPP scheme, because private funding may bring about additional costs
(usually the cost of borrowing money is higher for the private sector than for the
public sector) and administrative costs (for the management of PPP contractual
regimes) to be considered. Furthermore, in most cases, the public sector still bears
most of the risk involved in the project and this can make the PPP less efficient
than public direct investment.

3.2.2 BETTER RISK ALLOCATION

Adequate risk transfer from the public sector to the private sector is a key
requirement if PPPs are to deliver high-quality and cost-effective services to the
state and the users. With PPPs the government seeks to harness the innovation
and discipline of the private sector, by introducing investors who put their own
capital at risk. This is achieved either by permitting private sector ownership of a
state-owned asset or business, or by a contractual arrangement whereby the
private sector bears the financial risk involved in delivering a particular service or
other form of specified outputs.

11
For this purpose, many countries have created a PPP-enabling environment through the
establishment of necessary legal and regulatory regimes, initiated sector reforms,
streamlined administrative procedures, and have formulated policies to promote PPPs.
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However, a PPP scheme does not necessarily mean that the private partner takes
all risks, or the most important part of the risks resulting from the operation.
Besides, the main purpose of any PPP is the attribution of risk to the side which
has better conditions for its management at the lowest cost. The proper division
of risks between partners will be done case by case, taking into account the
capacities of the partners for evaluating, controlling and managing them,
therefore minimising the cost of the risks taken. The less the risk is transferred
to the private sector, the more the operation will resemble a public investment;
the larger the amount, the more the operation will look like a concession
(figure 3.1.).

Figure 3.1. Risk allocation in PPPs (from: KPMG International

12
Cooperative)

To conclude, the objective of the PPP approach is not to maximise the risk
transfer from the public to the private sector but to optimise the sharing of risks
between the two parties. Moreover, the allocation of risk to the private sector that
underpins a PPP can provide for greater certainty and predictability in relation to
the cost and quality of public service delivery. The stage of risk allocation is dealt
with in greater detail in another section of this book.

3.2.3 EXPOSURE TO PRIVATE SKILLS

The services made through PPP reveal advantages in terms of quality, efficiency
and value when compared to other contract approaches (Reis, Fortuna, &
12
KPMG is a global network of professional firms providing audit, tax and advisory
services.
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Mariano, 2009). A PPP is an important tool for introducing private sector

efficiency (not only in management activities but also in the actual definition of
the projects) in the development of public infrastructure projects and in the
provision of public services and is thus associated with flexibility. Additionally,
the transference of the technological, operational and management know-how,
from the private sector allows for better value-for-money in public services
(NASCIO, 2006) (figure 3.2.).

Figure 3.2. Exposure to private skills

Another issue is competition that stimulates innovation in public management

and may be fostered through the PPP approach. By exposing the provision of
public services to competitive tendering, PPPs enable the quality and costs of
such services to be benchmarked against market standards, thereby helping to
secure productivity improvements within the economy as a whole. Competition
also brings innovation and the more interesting PPPs are the ones in which the
bidders are able to introduce substantial innovation.

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Quality is another relevant feature of the infrastructure or service to be provided

under a PPP scheme. If the provider operates in a competitive market, market
disciplines will implicitly foster quality maximisation. If such disciplines do not
exist, and cannot be easily introduced, quality standards can be enforced through
regulation or by performance requirements in the contract. Actually, the
definition of the quality standards required and their reflection at the service level
are important elements to assure that the services required are made with a high
quality level in order to satisfy all the needs identified by the public promoter. For
Rubens Alves13, the specification of the required quality standards and the
provision of binding contract clauses at the service level are the key elements of
PPP contracts “to ensure that the services contracted are provided with the level
of quality needed to meet the public needs”.

By harnessing private sector disciplines in this way, PPPs can help improve value
for money, therefore enabling the state to provide more public services and to a
higher standard within the resources available. Accordingly, the quality of
services or infrastructures delivered in the scope of PPP arrangements tends to be
higher than those achieved under a traditional procurement approach. Also, the
need of private companies to generate returns means that they are compelled to
look for ways of enhancing the service they offer to their clients and to adapt to
their changing requirements and expectations, otherwise clients will go
elsewhere.

3.2.4 OPTIMISE WHOLE-LIFE DESIGN AND COSTS

The innovation of the private sector and the search for new opportunities for
developing profitable business are incentives for private companies to try out
new ideas which can lead to increased efficiency. This in turn should translate
into a combination of better quality and significantly lower cost services than
would be the case with traditional public investment and government provision
for the same services. Additionally, incentives related to innovation can reduce
the cost overruns. NZSIF14 notes that the “Australian experience shows that, on
average, cost overruns in PPP projects are 1% of the total project cost compared
to 15% of the total project cost for non-PPP projects”.

13
Rubens Teixeira Alves is KPMG’s director in Brazil
14
The New Zealand Social Infrastructure Fund (NZSIF) is a fund that enables New
Zealand investors to participate in the development of social infrastructure assets through
public-private partnerships.
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Figure 3.3. Average percentage of cost overruns in PPP projects (Adapted

from NZSIF)

Long-term contracts induce public authorities to think more strategically about

the services required, whilst there is the incentive for private sector service
providers to consider whole life costs (HM Treasury, 2006). All life time costs
(not only the conception and construction, but also the long way operation and
maintenance costs) of an infrastructure or service must be analysed. In this way,
the public promoting institution can persuade the future private partners to
achieve the quality level with reasonable costs and it can transform the PPP in an
option which generates higher efficiency and return on investment.

In the case of a DBFO contract, for example, the same private provider has to
build the facility and subsequently operate the service for the period contracted.
This will induce cost savings of the facility whilst keeping high levels of quality
because the costs of keeping the quality of the service contracted will directly
depend of the quality achieved for the facility (Camargo, 2004). This is especially
profitable for enterprises, and in this way, the public promoter does not need to
verify the construction as frequently as happens in traditional contracting. By
transferring the responsibility for public services provision to the private sector,
the public promoter may essentially act as a regulator, especially in the areas of
planning and service performance (verifying if the quality service indicators are
properly developed) instead of focusing on the construction and on the daily
management, as tends to happen in the traditional model.

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3.2.5 TIMELINESS OF SERVICES

Another significant benefit derived from the PPP approach is faster project
delivery than usually achieved under traditional procurement. The private sector
is normally far more skilled than the public sector in running business activities
and some elements of service delivery, including managing complex investment
projects to time and budget.

The attribution of the conception and construction responsibility to the private

sector, combined with the availability related to payments for the service
provided, offer relevant motivation to the private sector for delivering the project
as soon as possible so that the payment flow may start. This motivation allows the
conclusion of the work without delays, or even ahead of the schedule, therefore
satisfying the promoter in the most politically sensitive point – the opening date.
According to data published by NZSIF on a value-weighted average basis, “PPP
projects are delivered 3% ahead of schedule compared to 24% behind schedule
for non-PPP projects”.

Figure 3.4. Average PPP projects delivered (Adapted from NSZIG)

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3.2.6 SOCIAL AND ECONOMIC RESPONSIBILITY

The most important feature is that essential infrastructure investments can be
performed as soon as they are needed and without delays, because they aim to
satisfy public needs, attract new investments, create new jobs and stimulate local
economic growth. Additionally, the general public should benefit from the PPPs
through better allocation of tax-payer money, i.e. the benefits of efficiency gains
made by the private sector should be passed through to the end user by decreasing
user fees (United Nations, 2000). Because these long-term contracts involve
many public and private partners, the establishment of projects in a PPP scheme
conserves existing jobs and creates new ones. Finally, because PPPs foster
economic activity they generate fiscal income for the state that is later re-
distributed to the citizens.

3.2.7 SUMMARY
Summarising the previous paragraphs on the effects of PPP for the public sector,
it may be concluded that:
• PPPs enable the public sector to tap into the disciplines, incentives, skills
and expertise which the private sector has developed in the course of the
normal everyday business;
• PPPs enable the full potential of the people, knowledge and assets in the
public sector to be released;
• PPPs thus enable the public sector to deliver its facilities and services
better than through the traditional approach and to focus on the activities
which are primarily in its scope of action: procuring services, enforcing
standards and protecting the public interest.

3.3 FOR INVESTORS AND BANKS

The entities involved in financing a project conducted under a PPP scheme

exceed their ordinary funding activities and mainly act as investors. The level of
exposure for investors is very high, even if the project is considered solid by the
partners involved (public and private) and able to generate enough funds to
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reimburse and compensate the capital invested. Thus, only the entities with
reputable financial capacity, looking for diversification of their activities and
holding a strong strategic view will be eager to integrate consortia for this kind of
projects because they must ensure financial sustainability conditions throughout
the contract duration, and this may be quite demanding. However, the co-
operation of private investors with the public sector in the scope of a PPP also
provides some benefits for them, which may include (United Nations, 2000):
• Assuming that the PPP framework is appropriately established, investors
will be in a position to leverage their other projects;
• If the private provider performs well, it will be able to derive attractive
returns on initial investments;
• Investors will benefit from being involved in the project for the whole
length of the concession, thereby enhancing their experience in managing
long term projects and boosting their profile in the market.

In view of the above, before embarking in a PPP consortium, private investors

typically consider a number of conditions and factors, such as economic stability
and transparency (Vallilo, 2008). Firstly, because they are aware that this kind of
projects is attractive by their stability and transparency, by the business
opportunities they create, by the amount of capital involved and because they
assure appropriate return on capital invested and on risks assumed. Secondly,
because the investors give special priority to projects that show a strong viability
and encompass development potential (demand enough for generating revenues)
and with strong commitment from the public sector.

3.3.1 ENSURING REVENUES

A requisite for involving financial entities in a project running on a PPP scheme
is the financial viability of the project which includes assessing the whole life
costs and the time needed for recovering the initial investment. Once the financial
model of the project is developed, the implications of the alternative financial
structures and the effects of the amendments in the values of other parameters in
the cash flow may also be analysed. Obviously, it is important that there are no
negative variances to the business model designed for the time horizon stipulated
in the contract clauses (generally up to three decades, but may be more).

3.3.2 ENSURING RETURN

The relationship between project risks and return on investment is a key issue for
investors and banks although it may change over the project phases. First of all,
partnerships with low return on investment are not attractive for private investors
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because the risks they take must be balanced against their expected return on the
money invested. For projects conducted under a PPP scheme, investors consider
the rate of return of long-term investments (generally 20 to 30 year-periods) with
the government or another public entity as a partner (partnership with public
entities is a risk that has to be carefully assessed, nowadays).

Because of the nature of cash flows generated by these projects, private entities
can support relatively high levels of debt. The highest level of risk for investors
occurs during the construction phase when possible construction delays and cost
overruns may generate sensitive impacts on the cash flow of this type of
operation which tends to be relatively stable and predictable. This may have
serious consequences for the financial success of the project.

During the construction phase (which may be two or three years), investors will
be called upon to provide portions of their committed capital (debt levels are
expected to be high initially). It is during this phase that investors will require the
highest return on their capital to compensate for the risk, thus the cost of capital is
highest during this phase. When the construction is over and the cash flow from
operation has begun, project risks drop substantially and it is possible for
sponsors to refinance at lower cost (UNESCAP, 2008). Typically, the returns of
equity for investors commence when the asset is constructed and considered
operational (i.e. available for use), and extend through the operational phase of
the facility (concession payments by the public promoter, distributions of
operating profits, periodic returns of investment capital, etc.) depending on the
range of risks shared between the public and the private partner. The revenues are
typically inflation-linked and can be based either on “availability” (for use in
accordance with contractually agreed service levels) or on “demand” (payments
related to the usage of the project asset), depending on the nature of the project.

3.3.3 SOURCES OF PROJECT FINANCE

Project finance may come from a variety of sources but the type of funding
sources may have important implications on the overall project cost, cash flow,
ultimate liability and rights on the project incomes and assets. These sources
include: equity, debt, and government grants.

Equity refers to capital invested by the project sponsors (such as the government
or local authorities); capital provided by the private partner, third party private
investors, and internally generated cash. Debt refers to borrowed capital from
banks and other financial institution, and securities or bonds sold on capital
markets as a product (Figure 3.5.). Loans provided by national and foreign

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commercial banks and other financial institutions generally form the major part of
the debt capital for infrastructure projects (UNESCAP, 2008).

Figure 3.5. The Project Finance model

Generally, the financial model selected for this kind of project is Project Finance
because it has several advantages when compared to other financial approaches:
high indebtedness capacity, better allocation of risks between the partners
involved, tax benefits, etc. The Project Finance approach typically develops
through a Special Purpose Vehicle (SPV) that is a legal entity of special
character, the only purpose of which is to create cash-flow to the project and its
shareholders (Sousa, 2009).

Generally, the contracting company is created with initial capital (equity) and
money from bank debt (senior debt) with will be used for financing the tasks
required to put the service contracted into operation (Observatorio Permanente da
Justica Portuguesa, 2007).

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3.4 FOR CONTRACTORS

Projects conducted under a PPP scheme represent an opportunity to all those

involved in the construction industry since they offer a wide range of complex
activities and important technical and financial challenges. Although long-term
contracts like PPPs potentially generate higher risks, they allow for work
continuity for contractors and generate a variety of diversification opportunities.
Actually, these projects tend to be very large therefore requiring long
construction periods and this is beneficial for construction companies.
Additionally, the operational and maintenance activities of these projects
encompass a variety of tasks in which contractors may possibly engage, thereby
contributing to diversification of their current activities.

The PPP contractor is the entity responsible for the development and delivery of
the project in accordance with the terms specified by the public authority. This
may be achieved either by the PPP contractor directly or indirectly by third
parties. The contractor may be an existing company or a SPV, particularly when
the PPP is structured under a project finance scheme, as discussed above. A SPV
is a consortium of companies acting as shareholders (such as constructors, banks,
advisors, specialist contractors or service providers) specially tailored for
developing the project. Therefore, in this case, the contractor must monitor
construction management carefully in order to ensure that the particular interests
of any individual shareholder do not prevail over the project as a whole
(Conference Europeenne des Directeurs des Routes, 2009). Figure 3.6. depicts a
typical SPV organisation for an infrastructure project.

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Figure 3.6. Agents in PPP schemes (Adapted from Conference Europeenne

des Directeurs des Routes, 2009)

3.4.1 MOTIVATION FOR PPP CONTRACTS

PPP contracting may be quite challenging for the private sector and offers a
number of potential benefits as discussed below.

• Enlarging the business market

The PPP scheme allows that private investments are performed in sectors that are
traditionally operated by the public sector (Mu, 2008). Thus, for the contractors,
PPPs are the best way to increase investments through business opportunities in
current areas allowing the private constructors to build public infrastructures
projects or to provide services which, in the traditional approach, would not be
allowed. In this way the construction companies establish long solid relationships
with the public sector which will become a privileged client.

• Generating employment

PPPs are levers for the creation of jobs in the private sector. The PPP scheme is
specially tailored for the provision and operation of large infrastructure projects
involving the commitment of contractors for the medium or long run. This
stimulates the creation of job positions to cope with project requirements and the
maintenance of those jobs through the contract duration. This applies to the

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construction stage but is especially relevant during the operation stage which may
span several decades.

• Cooperation (clients & contractors)

The main competitive advantage of PPPs to the construction companies is the

possibility of increasing interaction with clients. This may be achieved in the
scope of the partnership between the public and the private partner granted by the
PPP scheme and may be further developed through co-operation networks
between them aimed at exploring the potential of know-how transfer (Reis,
Fortuna, & Mariano, 2009). Accordingly, whenever the public sector decides on
the areas lacking investment, it contributes with the know-how gained from past
similar investments and seeks the skills, qualified labour and the innovation of
the private sector to better solve its needs. Therefore, contractors have not only
the ability to directly influence the execution of the project (for instance, finding
the best possible constructive solutions, introducing innovative products and
technologies) but also to explore new and potential areas of mutual interest.

• Maximising investments

An inherent concept to any PPP is the transfer of part of the risks to the private
partner, which implies that the public partner refrains from defining the necessary
requisite (of resources, of process, etc) to the development of the project, but only
focuses on the definition of the expected results and on the quality level aimed.
Essentially, this is an approach focusing on the outputs and not the inputs
(Marques & Silva, 2008).

The contractor may greatly benefit from adequately planning the work to be
performed (starting from the preliminary study, through the detailed design and
the construction phase) and use technology that minimises the construction cost
and increases the project quality because this reduces the amount of initial
investment, increases income, improves operational results and benefits the
financial engineering of the project, at the same time as it contributes to client
satisfaction (Camargo, 2004). Alternatively, contractors may develop the project
with low construction costs but with poor work quality (e.g. by using
inappropriate construction materials). But this would later reveal a bad option
because under a PPP scheme contractors will have to operate and maintain the
built facility during the contract period and possibly incur substantial costs to
perform this according to the standards defined by the public promoter.
Therefore, companies that consider PPP only as a way of achieving new contracts
with higher profit margins may face serious long-term problems.

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It should be stressed that some amount of profit to contractors is almost always

assured in most PPP models. For example, according to the Portuguese law
(Decree-law no. 141/2006, article 6th, paragraph c), the adoption of a PPP
scheme should secure advantages to the public partner (that must be confirmed by
the Public Sector Comparator) and “present to the private partners the expectation
of obtaining adequate compensation to the amounts invested and to the risk they
face”. Moreover, in accordance with the Permanent Observatory of the
Portuguese Justice the adoption of a PPP scheme may ensure revenues for a long
time, as PPP contracts typically stand for a period of 30 years or more (especially
in the case of concessions), and may create profit margins higher than six per
cent, nine per cent or even 15 per cent, depending on the projects.

3.4.2 ACCEPTING AND MANAGING CONSTRUCTION

RISKS
When contractors consider participating in a PPP, they face new risks and new
opportunities. Whatever the type of PPP contract, it is important that the
contractors assess both the typical construction risks and the atypical risk (such as
long-term maintenance requirements) and work to reduce risks. Therefore,
contractors should know the risks they have assumed and exactly for whom they
are working.

As assets grow in scale and complexity, infrastructure owners increasingly want

to work with a trusted partner who can deliver more complete solutions. As
previously mentioned, PPPs give the public sector a solution to the achievement
of its purposes, in what concerns the availability of infrastructures, having per
background the private sector know-how and development capacities. The large
construction and engineering companies possess the best staff, accumulated
knowledge and experience which make them the ideal partner to accept and
manage construction risks. Therefore, beyond having the ability to accept and
manage construction risks, construction companies also have the ability to verify
conceptual studies and conduct complementary studies to optimise deliverables
on a whole life basis approach. But it is essential that contractors involve
experienced insurers, bonding agents, counsels and bankers to assist in
understanding the potential risk of some PPPs.

3.4.3 FOR OPERATORS

The PPP approach makes the contractor responsible for delivering the service.
The operator may be the PPP contractor directly or third parties selected for that
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purpose. If the project is developed by a SPV, then the operator may be a

stakeholder of the contractor. In most cases, specific know-how (market or
specialised technical knowledge) is required for operation, therefore an
independent company from the PPP contractor is likely to be appointed
(Conference Europeenne des Directeurs des Routes, 2009). A specific contract is
set up between the public promoter and the private operator whereby the operator
becomes responsible for the full delivery of services according to the aims of the
infrastructure or service, including management, operation, maintenance, and
rehabilitation. The public promoter is responsible for establishing performance
standards and ensuring that the operator meets them.

Private sector operators enter into an investment or contracting opportunity with

the clear goal of maximising profits. For example, in the road sector, the
attribution of asset operation to private companies (namely, contractors) allows
them to obtain profits through the charge of the concession toll and it is an
opportunity for private agents to amplify their market range, to invest and create
profits. Generally, operation concession contracts are for 20 to 30 years which is
often enough for the operator to recover the capital invested and get an
appropriate return over the life cycle of the concession.

The PPP scheme assumes that operators will recognize that the public sector is
their main business partner. Actually, public promoters expect that the private
operators acting under a PPP scheme will contribute to the public concern of
aggregating value and efficiency to the service or infrastructure provided, through
the provision of equipment and modern technology that may conduct more
competitive, efficient, attractive and profitable facilities, thereby fulfilling user
needs and the mission of the state. Under a PPP scheme, the operator will not get
paid if the tasks are not performed according to the quality contracted (figure
3.7.). The work of the operator is regulated and controlled by the public promoter
or by its agents and the operation performance may be checked against the
performance objectives of the PPP contract.

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Figure 3.7. PPP payments during the operational phase (font: KPMG
International Cooperative)

One of the main social benefits of a PPP contract is job creation, especially
during the operation stage of the contract. PPPs already contribute to a
considerable number of direct jobs in several countries because of their huge
diffusion throughout the world. Consequently PPPs are recognised by many
people for the career opportunities they generate. Looking at the partnership from
a win-win perspective, PPPs are also opportunities for enforcing the operator
social responsibility. Operators must make an effort to add value to the business
and infrastructures they manage, and that will be passed to the public ownership
by the end of the contract. This means working so that the value of the business
becomes higher than the first investment; the more value they create, the more
value they will pass to the next generations.

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CHAPTER 4
RISK DISTRIBUTION
AND MANAGEMENT IN PPPs

4.1 PURPOSE

According to the European Commission, a risk is defined as any factor, event or

influence that threatens the successful completion of a project in terms of time,
cost and quality (Mu, 2008). All organisations conducting a project face the risk
that actual outcomes will differ from those planned. Actually, it is impossible to
eliminate all the risks of a project even in a small project (Santos, 2006). Risks
result from uncertainty about the future, but also from inaccurate information
about existing conditions and from the failure of systems designed to contain or
control risk. Accordingly, all entities involved in the project should look at the
risk as a variable that is always present in their daily activities, including their
decisions, and find solutions for managing it correctly if it cannot be eliminated.

No other field has stronger influence on the success of planning and execution of
a project conducted under a PPP scheme than risk identification, evaluation,
allocation and controlling (Leidel & Alfen, 2009). Experiences in pilot projects
performed through PPPs show that there are improvements when the recognition
and evaluation of risk factors are early made, thereby allowing the project team to
maximise value for money (Leidel & Alfen, 2009).

The main characteristic of the PPP model is the transference of responsibilities,

including risks, between the entities involved in the partnership. It is important in
this process to identify which partner is best prepared to deal the risks identified
and to clearly establish which partner will eventually manage them. This
frequently involves transferring most of the risks from the public partner to the
private partner at reasonable costs.

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In addition to the steps of the risk management process, this section also explores
the risks in the project life cycle.

4.2 APPROACH TO RISK MANAGEMENT

IN PPPS

Essentially, risk management is a process which accompanies the project from its
early beginning through conception, execution, operation and closure. It is a set
of processes that includes identification, assessment, allocation, mitigation and
monitoring and control (Partnerships Victoria, 2001) (figure 4.1.) and aims at
increasing the probability and impact of positive events, and decreasing the
probability and impact of negative events throughout the project life (PMBOK
Guide, 4th Edition). Guidance in available PPP documentation, particularly
dealing with political and legal conditions, economic conditions, social conditions
and relationships, emphasises the importance of early risk identification and
management.

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Figure 4.1. Risk management process for PPPs (Leidel & Alfen, 2009)

Identification and assessment of risks is one of the most significant stages in a

PPP contract. This process includes careful analysis of all sources of risk from the
perspectives of all parties involved in project. There are several tools15 suitable
for risk identification, among which checklists prevail. However due to the
uniqueness and complexity of projects usually conducted under a PPP scheme,
fresh risks cannot be found in checklists, so some authors strongly recommend

15
Information about the tools available for risk evaluation may be found in the Final Draft
International Standard IEC/FDIS – Risk Management: Risk Assessment Techniques.
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the detailed consideration of risks by experienced16 people and in the course of

brainstorming sessions (Akintoye, Beck, & Hardcastle, 2003). It is thus not
surprising that organisations involved in a PPP scheme look for contracting risk
evaluation experts. Another currently used method for risk identification is
developing a risk catalogue that allows for better understanding from SPV
stakeholders.

Conceptual models for risk allocation and management relate to macro, medium
and micro level risks whereby both qualitative and quantitative allocations may
be utilised.
• Macro risks focus on the risks at a national or industry level status, and
upon natural risks (e.g. ecological, political, economic, social, natural
environmental, etc.);
• Medium risks represent the PPP implementation problem, involving
issues at project level (e.g. selection, finance, design, construction,
technical, operation);
• Micro risks, represent the risks found in the stakeholder relationships
formed in the procurement process (e.g. public services vs. private
profit).

Risk assessment involves hazard identification, determining the likelihood (or

probability) of occurrence and estimating the impact of each hazard on the project
(such as on schedule, cost, quality, or performance) and the chances of that
hazard materialising. However, many hazards are difficult to quantify in terms of
probability because there is not enough17 information or simply because it is not
available (Akintoye, Beck, & Hardcastle, 2003). In practice, risks that are known
are assessed initially, but those that are not known are not assessed until a
negative event has occurred (that unfortunately may have catastrophic
consequences). Due to the great variety of risks in projects conducted under a
PPP scheme and to the typical tight schedule for negotiations only the major risks
area catered for, i.e. those involving the most severe consequences or holding the
highest probability of occurrence or a combination of these. Akintoye et al (2003)
state that, for efficient time management, attention should be paid only to those
risks with the highest probability and impact, not disregarding less influential
risks, but this may be hard to achieve. Various procedures and techniques have

16
The experience gained with similar projects obviously allows for better risk
identification and for finding the best solutions to manage them.
17
Akintoye et al. (2003) justify through the UK example, where the majority of PFI
contracts are not yet finished, that it is impossible to obtain suitable data for concise
evaluation of future performance of PFI contracts.
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been used to control and minimise the impact of risk on projects conducted under
a PPP scheme, as summarised in Table 4.1.:

Table 4.1. Procedures and techniques to minimise risk impact

(Akintoye, Beck, & Hardcastle, 2003, p. 172)

Procedures/ Description/Benefits
Techniques
Basic risk standards (applicable to a wide variety of
Standardisation
market sectors) that may also be used for sound risk
guidance
allocation to PPP contracts.
Allow for evaluating if a specific project holds
Sector guidance special characteristics and if risk standards should be
adapted for coping with it.
Similarly, a pilot project may be used to test whether
Pilot projects a new sector is suitable for private finance and
assess any special features
Market sounding can be used to test the private
Market sounding
sector reaction to new or unusual risks.
Assist an authority to identify any project-specific
Diligence
features, obstacles and risks (risk matrix).
Other techniques (e.g. flexible design, use of
Other techniques standard designs, flexible project duration) to control
and minimise exposure to project risks.

It is unlikely that every risk will be entirely eliminated through a risk

management process but risk exposure may be reduced to an acceptable level
(Leidel & Alfen, 2009) by using tools for project risk mitigation and/or by
adopting specific measures for risk distribution among the project stakeholders
(in relation to the perception of risk and in accordance with the function and
experience of each stakeholder in that particular type of project). In any case,
contracting organisations must make an effort to mitigate risks (especially the
most important ones) because if they materialise they may generate inconvenient
(and even dramatic) consequences. Moreover, this would certainly result in a bad
image for the organisations involved in the project, putting at risk their credit and
possibly preventing the award of future projects (Akintoye, Beck, & Hardcastle,
2003).

Risk management is an ongoing process so it is necessary to regularly review

whether anything has changed which may impact on the risk issues that were
identified. It is the process of implementing risk response plans (risk mitigation

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strategies), tracking identified risks, identifying new risks and evaluating risk
process effectiveness throughout the project life time. This process takes place at
every stage of risk management. All the procedures and strategies of risk
management, involving the stages previously mentioned, should be documented
in the project execution plan (PEP)18.

18
The project execution plan (PEP) is a dynamic management document that records the
project strategy, organisation, control procedures and responsibilities. It is updated
regularly during the project’s life and used by all parties both as a means of
communication and as a control and performance measurement tool.
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CHAPTER 5

PPP SPECIFIC RISKS

5.1 RISKS AT DIFFERENT PPP STAGES

All projects in all sectors involve risks. It comes in many forms and often
depends on the characteristics of a particular project. In projects conducted under
a PPP scheme most of the specific risks incurred derive from the complexity of
the PPP arrangement. This is especially due to the excessive documentation, to
the method of finance, taxes, subcontracts, among other technical details
(Grimsey & Lewis, 2000). This leads to increased risk exposure for all parties
involved that have to deal with many risk issues right from the inception stage of
the project because the presence of some of these risks could hinder the
achievement of the project objectives (Akintoye, Beck, & Hardcastle, 2003).

A typical project conducted under a PPP scheme encompasses an extensive set of

activities that take place in a number of phases. The whole process of project
development is a complex, time consuming and expensive endeavour (Padiyar,
Shankar, & Varma), so it is necessary to adopt an adequate risk management
approach for dealing with it. All participants must look at the risks in the different
phases of the project and reflect upon the risk management approach, possible
strategies for risk mitigation, who will monitor and manage risks and so forth.
This essentially means creating a risk management cycle covering all stages of
project development within the PPP.

As previously mentioned, the main point of PPP is the provision of infrastructure

and public services by the public sector. These are projects that are particularly
subject to risks due to their magnitude and complexity, higher initial costs, higher
irreversibility (unrecoverable costs), and the higher durability of assets created
(Checherita & Gifford, 2007). The complexity of the projects are due to the
involvement of numerous stakeholders with different objectives and restrictions,
and they have to deal with many risk issues in terms of policies and regulations,
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documentation, financing, taxation, technical details, sub agreements, interfaces

etc., starting as early as possible in the inception stage of the project. It is
important to analyse projects for a period of 25 to 30 years if risks are to be
assessed and allocated adequately (Leidel & Alfen, 2009).

Figure 5.1. Risk sources in PPP (Padiyar, Shankar, & Varma)

The Standard Risk Matrix, developed by the Irish Department of Finance

identifies risk under seven headings; planning, design, construction, operating,
demand, financial and legislative Leidel & Alfen (2009) divide a project
conducted under a PPP scheme into the following stages: preparation and
conception, tendering and awarding, construction, operation and maintenance.
The following sections go through these stages, analysing risks therein.

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5.2 PREPARATION AND CONCEPTION

Initial tasks in the PPP process are to provide decision makers with all the
relevant information (objectives and strategies for the project, appointing the
project team, identifying stakeholders and authorities, checking external
approvals and budgets) needed for carrying on the project. The aim of the initial
stage is also to determine a list of pre-qualified bidders.

A number of generic risks interlinked with the planning process are identified
early in the project life cycle. These include not only the planning permission
itself (must be included in PEP), but also various issues related to the
consequences of the planning decision, time and cost overruns, public
consultation, land purchase, environmental impact assessment, licences and
consents, and so on. At this phase the level of negotiations are intense and
complex; the planning permission can be hard to obtain and design may not be
finalised before work starts (Davies, 2006). The need to answer all these
questions puts back the start date of the construction. For that reason, most of the
time, the entering of the partnership is still discussed.

Planning permission must be obtained before the project can proceed in full.
Risks associated with planning approval and related issues generally lie with the
public sector. In some instances, particularly in the transportation sector, the
public promoter may use statutory authorisation thereby avoiding the necessity
for planning permission, thus preventing this risk occurring 19. In order to
achieve this, the public promoter must identify at the feasibility phase any
approvals that can be obtained before the detailed design for the project is
finalised (e.g. any re-zoning and land-use consents).

As for licensing risks (including environmental licenses and local authority

licences) they may substantially increase the overall project cost (Monteiro, 2007)
if not addressed prior to the tender call. When the procuring authority is a local
authority, there needs to be sufficient and reasonable separation between the
functions of the local authority and the planning authority to pre-empt any future
judicial review challenge on the grounds of conflict of interest.

19
The planning process is not always tailored to PPP projects and can often be quite slow
and have uncertain outcomes. It is therefore important for the public sector to factor this
in within the risk matrix.
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Social risks can have also an impact on the acquisition of planning permission.
The public interest question is addressed rigorously during the pre-tender stage of
the project. If a site needs to be acquired for conducting the project and the
negotiation with the land owner proves to be unsuccessful, public authorities may
be given the right to acquire the land compulsorily in certain circumstances.
However, the process for this may take some time and have uncertain outcomes.
Projects conducted under a PPP scheme should be checked for whether the public
interest20 can be protected satisfactorily (Partnerships Victoria, 2001). If people
have to be displaced and compensated, or way leaves are involved in a project,
then securing planning permission may be delayed.

Whilst it is usually a public sector risk to provide the land for the project, in
certain circumstances it is possible to transfer this risk to the private sector, for
example, making it a tender requirement. When the private sector takes the risk of
planning, the public agency must ensure value for money. In the context of
overruns, private sector finance providers generally require approval prior to
entering into a contract.

Risks associated with environmental impact assessment and land acquisition

generally rest with the public sector, as do those arising from public consultation
and stakeholders (Akintoye, Beck, & Hardcastle, 2003).

5.3 TENDERING AND AWARDING

The principal objective of this stage is to select a preferred bidder who offers best
value and will deliver the required infrastructure or service to the standards set,
and within the budget and contract terms agreed. An important issue to ascertain
during the tendering stage is forecasting demand for the service or infrastructure
being contracted during the contract life cycle, since this will be one of the basic
data sources for estimating future revenues and compensations to the
concessionary. Accordingly, the extent to which the demand risk can be shared
between the public and the private sectors is part of the value for money equation.
20
Protection of community rights (including legal rights through planning and appeals
process); protection of public rights (of access to the facility, health and safety, and access
to information); and protection of users rights (including privacy, access for disadvantage
groups and consumer rights).
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In early PFI schemes in the UK, this was a serious issue, but more recently the
public sector tends to bear this risk, so the private sector is less concerned about
the service usage level (for example, the traffic demand on a motorway).
However, the responsibility for that risk may fall upon the private partner. For
example, in PPP contracts with specialist private companies (e.g. a waste
management contract), although the public client provides a preliminary
estimation of demand, the final responsibility may fall upon the private
contractor, because of the project specifics. Nevertheless, in road infrastructures
projects the demand risk cannot be integrally transferred to the private sector
because the determinant demand factors are beyond private control.

5.4 DESIGN AND CONSTRUCTION

Firstly, attention must be paid to the fact that issuing the project design (design
stage or conception stage) in a PPP contract is on the side of the private partner,
contrary to the traditional procurement approach, where the contractor must
implement the project conception previously developed by the public entity.
Design risks should obviously be assessed during the design stage but this may
turn into a challenging task for the contractor, because specifications may not be
thoroughly provided and innovative inputs are strongly encouraged by the client
(Akintoye, Beck, & Hardcastle, 2003). In this context, design risks basically
comprise delays, issuing incomplete documents and lack of fulfilment of the
client’s requirements (which translate into increased investment costs for the
contractor and more frequent maintenance during the operation stage). Even if
there were no control by the public partner on the design delivery, the
consequences of bad design (delays, design errors, faults or failure to meet the
client’s requirements) usually fall upon the risks catered for the private partner
(Franco, 2007). However, the risks of inadequate or incorrect initial specification
or change in requirements after tender/award remain with the public sector. In
some projects, it may not be possible for the public authority to specify exact
requirements at the tender stage or at the award stage. In these circumstances, risk
share tends to be negotiated between the parties involved.

Moreover, in the case of infrastructure using rapidly evolving technologies, there

is the risk of obsolescence in the contract period or after completion, because PPP
arrangements typically apply to long duration projects (25 to 30 years). Thus, the

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project must regard the flexibility of future use, that is to say, a “future-proofing”
project.

Construction risks cover notable events like late delivery, non-respect for
specified standards, additional costs (e.g. additional raw materials and labour
costs), technical deficiency, commissioning, external negative effects
(interruptions to construction due to noise complaints, disputes with local
residents, and so on), defective materials, power outages, labour disputes, design
changes and disruption of work by the elements. Cost overruns are very common
in the construction phase and there are several reasons why this could occur like,
for example, project changes (due to design changes or client demands).

When cost overruns are incurred, the financial feasibility of the conception may
be jeopardised. Construction risk is nearly always assigned to the private party,
which in turn is likely to include strong incentives for on-time completion of
works in its construction contract. However, should the initial specification be
incorrect or inadequate, or should there be specification variations, any
construction risks arisen thereof will have to be analysed and allocated in
accordance with the terms of engagement.

As is the case in the construction industry, the construction related risks are
usually transferred down the chain to the subcontractors. However, where
liability is being passed by the project company, a further mechanism may be
needed to apportion risk between subcontractors. This can be addressed in an
interface agreement between the subcontractors.

In a PFI project, these are commonly “equivalent project relief” provisions in the
subcontracts, which seek to match the claims of the subcontractors against the
project company with equivalent claims of the project company against the public
sector authority. However, in a recent case, the court held that under English
legislation, a construction subcontractor could not be prevented from referring
disputes immediately to adjudication and that certain of the particular “equivalent
project relief” provisions in the construction subcontract in question were
ineffective. Although the use of “equivalent project relief” provisions attempts to
mitigate the potential for mismatch between decisions at the subcontract and
project agreement levels, legislation contributes to the danger of inconsistent
decisions as construction and maintenance subcontracts are required to allow
disputes to be referred to adjudication whilst PPP/PFI project agreements are
exempted from this requirement.

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5.5 OPERATION AND MAINTENANCE

Under a PPP scheme, the contractor assumes the responsibility for damages
caused either by poor execution or by deficient operation of the infrastructure.
Therefore, facilities management is of great importance in PPP schemes so it
must be carefully planned from the early stages of the project development and
cost commitments must be duly assessed for the life cycle of the built facility.

Operating risks will very much depend on the nature, scope and context of the
contract. For example the operating risks of a DBF contract will be different from
those of an operate-only contract. Generally speaking, operational risks arise if
the service provided does not fully match the requirements imposed in the
contract by the public partner. Maintenance risks include the possibility that (i)
the cost of keeping the facility in the conditions required by the contract may
exceed the forecast costs (ii) the maintenance programme contracted in not
actually followed (Johannes, 2003). Moreover, it is common that PPP contracts
provide for penalties (e.g. income rebate) if the facility does not comply with the
quality standards of service delivery.

Several operation and maintenance risks should be considered for the operation
phase, for example, service operating and maintenance risks (e.g. additional costs
resulting from increased usage), possible acts of vandalism, design deficiencies,
and environmental performance. But the most significant risks for this stage may
be classified under the following headings, as discussed below: demand risks,
financial risks, legislative risks and residual risks.

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• Demand risks

This is the risk that demand for the asset will be greater or less than
predicted/expected. Where demand risk is significant, it will normally give the
clearest evidence of who should record an asset on their balance sheet. For
example, the demand for hospital beds by patients may be less or more than
predicted.

The length of the contract may influence the significance of demand risk, since it
is difficult to forecast for later periods. Once it is established that demand risk is
significant, it is necessary to determine who will bear it.

The importance of demand risk is linked with the financial arrangements that are
tied to the demand prediction. The demand for services or infrastructure below
expectations and consequently the lack of receipts to face expenses (cash flow
failure) is the most important risk during this operation stage, especially in terms
of the debt return for project investors. Hence, risks associated with any changes
to the scope of demand will usually rest with the public sector.

If the revenue generation is directly linked with the operation and part of the
contractor payment mechanism, any shortfall in revenue generation due to change
in demand will normally be an operator risk. On the other hand, the risk of fall in
demand due to a change in government policy, political decision, social,
economic or environmental change usually will remain with the public sector.

• Financial risks

Financial risks can be divided into two main types: internal disposal risks and
external financing risks.

Disposal risk is the risk that the expected value of surplus departmental assets,
detailed for disposal in a PPP contract to fund public services, is lower than
expected. Departments can reduce their exposure to this risk by transferring
assets, such as redundant hospital buildings and grounds, which have, or are to
become, surplus to requirement to the private sector contractor as part of the PPP
contract.

External financing risk is the risk that the private sector contractor fails to raise
sufficient funding for a public services project on the market. As with any
contract, the ability of the private sector contractor to secure the finance required

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to complete a PPP project, must be determined by the sponsoring department

before the deal is signed. External financing risks are also related to interest rate
risk, which is the risk that the interest rate will change between the time a bid is
tendered and the time a contract is signed. Adverse movements in the interest rate
during this time mean that the private sector contractor has to pay more to service
their debt, which may reduce the attractiveness of a PPP contract.

As previously discussed, it is in the interest of the public sector to transfer the

financial risk to the private sector in PPP arrangements; however, there are some
exceptions where the financial risk lies with the public sector. These include
insufficiency of the public funds or ability to pay over the contract duration (for
example for a period of 25 years). Furthermore, if there is a requirement for the
public sector for off-balance sheet treatment, that also has an impact on risk
allocation.

Risks for other finance criteria, where private finance is utilised, usually stay with
the private sector, including change in taxation (unless it is a discriminatory or
specific legislation), insurance and finance arrangements such as equity and bond.

• Financing of PPP projects

PPP projects are mostly structured in a way that private finance can be used to
fund initial capital expenditure, however, public sectors can also finance PPP
projects.

Typical sources of private finance will include:

• Equity – share capital and sub-debt are usually injected by sponsors or
specialist equity investors/funds, typically constituting around 10 per cent
of the project cost. The intention to optimise the finance structuring can
lead to the use of equity bridge facilities, to delay the date on which
equity is injected;
• Bank finance – debt finance provided by way of a bank loan, often
constituting around 90 per cent of the required funding and sometimes
syndicated to a number of banks or financial institutions;
• Bond finance – debt finance provided by way of debt securities, as an
alternative to bank debt. The debt securities are commonly marketed with
the benefit of a monoline insurer guarantee. Bond proceeds are made
available in one lump sum, rather than by drawdown as required. The
project's financial modelling needs to allow these proceeds to be invested
in order to mitigate the consequential increased “carry” cost, whilst still
allowing drawdown against scheduled project works;

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• Finance leases – finance raised by the sale of capital equipment to a

financial institution, which leases back the equipment in return for a
rental payment. Typically used for specific types of capital equipment,
such as rolling stock. The specific cash flow and taxation issues arising
from finance lease structures must be accounted for in the financial
modelling;
• Corporate finance – finance is raised from the sponsor's own internal
resources as an alternative to project financing. This is a rare occurrence.
The project structure and the terms of project documents may vary where
this approach is adopted. For example, the use of a project company and
the funder's security package (including direct agreements with the
procuring authority and the subcontractors) may be deemed unnecessary
where a corporate finance structure is used.

Where project finance is being used, funders will typically seek to mitigate the
risks to the project cash flow by passing down the project risk to subcontractors
with acceptable guarantors/bonding. Hedge arrangements are also utilised to
hedge against variable elements in the cash flow such as interest rate or RPI. In
addition, use of reserves or contingent finance are also made to address
contingent risks to cash flows.

• Legislative risks

The allocation of legislative risks would normally depend upon whether it is a

general change in law as opposed to a discriminatory or specific change in law.

Changes in law which are generally applicable are normally a risk for the private
sector, with some notable exceptions. If there is a general change in law which
comes into effect during the service period and involves capital expenditure, there
is often a sharing of risk, with the exposure for the private sector contractor to
such capital expenditure being on a sliding scale, with a capped value for the
contractor’s total exposure. Similarly, risk of changes in VAT status of the
contractor is also an exception which is normally protected against.

On the other hand, the public sector generally retains the risk of any changes in
law which would expressly discriminate against the PPP project, the project
contractor or the PPP sector. Similarly, changes in law which specifically refer to
the construction and servicing of facilities for the sector in question is a public
sector risk, providing such a change would not have been foreseeable at the time
of the project agreement.

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• Residual risks

Generally in the end of the PPP contract, the assets must be devolved to the
government. Residual risk is the risk that the actual residual value of the asset at
the end of the contract will be different from that expected. The risk is more
significant the shorter the PPP contract is in relation to the useful economic life of
the asset.

Where this risk is significant, who bears it will depend on the arrangements at the
end of the contract. For example, the public sector will bear the residual value
risk where:
• Iit will purchase the asset for a substantially fixed or nominal amount at
the end of the contract;
• The property will be transferred to a new private sector partner, selected
by the public sector, for a substantial fixed or nominal amount; or,
• Payments over the term of the PPP contract are sufficiently large for the
private sector not to rely on an uncertain residual value for its return.

In order to minimise these risks the public promoter should impose conditions
related to the maintenance and renewal of the assets and make periodical
inspections (Partnerships Victoria, 2001). Johannes (2003) also refers as the
mitigations measurements the realisation of audits towards the end of project term
and security measurements for instance final condition bond, or deduction from
unitary payment.

On the other hand, the private sector will bear residual value risk where:
• It will retain the asset at the end of the contract; or
• The asset will be transferred to the public sector or another private sector
partner at the prevailing market price.

Specific strategies are adopted at each stage of the project life either to reduce the
likelihood of adverse events or to allocate residual risks to the parties best
positioned to manage them (Padiyar, Shankar, & Varma).

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5.6 RISK ALLOCATION IN PPP PROJECTS

The common characteristic of all projects conducted under a PPP scheme is the
substantial need for allocating risks to the parts involved. The general rule is to
transfer risks to those who are best prepared to manage them and at the lowest
possible cost. But who will actually assume risks of building and maintaining the
infrastructure or delivering the service is often the central question in a PPP
arrangement (European Commission, 2003). Risks vary with the development
and delivery process – contractual mis-allocation of risks has been cited as one of
the leading cause of disputes. Therefore, careful risk allocation is critical to
unlocking the efficiency benefits of private sector involvement and is a key driver
of value in a PPP.

According to the Portuguese legislation the share of risks between public and
private entities must be clearly identified by contract and follows the following
principles (article 7th from Decree-Law no. 144/2006):
• The different risks related to the partnership must be divided between the
partners in accordance with their ability to manage those same risks;
• The partnership shall imply an important and effective transference of
risk to the private sector;
• It should be avoided the risks which do not have the adequate
justification of other existent risks;
• The risk of lack of financial sustainability of the partnership due to non-
fulfilment or unilateral modification of the contract by the public partner
or other important cause, must be, as much as possible, transferred to the
private partner.

In accordance to the orientations of PFI in the UK, risks (particularly in the

project area, construction/reconstruction and operation) should be shared or
transferred to the partner which is in the best position to internalise them. In
practice, this usually means transferring a considerable part of the risks to the
contractor committed to performing a project for a certain value and responsible
for obtaining financing as long as the project remains.

Different organisations and different individuals can have different tolerances for
the risk. Each party involved in a project may have different perspectives
regarding project risks due to differing knowledge and perceptions about the
nature of risks and their sources (Leidel & Alfen, 2009, p. 1). Indeed, in some
circumstances a party may prefer to walk away from the project rather than
assume such a risk.
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There are several approaches to risk allocation:

• Transferred risks (risks transferred to contracting party);
• Retained risks (risks retained by the public sector agency);
• Shared risks (risks shared between the contracting party and the public
sector)

Shifting a particular risk to a party that is not able to manage it is more costly and
may generate additional risks for the project. A process of negotiation for risk
allocation is depicted in Figure 5.2.

Figure 5.2. Risk allocation process in PPP/PFI contract procurement

(adapted from Bing, Akintoye, P.J. Edwards, & C. Hardcastle, 2004)

In practice, in order to achieve risk allocation, the public and the private partners
agree on the risk factors applicable to the contract, register them in an appropriate
document and define the most relevant risks each project stage (on the basis on
probability and impact) and their financial consequences. Based on this
information, the public partner decides on which risks it is prepared to assume or
share and which risks should be transferred to the private partner, thereby
establishing a preliminary risk allocation structure. The task of the private partner
is either to accept the public partner’s proposition (setting up the inherent
management costs and the paths for recovering possible losses arising from them)
or to negotiate on the re-allocation of some risks or even to abort the process
(Bing, Akintoye, P.J.Edwards, & C.Hardcastle, 2004). The negotiations would
consider whether the public partner should accept the high risk cost, share the risk
with the private partner, or retain the risk in the public sector. Quite often,
negotiations on the share of risks between project participants (both public and
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private) run for several months until risk property has been adequately analysed
and risks allocated to each partner (Akintoye, Beck, & Hardcastle, 2003).
Obviously, a balanced distribution of risk is a precondition to create a successful
long-term partnership.

5.7 RISK REDUCTION

The emphasis on risk in the PPP/PFI gives suppliers the opportunity to think
creatively about how the cost of risk can be reduced. For example, a purchaser
may impose a requirement on a provider that a lift is guaranteed to be operating
for the entire working day, every day of the week. This creates a high operating
risk for contractors, the cost of which will be passed on through the unitary
charge. Purchasers could explore other possibilities with the contractor to reduce
the potential cost of that operating risk. The contractor may be able to make other
space available, temporarily, in the case of a lift breakdown, effectively reducing
the significance of the lift’s reliability in the risk model and on the cost of the
project. But little evidence may be found, however, that purchasers are taking
such creative approaches for achieving risk reduction.

Government guidance states that purchasers should not transfer risks to the
operator to get a particular accounting result if this arrangement delivers poorer
value for money. In practice, however, there is not always a linear relationship
between the levels of risks accepted by the contractor and the price attached to
these in the contract. The strength of the link is likely to be influenced by the state
of the market and the profitability of the whole contract.

Moreover, large contractors, using their own equity, do not have to convince
financiers that the risks involved are reasonable and justifiable. If contractors
really want to get involved, they are likely to be prepared to accept a package of
risks, and clients may be surprised at the apparently low price attached to some
risks by contractors, compared with their own estimates. The result is that risk
transfers from the purchaser to the contractor do not necessarily mean significant
extra costs and reduced value for money.

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Quantified risks and associated probabilities could be used more often to find out
whether certain risks allocated to the contractor should be re-assumed during
negotiation. If the contractor were to be asked how much the price would be
reduced if a risk was reallocated to the public sector, value for money could be
improved.

Incomplete use is currently made of risk models in exploring risks and their
probabilities. Instead, risk models still tend to be used as ‘necessary’ number-
crunching exercises to demonstrate whether the PPP/PFI scheme is better than the
conventionally funded alternative.

While risk models can be used to assist skilled negotiators by showing general
tendencies in the likely movement of price with risk, they cannot be relied on to
generate a ‘correct’ answer. Given the nature of the market, and the approach
adopted by individual companies, PPP negotiation around risk is rarely simple or
predictable.

5.8 RISK TRANSFER

With PPPs, value for money is achieved through the transfer of risk to the private
sector, which is perceived to have an advantage in handling risk. The risks that
can be transferred to the private sector include, for instance, the financial risk.
Actually, it is an essential condition of any PPP project that the financial risk is
transferred to the private sector to secure value for money because privates have
advantages over the public sector in handling these risks (generally they have risk
analysts) thereby reducing the risks for the public sector (Allen, 2001).

The main benefit of transferring financial risk to the private sector is that they are
perceived to have an advantage over the public sector in handling financial risks.
Most successful private sector firms have risk analysts especially in the financial
sector.

A further effect of transferring a project’s financing risk to the private sector is

that it reduces the general risks of public service projects that have been retained
by the public sector. However, risk and reward go hand in hand: the higher the

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perceived risk that is being transferred to the private sector, the greater the risk
premium that will be required by the contractor from the public sector to
compensate them for their exposure. Given that some risks are difficult to
quantify it is difficult to determine whether a private sector contractor, for
accepting a particular risk, is charging a suitable risk premium for either party.

5.9 OPTIMAL ALLOCATION OF RISK

Once the risks associated with a particular PPP project have been identified, the
next task is to share the risks between the public and private partners. In keeping
with the well accepted principle that “risk should be allocated to whoever is best
able to manage it”, the public sector must not transfer risk for its own sake.
Demand and other risks should be a matter of negotiation with the value for
money impact being tested out, where appropriate, through bids on alternative
risk transfer bases against minimum and conforming requirements. To allocate
the major part of the risk to the private sector secures to the public sector the
quality of the infrastructure, but the more risks are allocated to the private sector,
the greater the cost of risk transference, since the premium of risk demanded by
the partner is usually higher. The transference risk system is, therefore, one of the
main characteristics of a PPP model, stressing the necessity of optimisation and
not of maximisation of the risk transference (Monteiro, 2007). The lower the
share of the risks transferred to the private sector, the more the investment
resembles a public investment. When all the risk is assumed by the public
sector, the investment, even if it was privately financed, should be take into
account as a public investment, as an “inputted loan” of the private partner.

• Principal risks retained by the public sector include (various sources

previously referred21):
o Risk of the long-term need for the service (as these contracts
often run for 25 years or may be even longer, the risk that a
particular service may no longer be needed should remain with

21
Akintoye, Beck, & Hardcastle (2003); Franco (2007); Padiyar, Shankar, & Varma;
Bing, Akintoye, P.J.Edwards, & C.Hardcastle (2004); Almeida; Ribeiro & Dantas; Pohle
& Girmscheid, (2007); and Schmachtenberg & Schenk (2007).
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the public sector; even if the service may no longer be required,

the contractor will be entitled to its payments for the duration of
the contract);
o Force majeure situations (additional rectifying costs may arise
from this type of situations, and such costs should be carefully
evaluated);
o Fiscal risk (taxes due on profits arising from the project);
o Long-term affordability of the project for the public authorities;
o Planning permission (environment impact assessment prior to the
tender phase; preliminary evaluating of the alteration costs for
environmental reasons; licensing; conflict management between
authorities; etc.).

• Principal risks retained by the private sector include:

o Project design (costs of modification and re-designing);
o Project development (alterations imposed by the public partner);
o Construction (additional labour and materials required or
additional costs incurred);
o Industrial relations risks (a direct consequence of this risk may be
increased labour costs, loss of revenues or additional
expenditures, delay in construction or service provision, and so
on);
o Financing risks, including variation of the interest rate (direct
consequences of this risk are additional funding costs and/or
unexpected refinancing costs);
o Demand risk (direct consequences are the reduction of revenues
because of lower throughput);
o Availability risks (penalties for non-compliance that may absorb
the revenues of the contractor shareholders);
o Risks related to service quality (penalties for lack of compliance
of specified service provision standards);
o Operation and maintenance risks (penalties proportional to the
extent of incompliance and to any flaws detected in the
infrastructure by the end of the contract).

The risks of a public service provision should only be transferred to the private
sector if, and to the extent that, the private sector is capable of managing such
risk. In situations where the private sector is judged best able to deal with risk,
such as construction risk, then the public sector should try and transfer this
responsibility completely. Where the private sector is deemed less able to manage
project risk, responsibility for these risks should remain within the public sector.

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Figure 5.3. Generic Risk Transfer Model in projects running under a PPP
scheme

How does the private sector manage risks allocated?

There are different possibilities for the private sector to manage the risks,
including, in particular (Schmachtenberg & Schenk, 2007):
• Detailed assessment in advance;
• Insurance;
• Indexation of financial claims;
• Limiting exposure by way of caps; and,
• Passing down the risk to subcontractors or limiting it by using a
project company.

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• Risk matrix
Risk allocation cannot be standardised on a permanent basis as individual
circumstances determine what the best is. However, a template may be settled
which will inform the project risks allocation.

A good example of a template is the risk matrix. A risk matrix (or check-list, or
risk sharing table) is a practical method for systematic risk assessment
(Heimonen, Immonen, Kauppinen, Nyman, & Junnonen). When prepared and
used correctly, it can be a useful tool, both to the public and the private sector,
because it helps list the most important project risks and allocate them to the
project participants. During PPP negotiations, the risk matrix can be used as a
verification tool for assuring that all risks are approached. After the contract is set
up it can also be used as a brief of the risk allocation scenario. However, this
does not prevent the need for detailed description of the risks and the way these
are allocated to the public or the private partner, or how they are shared between
them (Partnerships Victoria, 2001, p. 23).

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CHAPTER 6

PPP PROJECT PROCEDURES

There are various types of PPPs, established for different reasons, across a wide
range of market segments, reflecting the different needs of governments for
infrastructure services. Although the types vary, two broad categories of PPPs can
be identified: the institutionalised kind that refers to all forms of joint ventures
between public and private stakeholders; and contractual PPPs.

Concession Model PPPs

Concessions, which have the longest history of public-private financing, are most
associated with PPPs. By bringing private sector management, private funding
and private sector know how into the public sector, concessions have become the
most established form of this kind of financing. They are contractual
arrangements whereby a facility is given by the public to the private sector, which
then operates the PPP for a certain period of time. Often at times, this also means
building and designing the facility as well. The normal terminology for these
contracts describes more or less the functions they cover. Contracts that concern
the largest number of functions are "Concession" and "Design, Build, Finance
and Operate" contracts, since they cover all the above-mentioned elements:
namely finance, design, construction, management and maintenance. They are
often financed by user fees (e.g. for drinking water, gas and electricity, public
transport etc. but not for “social PPPs” e.g. health, prisons, courts, education, and
urban roads, as well as defence).

Private Finance Initiative (PFI) model PPPs

Another model is based on the UK Private Finance Initiative (PFI) which was
developed in the UK in 1992. This has now been adopted by parts of Canada,
France, the Netherlands, Portugal, Ireland, Norway, Finland, Australia, Japan,
Malaysia, the United States and Singapore (amongst others) as part of a wider
reform programme for the delivery of public services. In contrast to the
concession model, financing schemes are structured differently.

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Under PFI schemes, privately financed contracts for public facilities and public
works cover the same elements but in general are paid, for practical reasons, by a
public authority and not by private users (public lighting, hospitals, schools, roads
with shadow tolls, i.e. payments based on traffic volume, paid by the government
in lieu of tolls).

The capital element of the funding enabling the local authority to pay the private
sector for these projects is given by central government in the form of what are
known as PFI "credits".

PFI is not just a different way of borrowing money; the loans are paid back over
the period of the PFI scheme by the service provider who is at risk if the service
is not delivered to standard throughout. The local authority then procures a
partner to carry out the scheme and transfers detailed control, and in theory the
risk, of the project to the partner. The cost of this borrowing as a result is higher
than normal government borrowing (but cheaper when better management of
risks and efficiency of service delivery are taken into account). Currently, it does
not always appear as borrowing in public accounts; although how it appears in
public accounts may be changing as well.

Contract and risk transfer based PPP models

There are a range of PPP models that allocate responsibilities and risks between
the public and private partners in different ways. The following terms are
commonly used to describe typical partnership agreements:
• Buy-Build-Operate (BBO): Transfer of a public asset to a private or
quasi-public entity usually under contract that the assets are to be
upgraded and operated for a specified period of time. Public control is
exercised through the contract at the time of transfer;
• Build-Own-Operate (BOO): The private sector finances, builds, owns and
operates a facility or service in perpetuity. The public constraints are
stated in the original agreement and through on-going regulatory
authority;
• Build-Own-Operate-Transfer (BOOT): A private entity receives a
franchise to finance, design, build and operate a facility (and to charge
user fees) for a specified period, after which ownership is transferred
back to the public sector;
• Build-Operate-Transfer (BOT): The private sector designs, finances and
constructs a new facility under a long-term Concession contract, and
operates the facility during the term of the Concession after which
ownership is transferred back to the public sector if not already

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transferred upon completion of the facility. In fact, such a form covers

BOOT and BLOT with the sole difference being the ownership of the
facility;
• Build-Lease-Operate-Transfer (BLOT): A private entity receives a
franchise to finance, design, build and operate a leased facility (and to
charge user fees) for the lease period, against payment of a rent;
• Design-Build-Finance-Operate (DBFO): The private sector designs,
finances and constructs a new facility under a long-term lease, and
operates the facility during the term of the lease. The private partner
transfers the new facility to the public sector at the end of the lease term;
• Finance Only: A private entity, usually a financial services company,
funds a project directly or uses various mechanisms such as a long-term
lease or bond issue;
• Operation & Maintenance Contract (O&M): A private operator, under
contract, operates a publicly owned asset for a specified term. Ownership
of the asset remains with the public entity. (Many do not consider O&Ms
to be within the spectrum of PPPs and consider such contracts as service
contracts.);
• Design-Build (DB): The private sector designs and builds infrastructure
to meet public sector performance specifications, often for a fixed price,
turnkey basis, so the risk of cost overruns is transferred to the private
sector. (Many do not consider DBs to be within the spectrum of PPPs and
consider such contracts as public works contracts.);
• Operation License: A private operator receives a license or rights to
operate a public service, usually for a specified term. This is often used in
IT projects.

The options available for delivery of public services range from direct provision
by a ministry or government department to outright privatisation, where the
government transfers all responsibilities, risks and rewards for service delivery to
the private sector. Within this spectrum, public-private partnerships can be
categorised based on the extent of public and private sector involvement and the
degree of risk allocation.

In the UK public sector there is no legal requirement to adopt a uniform PPP

project implementation procedure. All the different sectors engaged in PPP forms
of procurement, for example, the defence sector, education sector, housing sector,
the ICT sector and so on, have created their own terms of engagement in terms of
PPP projects, with input and support from regulatory, legislative and executive
authorities. Although the first standard PFI contract was published in 1999, the

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different sectors have developed their own forms of contractual arrangements to

suit their particular requirements22.

In many sectors, there is non-statutory guidance which provides model

documentation and advice in relation to the PPP processes.

However, as a general overview, the PPP project procedures follow three key
phases:
1. Pre-delivery phase leading up to contract award;
2. Delivery phase leading up to operational delivery of the project; and,
3. Operational phase.

It may be noted that there are procedural differences between life-cycle based
PPP projects and service based PPP projects.

Life-cycle based PPP projects relate to complete projects including design,

finance, construction and operation, whereas service based PPP projects relate
only to the operating phase performing services and providing products for the
duration of the contract.

1. Pre-delivery phase

At this initial phase, the primary objectives of the process are:

1.1. Opportunity or need identification leading to outline planning;
1.2. Opportunity or need assessment leading to approval of outline business
case;
1.3. Bidding process leading to contract award.

1.1 Opportunity or need identification leading to outline planning

The objective at this stage is to identify opportunities or indeed the need areas
where the public sector can achieve benefits through appropriate use of co-
operation with the private sector. It is important to recognise that this is often a
politico-technical decision.

Once an area has been identified, an outline business case for such co-operation
has to be prepared which must give due consideration to key financial, technical

22
There is however a requirement to comply with the guidance available in a HM
Treasury publication – Standardisation of PFI Contracts (SoPC – currently at version 4
published in 2007) for PFI contracts
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and legal elements. The outline business case should also assess the necessity to
prioritise the opportunity or need.

An outline business case may contain the following elements:

• Objective;
• Scope;
• Key milestones;
• Indicative budget;
• Indicative programme;
• Key risks.

1.2 Opportunity or need assessment leading to approval of outline business case

At this stage, the objective of the process is to identify whether the PPP model is
suitable and appropriate for the realisation of the opportunity or the need, in
relation to other alternative solutions that may be available.

The process to achieve this objective will involve:

• Identification of alternative approaches;
• Assessing the options on the merits of feasibility (technical, legal,
operational & logistical), economics (cost benefit analysis) and risk;
• Selecting the best option based on the assessment outcome;
• Developing the PPP outline business case if indeed PPP is the best
option; and finally,
• Gaining approval of the outline business case from the appropriate
authority.

At the end of this process, the approved PPP outline business case becomes the
“bible” of the project, containing a fairly detailed description of the preferred
solution, key risks and risk mitigation tools and the success or the performance
criteria for the project.

1.3 Bidding process leading to contract award

The PPP procurement or bidding process, leading to contract award, is

underpinned by EU Public Contracts Regulations 2005 (L/N177/2005) enacted
from 3 June 2005. The fundamental principles of this regulation are:
• No discrimination between economic operators (tenderers);
• Transparency;
• Confidentiality of information provided by economic operators; and,
• All public procurement to be undertaken by public contract.
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1.3.1 Preparing for the bidding process

The procuring authority will have to undertake a number of key steps in

preparation for the bidding process. These include:
• Appointment of project procurement team;
• Appointment of advisors (where appropriate);
• Determine whether to adopt a two stage or a three stage selection
process;
• Determining a detailed timeline;
• Preparation of a deliverable specification and value for money benchmark
(the comparator);
• Issue of contract notice, information memorandum and pre-qualification
questionnaire (PQQ).

1.3.2 Pre-qualification

The pre-qualification process broadly consists of the following steps:

• Evaluation of the expressions of interest against the pre-qualification
criteria. The pre-qualification criteria usually includes tests of probity
(good standing), technical competence and financial capability. These
criteria are of general nature and independent of each other;
• On completion of the evaluation process, the tenderers are notified the
outcome of their expressions of interest;
• Where the number of successful tenderers exceeds five, a further round of
selection will have to be undertaken.

1.3.3 Short-listing and preparation of ITT

At this stage of the procurement process, the key elements are:

• The short-listed bidders are required to focus on a specific project and
make a further submission to prove their specific resolve, commitment
and approach to the project. This usually will not call for a fully costed
submission, although high-level costings are normally requested;
• The responses from the tenderers are evaluated on their particular merits
taking account of this submission. The number of successful bidders, at
the end of this evaluation is usually restricted to three to which the ITT is
issued;
• The procuring authority often takes this opportunity to update the original
benchmark costings before issuing the ITT.

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1.3.4 The tenders

This stage comprises the following key elements:

• After issuing the ITT, the tenderers are often allowed 12 to 18 weeks to
submit their responses;
• Mid-tender meetings may be held with the tenderers if necessary,
particularly if there are grey areas in the ITT which require clarification;
• Competitive dialogue23 will be held separately with the tenderers upon
receipt of their submissions;
• Once the dialogue phase is complete the bidders will be given an
opportunity to revise and resubmit their tenders as “Best and Final
Offers” (BAFOs).

Competitive dialogue process

For large and complex projects, a competitive dialogue process is often used. The
procuring authority will appoint an “ad hoc” committee to undertake the
competitive dialogue on behalf of the appointing authority.

The essence of competitive dialogue procedure is:

• It is a process of discussion and review leading to a refinement of the
tendered solution and the requirement;
• This is carried out between the individual tenderer and the authorised
representatives of the contracting authority;
• Information gathered from tenderers is confidential and cannot be
divulged to other tenderers;
• The process covers the broad package and is not solely price-based but
price is a key indicator and comparator to the contracting authority's own
benchmark;
• When the competitive dialogue procedure ends, tenderers re-submit their
final proposal taking account of re-defined solutions emerging from the
dialogue.

1.3.5 Evaluation of BAFOs

The evaluation process for the BAFOs follow the key fundamental principles of
public procurement and the following are the key elements at this step:

23
The procuring authority will often use the competitive dialogue process as part of
the bidding procedure especially for large and complex projects.
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1. BAFOs are ranked according to the most economically advantageous

offer;
2. The ranking is undertaken on the basis of affordability and value for
money tests;
3. If the preferred BAFO passes the requisite tests, the bidder submitting the
BAFO is appointed as the “preferred bidder”;
4. Tenderers whose BAFOs are rejected are notified accordingly and
reasons are given why they were not chosen.

1.3.6 The preferred bidder

At this stage, the competitive process ends and both parties work to proceed
towards contract signature by settling any minor outstanding contractual details.
This stage should not take longer than 12 to 18 weeks and contract signature (i.e.
contract award) should lead directly to the commencement of works (the delivery
phase). No further discussions of commercial substance are anticipated at this
stage

1.4 Contract award leading to delivery phase

After signing the contract, the key elements that are required to be dealt with
prior to the commencement of the delivery phase include:
• Confirmation of the business case with the private sector partner;
• Completion of negotiation of finance agreements, insurance, dispute
avoidance/resolution processes, guarantees, payment mechanisms etc.;
• Establishing and implementing monitoring and performance regimes;
• Preparation and agreement of a detailed project delivery plan.

After signing the contract and establishment of the project delivery plan, the
project delivery phase commences.

2. Delivery phase

The delivery phase of PPP projects will be similar to construction projects in the
sense that it has to go through the design and construction stages with the added
element of financing where private financing options are utilised.

At this phase, the PPP project will have to be implemented in accordance with the
approved and agreed business case. Key elements at this phase will include:
• Implementation of project delivery plan;
• Ensuring public sector monitoring and supervision;

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• Establishment of risk-based contingency plans;

• Depending on the type of the PPP project (see Figure 6.4.) design,
construction and delivery of the project.

The key outputs and objectives for this stage will focus on timely provision of a
fully commissioned and operational facility and services, ensuring the necessary
fit between the service requirements, the payment mechanisms and the
contractual monitoring regime.

For service contract PPP projects this phase will not apply.

3. Operational phase

At this stage, for both services based PPP and life cycle based PPP projects, the
focus is on providing the service outcomes as expected in the approved business
case for the PPP project.

The monitoring and payment mechanism for the private operator will depend on
the type of PPP project (see Figure 6.4.).

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PPP Life Cycle

Delivery phase Operational phase

Life cycle based PPP projects Design Finance Construc- Operation &
tion maintenance Use

Service based PPP projects

Operation &
maintenance Use

Figure 6.1. Life-cycle based and service based PPP projects24

24
Girmscheid et al 2007
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Pre-Delivery Phase

Figure 6.2. Indicative time table for PPP process: up to contract award

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Figure 6.3. The PPP procurement process

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Public sector responsibility Design-Build-Deliver Design-Bid-Build-Deliver

Conventional Public Sector Works

Public Sector Owner

Operator

Consultants Contractor

Build- Operate-Transfer Turnkey

Build Operate Transfer (BOT)

Public Sector Owner

Contractor Operator

Consultants

Develop & Maintain Build-Own-Operate-Transfer

Design-Build-Finance-Operate (DBFO)

Public Sector Owner

Private Concessionaire

Contractor Operator

Consultants

Asset Divestiture

Build-Own-Operate (BOO)

Private Sector Owner/Equity

Contractor Operator

Private sector responsibility Consultants

25
Figure 6.4. Different types of PPP projects
25
Information distilled from “Guidelines for successful public private
partnerships”, EC, 2003
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CHAPTER 7

CASE STUDIES

7.1 INTRODUCTION

The decay of buildings, unemployment, social degradation and exclusion are

serious problems affecting the social and economic well-being of residents of
many Portuguese historic city centres (HCCs). This has particularly hit the largest
cities that ought to be seen as engines for innovation and economic development.
In the last few years urban degradation has been registered in areas of high
population density following the lack of maintenance and subsequent
abandonment of residential buildings. According to data from the European
Construction Industry Federation (FIEC), Portugal is one of the countries with the
lowest investment in residential building refurbishment. Therefore, it is not
surprising that the number of residents in the largest Portuguese cities has
decreased over the last years particularly affecting their HCCs. This is a serious
problem for the social and economic sustainability of cities.

In view of the above, promoting rehabilitation and refurbishment projects of the

public and private real estate stock of the Portuguese HCCs is broadly supported
by the main social and political actors and by society as a whole. Beyond the
reasons mentioned above, it is clearly recognised that such projects correspond to
strategic investments that are essential for re-launching the economy because they
can improve the attractiveness of cities for residents and visitors. This is crucial
for recovering the status of HCCs as centres of culture, knowledge and
innovation. Additionally, urban rehabilitation is an essential strategic component
of city planning and housing policy. Rehabilitation is also a business opportunity
for construction and other economic activities thereby creating job opportunities
and business prospects, all this being advantageous for the cities and the country.

Urban Rehabilitation Societies (Sociedades de Reabilitacao Urbana – SRUs, in

Portuguese) are the most recent rehabilitation strategy for the Portuguese HCCs
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and have quickly assumed a determinant role in the national scene by spreading
across various national cities. The aim of SRUs is to refurbish urban areas
classified as Historic Centres and to promote small businesses complementary to
the housing function on those areas, thereby fostering the attraction of new
residents and of more private investment. SRUs have been created by the Decree-
law nº 104/2004.

Because of the present negative situation of the national economy and the
decrease of the construction activity over the last decade26, the joint collaboration
of public and private entities has become essential for conducting projects
directed to the rehabilitation of degraded buildings. In this context, PPPs are
viewed as excellent tools for urban rehabilitation because they can accommodate
a diversity of funding sources and allow for various management models.

7.2 THE URBAN REHABILITATION

SOCIETY OF PORTO – PORTO VIVO,
SRU

The municipality of Porto has long assumed the responsibility for urban
renovation mainly through various rehabilitation projects conducted in the HCC.
Essentially, the municipality tried to oppose degradation and loss of residents by
refurbishing the public space (streets, squares and green areas) and buildings of
cultural and architectural value. This mission is now held by Porto Vivo SRU27,
the Urban Rehabilitation Society of Porto, that is a public company shared by the
Portuguese State, through the Institute for Housing and Urban Rehabilitation
(Instituto da Habitacao e da Reabilitacao Urbana – IHRU, in Portuguese) and the
Municipality of Porto. The intervention area of Porto Vivo covers the so called
Critical Area for Urban Recovering and Rehabilitation (Area Critica de
Recuperacao e Reconversao Urbanistica – ACRRU, in Portuguese) of Porto.
However, for operational reasons, a smaller intervention area has been assigned

26
Portuguese construction activity reached a historic maximum in 2001 but has been
decreasing since then at an annual rate of as much as 4 per cent.
27
“Porto Vivo” means Porto Alive in Portuguese
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to Porto Vivo, the so called Area of Priority Intervention (Zona de Intervencao

Prioritaria - ZIP, in Portuguese) where the rehabilitation effort will concentrate.

Basically, the role of Porto Vivo is to set up the strategy for the intervention in
the area and to act as a mediator between building owners and tenants or to
directly conduct the rehabilitation operations, if mediation efforts fail, making use
of the legal empowerment conferred by the regulations mentioned above. More
specifically, the competences of Porto Vivo SRU (as well as the other SRUs) are
as follows:
1. To select investors according to a set of previously defined criteria
(financial capacity, suitability, project quality, technical capacity, project
duration, etc.);
2. To decide on contracts with the entities selected;
3. To monitor project execution including quality and duration;
4. To develop a sound communication policy;
5. To implement procedures for reducing time and costs of compulsory
legal transactions that investors must go through;
6. To suggest special fiscal regimes.

Porto Vivo currently manages various incentives for building rehabilitation,

namely, fiscal benefits (through the reduction or exemption of several municipal
taxes), financial support (through the IHRU rehabilitation support programmes)
and bank protocols (supporting funding access for building rehabilitation
projects).

7.3 REHABILITATION PROGRAMME OF

MORRO DA SE

7.3.1 PORTO AND URBAN REHABILITATION

Porto is the second Portuguese city geographically situated in the north west area
of the Iberian peninsula and in the northern area of Portugal. The city extends for
42 km2 and has a population slightly over 200,000 inhabitants but the surrounding
area of Greater Porto is substantially larger and has roughly 2,000,000 inhabitants
(according to the 2008 census). Porto is internationally recognised for the

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Mediterranean weather, the wine, the splendorous Douro River and its bridges,
and for the HCC and the value of its cultural heritage, classified as a National
Monument and awarded World Heritage site status by UNESCO. In 2001 the city
was the European Capital of Culture. Because of all these attributes, Porto hosts
more than one million tourists per year (Figure 7.1.).

Avenida dos Aliados Ribeira

Ponte
D. Luís I

Figure 7.1. Images from Porto

However, Porto is a city with considerable rehabilitation needs. The degradation

of the built environment in the last decades is especially felt in the HCC and

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resulted from the lack of intervention in the public space, poor asset management
and scarce building maintenance. Rehabilitation of the public space took too
much time to start and so far has had little impact on local socio-economic
conditions. Building refurbishment has been incidental because of the lack of
financial conditions of owners and tenants for supporting costs and because of the
lack of attractiveness of the area. This has pushed former residents out and
prevented the installation of new ones. In view of the above situation and
considering the extension and complexity of the Porto HCC it was realised that
the rehabilitation process could not rely solely on private initiative but should be
adequately planned and promoted by the municipality. The rehabilitation plan
should consider the specifics of the area in terms of the socio-economic
conditions of asset owners and residents, the nature of the built environment
(background, urban process, building conservation), and the refurbishment
priorities and so on. Accordingly, a set of rehabilitation master plans was
developed.

7.3.2 THE REHABILITATION PLAN OF MORRO DA SE

Morro da Se (meaning the Cathedral Hill ) is a small area in the Porto HCC in
the neighbourhood of the Cathedral, very close to the city centre and to the left
bank of the Douro river.

Localização cartográfica do Morro da Sé

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Sé do Porto Morro da Se

Figure 7.2. Aerial view of Morro da Se

Morro da Se is a residential neighbourhood of narrow and steep alleys running

between several degraded buildings, located within the UNESCO classified area
(figure 7.3.). Despite its high historic value, the area has suffered a significant
socio-economic decaying process in the last decades, mostly due to population
loss, the reduction of income and the decrease of economic activities. This
simultaneously attracted businesses that were unpleasant for residents and visitors
and definitely not appealing to real estate promoters.

Figure 7.3. Images from Morro da Se

However, against the weaknesses presented, there are several strengths of Morro
da Se that can be clearly highlighted. Morro da Se holds a strategic position in
relation to several commercial, leisure and cultural places of indubitable
attractiveness in the city, and is well served by transport services, which
positively contributes to the sustainable mobilisation of young students and

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tourists. Therefore, the rehabilitation of Morro da Se should take these features in

consideration.

Moreover, despite the high density of residential buildings, Morro da Se offers

sufficient free space in vacant degraded buildings. This enables the development
of new projects that may contribute to refurbishing existing buildings of cultural
value, attracting new residents and businesses, and increasing the urban and
cultural value of the area.

7.3.3 THE STUDENT RESIDENCE PROJECT

According to the strategy for the rehabilitation of Morro da Se, the aim of the
student residence project is to promote the installation of higher education
students as a way of introducing new living experiences and new social
dynamics, and a lever for supporting new economic and tourist activities in the
area. The underlying concept is to introduce a number of new young inhabitants
in a traditional urban area, thereby promoting new interests to the residents and
new dynamics in local businesses. The privileged characteristics of Morro da Se
will help promote awareness of environment issues including the reutilisation of
old buildings and materials reclaimed in the new facilities, respect for the
environment and the use of public transport and non-pollutant vehicles.

The advantages of the project are installing a modern student accommodation

facility in the city centre, in the surroundings of all relevant amenities and
holding a distinctive character, closely attached to local history and traditions. It
is expected that the accommodation will be attractive to students and to small
proximity businesses and a reference for the local population. In view of its
location and closeness to the city centre, the accommodation may also attract
other people, like young visitors and artists.

The space available for the installation of the accommodation is a set of 22

adjacent old buildings and backyards (Figure 7.4.). All buildings are in very bad
shape, urgently needing deep refurbishment intervention. It was estimated that the
space available would allow for the accommodation of roughly 150 people.
According to the project aims, the accommodation should be designed mainly for
students, researchers, visiting teachers, young professionals and others that may
have a connection with the academy of Porto and may need shelter for some time
in the city.

The area for the student residence holds some special conditions for design
restrictions that were set up in the project preliminary guiding programme

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developed by Porto VivoSRU, and was one of the documents of the tender
procedure.

Figure 7.4. Location of the student residence of Morro da Se

7.4 CONTRACTING MODEL

7.4.1 TENDERING AND CONTRACTING

In view of the conditions described above, Porto Vivo SRU decided to embark on
a public private partnership for developing the student residence project of
Morro da Se.

Because the area in its present conditions is of little interest for private investors,
Porto Vivo SRU decided to submit the project to the Portuguese Framework
Programme (Quadro de Referencia Estrategico Nacional – QREN, in Portuguese)
by the contractor, in the scope of the Urban Rehabilitation Programme (Programa
para a Reabilitacao Urbana - PRU, in Portuguese) for funding. In the case of
success, sunken funds obtained from the support of QREN would then be

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conducted to the private partner and this would have to compensate the public
partner by half of that amount raised.

Additionally, because the project is located in the ZIP, the private partner may
use a set of incentives applicable to urban rehabilitation this area, namely:
• Permanent exemption from real estate taxes and from taxes over real
estate transactions (these are municipal taxes in Portugal, therefore within
the authority of the municipality that was liable to decide on this; these
taxes are called the Imposto Municpal sobre Imoveis - IMI, and the
Imposto Municipal de Transaccoes, IMT, in Portuguese, respectively),
because the area is in the World Heritage Area;
• Reduction of the VAT applicable to construction work to five per cent;.
• Reduction in municipal taxes;
• Quicker and easier municipal building authorisation;
• Access to the incentives applicable to rehabilitation projects taking place
in the central area of Porto (SIM – Porto28). This system enables the
municipality to allocate exceptional construction rights in other areas of
the city to the promoters investing in ACRRU.

Following the Portuguese Code of Public Contracting, the first step was
launching an open tender to select the private partner for setting a PPP contract
for designing, building and operating (a DBO contract) the facility. The tender
was awarded to a joint venture of NOVOPCA, Construtores Associados, SA
(building company), SPRU (Sociedade Promotora de Residencias Universitarias),
SA (operator) and NOVOPCA II – Investimentos Imobiliarios, SA (financing
company and investor), as depicted in Figure 7.5.

28
SIM – Porto is an accronym of “Sistema de Informação Multicritério da Cidade do
Porto” and means Multiciteria Information System for the City of Porto.
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Contracting entity:

Consortium

Figure 7.5. The partnership for the student residence of Morro da Se

7.4.2 ECONOMIC MODEL

According to the contract terms, the contractor holds the responsibility for
designing, building and operating the facility under the concession of the public
partner Porto Vivo SRU for a period of 50 years. For compensation, the private
consortium will pay 12.5 per cent of the operational results before taxes. This
amount may be altered if the submission to the funds of QREN reveals
successful, in the terms mentioned above. The initial investment agreed is about
4.7 million Euros and the maintenance costs were estimated at 315 000 Euros for
every ten years.

7.4.3 DUTIES OF THE PUBLIC PARTNER

The duties of Porto Vivo SRU are freeing the buildings and conceding the spaces
to the private partner for implementing the project and operating the built facility.
Part of the buildings were already owned by Porto Vivo, SRU (totalling 2
561m2), but others (totalling 2.559m2) were still private and were specifically
expropriated (taken for public domain) for developing the project29. Porto Vivo
SRU is also responsible for managing and accepting the project design,
conducting the process for approval and construction authorisation from the
authorities, monitoring construction and following the first year of operation.
Finally, Porto Vivo SRU is responsible for settling all problems emerging from
the effects of the construction activities in the public space and in neighbouring
properties (provisional use of public space, effects on access rights of third
parties, traffic disruptions and diversions, and so on).

29
This is a right conferred to the SRUs by the Portuguese regulations mentioned above
(Decree-law no 104/2004), and aims at allowing these public societies to implement the
rehabilitation strategy approved by the public authorities for a specified deprived area.
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7.4.4 DUTIES OF THE PRIVATE PARTNER

Beyond designing, building and operating the student residence, the consortium
also has the duty of obtaining the corresponding permissions required by law. The
consortium has to develop the project according to the schedule agreed in the
terms of the contract with the public partner, otherwise it may incur penalties and
possibly contract cancellation. The construction period was stipulated at 18
months after obtaining all the necessary building permissions and within 36
months after signing the contract with Porto Vivo SRU. Prior to opening the
student residence, the contractor must have installed all the equipment and
furniture needed and contract and train all the staff required for assuring the
operation and maintenance of the facility in adequate conditions.

7.5 PFI CASE STUDY: SEVERN RIVER

CROSSING, UK

Project name SEVERN RIVER CROSSING

Total capital value £331m
Operational period of contract 30 Years
Actual date of financial close 1 October 1990
Government department Department for Transport
Commissioning body Highways Agency
Region South West
Project operational? Yes
On/off balance sheet Off

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Figure 7.6. Bridge over Severn River

Brief
The Severn River is a wide natural divide between England and Wales in the
south west area of the United Kingdom. It presents a barrier to the
infrastructure links between the important cities of Bath and Bristol in
England and Newport and Cardiff in south Wales.

The first bridge, to two lane motorway standard, was opened in 1966 to
replace the ferry connection. It was built in conjunction with the main M4
motorway linking London and Cardiff. However, by the early 1980s it was
reaching its capacity for traffic volumes, especially at peak times, and an
alternative had to be found to reduce the resulting traffic congestion.

In 1984, the government started to study the problems and in 1986 announced
its intention to build a second crossing at English Stones, some 5km
downstream of the existing bridge.

Following the tender process, the Secretary of State for Transport announced
the selection of the bid led by John Laing Ltd (now Laing O’Rourke) with
GTM-Entrepose to design, build and finance the second crossing. This
consortium was also to take-over the maintenance and operation of the
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existing Severn Bridge for the same 30 year concession period. The agreement
was formally signed between the government and Severn River Crossing plc -
a company formed by Laing O’Rourke and GTM with Bank of America and
Barclays de Zoete Wedd in October 1990.

However, before work could start, the government sought powers from
parliament to enable the building of the new crossing and approach roads by
means of the Severn Bridges Bill which was introduced in parliament in
November 1990. Royal Assent was given in 1992 to the Severn Bridges Act
1992 enabling the concession and construction of the new crossing to start in
April 1992.

The new crossing was opened on 5 June 1996 by His Royal Highness, The
Prince of Wales.

The Severn Bridges Act 1992 allows the income raised by Severn River
Crossing plc from the crossing toll charges to be used to cover the ongoing
operation and maintenance during the concession period and to cover the
financing of the debt and equity.
Project technical details

Figure 7.7. Technical details - bridge

Overall length of crossing structure 5,128m

Length of main span 456m
Navigation clearance 37m
Length of Welsh approach viaduct 2,077m
Length of English approach viaduct 2,103m
Height of main span pylon towers 137m
Number of approach spans - Welsh side 24
Number of approach spans - English side 25
Maximum height of approach piers 48m

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Number of foundations in caissons 37

Totalvolume of concrete required 320,000m cubic
Weight of reinforcing steal 30,000 tons
Totallength of pre-stressing steel 150,000m
Totalnumber of concrete deck units 2,434

7.6 PFI CASE STUDY: FORTH VALLEY

HOSPITAL, UK

FORTH VALLEY ACUTE

Project name
HOSPITAL
Total capital value £293m
Operational period of contract 30 Years
Actual date of financial close 1 May 2007
Government department Scottish Government
Commissioning body NHS Forth Valley
Region Scotland
Project operational? Yes
On/off balance sheet Off

Brief
The Forth Valley Royal Hospital project was funded via the private finance
initiative procurement process, to deliver a new 850 bed acute services
hospital of approximately 95,000m2 gross internal floor area, to take the place
of five local hospitals in Stirlingshire, Scotland. The new hospital also
includes 16 operating theatres, 4,000 rooms and 25 wards.

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Forth Health Limited (a company formed between John Laing plc and
Commonwealth Bank of Australia) was awarded the contract in 2007.

The Forth Valley Royal Hospital team was a true collaborative partnership
between NHS Forth Valley, Forth Health Ltd, Serco, Laing O’Rourke and
their Keppie-led design team and ensured that the three completion phases
were handed over on the due dates, namely phase 1 by 10 May 2010, phase 2
on 16 August 2010 and phase 3 for 18 April 2011.

The new hospital comprises a number of blocks of varying heights arranged

on either side of a diagonal central street, which separates core clinical
treatment facilities from in-patient wards, facilities management (FM)
facilities and administration offices. The core facilities are in two to three
storey rectangular courtyard blocks to the south of the central street. The
wards, offices and FM facilities are arranged in a series of three to four storey
L-shape blocks to the north of the street, with the FM and support facilities at
a partial lower-ground floor level.

However, the hospital is more renowned for the innovative building design
which separates the services from patient and visitors. Thirteen robots
(automatic guided vehicles) use segregated tunnels and FM hubs for the
collection of waste and delivery of linen, meals and vital medical supplies to
the wards and departments (see picture below).

The annual unitary charge payment commencing in financial year 2010/11

provides revenue Forth Health Ltd’s on-going operation and maintenance
responsibilities for the hospital until the year 2041/42 and is subject to full
‘availability’ for use of the hospital’s facilities.

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Figure 7.8. Forth Valley Hospital

7.7 PFICASE STUDY UK: M6 TOLL ROAD

M6 TOLL ROAD (formerly

Project name Birmingham Northern Relief Road
‘BNRR’)
Total capital value £485m
Operational period of contract 53 Years
Actual date of financial close 1 February 1992
Government department Department of Transport
Commissioning body Highways Agency
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Region West Midlands

Project operational? Yes
On/off balance sheet Off

Figure 7.9. M6 Toll motorway location

Brief
The M6 Toll motorway is the first toll motorway in the UK. The motorway is
a privately financed three lane motorway 43 kilometres (27 miles) in length
and provides a new strategic route to the north east of the West Midlands
conurbation (see map above).

1992, the UK government signed a concession agreement with Midlands

Expressway Limited (MEL) to first obtain planning approval and then design,
build, finance and operate the M6 Toll. Macquarie Infrastructure Group
(MIG) owns 100 per cent of the equity in MEL. The 53-year concession
agreement commenced on 26 January 2001 under which the concession
company has the exclusive right to set tolls for the entire concession period.

These procedural processes for the motorway had however started back in
1980 with the preferred route being announced in 1986. Once in contract,
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MEL made changes to this route and then progressed their scheme through the
subsequent public inquiry and planning processes, including the preparation
of an environmental impact statement to allow go ahead from the Government
in 1997. However, legal challenges against the scheme were lodged by the
Alliance against BNRR which meant the scheme was not finally cleared until
1999.

Subsequently, MEL arranged finance and tendering and negotiated the

construction contract for the project. Financial close was reached on 29
September 2000.

A joint venturebetween Carillion, Alfred McAlpine, Balfour Beatty and

AMEC (CAMBBA) commenced the 40 month construction contract in 2000
allowing the M6 Toll to open on time on 9 December 2003.

Since opening, the five millionth motorist was logged on 29 April 2004 and
the 10 millionth on 12 August 2004. The motorway now copes with 145,000
vehicles per day.

MEL now employs over 140 people to maintain the road and to keep it
running safely. MEL is a member of ASECAP. ASECAP is the European
professional association of tolled motorway companies and represents some
121 organisations that manage 23,000 kilometres of toll roads through 16
European countries.

Figure 7.10. M6 Toll motorway

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Success against scheme objectives

Objective Success
To provide through Five years on, the M6 Toll continues to provide an
traffic with an alternative route for motorists to the M6 offering
alternative to the M6 faster journey times and greater reliability
To relieve the M6 Journey times have reduced compared to before
the M6 Toll opened. Although they have increased
slightly since 2005, they have remained quicker
than before the M6 Toll opened.
To improve journey time More consistent journey times have continued to
reliability be exhibited on the M6 since the M6 Toll opened.
To reduce traffic levels Traffic on the A38, A5 and A50 has reduced
on less appropriate local compared to pre-M6 Toll opening levels; however
routes flows have started to increase on these routes
again.
To improve transport Local transport links have undoubtedly improved
links with towns to the due to the reduced journey times and increased
north and east of the reliability of journeys.
West Midlands
To become an integral The M6 Toll continues to provide an alternative
part of a continual route for motorists to the M6 along the northern
motorway corridor along part of the Birmingham Box which is included in
the backbone of the the Trans-European Road Network. Freight
country between the Celtic nations and continental Europe,
as well as from the West Midlands and other
English regions, passes through it.
To provide a safe Analysis of accident records for the M6 Toll has
motorway shown that the road has a good safety record. In
particular:
In the first five years, there was an average of 18
accidents per year on the main tolled part of the
M6 Toll; and the accident rate per million vehicle
kilometres is less than half the national average for
a motorway which is the rate seen on the parallel
M6.

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