… and carrots for all

If parties to a public–private project struggle to partner effectively during the bid period, the resulting costs make projects unattractive for the parties and their advisers alike. Negotiations can be strained and protracted because of public sector paranoia over being held to ransom by the private sector, and private sector bullishness to achieve a good deal. The subsequent costs are particularly marked in the areas of legal documentation and design development.

But we must recognise the limitations of contract standardisation for private finance projects. For one thing, it is no good calling something standard if it is not accepted by the banking industry.

In truth, the way standard contracts develop has meant that there is a proliferation of guidance for them, which can be exploited in any non-partnering environment. The result, all too often, is a breakdown of trust, protracted negotiation and increased costs.

In addition, project-specific issues will always need dialogue and the parties need to be flexible and confident enough to make the necessary amendments to standard contracts. A partnering approach is always vital.

Importantly, standard contract structures in PPPs and PFIs do not cover the bid-to-financial close phase. So where do we start with partnering during this period, and what does it mean? There are two essential characteristics. First, the project parties need to be open and realistic with each other about the responsibilities that each owes to bring the project to financial close.

We need a timetable that means something, and highlights the inputs and responsibilities of all key parties: public sector client, special purpose vehicle and subcontractors. In practice, the public sector will not be interested until the appointment of a preferred bidder. However, there is nothing to stop the timetable applying before that date, to nail down subcontractors prices, scope, design development, and cooperation.

There must be real incentives for the parties to comply with the timetable. These incentives can be whatever the project parties decide in the spirit of partnering, but typically they can include the following:

• If a subcontractor causes delay, then the date to which their bid price is fixed could be extended.
  
• A delay by the SPV could lead to some limited sharing of financial model contingencies.
  
• A delay by the public sector could link to an increase in price to reflect the reasonable cost of the delay. This encourages the public sector to create its own contingency to cover such a possibility – and why not?

This approach is of real benefit to the project as a whole and a selling point to a potential public sector client. The process to financial close is clearer, with defined roles and responsibilities following on from a more rigorous analysis of bid risk and the pricing of contingencies. This method of working together sets the template for a partnering relationship that will endure for some time. It also gives advisers confidence to give fee quotes that will stick.

Now to the second essential characteristic: the project parties should ensure that project teams have the right qualities to bring the project to close. This is a function of personality, experience, training and internal organisation. In particular, the project directors on both sides should be fully empowered by their respective organisations to make decisions on that project. On the public sector side, this means a project director having influence over key user groups. On the private sector side, this means the project director having real influence over key subcontractors. These matters are fully tested when using a project partnering timetable. When investigating the integrity of the timetable, parties are put to task as to whether they can deliver. If they cannot, it will become obvious.