The first step in a PPP rests almost entirely with the public sector. Government officials must decide whether a project is suitable for a PPP. This is a complex decision involving both quantitative and qualitative analysis. In the United Kingdom, Her Majesty's Treasury, a unit of the national government, has developed formal guidelines to be used by local authorities in deciding on whether projects should be developed as PPPs. The recommended procedures include quantitative analysis of the potential savings based on calculations of lifecycle costs, but also take into account qualitative factors, such as the potential for private sector innovation, the degree of competitiveness in the market among potential bidders, and the potential for developing clear measures for contract performance. Under these criteria, IT projects and projects with a capital value under £20 do not represent value for money and can no longer be considered as PFI/PPP. 77
If a project is pursued, public officials must negotiate a viable contract with the private partner. One observer has aptly summarized the challenge as striking a balance between flexibility and accountability: "The ideal partnership [has] the minimum number of control mechanisms (for greater flexibility), but enough of these mechanisms strategically placed so as to insure sufficient feedback (i.e. accountability) to keep the partnership on the straight and narrow."78
The contract should include explicit mandates that require the private partner to perform some action or provide some level of service that is particularly important. For example, Cemusa is required to clean and restock its automatic public toilets daily, repair broken glass at bus shelters within 24 hours, inspect and remove graffiti and garbage twice a week, and clear a 3 foot area around street fixtures when it snows.79 Similarly, the ITR contract lays out specific timetables by which various types of maintenance must be performed and by which emergency repairs must take place. These mandates are useful in regulating areas of particular concern, but should not be so prolific as to be overly restrictive to the private partner's ability to perform. A 2001 U.K. study by the NAO found that public managers of 30 percent of projects reported no innovation while projects were in operation, which can be explained by contractors who reported that their ability to innovate was restricted by excessive regulations.80
The ways in which contract flexibility (or lack thereof) can strengthen or undermine a PPP are illustrated in two examples from the United States: Terminal Four at John F. Kennedy International Airport and California State Route 91 (SR91) Express Lanes. At the time of the terrorist attacks on September 11, 2001, John F. Kennedy International Arrivals Terminal, LLC (JFKIAT), the consortium that constructed and runs Terminal Four, had been in business for just a few months. With air travel severely reduced and airlines' profits suffering, there was an urgent need to renegotiate contracts with airlines to attract and keep tenants at the terminal. The contract permitted these individual negotiations in a way the Port Authority, the public partner, would not likely have been able to do due to public leasing regulations.81
In contrast, a lack of flexibility led to the buyout of California Private Transportation Company (CPTC) for SR91. The contract had a restrictive non-compete clause that precluded any road improvements for 1.5 miles around SR91 for the length of 30-mile tolled express lanes until 2030. This restricted the State from widening the adjacent un-tolled highway lanes. Public pressure to make improvements to the free lanes led to the dissolution of the partnership and the sale of SR91 to the Orange County Transportation Authority.82
Disagreements in interpreting the contract and on the quality of service provided are key reasons that disputes arise in partnerships.83 The near inevitability of conflicts between the partners means that dispute resolution procedures should be part of good contract design. This can be critical in some countries where private foreign investors may have doubts about the neutrality and independence of the judicial system, but it can also be relevant in advanced democracies where prolonged court cases are not desirable. Mutually agreed upon private dispute resolution procedures can be part of PPP contract design; for example, the Indiana Toll Road Lease Agreement specifically lays out procedures and timelines for resolving disputes through senior-level negotiations, mediation and, if necessary, final arbitration. In Brazil, the 2004 federal legislation authorizing PPPs explicitly permits such mechanisms.84
___________________________________________________________________________
77 HM Treasury. "Value for Money Assessment Guidance." November 2006. Available online at http://www.hm-treasury.gov.uk/media/4/4/vfm_assessmentguidance061006opt.pdf.
78 John O'Looney. "Public-Private Partnerships in Economic Development: Negotiating the Trade-off Between Flexibility and Accountability." Economic Development Review, v. 10, n. 4, fall 1992, p. 21.
79 The City of New York. "Franchise Agreement between the City of New York and Cemusa, Inc. Coordinate Street Furniture Franchise."
80 National Audit Office. "Managing the Relationship to Secure a Successful Partnership in PFI Projects." 29 November 2001. Report by the Comptroller and Auditor General. HC375 Session 2001-2002.
81 Conversation with David Kagan and Michael Sibilia at a meeting of the CBC Public-Private Partnerships Committee on March 12, 2008.
82 Government Accounting Office. Private Sector Sponsorship and Investment in Major Projects Has Been Limited. Report to Congressional Requesters. March 2004.
83 National Audit Office. "Managing the Relationship to Secure a Successful Partnership in PFI Projects." 29 November 2001. Report by the Comptroller and Auditor General. HC375 Session 2001-2002.
84 Henry G. Burnett. "Dispute Resolution under Brazil's Federal PPP Law," in Joel Moser, ed., Global Infrastructure, Volume 1, (Fulbright & Jaworski L.L.P., 2007) pp. 19-23.