7.1 Key elements of effective contract management
The long life of assets in public utility infrastructure sectors (water and sanitation, energy, transport and telecom), as well as their specificity, the capital intensity, etc. make particularly relevant the impossibility of designing "complete contracts" , which makes the settlement of disputes in court more difficult.81
This impossibility calls for the need to have a contract management strategy to help dealing with changes in circumstances and non contracted events or situations. An efficient contract management will help dealing with different type of problems. Adapting the contract to changes in technology or demand conditions is the first task to consider. Maximizing Value for Money and preserving the contract equilibrium and risk allocation are the two central considerations in this context.
Protecting users, particularly in the cases when the service is delivered by a monopolist is also a main concern of contract management. In many cases this particular goal is entrusted to a separate regulatory agency. When dealing with public utility infrastructure sectors, a common practice has been transferring the responsibility for the control and supervision of the contract's operation stage to an independent regulator, with powers to set prices and oversee contract compliance by the private firm. In some cases the regulator is also entrusted with carrying out a due process to solve issues and procedures not provided for in the contracts and to settle the disputes between the parties.
Therefore, PPP contracts in such sectors evidence a special feature which relates to the institutional breaking-point that takes place upon the beginning of the operation stage.
This is the main difference of PPPs in public utility infrastructure with PPPs in other sectors (hospitals, schools, etc.), where the existence of competition makes it unnecessary for the enforcement authority to set detailed pricing rules to govern the contract. The natural monopoly nature associated to public utility infrastructure sectors causes the relationship between the parties to the contract to be more extended, thus generating a second particular feature of PPP contracts in these sectors.
Nonetheless, although that institutional breaking-point is a special characteristic in most public utility infrastructure sectors of most of the countries, it is also worth mentioning that there are other institutional alternatives to control and supervise PPP contract during the operation stage.
In many situations, during the PPP stages previous to the signing of the contract, the institutional responsibilities are borne by special PPP units specifically created for such purposes.
In many countries there exist the so-called PPP units (Error! Reference source not ound.), with specific functions set forth by law, which mainly act during PPP contracts' design and promotion stages. Although they may sometimes act during the supervision stage, they are generally created to promote the benefits of PPPs and to act as information, guidance and advisory centers. The advisory support is usually related to the design of contracts and procedures to identify, assess and complete potential PPP projects. In addition, these units can be a source of human resources for the government as well as of financial resources to fund the advising costs.82
Table 1 : PPP Units
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| Resource centre | PPP | Intensive | Role as | Role in | De jure or | |
| Andhra Pradesh, India: AP Infrastructure Authority |
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| British Columbia, Canada: Partnerships BC |
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| Gujarat, India: Gujarat Infrastructure Development Board |
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| Ireland: National Development Finance Agency | ― e | ― e |
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| Italy: Project Finance Unit |
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| Netherlands: PPP Knowledge Center |
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| Philippines: BOT Center |
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| South Africa: PPP Unit, National Treasury |
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| United Kingdom: Partnerships UK |
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| Victoria, Australia: Partnerships Victoria |
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| a. Funding far consultants working with the line department or local government. b. Involves greater responsibility than for an adviser and fees based on some measure of performance (such is closing of a deal). c. All PPPs must be referred to the state's Infrastructure and Investment Department, which may then refer them to the AP Infrastructure Authority for clearance. d. Contract management role can be requested by clients (line departments and local governments). e. The central PPP unit provides general guidance and policy material. f. Gives project-specific advice and carries out the procurement of PPPs in health, justice, and education. Line agencies are responsible for procurement in other sectors. g. Plays a role in approval through membership in the Investment Coordination Committee. h. Prepares a report for each local government Private Finance Initiative project that goes to an interdepartmental committee for approval i. Monitors contract management by line agencies and gets involved where major issues arise. | |||||||
Source: Mark Dutz, Clive Harris, Inderbir Dhingra, and Chris Shugart, "Public Private Partnership Units. What are they and what do they do?" Public policy for the private sector. Note N° 311. September 2006.
Irrespective of the existence of these PPP units, in these countries, when talking about public utility infrastructure, upon commencement of the operation stage, the oversight duty is usually entrusted with a regulatory agency and, in some cases the PPP unit may cooperate during this stage providing advisory support (see Error! Reference source ot found. for the Brazilian experience in this regard).
BOX 1 : UNITS in Brazil
| The Economic Advisory Board of the Ministry of Planning, Budget and Management - MP has a multidisciplinary team (PPP Unit) composed of sectoral specialists and professionals with expertise in concessions and Public Private Partnership - PPP globally. The mission of the Brazilian PPP Unit is to operate as a center of excellence in Public Private Partnership for the dissemination of knowledge of the methodology and the appropriate legal framework; the design of contracts and standardized bidding processes; guidance for the performance of technical economic-financial and legal feasibility studies of the sector entities that intend to execute PPP contracts. The Unit also has the role of preparing a favorable environment for the development of PPP in Brazil, in relation to: a) regulation of the PPP law; b) management of the studies of the first projects to be put out to tender under the PPP modality; c) promotion of training; d) disclosure of information on the oversight of contracts. The Brazilian PPP Unit is presently devoted to the development of the first projects to be put out to tender pursuant to the new modality regulated by Law No. 11,079 of 2004 and its main objective, in the medium run, is to disseminate the expertise among the sector Ministries on the standardization of projects, bidding calls and PPP contracts. The Brazilian PPP Unit is divided into three teams: legal and regulatory powers, administrative and institutional management and strategic investments. The Decree No. 5,385 of 2005, created the Federal Public Private Partnership Management Committee -CPG- with the following duties: 1. To define the priority services to be executed under the PPP regime; 2. To define the criteria that will define the analysis of convenience and opportunity of the procurement under the PPP regime; 3. To discipline the procedures for the execution of PPP contracts and approve its amendments; 4. To authorize the opening of the bidding procedures; 5. To approve bidding calls, contracts and their amendments; 6. To assess and approve the half-yearly reports on the execution of PPP contracts, submitted by Ministries and Regulatory Agencies, in their areas of scope; 7. To prepare and submit to the National Congress and the Union's Court of Accounts (TUC) an annual report on the performance of PPP contracts; 8. To approve the Public Private Partnership plan, support and assess its execution; 9. To propose the edition of rules on the presentation of PPP projects; 10. To establish PPP projects' procedures and requirements as well as the respective calls for biddings, subject to the analysis of Ministries and Regulatory Agencies: 11. To establish standard calls for bids and PPP contracts, as well as the minimum technical requirements necessary for their approval; 12. To establish the basic procedures for the follow-up and periodic evaluation of PPP contracts; 13. To prepare internal rules and regulations; 14. To issue the resolutions necessary for the exercise of its powers. Law No. 11,079 sets forth that it falls within the scope of the Ministries and Regulatory Agencies, as appropriate, the duty to support and supervise public private partnership contracts. Moreover, the law also provides that the Ministries and Regulatory Agencies shall file half-yearly reports on the execution of PPP contracts with the CGP. These reports shall be the principal source of information for the preparation of the annual report on the performance of PPP contracts that the CGP, pursuant to item 7 of the list of duties, has to submit the TCU. In effect, and as it arises from the INSTRUÇÃO NORMATIVA TCU No. 52, the responsibility for the supervision of Public Private Partnership contracts lies with the Federal Granting Office or the regulatory agency. Specifically, Section II provides that such institutions are responsible for the oversight of the contracts performance, which shall be carried out through surveys, inspections, audits and monitoring, as appropriate. |
Source: http://www.mp.gov.br/ppp/index.htm
PPP units have a limited but important role during the operational stages of the contract. In Australia for example the PPP Unit in Finance "can assist in providing advice on PPP issues, interpreting external specialist advice and guiding an agency through the PPP process. The PPP Unit acts as a central repository of know-how and experience gathered through working with other jurisdictions and agencies. It is therefore important to consult with the PPP Unit to ensure that experience can be shared and utilized across government."83
After completion of the initial stages of the PPP process, usually in charge of PPP special units, the contract management tasks of supervision and control appear in the following stages (construction, operation and maintenance) giving rise to the need of process, institutions and tools aimed at these specific objectives.
The first section examines the required resources, organizational structure and autonomy of the public overseeing body in order to adequately manage the PPP contract. In a second stage, the governance responsibilities and principles are described, in order to identify a set of general best practices in contract management. Finally, the last section emphasizes the crucial role of market testing, regulatory accounting, financial modeling, performance indicators and benchmarking for a successful information management.
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81 For a concise introduction to the theory of contracts, see Bernard Salanie, "The Economics of Contracts: A Primer." The MIT Press. Cambridge, Massachusetts. London, 1997. Chapter 7 develps the problems associated to incomplete contracts.
82 Mark Dutz, Clive Harris, Inderbir Dhingra, and Chris Shugart. "Public-Private Partnership Units. What Are They, and What Do They Do?" Public policy for the private sector. Note N° 311. September 2006.
83 Australian Government: Public Private Partnerships: Contract Management December 2006