By bundling the construction and operation and maintenance stages PPP contracts ensure that the private sector has the right incentives during the construction stage as it will be responsible for providing the service. Defects during construction will increase operation costs in the following stages therefore there are incentives for efficient construction.
Even when there is a well-designed contract, there are two arguments that justify the supervision of the physical work throughout the construction process. The first one is related to the existence of irreversible results and, therefore, the potential negative effects beyond the economic aspects have to be constantly checked. The second reason is that some characteristics of the new asset are not directly observable upon its completion.
When considering specific types of infrastructure (for example, hydroelectric power stations, nuclear power plants, water treatment plants, etc.), certainly it is impossible to change the final outcome once the infrastructure is completed, if it does not meet the expected quality requirements and standards necessary for an adequate and safe provision of the service.
For instance, the construction of a nuclear power plant entails certain requirements for a regular and safe operation. The materials, the structures and even the design must meet certain requirements and this is the reason why it is essential to supervise the work progress, although in this case, not in relation to the compliance with the terms of completion as mentioned in the previous paragraph, but in relation to architectural and design aspects. Once the work is finished, if it does not meet the aforementioned requirements, it will be unsuitable for use, and thus an important amount of resources would have been wasted.
Lack of work progress supervision, in the case of irreversible results, represents a significant risk that may cause effects beyond the economic aspects. On the other hand, if the supervision is not adequate and the infrastructure starts to operate even without meeting certain requirements, this will give rise to a very dangerous risk for all the population.
BOX 17 shows a checklist included in the Practitioners' guide to Victorias' partnerships for the supervision of projects during the construction and commissioning stages.115
BOX 17 : Construction and commissioning stages
| Matters to plan include: ■ Setting and achieving contracted milestones for development, site acquisition, construction and commissioning; ■ Ensuring that financial arrangements are in place, ready to be drawn down as required; ■ Ensuring adequate insurance coverage is obtained; ■ Setting up appropriate quality management systems and providing for their audit; ■ Ensuring that government does not inadvertently take back risks allocated to the private party (for example, by approving design changes); ■ Ensuring that any later variations to contracts do not change the risk profile; ■ Ensuring that no changes in practice or procedure occur which amount to de facto waivers or contract variations without prior consideration and approval; ■ Ensuring that any critical issues and claims by any parties are investigated and dealt with in a timely manner; ■ Establishing a contingency plan in case of service failure during the project implementation phase (if relevant) - this includes identifying any possible need to step in or take other action to ensure the project is delivered in line with the contract terms and conditions; ■ Setting up a reporting and monitoring system - this should be provided for in the contract; ■ Developing a communications plan for public relations and for communicating key changes to internal stakeholders; and ■ Planning for obtaining completion and compliance certificates. |
Source: Partnerships Victoria. Guidance Material. Practitioners' guide. March 2001.
In the supervision of the construction stage, particularly as regards the engineering and technical aspects of the project, it is very likely that specialized services are contracted out. The existence of specialized firms to develop this supervision task, the short deadlines implied (since in a typical infrastructure project, the construction stage is shorter than the operation stage) and the possibility of anticipating the aspects to be supervised are all factors associated to the mechanisms of contracting out.
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115 Partnerships Victoria. Guidance Material. Practitioners' guide. March 2001.