The success of the PPP infrastructure projects is based, to a great extent, in the stages of design, bidding, construction, operation and maintenance. A careful allocation of risks and responsibilities in the design stage is a key factor in the creation of efficiency incentives and cost minimization. Given the strong capital intensity in these sectors, the cost of capital - defined by the risks associated to the project - is crucial for assuring sustainability and "value for money" of the projects.
The selection mechanisms of the private partner, particularly in the process of competitive bidding, are the second element towards the success of the PPP projects. A bidding process that is well designed and implemented - with a high degree of competition - is central for the selection of the most efficient partner for each project.
The long life of the infrastructure PPP projects, the political sensitivity in the sectors where these projects are developed, together with the impossibility of writing complete contracts, makes it impossible to avoid in all circumstances the emergency of problems. An active contract management, therefore, is also an essential part of a successful PPP.
The supervision of the construction, operation and maintenance stages is the fourth factor that will result in a successful PPP Project. In this stage the mechanisms and institutions that will permit a suitable relation between parties - essential to the nature of PPPs' -are needed, together with an effective control and enforcement of the contract. The latter can also be reviewed and adapted to changes in the circumstances, dynamically maximizing "value for money".
However, even if the best practices are applied in each stage, the emergence of conflict and distress situations cannot be completely avoided. The objective of this paper is to summarize the literature, review recent findings and empirical evidence on contracts under stress. At the same time, best practice approaches to PPP contracts under stress will be presented to illustrate the main conceptual and analytical points discussed in the paper. In this analysis is important to focus on both the private and the public sectors, as distress situations in PPP contracts affect the whole of the partnership.
One of the central elements in PPP projects is an efficient allocation of risks among all stakeholders. In financial theory, risk is defined as the chance that an investment's actual return will be different from expected. This includes the possibility of losing some or all of the original investment. Given that the risk is inherent to PPP projects, it is clear that under certain situations adverse scenarios will be realized, negatively affecting the project.
The situations of distress are then primarily associated to the realization of scenarios (states of nature) that will negatively affect the business development. These can be related to any of the variables that allow for risk, including exogenous variables (such as the level of demand, costs, and inputs availability, etc.) or endogenous (behavior of the subscribers to the contract).
Nevertheless, not every negative scenario will result in a distress situation. In many cases, these scenarios will result in negative effects that may be absorbed by the parties within normal ranges of business operation, without affecting the contract. In other cases conflicts associated to these scenarios may arise - particularly common in cases where risk has not been properly allocated in the contract - without resulting in a situation of contractual distress, as the conflict might be solved by the dispute settlement mechanisms provided in the contract, or the negotiation between parties.
In some cases however, situations may appear where the negative effects are of such magnitude that they cannot be absorbed by the parties or the conflicts cannot be solved under the contractual framework, giving place to a situation of distress. Even if these circumstances cannot be totally eliminated, a correct design and management of the project are essential to minimize such situations, or once realized, to minimize their impact.
When analyzing the situations of distress and their consequences, it is important to bear in mind two aspects. Firstly, the negative impact of the situations of distress in a PPP project generally goes beyond to affect other projects and in some cases the whole economy. Secondly, the nature of some of these sectors makes the government to have the ultimate responsibility in the provision of service.
These two elements give the government strong incentives to prevent and minimize the occurrence of distress situations. As a result, due care is needed when designing, implementing and supervising the PPP contracts in order to minimize not only the occurrence but also the associated negative effects. In this context is important to analyze and anticipate potential conflict situations so that appropriate interventions may be designed to prevent or mitigate the likely consequences. For example, programs may have early warning systems or may establish contingency plans in conflict situations to allow for an efficient management during extraordinary periods associated with crisis.
This document is focused on analyzing the empirical and analytical experience that will allow for a better characterization and understanding of such phenomena in order to contribute to its efficient prevention and management.