As Figure 1 (in section 2.2) demonstrates, a PPP is not a simple two-party, 'principal and contractor' arrangement. Rather, there are five separate private sector roles with a significant financial interest in the project. Each role has different interests, rights and obligations in relation to the project, so the commercial interests of the private sector parties are not aligned. Further, most roles, such as the D&C Joint Venture, the Equity Investors and the Debt Financiers typically comprise several different companies, each with its own unique objectives.
As a general rule, before the SPV can agree to any changes to its PPP contract with the government, the SPV must first obtain the agreement of its Equity Investors, its Debt Financiers, the D&C Joint Venture and the Operator, if the change to the PPP contract will increase the obligations or otherwise adversely affect the interests of these parties.
Negotiating a deal that enables the SPV to obtain the agreement of all of these parties is a major challenge for any government that wishes to extend or otherwise make a significant change to a PPP contract after it is signed.
This is the primary reason why PPP contracts are less flexible than more traditional contracting methods. The involvement of private sector finance significantly constrains the ability of government to make changes to the PPP arrangement after it has been signed.
Another reason PPP contracts are less flexible than more traditional contracting methodologies is their long term nature. The long term is driven by a desire to incorporate a fixed price operation and maintenance period of sufficient length to motivate the SPV to optimise the trade-off between lower design and construction costs resulting in higher operating and maintenance costs. Each of the PPP contracts considered in this paper has an operation phase of at least 15 years, on top of the construction phase. Although 15 years is considerably shorter than the 30+ year term associated with most PPP contracts, it still means the option of simply waiting for the current contract to expire and then going out to tender with a new contract incorporating the desired changes won't be available to government until late in the contract term.