The most obvious way to build flexibility into a PPP contract is to include a broad power to order variations in the contract, similar to the variation power found in most construction contracts.
This power allows the government to direct changes to works and services that are to be provided under the contract, on the basis that government will compensate the SPV for any additional costs or loss of revenue arising from the change.
However, the law ordinarily implies a limitation of reasonableness on this power. The courts have said that extent of variations ordered must be reasonable having regard to the extent of the additional work, the time at which it is ordered, and any changes in circumstances since the date of the contract.14 The courts have also said that the changes cannot go beyond what the parties ought reasonably to have contemplated at the time the contract was signed.15
Accordingly, a normal contractual power to order variations would not permit a government to direct the SPV to build or operate a significant extension to a railway system.
But like all implied terms, this implied limitation of reasonableness can be over-ridden by clear words to the contrary. Accordingly, if the PPP contract clearly states that the government can direct the SPV to build and operate a significant extension to a railway, the courts will give effect to this.
This explains why the variation power in the Canberra light rail PPP contract expressly permits the ACT Government to direct the SPV to build, operate and/or maintain all or part of an extension to Canberra light rail system. It also explains the inclusion of similar powers in the Sydney light rail PPP contract.
But having an express power to order variations of this nature only gets you so far. The real challenge for government is getting certainty and value for money on the price and other consequences of exercising the power.
It is usually not possible to obtain a fixed price for the construction, operation and maintenance of a potential extension as part of the competitive bidding process for the original PPP contract, as government does not know, at the time when bids are submitted, exactly what it wants in relation to the extension, or when it will require it.
It may be possible to secure fixed prices for certain elements of the extension, such as the supply of extra trains. This was achieved on each of the projects considered in this paper.
However, there will be many significant elements for which this won't be possible, such as the operation and maintenance of the extra trains and the extended network. The pricing for these elements can only be agreed or determined once the scope of the work is known.
For these elements, the best government can get is:
• a commitment from the SPV to negotiate the price and other consequences after government has worked out what it wants; and
• a right to have the price and other consequences determined by an independent expert if the parties can't reach agreement.
Whilst the right to have the price and other consequences determined by an expert in the event the parties can't reach agreement seems a reasonable solution, it would be high risk for government to order the variation before the price is agreed or determined, given the massive costs involved and the possibility that the price determined by the expert could be many millions of dollars different to what government expected.
On some projects, such as Sydney light rail,16 government also has the option of waiting for the expert's determination before making a final decision on whether to proceed with the variation. But other projects, such as Canberra light rail,17 have no such option.
Even where the option of waiting for the expert's determination before making a final decision does exist, it is unlikely to be an attractive pathway for government, given the additional time involved, and the damage that the dispute resolution process could cause to the parties' long-term relationship.
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14 Wegan Constructions Pty Ltd v Wadonga Sewerage Authority [1978] VR 67;
15 Bush v The Trustee of the Town & Harbour of Whitehaven (1988) 52 JB 392.
16 Sydney Light Rail Project Deed, clause 29.12
17 Capital Metro Project Agreement, clause 33.