Changing external advisors at key moments may create additional risks to a project.
The project has highlighted the importance of keeping the same key staff and advisors for a long period of time wherever possible, especially on long-term and complex contracts such as PPPs. A Procuring Authority will almost always rely on external advisors on technical, legal and financial issues in complex transactions, and changing the advisors part way through the project, particularly at key phases, creates additional risks and should be avoided where possible. In this example, the Procuring Authority was required by central government policies to retender advisory contracts, which resulted in a change of some of its advisors.
A strong relationship between the Procuring Authority, the Project Company and other key stakeholders can help to mitigate the potential impacts of new issues.
The strength of the relationship between the Procuring Authority, the Project Company and Hitachi allowed the Procuring Authority to deal with challenges caused by external factors, such as delays in the electrification of the rail line. In this case, a collaborative approach combined with a payment mechanism which incentivised the private partner to deliver the trains as quickly as possible allowed the track electrification issues to be addressed with minimal delay to the project itself. This was also helped by the drive and commitment of the Procuring Authority team's leadership, which, in this case, was vital to overcoming challenges.
Resourcing is required to manage all relevant stakeholders, particularly where there are complex interfaces between multiple parties.
The effort required to manage a range of stakeholders should not be underestimated, particularly in a multi-faceted environment such as the UK rail industry. In this case, the process of managing two Train Operators during the design and manufacturing phase was more challenging than anticipated, as it required additional effort and resources to balance the desires of two different operators which were not always aligned.
Risks related to third parties with which the Project Company does not have a direct agreement will typically be retained by the Procuring Authority, which means it will have to manage those third parties.
The electrification of the Great Western Main Line and the works required under the project were both independent and interdependent projects, and at the time of signing the PPP contract, Network Rail was an independent company with which the Project Company did not have a relevant, direct agreement. The Project Company and the Procuring Authority agreed that the Procuring Authority should retain the risk for electrification delays caused by Network Rail. Network Rail was reclassified as an arm's length public body in 2014, which means that it retains operational independence but the board of directors reports to the UK Secretary of State for the Department for Transport. While this change now gives the Department for Transport some additional influence over Network Rail's performance, management of Network Rail's performance to deliver on time remained a risk for the Procuring Authority. The delays and costs caused by the delay in electrification demonstrate the impact third parties can have on the overall programme of works. The complexities and unique features of the UK rail industry led to the eventual materialisation of this risk.
Where Procuring Authorities can share in a potential refinancing gain with the Project Company, they should be mindful of potential opportunities in the financial markets as they may lead to substantial benefits for the Procuring Authority.
Refinancing can sometimes be used to extract value and generate savings from a project, and it is common in advanced PPP markets for PPP contracts to allow the Procuring Authority to request refinancing and share in the Project Company's savings. In order to do so, the Procuring Authority must have the necessary expertise to recognise that an opportunity exists in the financial markets, and to carry out the process quickly enough to take advantage of market conditions. Refinancing the project resulted in substantial benefit for the Procuring Authority.
Variation provisions in the PPP contracts should be workable and not overly complex. There are also times where the Procuring Authority should adopt a flexible approach to facilitate delivery of the broader benefits of the project.
The Intercity Express Programme included a concept of "contemplated variations", which defines a process for one party to request a variation should certain circumstances arise. The concept was designed to simplify the process in agreeing changes where a certain level of agreement of likely changes was understood between the parties at the time of signing the PPP contract. In this case, the circumstances were more complex than anticipated, with electrification delays being much greater than what would have reasonably been expected. This meant the "contemplated variations" clauses weren't completely helpful, and the Procuring Authority decided to adopt a flexible approach.