November 25, 2014|Carter Templeton
BY DAVID BAXTER
Director, Institute for Public Private Partnerships
SETH W. MILLER GABRIEL
P3 Advisor, Institute for Public Private Partnerships
“Why do you want this project?” and “What do you what from your private sector partner?” are the two questions we ask each of our training participants when they state they are ready for a public-private partnership (P3) for any infrastructure sector, including transport. Knowing what the public sector sponsor of a P3 wants from this complex relationship is the critical first step to any successful P3. Without an understanding of goals, it will be impossible to match the goals and expectations of partner organizations and the P3 project is doomed to failure.
On paper, a P3 is nothing more an elaborate contract between two parties – generally a public sector authority and a consortium of private firms working together under a different set of contractual agreements as a ‘special purpose vehicle’. In reality, a P3 is a long-term relationship not too dissimilar to a marriage, with shared risks and shared rewards. Also similar to a marriage, is the need for synchronizing expectations and desired outcomes for the full life cycle of the agreement… only in a P3 ‘’till death do you part’ could be 99 years.
How can managing expectations result from knowing what outcomes you want from a project, a P3 or otherwise? With regard to the first question, is it really a new road bridge that elected officials, transportation planner and the public really want? Or is it a vehicle for economic growth in an area with limited road connectivity? Is it increased capacity for new freight rail traffic that regional leaders are asking for, or is it a way to maintain throughput from the deep water port that supports thousands of jobs? Once you know what you really want from a project, it is time to find the right private partner.
The procurement process is where the true management of expectations begins for the public sector. This is now when the question What do you what from your private sector partner? needs to be asked and answered. Beyond project delivery and establishing the project’s goals, the public sponsor needs to find a private partner that can also provide the public with the additional benefits that can be achieved through a P3. The public should want more than just a new road from the private sector. The public should require a private partner to do more, and that ‘doing more’ should come in the framework of mitigation of risks. Risk management is what the public sector really wants from its private partner.
To assign risks correctly to the private partner, the public sector—with input from stakeholders—must first identify the project risks. Risk identification comes from the careful review of the project in the form of a feasibility study. Within the feasibility study some of the project’s carefully identified risks should be listed and placed in the phase of the project in which they are most likely to present. Below is a useful chart that IP3 has used for risk identification training exercises; while not a universal list of all possible project risk, it is a good place to start.
This method of risk identification allows the public sector to track risk throughout the project life cycle, to find the nature of the risk, to plan mitigation strategies and to state desired outcomes. The critical item for matching the public and private expectations lies in the ‘responsible party’ column: who will be managing which risks? This is the base for achieving each party’s expectations for the partnership and why the correct risk assignment is so important to a successful P3.
At this point, the public sector should know what it truly wants from the proposed P3 project, and should also know what to expect from the private sector partner under the project contract. Before beginning the procurement process to find the perfect private partner however, those in the public sector need to make sure they have included risk assessment results and manageable mitigations. These risks – or expectations – must be aligned in the procurement from beginning to end. Here are three suggestions for P3 contract management that will help mitigate risks and help to make sure that each party is sharing the same expectations and responsibilities:
- Strategic Contract Management: Both the public and private sector partners must avoid behaviors that will damage the project and adopt internal strategies for mitigating the risks that they each have been assigned;
- Partnering and Cooperation: The P3 agreement should be a relationship, not just a document, that allows for the two co-equal parties to interface to address when risks arise; cooperation and open communication will prevent many identified risks from becoming contract events; and,
- Contractual Enforcement of Risk Assignment: The public sector must have the ability to enforce the agreement and ensure that the private sector mitigates risks they have accepted.
P3 risk and expectations management requires building a project framework that is focused on directing responsibility of balance risks as prescribed in the contract to the party that can best manage the risk. It also requires the institutional capacity needed to implement the risk management, monitoring and mitigation – this capacity must reside with the public sector throughout the life of the project.
This stark reality leads to the third question that a public authority must ask itself before beginning the P3 process: “Are you ready to monitory this project for the full term?” If not, it does not matter if there is a desire outcome and aligned goals because without the ability to monitor the project’s life cycle, the project will not be kept on track and the chance of failure is high.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of The Eno Center for Transportation.
David Baxter is Director for the Institute for Public Private Partnerships. He is an experienced socio-economist and infrastructure planner (water, energy, and transportation) with 25 years of focused work in developing countries.
Seth W. Miller Gabriel is a recognized expert in the Public-Private Partnerships (P3) field. As one of IP3’s P3 Advisor and International Consultants, Seth leads the efforts to increase the consulting market share and training activities in the growing North American market, as well as providing leadership in global P3 activities.
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