This presentation by Michael BURNETT was made at the 7th Meeting on Public-Private Partnerships held on 17-18 February 2014. Find more information at http://www.oecd.org/gov/budgeting/ppp.htm

1. Maintaining value for money in the operational phase of
PPP contracts
Michael Burnett, Director, European PPP Forum, European
Institute of Public Administration, OECD meeting of Senior PPP
Officials, 18 February 2014
learning and development - consultancy - research
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EIPA 2014

2. Scope
 PPP contract management – The challenge
 PPP contract management – Common mistakes
 PPP contract execution – What can go wrong
 PPP contract execution – What to do if contracts go
wrong
 PPP contract execution – Examples of responses to
challenges
 Contract execution – Challenges in the new EU
Directives
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EIPA 2014 - www.eipa.eu

3. Introduction – Michael Burnett
 Chartered Accountant (c.20 years working in public
procurement)
 Assistant Director, KPMG
 Director, EIPA European PPP Forum (9 years)
 Member, European Commission Stakeholder Expert
Group on Public Procurement since 2012
 Member, Editorial Board, European Procurement and
PPP Law Review since 2007
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EIPA 2014 - www.eipa.eu

4. Contract management and the award process
 Clear specification of contract objectives (including
KPIs, targets for KPIs and how measured)
 Robust performance management régime to verify if
contract objectives being met
 Change protocols for planned/unforeseen change
 Contract conditions giving access to necessary
information
 Means to verify continuing value for money (VFM)
during contract
 Affordable exit strategy/enabling service continuity
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EIPA 2014 - www.eipa.eu

5. Challenges in realising procured VFM
 Deals skilfully tendered and astutely negotiated by the
public sector still have to be managed effectively:
- Maintaining procured VFM when change needed
- Combatting bargaining weakness when change
needed
- Combatting information asymmetry
- Application of performance monitoring régime
 Important to have the right resources and skills in
contract management team (economic operators will
usually have more experience)
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EIPA 2014 - www.eipa.eu

6. PPP contract management – Common mistakes
 Failure to plan contract management during
procurement phase
 The “sigh of relief” factor
 Failure to transfer procurement knowledge to contract
management team
 Inadequate contract management resources
 Poor match to required skill set (e.g. training, past
experience)
 Senior management switch off/demotivation of
contract management team
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EIPA 2014 - www.eipa.eu

7. PPP contract execution – What can go wrong (1)
Ineffective contract management is often a major cause
of difficulties in contract execution
BUT ALSO
 Procurement errors by Contracting Authority
 Demand forecast errors
 General economic shocks
 Force majeure event
 Mismanagement/under-resourcing by private partner
 Project-specific changes in economic circumstances
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EIPA 2014 - www.eipa.eu

8. PPP contract execution – What can go wrong (2)
 Legislative change (controllable/non-controllable)
 Technological change
 Professional practice change
 Public acceptance change
 Change of political control/orientation
 Collusion
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EIPA 2014 - www.eipa.eu

9. PPP Contract execution – Options if things go
wrong
 Change contract in favour of private partner (e.g.
length, scope, performance targets, payment amounts,
payment flow, shift to partial or full availability basis,
future revenue/refinancing guarantees, partial debt refinancing, hand-back terms, lower DSCRs subject to
lender approval, other risk re-acceptance etc)
 Don’t change and leave responsibility for recovery
with private partner
 Rebalance the contract on the “something for
something” principle
 Terminate the contract
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EIPA 2014 - www.eipa.eu

10. Evaluating options if things go wrong
Determine approach on case by case basis based on:
 Responsibility for specific contract issues arising
 Responsibility in original contract for risk materialising
 Partnering behaviour of private partner
 Scale of recovery needed
 Scope for change (affordable?, foreseen in contract
review clauses? legally permissible?)
 Consequences of failure for public sector
 “Balance of power”
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EIPA 2014 - www.eipa.eu

11. PPP Contract execution – Options for
rebalancing the contract
 Activate LGTT, Europe 2020 Project Bond Guarantees
or other guarantee options (if relevant)
 Portfolio/territorial re-negotiation
 Compensating adjustments by SPV (e.g. more sponsor
equity, new equity investor, acceptance of public sector
equity/board representative in SPV, future public sector
gain sharing, refinancing with gain sharing, future
enhanced monitoring/certification/audit, future
requirement for performance bond/sponsor parent
company guarantees, earlier recovery of asset, lower
user tariff, pass through of energy/insurance/sub-letting
shared savings etc)
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EIPA 2014 - www.eipa.eu

12. PPP contract execution – Examples of
responses to challenges (1)
Example 1 – NATS
 Causes of problem: General economic shock
(September 11th) and over-optimistic demand forecasts
(but NB also risks in initial financing structure of NATS)
 Nature and scale of problem:
- Project company loan covenants in danger of being breached
- Lenders threat to withdraw funding from project company
- Investors unable to provide sufficient extra finance
- Threat to functioning of UK Air Traffic Control system
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EIPA 2014 - www.eipa.eu

13. PPP contract execution – Examples of
responses to challenges (1) continued
 Result:
– Need for short-term emergency funding facility of £60m (£30
million from government, matching £30 million loan from NATS
bankers)
– Financial restructuring (BAA as new private investor invested £65
million, government capital injection of £65 million, lower overall
price cap, upside and downside volume risk sharing mechanism
through price adjustments, planned cost reductions, significant
replacement of bank debt by bond finance, less tight bank
oversight, less onerous debt covenants, tighter monitoring of
future distributions, safeguards re conflict on interest for new
shareholder, no need for government takeover)
– No major financial shocks since refinancing, no further public
finance needed and company has traded profitably in recent years
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EIPA 2014 - www.eipa.eu

14. PPP contract execution – Examples of
responses to challenges (2)
Example 2 – London Underground PPP
 Cause of problem: Ineffective contract management by
Contracting Authority and mismanagement by private
partner (but NB also contract strategy errors by
Contracting Authority)
 Nature and scale of problem (Part 1):
– One of the two private partners (Metronet) went into
administration in 2007 (after cost overspends and threat by lenders
to withdraw access to loan facilities) and the PPP Arbiter granted
only £121 million of requested interim £551 million UP increase for
2007-08
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EIPA 2014 - www.eipa.eu

15. PPP contract execution – Examples of
responses to challenges (2) continued
 Nature and scale of problem (Part 2):
– Three years later the other private partner (Tube Lines) requested
£1.3 billion for additional expenditure for upgrades required
compared to estimates of the PPP Arbiter
 Result:
– Termination of PPP and public sector takeover of Metronet and
Tube Lines contracts
– In Metronet’s case, public sector paid £1.7 billion to meet
guarantee to lenders on early termination
– In Tube Lines case, public sector paid £310 million to acquire
shares of project company and assumed £1.3 billion of project
company’s debt
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EIPA 2014 - www.eipa.eu

16. PPP Contract execution – Challenges in the new
EU Directives
 Possibility to change contracts to greater extent/more
easily and frequently to include additional works,
services or supplies (Art.72(1)(b) Public Procurement
Directive, Art.43(1)(b) Concessions Directive)
- Removal of the “unforeseen circumstances” test
- Removal of cumulative limit on total value
- No limit on number/frequency of changes
 Step-in rights for lenders unambiguous? (Art.72(1)(d)
Public Procurement Directive, Art.43(1)(d) Concessions
Directive)
 Impact of legislative provisions on number of
challenges?
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EIPA 2014 - www.eipa.eu

17. European PPP Forum
WEB SITE
http://www.eipa.eu then search for PPP
CONTACT DETAILS
Mr Michael Burnett
Director, European PPP Forum
European Institute of Public Administration
Maastricht, the Netherlands
Tel +31-43-32 96 286 E-mail: m.burnett@eipa.eu
Twitter: @eipappp
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EIPA 2014 - www.eipa.eu