PPP Contract Management / Q&A
Periodic reviews in PPP contracts
Considering the importance and purpose of long-term/continued contracts of Concession Agreements, i would like to know: 1. Which Countries adopt the methodology of Periodic Reviews in Concession Agreements (PPP's)? (Hint: I have seen that UK adopts the method in the study case of HS1 - High Speed 1- http://orr.gov.uk/rail/economic-regulation/high-speed-1/hs1-periodic-reviews-and-access-charges-reviews/hs1-periodic-review-2019.) 2. What is the scope and limits for this revision? 3. How does the periodic review occur and what does it normally imply towards the parties of the contract?
There are two main ways in which private participation in infrastructure takes place. In PPPs, the focus of this tool, efficiency is driven by competition for the PPP contract, while in the Regulated Asset Base model, an economic regulator sets incentives at periodic reviews to drive ongoing efficiency in the provision of infrastructure. In the UK the Regulated Asset Base model is used in a number of sectors; for example the water regulator carries out a review of price limits every five years. This type of “periodic review” is not a common occurrence in PPPs, as it is not a fundamental element of the model itself.
Nonetheless, there are a number of ways in which PPP projects are reviewed periodically. These are generally related to a review of the Project Company’s revenue, for example through a review of level of tolls on a highway project. This type of review is normally anticipated in the PPP contract, and is based on a limited number of variables (for example to take into account a change in inflation). Another way in which a review may take place is via benchmarking, where the Project Company is required to benchmark certain costs during the operation & maintenance phase, such as insurance. The frequency of various periodic reviews referred to above is agreed by the parties to the contract and generally varies between projects. Best practice for managing this process is the same as for managing a PPP contract more broadly, and Procuring Authorities should use the mechanisms available in the contract to ensure value for money is maintained. In addition, the procuring authorities should also exercise its rights to audit the project company’s and/or operator’s procedures for delivering their obligations related to for example: fare collection, fare evasion, maintenance renewals, safety issues, etc.
Another example of a type of review is via economic rebalancing, which is an example of modifying the financial conditions that were agreed as part of the original contract, with the intention of restoring the original economic equilibrium of the PPP contract. These provisions are specific to certain civil law jurisdictions, for example in Latin America, and the rebalancing itself can be implemented through a range of mechanisms.
It should be noted that the primary reason for carrying out the types of review described here is to take into account risks or opportunities which have materialised, and these reviews are generally stipulated in the PPP contract. However, it is also recommended that the Procuring Authority carries out periodic reviews or assessments of the PPP contract. This should aim to identify any changes required by a changing environment, and has the potential to lead to a renegotiation being initiated by the Procuring Authority. For further information, see Chapter 4 of the PPP Contract Management Tool on Renegotiation.
Your question makes a specific reference to HS1. HS1 is a 30-year concession (and hence a PPP under our broad definition) which does have periodic reviews, however this is a unique situation, as it is the only example of privatised track infrastructure in the UK, and the approach of the regulator is more analogous to the Regulated Asset Base model. When it set up the concession for HS1, the Government provided the Office of Rail and Road (ORR) with a role in relation to the periodic review of costs and charges. The Concession Agreement sets out the purpose of and the process for conducting periodic reviews. Each periodic review covers a five year control period. The 2014 Periodic Review (PR14) is the first periodic review. It covers the period from 1 April 2015 to 31 March 2020.
For further information on periodic reviews of regulated industries, we recommend referring to the relevant UK regulators, for example the Office for Water (https://www.ofwat.gov.uk/regulated-companies/price-review), which has substantial information available on the scope and processes of its reviews.
Response from Turner & Townsend