A. Consider the scope of the Procuring Authority’s role in the management of the specific PPP contract

The first step for the Procuring Authority is to understand the nature of the role that it is required to play in managing the relevant PPP contract. The structure and size of the contract management team should depend on the level of involvement the Procuring Authority is required to have in the contract management activities.

The structure and size of the team will depend on several factors that should be considered on a case-by-case basis:

  • The size, geographic distribution and complexity of the project

  • The scope and complexity of the service(s) being delivered, including its sector

  • The complexity of the contractual arrangements

  • The risks that have been retained by the Procuring Authority under the PPP contract, or are inherent to the Procuring Authority irrespective of what is agreed in the PPP contract, such as social risks and counterparty risks

  • The Procuring Authority’s positive obligations under the PPP contract

There are two broad approaches to contract management which play a role in determining the size and structure of the Procuring Authority’s contract management team: active contract management and passive contract management. The appropriate approach will depend on the factors outlined above.

Active contract management

Active contract management broadly refers to the circumstance where a Procuring Authority has taken on substantial obligations and risks, and needs to be closely and actively involved in contract management activities to manage those risks.

On large or complex projects, the Procuring Authority may still need to be closely and actively involved in the contract management, even where there has been substantial risk transfer to the Project Company.

There are several aspects of PPPs that are likely to require more active contract management:

Performance monitoring. PPPs are typically based on the principle that the Project Company will be self-monitoring, and will consequently submit a large volume of regular reports to the Procuring Authority for verification and approval. The Procuring Authority must therefore have personnel with the capability and experience to understand and analyse the Project Company’s monitoring reports, and data interpretation may be resource intensive.

Stakeholder management. By their nature, PPP projects involve a vast array of inter-connecting relationships. These exist not only between the Procuring Authority and the Project Company, but also with and between other stakeholders including end users, the public, equity investors, lenders and other government departments. Adequate resourcing needs to be allocated to these relationships. On high-profile projects there is also the element of reputational risk that needs to be managed across these various relationships.

Land acquisition, enabling works and other obligations. The Procuring Authority may be responsible for enabling works, such as utility diversion, regulatory approvals or connection to interface infrastructure. The link between these activities and the Project Company’s activities may present a significant risk. The Procuring Authority may also need to manage the performance of third parties whose projects and/or activities may have a material impact on the PPP contract. For many project types, it is common for the Procuring Authority to be responsible for land acquisition and right-of-way access.

PPP contracts also often require active involvement of the Procuring Authority during the construction period (e.g. sign-off on designs, construction programs, certification of completed milestones). The Procuring Authority needs to respond quickly to avoid being responsible for Project Company delays.

Scope changes and Project Company claims. Any kind of scope change, variation or Project Company claim can have significant financial implications for the Procuring Authority, and robust systems are required to effectively manage them.

Other aspects of PPP projects that require active management by the Procuring Authority team are disputes (the data indicates that 17% of PPPs encounter a dispute in the first four years after financial close), managing renegotiations (the data indicates that 45% of PPPs are renegotiated by their tenth year after financial close) and information management, which is relevant to many other activities.

The other chapters and sections of this reference tool detail the management of the aspects described above: Section 3.1 (Managing transitions), Section 3.2 (Performance monitoring), Section 3.3 (Stakeholder management), Section 3.4 (Information management), Section 3.5 (Claims), Chapter 5 (Disputes), etc.

Passive contract management

Most PPP contracts will require a degree of active contract management.

For some PPP contracts, the Procuring Authority may be able take a more limited role in contract management, if it is exposed to a lower level of risk with less onerous contractual obligations, or if the project is smaller and less complex. For example, in some power purchase agreements (PPAs), a Procuring Authority agrees to purchase energy generated by a Project Company over a certain period of time and provides limited oversight, such as administering performance reports, tariff changes, and performing periodic audits on asset condition and financial performance.

However, even in such cases, the Procuring Authority may also be responsible for the interface with related projects, such as a transmission line for an energy asset. The Procuring Authority would then be exposed to a higher level of risk and more onerous obligations with respect to delivery of the adjoining project. This must be carefully managed and a more active approach is often required.

Example – Passive contract management in in Brazil

The energy regulator in Brazil, the National Electric Energy Agency (ANEEL) has recently signed 10 new hydroelectric plants, which have added 2,607 MW of generating capacity. Design, construction and operational requirements are the responsibility of the Project Company, which takes the energy demand risk, and hence the Procuring Authority focusses on a small number of performance indicators associated with the frequency and duration of failures in supply.

B. Base the size of the contract management team on the nature of the project and the availability of external resources

C. Ensure the Procuring Authority’s contract management team has an appropriate governance structure, and skillset and competencies required for the project

D. Plan the set-up of the contract management team before financial close

E. Centralise resources where there is a program of PPPs and benefits could be generated through synergies between different projects

F. Use external consultants where appropriate and ensure transitions between consultants are managed effectively

G. Evaluate the structure and resourcing of the contract management team on an ongoing basis and make adjustments as necessary

H. Plan for staff turnover and ensure adequate procedures are in place to manage continuity of knowledge

I. Consider setting up the contract management team in a way that mitigates the risk of a change in government or policy

Questions & Answers

View our list of previous questions and answers or submit a question to our PPP Contract Management team.