This section provides a summary of the data analysis related to disputes. The full data analysis is available in Appendix A (Data Analysis).
Contractual disputes are common in PPPs during both the construction and operational phases. The research found that a formal notice of dispute was issued by one of the contracting parties on 42 projects out of 165 PPPs studied (for which dispute data was available) which is a prevalence of 25%. There was a prevalence of 17% for dispute events occurring in the first four years after financial close. There was an approximately even split between disputes during the construction and operational phases. Construction phase disputes occurred 3.2 years after financial close on average. Operation phase disputed occurred 4.3 years after financial close. The average length of the construction phase for the projects was 3.9 years indicating that the disputes in the operations phase were occurring near the start of that phase. The prevalence of disputes during the operations phase would have potentially been higher than during construction had the study timeframe been longer and had it included projects which had completed their full contract term. The study was limited to projects that reached financial close between 2005 and 2015 (inclusive). There was only one project which had completed full operations during this period. Given the timeframe, the earliest projects in the study (i.e., those that reached financial close in 2005) have reached a maximum of 13 years after financial close.
The highest prevalence of disputes was in the transport sector, with 27 instances out of 77 projects for which data was available (35%). The energy sector came in at 16%, with 11 instances out of 68 projects for which data was available. There were four disputes found in the water and waste sectors. These numbers are too small to draw any firm conclusions on the prevalence of disputes in these sectors.
The research also indicates that asset condition upon handback is often an under-appreciated risk and there could be several handback-related disputes in the future for the projects studied.
There was a large variation in the subject matter of disputes in the sample. The research indicates that disputes often occur due to ambiguous contract drafting, misunderstandings of the intent of risks transferred and the further risks associated with the differing interpretation of bespoke and/or complex terms.
The most common reason for the Project Company to issue a dispute notice was an increase in costs for which the Project Company was seeking compensation. Some common examples from the study were increased costs due to: unexpected ground conditions; unanticipated maintenance costs for existing infrastructure; a change in scope; and revenue forecasts. These disagreements were based around how to calculate the compensation to the Project Company or the Project Company arguing that the actions of the Procuring Authority led to reduced demand.
The most common reason for the Procuring Authority to issue a dispute notice was the ongoing failure of the Project Company to meet operational requirements. Some common examples from the study came about as a result of poor road quality or a failure to meet Key Performance Indicators.
The other category of disputes which appeared were those caused by actions of a third party. This includes decisions by an environmental regulator or ongoing protests by local populations. These are worthwhile noting as a reminder that external events have the potential to cause problems if handled poorly, either before contract signature or during project delivery.
Overall, disputes caused by issues related to permitting, environmental and social impacts or land acquisition and resettlement amount to 37% of all disputes identified on the 165 projects for which data was available. If disputes due to ground conditions and various other construction delays and associated cost overruns (for which full detail on granularity of causes was not available) are added to this category then the overall prevalence of disputes due to site conditions, permits and or approvals, social issues and land acquisition amounts to 63%.
The majority of projects investigated in the study have defined dispute resolution mechanisms (78 projects out of 115 for which data was available, i.e., 68%). The prevalence of each type of mechanism is shown in Table 1 below.
Many projects were able to solve their issues using the earlier escalation mechanisms stipulated in the PPP contract. An example of this is illustrated in the Central Berkshire Waste Case Study. Multiple projects which were investigated as part of the data collection process, however, had no dispute resolution mechanisms detailed in the PPP contract (as common in some civil law jurisdictions) and consequently disputes were escalated to the relevant court.
A preferred method for project parties is to pursue settlements through facilitated discussion and mediation. This is done to avoid progressing detailed claims on a winner takes all basis, such as through court proceedings or arbitration. A private, collaborative approach enables parties to reach amicable settlement where both parties compromise and thereby also avoid expensive and potentially acrimonious formal dispute resolution mechanisms which may damage the parties’ working relationship. This process may also allow discussion and exploration of the different methods of financial compensation and funding available through the various payment models in place. The data showed only 9% of disputes are settled by mediation. However, this is likely skewed since mediation proceedings are typically confidential and so data is less accessible.
Although many disputes in PPP transactions are resolved before they reach court or arbitration, the data indicates that as high as 65% of disputes are still settled through court proceedings or arbitration. This data may also be skewed as there is typically more data available on higher profile arbitration and court proceedings.