BALANCING CONTRACTUAL AND RELATIONAL APPROACHES FOR PPP SUCCESS - - PowerPoint PPT Presentation

PPP CONFERENCE HK 2005 1

BALANCING CONTRACTUAL AND RELATIONAL APPROACHES FOR PPP SUCCESS & SUSTAINABILITY Mohan Kumaraswamy Aaron Anvuur Motiar Rahman The University of Hong Kong

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Presentation Outline

PPP Characteristics &

Priorities

Control Mechanisms RC & PPPs RC & Sustainable

Infrastructure

Research Agenda Concluding Remarks

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PPP Projects

Characteristics

Mostly natural monopolies High stakeholder interests High Uncertainty

–

market, technology, economy, project contextual conditions

Long-term

–

and so accentuating the uncertainties

Large

–

requiring huge resource deployment

Complex

–

multiple interlocking dependencies of various aspects

Prohibitive transaction costs

–

lengthy and costly bidding process

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PPP Projects

Priorities

Maximise value capture to society

– the reason for the first ‘P’ in PPP

Obtain best quality at lowest possible cost

– another name is value for money

Demonstrate probity and accountability Ensure sustainability of service and the

environment

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Control Mechanisms

Approaches to ensure control and cooperation

Market Hierarchy Classical Contracting Trust Price, Authority & Trust

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Control Mechanisms

Market Transactions are governed by price and

sealed by contracts

Considered suitable when there

– are alternative supply sources – are low uncertainties – is low transaction frequency

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Control Mechanisms

Hierarchy Authority structures control transactions

and the allocation of resources

Authority dominates when

– there are limited supply sources – there are high uncertainties – requirements are difficult to define – frequent recontracting occurs

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Control Mechanisms

Classical contracting

PPPs share features of both mechanisms, e.g.

– many supply alternatives/outlets – high uncertainties

Price and authority are woven together to control

PPP project transactions

– competitive tendering establishes the right price – authority mechanisms are written into contracts – e.g. contractual adjustment mechanisms, guarantees

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Control Mechanisms

Classical contracting

Manipulative incentive systems designed to discourage

• pportunism and promote cooperation

–

e.g. liquidated and ascertained damages

Quality control systems & inspection arrangements

–

e.g. regulatory reviews

But these incentive/ sanctioning systems are themselves the

source of many disputes

–

focus teams on achieving incentives or avoiding punishments

High transaction costs

–

bidding costs, inspections and monitoring, renegotiations

Leading to adversarial relationships, a damaging industry

reputation, missed opportunities

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Control Mechanisms

Classical contracting

Incentives/ sanctions have limitations in

ensuring control and encouraging cooperation

But the public sector relies on these controls

– to demonstrate probity and accountability – to demonstrate value for money??

A need for cooperation & transaction cost

efficiency

– the role of trust

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Control Mechanisms

Trust Trust creates norms of obligation (i.e.

control)

– limiting behaviours, self-regulation

Trust leads to discretionary cooperation But trust begets trust, distrust begets

distrust

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Control Mechanisms

Trust

Trust is shaped by justice judgements

– fairness of decision making processes & procedures

experienced

– fairness of outcomes received – e.g. distribution of risks and rewards and contractual

adjustment procedures

Trust is dynamic

– always increasing or decreasing

Trust determines the value of guarantees and

comfort letters

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Control Mechanisms

Price, Authority and Trust

Relational Contracting (RC)

– uses formal (price & authority) and informal (trust)

mechanisms

Trust does not replace price and authority

– it complements them

When trust is high, there is less need of formal

mechanisms

– e.g. contracts can be more flexible; incomplete

RC principles underpin partnering and alliancing RC engenders proactive project delivery

– by fostering cooperation among team members with a

longer-term mindset (Figure 1)

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RC & PPPs

Role of RC in PPPs

Balancing Classical contracting Approaches (CAs) & Relational contracting Approaches (RAs) in PPPs

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RC & PPPs

RC in PPPs RC should not make PPP projects cosy

– contracts should be clear – must transfer significant performance risks

to the private sector

– perform better than the PSC – maximise the value capture to society

But there are many challenges

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RC & PPPs

RC in PPPs

Level of profits

– needs to be substantial to be passed on as lower

costs to end users

– but this may undermine public confidence in the

regulatory system

Renegotiations

– are common in PPPs – but can create the potential for opportunistic

behaviour by investors

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RC & PPPs

RC in PPPs

A comprehensive regulatory framework is

needed to demonstrate probity & accountability

– and value for money?

The need to maximise level of service to

society

All these require the exercise of discretion on

information-deficient matters

– and these decisions cannot be contracted out

There is therefore the need for BALANCE

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RC & PPPs

Balancing CAs & RAs in PPPs

Balance is required in decisions on

– e.g. risks transferred & governmental guarantees

provided

This balance should be dynamic

– e.g. to accommodate changing environmental

contingencies

Achieving this balance requires joint efforts

– trust & RC approaches Reviews of PPPs support this proposal

– successful PPPs point to the existence of these principles – PPP failures also point to the absence of these principles

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RC & Sustainable Infrastructure

Sustainability defined Sustainability Indicators An RC Driven Approach

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RC & Sustainable Infrastructure

Sustainability Defined

Sustainable Development

– the Brundtland Report 1987 – ‘development that meets the needs of the present

without compromising the ability of future generations to meet their own needs’

Sustainable infrastructure

– goes beyond green construction

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RC & Sustainable Infrastructure

Sustainability Indicators

Public Health & Safety

– including occupational health, safe working systems

Solid Waste Management

– recycling, safe disposal systems

Design

– innovation, flexibility, design-out waste,

Contractor & suppliers involvement

– durability & constructability

Resource utilisation, e.g.

– re-usability of moulds & formwork, prefabrication

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RC & Sustainable Infrastructure

An RC Driven Approach?

Inclusion of sustainability related clauses at contract

administration levels

Stakeholders sign up to a common sustainability

agenda

Trust building in RC relationships results in team

working

– underpins collaborative decision-making across project

interfaces

– results in innovation, efficiency, sustainable infrastructure

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Research Agenda

Assessment

Frameworks

Parallel Research

Thrusts

Support for Proposal

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Research Agenda

Assessment Frameworks

for Relational and Sustainability performance

– qualitative and quantitative assessments

These tools need to be

– client-, project- and country-specific

ICT-enabled frameworks and decision-

support tools

– to address the knowledge sharing & computational

dimensions

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Research Agenda

Parallel Research Thrusts

into RC & JRM

– e.g. an international survey on selecting potential

project partners for RC evaluated the importance

• f 22 factors comprising 9 technical and 13

relational factors with interesting findings

into the Sustainability Assessment of projects

– e.g. a Hong Kong based postal questionnaire

survey identified key Sustainability Indicators again with interesting findings

These and other findings will contribute to the

proposed framework

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Research Agenda

Support for Proposal

Global Reporting Initiative (GRI)

– sustainability performance reported alongside

financial performance

Innovative selection methodologies

– involving mainly non-price, relational and

sustainability criteria

Assessment of performance on technical

criteria is now common, e.g.

– PASS in Hong Kong – CONQUAS in Singapore

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Research Agenda

Support for Proposal

Assessment of past performance focuses

attention

– on developing needed capacities – ensures selection of optimal PPP teams

An integrated framework

– incorporating relational, technical and

sustainability assessment is required

– is synergistic, consistent and reliable

Research is ongoing at CICID

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Concluding Remarks

PPPs can be valuable Success in them requires a good

balance of classical and relational contracting approaches

Achieving this balance is a major

challenge, but nonetheless, surmountable

This balance is dynamic

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