Much of the PPP debate in Saudi Arabia has focused on the importance of shifting the public sector expenditure burden to the private sector. Wherever this has been the sole focus of a PPP programme, the responsible government has struggled to achieve value for money. If public expenditure is the only concern, it is certainly possible to pass the responsibility to the private sector, but at what long term cost? The UK government’s PFI programme of the 1990s placed insufficient emphasis on value for money. This ultimately resulted in the termination of the programme. In other jurisdictions, ill-conceived projects resulted in the public sector desperately seeking to restructure deals in an attempt to secure value for money.
A close look at Saudi Arabia’s Vision 2030 document and the National Transformation Programme indicates that value for money is a key consideration for the Kingdom. In the first of this three part series of articles on value for money in the Saudi PPP market, we look at imposing obligations on the PPP developer to monitor its own obligations under the PPP Agreement and how that can be used as one of a number of key building blocks for achieving value for money.
Defining the key obligations of a PPP developer (the “Developer”) runs to the core of structuring a successful PPP programme. A well structured PPP project should impose an obligation on the Developer to achieve certain outputs. This is typically set out in the Output Specification. The Output Specification is a distinguishing feature of PPP projects. It generally defines outcomes, without specifying the way in which those outcomes must be achieved. The advantage is that it provides scope for the Developer to introduce innovation. In the context of an airport terminal PPP project, one aspect of an Output Specification might be providing “adequate safety measures”. This contrasts with an input specification where the same safety issue might be addressed by specifying the equipment and personnel required to ensure the safe landing and take-off of aircraft.
Output Specifications can be structured in a myriad of different ways, but one simple approach is for the government procuring party (the “Procurer”) to produce a “Works Specification” for the construction phase and a “Services Specification” for the services phase. The primary objective is to ensure that both parts of the Output Specification are strictly adhered to during the course of the PPP project. Achieving this is not as easy as it may first seem and hence value for money can often be an illusive concept.
UNITARY CHARGE AND AVAILABILITY
At the heart of ensuring compliance with the Output Specification is the structuring of the remuneration of the Developer. PPP developers are typically paid on the basis of a “Unitary Charge”. The Unitary Charge is linked to the performance of the Services and compliance with the Output Specification. Payment under a PPP regime is therefore performance based and deduction mechanisms are typically adopted to penalise departures from the Output Specification. Such deductions can be linked to “availability” and/or non-compliance with key performance indicators (“KPIs”).
The concept of availability (and the associated idea of unavailability) tends to be project specific and will also differ from sector to sector. In the case of an education project, unavailability might be the failure to recruit sufficient teachers during the course of the academic year. In such a situation, there would be a formula for a deduction from the Unitary Charge depending on the extent of the failure.
In some situations, there may be poor performance on the part of the Developer that does not necessarily affect the availability of the Services. Such poor performance may have a serious impact on achieving value for money. This issue typically is addressed by incorporating a regime for KPIs. In the case of a hospital PPP project, a KPI and associated KPI penalty might be linked to the frequency of patient complaints.
Even where there is a carefully crafted Output Specification, Unitary Charge, Availability and KPI structure, there is no guarantee that the Procurer will secure value for money. These structures have been used in hundreds of PPP projects across the world and yet many have failed to obtain the policy objectives of the host government.
If value for money is to be achieved, the PPP Agreement must contain a robust regime of monitoring. This goes to the heart of a sound PPP structure. Without monitoring, there can be no enforcement and without enforcement, there is little value in an Output Specification and associated performance based Unitary Charge structure.
Like many infrastructure projects, PPP structures provide the Procurer with extensive monitoring rights. However, unlike other projects, PPP transactions, if properly structured, will ensure that obligations are imposed on the Developer to monitor its own performance and report non-compliance to the Procurer.
DEVELOPER REPORTING OBLIGATIONS
Developer monitoring can take many forms. At a minimum, the onus should be placed on the Developer to report its own non-compliance to the Procurer. Even though the Procurer will be conducting its own monitoring, it will often not be best placed to identify every Developer breach. Although Developer monitoring assumes an element of trust on the part of the Developer, the Developer will nonetheless know that breaches are likely to eventually come to the attention of the Procurer. An experienced Developer would be wise to bring its own failures to the attention of the Procurer early on and avoid the risk of termination of the PPP Agreement for continued non-reporting and repeated breaches.
Because the Output Specification covers both the construction and services phases, the Developer obligation to monitor performance and report breaches is an ongoing requirement throughout the term of the PPP Agreement.
ROOT CAUSE ANALYSIS
Where there has been non-compliance or perhaps repeated non-compliance with the Output Specifications, the Developer should be required to carry out a “Root Cause Analysis” in relation to such non-compliance. The Root Cause Analysis should be directed at remedying the non-compliance, but also ensuring that there is no future non-compliance. A well structured Root Cause Analysis regime will include the following:
- promptly reporting performance failures to the Procurer;
- identifying the cause of the failure;
- providing the Authority with a written report detailing the cause of, and procedure for correcting, the failure;
- implementing such procedure and providing to the Authority, as and to the extent requested by the Authority, status reports of the remedial efforts being undertaken with respect to such failure; and
- taking appropriate preventive measures so that the failure does not recur.
Where any element of the Output Specifications do not have a clearly defined services standard that is linked to availability or a KPI, the Developer should be required to provide the service in a timely and professional manner in accordance with Good Industry Practice. This can be generically referred to as a “Performance Standard”. Where there has been a failure by the Developer to comply with a Performance Standard and the matter has been reported to the Procurer, the Developer should be required to promptly investigate and identify the root cause of the failure and perform, in accordance with Good Industry Practice, the remediation of any such failure and take appropriate preventive measures so that the failure does not recur.
Relieving the government of the burden of public expenditure is a key component of Vision 2030. Yet government policy, as stated in Vision 2030, goes far beyond government expenditure. Value for money is recognized under Vision 2030 as critical and it can only be assumed that the Kingdom is cognizant of the PPP policy failures of other host governments. The policy enunciated in Vision 2030 is clearly a fundamentally important step in the right direction. The next step is implementation and securing value for money. This is a multi-faceted issue and Developer monitoring is a very important element.
In the next article in this three part series on value for money in the Saudi PPP market, we will be examining Procurer monitoring and how that can be best used to facilitate value for money.