How to master a Public-Private Partnership (P3) contract

By Gary Watkins

Public-Private Partnership contracts (P3s) may have originated in the UK and developed in a number of other countries such as Australia, but no country has come close to Canada in perfecting the model. The country has reached financial close on more than 220 infrastructure projects from roads, hospitals and schools through to water treatment plants representing over C$70 billion of capital investment.  

But despite this success, for private sector organisations and their public sector counterparts entering into P3 partnerships for the first time, and even for some very experienced businesses, there are potential pitfalls that can come to light during the operational phase. The issues tend to revolve around different perceptions of the reality on the ground.

Contracts and contract management

In some cases, the original P3 contracts were poorly drafted. The language used was overly complex, and was difficult to translate into day-to-day facilities and maintenance activities. The legalese meant that both parties were unsure of their responsibilities, which caused confusion and the potential breakdown of stakeholder relationships. Survey evidence from the UK shows that the most frequent reason for disputes between public sector clients and the private partner is over the interpretation of the contract (National Audit Office 2001).

Even now, some contracts are not ‘translated’ into standard English leaving both client and service partner floundering. Having an agreed and objective interpretation of the contract is essential when dealing with complexities as they arise. An obvious solution to this is to ensure that all parties in a P3 relationship interpret each clause of the contract in a common way. This might be a lengthy process but it will save a great deal of time and trouble further down the line. A properly designed contract management framework that outlines the service outputs that the client requires, the methods for measuring and monitoring performance, and the regime under which the payment due to the private partner is determined, reinforces the sense that everyone knows what is expected of them, and by when.

Furthermore, some of the original P3 contracts failed to adequately anticipate that adjustments might need to be made to the contract to respond to the changing requirements on the ground. For example, the maintenance requirements for a hospital is unlikely to be the same in year one, as it is in year 25. Medical advances, combined with technological change in building management, would mean that the contract needs to be modified to support the environment and its users.  Having a strong relationship of trust, generated from having one version of the truth as described above, can help to ensure that any adjustments are smooth.  

Within the public sector, professionals are often over-stretched or lack the experience to manage such highly complex contracts. With a strong desire from taxpayers to ensure that their funds are being well spent, it can be challenging to demonstrate that these massive deals are delivering good value – or not.

The role of good data

Independent, transparent and auditable data is the solution to this challenge. If the public sector client has detailed and unbiased data about the operation of the contract – on the service provider’s performance on a specific range of service level agreements and key performance indicators – then they can demonstrate with certainty to the government and taxpayers that they have achieved value for money.

Within successful P3 relationships, the contract’s legal requirements are typically translated into a performance management software system that produces outputs which are clear and easily understandable by everyone. Such systems can also analyse the financial and operational impact of any changes to the contract which might be needed.  The key is for the data to be transparent (fully available and accessible to all) and auditable (recorded to enable systematic review and evaluation to determine the quality and timeliness of the services provided).

While the public sector’s requirements are typically framed in an output specification that is measured through the performance management software, which determines the correct payments to a service provider from the authority, many newer P3 relationships are going even further. Introducing an automated payment mechanism system to ensure that where the quality of service delivery falls short of that outlined in the output specification, the appropriate financial deduction can be levied on the service provider, is ensuring complete transparency.

The payment mechanism sets out the time required for repair and rectification of failures, depending on the importance of the affected area, before payment deductions are triggered. In the hospital example, a light bulb out in an operating theatre would require a much quicker rectification time than a similar issue in a storeroom. Many P3 relationships have also introduced ‘ratchet’ mechanisms, whereby recurring or widespread failures across key services lead automatically to higher deductions.

The important thing is for the deductions to incentivise good performance, and not introduce perverse incentives or unintended consequences. Poor use of payment mechanisms, for example, using them as a punitive, revenue-generating tool, rather than as a joint management tool to optimise performance, its intended purpose.

P3 contracts are complex and the pitfalls are numerous. But with a strong relationship based on trust and independent, transparent and auditable data providing one version of the truth, they can provide enormous benefit to society, improving infrastructure and service delivery and creating jobs.

Gary Watkins is CEO of Service Works Global, an international solutions provider of  Facilities, property and P3 Performance Management software.


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