CHAPTER 5 DISPUTE RESOLUTION FRAMEWORK FOR INFRASTRUCTURE PPPs
5.4. Proactive DR
Most of the interview and focus group participants of this study emphasised that the key to resolving disputes in infrastructure PPPs is to address issues proactively before they advance into disputes. This has been termed as proactive DR in this framework and some guidelines on approaching it are provided below based on the data obtained from this research.
5.4.1. Considerations in selecting the PPP model
The motivation behind choosing the PPP model over other delivery models was cited as a source of disputes on some infrastructure PPP projects especially between the public partner and SPV. This was said to be an issue where projects that were not viable for delivery through the PPP model were delivered as PPPs, resulting in several issues on the projects. There is therefore a need for the government to reassess the broader drivers of choosing the PPP model for any given project during the procurement options analysis (Department of Infrastructure and Regional Development 2008). Rather than formulating projects with the mindset that the PPP model is the best option, objective criteria that is not only suitable for the circumstances of the projects but also considers the numerous priorities of the public procurer should be used for evaluating all possible project delivery options.
While most governments tend to prioritise risk transfer and cost certainty for such projects, care should be taken to ensure that these two priorities are not assigned too much weight during the procurement options analysis. The focus should move merely from transferring risks to the private sector or utilising private sector capital, to ensuring that the most appropriate model is
selected for the long-term nature of the projects. A recommended approach is for the public procurer to recognise that a real partnership in the PPP project environment is more effective than a zero-sum game in which most of the risks are bundled onto the other party and that party
“loses” when the risks materialise.
Moreover, the common infrastructure PPP delivery model was reported as being characterised by unbalanced risk allocation with fixed contract prices lasting multiple decades. This was reported as one of the reasons why its popularity is diminishing in some countries. Therefore, there is a need to rethink the way risk transfer is handled in infrastructure PPPs and the idea that PPPs should be chosen over other delivery models because they allow for most of the risk to be transferred to the private sector.
5.4.2. PPP project structuring and DR provisions
Once the PPP project model has been selected as the most suitable means of delivering a given project, attention should be paid to structuring the PPP contract and DR provisions that will be stipulated in the different contracts within the infrastructure PPP project set-up. This would help minimise disputes that are generally associated with the way contracts are structured. There was an appeal from the practitioners that participated in this research for a need for an authority to oversee the actions of the government / public partner in the PPP project.
In terms of PPP contracts structuring, infrastructure PPP practitioners called for balanced risk allocation on infrastructure PPP projects and more sharing of risks that are related to uncertain events between the government and the private parties on the PPP project.
Where possible, thick SPVs should be used as opposed to thin SPVs because of their ability to foster better working relationships with government counterparts in addition to quicker decision making during DR.
Infrastructure PPP practitioners reported that DR provisions for these projects are often formulated as an after-thought, without consideration of practicality of the recommended DR
processes for any given dispute situation encountered on the infrastructure PPP projects.
Elements of the DR provisions that would enhance their practicality include: the time allocated for issuing a notice of dispute bearing in mind that some claims particularly linked ones require more time for review by all parties involved at each level; the time allocated for each DR process, including clear time-bound stipulations within which a dispute can progress to the subsequent DR process; and specifying the right set of individuals to represent each party when an issue arises. These individuals should understand the technicality and context of the dispute as well as have the corporate authority to make decisions on behalf of the parties they represent.
For each of the DR processes proposed in the DR provisions, the minimum requirements for the best-suited representatives for each party should be specified. It is recommended that the team of representatives have combined skills of engineering, finance, corporate administration and legal aspects.
Bearing in mind that no single stipulated DR process will fully be adequate for all dispute encountered on any single infrastructure PPP project, some flexibility in the DR provisions would allow for customised DR processes to be applied depending on the specific dispute. For instance, linked (pass-through) claims would be accorded a longer notice of dispute than claims that do not have to be passed through several parties in the infrastructure PPP project set-up.
While the time allocation for issuing notices of dispute could vary depending on the type of dispute, there was consensus from infrastructure PPP practitioners that the 5 – 10-day timeframe that is usually specified is not sufficient. As a fair balance between resolving issues quickly and encouraging more collaborative problem-solving on infrastructure PPP projects, this period should be a minimum of one month and could stretch between 3 and 6 months for linked claims requiring decision-making from multiple entities within the PPP arrangement. Six months were selected as the maximum period that can be allowed from the time an issue arises to the time by which a formal dispute should be issued because it was the upper bound of the average time that is usually spent on negotiation (Table 4.5 of this thesis). While this may sound like a lot of
time, it is much shorter than the time that is usually spent on arbitration or litigation and the possible collaborative problem-solving would cost less in addition to preserving relationships.
Additionally, DR provisions in the different contracts within each PPP project should ideally be set up so that they are cascaded from the upstream contract between the government and SPV to downstream contracts such as the contracts between the SPV and the head D&C contractor, the SPV and equity investors, the SPV and debt financiers (through loan agreements), the SPV and the O&M contractor; and the head D&C or O&M contractor and sub-contractors as well as joint venture agreements between any parties.
5.4.3. Communication, information sharing and coordination
From the onset of the project, communication channels across the entire infrastructure PPP project interface should be clear. In respect to emerging issues that could potentially grow into disputes, the project should be structured in such a way that all project parties know who to approach when specific issues arise.
Also, infrastructure PPPs are often complex projects requiring numerous engineering systems and processes to be integrated. Thus, continuous communication facilitated by a joint communication and information sharing platform would allow effective coordination and integration of parties’ efforts across the entire PPP project cycle.
The information and knowledge sharing platform would be accessible to all parties in the infrastructure PPP project. In addition to acting as a central repository for sharing information affecting project delivery, the platform would increase the parties’ awareness of one another’s problem-solving orientation. Consequently, the parties would relate in more stable and predictable ways thereby encouraging more informal approaches to DR which are often characterised by better collaboration (Steijn, Klijn and Edelenbos 2011).
Furthermore, a joint information and knowledge sharing platform would expose any issues that could potentially cause delays on the project and allow parties to act ahead of time. This would
also stop manipulative behavioural tendencies where some parties hold onto vital information in favour of their claims.
Finally, in acknowledgement of the overarching need for the government to provide the general public with accurate information regarding the construction or operation status of PPP projects, the joint information and knowledge sharing platform would house information that can easily be retrieved to draft high-level briefs which can be shared with the general public when needed.
5.4.4. Minimising escalation of issues into disputes
As a means of collaborative management of conflicts and proactive resolution of disputes, a joint DR forum (PPP Board) for collectively handling issues among all infrastructure PPP project parties is recommended. This forum would bring together all parties of the project to discuss matters on a regular basis and flag any potential issues before they get out of hand. The deliberations from this forum would be recorded in the communication, information sharing, and coordination platform discussed in Section 5.4.3 of this thesis. This would help to guide future discussions. In addition to facilitating early management of issues, the PPP Board would also be helpful in ensuring balanced representation for disputes arising from linked (or pass- through) claims in addition to significantly reducing the time spent on decision-making.
Presently, such joint DR forums commonly manifest on infrastructure PPP projects as dispute boards and common disputes deeds. However, common arrangements sometimes exclude most of the project parties. Preferably, a joint platform set up for proactive DR on a project should bring together not just the government agency and the SPV but also contractors and subcontractors, independent engineers and reviewers and all other parties involved in the delivery of the project. Where the project is concerned about the costs of maintaining the joint DR forum for the entire duration of the PPP project lifecycle, it can be set up for the D&C phase of the project given that it was found that 90% of disputes on infrastructure PPPs occur during the D&C phase.
Also, a rational project management approach is essential in proactive resolution of disputes in infrastructure PPPs. Ideally, project managers should review all claims on the basis of their merits and address issues in a timely manner before they escalate to disputes.