balancing cas & ras for ppp success & sustainability · 2007-11-16 · ppp conference hk...

PPP CONFERENCE HK 2005 1

BALANCING CONTRACTUAL AND RELATIONAL APPROACHES FORPPP SUCCESS & SUSTAINABILITY

Mohan Kumaraswamy Aaron Anvuur

Motiar Rahman

The University of Hong Kong


Presentation Outline

PPP Characteristics & PrioritiesControl MechanismsRC & PPPsRC & Sustainable InfrastructureResearch AgendaConcluding Remarks


PPP ProjectsCharacteristics

Mostly natural monopoliesHigh stakeholder interestsHigh Uncertainty

– market, technology, economy, project contextual conditionsLong-term

– and so accentuating the uncertaintiesLarge

– requiring huge resource deploymentComplex

– multiple interlocking dependencies of various aspectsProhibitive transaction costs

– lengthy and costly bidding process


PPP ProjectsPriorities

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 accountabilityEnsure sustainability of service and the environment


Control Mechanisms

Approaches to ensure control and cooperation

Market HierarchyClassical ContractingTrustPrice, Authority & Trust


Control MechanismsMarket

Transactions are governed by price and sealed by contractsConsidered suitable when there– are alternative supply sources– are low uncertainties– is low transaction frequency


Control MechanismsHierarchy

Authority structures control transactions and the allocation of resourcesAuthority dominates when– there are limited supply sources– there are high uncertainties– requirements are difficult to define– frequent recontracting occurs


Control MechanismsClassical 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



Manipulative incentive systems designed to discourage opportunism and promote cooperation

– e.g. liquidated and ascertained damagesQuality control systems & inspection arrangements

– e.g. regulatory reviewsBut these incentive/ sanctioning systems are themselves the source of many disputes

– focus teams on achieving incentives or avoiding punishmentsHigh transaction costs

– bidding costs, inspections and monitoring, renegotiationsLeading to adversarial relationships, a damaging industry reputation, missed opportunities



Incentives/ sanctions have limitations in ensuring control and encouraging cooperationBut 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


Control MechanismsTrust

Trust creates norms of obligation (i.e. control)– limiting behaviours, self-regulationTrust leads to discretionary cooperation

But trust begets trust, distrust begets distrust


Control MechanismsTrust

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 proceduresTrust is dynamic

– always increasing or decreasingTrust determines the value of guarantees and comfort letters


Control MechanismsPrice, Authority and Trust

Relational Contracting (RC)– uses formal (price & authority) and informal (trust)

mechanismsTrust does not replace price and authority

– it complements themWhen trust is high, there is less need of formal mechanisms

– e.g. contracts can be more flexible; incompleteRC principles underpin partnering and alliancingRC engenders proactive project delivery

– by fostering cooperation among team members with a longer-term mindset (Figure 1)


RC & PPPs

Role of RC in PPPs

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


RC & PPPsRC 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


RC & PPPsRC 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 systemRenegotiations– are common in PPPs– but can create the potential for opportunistic

behaviour by investors


RC & PPPsRC in PPPs

A comprehensive regulatory framework is needed to demonstrate probity & accountability– and value for money?

The need to maximise level of service to societyAll these require the exercise of discretion on information-deficient matters– and these decisions cannot be contracted out

There is therefore the need for BALANCE


RC & PPPsBalancing CAs & RAs in PPPs

Balance is required in decisions on– e.g. risks transferred & governmental guarantees

providedThis balance should be dynamic– e.g. to accommodate changing environmental

contingenciesAchieving 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


RC & Sustainable Infrastructure

Sustainability defined

Sustainability Indicators

An RC Driven Approach


RC & Sustainable InfrastructureSustainability 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


RC & Sustainable InfrastructureSustainability 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


RC & Sustainable InfrastructureAn RC Driven Approach?

Inclusion of sustainability related clauses at contract administration levelsStakeholders sign up to a common sustainability agendaTrust building in RC relationships results in team working

– underpins collaborative decision-making across project interfaces

– results in innovation, efficiency, sustainable infrastructure


Research AgendaAssessment Frameworks

Parallel Research Thrusts

Support for Proposal


Research AgendaAssessment 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


Research AgendaParallel Research Thrusts

into RC & JRM – e.g. an international survey on selecting potential

project partners for RC evaluated the importance of 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


Research AgendaSupport for Proposal

Global Reporting Initiative (GRI)– sustainability performance reported alongside

financial performanceInnovative selection methodologies– involving mainly non-price, relational and

sustainability criteriaAssessment of performance on technical criteria is now common, e.g.– PASS in Hong Kong– CONQUAS in Singapore


Research AgendaSupport 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


Concluding Remarks

PPPs can be valuableSuccess in them requires a good balance of classical and relational contracting approachesAchieving this balance is a major challenge, but nonetheless, surmountableThis balance is dynamic

balancing cas & ras for ppp success & sustainability · 2007-11-16 · ppp conference hk...

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