A number of recent and ongoing Australian PPP projects have and continue to face significant delays and financial distress. Notable examples include Victoria’s Ararat Prison and Desalination Plant projects. This sort of distress on PPP projects invariably leads to disputes and is, as a result, very damaging both for the individual projects and for the future of major public infrastructure projects more generally.
To assist in avoiding problems leading to disputes, we believe that governments should consider including dispute boards (DBs) on PPPs. For a number of years DBs have been used successfully in major projects in Queensland and NSW1. In our view, DBs could also be helpful for PPPs, with the appropriate modifications to cater for the complex structure of these projects. Recently, this view has received support from the chair of Infrastructure NSW, Nick Greiner2.
In this article, we briefly explore how DBs could be used on PPP projects, including what DB models could be appropriate in a PPP context.
What are DBs?
A DB (also known as a “dispute resolution board” or “dispute avoidance board”) is a panel of one or three independent experts who have been engaged by the contracting parties to oversee the execution of the project. Its primary function is to prevent disputes, or where this is not possible at least assist the parties to achieve a quick, cost-effective and acceptable resolution. It does this by involving the relevant panel at an early stage, as real project participants and then ensuring appropriate engagement among the parties at an early stage when issues arise. DBs are particularly useful for projects which are complex, high risk or high profile. For this reason they are, at least in theory, well suited for large PPP projects.
Much has been written on the benefits of DBs3, so this article will not repeat those benefits apart from noting the overwhelming evidence that DBs reduce the risk of dispute. However, it is important to note that DBs are intended to change the parties’ behaviour in a positive way, but they do not change the risk allocation between the parties. DBs are not another form of dispute resolution, but rather a structure put in place within a contracting model to actually deal with issues as they arise and to actively prevent conflicts from ever resulting in disputes.
How to use DBs in PPPs
In our opinion, the great benefit DBs would bring to PPP projects is their ability to encourage greater communication and collaborative behaviour between the parties without changing the commercial risk allocation and the contractual separation between the parties. Those who have lived through a distressed PPP project will have observed the lack of direct and open communication between the parties, particularly between the State entity and the builder. In our experience it is this communication which is needed to resolve issues quickly as they arise.
Key to government take up of DBs on PPPs is the preservation of its contractual separation from the builder and facilities management provider to ensure that the project company retains sole contractual responsibility for the design, construction, maintenance and financing of the project.
Accordingly, we propose a DB for PPPs which has a “roving” role between all of those parties and which can provide non-binding recommendations and advice at multiple levels. That is, one DB will sit across the entire PPP project and communicate with the government party, the project company, the builder and the services provider. We explore three key aspects of this proposed model in further detail below.
The nature of the DB’s “roving” role
The DB’s roving role would allow it to meet on a regular basis with representatives of each stakeholder at both a site operational level and a senior management level. At a minimum, the DB would hold formal meetings every three months. It would also receive copies of the monthly reports from the private parties as required under their respective contracts, which would typically include registers of notices, claims and disputes.
A party could also have private sessions with the DB to discuss any issue in confidence, without the content of those discussions being passed on to any other party. Given the importance of probity issues on PPP projects, appropriate probity obligations will need to be imposed on the panel.
DB will provide non-binding advice and recommendations
As the DB will be fully up-to-date with the issues and claims in relation to the project, it will be in an ideal position to focus the parties’ attention of the key matters to be resolved and to facilitate communication between the parties, without breaching confidences, to achieve such a resolution. It would be able to provide suggestions about ways to overcome roadblocks and suggest processes for avoiding disputes. Where a dispute cannot be avoided, if requested, the DB could hold hearings on and making non-binding recommendations in relation to disputes referred to it.
In our opinion, there are good reasons for the DB’s advice and recommendations to remain non-binding particularly within a PPP model. In particular, this will ensure that the parties communicate openly and do not assume an adversarial approach to the DB. Further, this will ensure that the DB model does not undermine the integrity of the PPP structure and risk allocation.
Appointment of members
In our view, given the complexity of PPP projects, the DB should be appointed at the start of the project and have three members. One option is that the government and project company would each choose one board member, with those members then selecting the third member. Alternatively, the builder could appoint the third member.
Another option is that the government would provide a list of acceptable DB members from which the project company and builder can select the three members. In any case, the process for appointing members must be agreed by all parties so that they all have confidence in the DB’s role and authority to give advice and recommendations.
The authors also recognise the need to avoid adding layers of cost to PPPs, as those costs will ultimately need to be added to the financial model for the project. Fortunately, DBs are typically very cost effective when used on large projects. The base cost of the DBs in Australia is between 0.1% and 0.2% of the total project cost of a project over $100 million4. It is anticipated that the cost of the DB model for PPPs proposed above would fall within that cost range.
Whilst the DB model proposed above is one way that DBs could be included in PPPs, the authors recognise that there may be several possible alternatives. Further, as DBs have not to date been used in PPPs in Australia, other aspects of the DB model will also require further consideration before DBs are included in PPPs.
Given the evidence of the success of DBs in avoiding disputes on other major project structures, we believe that including DBs in future PPP projects is one of the most readily achievable and effective ways for governments to minimise problems in PPP projects. DBs could lead to less disputes, lower costs, fewer delays and greater confidence in the PPP market, all of which could ultimately provide better project outcomes and value for money for taxpayers.
This article has touched on one possible DB model for PPPs which could encourage real, positive behavioural changes without compromising the complex risk allocation and structure of PPP projects. Of course, there may be other DB models which are appropriate for PPPs.
Given the current difficulties being encountered on a number of PPP projects in Australia, it is our opinion that the timing is right to introduce an attitude change in the way PPP projects are delivered. The use of DBs is one tool to achieve this and to restore the confidence of all stakeholders in this important method of providing important public infrastructure.