Reflections on International Lessons Learnt

International best practice is based on lessons learnt by leading practitioners. The following section provides an overview of lessons learnt regarding risk and the management thereof, which laid the foundation for best practice in PPPs.

3.3.3.1 The London Underground, United Kingdom

Private sector companies (Infracos) was awarded contracts for the upgrade and rehabilitation of the London tube underground networks, and the public sector (London Underground Ltd.) was responsible for the final service delivery of the transportation to users. The issues experienced by the PPP project included incompleteness of the contract and unclear VFM, which led to legal and political challenges to the PPP agreement and excessive costs. The demand risk was borne by London Underground Ltd. (LUL). The risk of cost overruns was shared between the private party Infracos and the public party LUL. The private party was criticised for not undertaking works in an efficient and economic manner, and LUL was blamed by the private party for ‘specified rights’ to demand supplementary works for cost overruns incurred, and thus had no argument to support compensation claims. Conflict arose surrounding the compensation claims which had a significantly adverse effect on the project (Iossa et al. 2007:10-14). Controversy surrounding cost overrun, considering the economy and efficiency, could have been avoided if the contract had been designed properly and circumstances for the sharing of the cost overrun risk had been stipulated.

3.3.3.2 Channel Tunnel Rail Link, United Kingdom

The Channel Tunnel Rail Link (CTRL) was developed to establish a high-speed rail link between the Channel Tunnel and London. The design, construction and infrastructure risks were allocated to the private partner, and revenue risks were also allocated to the private partner, but with safeguards. The project was delivered on time and within budget and there was effective control over the design and construction. However, there was little progress in developing feeder train services and the commuter numbers were lower

84 than forecasted. Nonetheless, the PPP showed remarkable commitment from government (EU 2004:119-123).

Lessons learnt include:

 PPPs can deliver on time and within budget.

 Risks should be sufficiently conceptualised and managed. The patronage risk was not sufficiently conceptualised. A reason for the occurrence of the patronage risk, could be that the supporting networks were not integrated and there was not sufficient marketing and public awareness, thus, there was not enough incentive for the use of the rail link.

3.3.3.3 The Centre Hospitalier Sud Francilien, France

The Centre Hospitalier Sud Francilien (CHSF) provides an example of how the private sector can retain risk. CHSF was awarded to a special purpose company originally created by Eiffage Construction for a prison deal. The private sector added value and construction risk guarantees. The private sector retained financial risk by taking on a corporate guarantee. The risk-oriented approach taken by Eiffage, permitted some of the lowest financing conditions accessible for this type of deal to date (UNECE 2008:75- 77).

3.3.3.4 The Vancouver Landfill Project, Canada

The Vancouver landfill project provides an example of how the public sector can retain risk. The City of Vancouver, British Columbia, contracted a private party to transform a landfill site producing gases into beneficial commercial uses. The private partner was responsible for the design, finance and construction of a cogeneration plant, which uses the landfill gas as fuel to produce electricity that is sold by the private partner to a resident utility. The private partner and the public partner share the proceeds from the sale of electricity and thermal energy. The private partner receives no payment from the public partner, but the public provides guarantees of providing landfill gases for the twenty-year duration of the contract. The supply risk is allocated to the public party, but it decreases the risk by retaining responsibility for the management and operation of the gas collection system (UNECE 2008:72-73).

3.3.3.5 Pamir Private Power Project,Tajikistan

The Pamir Power Project is an example that even in a high political risk country, PPPs can work. The Pamir Project contracted a private party for the implementation of a power project. The Pamir Power Project is exemplary of how, through careful planning and development, the project was a success because risks were originally assessed and moderated before the project was implemented (UNECE 2008:81-83).

3.3.3.6 Toll Roads, Spain

The Spanish toll road project is an example of how, through careful planning and risk forecasting, risks can mitigated. Over thirty years ago the government, in an effort to renovate its roads around its coastal seaside resorts in an effort to increase tourism, decided to assume the exchange rate risk on the project. Despite the fact that the exchange rate protection continues up to the present day, based on the cost calculations of assuming such a risk, it seems as if over this period, the public sector lost nothing in undertaking this risk (UNECE 2008:39).

Reflections on international lessons learnt indicate that risks should be sufficiently conceptualised and managed. The contract should be designed properly and circumstances for the sharing of the risk should be stipulated and linked to output specifications. The contract should provide specifications but should also be flexible for changes.

In conclusion, most reference to risk and risk management in the body of knowledge generally focuses on beta risk, and there is a lack of comprehensive guidelines that are inclusive of both beta and alpha risk. In summary, lessons learnt indicate that careful planning is required in structuring risk ownership and risk management.