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Demirel, H C (2022) Dealing with uncertainty in infrastructure public-private partnership projects, Unpublished PhD Thesis, , Delft University of Technology.

• Type: Thesis
• Keywords: flexibility; governance; infrastructure project; partnership; private sector; project success; public infrastructure; roles; stakeholders; public value; sustainability; transaction cost; trust; uncertainty; case study
• ISBN/ISSN:
• URL: https://doi.org/10.4233/uuid:4df455e4-3f65-497b-bcd4-fa9baf1351fa
• Abstract:
  This research concerns uncertainty in infrastructure Public-Private Partnership (PPP) projects. PPPs comprise a network of actors or organizations in mutual relationships regulated by contracts. These contracts arrange a division of tasks and responsibilities between contracting parties, and they allocate risks and uncertainties. Where risk is a calculable event concerning probability and consequence, uncertainty is the unclear future state in which there is no possibility of placing a numerical probability or calculating the possible effect on an impactful event occurring. Uncertainties are inevitable in infrastructure PPPs because of the dynamic environment in which PPPs usually are implemented and the complex structure of their arrangements. Moreover, the long-term nature of the contracts increases exposure to uncertainty over the life-cycle of the project. Although risks have been heavily discussed in the literature, the contractual and non-contractual mechanisms that each party actually applies, or may apply, in practice to deal with uncertainty are not well addressed. Therefore, the aim of this study has been to gain insight into the contractual and non-contractual mechanisms that are applied by parties involved in PPP infrastructure projects. The main research question is formulated as: How to deal with uncertainty in infrastructure Public Private Partnership projects? This main research question is further elaborated in the following sub-questions: 1. What potential changes typically occur in infrastructure PPP projects? How to deal with these potential changes? What is meant by flexibility in infrastructure PPP projects? 2. What mechanisms, additional to the formal contract rules, are used in practice to deal with variations in infrastructure projects, and how are these mechanisms operationalized? 3. How do financiers approach risks and uncertainty when investing in infrastructure projects? How do financiers protect their returns on investment? In what way does project governance influence the protection of financiers’ returns? The research focuses on PPP projects in the Dutch infrastructure sector. [...detailed text omitted in database...] This research is based on three empirical studies, each of which focus on a different cluster of relationships and actors. The first case study focuses on the relationship between the public contracting authority and external stakeholders such as municipalities, water boards, and port authorities. The second case study focuses on the relationship between the contracting authority and a project’s SPV. The final case study focuses on financiers in types of international infrastructure PPP projects. [...detailed text omitted in database...] The research provides insights into and an understanding of potential fields of uncertainty and the mechanisms that actors in infrastructure PPP projects use to deal with this uncertainty. The roles that actors (public commissioner, financier, and contractors) play in current PPP arrangements tend to result in an uneven risk and uncertainty allocation. Following the general PPP definitions and logic, public authorities try to shift risks to the private sector. Financiers are, however, averse to accepting those that reduce the predicted return on investment. Quantified risks are incorporated in their financial models, but unquantifiable uncertainties are, as far as possible, either not accepted and returned to the government, or contracted away to others (i.e., the project contractors) as externalities. The consequence of all of this is that, in practice, the responsibility for most of the risks and uncertainties ends up with the contractors. Although contractors are essential for the successful realization of a project, they are in an unfavorable position in the PPP arrangement due to this uneven risk and uncertainty distribution. From a transaction cost perspective, this may lead to project inefficiencies and extra costs, and therefore threatens project success not only for the contractors involved but for all partners. Since financing is an essential part of infrastructure PPPs, public infrastructure managers need sufficient skills and knowledge to understand the dynamics of investing and financing. Part of this involves ’opening the black box’ by requiring detailed information from financiers about their mechanisms for dealing with risks (and uncertainty) and the way they guard their return on investment when contracting infrastructure PPP projects. This research also indicates that social mechanisms are essential in coordinating PPPs undergoing contract variations. Proactively building social arrangements, in addition to the formal contract rules and throughout the project, appears crucial for flexibility, i.e., having the ability to deal with uncertain events. Relational arrangements offer flexibility by allowing partners to become more engaged and act according to the spirit of the contract rather than the letter. The focus on relationships may lead all the parties to gain a better understanding of each other’s interests and to understand how parties perceive the contract. In practical terms, partners can proactively develop a common approach by translating the contract provisions into their mutual personal relationships to achieve a certain degree of cooperation. This can decrease the level of formality and ease dealing with unforeseen events, for example by creating a favorable environment of trust and transparency in the renegotiation process. The ability to develop such a common and cooperative approach is strongly influenced by the contracting culture and nature of the contract. The Anglo-Saxon approach to contracting may exert pressure on the execution of infrastructure projects especially when applied in a Rhineland context. The reasonability and fairness basis of the Rhinish law culture may help to solve problems in a more relational way based on reasonability and fairness. Apart from the legal culture, the principle of reasonability and fairness can also be arranged on the sectoral level. For example, an overarching vision agreed between the public authorities, financiers and the contractors may help to achieve a more balanced risk and uncertainty allocation and create a basis for social arrangements. With regard to the large societal challenges we are currently facing, public authorities may consider using PPPs not only as a vehicle to realize infrastructure but also to stimulate societal transitions. Public ambitions such as sustainability and digitalization can be incorporated into PPP contracting and contracts to increase public value and force private investors in the direction of a societal transition. This research provides practical guidance for infrastructure managers on how to make infrastructure projects more valuable for society.

Liu, Y (2021) From best practices to next practices: project0based learning in the development of large infrastructure, Published PhD Thesis, Faculty Of Civil Engineering and Geosciences, Delft University of Technology.

Volker, L (2010) Deciding about design quality: value judgements and decision making in the selection of architects by public clients under European tendering regulations, Published PhD Thesis, Faculty of Architecture, Delft University of Technology.