This article is based on "NEC for design build finance and operate (DBFO) contracts – taking best practice procurement into PPPs”, Richard Patterson and Barry Trebes, ICE’s Management, Procurement and Law, November 2015, which won the ICE’s Parkman medal for best MPL paper, 2015. Click here to access the full, free version.
Huge investment in the global asset base could be streamlined through the development of a standard international contract for public-private partnership (PPP) projects.
We have entered an unprecedented period of investment in global infrastructure, with global spend set to reach between US$3trn-US$6trn each year for the next two decades. A growing world population – expected to hit 9.7bn by 2050 – combined with urbanisation and a desire for better services will drive development of the global asset base, predominantly in the developing world.
Much of this work will see national governments working with development agencies and financial institutions to enlist private sector developers in so-called PPP projects.
Each will require a project-specific contract to be drawn up, specifying the obligations of each party, the payment mechanism and so on – a process which can take years to finalise and which adds to the time and cost of the project. In some countries where there is a clear pipeline of projects in a certain sector, something close to standard terms have been developed, sometimes based on the UK’s experience with the private finance initiative (PFI). But this is often not the case, and the PFI was fraught with problems.
With so many PPP projects expected, it’s time we developed a standard international contract that can be rolled out as a template for the vast majority of projects.
PPP projects are mostly for design, build, finance and operate (DBFO). The NEC – formerly known as the ‘new engineering contract’ – has well-established and popular contracts for design and build and, separately, for providing a service. These have been used extensively in the UK and South Africa and are increasingly being used in Hong Kong and New Zealand too. These contracts can be combined for design, build and operate and can be expanded to encompass the finance element too – making them the ideal template for a standardised, international contract for DBFO projects.
If the NEC is used as the basis of the DFBO project agreement, then NEC contracts could also be used for the engineer, procure, and construct and the operations and maintenance subcontracts, and in turn for any sub-subcontracts.
Why the NEC could work for an international DBFO:
1. Well developed, standard processes for design and build and for providing a service.
2. Written in plain English and is designed for use internationally.
3. Flexibility: NEC contracts are not specific to any particular market sector or technical discipline; they allow a range of payment mechanisms; and they are built in a modular fashion which allows varied options to be chosen according to the particular contract.
4. Clear on risk allocation, critical in PPP contracts.
5. Encourages collaboration and change management. This starts with an obligation to ‘act as stated in this contract and in a spirit of trust and collaboration’ and is reinforced through a simple but critical ‘early warning’ mechanism and clear processes for dealing with the time and cost of any risks occurring that the bidder was not required to allow for.
However, there are some key challenges to establishing the NEC as a standard DBFO contract:
The PPP market’s apparent reluctance to use a standard contract. Embedding an international NEC contract for DBFO projects will require collaboration between the NEC itself and organisations representing potential users including clients and their legal, technical and financial advisors in the PPP market.
The false perception that NEC is ‘just a construction contract’. NEC is much more than this: the NEC family includes robust contracts for providing services, which are endorsed by the British Institute for Facilities Management (BIFM).
The need for NEC contracts to be actively and professionally managed. There is real value in properly using the NEC’s in-built management processes but they are so well developed that standard ‘in the cloud’ management software for all NEC contracts is available.
If we can address these challenges, then developing an international DBFO contract based on the NEC could bring a number of benefits:
1 Standard procedures: This will ensure efforts are focused on elements which are truly unique to each PPP project.
2 Clearer subcontracts: The ability of the private sector partner to use standard NEC contracts to pass on their responsibilities and liabilities to subcontractors for design, construction and operation.
3 Reduced transaction costs: All involved will be able to focus on project-specific issues, saving time and money on defining what is meant by terms such as ‘programme’ and ‘change’, as is often the case with one-off PPP projects.
4. Reduced time to achieve financial close: With simpler, standard contracts the time to close could be significantly reduced. PPP deals can take years to finalise and a standard starting point would be to everyone’s advantage.
5. Better management: Standard procedures will bring efficiencies to contract management in all parts of the value chain.
Using NECs as the basis for a standardised DBFO is not only possible – it should be seen as an opportunity to embed best practice in contract preparation and management in the international PPP market.