The transition from traditional, PPP-type non-recourse financing has created several unintended consequences. These are captured in the data gathered but also in the literature reviewed as part of this research.
One participant stated the following when asked if relational contracting could have a positive effect on PPP programme delivery: “…I would say yes. This allows for an alignment of interests between the SPV and the EPC because risks are shared between them … and this allows the EPC [contractor] to understand that there is some downside protection so that they are actually looking towards the incentive of building the right project from a quality, safety and standards perspective, rather than just cutting corners to go faster or trying to cut budgets or find operational efficiencies… I would think that collaboration also helps supply chain management, avoids bankruptcies, and avoids litigious behavior between the various entities. So, all of this comes down to better alignment of interests, in my opinion….” This finding is corroborated by the literature, specifically Clifton and Duffield’s (Clifton et al., 2006) assertion that, historically, PPP programme sponsors have transferred too much risk to the private sector and created an overly litigious environment. Alliance principles are still being evaluated in their efficacy to deliver better programme outcomes, but several major programme sponsors agree that a less litigious approach is needed for successful delivery of major programmes (Clifton et al., 2006).
PPP contracts are litigious in nature for several reasons. We have already seen how the drive to lower costs reduces the financial resiliency of the structure and the transfer of risk to the private sector increases the potential for financial shocks, leaving the EPC contractor responsible for recovering the losses through litigation (Eden, Ackerman and Williams et al., 2005). This situation is exacerbated by the SPV drop-down of the contractual obligations down to an EPC contractor. PF and PPP are a series of interrelated contracts that attempt—but often fail, especially in very complex major programmes—to allocate risks to the party best able to manage it. However, certain practical elements are frequently overlooked, especially those related to capital structure. In PF and PPP, cash flows are isolated and restricted to a single-purpose capital asset, with the life of the PF firm (usually an SPV) limited to the life of the asset; therefore, the ability to absorb financial shocks has to be self-contained within the major programme’ SPV financial structure. However, a loophole was created by reassigning these obligations to EPC contractors on a back-to-back basis, effectively placing risk off the books of the major programme and leaving the contractor to manage a significant amount of risk through the offer of parental guarantees to programme lenders and programme sponsors.
The excessive risk transfer widely used in PPP also creates another negative behaviour within the project sponsor organization. Programme sponsors typically assume a command-and-control role within the delivery of the PPP programme, assuming that the private sector and its private capital will resolve all issues and deliver the programme on time, on budget, and in accordance with the contract. Penalties will allegedly impart suitable behaviours, and private capital—motivated by these penalties—will generate the required innovation to deliver the project for a price significantly below what the programme sponsors have budgeted for. However, this rarely materializes because the risk exposure to private capital is extremely low, and penalties are an insufficient incentive for the private sector.
Furthermore, contractors are in “loss-limiting mode,” since most contracts have already been underbid. (Hellowell & Vecchi, 2012)
In an attempt to create better programme outcomes by borrowing from a successful delivery model such as PF and adapting it to the project sponsor’s needs, a hybrid model (PPP) was created that does not deliver the intended outcomes despite the promise that PPP can deliver value for money and allocate risk to the party best able to manage it. There is significant debate in the literature about the effectiveness of PPP in delivering positive outcomes for major programmes, but the fact that the evidence remains inconclusive after thirty years speaks volumes about the effectiveness of the PPP structure, especially considering that newer, more collaborative models with less risk transfer are starting to prove more effective in the delivery of major programmes (Greve and Hodge 2017).