Public-private partnership (PPP) and STERLING QUEST ASSOCIATES (SQA)

Partnership enables a third party to entrust, for a given time, a global mission dedicated to financing, conception, realisation or maintenance of a building delivering public services. This mission is paid for the period of the contrat.

Competitive dialog
On the contrary of a public tender which is managed by stricted rules, PPP contract follows a flexible procedure of consultation in order to find a arrangment between the needs and expectations of the public entity and the technical, legal and financial offer of the private entity.

Sterling Quest Associates (SQA) has developped a recognized know-how on the management of the competitive dialog because of assisting both sides of partnerchip (public and private parties) for many cases of PPP in France. We learnt from past experiences that the key point of this kind of contract isn’t how long the dialog is but the quality in negociation since the beginning of the dialog.

Coordination between all business consultants
Our experience of this kind of missions taught us that it is essential that legal, financial and technical experts show a good cooperation.
It is highly recommanded to ensure a perfect coordination between all experts in order to plan the mission in an efficient way and to install a good comunication with the managing commettee in the different phasis of the project.

The contrat

The contractual documents must be precise, understandable by all and show a fair share of risk between parties. Success of the operation would depends on the ability of the public entity and the private entity to negociate a balanced position on several key points:

Definition of needs : the partnership should find a balance between the necessity of the public entity of flexibility and the necessity of the private entity to receive precise obligations ;
Performance definition and penalties principles is a key point of the PPP schema;
Payment procedure : it should express principles explained bellow and it should be progressive enough in order to be incitative and not to be prejudicial for global cost of the project. Experience show us that in case of penalties too high, it is always counterproductive for the project. Indeed if penalties are too high, it occurs a lack of cooperation because amounts aren’t realistic, or it could be reflected on rents. That ‘s why we think it is important to define capped penalties so that the objectives of the project are reached ;
In case of contract breach, it is necessary to define indemnisation fees ;
Guarantees : ask for appropriate amount of protection to avoid “overhedging” (guarantees + penalties).
Control of solvability and viability of the entity created by the private side should be carefully followed because it could be successful only whether risks are fairly shared between all stakeholders of the project. This analysis takes also into account legal issue.

Then, the financial advisor is in charge of analysing risks of hedging about construction overcosts (ex: expected alea margin, commitment of builder, standby credit line, insurance, etc.), delay (ex: reserve account), financing (ex: hedging rate), maintenance (ex : commitment of exploitation manager, insurance, etc.) and renewal (ex: provision rules).

Finally, it is necessary to check whether the entity which manages the project is able to cope with residual risks in a technical point of view. And it is also important to test whether it helds enough share equity to cover these risks. This analysis must be done with sensibilityy testing.