Framework for Risk Management and Disputes Avoidance in PPP Contracts for Road Projects: Role of Pavement Performance Prediction Models

Abstract

With the increasing reliance on Public-Private Partnerships (PPP) in roadway construction and preservation, and due to the long-term nature of these concession contracts, there arises the need for practical and reliable tools that help in assessing the rights and responsibilities of each of the two main parties involved in a PPP road project – the highway agency and the concessionaire – thus forming a clear basis for the negotiations conducted between PPP parties whenever a change in the contract terms is required.

This study addresses three risks that are directly related to the pavement’s technical aspect in PPP highway projects: 1) the non-compliance with the standard construction specifications, 2) the increased legal load limit and 3) the traffic volume risk. This will provide a framework for effectively managing these risks, through an accurate estimation of the effect of each risk on the financial flow of the negatively-impacted PPP partner.

First, the non-compliance of contractors with the standard construction specifications set by transportation agencies is a major concern in all pavement construction projects. In traditional road procurement strategies, the owner imposes “penalties”, also known as “pay-adjustment factors” on the contractor in case the latter delivers an out-of-specs pavement construction. Pay-factor assessment methods available in the literature consider only the time to the first heavy maintenance activity and the increased agency cost. Such methodologies are not suitable in the context of a long-term complex PPP road project. Accordingly, the present study proposes a methodology for assessing the pay-adjustment factor to be imposed by the concessionaire on the construction subcontractor based on the predicted performance of the out-of-specs pavement. Both the agency and user costs, as well as all maintenance activities performed throughout the concession period, are included in the analysis. The pay-factor assessment method must be addressed during the negotiation phase and approved by the highway agency or its representative, who will be responsible for monitoring the performance of the pavement throughout the concession period, ensuring that appropriate maintenance is conducted to maintain the pavement at a satisfactory ride-ability level, as required by the contract terms.

Second, an increased legal truck load limit significantly affects the pavement performance, leading to its accelerated deterioration and imposing additional expenditures for maintaining the road condition at a satisfactory ride-ability level, as required by the contract terms. These expenditures, in a PPP road project, are typically borne by the concessionaire. This study proposes two compensation strategies that can be adopted by the highway agency to remunerate the concessionaire for the increased maintenance costs caused by the increase in the legal truck load limit. The level of compensation depends on the corresponding reduction in the pavement performance throughout the concession period.

Finally, inaccurate traffic volumes forecasts represent a major concern in PPP road projects. The two most common traffic volume risk sharing mechanism are the Minimum Revenue Guarantee (MRG) and the Least Present Value of Revenues (LPVR). Current practices in traffic volume risk sharing mechanisms ignore the effect of the change in traffic volumes on the pavement maintenance costs, therefore leading to an unfair risk management. Accordingly, this study addresses traffic volume risk by investigating the effect of the deviation in traffic levels on two major PPP parameters: the generated tolls and the maintenance costs. Then, the MRG and LPVR are adjusted by incorporating the effect of traffic volume risk on the project’s total cash flow, as to ensure a fair risk sharing between PPP partners.

Briefly, the methodologies presented in the study require an accurate prediction of the pavement performance subject to the previously described scenarios: 1) delivering an out-of-specs pavement construction, 2) increasing the legal load limit and 3) encountering lower or higher than forecasted traffic levels. The AASHTOWare Pavement ME was used for the performance prediction, along with the LCCA tool, RealCost and a numerical model developed by the World Bank specifically designed for the financial analysis of PPP road projects.

The findings of the this study imply that the most critical parameter that needs to be carefully monitored by the construction subcontractor is the thickness of the asphalt-concrete layer, followed by the air-voids content in the asphalt mix. The binder content, on the other side, seems to have a relatively low impact on the pavement’s performance. This is justified by to the fact that high quality materials are typically used for the construction of PPP road projects, thus increasing the pavement’s resistance to rutting. Furthermore, the proposed strategies that can be adopted by the highway agency to compensate the concessionaire for the increase in the allowable truck load limit are dependent on the pavement’s characteristics, in terms of the materials used in the different pavement layers, as well as the traffic and climatic conditions. Finally, the results of the conducted financial analysis considering different traffic volumes emphasize the need to include the resulting effect on the maintenance expenditures, as well as the generated toll revenues. In fact, ignoring the impact of the traffic level on the maintenance cost leads to an unfair traffic volume risk sharing between PPP partners.