Charles Parekh | HKA
Public-private partnerships (PPPs) are an increasingly prevalent financing and project delivery model in the construction industry, addressing complex infrastructure challenges by merging the strengths of both the public and private sectors. This collaboration is often crucial to meeting the escalating demand for modern infrastructure driven by rapid urbanization and technological advancements. However, compared to 100 percent publicly or privately financed projects, PPPs face contrasting challenges when projects encounter difficulties.
Using HKA’s proprietary CRUX construction data,[1] this article illuminates the different litigation challenges PPPs experience in the real world. Evaluated against public and private projects, there are notable differences in the causes of claims or disputes for PPPs. Understanding not only the genesis of these claims and disputes but also the broader economic benefits and challenges can aid proactive risk mitigation and dispute resolution efforts should a conflict arise. It is important to note that this article focuses on the financing models of the projects. Various forms of delivery include design-bid-build, fixed-price design-build, progressive design-build, and others. These differing delivery models may have an impact on the causes and types of disputes; however, because design-build is the PPP delivery model most found in the CRUX dataset, it is the focus of this article.
PPP Fundamentals
PPPs involve an agreement between a government entity and a private company to deliver a public asset or service. This usually entails a developer or concessionaire providing financing, design, construction, and operations and maintenance of a public facility in return for payments over the concession period derived from a share of operations, leasing, toll revenue, or government entity availability payments. The partnership capitalizes on the private sector’s financial resources and technical expertise while ensuring the public sector retains regulatory oversight and accountability. Often employed for large-scale infrastructure projects such as highways, hospitals, and water treatment facilities, PPPs offer a viable solution to the public sector’s budgetary constraints and efficiency challenges.
Economic Benefits of PPPs
PPPs provide several economic advantages, making them an appealing solution financially and operationally for major public-oriented construction projects. From upfront capital to long-term performance, this model alleviates several challenges of traditional public sector projects and delivers valuable benefits for both parties, including:
- Risk Sharing
One of the primary advantages of PPPs lies in the distribution of risks between the public and private partners. In traditional public sector projects, the government shoulders the majority of financial and operational risks. However, in a PPP arrangement, risks such as construction delays, cost overruns, and operational inefficiencies are typically transferred to the private partner. This risk-sharing mechanism shields the public sector from potential financial burdens and incentivizes the private sector to enhance project efficiency and performance through innovative practices.
- Access to Capital
PPPs enable governments to tap into private capital for infrastructure projects without the need for substantial public funding upfront. This is particularly advantageous during periods of budgetary constraints, allowing for critical infrastructure development without immediate fiscal pressures. By engaging private investors, governments can initiate projects that might otherwise be postponed due to funding limitations, thereby accelerating infrastructure growth and modernization.
- Efficiency and Innovation
Private companies involved in PPPs bring a wealth of experience and innovative practices to the table. Their profit-driven nature encourages them to develop cost-effective solutions and adopt advanced technologies to ensure projects are completed on time and within budget. This focus on efficiency and innovation can lead to improved project outcomes compared to traditional public sector projects, which may be hampered by bureaucratic processes and limited flexibility.
- Long-Term Perspective
PPPs often involve long-term contracts, sometimes spanning several decades. This long-term engagement encourages sustainable planning and helps ensure infrastructure is maintained effectively throughout its lifecycle. Private partners are motivated to consider the asset’s longevity and performance as they are responsible for operations and maintenance over an extended period. This commitment to long-term quality can result in better service delivery and reduced lifecycle costs.
Economic Benefits of PPPs
Despite their considerable advantages, PPPs are not without challenges. Successful implementation requires careful planning, clear agreements, and robust legal frameworks to safeguard public interests. Potential hurdles include:
- Complex Negotiations
PPPs involve complex negotiations to define the partners’ roles, responsibilities, and risk-sharing mechanisms. This complexity can lead to delays in project initiation and higher transaction costs. Clear communication and transparency are crucial to navigating these negotiations and establishing mutually beneficial agreements.
- Public Interest Concerns
Private sector involvement in public infrastructure raises concerns that profit may be prioritized over public interest. To ensure projects remain accessible and affordable to the public, governments must implement regulatory measures and performance standards to guarantee the private sector delivers on public service obligations and maintains quality and affordability.
- Long-Term Commitment
The long-term nature of PPP contracts can be both a benefit and a drawback. While such longevity brings a sustained focus on project quality and accountability, it can also lock governments into agreements that may become less favorable over time due to changing economic or political conditions. Notable examples include the 75-year lease on the Indiana Toll Road, which went bankrupt after eight years, and the Chicago parking meter 75-year lease, which has ended up favoring private investors over local taxpayers.[2][3] Flexibility and adaptive management strategies are essential to address unforeseen changes and evolving public needs.
- Regulatory and Legal Challenges
Implementing PPPs requires a robust legal and regulatory framework to address issues such as land acquisition, environmental concerns, and contractual disputes. This framework must be transparent, adaptable, and built on precedent to support successful PPP implementation and management.
CRUX Insight on PPP, Public, and Private Projects
HKA’s proprietary CRUX dataset[4] provides tangible insight into the challenges PPP construction projects (Table 1) encounter and how they compare with public and private projects (Tables 2 and 3). By synthesizing intelligence from investigations conducted by HKA experts providing claims consulting and dispute resolution services, CRUX identifies the primary causes of claims or disputes on major capital projects worldwide. The data represents nearly 1,700 global construction projects — including 74 PPP projects, 695 public projects, and 920 private projects — with an average project capital expenditure (CAPEX) of over $1 billion and a total capital expenditure of more than $2.247 trillion.
Table 1: CRUX Insight on PPP Projects
| PPP PROJECTS | |||
|---|---|---|---|
| Country/Region | Number of Projects | Number of Countries | Average CAPEX (USD) |
| Globally | 74 | 20 | $1.93 bil |
| United States | 18 | 1 | $811 mil |
| Rest of the World | 56 | 19 | $2.30 bil |
Source: Data from HKA Global Limited, CRUX Insight Seventh Annual Report: Changing the Narrative, 2024.
Table 2: CRUX Insight on Public Projects
| PUBLIC PROJECTS | |||
|---|---|---|---|
| Country/Region | Number of Projects | Number of Countries | Average CAPEX (USD) |
| Globally | 695 | 73 | $1.26 bil |
| United States | 170 | 1 | $890 mil |
| Rest of the World | 525 | 72 | $1.39 bil |
Source: Data from HKA Global Limited, CRUX Insight Seventh Annual Report: Changing the Narrative, 2024.
Table 3: CRUX Insight on Private Projects
| PRIVATE PROJECTS | |||
|---|---|---|---|
| Country/Region | Number of Projects | Number of Countries | Average CAPEX (USD) |
| Globally | 920 | 70 | $1.49 bil |
| United States | 258 | 1 | $428 mil |
| Rest of the World | 662 | 69 | $1.93 bil |
Source: Data from HKA Global Limited, CRUX Insight Seventh Annual Report: Changing the Narrative, 2024.
Top Causes of Claims or Disputes
The CRUX data[5] analyzes 38 causes of claims or disputes. To define these causation factors, HKA compared taxonomy across 57 peer-reviewed academic publications, industry reports, and other available sources worldwide. This produced a list of 1,750 causes of construction and engineering claims and disputes. Through detailed analysis and mapping of trends and variations in terminology, we condensed these causes into 50 individual definitions. The list was then examined against practical experience by HKA experts around the world and refined to distill the most salient causes.
Evaluating the top three causes of claims or disputes across PPP, public, and private projects (Table 4) reveals that PPPs have a fundamentally distinct risk profile. While all three project types have different leading dispute causes, PPP claims and disputes are heavily concentrated around incomplete design, a key factor cited in nearly 40 percent of PPP projects. In the overall data, “Design is incomplete” accounts for claims or disputes in only 21.7 percent of projects. With an incidence double that figure, incomplete design is a significantly more prevalent issue in PPPs than in public and private projects.
This is a logical finding considering the nature of PPPs. The involvement of various partners can complicate an already complex design process and the understanding of what a complete design entails, opening the door to design gaps. These projects’ long-term horizons also contribute to designs that may be incomplete or perceived to be incomplete due to information that changes over time during the project.
It is important to note that the structure of PPP projects is more complex than described in this article. Often, multiple parties, including the design-builder, concessionaire, and subcontractors, are potentially responsible for claims or disputes. These nuances are beyond this article’s scope but may cause potential changes in the rankings. However, they are not likely to change materially.
Similarly, these factors contribute to other major challenges for PPP projects. “Change in scope” ranks as the second leading cause of PPP claims or disputes. “Design information was issued late,” the third largest cause of PPP claims or disputes, adds to the unique risk landscape of these partnerships. PPPs have seen more claims or disputes arising from this issue than any other project type.
Table 4: Top Causes of Claims or Disputes
| Project Type | Primary Causes of Claims or Disputes | Incidence |
|---|---|---|
| PPP Projects | Design was incomplete | 39.2% of all PPP projects |
| Change in scope | 33.8% | |
| Design information was issued late | 28.4% | |
| Public Projects | Change in scope | 39.9% of all public projects |
| Design was incorrect | 26.5% | |
| Design was incomplete | 25.9% | |
| Private Projects | Change in scope | 33.5% of all private projects |
| Design was incorrect | 22.7% | |
| Design information was issued late | 22.2% |
Source: Data from HKA Global Limited, CRUX Insight Seventh Annual Report: Changing the Narrative, 2024.
Claims and Disputes by Sector
Breaking down the CRUX data[6] by sector provides additional perspective on the most pressing risks for different types of PPP projects (Table 5) and how they compare to sector-specific public and private projects (Tables 6 and 7). As these tables illustrate, the top cause of claims and disputes for public and private projects is almost always a change in scope. For PPPs, however, the top cause is relatively varied, again reflecting the added complexities of these projects and reinforcing the need for a multifaceted approach to risk control.
It is interesting to note that buildings, one of the most numerous categories, have the same top reason for claims or disputes, “Change in scope,” regardless of project type. Additional CRUX data shows that “Design was incomplete” is another leading cause of claims and disputes across sectors for PPP, public, and private projects alike.
Table 5: Claims and Disputes by Sector – PPP Projects
| PPP PROJECTS | ||||
|---|---|---|---|---|
| Sector | Number of Projects | Number of Countries | Average CAPEX (USD) | Top Cause of Claims or Disputes |
| Buildings | 23 | 7 | $448 mil | Change in scope |
| Energy & Natural Resources | 12 | 9 | $7.04 bil | Design information was issued late |
| Industrial & Manufacturing | N/A | N/A | N/A | N/A |
| Power & Utilities | 15 | 9 | $881 mil | Physical conditions were unforeseen |
| Technology | 1 | 1 | N/A (confidential) | N/A |
| Transportation Infrastructure | 23 | 9 | $1.41 bil | Design was incomplete |
Source: Data from HKA Global Limited, CRUX Insight Seventh Annual Report: Changing the Narrative, 2024.
Table 6: Claims and Disputes by Sector – Public Projects
| PUBLIC PROJECTS | ||||
|---|---|---|---|---|
| Sector | Number of Projects | Number of Countries | Average CAPEX (USD) | Top Cause of Claims or Disputes |
| Buildings | 214 | 25 | $516 mil | Change in scope |
| Energy & Natural Resources | 70 | 26 | $3.70 bil | Change in scope |
| Industrial & Manufacturing | 9 | 5 | $10.4 bil | Change in scope |
| Power & Utilities | 131 | 32 | $1.02 bil | Change in scope |
| Technology | 16 | 8 | $174 mil | Change in scope |
| Transportation Infrastructure | 255 | 38 | $1.20 bil | Change in scope |
Source: Data from HKA Global Limited, CRUX Insight Seventh Annual Report: Changing the Narrative, 2024.
Table 7: Claims and Disputes by Sector – Private Projects
| PRIVATE PROJECTS | ||||
|---|---|---|---|---|
| Sector | Number of Projects | Number of Countries | Average CAPEX (USD) | Top Cause of Claims or Disputes |
| Buildings | 463 | 28 | $266 mil | Change in scope |
| Energy & Natural Resources | 171 | 37 | $6.11 bil | Change in scope |
| Industrial & Manufacturing | 51 | 17 | $421 mil | Change in scope |
| Power & Utilities | 140 | 39 | $554 mil | Change in scope |
| Technology | 13 | 7 | $151 mil | Design was incomplete |
| Transportation Infrastructure | 82 | 21 | $986 mil | Change in scope |
Source: Data from HKA Global Limited, CRUX Insight Seventh Annual Report: Changing the Narrative, 2024.
Minimizing Damages from Construction Disputes
Maximizing the benefits of PPP projects requires fully understanding the risks and having the practical resources to proactively address potential issues, strategically manage disputes, and minimize damages. This demands niche experience that typically falls outside the expertise of even very shrewd legal, finance, and contracting stakeholders. A multidisciplinary team of claims consultants and dispute resolution advisors with first-hand experience, technical expertise, and extensive testimony experience in the case of litigation is best suited for this role. Public and private entities with partners in place from the outset of a project can stem problems before they start and protect what is equitable if and when issues develop.
Long-Term Economic Prosperity
Public-private partnerships are a powerful tool for addressing infrastructure needs in a cost-effective and efficient manner. As urbanization continues and infrastructure demands increase, PPPs will likely play an even more significant role in shaping the economic landscape of the construction industry. By leveraging the strengths of each sector, PPPs can drive economic growth, enhance service delivery, and create jobs. However, their success depends on careful planning, transparent negotiations, fair allocation of risk, and a commitment to balancing public and private interests.
Governments and private entities must work together to establish clear frameworks that protect public interests while encouraging private investment and innovation. In doing so, PPPs can continue to deliver valuable infrastructure projects that meet the needs of growing populations and evolving economies. With the right approach and a constant eye on risk management, PPPs can provide sustainable solutions that benefit communities and drive long-term economic prosperity.
References
| ↑1 | HKA Global Limited, CRUX Insight Seventh Annual Report: Changing the Narrative, 2024 |
|---|---|
| ↑2 | Bipartisan Policy Center, Infrastructure Case Study: Indiana Toll Road, n.d. |
| ↑3 | Spielman, Fran, “Parking meter deal keeps on giving — for private investors, not Chicago taxpayers,” Chicago Sun-Times, June 11, 2023 |
| ↑4 | HKA Global Limited, CRUX Insight Seventh Annual Report |
| ↑5 | HKA Global Limited, CRUX Insight Seventh Annual Report |
| ↑6 | HKA Global Limited, CRUX Insight Seventh Annual Report |
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