Performance-based contracts for road projects: Comparative analysis of different types

Abstract

Mobility is the basic need for economic growth and social welfare. Without sufficient infrastructure, especially transport infrastructure, efficient mobility cannottake place. Therefore, the governments of developing and developed countries areinvesting big amount of its fund in developing infrastructure. The focus of this bookis to compare the available performance-based road project delivery systems, whichare in implementation worldwide. The book recognizes performance-based roadmanagement and maintenance contract (PMMR), Funktionsbauvertrag (FBV, functionalconstruction contracts), and PPP as the widely used performance-based roadproject delivery systems worldwide. Infrastructure development requires bigamount and it is time consuming. Therefore, the public sector and the private sectorare working together to deliver the infrastructure in an efficient way. The purpose ofthe book is to compare the above-stated delivery systems to find out the similaritiesand differences between them. This would be helpful in order to select the particularmethod in the particular situation.PMMR, FBV, and PPP are all "output"-based contracts where the required levelof performance is to be delivered. These contracts do not defi ne the process, procedures,techniques, and material requirements. This provides the opportunity for thecontractor to be innovative in the selection of methods, techniques, and materials.They are long-term contracts, usually 15-30 years. PMMR and PPP are morewidely used in Anglo Saxon countries, whereas FBV is developed and implementedin Germany. PPP has gained its popularity all over the world, whereas PMMR ismore popular in South America, although it is also in implementation in the UK,Canada, Sweden, Australia, and Chad, among others. FBV has been developed andis in implementation only in Germany. FBV is developing slowly because from2002 to 2010 only fi ve projects are implemented and three other are under consideration.They all have well-defi ned set of performance indicators and service-levelagreements to be achieved by the contractor. Funktionsbauvertrag is further dividedinto contract parts A, B, and C, which are not seen with PMMR and PPP. Part Aincludes the preliminary works prior to the construction or renovation and is like aconventional contract. Parts B and C are described with the functional requirements. Part B includes construction or renovation of the road, and part C includesmaintenance work. So, FBV cannot be seen as a single contract.Cost reduction with quality improvement is the basic principle of each deliverymethod, but not all methods achieve it. The fi nancing with PPP is through theprivate fund which is later on paid by the government or collected through the userson successful completion. Financial institutions normally allocate higher interestrates on private borrowing than on public borrowing in Germany as well as in othercountries. Therefore, PPP suffers additional costs because of the high interest rate,but PMMR and FBV are fi nanced by the government. In this point of view, PMMRand FBV are cost-effective compared to PPP.They are obliged to deliver the project at the required level, which is also thebasic requirement for payment. Therefore, they all are equally effi cient in terms ofquality. Risk allocation is a considerable factor. Principally, with all these deliverymethods, risks are transferred to the partner who can best manage it. However, theydiffer slightly in allocating unpredictable costs. For example, with FBV (in FBV, therisk allocation is carried only for contract parts B and C), risk resulting from politicalchange is shared among the owner and the contractor. This risk is managed bythe owner with PMMR and PPP. With PMMR, the risk allocation for unpredictablecosts differs slightly from one country to the other. For example, in Virginia, USA,the contractor bears the risk for unpredictable costs like infl ation, accidents, andforce majeure, but in Argentina, the costs resulted from force majeure and otherdisasters are borne by the owner. 1PMMR and FBV are similar in nature and procedure compared to PPP. PMMRand FBV are designed specifi cally for the road project delivery, but PPP deliversother projects like hospitals, prison, and roads. However, principally, FBV could beused for other project delivery like schools, hospitals, and water supply. In this case,functional requirements for all types of projects are to be developed and definedclearly. PMMR doesn't include new construction; therefore, it may be implementedfor the renovation and maintenance of other infrastructure other than roads bydefi ning the functional requirements for each project.PMMR and FBV differ significantly in regard to the implementation area; FBV isdesigned for new road construction, road renovation/rehabilitation, and maintenance.PMMR is designed for road renovation/rehabilitation, maintenance, and management.PMMR doesn't include new road construction like FBV. However, only oneFBV project ( A 6 - section between existing point Roth and highway junctionNürnberg-Süd) is considering the new road construction, and all other are consideredfor road renovation/rehabilitation and maintenance of the road superstructure.They also differ in the selection of contractor; PMMR selects through competitivepublic participation with "best value approach, " but the practical examples show that FBV uses the restricted selection procedure ("nicht offenes Verfahren mitöffentlichem Teilnahmewettbewerb"). The payment and fi nancing with both arethrough the public funds. Therefore, FBV and PMMR are not identical, but they aresimilar in principle, procedures, and implications. PMMR has a well-developedstructure because it has been implemented since 1998 (Zietlow G, Implementingperformance-based road management and maintenance contracts in developingcountries - an instrument of German Technical Co-operation, Eschborn, 2004), butFBV was for the fi rst time implemented in 2002, and it is still considered a pilotproject. Due to being similar types of project delivery systems, FBV can learn andadopt the features of PMMR. Gerdes, Enno stated that FBV is not a new contractingmethod; similar contracting methods exist in Argentina, Brazil, Chile, Finland,Guatemala, Canada, New Zealand, Peru, the UK, Uruguay, and the USA. He wouldhave indicated PMMR. This statement also supports that FBV is similar to PMMR.Two case studies have been included in the book: one on Funktionsbauvertrag(Road Project: Rastplatz "Blauer Stein" - Miel on the Highway BAB A 61) and theother on performance-based road management and maintenance contract(performance- based road management and maintenance contract in Argentina).Case studies presented real-world examples to support the analytical study.