Operations and Maintenance Role in a P3
P3s are performance-based contracts between a public agency and private project company for the delivery of a service. The performance will be delivered by the project company’s operator during the operations period of the P3 contract. It is the P3 asset’s performance and how that conforms to the public agency’s needs, budget, and mission over the operating life of the project that will define the P3 project’s success. It is also useful to be mindful that the public agency’s Operations and Maintenance (O&M) staff are most often the P3 project’s end-users or managers.
The technical terms of a P3 refer to those activities for which there are typically performance standards or outcomes. These activities should be consistent with current proponent practices to provide the optimum development strategy of the private sector and on a practical level, to ensure that the outcomes are reasonably obtainable. Higher performance standards or outcomes may increase costs to the owner. Dialogue during the development phase of a P3 is highly encouraged in particular to be sure that industry and the owner have a full understanding of outcomes that may not be achievable or are achievable at a high cost.
Implementing a P3 therefore requires thoughtful consideration of the O&M standards applicable, those measures to be monitored for the services provided, and the best O&M management practices sought. It is also important to identify all of the communications and interactions needed throughout the entire term of the contract and at its conclusion.
A P3 contract needs to include all of the appropriate standards of performance with defined reporting, processes and procedures, which have commensurate consequences and possibly damages for lack of performance. It is essential that the O&M considerations of a P3 are identified as early as possible in the project to ensure inclusion of the necessary contractual provisions for all of the O&M interactions required to jointly manage the project to meet its objectives. Project designs that integrate the O&M considerations and expectations typically yield the best economic and performance projects.
Water infrastructure systems are dynamic and what is needed today is likely not going to be what may be needed a few months or years from now. Water P3 contracts may also need consideration of provisions to address changes in the demands for their service over time.
One work stream in the implementation of a P3 that should begin concurrently with the development of the project definition is the operations need assessment. What are the inputs and outputs that will be needed to manage the capital assets that will provide the services over the term of the contract? What records and reports are necessary and how and where will they be maintained. What are the appropriate standards for maintenance and equipment renewal and replacement? How will regulatory compliance and public information for the project be addressed? What approvals will be required by the public agency over the term? What happens if the demand for services changes over time? What are the project company’s responsibilities to turn over the facilities at the end of the term? How will ancillary equipment such as O&M software, inventory and vehicles be addressed at the project turn over?
In a greenfield P3 there are no existing O&M staff. In a brownfield P3, the provisions for transferring or retaining staff are considered. Additionally in a brownfield P3, transferring ancillary equipment such as existing computers, O&M software, inventory and vehicles need consideration.
At the core of P3s in the water market is usually a complex capital asset consisting of various components of facility and equipment that have useful lives that can range from a decimal fraction of the P3’s term to twice or three times that term. A fundamental consideration of a P3 is the required condition of the project’s assets at the end of the term.
Consequently, in consideration of achieving that goal, specifying maintenance management practices, and activity reporting are typically project considerations. Additionally, carefully crafted contract provisions for monitoring the management and replacement of equipment and facilities over the longer term are needed. The objective is to ensure the project company is appropriately incented to optimize the useful lives of all of the asset classes involved, while not micromanaging. There are a variety of technical and financial commercial terms and conditions that can be used to aid in ensuring that the project’s assets are appropriately maintained. It is worth reiterating that the clearly articulated standards of performance for all maintenance with defined reporting, processes and procedures, with commensurate consequences for lack of performance should be included in the P3 contract. Lastly, if the project’s assets are to be turnover to the public agency under any condition of the P3 contract, then there will need to be careful consideration of a fair and equitable pre-end of term condition assessment and the appropriate asset transfer conditions that will need to be met.
Public agencies have the right to contract the right to periodically conduct varying levels of inspections of the project and its records. This is as a monitoring and validation process of the project company’s performance related to the specified contractually maintenance management provisions and procedures and other asset management provisions. Agencies reserve the right to either jointly or independently conduct performance audits and/or inspections of the project as a precedent to any type of end-of-term transfer to assure compliance with any end-of-term asset condition contract provisions.
Examples of maintenance
At its core, a P3 project is a specified service provided for a given price. Consequently, it is important to be mindful of the information that is needed to manage the project, what may be considered confidential, and what right of approvals that will be retained or necessary to allow all parties to perform their obligations. Often a consideration in a P3 is the record documents needed to be maintained by the project company and the rights to those documents the public agency will have? These records documents often included updated Asbuilts, specifications, O&M manuals, operating permits, Operating plans (e.g. Hazard Management), equipment manufacturers information, warrantees, regulatory compliance reports and correspondences. Additionally, consider periodic information reports to be required by the public agency.
As P3s are a partnership, it is recommended to consider the approval rights to be retained by the public agency. Consider if the project company can change permit conditions, change owners or refinance, and sell its services directly to third parties. Carefully consider retaining approval rights, and related processes and procedures. Public agencies frequently have schedule considerations different from the private partner related to granting approvals.
A real view and analysis of costs over the full life cycle of assets.
An owner should deal with selecting contract term during P3 planning (selecting a commercial model) and it is either driven by available financing terms or owner-industry specific considerations such as IRS safe harbor rules, O&M terms to attract teams (> 5-years , up to 20 years, or < 2-years so owner can take over & operate asset (DBFOM).
Typical Water P3 Structure Graphic