A Right of First Action for Public-Private Partnerships

Public-private partnerships can offer governments the opportunity to undertake major public-works projects, in partnership with a private developer, that might be too expensive or risky to undertake alone, especially for developing nations. The contracts that govern these partnerships establish the rules by which the parties relate. These contracts sometimes contain a Right of First Action clause (RoFA), often seen in real estate or extraction industries. The holder of this clause has the right, but not the obligation, to invest in expanding the project in some way, in the future. We believe the inclusion of this clause can help align the often-conflicted incentives of public and private parties (governments want long-term value preservation through appropriate operation and maintenance, while private parties may be incentivized to cut costs in order to maximize profits). If government sponsors delineate the expansion work from the initial build-operate work of the private partner through the creation of the RoFA, they have created an additional asset – a future source of potential cash flows. Our research shows how to quantify these potential cash flows and derive a transparent value of the RoFA. 

In this way, the RoFA is an asset that exists in addition to the primary revenues expected upon the completion of the initial build-out. If the public sector is issuing a Request for Proposals   (RFP), there are several ways in which the RoFA can be appropriated. For example, the RoFA could be offered immediately to the private partner, augmenting the value of the project, or it could be held by the public sector until certain conditions are met – such as value preservation on behalf of the private company.