Fresh approach
Is it time to reappraise Public Private Partnerships asks Mark Williams?
Let’s start with some context:
- The worldwide need to address underdeveloped or ageing infrastructure, governmental fiscal constraints and for economic growth;
- A strong pipeline of planned PPP in many developed countries, the building pipeline of PPP in emerging markets and developing economies and the recently launched World Bank Group consortium PPP guide, accompanying training and APMG CP3P certification; and
- In the UK, where historically more PPP has been done than anywhere else, the future PPP pipeline is still a trickle.
Approaches to private sector funding of public sector property:
What is the landscape like for Private Finance Initiatives (PFI) and Public Private Partnership (PPP) models in the UK? What does the future hold in store for them? PFI has come in for some harsh criticism over the years, decried as inflexible and expensive. But with the right approach, PFI can deliver significant savings and improved outcomes.
PFI was pioneered in the UK and has been adopted, developed and progressed around the world. While it might have been born here, in recent years it has been very much out of favour. PFI schemes have been slated in the past for inflexibility and poor value for money.
Is this criticism always justified? There are certainly pockets of good contract management practice that have resulted in significant savings – in aggregate these run into billions – so is it time to reappraise PFI and consider how these contracts can work harder for the public sector? Part of the reappraisal is considering PF2, launched in December 2012 following intensive consultation, to address the ‘failings’ of PFI. However, very few PF2 projects have progressed.
Philip Hammond, UK Chancellor, understands the economic benefits of spending on infrastructure and the new government recognises the need for further investment. His Autumn 2016 Statement suggests that PPP/PF2 may make a return, notwithstanding the amount of confusion surrounding PFI. To help with this confusion it is worth noting the private sector is always going to be involved in the design, build and maintenance of property and infrastructure. In some cases they also pick up operations. When running a near £2 trillion Government debt, the private sector will also finance this. PPP/PFI/PF2 merely offers a procurement route to integrate these components in a whole assets life fashion. Given that 800 PFI/PF2 projects have been signed to date, all being subject to HM Treasury compliant business case, then the Value-For-Money argument will have been made 800 times.
Challenges:
Historically, from a privatesector perspective, a major threat to the future of PFI/PPP deals has been the length of UK procurement processes. These have been much longer than in other countries; for example, as little as two months compared to a UK average of 33-36 months. The high cost of such long bidding process has limited the value for money that potential bidders could achieve, and, as a result, proves a deterrent from bidding. A wider problem existsbetween private and publicsectors, in that each one has a very different approach to commercial negotiations and very different objectives.
The private sector must provide transparency and win trust, by using detailed, specific and clear agreements that recognise the commercial nature of the relationship. Particular challenges relating to transparency are when, for example, a PPP/PFI/ PF2 deal, apparently concluded in good faith, is later refinanced to generate substantial additional private-sector profit with no gain to the public sector. The public sector understands the imperative for the private sector to generate profits (although not necessarily the best way to incentivise the private sector efficiently) and so the public sector needs good advice to help it understand the drivers of private sector behaviour. Also, there is a need for greater flexibility in long-term partnering arrangements. Most PFI/PPPs welcome increased demand/ workload, but cannot adjust to reduced demand/workload. Clearly some work is needed in order to understand how more flexible arrangements can be put into place.
Moving forward:
A vital focus for the future of PPP/PFI/PF2 deals is the need to review, shorten and simplify the UK procurement process to bring it in line with the rest of the world. This should be underpinned by a focus on bridging the intellectual gap between the private and public sectors, and the design and implementation of more flexible and transparent contracts. In this way a true partnership approach can be created for the next generation of PFI/ PPP contracts. Indeed, a recent innovation by the World Bank Group (WBG) and a consortium of other international banks, seeks to help public officials and their advisors implement efficient, sustainable PPPs with the creation of a PPP guide.
There remains, in some quarters, an assumption that once a PPP/ PFI/PF2 deal is signed it runs on autopilot for the next 25 years. This is far from the case and private sector partners are constantly looking for amendments and changes that will improve their outcome. The public sector must be just as agile: Value for money (VFM) from a PPP/PFI/PF2 does not materialise on contract signing but across the life of the deal and this needs active management.
There are three elements to this active management:
- Good contract management – teams need to be trained up so they understand the basis for all key performance indicators and ensure deductions are reported and taken where due.
- Enhanced asset utilisation – considering whether there are opportunities to enhance the utilisation of the assets underlying a PPP/PFI/PF2 arrangement is a more strategic exercise. It requires familiarity not only with a public sector body’s portfolio of assets, but also those of the wider public sector and the voluntary sector. Given the 25-year plus life of a PPP/PFI/ PF2 arrangement, it is unrealistic to assume that volumes, ways of working and usage will remain unchanged. Provided that the relationships between the public and private sector are good, the motivations of each party are broadly understood and returns are maintained it is possible to change the usage of assets underlying a PFI.
- Financial intervention – this might range from doing nothing to a decision to exit the PPP/ PFI/PF2 arrangement. There are a wide range of actions that can be taken, including benchmarking or market testing soft facilities management costs such as cleaning and catering, reviewing target profit or Internal Rate of Return (IRR) caps and using change of ownership clauses and refinancing clauses. Outside of the contract it might be possible to negotiate the contract term, insurance arrangements, hand-back requirements, reserve funds, etc.
Conclusion
It is worth reappraising PPP/PFI/ PF2. Public and private sector partnerships are going to remain high on the agenda in many countries Experience shows that with the right interventions, significant savings and improved outputs can be made in operational PPP/PFI/PF2. Such gains are far more desirable than the alternative of frontline service cuts.
Mark Williams is PA Consulting Group’s Property & Infrastructure Lead. PA is an independent firm of over 2600 people, operating globally from offices across the Americas, Europe, the Nordics, the Gulf and Asia Pacific. It is an expert in consumer and manufacturing, defence and security, energy and utilities, financial services, government, healthcare, life sciences, and transport, travel and logistics. Its deep industry knowledge together with skills in management consulting, technology and innovation allows us to challenge conventional thinking and deliver exceptional results that have a lasting impact on businesses, governments and communities worldwide.
For more information, please see www.paconsulting.com
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The CP3P / APMG PPP Certification Program has been developed by a number of regional development banks and the World Bank Group, and was part funded by the Public-Private Infrastructure Advisory Facility to enhance PPP performance globally.
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