Public Private Partnerships (PPPs)/Private Finance Initiatives (PFIs) are extensions of procurement contracting methodologies of outsourcing, contracting out and privatisation that highlights equity joint venture between private and public entities with defined obligations clearly set out in contract documents. The term PPP will be used in this blog article to loosely refer to either of PPP or PFI.
PPPs are alternative methodologies to traditional public sector procurement arrangements that are engaged for project delivery by governments, and the main objective is to access efficiency and effectiveness levels that are not attainable within government’s bureaucratic system. In return for bearing the entire project risk, the private sector is entitled to performance-related remuneration. However, the performance of the methodology has been assessed with mixed reactions over the years with assessment resulting in more of criticisms than positive outcomes.
The National Audit Office (NAO) had in 2002 assessed the performance of the UK government’s adoption of the PPP methodology, and highlighted the benefits of the “whole life cost” approach and its impact on good quality design and construction. In the same report, the NAO also noted the favourable user feedback regarding design quality and construction of PPP buildings. However, in 2004, the NAO started to express misgivings regarding the performance of PPPs, complaining about the complexity of the relationships, the scale of the projects, limited knowledge about the maintenance of some delivered assets, and that some projects only offer prospects regarding the London Underground PPP, also, the NAO expressed concerns that the cost of three tube PPPs were unreasonable and that the final cost was uncertain with significant revisions expected.
Furthermore, in 2009, the NAO came all out against the PPP methodology that as with any business venture, PPPs require careful management and that while they are encouraged by institutional incentives, PPPs can deliver benefits as a result, but they are not suitable at any cost or in every circumstance, and in particular that the departmental justifications for PPPS are often vague. They also argued that a lack of competition makes PPPs dysfunctional for the achievement of value for money (VfM). Essentially, the NAO reported in 2009 that the failure of Metronet, a private infrastructure venture that was contracted for the maintenance and upgrade of key sections within the London Underground rail network incurred an estimated loss of between £170 million and £410 million for the tax payer in a maintenance and upgrade contract that cost of £4.2 billion. The NAO found that the Metronet PPP contract was deficient to the extent that there was no mechanism to protect the tax payer, wherever Metronet failed to deliver on the contract. Eventually, Metronet failed and went into administration in 2007 due to poor corporate governance and leadership issues, and their inability to meet their financial obligations, all of which constrained its shareholder-dominated supply chain.
NAO has argued that the PPP procurement methodology has over the years failed deliver VfM in the UK, in spite of the huge investments and resources committed. But then, the huge shortfall in the UK social and economic infrastructure gap which the Infrastructure Projects Authority (IPA) estimates to be more than £300 billion as at 2022 has to be filled. To do this, the UK government plans to spend 1.0% to 2.0% of its Gross Domestic Product (GDP) annually between 2020 and 2050, and the NAO has suggested that the PPP methodology remains the preferred approach for delivering infrastructure in spite of its shortcomings. Meanwhile, most of the PPP contracts that were signed thirty years ago are coming to their contractual ends, and there is concern regarding whether to renew the contracts or not. Opinions are mixed in this regard as there have been arguments from those who have never supported PPPs in the first place; who are already arguing for government to push out PPPS and take hold of the governance of these projects, but the caveat is whether the individual government entities (hospitals and schools) are getting the right support from the government.
This has prompted the NAO to decide on a change of its previous stance of opposing the PPP methodology because it believes there is now a huge body of experience built from thirty years of applying the methodology which can be applied to enhance other procurement forms as well as the PPP methodology itself. Also, I believe this is a worthwhile endeavour because the experience built over the years can help the government to secure cost savings in excess of £3 billion on future projects. Furthermore, the era of data analytics requires that the government evolves into an ‘intelligent customer’ by developing data that can be used to model performance on future projects. Thus, the government will develop ‘enablers of success’ which the NAO agrees should be developed into a robust data collection system that enhances decision making, organising appropriate skills for projects, and for testing, challenging and assessing ‘go, no go’ project decisions, and using commercial awareness protocols to derive better deals through negotiations. Government is particularly wary of the increase in the cost of private finance which arose from the 2008 credit crises; therefore, there is a necessity that the case for applying private finance to public projects must be challenged more rigorously to justify the impending costs. Further, the fact that national accounting rules continues to allow for off-balance sheet financing is an incentive for the private sector to continue to finance projects.
Prior to now, we are yet to see a systematic approach for evaluating VfM in PPP contracts, I believe the NAO will want to use this opportunity to provide an operational approach for assessing VfM. My argument is based on the premise that there is sufficient data that can be used to demonstrate this assessment. Project assurance is of priority to the NAO, they may include a systematic assessment model for assessing a project on a continuous basis with a view to challenge the basis for continuing the project at specific milestones, and provide for the ability to make a decision on whether the project must be stopped or re-evaluated for a change in scope and scale to suit other objective, should the previous objective become obsolete.
To be fit for purpose, the PPP model needs to be strengthened with legislation providing clear guidelines for risk bearing, and remuneration in case of failure, rather than just rules. Further, the new methodology must strike a balance between quality and deliverability, and accounting must provide for separating maintenance and renewal contracts from enhancement contracts.
#PPP #LondonUngerground #WorldBank #NAO #IPA #infrastructure
References:
PFI Centre of Excellence – GOV.UK (www.gov.uk)
What is a PPP: Defining “Public-Private Partnership” Public Private Partnership (worldbank.org)
Home – National Audit Office (NAO)
Infrastructure and Projects Authority – GOV.UK (www.gov.uk)
Public-private partnerships (PPPs) (ebrd.com)
DFID’s Approach to Value for Money (VfM) (publishing.service.gov.uk)
DFID’s Approach to Value for Money (VfM) (publishing.service.gov.uk)
Infrastructure and Projects Authority Mandate – GOV.UK (www.gov.uk)
Legal and Regulatory Issues Concerning PPPs | Public Private Partnership (worldbank.org)
