22nd January 2015 • Paul Chaffe
One of the primary issues affecting the current UK Construction and Engineering market is the Public-Private Partnership (PPP). Companies such as Carillion, Mott MacDonald and BAM all have roles within PPP, and so issues with these partnerships are understandably very pressing when it comes to the industry.
Whilst they are a vital source of investment income, these partnerships run a high risk. Problems abound, from time lags between bidding and receiving earnings to project over-runs and communication conflicts.
Essentially, when a private party signs a contract with a public sector authority, agreeing to provide a service or project – incurring substantial financial, technical and operational risk – they enter into a public-private partnership.
A more general way to refer to these partnerships is a “shared service delivery” – in short, there are various municipalities joining together with non-profits or private firms to provide specific services.
Sometimes those using the service provided will be the ones paying its costs, not the taxpayer, and in other cases, the investment of capital is made by the private sector on the basis of a Government contract, and so the Government bear the costs of providing this service.
Within projects such as infrastructure, the Government might provide capital in the form of a one-time only grant, in order to make the project more attractive to potential private investors.
PPP’s provide the public sector with access to private sector skills and expertise, benefitting services and facilities which are usually procured and delivered by publicly owned industries.
The way in which these partnerships are structured mean that the capital investment made by the public sector incurs no borrowing. This borrowing is, instead incurred by the private sector entity or organisation which is implementing the project. There are many variations in how financing the delivery of the new public sector assets, including off-balance sheet and on-balance sheet.
In the UK, there are several examples of PPP decline.
2/3 of the London Underground PPP was taken back into public control in 2007, a mere 4 ½ years after it began, with an estimated cost of £2 billion. In May 2010, the remaining 1/3 was taken back into public control at a purchase price of £310 million. In addition, the Government paid advisors £180 million for negotiating, structuring and implementing the PPP, AND had to reimburse £275 million in costs to the winning bidders.
The refurbishment of the MoD in London, a 30 year PPP contract was estimated to save only £100,000, in comparison to the £746.2 million cost of public procurement.
Public private partnerships incur a substantial risk if not entered into with caution.
Many PPPs dissolve as result of some of the following factors:
A disparity in timelines
Whilst non-profit organisations work on a long term timeline, profitable organisations work on a short term basis, focusing on potential turnover. Government agencies depend heavily on election timelines and thus when in partnership, these organisations can run into great difficulties when it comes to establishing goals.
Within a public private partnership non-profits adopt a greater proportion of responsibility. As the government increasingly comes to rely on these organisations, it becomes harder to hold non-profits responsible – unless parameters are set to the letter there is a high risk of under-management, mismanaged funding, and miscommunication.
When entering into a cross-sector partnership it is extremely tricky to understand and collaborate across industries and sectors. Differing interpretations of performance measures, regulations, the nature of funding and goal measurements can lead to blurring communication, and may also lead to issues of autonomy within the partnership.
These issues over who takes the initiative may lead to conflict and halt a partnership altogether.
It’s important that the Government and those organisations involved in public- private partnerships create formal control mechanisms and ensure that there remains a continuous commitment to communication when facing troubles. There must also be an ongoing narrative on the development, maintenance and termination of these partnerships.