NOTE: This article was originally published in the Procurement Insights European Union Edition.
In Part 2 I will provide a detailed commentary centered around Colin’s post as well as the recent news that States such as Florida have just signed into law Public-Private Partnership legislation, including what it means on a go forward basis – Andy Akrouche
There was much debate when the current UK government came to power in 2010 about whether PPPs provided value for money. PPPs are a means whereby the public sector can get facilities built, such as hospitals, roads or prisons, without upfront investment. That means that infrastructure projects, that might otherwise have to wait many years, can be built quickly. The private sector provides the funds and is then paid to run the facility for a period of, say, 25 years. At the end of the contract period, it hands back the facility to the contracting authority.
The contractor recovers the costs of building the facility over 25 years. So, contractors are usually part of a consortium – a finance provider, construction company and facilities management company. Negotiating the contracts is complex and many public sector organisations do not possess the skills. They therefore rely on private sector consultants, who also often fail to possess the skills that they claim to have.
PPP (originally called Private Finance Initiative – PFI) was ’invented’ in the United Kingdom – to get infrastructure built quickly, but with the rationale that private sector contractors would have an incentive to build to higher standards than would happen if the public sector commissioned a building project. This is because the private sector supplier would want to minimise running costs. Perhaps surprisingly to those who advocated the policy on financial grounds that prediction turned out to be correct.
There have been several issues with PPPs. Firstly; it is argued that government’s can borrow more cheaply than the private sector. Therefore, it doesn’t make sense for them to contract with a private sector provider of finance. Secondly; contracts can be fairly inflexible. If the contracting authority starts to run short of funds during the life of the project, oh dear! Also, if demand varies from that which is predicted – up or down, there will be financial consequences. The contractor will still want to recover its upfront investment plus profit. For hospitals where, in the UK, much of the PPP effort has gone, 25 years requires some pretty good crystal ball gazing, particularly given medical advances and attempts to reduce the length of stay in hospitals. Also, will the structure of the building be suitable for new technology in 10 years time?
Another issue is that the specification should be right. Should the facilities management include cleaning or should it focus on infection reduction?
Health authorities in the UK have been criticised over PPP contracts that worked less well than they should. Problems have been partly because each one let its contract independently, whereas had the contracts been let by a single centralised team, the expertise of that team would have been available to all.
Other potential issues are that creating a competitive market is difficult. Inadequate competition or the same bidders each time creates condition ripe for making excessive profits. The uncoordinated approach in the UK to letting such contracts has made this easier. This can render PPPs ideal for corruption. It is difficult to rule out that some may take place in order to provide a commission to someone as who will argue against a new hospital? That is a further reason why one needs an independent procurement team to manage the contract negotiations and be prepared to blow the whistle either if the business case does not stack up or if there appear to be irregularities in the amount of competition.
So what is the verdict on PPPs? From the hospital patient point of view, they are a great success – new facilities instead of out of date and unsatisfactory old ones. They are also great for the medical profession – much better working environments. However, they can be a major financial headache and lack of contracting and specification expertise in the contracting authority – something that many fail to recognise beforehand or where senior people in the hospital believe they have the expertise, but do not – can create a sub-optimal project – or even a near disastrous one.