New approaches to procuring public sector infrastructure and services are being implemented around the world. Although some might argue that deal flow has yet to reflect this in some countries, the increasing interest shown by central and local governments in developments that are taking place in the UK and other countries demonstrates that changes are afoot in a broad range of markets.

The challenge for governments that are taking their first steps in pursuing public-private partnerships (PPP) is choosing new target markets for developers, operators, lenders and advisers alike.

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PPP takes various forms. In the UK, the most developed form is the private finance initiative (PFI), which involves a long-term contractual relationship between government (both national and regional) and the private sector to design, construct and maintain buildings.

Explaining PFI

PFI is distinct from the delivery of front-line public services, which are usually free at the point of use (like health and education, for example) but paid for by the government on behalf of the tax payer. PFI relies on putting long-term private capital at risk, which in turn drives a whole set of behaviours that incentivise delivery of services to deadline and budget to achieve value for money.

Expansion

About 700 PFI contracts have been signed in the UK with a total value of more than £40bn, 450 of which have completed and are operating their projects. Many other countries are expanding their PPP programmes – which hitherto had comprised the more traditional areas of transport concessions – into these new areas.

PPPs can cover a wide range of engagement between government and the private sector. The PFI should be seen as just one form of PPP procurement tool in a continuum of other approaches. This avoids chasing PFI-type structures for their own sake when what really matters is the best way of engaging (if at all) with the private sector to deliver a particular service or product.

There are some very successful information technology PPPs in the UK, although they are no longer procured using PFI due to the difficulty in arriving at clear specifications at the outset and in attracting third-party finance. The latest schemes in the education and health sectors involve developing long-term strategic partnerships between the public and private sectors to manage whole programmes of individual PFIs and other types of procurement.

Opportunities

In the transport sector, the nature of partnership, especially for larger schemes, can be very different again. With the right mechanisms in government, the opportunities for both the public and private sectors are huge.

However, the disciplines and lessons learnt from developing PFI projects are often the catalyst and starting point to wider forms of PPP. What useful lessons can markets where PPPs are in the earlier stages of development draw from the more mature programmes?

The first lesson is to address the asymmetry in transaction skills between the public and private sectors, while ensuring that there is a more sophisticated mutual level of understanding. It is not surprising, therefore, that governments are increasingly accepting that they need to establish some form of specialised and centrally located PPP unit.

Across the EU, there are more than 14 such units, a third of which have been established in the past year, although the range of structures and capabilities is still quite wide. Similar developments are taking place in North and South America and Asia.

Not only do these units serve to join up public sector approaches and collect data, but they can also undertake the more important task of providing experienced guidance and ongoing support to the procurement bodies involved, both before and after the projects become operational or perhaps where refinancing is being considered.

Level playing field

One of the biggest practical challenges that follows is the need to create a platform to attract individuals with the knowledge and experience to work on the public sector side and thereby level the negotiating field. This requires recognition that time and resources are needed to establish the capability. Using private sector secondments is a route that may help, but this approach should not be relied on exclusively because it does not usually address the issue of retaining those skills.

A follow-on lesson is to keep the mandate of any PPP unit relatively tightly defined, to make it easier to get the right people: it is a challenge to recruit people with 30 years’ experience in banking and another 30 years’ in public sector policy work.

Another lesson is to take a programme, rather than an ad hoc project, approach. It may be tempting to launch a highly visible flagship project as the first PPP, but this enters high-risk territory. If the project fails, it will increase the chances that the whole programme will stumble. Starting with one or two pilot projects, for which the risk transfer and service requirements are relatively modest, enables experience and skills to be developed in both the public and private sectors.

What is unknown is unknown: under-estimation of the complexity and of the time needed for these transactions is almost universal, as is government pressure to find a fast-track solution.

Misperceptions

There can be a perception that private sector capacity can be switched on instantaneously. However, such capacity requires time not only to grow, but also to convince private sector players to develop the capacity in the first place.

The market prefers to see a pipeline of similar transactions being developed in an orderly and consistent framework. This can make one-off PPP projects in small programmes particularly challenging. This supports the longer-term programme rather than one-off project approach. It also highlights an important role for a centralised unit to communicate and co-ordinate the flow of projects to the market. This can help to prevent the public sector from competing against itself (so bidding up prices). Suppliers also prefer a predictable stream of bidding opportunities so they can plan and find resources accordingly.

Another common problem is over-optimism about private sector capacity to manage risk: surely it is a question of price? The mantra of allocating risk to the party that is best able to assess or manage the risk, even if it is the government, saves time and cost (and face) in the long term for all parties. This lies at the heart of achieving value for money.

Establishing a government capability to keep close to capacity issues and developments in the private sector and the private sector’s willingness to share its views are important. A balance is needed between a confident and continuous dialogue with the private sector and encouragement of a healthy competitive environment.

Besides building the necessary legal and institutional structures, there is also a need to recognise the importance of having adequate resources in place for the preparation of individual projects.

False economy

Understandably, this might initially appear unattractive to public authorities, which look to PPP as a way of relieving budget pressures rather than creating them. But it is a false economy to embark on this route without having the resources to ensure that output specifications are clearly defined, that they match the ability of the private sector to supply and that the cost of the project over the long term is properly evaluated and affordable. This work is usually carried out by specialist private sector advisers contracted by the public sector. What is important is for the public sector to develop the tools to evaluate, appoint and manage the range of advisers required.

Linked to this is the need for a good communications programme so that political leaders and civil society can understand what is being developed and achieved, and the complexities involved.

PPPs usually involve a change from long-held ideological views and a reform in the way public services are procured and delivered, so they are bound to encounter opposition from those whose interests – such as terms and conditions of employment – might be adversely affected, or those resistant to change.

The complexity of PPPs can make them easy targets for opposition groups – and badly handled PPP procurements are a gift to them. It is sometimes helpful to distinguish PPPs from privatisations by emphasising the fact that under a PPP, the public sector is still ultimately responsible for public service delivery.

Equally important is the need for processes that engage with the more immediate stakeholders and users. PPPs involve encouraging good design and innovation, and users are vital to this process – as is the acceptance of striking a balance between the cost and time that this can sometimes involve.

Practical skills

Managing PPP procurement is a complex and multidisciplinary process. Establishing a step-by-step method is therefore another key lesson. Guidance and, where necessary, legislation can only go so far. But practical day-to-day management of the process that takes the project to the point at which it can be put out to tender and subsequently procured is what makes the big difference between success and failure.

The use of specific project boards and a clearly identified individual as project manager (who has a sound knowledge and the ability to interpret the guidance) has also proved a useful management tool.

This, combined with a ‘gateway quality’ control process that demands rigid business assessments to be independently reviewed at defined stages during the development and procurement phases of the project, can help to break down into manageable chunks what might at first appear to be a daunting array of issues.

Strong leadership

The last and perhaps most relevant lesson for those at the early stages of the programme is the importance of its being underpinned by strong political leadership and support. This links in with understanding the heart of the approach. PPPs involve changes to the role and behaviour of the public sector. If a willingness to change is not inspired from the top, then the rewards for all the effort needed to make these approaches work will be modest. Over time, institutionalising the process would ensure that it survives changes in leadership.

The good news for those embarking on the PPP journey is that others have gone ahead, so there is a growing body of experience and guidance available. Partnerships UK, which is 45% owned by the UK’s Treasury department, has worked with overseas governments to share the practical lessons from the UK experience and runs a masterclass specifically for public sector officials who are charged with setting up and running PPP programmes.

Although the focus of this article is the public sector, any private sector investor or developer looking at new markets will want to understand each government’s approach to developing the market. This is relevant not only to assess future deal flow, but also to take a long-term view on the order and transparency of the process and, crucially, the potential bid costs and timetables involved. Hopefully, some of these approaches will help in the overall analysis of such programmes.

Edward Farquharson is assistant director of Partnerships UK in London.