PPP - Paper 1 - an overview and introduction

Introduction

This paper forms the first of a series of papers the purposes of which are to:

(i) Explain some of the thinking behind privatisation and public private partnerships as well as consider issues that have arisen from the implementation (or not) of earlier schemes;

(ii) Address the formulation of a procurement scheme;

(iii) To consider in concepts the contents of a request for pre-qualification and request for proposals (RFQs and RFPs); and

(iv) to make some suggestions in relation to the conduct of a bidding process and the negotiations.

What are PPPs?

Public Private Partnerships consist of a relationship through which the public sector is able to deliver or procure the delivery of a public service obligation by using, not only the expertise of the private sector, but also finance from the private sector.

Of course, for many years the public sector has purchased physical assets including construction from the private sector as well as services. It has also borrowed from private sector banks. The key difference between outsourcing where the public sector engages the private sector to deliver a service and under a public private partnership is that under the latter, the delivery of the service is inextricably linked with the investment by the private sector and, as a consequence, a real transfer of risk to the private sector.

Public Service Obligation

In many countries the electorate have a high expectation of what Government should provide. In a number of former centrally controlled economies there is a risk that the expectation is not realistic. However, broadly, the core public service obligations fall into categories of health, education, transport, public security and safety and defence.

Traditionally, the public sector would either itself construct or procure the construction of the facilities required to deliver the services, would maintain or procure the maintenance of those facilities and would employ the personnel delivering the relevant service. Under the PPP concept, the public sector engages the private sector to design and construct/install the facilities, to raise some or all of the finance and then to maintain the facilities. The scope of operational services depend upon the project.

In return the public sector either permits the private sector to exploit the facilities such as in the case of a tolled road or airport facilities or water concession or pays a performance fee to the private sector. It is this income which is used to secure the finance for the project.

Finance

Although most ICT (Information and Communication Technology) PPPs have been financed by the successful bidders for the project, in most cases PPP projects are financed on the basis of limited recourse finance. In brief, the lenders to the project look to the revenue stream of the project. The shareholders ("the sponsors") in the consortium of companies which wins the bidding competition for the project will form a limited company which will enter into the project agreements. That company will borrow money and the lenders will have their capital repaid and interest on that capital paid out of the revenue stream of the project. Other than a pre-agreed amount of equity which the sponsors subscribe to in the company (or lend by way of subordinated debt) the sponsors have no obligation to pay the debt of that company.

Examples of PPPs

Accommodation

+ office

+ residential care homes

+ social housing schemes

+ law courts

+ scientific laboratories

Defence and Security

+ military accommodation

+ prisons

+ military training including flight simulators

+ military and emergency services vehicles (police, fire etc)

+ accommodation for emergency services

+ police fire army (training) unit

Education

+ schools (including ICT)

+ universities

+ secure training units

Transport

+ road

+ rail

+ airports

+ ports

+ ships (ferries)

+ road maintenance

+ street lighting

Heath and Safety

+ hospitals

+ doctors' surgeries

+ mental health facilities

+ renal and other clinical units

+ scanning (x-ray and MRI)

+ pharmaceutical delivery services for dependent patients

+ portable water and sewerage treatment

Changes in Procurement

The original private sector finance for infrastructure projects were closely allied to the then usual procurement by the public sector and, therefore, often the specifications were input, rather than output specifications. In the author's experience, it was quite difficult trying to persuade technically qualified personnel within the public sector that they should allow the private sector to develop the project and that the public sector only need state what outcome it wants to have achieved.

In India, where CMS Cameron McKenna has advised in relation to roads, on some schemes the specification was so detailed as to indicate the thickness of metal to be used on the toll plazas and the material to be used in the various stratas of the road, including the wearing surface. In that respect, the private sector was precluded from suggesting that instead of tarmacadam (which has to be imported and therefore has a foreign currency impact), whisper concrete should be used which creates a longer wearing surface which although may have a higher capital cost, produces a better whole life cost. By this, the Indian Government, or to be precise, the National Highways Authority of India, produced a result where the private sector was constrained in bringing in the initiative. However, it is quite difficult to allow total flexibility as otherwise that produces uncertainty.

There are ways of scoping and sculpting the public sector's requirements. On the first of the local authority shadow toll roads in England (the A130) the local authority held a workshop consisting of experienced practitioners, both from the consultancy side, e.g. lawyers, financial advisers etc. and from the potential service providers' side. As a consequence, a number of issues were raised and solutions identified before the project went to competitive tender. Similarly, in relation to the high speed rail link for The Netherlands, CMS Cameron McKenna developed some six different procurement strategies. These were then distilled into a number of options and a paper was put out on a website and also sent to certain selected individuals for comments. Provided that a huge amount of time is not required, the private sector will contribute and this does help the public sector in reaching decisions.

The public sector needs to know and needs to set out clearly, the legal parameters, not only within which it, but also within which the private sector needs to operate. There is, perhaps, in the USA a culture which is used to the freedom of information whereas the UK is still getting used to the concept. Secrecy has been of assistance, both to the public sector and the private sector. The private sector can prepare bids, etc. knowing that the information contained in the bids will not become available to its competitors. The public sector is used to dealing with matters on the basis of "commercial - confidential" although there is a recognition that the processes of procurement may well be subject to review by the National Audit Office. Only now is the UK getting to grips with the issues which arise when there is a likelihood that a contract between the public sector and the private sector will move into the public domain. Living with openness will require adjustment and this too needs to be embraced by the management team of the public sector.

Business Objectives

Another element is that the public sector entity needs to define its business objectives. It is not for nothing that we call our permanent Government officials, Civil Servants. There is a degree, and a very high degree, of service obligation that many Civil Servants feel. They are not highly remunerated, they are not bonus driven, they do not have a product which they are selling. A Government Department is not a monolithic institution any more than any other organisation is a monolithic institution. It consists of a variety of personalities of differing objectives and ambitions. In the private sector where there is a profit motive, then there is perhaps a single binding element which is that the organisation needs to make profits for investment and to give a return to shareholders and the incentive schemes and the like developed for employees reflect those needs. It does that by delivering a product which meets the requirements of the users/purchasers of that product at a competitive price. However, even within a board of directors with a common cause, there will be differences of opinion. How much more so when Governments only have a general policy?

In the ultimate analysis, a core set of requirements or similar does need to be identified. Thus, the public sector needs to ensure that within its make-up there is a decision making process and that those required to make the process work are not only in place but know their role.

Government Departments therefore have to have management structure and the managers need to have bought into the policy and core requirements at an early stage. Where there is likely to be a requirement for support from the Finance Ministry, then co-ordination needs to be set up in order to ensure that the Finance Ministry buys into the proposals and is kept abreast of changes which may develop as a consequence of the procurement process.