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New PFI/PPP guidance could offer a more flexible future

Wayne Butcher Wayne Butcher

Could public-private partnerships in public services be reset in the wake of COVID-19? Wayne Butcher and Ian Tasker look at why the ethos of partnership has been eroded and how new government guidance could be used to bring more flexibility and trust back into the mix.

Since the late 1990s, the public sector has entered into a number of private finance initiative (PFI) / public-private partnership (PPP) contracts to provide investment and replace critical infrastructure across many sectors including education, health, defence and housing.

Many of these contracts have faced challenges around affordability and value for money. And the austerity measures of the last 10 years have placed further pressure on public sector bodies to make PFI/PPP arrangements work.

IPA guidance for PFI/PPP

In April 2020, the Infrastructure Projects Authority (IPA) issued guidance in relation to COVID-19. It stated that: “contracting authorities should work closely with PFI contractors to use all available options to maintain public services during the emergency period. This will include maintaining unitary charge payments (enabling PFI contractors to pay their workforce and suppliers), revising contract requirements/standards (including scope changes where necessary), and moderating payment and performance mechanism regimes where appropriate.”

Both parties in public-private partnerships will need to be nimble to ensure critical UK infrastructure remains open during the coronavirus situation; not only for the short term but with a new mindset that allows this to continue for the medium to longer term.

The following graphic shows the build-up and roll-off of the contracts for the next 30 years with 2019/20 seeing the peak number of live contracts in the UK at just under 700. This length of time highlights the need for the public sector to work collaboratively with the private sector through revisiting contracts and embedding a more positive road going forward.

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What can be done to improve PFI/PPP project delivery over the next 30 years? The questions we often ask when advising the sector around financial and commercial opportunities to improve the existing arrangements are:

  • why have these contracts failed to evolve over time and continue to face public criticism?
  • why are existing projects not delivering expected outcomes?

Below we explore some of challenges that have faced PPP procurement up to now, and also suggest some potential remedies.

Risk transfer in PFI/PPP contracts

During dialogue of the contracts, risk transfer was often the primary point of discussion.

In many cases, the public sector’s desire to achieve an off-balance sheet treatment drove decision-making, which transferred certain risks to the private sector. This meant the private sector was often responsible for areas of delivery that the public sector was better suited to deliver, often around ‘soft’ services, such as security, catering and pastoral care.

This typically resulted in not having the right people doing the right things. The private sector held responsibilities that didn't naturally fit with their operational capability and led to the charging of risk premiums, resulting in contractual arrangements that were sub-optimal. The charging schedule was not in keeping with the complexity of the task, bringing further spotlight on the contractual structures and the notorious tales of ‘£100 to change a lightbulb’.

Time to re-assess PFI/PPP?

While the PFI market attempted to evolve to address such challenges, the post-coronavirus environment presents further financial pressures on the public sector and now brings a further and fundamental opportunity to re-assess contracts where the public and private sector agree that ‘true’ value for money is not being delivered.

The opportunity for flexibility presented in the IPA’s April 2020 statement needs to be granted more widely. It needs to give the freedom to open up a contract to determine how we can reach a position where we have the right parties delivering to each other’s strengths and ultimately to build trust. A sensible discussion is required, one that recognises that savings might require risk transfer back to the public sector but that ‘value for money’ should be the ultimate objective.

Trust – the public-private culture clash

In many PFI/PPP schemes, the trust between the public and private sector has eroded. The public sector often holds a cultural view that the private sector’s sole motivation is centred around financial returns and that the public sector is not receiving all the benefits it is entitled to. All stakeholders need to be sympathetic to the challenges faced by the key parties over the full term of the contract. This requires active listening to understand how arrangements can be agile to ensure longevity and strike a win-win balance.

It is interesting to consider how we have reached this point. When the original contracts were being established, ‘partnering’ was the buzzword. But with the passage of time this ethos has been lost. How can we bring it back?

Teamwork, compromise and collaboration have never been more important than now. With these principles at the heart of partnering, we can surely deliver better results for PFI/PPP in the future. Fostering an environment where interaction is based upon these principles and not the nuts and bolts of the PFI/PPP project contract will be more beneficial.

We are not saying that the contract is unimportant, but relationships are just as important and a shift away from a knee-jerk reaction to reaching for the contract when challenges are initially faced. This can generate value for all stakeholders; not only to improve the existing arrangements but also to identify new opportunities and respond to the strategic challenges that lie ahead.

Next 30 years for PFI/PPP?

PFI/PPP projects are set to continue until the early 2050s with more than £200 billion of payments to be made from the public sector to the private sector for the assets and services provided. There is a huge opportunity to change course and generate efficiencies which would be invaluable to the current economic climate.

Previous research performed by the National Audit Office in 2013 indicated that up to 1.7% of savings from the unitary charge payments could be made until circa 2040. Extrapolating out, this indicates that circa £2.5-£3 billion could still be saved if the right mindset is employed and indicates that this exercise is well worth taking on.

If you would like to discuss any of the above issues in more detail, please contact Will McWilliams.