Blog: PPPs need tweaked to build vital infrastructure
Tackling negative perceptions of this scheme are vital, says Charlene Mclaughlan from DLA Piper.
As a procurement model, public-private partnership (PPP) continues to come under fire from some politicians and members of the general public. However, we only tend to hear about PPP projects when they go wrong; the positives are usually lost in the rhetoric.
PPP is a means of procuring public infrastructure assets (such as schools, hospitals, roads or waste facilities) through the private sector. It differs from traditional capital procurement, in that the public authority procures a whole life serviced asset. In other words, rather than the public authority simply procuring and paying for the construction of an asset up front, the cost of the design, build, finance and upkeep of that asset is packaged into monthly revenue payments, which only start being paid by the public authority when the asset is complete and meets a set of required standards making it available for use.
PPPS are long-term contracts (typically 20-30 years) governed by output and performance-based specifications, intended to encourage innovation from the private sector. Failure to meet the required outputs, for example failure of a building to operate the asset to the correct performance standards, entitles the relevant public authority to make deductions from the monthly revenue payments to be paid to the private sector.
When the asset is handed back to the public sector at the end of the contract term, its condition must meet standards set in the contract or further sums can be withheld by the public sector.
A key driver for PPP over recent years has been the need to find means to fund infrastructure outside of capital budgets. It enables public authorities to procure vital infrastructure ‘off’ the public sector balance sheet. However, some critics confuse PPP with privatisation and successive governments have therefore sought to rebrand, refine and de-stigmatise the model.
In Scotland, the Scottish Futures Trust adopted the Non-profit Distributing (NPD) model, which capped private sector returns. However, it is now clear this defining feature of the Scottish model is at odds with off balance-sheet statistical treatment under the current European System of Accounts (ESA10), so further re-design will be needed if that type of PPP model is to have a future in Scotland. In England and Wales, we have seen the evolution of other alternative PPP models, namely PF2 and MIM, respectively.
Common across all these newer models is a structure that is designed to tackle negative public perceptions around transparency and private sector profiteering from the public purse.
Another significant development in UK PPP models has been the move away from the provision of soft FM services (such as cleaning and catering). This limits the likelihood and potential number of staff transfers from the public to private sector when a PPP is implemented, which may be considered as important from a political perspective.
Risk is heavily weighted towards the private sector in PPP and is priced by it in a competitive tendering environment. The Report of the Independent Inquiry into the Construction of Edinburgh Schools issued earlier this year considered significant defects in the construction of schools built under a PPP model. The report addresses issues more broadly attributable to the construction sector generally and notably, tucked away on page 122 is a statement which reads: “the financing method per se did not have such a direct relationship with the presence of defective aspects of the construction in the Edinburgh schools.”
Much has changed since the introduction of PFI in the early 1990s. Further, PPP models are likely to continue to evolve as governments and the industry adapt, innovate and apply lessons learned to PPP models as a viable form of procurement to build the vital infrastructure we need here in Scotland and across the UK.
- Charlene Mclaughlan is legal director in DLA Piper’s finance and projects practice in Scotland.
This article first appeared in The Scotsman