Category: Public Private Partnership

How does PPP work

Public / Private Partnerships originated in Australia as governments sought new way of dealing with public procurement of infrastructure in the 1980’s. In the intervening periods they have remained similar as a financial model but as governments like to change the name when there is a new administration in a misguided attempt to make it look like a new policy as opposed to a rehash of the old ones there have been various iterations in the United Kingdom.

The last Conservative Government of John Major started using these financial models and they were knows as a Public Private Partnership (PPP). While in opposition Gordon Brown called into question PPP’s and made it clear they would not be used if Labour won the next General Election. So were born the  Private Finance Initiative (PFI) which as the Labour government became tired and ran out of steam were ridiculed by Gideon Osbourne and would not form part of any incoming Conservative government procurement plans. Of course a little tweak here and there and now we have Private Finance 2 (PF2).

Yet in reality they are little changed, save for the minor tweaks.

What are Public Private Partnerships?

Public Private Partnerships are generally where public services or private business ventures are funded and operated through a partnership between the Government and one or more private sector companies.

They allow Government to contract out the design, building and operation of a facility for the benefit of the public to a private sector company usually for a period of 25 to 30 years usually based on a “value for money” test over traditional procurement. In effect government had two ways to procure:

  • A standard procurement structure, in which the Government specified what it wanted in terms of an asset and then paid a contractor to build that asset. The Government then took ownership of the asset, and took on the obligation to maintain it, after it was built; or
  • A PPP structure in which the Government specified what it wanted in terms of a service and either pay a service provider to make that service available, or allow the service provider to retain the resulting revenue or share it with the Government.

However the effective result of PPP is that everything is procured through the PPP model and has resulted in almost every aspect of what the government provided being effectively sub-contracted, through large service providers, such as Capita. There is some miss-guided notion that a private company can run the service for less money and still make a profit than government after factoring in inherent inefficiency. The actual result is usually poorer service. There is a scandal every so often, the culprit is given a token ban from securing government work, but this is soon dropped and they back on the gravy train.

A worked example

For the purposes of this example we will assume the highway authority want to provide traffic relief by building a new toll road (such as the M6 toll which by-passes Birmingham via Cannock in the West Midlands) and maintaining and managing the asset for a 25 year period.

There would clearly be key functions that would need to be considered and evaluated by the PPP operator, such as

  • The cost of building and operating the road would need to secured
  • The PPE contractor would have to engage a designer to determine the layout and specification of the road
  • A contractor would need to be appointed to construct the road
  • A service organisation would be required to clean the road, replace damaged infrastructure from crashes, provide and maintain lighting, institute a “smart” tolling system (Such as at the Dartford Crossing of the Thames River
  • Cyclical maintenance such as resurfacing would need to undertaken
  • A mechanism would need to be established of what the handover procedure is when the lifecycle of the PPP ends

As can be seen this is a multi-disciplinary activity and the government would in effect expect the cradle to grave cycle to be undertaken by the successful bidding organisation. This generally means that the bidders are Joint Ventures (JV) (incorporated or unincorporated) that allow the main Special Purpose Vehicle (SPV) that will hold the effective PPP contract to cover different competencies. In our example the SPV could be made up of a Finance House, Design Organisation, Main Contractor and Service Provider. However despite this make-up of the JV the actual works will still be sub-contracted even to a partner company. This is because the trend has been for these SPV’s to be sold off after a defined period. In effective the SPV is a shell because it owns no physical assets, employs few (if any staff) and exists to own the head contract for the PPP being contracted for.

Risk is obviously a major consideration in these projects because of their complexity and part of the PP process would be for government to transfer risk to the SPV and its agents. This could be done as follows:

  1. Risks that Government want to pass to the PPP SPV would be set out in the contract between the parties, or assumed by the SPV as applicable at law to its activities, such as liability for contamination during the construction phase
  2. As the SPV is project specific and does not own anything physically these risks and obligations are allocated to the various members of the supply chain where applicable or where this cannot happen will be left as a risk the SPV holds with some form mitigation to cover the financial consequences of the risk crystallizing. In effect the cost of this type of risk would be a component of one of the costs of the service
  3. During the construction phase – for example, liability for environmental pollution during construction phase the risks would be passed down by the SPV to a Contractor (who could further pass down the risk to Sub-Contractors) through “back-to-back” provisions in their contracts. In effect this means the Contractor agrees to perform all the defined services the SPV has agreed to provide to the government. The Contractors programme would be of equal length of shorter than the SPV, to build a road to the same specification required by the government in the head contract and to ensure the SPV would not be in breach of contract and subject to Liquidated and Ascertained Damages. (LAD’s) However there would be a “back to back” provision that would make the Contractor liable to the SPV for LAD’s at the same level in the event he was in breach of contract. In effect mitigating this risk for the SPV. The effective purpose would be to leave the allow the SPV neutral and the Contractor managing the risks involved in the construction of the asset
  4. When the road was complete and able to operate as a toll road, the SPV would operate the road and, again, these obligations would sub-contracted to an Operating Company using a similar methodology as detailed in the previous point. However it is possible that not all operation and maintenance risk could be passed to the Operating Company, two examples would be:
  • “Day-to-day” operation and maintenance could be passed on but obligations to undertake periodic, major maintenance, such as resurfacing for wear and tear may not be subcontracted at the start but remain an SPV risk, and contracted for separately when required (where defined in the head contract) or as due when there are sufficient funds and resources
  • “Change in Law” provision are a risk that cannot be evaluated at the start and that the Operating Company could not take on because of the length of the service contract. These risks are to a large extent under the control of government as the legislator. It is likely this would be a shared risk between government and the SPV and be dealt with as and when the risk crystallises following a change in law.
  1. The SPV has to finance the construction and initial operational activities, in effect the construction costs of the road would need to be paid for, and the money for this would need to be repaid from revenue generated by the road when it opened for traffic. The financial model would see the funding requirements should exactly match the SPV’s liabilities to pay its subcontractors. In effect a lean organisation

 Nature of risks with this PPP project

At the simple level the risks would be:

  • Can the road be built on time and to the required specification
  • Can the road be operated as the government requires
  • Will revenue generation be as expected as the financial model will be based on revenue assumptions

We could now expand these sub heading and detail some of the specific further risk that could be associated with each.

Built on time and to the required specification

  • Does the SPV have the necessary access to the site
  • What happens if ground conditions are different from expected
  • What happens if the law relating to road construction changes during the construction period
  • What happens if resources that the contractor is expecting to use are not available or in short supply
  • Who takes the risk that the road costs more to build than expected
  • What happens if a natural disaster occurs

Operated as the government requires

  • Does the SPV have the required access to the site
  • What happens if the law relating to road operation changes during the operating period
  • What happens if resources that the operator is expecting to use are not available or in short supply
  • Who takes the risk that the road costs more to operate than expected
  • What happens if a natural disaster occurs

Revenue generation expectations

  • Has the road been built to specification
  • Is the road being operated according to the Government’s requirements
  • Demand risk: will cars, lorries etc want to use the road
  • Payment risk: will cars, lorries etc want to pay to use the road
  • Are the operating costs, including finance cost fixed or variable

 These risks are typical but not exhaustive and each would require a provision in the contract to deal with. Some we have already looked at in other blog posts such as access (frustration) or natural disasters (Force Majeure). However Demand Risk could be dealt with where government makes up for any shortfall in notional demand. Of course this really means the taxpayer is obligated to pay the shortfall.

However in the alternative these risks would exists under traditional procurement where the accepted norm is to contract out the running.

As the Local Democracy, Economic Development and Construction Act [2009] outlawed Conditional Payment clauses, although this is the standard in PPP contracts where the SPV is created for the sole purpose of procuring the project has no assets and is not intended to have any liability unless it is first paid. Therefore PPP contracts have an Exclusion Order where Conditional Payment provisions will exist, although in the longer term this may need to be subject to further legislation. However because of the nature of the contracts and that they are bespoke, heavily negotiated forms this is a risk known to all parties at the outset.

The Exclusion Order means that provisions in first tier PPP sub-contracts which make payments in such contracts conditional upon obligations being performed in other contracts (such as providing certificates and ‘pay when paid’ clauses) will be effective.  However, ‘pay when paid’ clauses will, generally speaking, continue to be ineffective in accordance with the Local Democracy, Economic Development and Construction Act [2009]

PPP as a procurement model has been with us for over 20 years. It’s a simple and legal way for government to not have to declare obligations as government debt. In an overwhelming majority of cases where a dual analysis of PPP and traditional procurement has been evaluated, the assumptions are skewered to assist in ensuring the PPP option is the governments preferred procurement route. However when costs are well known and become public knowledge PPP proves itself to be poor value for money.

But the reality is it’s here to stay, even if when the current Conservative government runs out of steam and the electorate give another party the opportunity to govern, probably Labour once again once they have dispensed with their insane trip back to 1920’s state control under Jeremy Corbyn and his “brothers” and “sisters”. One thing is sure PPP will continue, it will just be called something else.

Maybe they could call it Stakeholder Hybrid Infrastructure Term Schemes.


Sport, Business & Politics

The United Kingdom (UK) and the world (as it is so small and interconnected now) saw a once in a lifetime (if that) event on Monday, 2nd May 2016. A team of footballers from all over the world with their lynchpin a local boy by the name of Jamie Vardy; managed by an Italian known as the “Tinkerman” or “Nearly Man of Football” winning the highest league in England. The last comparible event in the football world was Nottingham Forest being promoted and winning the old Division 1 in their first season under Brian Clough in 1978.

By some ironic twist of fate the League Championship trophy should be received at Chelsea, a team that sacked Claudio Ranieri because, in their owners view he did not have what it took to win the league. This was in all probability because he was not a “Big Name.” How wrong that analysis has proved, and at huge financial cost for the financial settlements paid to all those that have followed the Roman at Stamford Bridge. These payments alone are worth more than the collective paper value of the Leicester City squad. 11 footballers who have won the biggest prize in English sport worth less collectively than a bunch of effective losers who only got employed because they were a “Big Name” with a reputation.

This asks the question are there lessons to be learned from this remarkable achievement, after all in reality football is a business that exists to kick a ball around for 90 minutes, 38 times a season (in the Premier League) and take part in other joint venture enterprises, such as the European Cup and FA Cup.

The UK is a confused and disjointed nation, all self-inflicted as it tries to live in denial of the past. Historians are generally people who try to tell us what happened in the past, usually without any actual factual knowledge to back up the tripe they write and viewed retrospectively when the consequence has played out. We can all chose winning lottery numbers after the draw has taken place. There is only one thing that we can safely generalise about historians; they would never have made the history if they were there at the time. In pub language Tristram Hunt may be very close to that what rhymes with his surname, he is certainly no Churchill.

The clear historical fact that Britain controlled over 25% of the world is looked upon in the same vein as having assisted paedophile Jimmy Saville in his charity quests. Yet colonialism happened, it shaped Britain in many ways and could never have been all negative in the countries that were colonies, such as the railway network in India. The reason for the railway being build may not be something to be proud of, as it was to help British trade, but the railway is still there in a sovereign, independent India to drive India’s economy. Where I do agree with historical views is where it is said “we civilised these places.” The truth is they had their own civilisations that had evolved and worked long before we turned up. What colonialism did was hasten their decline to be replaced by so called Western civilisation, Mr Ghandi’s comment on that being a good idea was quite apt. While these social structures would inevitable have changed, that is indeed a dark legacy of the colonial period.

Likewise those in the political classes seem to think that as victors in the World War II, this cannot be trumpeted about. Yet the truth is the United States of America (USA), UK and its allies saved millions from needless death and only subjected half of Europe to the tyranny of Communism rather than all of Europe to the tyranny of National Socialism. This victory generally brought about the freedoms that we have today, including a Germany that is part of the world as an equal partner. But we cannot say that in case we upset some defeated nations sense of pride which was dented by a military defeat.

Its brought us to where we are today that soon another once in a lifetime event, the referendum on membership of the European Union.(EU) The EU is a typical political organisation, it is bureaucratic, unwieldy, unaccountable, staffed by the unemployable in any other field. Yet, these people who we never get to meet, who never put themselves up for election by popular vote, control our lives. They have a propaganda department that would have made Josef Goebbels blush. We see the signs “Funded by the EU” everywhere. Yet the reality is it’s funded by taxpayers. In the case of the UK, Britain is a nett contributor, in other countries we are funding building of roads etc. No different to the railway in India example, but with no tangible benefit to Britain. In other words we get less than we put in back. If we vote to leave we could still have the signs but they could say “Funded by British Taxpayers.”

How many people know that the EU accounts have not been signed off for over a decade? In layman terms their auditors do not believe what they are told and where people have used the whistle blowing provisions to highlight systemic fraud, they have been silenced.  Like I say Goebbels would be proud.

Now weighing in on the argument we have the worst President in American history, whose sole interest in the referendum is to ensure the signing of an EU/USA trade deal which is so one-sided its embarrassing and a scandal. Its known as the Transatlantic Trade and Investment Partnership (TTIP). You can read more on TTIP here,

If not having that deal foisted on British business means we are at the back of the queue, that’s the best place to be. After all if Britain votes to leave the EU, we will not lose all our significant technology advantage in new technology, where we are a leading nation. In fact perhaps then state aid would be allowed meaning that instead of the first social media phenomena, Friends Reunited not having withered and died, it could have been what Facebook is today. Our goods and services will still be needed and that will move us up the trade queue.

Also making a late surge to be heard is a former US President whose claim to fame is using a cigar for a rather unorthodox activity and one who has at least set the boundary on what is a sexual encounter.

We have the disgraceful sight of two posh boys who don’t know the value of anything talking down Britain and saying in effect, we cannot cope in the real world without the protection of the “nanny-staters” in Brussels and linking it to trade, where in reality trade is a by-product of the EU. It is first and foremost a political institution.

On the political front, it’s time to do a Leicester City and not believe all the rubbish that is written and spoken by those who cannot see past the big organisation and with an eye on where they can go and continue their ride on the gravy train long after we have kicked them out. It’s time to show that we may be a small Island, but we punch well above our weight and as a real sovereign state able to shape its own future without interference can punch even harder.

When the UK was last given the opportunity to vote in a referendum of this magnitude, we were the sick man of Europe, an economic basket case that had to be bailed out during the last days of the Callaghan led Labour government. The 1979 general election which saw the election of Margaret Thatcher was fought over who governs Britain; the elected government on behalf of the people (well notionally anyway) or the trade unions.

While no expert on the intricacies of “Thatcherism” from an economic stand, the Iron Lady effectively believed that you could be what you wanted to be as long as you worked hard. The state was there to assist when you stumbled, not there to live your life for you.

From a business perspective probably the key policies of this new empowerment was “Right to Buy” and “Privatisation.

Of course like all governments over time a good idea, such as the initial Privatisations of utilities, British Airways and de-regulation of buses etc have now led to the point where they think everything can be improved by the market, like education and the provision of heath services. When you know the value of nothing and have a worthless degree from a great University how can you understand this.

The reality is that Privatisation ran its course over 20 years ago, but it allows the government to generate revenue by selling assets that the taxpayer has paid for on the cheap, with no tangible benefit. Royal Mail was a classic example. In education Independent Schools are the market driven improver, but that’s not possible for everyone, so we have the usual half way house which seeks to exclude those who need access to good education even more.

How long will be be before the railway operator, Network Rail (NR) ends up back in the private sector. Last time it ended in bankruptcy for Railtrack PLC. Why will it be any different this time?

Yet the real driver of any Privitisation of NR will actually be to mask the massive debt that Gordon “No more boom and bust, just bust” Brown allowed when NR was a government company that was Limited by Guarantee. In other words the debts were guaranteed by the Exchequor, but the debt was not shown as government debt. Its effectively an Enron scam, which was declared illegal. The consequence is NR’s debt is now shown as national debt, as it should be.

Companies started up under the early Privatisations, such as transport giant, Stagecoach. A company started up with redundancy monies and an idea.

Does this happen now?

No the beneficiaries now are the already huge, in some case offshore based or foreign owned companies getting first take at these assets and government services, such as all tax offices being sold to a company in a tax haven and then some leased back.

Are they run well, such as Southern Railways?

No, they are a disgraceful service and the roll call of failed government projects that have never delivered, other than revenue to the contract holder grows all the time, Fujitsu with the NHS and then the companies to train people for work such as A4E, which have produced no real employment. However we continue to be giving more and more government contracts to effectively not deliver.

Business has us conditioned to believe that only the largest companies, (remember why Ranieri got sacked at Chelsea? See the parallel?) usually riven with inefficiencies and waste can deliver and this is driving up costs, particularly in the public sector.

A positive impact of “Right to Buy” was making people property owners, yet the Labour government of Tony Blair, another confirmed “Remain” cheerleader sold off government buildings, paid for by generations of taxpayers to become tenants. Insance or wht?

A negative of “Right to Buy” was that the Exchequer receipts of these sales were never used to build future affordable and social housing through public works. Now we in a position where new developments are bound by law to have a social rented and affordable element component to a development, but built by property developers who exist to make a profit. It’s about as compatible as private companies improving education for less money than the state can deliver it. It is done by cutting services, aka quality.

Why then when government contracts are handed out is there no entrepreneurial incentive that means only Micro (where appropriate) and Small Medium Enterprises (SME) are allowed to bid and win. These would need to be bona fide SME’s and not just arms-length companies of course. That would drive a new kind of entrepreneurship, a new kind of ownership and a culture of calculated risk taking for financial success, much like how Stagecoach came about. Those who take the chance will be winners, but so will staff who are like minded and the country benefits too as tax receipts are kept at home to be spent here.

If we look at transport infrastructure for example, Crossrail in London has been the exclusive domain of the multinational engineering companies, yet the actual contracts were broken up sufficiently to allow those that were in the supply chain to be used as first tier contractors. High Speed 2 (which we all know will happen, it’s a typical vanity project with no tangible long term economic benefit in a digital age) will be the same. In the rail sector there is a huge push on electrification, yet the contracts are again being let to the multinationals in Framework type contracts. These companies have neither the resources nor capability to deliver without using the supply chain and just adding fee on fee generally. So why not use the smaller leaner supply chain as Tier 1? They have everything required from a compliance perspective generally.

The real issue is fear because managers are riven by fear of doing anything different because the “Big Companies don’t let you down” mentality holds sway. Yet the reality is they let all of us down (because the taxpayer is the ultimate client) all the time. The Great Western Electrification Scheme in Wales is a text book example. Over budget, late and with an insane Private Finance initiative (PFI) for the supply of the rolling stock which will mean that they taxpayer pays from a set date in huge financial penalties, even though the trains will not be able to run because the infrastructure upgrade is so far behind programme.

Yet the reality as Leicester City Football Club have proved in a highly complicated business, with a number of stakeholders all with different expectations that biggest is not best. They have a history of over 130 years, yet Manchester United Football Club (MUFC) have spent more in transfer fees in the last two years than Leicester have in their entire history. Under both Louis van Gaal and David Moyes, MUFC have epitomised everything wrong with business in Britain today, a proper don’t care attitude by the staff. It’s almost like they have a “Timesheet Mentality” where you don’t focus on what has to be done but just making sure you get paid. Sadly there are many businesses in the country that have the same or worse psyche as an unwritten philosophy.

The events of Monday, 2nd May 2016 on a bit of grass in west London should send out shock waves to the leaders of this country in all avenues of life that if we believe in ourselves the opportunities are endless.

At the risk of polarising, that would make us all “Thatcher’s Children.” After all she was the lady who said Britain can be Great again, and set about building the foundations. We still thrive as a nation because in 1979 the people decided trade unions don’t run the country.