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An Introduction to Public Private Partnerships:
Why Government needs to work with the private sector
Vilnius
22nd November 2006
Stephen Harris - Head, International IFSLChairman: UKTI PPP EXPORT GROUP
PPP is About
• Better procurement• Public sector reform• Better strategic planning• Building and maintaining good
infrastructure• Better services for the taxpayer• Sharing of risks between most appropriate
parties• Public and private sectors working
together
PPP is not:
• Free infrastructure• Just about finance• Just building infrastructure• Just about involving the private sector• Privatisation, simple concessions,
outsourcing or property development • A method to make a bad project good
Characteristics of PPP
• Contractual arrangement between the public sector organisation & private sector provider
• To deliver a service -usually a new asset• Output not input specification• Integrate design, construction and maintenance• Contractor/operator finances investment• Cost effective allocation of risks• Over a long term
Characteristics of PPP
• Payment mechanism designed to ensure delivery and performance
• Contract can terminate for non- performance• Penalties for not meeting contract terms• Government retains reponsibility for ensuring
service delivery to agreed standard• Assets revert to Public body at
end of contract- For letting out on another PPP
- Or operating by Public body
Why do countries need to involve the private sector?
• Governments seeing lack of funds for new infrastructure
• Pressure on tax base– Traditional routes for raising finance not enough
• Governments don’t maintain existing infrastructure
• Economic growth leads to demands for new infrastructure
• Leads to: Infrastructure gap– Can’t afford new infrastructure– Existing infrastructure deteriorating
• Result: Poor Services for the public
Infrastructure Gap
Value ofInfrastructureIn real terms
Demand (GDP – led)
Supply (net investment)
Time
Governments need to:
• Build new infrastructure• Maintain new and existing infrastructure to a
consistent standard• PPP provides:
• Provision of assets or services otherwise unavailable
• Better integration of operation and maintenance with design
• A whole life approach to delivering services
• A fairer way to raise money from the taxpayer
• Result: Better services to the public in the long term
Problems of traditional procurement
• Adversarial approach to contracts• Lowest bidder wins• Requirements ill-defined/changes• Cost / time overruns-poor value for money• Limited innovation in design or operation• May not exploit third party revenue• Focus on infrastructure not service• Unnecessary retention of risk• Poor strategic approach
Cost and Time Overruns
Holyrood Horror -The Scottish Parliament
• Original budget estimate(1997)-£10-20m• Original completion date estimate-July 2001
Holyrood Horror – The Costs
0
50
100
150
200
250
300
350
400
450
£ millions
1997 1998 2000 2004
Year
UK PPP: Evidence of Benefits
Source: National Audit Office – UK Parliament - Expenditure Auditor
Delivery on time and on budget
Performance of completed projects – No. of Projects
PPP ConventionalProcurement
80%
30%
On time
On time
On budget
On budget
ASSET LIFE CYCLE
0 5 10 15 20
YEARS
ASSE
T CO
NDIT
ION
Failed
Very poor
Poor
Fair
Good
Excellent
40% drop in quality
40% drop in quality
12.5% of life
€1 for renovation herewill cost $€ here
Asset deterioration
0
1000
2000
3000
4000
5000
6000
0 7
14
21
28
33
41
48
55
62
69
76
83
90
97
10
4
$ m
illi
on
s
Years
Benefits of proper maintenance
Problems of working with the private sector
• PPP should be a Partnership• Public and Private sectors have very different
drivers• Many relationships between public and private
sectors are unbalanced• Problems caused by:
– Lack of understanding of other party’s key drivers– Lack of equality in bargaining power
Problems of working with the private sector
• We see the result in many privatisation, concessions and outsourcing deals– “bad” deal damages image– Fall out can make investors wary of market
• A PPP programme should aim to give more balance– Between public sector, private sector and
citizen• PPP gives Government more control• Government is responsible
PPP: Benefits• Value for Money/cost savings• Strengthens Infrastructure• A whole life approach to delivering services• Better mobilisation of Capital• Provides assets or services otherwise unavailable• Innovation• Elimination of cost overruns• Maintenance of assets to a high standard• Creates new business sector• Transfer of risk and accountability to private sector• Fairer finance burden on citizen
PPP Issues for Public Sector
• Loss of control of service– Accountability remains
• Introduction of business ethic in service provision• PPP projects take longer to procure• Commitment to long term agreement• Change in procurement practice• Integration with remaining publicly run services• Inexperience of public sector in monitoring and control• Union resistance
Service Provider Performance
Performance measurement shows that the contract service levels are being achieved...
Source: Report on Operational PFI Projects, PUK
Always Almost always About half of the time Almost never Never
12%
77%
10%
1% 0%
89%
User satisfaction
Source: Report on Operational PFI Projects, PUK
…and users are satisfied with the standard of services being delivered
Always Almost always About half of the time Almost never Never
14%
65%
20%
1% 0%
79%
Key relationships for the Public Sector
• Selection of Advisors– Experienced advisors– Legal, Financial and Technical advisors– Mentor-type advisors
• Private Sector delivery partner– International confidence– Number of players important to investors– Best not cheapest
• Public concern over relationship– Quality of solution– Transparency of bidder selection
Importance of Training
• Training and mentoring the public sector is a key role for:– The national, ministerial or municipal PPP unit– a private sector consultant
• Developing internal capacity– Retaining expertise
How can IFSL Help?
• Organising Workshops/Seminars locally
• Organising visits to the UK
• Facilitating training – IFSL modular courses locally
• For public sector• For private sector
