Hand In Hand

Hand In Hand

There are many benefits to be gained when the spheres of government and business intersect. Partnerships enable the public sector to benefit from commercial dynamism, innovation and efficiencies, by harnessing private sector capital, skills and experience with the high standards and commitment found within the public services, but these rewards don't come without risks.

Throughout the world the slow march towards digital government is forging radical new organisational architectures shaped from a hugely refined set of competitive, contractual and collaborative structures. The transformation coincides with moves by governments, under growing budgetary pressures and the weight of increased customer expectations, to force substantial transformation in the design, delivery and organisation of public services.

Meanwhile the love affair between government and the private sector continues, with sustained enthusiasm for outsourcing spawning new relationships between government and industry, and driving the formation of public-private partnerships (PPPs) as key stays of the digital state. Many government agencies love the notion of contracting the delivery of infrastructure and non-core services to the private sector, seeing in it a chance to deliver improved public services more cost effectively while allowing public servants to focus on the delivery of core services. But with interest in the PPP paradigm picking up, Australian policy analysts are warning the added complexity inherent in implementing PPPs and the considerable legal, economic, ethical, political, and technological questions attending the revolution bring their own perils and pitfalls. And governments are moving cautiously, well aware of the extra risks.

"Anyone engaged in or entertaining private financing has to be aware that you're looking at deals which are inherently more complex than more usual procurements and somewhat less transparent," affirms a spokesman for the Commonwealth Department of Finance. "A lot of what makes a private financing arrangement attractive is the risk allocation and the risk transfers that can be achieved and, if you like, the higher potential to realise a more efficient risk allocation between public and private sector and to make a given service more performance-oriented. But risk is in fact a very complex area, particularly where government is one party that is involved, due to its position as the ultimate deep pocket defender of things. So deals do have to be fairly carefully analysed."

But while the federal government has barely put a toe into PPP waters, some state governments are pursuing the concept with enthusiasm.

The public-private partnerships model first emerged in the UK under the Thatcher government, and was enthusiastically adopted by the Blair government, eager to have the private sector add value to big public infrastructure projects. The British private sector now builds and maintains large numbers of schools and hospitals, which are then staffed, operated and controlled by the government.

In another shining example Siemens Business Services (UK) is providing corporate (IT, HR, finance, procurement) and line operational (sales, treasury management, accounting, and the like) services to National Savings, an executive agency of the Chancellor of the Exchequer. The 10-year contract is reportedly allowing National Savings to respond more flexibly to customer demands while shrinking its payroll from 4400 staff to 130.

In Australia, the Bracks government in Victoria is leading the charge, first with the launch in 2000 of its Partnership Victoria Policy then with its follow-up release in June last year of comprehensive guidance material for PPP projects. A number of wastewater projects, two hospitals, several prisons and the Melbourne County Court project have all been developed under Partnership Victoria.

Treasurer John Brumby says probity, consistency, clarity of risk allocation, honouring of commitments and care in costing the exposure of the public purse remain fundamental virtues under the program. "Importantly, it recognises that a government has particular responsibilities and democratic accountabilities with respect to the delivery of services to the community," he says.

A green paper, Private Financing of Infrastructure and Certain Government Services in New South Wales, was issued in November 2000. All other state governments and the Commonwealth have either set up units to investigate the use of, or the introduction of, PPP policies, or are in the process of doing so.

The Commonwealth has issued its policy, but was hamstrung on moving too fast during the 2001 federal election run-up in November and early December. The Finance Department says it is moving to develop methodologies and will draw very heavily on "the excellent work done by the Victorians in that area".

"There's a very strong desire in our government as there is with the other Australian governments, to try and harmonise as much as possible," a Finance Department spokesman says. "With a view to that, when the former Minister Fahey announced the policy he also issued invitations for people who are interested in being part of a broad-based forum for the discussion of private financing between industry and government."

The spokesman says the Commonwealth government has a very good resource management and budgeting framework for managing the immediate year's budget and even to a three- or four-year time horizon. The policy, however, recognises that when it comes to deals that might bind the government for up to 20 years, the framework needs considerable support.

Analysts say the increase in focus on, and commitment to, PPPs by several governments suggests a substantial increase in the number of projects being procured under PPP arrangements over the next few years. And the Australian Council for Infrastructure Development supports that growth, arguing PPP deals can bring savings of between 15 and 20 per cent over traditional public sector models.

In Queensland Premier Peter Beattie says his state is exploring the potential of such models to help build infrastructure to galvanise growth in the smart industries of the future, those based on helping present and future generations to commercialise their intellectual capital. Beattie says both government and business must invest in the necessary infrastructure. "The new economy of the future will not be characterised by the stark distinction between public sector as infrastructure providers and the private sector as infrastructure users," he says.

The Department of Defence is equally eager to further explore the merits of private financing after a first "accidental" foray into a form of PPP.

Director general for organisational effectiveness Commodore Syd Lemon says when the Navy needed to improve the maintenance of its minor war vessels it first looked to the CSP, the Commercial Support Program, to take over the work. Once it became clear the business was in too poor a state for CSP to take up, the department sold off all of the boats. It then bought back a service for provision of support in all Australian and some overseas ports, and maintenance of all of the boats on Defence ships. The model has proved pleasingly effective.

Now Defence is keen to further explore private financing with a contract for provision of electronic warfare training. But like other agencies around Australia, Defence is moving cautiously, aware that in pursuit of private financing deals it cannot afford to lose sight of its main objectives. It's a danger that Commonwealth Auditor General Pat Barrett was warning against at a Private Executive Seminar breakfast in Perth as early as May 2000.

"The clear intention on the part of Defence in widening the use of private financing is to achieve the best affordable operational capability," Barrett noted. "But any such move towards private financing of Defence activities would need to consider what core business the department needs to maintain in order to manage effectively the longer-term risks that are involved in any outsourcing."

"With this in mind, the department has indicated in a recent discussion paper that private financing is to be considered for all capability proposals and tested as an acquisition method unless the capability:u involves the direct delivery of lethal force (core Defence business); oru is demonstrably inappropriate and uneconomic (that is, does not reflect best value for money.

Lemon says Defence's biggest challenge is in identifying future commitments and gaining control over future expenditure. "The private financing is a means of providing a pretty strong incentive for the person who designs and builds the product to actually influence the through-life costs in a positive manner," he says.

"For example take building a boat. When we come to make decisions about what equipment is redundant or not, by and large the risk equation is fairly vague and often gets lost in the face of cost. If someone is actually getting paid not for selling you a boat but for delivering the product, they've got a method of costing out the loss of service. It's measured against their revenue flow and they can come up with a fairly good equation on whether they're better off designing in reliability or designing in quick maintenance."

But Lemon is acutely aware of the risk that Defence could fail to take advantage of all the benefits of private financing by having a process that is too difficult to engage in. He says everywhere else that it's been done there have been dual-edged incentives. "They've had a large amount of infrastructure that has not been well maintained, in the same way that we had with our minor war vessels, and they didn't have the money to actually do it. That was the driving force in the UK, and the Treasury was behind it and you actually had to prove that you couldn't privately finance it," Lemon says But he points out that proving particular private financing deals will deliver better value for money may not be easy, because Defence finds it particularly difficult to measure lifecycle cost. It can be equally hard to assess the amount of risk that has been transferred, and the value of that risk.

That means a good private finance initiative (PFI) is one where there is a large service component and where the outcomes are clear and defined. In that context "patrol boat days at sea" is a good definition of a success factor, he says.

"You have debates over whether a patrol boat is ready to go or not, but once you resolve those it's pretty easy to determine whether the service has been delivered objectively. It's also pretty easy to have a pricing structure that encourages the person to provide the service and gives him an incentive to provide the service and doesn't place you in a position where for a minor failure you have to terminate the contract.

"It's important that the KPIs [key performance indicators] and the risks and the payment structures are all in balance," he says.

Mixed Reviews

The story of private financing in Britain is by no means one of glowing success, with both successes and failures attached to its name. And initial enthusiasm about PPPs has been tempered by a growing sense of unease in some sectors overseas.

For instance George Monbiot, Professor in Political Science at the University of East London and columnist for The Guardian newspaper, suggests that rather than bringing private money into the public sector, such projects in Britain are draining vast quantities of public money into the private sector. He claims the government's own consultants concede that for every £200 million spent on PFI in the National Health Service (NHS), the service loses 1000 doctors and nurses.

"As most readers of this page will, by now, be painfully aware, the private finance initiative (under which much of the country's new infrastructure is being built) is a pernicious scam," he wrote in The Guardian in June last year. "The public hospitals, roads, schools and prisons constructed with private money generally cost more than their public equivalents, while delivering worse services. As private companies, unlike the government, seek to make a healthy profit on their investment, this should scarcely be surprising. But what I have discovered now suggests that the problem is far graver than anyone had guessed. Our money is being siphoned out of the NHS before the privately financed hospitals receive a single patient."

Monbiot claims the same patterns spell the beginning of the end of universal public provision in Britain - sector by sector, from schools, to universities, to roads and bridges. "I can't blame the companies involved in PFI for taking everything they can get: their directors have, after all, a legal duty to maximise the value of their shares," Monbiot says. "But a government which lets them do it at public expense is a government unfit for office."

Likewise, British public sector union Unison claims a growing body of evidence shows PFI schemes are running into serious problems. Unison has published two reports that show disturbing trends in PFI projects, including a tendency for PFI schemes to escalate both in cost and in scale.u A Unison study in 1997 showed that for 14 PFI hospitals, the original costs escalated by an average 72 per cent, from a total of £766 million to £1314 million.u The Birmingham Schools PFI started at £20 million for eight schools in 1996 and by 1998 was £65 million. The latest estimate is £70 million for 10 schools.

The union claims the studies show a clear affordability gap opening up in PFI schemes. Worse, it says in Health, where PFI is more established and there is more evidence available, the affordability gap is being met by hospital closures, reductions in services and capacity, and by drawing in money in subsidies from the Treasury and other parts of the health budget.

"PFI is a public finance issue. The more money that is devoted to PFI the less will be available for the rest of the public services," the union claims. "PFI is only possible if a short-term view of the public services is taken. The very long period needed to repay PFI finance means that we are now getting new and refurbished infrastructure that future generations will be paying for. The calculations of how this will impact on future public services have not been done, but the PFI bill will have to be paid by someone."

Unison says it's little use saying you've transferred the risk when you can't afford for the service not to be provided and the only solution you have in event of failure is to cut off the service.

In May last year centre-left think-tank the Institute for Public Policy Research (IPPR) echoed the warnings, telling Prime Minister Tony Blair his plans for world-class public services could be undermined by flawed schemes to harness private sector finance and disciplines. In a report by its commission on public-private partnerships, the institute cautions that major changes in the way such partnerships function are needed if they are to deliver the kind of quantum leap improvements the government has promised in education, health and transport.

The report argues the record of private sector involvement in public health and education projects led to shortcomings in the proposed models for the London Underground and the equally controversial scheme for National Air Traffic Services. The report's conclusion is that far-reaching reforms are needed if they are to improve the public services.

"If in five years time, after a sustained period of strong funding, citizens feel that public services are still failing to deliver, those opposed to the principle of collective provision would find it easier to argue that public services are an anachronism," IPPR research director Gavin Kelly says.

Meanwhile, Barrett has warned involvement of the private sector has created tensions between demands for greater cost efficiency and the broadly based accountability requirements of the Parliament and citizens. And he says the greater involvement of the private sector in public sector activities will force governments to better understand the similarities and differences between the sectors, including in risk identification, assessment, treatment and monitoring and review.

"With the greater participation of the private sector in the delivery of public services, one question is to what extent can, or should, both sectors share responsibility and accountability in at least some of these latter respects as well as for the risks that go with them. Of note is that the adoption, or adaptation, of private sector approaches, methods and techniques in public service delivery has highlighted trade-offs between the nature and level of accountability and private sector cost efficiency," Barrett says.

Ross Landsberg, a partner in the Brisbane office of law firm Minter Ellison, says governments to date have not been very successful in getting the price right and the service levels set appropriately in PPP deals. He says that, with governments relying on the Public Sector Comparator (PSC) as a measure of whether the private sector can do something more cheaply than the public sector in a total cost package, how that PSC is drawn up is crucial. Australia should learn from the UK government, which is constantly evaluating its PSCs as predictors, making them more reliable all the time, he says.

Professor John Quiggin from the Australian National University Faculty of Economics and Commerce warns that governments should be looking carefully at what went wrong with the Build Own Operate Transfer (BOOT) schemes before leaping too whole-heartedly into PPPs.

"What we can see in those projects is two things. One is that despite occasional claims to the contrary, they were basically motivated by a notion of getting something for nothing. And second, that in most cases the allocation of risk was totally wrong.

"Obviously you don't get something for nothing," Quiggin says. "That is particularly true of the transfer at the end, the notion that you hand it back to the public sector at the end of some specific period of time so far in the future that its discount of present value is possibly zero. That element made it very clear that whatever the underlying merits of the projects in question, they had been packaged in a way that was designed for budgetary and political cosmetics, not for a sensible allocation of resources.

"If there is one big danger with this stuff it is a notion that still persists that government debt is a bad thing and that by getting the private sector to do these things we can get projects produced without any additional public debt."

John Walter, another partner with Minter Ellison, says the private sector partnership process means government must be more articulate about the reason for undertaking transactions and the longer-term arrangements, which derive from the commitment of capital to those projects.

"I don't see the issue as being so much a structural issue, or one which stems from the adoption of a Partnerships Victoria or PPP approach. It arises from the fact that government makes long-term decisions and that this process requires them to be quite explicit as to what they are expecting from that long-term decision. You can't simply fix it through the process by changing the deal, you need to upfront identify all the issues which are likely to arise and mechanics for addressing those issues," he says. vSuccess FactorsThere appear to be several key factors that will encourage a successful partnership, either in the private or public sectors, or between them, according to Tim Turner, a lecturer in the School of Computer Science at the Australian Defence Forces Academy.

Turner says summarising the literature suggests:

- Clear statement of intended vision, goals and scope: all partners in the arrangement must understand what is to be achieved, their part in it, and commit to those goals.

- Mutual benefit: the partnership must provide tangible benefits to all partners.

- Clear performance metrics and the means to measure them: this reinforces the understanding of what is important, and how partners will know if they are contributing.

- Complementary or synergistic contributions: the less overlap between partner capabilities in delivering the outcome, the more likely that the partnership will benefit the partners, and the collaborative result.

- Joint management of the partnership: the exact balance of the management between partners is not critical, nor is the fact of whether the partnership is a separate legal entity or not.

- Separation of strategic and tactical management: the partnership should be managed by a collaboration of partner representatives at the strategic level, and this may apply at a tactical level, but there must be a distinction between the strategic and tactical managers.

- Stakeholder involvement: in PPPs in particular, the involvement of the recipients of services or goods produced by the partnership appears to promote the success of the partnership. Similarly, other players that may have vested or parallel interests can influence success.

"The importance of a clear understanding of what the partnership will achieve cannot be overstated," Turner says. "A clear statement of the vision and goals allows partners to:

- Communicate clearly how they will each contribute.

- Understand how they will benefit.

- Steer the partnership in the mutually beneficial direction.

"If partners are not drawing value from the partnership, it will fail. The partners must perceive, and receive, sufficient value to continue to contribute to the partnership. How ‘sufficient' is measured will differ for each partner and over time. It is not necessary that all partners draw a quantitatively equal benefit, or that the benefits will flow to them evenly over time, or that the benefits cease for them simultaneously," he says.

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