Transparent view of PPPs

09 February 2012

A new white paper outlines some of the issues around PPPs and describes how the way to make them work is through the partnership approach.

For many reasons PFI (Private Finance Initiative) projects continue to receive controversial press coverage in the UK. But many countries across the world have renamed, embraced and refined the model with demonstrable success, resulting in both users and tax payers reaping the rewards from the rapid delivery of high quality, often innovative projects, with lower costs.

According to the latest white paper by PFI / PPP software solutions company Service Works Group, whose software is used to manage the service delivery performance and asset management for in excess of 160 PFI / PPP projects across the globe, the quality of information among the parties, combined with a commitment to ensuring the transparency and auditability of PPP contracts, is of fundamental importance to the success of the partnership.

With case study examples drawn from mature PPP markets across the globe, the white paper, The Importance of Transparency and Auditability in PPPs: Facing up to the Challenge of Complexity, sets out and illustrates the criteria required to ensure that PPP contracts truly reflect the partnership approach that they are intended to embrace, bringing new or upgraded facilities to communities for who they are intended to benefit.

The white paper:

Explains the difficulties that can emerge when information flow is inadequate and when terms in the contract are open to interpretation and how best to manage this.
Examines the significant benefits that result when both parties enter into a partnership in a spirit of collaboration and are committed to managing the contract in an open and objective way, resulting in the projects producing outstanding results.
Explains the importance of everyone involved in the PPP process engaging with the payment mechanism, knowing how it will operate in practice and understanding the expected outcomes and how to achieve this.
Concludes by making a number of important recommendations around how to secure operational transparency and auditability in PPP contracts.

The global PPP market is large and growing with many governments turning to PPPs to provide public facilities and services. In the UK, the coalition government has confirmed it remains committed to the Private Finance Initiative (PFI), although changes are proposed on the financing side. In total, 61 PFI projects are being procured with a combined capital value of £7 billion, and billions more are in the pipeline, including a new £2 billion schools programme. The new investment will add to the £62 billion of capital (in 2010 prices) already committed by the private sector under signed contracts.

While the use of the PPP model as a routine method for producing new investment and services originated in the UK in the 1990s, several OECD countries now use the model to finance, build, and maintain new social infrastructure, such as hospitals, schools, housing, prisons and leisure facilities. The capital value of PPPs signed in the European Union was €18.3 billion in 2010, of which €14 billion related to contracts signed outside of the UK (with Spain the largest market). There are also substantial, and growing, PPP programmes in Canada (where the term “P3” is commonly used), Australia and emerging economies such as Brazil, Russia, India and China. There is also increasingly strong evidence that the United States may be about to adopt PPPs in a sustained way in order to address the country’s multi-trillion dollar infrastructure gap.

Because PPPs are all about value for money, the contract is the mechanism through which value is created. It sets out the key terms under which the authority and contractor agree that their partnership will be based, including the allocation of risk to the private sector and the required quality of service. Payments under PPPs tend to be based on outputs, such as the availability of facilities and the quality of the services to be delivered. The public authority is often entitled to reduce the payments due to the private partner if the contractor’s performance falls below contractually- defined standards. Therefore, PPP contracts require that a consortium takes on long-term operational risks under a highly complex and frequently challenging performance-based payment mechanism. The quality of information shared by the partners is therefore of fundamental importance for the quality of the partnership. In particular, it is essential that the contract management system serves to achieve auditability (so that data is recorded to enable review and evaluation to determine service quality) and transparency (so that data about the nature and quality of services under the contract is fully available and accessible).

To build a PPP on the principles of transparency, auditability, trust and value for money, all parties must adopt a hands-on approach, engage with the payment mechanism, know how it will operate in practice and understand the expected outcomes. The use of intelligent, proven, contract performance management software – engaged at an early stage – is fundamental. Where these pieces are in place, information will flow effectively and the partnership will function. A PPP will be in place which truly reflects the collaborative approach that this model is intended to foster.

To receive a complimentary copy of the white paper, please email info@swg.com