PPP politic?
Public private partnerships have gained broad acceptance from the
two main political parties in the UK. They have not gained
universal acceptance ? the liberal democrats, the unions and, to
some extent, the public remains either opposed or sceptical.
nonetheless, the limitations on what the public sector can itself
deliver without the help of the private sector has convinced the
two main parties that they need to embrace ppps in order to be able
to improve public services. they calculate that the political flak
they take for the continued erosion of public services is greater
than the flak they take for embracing ppps. if tony blair's
reacquaintance with reality on the doorstep of a hospital during
the election campaign is anything to go by, this calculation may
well be correct.
Labour's Strategy
This consensus in favour of PPPs is based on the principle that they can be used to drive investment in public sector infrastructure. The private sector investment is achieved by turning over responsibility for the facilities management of public sector assets to the private sector. Long-term contracts enable providers to raise the capital required to renew or refurbish public sector assets. However, retaining core service provision in the public sector has been a key aspect to achieving this broad political consensus. The Government has retained public sector delivery of health and education services and, indeed, has reversed the policy of the previous administration on the provision of custodial services by the private sector.The centrepiece of Labour's campaign has been the need to improve the quality of public services, tacitly acknowledging that thus far it has not been able to achieve this improvement. Four years in office has proved to Labour exactly how hard it is to achieve this improvement. One of the planks of its future strategy appears to be the extension of PPPs. During the campaign, Tony Blair spoke of the need to think innovatively about service provision if the UK is to be able to improve the quality of its public services. He maintained that the key essential of a public service is that it is ?free at the point of delivery?1. He left the converse unsaid but it is clear: it is not essential that a public service is actually provided by the public sector. The manifesto concentrates on three areas.
On health, the manifesto talks about the creation of day case surgical units which may be publicly or privately run. On education, certain education services may be included in private sector contracts (indeed this is already happening).2 On transport, the government has ambitious (if unspecified) plans to procure the investment of billions of pounds in transport.
This emphasis on the private sector providing hitherto core public services may well have an impact on the shape of future PPPs. Until now the emphasis has been on driving investment in public sector infrastructure, the new infrastructure in turn driving improvement in the quality of public services. Labour now appears to want to improve the quality of public services by driving investment in the services themselves, not just the infrastructure.
The Challenges
Irrespective of your political views, there are three major challenges ahead if Labour is to deliver on this vision. First, developing a political consensus which will be essential to deliver private sector investment in the strategy and an effective roll out programme. Second, the creation of new markets. Third, the battle of the cost overruns on transport projects.
Developing the political consensus
In health and education, there is likely to be vocal opposition to the possibility of the private sector providing ?core' services. The Conservative Government tried this in 1994 with the procurement of a new community hospital in Stonehaven. The Health Board included the provision of medical services, namely a minor injuries unit and the management of GP controlled beds in the contract potentially to be awarded to the private sector3. The Government very quickly decided that this would be a one off and that no further hospitals would be procured in this way. The provision of day case surgical units will require consultant led services ? which is at the heart of NHS services. It is hard to think of proposals that are more controversial.
Creating new markets
In core services, there is currently only limited private sector capacity, particularly in health. Thus, Labour's proposals will require the creation and development of new markets. Contrast this to the proposal for private sector provision of facilities management in the early nineties, the cornerstone of current PPP policy. At that time, a sophisticated and growing market already existed. In addition to that, there was an obvious synergy between construction and maintenance, particularly with the increased focus on whole life costing. Whilst PPP offered a great market opportunity, it did not need to create the market in the first place.
Extending PPPs to cover consultant led services presents a much greater challenge. The provision of consultant led services in the private sector already occurs ? there are a number of private hospitals in the UK. However, in the main, they use NHS consultants working in their spare time. In effect, the private sector uses a public sector resource and manages the extra capacity that exists within that resource (albeit an extra capacity that only materialises when the price is right). Will the Government be able to generate much further capacity? Probably not ? at least not without an expansion of NHS resources. In other words, in order to be able to develop any meaningful markets to enable such a PPP programme to become established, the NHS will need to increase its own resource pool of doctors in order to be able to resource private sector provision. Something of an irony.
Private sector contracts using NHS doctors will only ever affect service provision at the margin. If Labour truly wants to transform the NHS by using the private sector, it will need to promote the creation of a separate private sector resource. This would require a major investment from the private sector both in employing and in training doctors. This will only happen if the extent of the potential market is clear and the political will is there to deliver that market. That means Labour nailing its colours to the mast ? not exactly in keeping with their approach since coming to power.
Transport project cost overruns
In transport, the problems are different. In rail, the private sector already exists in the form of Railtrack. The original idea behind privatisation was to give Railtrack access to the capital markets. Railtrack has been unable to deliver because it cannot raise the necessary cash on its own. The Government and the Strategic Rail Authority have recognised that some public sector capital will be needed to leverage private sector capital into projects to improve the network's capacity. A look at the fundamentals of the projects backs up this view. To date, the majority of PPP schemes, although ?public private partnerships' are wholly financed by the private sector. Transport projects are different. In the first place, the revenue is generated from users or customers rather than the Government. Again, in the majority of PPP projects to date, the Government has guaranteed a level of revenue by entering into contracts agreeing to make availability payments for a specified contract period. Thus, if performance can be achieved, revenue is guaranteed. Revenues generated from customers are inherently less predictable. As a consequence there are a range of complex issues to be addressed and lenders will require a greater input of risk capital (private or public) in order to finance the project. Second, customer revenues are usually insufficient to support the investment required. Therefore, most transport projects are likely to be truly public-private partnerships where both private and public money is invested in the project.
The experience of cost overruns on rail projects has not been favourable. Consequently, both the public and private sectors will be looking to the other to underwrite the total funding requirement. In other words, the public sector will be looking to make a contribution of public money of a fixed amount to the project, with the private sector analysing and taking the risk on the total funding requirement. In contrast, the private sector is likely to look to the public sector to fund cost overruns. The winning of this battle may well delay the overall programme. At the same time, many light rail schemes in UK cities are not likely to get off the ground unless they are either supported by public sector capital or, more controversially, road user charges are introduced to support the project revenues.
The bottom line is that achieving a reasonable roll out rate on transport projects is likely to involve some hard political choices.
Opportunities for PPP providers
Problems, of course, present opportunities. Labour's strategy for improving services is two-pronged. Deliver investment in infrastructure and in the services themselves. The question for most PPP providers today will be how the Government intend to achieve these twin objectives. Will the Government propose a single procurement, or will the infrastructure and core services be procured separately? Combined procurement will lead to unified service delivery but procurers may be faced with the difficult task of choosing between poorer infrastructure and better service delivery ? or the converse. Separate procurements will alleviate this problem but will result in the continued split service provision with the consequent interface problems. If the Government does opt for combined procurements, the current dominant players in the health and education facilities markets will need to develop alliances with providers of health and education services, if they are to maintain their market positions.
Labour's vision for public services is to improve their ?quality'. The aim of Conservative policy was always to improve the ?efficiency' of public services ? a byword for cost cutting to enable tax cuts. If quality really is to be the aim, then for those PPP providers who are able to deliver, there must be the prospect of achieving better margins.
Mixed public private funding presents an opportunity for financiers who are able to develop proposals acceptable to both the Government and the lender markets. This will not be easy in the transport sector since the huge cost of transport projects means that the lending will need to be syndicated. Will anyone take the risk of financing a project on an untried formula when they have to later convince the syndicate banks to participate? It has happened before but past experience has made lenders particularly wary of transport projects, so it will take a brave financier to take such a step.
The PPP market to date has been a fast changing one. Labour's plans will ensure that the pace of change remains high. n
Footnotes
1 21 May 20012 For example, Walton Forest, London where an Amey/Nord Anglia alliance have been appointed to provide a mix of facilities management and education services for a 5 year term. 3 As it happened, a consortium led by the local Trust won the tender and the medical services are provided by it.
Contact
Keith Patterson, MacRoberts Solicitors, Excel House, 30 Semple Street, Edinburgh Tel: 0131 229 5046 email: keith.patterson@macroberts.co.uk
Labour's Strategy
This consensus in favour of PPPs is based on the principle that they can be used to drive investment in public sector infrastructure. The private sector investment is achieved by turning over responsibility for the facilities management of public sector assets to the private sector. Long-term contracts enable providers to raise the capital required to renew or refurbish public sector assets. However, retaining core service provision in the public sector has been a key aspect to achieving this broad political consensus. The Government has retained public sector delivery of health and education services and, indeed, has reversed the policy of the previous administration on the provision of custodial services by the private sector.The centrepiece of Labour's campaign has been the need to improve the quality of public services, tacitly acknowledging that thus far it has not been able to achieve this improvement. Four years in office has proved to Labour exactly how hard it is to achieve this improvement. One of the planks of its future strategy appears to be the extension of PPPs. During the campaign, Tony Blair spoke of the need to think innovatively about service provision if the UK is to be able to improve the quality of its public services. He maintained that the key essential of a public service is that it is ?free at the point of delivery?1. He left the converse unsaid but it is clear: it is not essential that a public service is actually provided by the public sector. The manifesto concentrates on three areas.
On health, the manifesto talks about the creation of day case surgical units which may be publicly or privately run. On education, certain education services may be included in private sector contracts (indeed this is already happening).2 On transport, the government has ambitious (if unspecified) plans to procure the investment of billions of pounds in transport.
This emphasis on the private sector providing hitherto core public services may well have an impact on the shape of future PPPs. Until now the emphasis has been on driving investment in public sector infrastructure, the new infrastructure in turn driving improvement in the quality of public services. Labour now appears to want to improve the quality of public services by driving investment in the services themselves, not just the infrastructure.
The Challenges
Irrespective of your political views, there are three major challenges ahead if Labour is to deliver on this vision. First, developing a political consensus which will be essential to deliver private sector investment in the strategy and an effective roll out programme. Second, the creation of new markets. Third, the battle of the cost overruns on transport projects.
Developing the political consensus
In health and education, there is likely to be vocal opposition to the possibility of the private sector providing ?core' services. The Conservative Government tried this in 1994 with the procurement of a new community hospital in Stonehaven. The Health Board included the provision of medical services, namely a minor injuries unit and the management of GP controlled beds in the contract potentially to be awarded to the private sector3. The Government very quickly decided that this would be a one off and that no further hospitals would be procured in this way. The provision of day case surgical units will require consultant led services ? which is at the heart of NHS services. It is hard to think of proposals that are more controversial.
Creating new markets
In core services, there is currently only limited private sector capacity, particularly in health. Thus, Labour's proposals will require the creation and development of new markets. Contrast this to the proposal for private sector provision of facilities management in the early nineties, the cornerstone of current PPP policy. At that time, a sophisticated and growing market already existed. In addition to that, there was an obvious synergy between construction and maintenance, particularly with the increased focus on whole life costing. Whilst PPP offered a great market opportunity, it did not need to create the market in the first place.
Extending PPPs to cover consultant led services presents a much greater challenge. The provision of consultant led services in the private sector already occurs ? there are a number of private hospitals in the UK. However, in the main, they use NHS consultants working in their spare time. In effect, the private sector uses a public sector resource and manages the extra capacity that exists within that resource (albeit an extra capacity that only materialises when the price is right). Will the Government be able to generate much further capacity? Probably not ? at least not without an expansion of NHS resources. In other words, in order to be able to develop any meaningful markets to enable such a PPP programme to become established, the NHS will need to increase its own resource pool of doctors in order to be able to resource private sector provision. Something of an irony.
Private sector contracts using NHS doctors will only ever affect service provision at the margin. If Labour truly wants to transform the NHS by using the private sector, it will need to promote the creation of a separate private sector resource. This would require a major investment from the private sector both in employing and in training doctors. This will only happen if the extent of the potential market is clear and the political will is there to deliver that market. That means Labour nailing its colours to the mast ? not exactly in keeping with their approach since coming to power.
Transport project cost overruns
In transport, the problems are different. In rail, the private sector already exists in the form of Railtrack. The original idea behind privatisation was to give Railtrack access to the capital markets. Railtrack has been unable to deliver because it cannot raise the necessary cash on its own. The Government and the Strategic Rail Authority have recognised that some public sector capital will be needed to leverage private sector capital into projects to improve the network's capacity. A look at the fundamentals of the projects backs up this view. To date, the majority of PPP schemes, although ?public private partnerships' are wholly financed by the private sector. Transport projects are different. In the first place, the revenue is generated from users or customers rather than the Government. Again, in the majority of PPP projects to date, the Government has guaranteed a level of revenue by entering into contracts agreeing to make availability payments for a specified contract period. Thus, if performance can be achieved, revenue is guaranteed. Revenues generated from customers are inherently less predictable. As a consequence there are a range of complex issues to be addressed and lenders will require a greater input of risk capital (private or public) in order to finance the project. Second, customer revenues are usually insufficient to support the investment required. Therefore, most transport projects are likely to be truly public-private partnerships where both private and public money is invested in the project.
The experience of cost overruns on rail projects has not been favourable. Consequently, both the public and private sectors will be looking to the other to underwrite the total funding requirement. In other words, the public sector will be looking to make a contribution of public money of a fixed amount to the project, with the private sector analysing and taking the risk on the total funding requirement. In contrast, the private sector is likely to look to the public sector to fund cost overruns. The winning of this battle may well delay the overall programme. At the same time, many light rail schemes in UK cities are not likely to get off the ground unless they are either supported by public sector capital or, more controversially, road user charges are introduced to support the project revenues.
The bottom line is that achieving a reasonable roll out rate on transport projects is likely to involve some hard political choices.
Opportunities for PPP providers
Problems, of course, present opportunities. Labour's strategy for improving services is two-pronged. Deliver investment in infrastructure and in the services themselves. The question for most PPP providers today will be how the Government intend to achieve these twin objectives. Will the Government propose a single procurement, or will the infrastructure and core services be procured separately? Combined procurement will lead to unified service delivery but procurers may be faced with the difficult task of choosing between poorer infrastructure and better service delivery ? or the converse. Separate procurements will alleviate this problem but will result in the continued split service provision with the consequent interface problems. If the Government does opt for combined procurements, the current dominant players in the health and education facilities markets will need to develop alliances with providers of health and education services, if they are to maintain their market positions.
Labour's vision for public services is to improve their ?quality'. The aim of Conservative policy was always to improve the ?efficiency' of public services ? a byword for cost cutting to enable tax cuts. If quality really is to be the aim, then for those PPP providers who are able to deliver, there must be the prospect of achieving better margins.
Mixed public private funding presents an opportunity for financiers who are able to develop proposals acceptable to both the Government and the lender markets. This will not be easy in the transport sector since the huge cost of transport projects means that the lending will need to be syndicated. Will anyone take the risk of financing a project on an untried formula when they have to later convince the syndicate banks to participate? It has happened before but past experience has made lenders particularly wary of transport projects, so it will take a brave financier to take such a step.
The PPP market to date has been a fast changing one. Labour's plans will ensure that the pace of change remains high. n
Footnotes
1 21 May 20012 For example, Walton Forest, London where an Amey/Nord Anglia alliance have been appointed to provide a mix of facilities management and education services for a 5 year term. 3 As it happened, a consortium led by the local Trust won the tender and the medical services are provided by it.
Contact
Keith Patterson, MacRoberts Solicitors, Excel House, 30 Semple Street, Edinburgh Tel: 0131 229 5046 email: keith.patterson@macroberts.co.uk
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