The public finances are protected by transferring risks usually taken by the public sector to the private sector in public-private partnerships, argues Philip Lee
Commentators on public-private partnerships, perhaps understandably, have limited practical experience of implementing PPPs in Ireland or elsewhere and this has led to misconceptions.
When any major infrastructure project is being built there is, inevitably, an agreement between the private sector and the public sector. Contrary to Prof William Kingston's opinion in an article here on August 12th, PPPs do not create any greater risk of "rip-offs" for the public sector.
The main reason for a PPP is, in fact, to protect the public finances by transferring to the private sector risks normally assumed by the public sector, including risks relating to the design, construction and operational risks of large infrastructure projects.
Prof Kingston articulates what appears to be a widespread misapprehension in his criticism of PPPs; that in any negotiation, civil service structures will be "incapable of protecting the public interest in public-private deals" because the "hard-nosed businessmen" will be more highly motivated. He cites by way of example the "Iarnród signalling fiasco", which was not a public-private partnership but a standard construction contract with a small element of design.
It appears that he has not taken account of the process by which PPPs are awarded. In the transparent and competitive tender process for a PPP, the "hard-nosed businessmen" referred to by Prof Kingston must compete against other hard-nosed businessmen to win the contract. For major projects, the public sector is obliged to follow strict tendering guidelines under the EU procurement rules. The transparency and competitiveness of the tender process is the one of the keys to successful PPPs.
In the traditional non-PPP scenario, if the public sector wants, for example, to treat sewage, it first engages consultants who will design the plant. Taking the design from the consultants, the public sector then seeks tenders from building contractors to build the plant. When the plant is built, the public sector operates it.
In this traditional arrangement, the public interest may be placed at risk for a number of reasons. The design consultants may have overspecified the project - they may have designed a Rolls Royce when a Ford Mondeo was more than adequate. Payments to consultants are calculated on the basis of the final capital value of the project, so there is no incentive to reach the most economical design.
The building contractor may blame faults in the project on the design and ultimately it may be impossible for the public sector to find where the fault lies. In such situations, the public purse inevitably pays.
Under traditional government contracts, the contractor will seek to recover all forms of increased costs, whereas PPPs are more often priced on an "all-in" basis.
When the infrastructure is finished, the public purse is exposed to operational costs associated with the design: for example, high fuel or maintenance costs.
Under a PPP, by contrast, the private sector has responsibility for operation of the infrastructure. The private sector has a serious incentive to use the latest technology to win the tender and build a plant which is economical both in terms of capital cost and running costs. In a PPP, Prof Kingston's "thrusting entrepreneur" has to grapple with the adequacies of the design and has to deal with the building contractor to reduce additional unforeseen costs. Design problems or unnecessarily high costs of maintenance remain problems for the entrepreneur; the public sector gets the job done at a price resulting from a competitive tendering process.
Clearly, the private sector will include a price for taking on those risks, but in the context of a competitive tender process, if too high a price is sought the contract will be won by a competitor.
By using a PPP, the public sector is forced to look at the services which it actually wants to receive and not the physical asset. The public sector doesn't want to own a hospital building: it wants patients treated professionally and promptly.
Under a PPP, the private sector is paid on results.
Indeed, in some cases where the private sector has provided prison services, the private contractor has been rewarded not simply on the number of prisoners detained, but partly on the basis of how many prisoners were reintegrated into society and did not become repeat offenders. The PPP concept allowed the public sector to take a fresh look at an aspect of the public interest, namely the education and rehabilitation of prisoners.
The PPP concept is not appropriate in all cases, but does offer huge opportunities to improve the quality and value for money of public services.
However, to address public concerns, it is fundamental that there is a transparent and competitive bidding process where the "hard-nosed businessmen" compete directly against each other. That competitive process, together with an appropriate transfer of risk to the private sector under a PPP, can deliver the best value for money to the public coffers.
We are still in the early days of PPPs in Ireland. Public-private partnerships are not without their risks, but they can in many cases offer innovative and attractive ways of providing public services.
Philip Lee is a solicitor who has advised public and private clients on PPPs: