Public Private Partnerships For Procurement

Ann Gorey , 13 April 2015

PPP projects do not always deliver all that is claimed – and architects rarely benefit. Ann Gorey reflects on the perceived advantages, claimed benefits and actual costs of this common procurement method.  

Public Private Partnerships (PPP) have been widely used for public infrastructure over the past ten years. While earlier projects were hard infrastructure – for example, roads, rail and bridges – more recent projects are soft infrastructure, such as schools, hospitals, recreation centres. 

PPP is an alternative to standard procurement processes and comprises a different approach to planning, design, construction and, particularly, financing. This enables key items on the government’s list of desired/required projects to be financed ‘up front’ from another source of money and for the project to be ‘off-balance sheet’.

The key characteristics and difference to traditional funding models are as follows:

Risk

The PPP process places the responsibility for managing associated ‘risk’ on the private sector, which factors that exposure to risk into the price it bids. 

Maintenance

The traditional funding model for a project allows for planning prior to construction, but does not make provision for ongoing maintenance or refurbishment or refinement once the building is in use. In a PPP project the cost of maintenance is factored into the overall cost.

Financing 

The PPP process allows government to commence paying when the building is made available for occupation and then to pay off the cost evenly over a set period of time – possibly 25 or 30 years. The private sector consortium owns the asset and effectively rents it to government for the agreed life of the asset. Taking a deferred payment option is like putting it on a credit card. Regular payments are required and interest accrues over the period of the loan.

Usually Government can borrow money at a lower rate than the private sector, especially in the current economic climate (2015). However any money borrowed has to be part of an approved program and ‘on the books’ for financial accountability. A PPP project is not recorded in the same way.

Perceived Advantages

There are two main perceived advantages for government in the PPP process – timeliness and maintenance.  

Most government budgets do not include sufficient money to underwrite the numerous projects on its lists. The PPP process enables government to bring forward projects needed and/or demanded by the community and therefore to meet community expectations and provide political benefit (‘to deliver on promises’). 

PPP projects include guaranteed maintenance for the life of the asset. This is a clear advantage and is greatly appreciated by the end users. However, it comes at a cost that is included in the PPP arrangements. The same maintenance program could be done for all public infrastructure if governments had the necessary cash flow. But they don’t. This means that ‘not PPP assets’ do not get the maintenance they require. Instead, the term used for maintenance of regular projects is ‘fix when fail’ or ‘fix when funded’.

Claimed Benefits 

Further benefits are often claimed for PPP projects, but these are not substantiated. Frequently claimed benefits include the following:

Greater Innovation 

PPP processes are often claimed to bring greater innovation than standard procurement processes. There is very little evidence to support this. If there is a need for innovation and problem solving, competent professionals can provide this. 

A request for ‘innovation’ may mean a number of things – that the agency does not know what is needed, or that it is looking for new ideas and is relying on someone else having done recent research into alternative approaches, previous projects of a similar kind, or be prepared to investigate, evaluate and suggest alternatives. Most architects and educational facilities planners do this and can also provide relevant information within other procurement contexts.

PPP consortia seek out people qualified in this field to advise the project team.

Faster Delivery

Delivery times are difficult to substantiate because the start point is not clearly defined in a PPP process. If the process starts from the first call for expressions of interest, and proceeds through the bid process, selection of preferred bidders et cetera before the contract for construction is let, then the process is in fact longer and more expensive. This is because process consultants, probity auditors, lawyers and financiers are all involved and their work takes time without contributing to the design and construction of the project. These people tend to be paid more than design professionals such as architects and engineers.

Cost Savings 

PPP projects are claimed to be cheaper than standard procurement processes.  In reality, it is not likely to be cheaper unless the standard of construction is lowered. 

A ‘design and construct’ process embedded in a PPP will give the lowest standard allowable under the Australian Standards – and the less the project is required to meet specific requirements, the cheaper it will be. (That is, let the builder decide how to meet the requirement instead of telling the builder how the requirement must be met.) However, if the agreed Australian Standards continue to be met, the project will not be cheaper. 

Some PPP’s argue that their ‘innovations’ bring about lower costs. Usually this is done by lowering construction standards or reducing floor area.  Lower building costs may also result in higher maintenance and operating costs.

Disadvantages

PPP processes also bring a set of disadvantages, which mostly impact on the government agency, the community and end users.

Community Consultation

For the past 50 years (since the 70s) the community has been consulted about the location, design and purpose of community assets. 

The PPP process provides very limited opportunity for community comment and suggestions. This means that community consultation needs to be undertaken by the agency during the development of the project brief.

Briefing and Development

A PPP project requires a very detailed design brief, which means that the government agency needs to be very clear about its requirements.  

In the standard procurement processes, there are opportunities to change aspects of the design as the project proceeds, even during the construction phase. In PPP projects the opportunity to change or fine-tune the design is not available after sign-off, except with a high cost penalty. One reason given for this by PPP proponents is that they want to proceed quickly and without delay – giving rise to the claim that the PPP process is faster 

Should the agency wish to change or add to a PPP-derived building or site, it is at the mercy of the owning consortium and the price is a non-competitive process.   

Most agencies and end-users are more familiar with a process that allows for fine-tuning and adjustments during the design and construction phases, so the cost of late changes can be a shock to them.

Precise Specifications

The need to specify precisely what is required is often difficult, especially for those in the ‘soft sciences’ – such as education, health. In these areas, government agencies are often looking to implement new approaches but may not be able to articulate clearly what this means terms of the building design. 

This reinforces the need to put adequate time and resources into developing the project brief.

Winners and Losers – Who Makes to the Money and Who Might Not?

The people who make the most money out of a PPP are the upfront group – the financiers and the lawyers who set up the arrangements, the consultant process and probity auditors and then the builders who deliver the project 

There are two groups of people who are most disadvantaged. One is the designers who may be required to work to a price and to unrealistic timelines for design and documentation. Another is the company that takes on the 25 to 30 year maintenance contract. This period of time includes an uncertain future for use of the PPP buildings and for the ongoing viability of the maintenance company. Maintenance is also dependent on the quality of the initial construction and the degree of wear and tear imposed by the users.

A problem for the PPP consortium is that there is no payment until occupation. Consequently, the consortium tends to push as much of the cost to the tail end of the project because they are working on borrowed money and need to minimise the amount of time between borrowing and being paid.

The Cost of Bidding for PPP

A $300 million construction cost PPP will cost the bidding company about $3 million for the bid. Consequently no company can afford to bid and lose too often. If a company wins 1 in 3 bids, it will probably break even. If it wins 2 out of 3 it will make a profit.  If it bids for 3 and fails to win any, it places the firm in a very tight financial position.  These are not good odds for a private company.

Other factors

Fair and Equitable Process

It is questionable whether PPP’s involve fair and equitable processes. Competing bids take time and effort. This inevitably means that someone has done a lot of work but will not get paid for it. Design professionals (architects and engineers) are expected to do considerable work to compete and do not get paid for this work if their bid is unsuccessful. This can be very damaging to the financial viability of a design or building company.

The contract is let on a design so there can be time and cost savings if the requirements are clearly defined and the number of changes is kept low

What Works Best?

The way to achieve the best outcome from a PPP project is to provide a clear and detailed brief. This should be based on a separate planning process that includes time for consultation, options to be developed, discussion held and a preferred option put forward. The cost of bidding can be very high, so it is preferable to separate the planning process from the bidding costs.

Government’s ‘Value for Money’

Achieving value for money does not mean that the highest or the lowest bid is selected. Value for money requires all factors affecting the procurement process to be taken into account – this includes the benefits, costs, and risks, and ensuring that the requirements of the project will be met. The challenge is to identify and evaluate the extent of the benefits and costs and then make an informed decision. Invariably a weighting is used to evaluate the various aspects of the bid proposals to ensure that the best design at the best cost is selected.   This is not always an easy task. In a recent case in South Australia, it was determined that the proposal did not represent ‘value for money’ to the taxpayer and the project was withdrawn.

Ann Gorey has had a long career working in government policy in education and buildings, and with the OECD in PPP policy.

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