What next for PPP?
The new coalition government is shaping up to be more radical than Thatcher’s first term. But how will the government’s ideas for themes such as the “Big Society”, increased localism, greater mutualism and further third sector involvement, be translated into the PPP arena? Michael Scott and Dani Lodge examine what lies ahead.
Recent articles in the press are a reminder that, in certain circles, PFI remains controversial. Arguments continue, despite the evidence of success from more than 700 new capital public works projects, completed on-time and on-budget. PFI involved a lot of new ideas but was developed using well-established project finance concepts and documentation. The guiding light to success was the mantra that each risk in the project should be borne by the party best able to manage such risk.
Despite the huge number of completed projects and the fact that PFI undoubtedly met the need for private investment in public assets, certain key questions were left unanswered. For example, was PFI value for money over the lifetime of the project? Does the private sector really provide services better than the public sector and, if so, why? Should services be privatised? How should public services be reformed? Do the contracts have to be so inflexible and complicated?
The Cabinet Office, led by Francis Maude MP, has been talking about a "reconfiguration of public services" which is anticipated to herald a whole scale shake-up of the PPP market. What will PPP look like over the next five years, and what mantra will be developed to guide those deals? For reasons set out below, we believe the recurring theme for future PPPs will shift from the allocation of risk, to the allocation of power.
Future PPP will be shaped by various themes and ideas being developed by the coalition government all appear to involve transfers of power in some shape or form. Key concepts include:
- third sector involvement
- welfare reform
- more shared services
- greater employee ownership
- Big Society and more localism
Third Sector Involvement
PPPs will evolve to reflect yet more sophisticated relationships between the public and private sector. These are likely to build on ideas and concepts developed by the pathfinder strategic joint venture PPP partnerships in the local government sector, such as IBM's project with Essex County Council. Such partnerships may become even more complex with the anticipated expansion of the third sector. Future projects could be tri-partite – public, private and third sector partnerships, perhaps ushering in a new acronym: PP3P?
In any joint venture, the correct allocation of power is vital. Each party or stakeholder must have a voice, but the arrangement must include the right checks and balances to avoid any one party having too much power. That said, once the correct balance is struck, it should be possible for the parties to get started without having the burden of having to negotiate and record every last detail of a long-term service agreement. Instead, the parties can proceed with the partnership on a limited scale with each new system, service or works being added in sequence based on mutually agreed business cases. The Essex PPP is intended to work in this way.
Welfare Reform
One of the first new waves of PPP projects to be procured by the coalition is the highly publicised "Work Programme" under the Welfare to Work initiative. The Work Programme is billed as "a new approach" to delivering employment related support services, intended to simplify the complex array of existing employment programmes and deliver one coherent scheme, providing personalised help for people who find themselves out of work.
Providers under the Work Programme will be paid on the basis of outcomes, which may mean the placing of an individual into long-term employment, but it is also open to providers to propose much broader solutions. The Programme also serves as a prime example of the way in which other future large-scale projects are likely to be procured, with themes such as:
- the encouragement of consortia, combining the appropriate mix of public, private, community and third sector companies
- payment by results, to reduce the need for public investment and incentivise outcomes
- contracts via a framework arrangements, to reduce procurement costs and allow flexibility.
Shared Services
Drawing from the lessons on procurement of shared services under the Total Place pilots, it is likely that the coalition will be seeking significant economies of scale through joint procurement of good and services.
The National Audit Office report published in May this year – A View of Collaborative Procurement Across the Public Sector – highlights the fact that there is currently no overall governance of procurement in the public sector. Radical reform will be needed before pan-government procurement can become established.
Even if public sector bodies can be incentivised to work together, in local government, there is a fundamental legal issue likely to prevent local authorities combining forces. Over recent years local authorities had started to embrace a more business-like approach having (in particular) been given limited rights to charge customers for certain services (section 93 Local Government Act 2003) as well as the general "well-being" power (section 2(1) of the Local Government Act 2000).
This trend however suffered a major set back when considered in the case of Brent London Borough Council v Risk Management Partners Ltd and others [2009] EWCA Civ 490. The judgment in this case is complicated but, in essence, the Court of Appeal dissected the general "well-being" power and concluded that it did not extend to cover arrangements that have as their sole object the improvement of the authority's own financial position.
The Brent case has led to other authorities reverting to a more cautious approach as highlighted in the recent decision of Slough Borough Council to pull out of its proposed shared services partnership with Cambridgeshire and Northamptonshire County Councils following legal advice on the impact of the Brent case.
The Local Government Association is now pressing for a change in the law and has published a draft bill to give local authorities a power of "general competence" which will hopefully (once passed) finally allow local authorities to escape their current tight constraints.
Employee Ownership
The election manifesto for the Conservatives included a firm commitment to more employee ownership. It said that public sector workers will be encouraged to form "employee-led co-operatives” and “bid to take over the services they run”. Co-operative members would set working practices and could remove managers who lost workers’ confidence.
Twelve fledgling public service spin-offs have been chosen recently as pathfinders by Minister for the Cabinet Office, Francis Maude. The intention is to allow public sector staff within these government departments (or arm's length bodies) to take ownership of the function or service and to change radically the way in which things have been done in the past. The pathfinder projects are to be supported by a number of business mentors including staff from the John Lewis Partnership.
In terms of a model for employee ownership, there is perhaps no better example than John Lewis. John Lewis plc (which is 100% owned by its 70,000 employee members) turns over in excess of £7bn a year. Under its constitution, the partnership puts the happiness of partners at the centre of everything it does. The partnership constitution is interesting as it provides the necessary checks and balances to ensure that the business is run commercially whilst at the same time giving staff a genuine share of power.
The coalition's encouragement of employee ownership could herald the beginning of a fundamental change in how public services are organised and managed.
Big Society and Localism
The coalition supports stronger local democracy and a substantial transfer of power from central to local government. They have stated that as part of the Big Society they will "promote the radical devolution of power and greater financial autonomy to local government, including a full review of local government finance".
If the coalition is looking for precedents from history for such localism, they may want to look at the example provided by the Dutch water boards. These bodies, which were established by the Dutch in the 13th century to manage and operate the water barriers, waterways and water levels in separate regions, continue to exist today as shining examples of how local democracy can work. Their longevity is testament to the careful balance of power engineered into their constitutions by medieval lawyers, including a general administrative body, an executive board and a chairperson.
We expect localism to become a recurring theme of future PPP and bidders will need to be alert to the need and opportunities of involving local residents and other stakeholders in their bids.
This article gives a snapshot of the big shift in government thinking and the radical change in priorities which is likely to drive the PPP market in new directions. We await the outcome of the Comprehensive Spending Review in October with interest and look forward to working in the new world of PPP as it takes shape over the coming year.
Michael Scott is a partner and Dani Lodge is an associate at Reynolds Porter Chamberlain. Michael can be contacted on 020 3060 6563 and via
- Details
The new coalition government is shaping up to be more radical than Thatcher’s first term. But how will the government’s ideas for themes such as the “Big Society”, increased localism, greater mutualism and further third sector involvement, be translated into the PPP arena? Michael Scott and Dani Lodge examine what lies ahead.
Recent articles in the press are a reminder that, in certain circles, PFI remains controversial. Arguments continue, despite the evidence of success from more than 700 new capital public works projects, completed on-time and on-budget. PFI involved a lot of new ideas but was developed using well-established project finance concepts and documentation. The guiding light to success was the mantra that each risk in the project should be borne by the party best able to manage such risk.
Despite the huge number of completed projects and the fact that PFI undoubtedly met the need for private investment in public assets, certain key questions were left unanswered. For example, was PFI value for money over the lifetime of the project? Does the private sector really provide services better than the public sector and, if so, why? Should services be privatised? How should public services be reformed? Do the contracts have to be so inflexible and complicated?
The Cabinet Office, led by Francis Maude MP, has been talking about a "reconfiguration of public services" which is anticipated to herald a whole scale shake-up of the PPP market. What will PPP look like over the next five years, and what mantra will be developed to guide those deals? For reasons set out below, we believe the recurring theme for future PPPs will shift from the allocation of risk, to the allocation of power.
Future PPP will be shaped by various themes and ideas being developed by the coalition government all appear to involve transfers of power in some shape or form. Key concepts include:
- third sector involvement
- welfare reform
- more shared services
- greater employee ownership
- Big Society and more localism
Third Sector Involvement
PPPs will evolve to reflect yet more sophisticated relationships between the public and private sector. These are likely to build on ideas and concepts developed by the pathfinder strategic joint venture PPP partnerships in the local government sector, such as IBM's project with Essex County Council. Such partnerships may become even more complex with the anticipated expansion of the third sector. Future projects could be tri-partite – public, private and third sector partnerships, perhaps ushering in a new acronym: PP3P?
In any joint venture, the correct allocation of power is vital. Each party or stakeholder must have a voice, but the arrangement must include the right checks and balances to avoid any one party having too much power. That said, once the correct balance is struck, it should be possible for the parties to get started without having the burden of having to negotiate and record every last detail of a long-term service agreement. Instead, the parties can proceed with the partnership on a limited scale with each new system, service or works being added in sequence based on mutually agreed business cases. The Essex PPP is intended to work in this way.
Welfare Reform
One of the first new waves of PPP projects to be procured by the coalition is the highly publicised "Work Programme" under the Welfare to Work initiative. The Work Programme is billed as "a new approach" to delivering employment related support services, intended to simplify the complex array of existing employment programmes and deliver one coherent scheme, providing personalised help for people who find themselves out of work.
Providers under the Work Programme will be paid on the basis of outcomes, which may mean the placing of an individual into long-term employment, but it is also open to providers to propose much broader solutions. The Programme also serves as a prime example of the way in which other future large-scale projects are likely to be procured, with themes such as:
- the encouragement of consortia, combining the appropriate mix of public, private, community and third sector companies
- payment by results, to reduce the need for public investment and incentivise outcomes
- contracts via a framework arrangements, to reduce procurement costs and allow flexibility.
Shared Services
Drawing from the lessons on procurement of shared services under the Total Place pilots, it is likely that the coalition will be seeking significant economies of scale through joint procurement of good and services.
The National Audit Office report published in May this year – A View of Collaborative Procurement Across the Public Sector – highlights the fact that there is currently no overall governance of procurement in the public sector. Radical reform will be needed before pan-government procurement can become established.
Even if public sector bodies can be incentivised to work together, in local government, there is a fundamental legal issue likely to prevent local authorities combining forces. Over recent years local authorities had started to embrace a more business-like approach having (in particular) been given limited rights to charge customers for certain services (section 93 Local Government Act 2003) as well as the general "well-being" power (section 2(1) of the Local Government Act 2000).
This trend however suffered a major set back when considered in the case of Brent London Borough Council v Risk Management Partners Ltd and others [2009] EWCA Civ 490. The judgment in this case is complicated but, in essence, the Court of Appeal dissected the general "well-being" power and concluded that it did not extend to cover arrangements that have as their sole object the improvement of the authority's own financial position.
The Brent case has led to other authorities reverting to a more cautious approach as highlighted in the recent decision of Slough Borough Council to pull out of its proposed shared services partnership with Cambridgeshire and Northamptonshire County Councils following legal advice on the impact of the Brent case.
The Local Government Association is now pressing for a change in the law and has published a draft bill to give local authorities a power of "general competence" which will hopefully (once passed) finally allow local authorities to escape their current tight constraints.
Employee Ownership
The election manifesto for the Conservatives included a firm commitment to more employee ownership. It said that public sector workers will be encouraged to form "employee-led co-operatives” and “bid to take over the services they run”. Co-operative members would set working practices and could remove managers who lost workers’ confidence.
Twelve fledgling public service spin-offs have been chosen recently as pathfinders by Minister for the Cabinet Office, Francis Maude. The intention is to allow public sector staff within these government departments (or arm's length bodies) to take ownership of the function or service and to change radically the way in which things have been done in the past. The pathfinder projects are to be supported by a number of business mentors including staff from the John Lewis Partnership.
In terms of a model for employee ownership, there is perhaps no better example than John Lewis. John Lewis plc (which is 100% owned by its 70,000 employee members) turns over in excess of £7bn a year. Under its constitution, the partnership puts the happiness of partners at the centre of everything it does. The partnership constitution is interesting as it provides the necessary checks and balances to ensure that the business is run commercially whilst at the same time giving staff a genuine share of power.
The coalition's encouragement of employee ownership could herald the beginning of a fundamental change in how public services are organised and managed.
Big Society and Localism
The coalition supports stronger local democracy and a substantial transfer of power from central to local government. They have stated that as part of the Big Society they will "promote the radical devolution of power and greater financial autonomy to local government, including a full review of local government finance".
If the coalition is looking for precedents from history for such localism, they may want to look at the example provided by the Dutch water boards. These bodies, which were established by the Dutch in the 13th century to manage and operate the water barriers, waterways and water levels in separate regions, continue to exist today as shining examples of how local democracy can work. Their longevity is testament to the careful balance of power engineered into their constitutions by medieval lawyers, including a general administrative body, an executive board and a chairperson.
We expect localism to become a recurring theme of future PPP and bidders will need to be alert to the need and opportunities of involving local residents and other stakeholders in their bids.
This article gives a snapshot of the big shift in government thinking and the radical change in priorities which is likely to drive the PPP market in new directions. We await the outcome of the Comprehensive Spending Review in October with interest and look forward to working in the new world of PPP as it takes shape over the coming year.
Michael Scott is a partner and Dani Lodge is an associate at Reynolds Porter Chamberlain. Michael can be contacted on 020 3060 6563 and via
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