PPPs – The Only Show in Town?
By Paul Maltby.
Reproduced by permission of the Public Management and Policy Association.
More than two years after ippr’s report on public private partnerships (PPPs) Building Better Partnerships, PPPs are still attracting a significant amount of opposition and debate. Much of this opposition is ideological in nature: for some commentators PPPs should be opposed regardless of whether the private sector has been historically involved, or whether cost and quality improvements can be demonstrated.
There are many other practical concerns about PPPs, but two vital questions remain unanswered:
- Is the Private Finance Initiative (PFI) achieving value for money?
- How should PPP policy develop?
Value for money
There remains a remarkable lack of evidence about whether the most common form of PPP, the PFI, is delivering high quality services at an acceptable price.
The Government continues to assess value for money by comparing the costs of PFI bids with a ‘public sector comparator’, a notional publicly financed deal. When ippr looked at the publicly available data on these comparisons, the results were mixed. Some projects showed significant cost savings (around 15 per cent for roads and prisons). However, others, such as school and hospital schemes, demonstrated more marginal savings of between only two to four per cent.
These figures need to be treated with caution. Firstly, they deal with predicted costs rather than actual costs. Secondly, most project managers know they will only get permission to build their new assets if the PFI bid appears cheaper, regardless of how marginal any supposed savings are.
These figures also take no account of differences in quality – a key issue in public service delivery. We are only just beginning to see evidence about whether the PFI delivers advantages in practice. Both Audit Scotland and the Audit Commission have now released data about working PFI schools. Although both organisations were supportive of the general PFI process, Audit Scotland dismissed any final cost savings as ‘narrow’ and the Audit Commission found that design quality was significantly worse in PFIs than in new traditionally procured schools.
In contrast, the National Audit Office examined construction performance in the PFI in a February 2003 report and found that it had significantly improved time and cost certainty in public procurement. This represents a serious achievement for the PFI.
The way forward
The political hostility to PPPs in many quarters needs urgent attention. In order to move the PPP debate forward the Government should take two immediate steps. First it needs to demonstrate evidence about the PFI and value for money. To this end ippr would like to see a major audit review of PFIs across the public services, looking at cost, quality and time and cost certainty. Schools were always expected to receive limited benefits from the process, and such a review is likely to present the PFI in a more favourable light than the Audit Scotland and Audit Commission reports on PFI schools. However, until doubts have been comprehensively addressed the issue of PFI and value for money will continue to drive suspicion about PPPs in general.
Secondly, The Government should take steps to demonstrate that the PFI is not ‘the only game in town’, as often alleged. We have moved from a monopoly of typical public sector procurement, to a new monopoly of the PFI. Yet the PFI is only one of many possible ways of organising public procurement, and should not be seen as a panacea. A simple way to create a more level playing field between the PFI and other procurement options (including other types of PPP) would be to account for the PFI as if it were on balance sheet. Too often the dubious attractions of ‘off-balance sheet’ financing sway the opinions of public sector managers in favour of the PFI. This could reduce these illusory benefits at a stroke
But government could do still more, by indicating a willingness to reform the PFI process where performance has been less than adequate. There are some encouraging signs in this regard; the Department for Education and Skills is consulting on a new PFI model with centralised procurement and six ‘exemplar designs’.
PPPs are no longer a new and rare feature of the public service landscape, yet their political context continues to evolve. The Government no longer sees public infrastructure as a core issue as it did in 1997, instead its attention has turned towards public service reform. As a result a major issue will be the degree to which services should be included within PPP deals. Currently most PFI projects limit private sector involvement to support services, although prison PFIs and the new Diagnostic and Treatment Centres in the NHS also feature core service delivery undertaken by the private sector.
In the current political climate the PFI is likely to remain used primarily for public infrastructure. The Government is wary about relying on contracts alone to secure the public interest for complex and high profile services. In our latest publication In the Public Interest? Assessing the potential for Public Interest Companies (April 2003) ippr argues that new models with stakeholder ownership, such as foundation hospitals, are likely to become the government’s vehicle of choice for these complex services and a number of other specialised situations.
PPPs continue to be a major political issue. However, the public debate on PPPs shows no signs of moving beyond simple dogmatic slogans.
Yet much of the power to move beyond the current difficult situation is in the hands of the Government. Firstly, Government should be more honest about where the PFI is working and where performance needs to be improved, and this needs to be backed by thorough independent evidence. Secondly, the ‘PFI monoculture’ needs to end and public managers should have access to a variety of delivery mechanisms. It makes little sense for the Government to nail its political colours to the PFI mast alone. Doing so risks sinking on a wave of uninformed anger. Thirdly, the Government should develop a more sophisticated understanding about when the various delivery models available to government – including new models such as Public Interest Companies – should and should not be used.
And finally, the Government should continue its recent confidence in refining PPP policy. The reform of schools PFIs is welcome in this regard, as is the Government’s efforts to end the two-tier workforce issue – for too long a serious complaint of trade unions.
Procurement policy is a complex and technical subject. It is a sign of a failure of policy and political strategy that PPPs have been thrust into the limelight and continue to dominate the domestic political agenda.
Paul Maltby is a Research Fellow with the Public Private Partnerships, Institute for Public Policy Research.