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Public-Private Partnerships need to bypass ideology

Public-Private Partnerships need to bypass ideology

Champion the involvement of private capital in vital public services at a metropolitan dinner party these days and you’ll sooner be handed your jacket than dessert. Judging by some recent populist commentary, a growing number of voices now appear to believe that central planning and taxpayer financing is preferable to the involvement of the private sector.

Admittedly, much of the anger has been generated by the failure to limit the perceived excessive profits made by owners of privatised public utilities. Some of the ire has unfortunately been directed at Public-Private Partnerships (PPP) — also known as the Private Finance Initiative (PFI) — to the extent that this important potential channel of private capital has all but dried up.

As one of the largest managers of pension fund capital invested in PPPs in the UK and globally, we are involved in more than 60 projects across the UK. Our insights and practical experience are derived from the many projects that have benefited all parties — and whose advocates are frequently our public sector counterparts — as well as some that have run into difficulties.

The pros and cons of PPP are not easily explained in less than 140 characters. However, the fashion for simplistic understanding, or misunderstanding, of this issue risks cutting off responsible private capital and so hurt the very public that some commentators claim to be helping.

Many billions of pounds of capital is required in the coming years to build and maintain the new hospitals, transport networks, schools and water treatment infrastructure required across the world — at a time when sovereign balance sheets are weighed down by high levels of debt. This modern infrastructure is a necessity if we are to maintain our quality of life and grow our economies.

There is enormous merit in governments partnering with private capital to make a success of these projects, subject of course to transparent contractual obligations manifest within the PPP framework. Much of this capital is aggregated pools of ordinary savers and pensioners, who are looking to grow their retirement pots.

Some critics speak only of gains but completely ignore the projects in which the private sector has absorbed considerable losses. PPP is not without risk, it is about effective and fair risk management. Cost overruns and inadequate maintenance on PPP projects have occurred in a few cases, such as Worcester Royal Infirmary or The National Physics Laboratory.

However, the costs and losses were borne by the private sector. This has never been the case with public procurement, where the taxpayer absorbs the costs and losses but is never made aware of them.

The potential benefits of PPP are recognised globally. In fact, it has become something of a UK export success story.

The potential benefits of PPP are recognised globally. In fact, it has become something of a UK export success story. UK professionals and companies have helped establish growing PPP markets across the world and in each continent. These countries have been attracted to the transparency and accountability that comes with the introduction of private finance.

PPP is an effective government tool reducing the scope for corrupt procurement and the concept has been backed by the G20 for this reason alongside the economic rationale. Indeed, it is also worth reflecting that even oil and cash-rich nations with large sovereign wealth funds, including Qatar and Abu Dhabi, have PPP frameworks, though they evidently do not need the finance. They see huge benefits in tapping the private sector’s deep understanding of procurement partnering and whole life asset costing and performance.

The PPP framework transfers risk to the private sector partner as well as reward. The partner is strongly incentivised to provide the project on time and within budget and cannot omit or change items from the scope.

While some early PPPs have run into difficulties, let’s remember that it was conceived to solve acute funding issues caused by inadequate fiscal control and where UK public authorities have been notoriously poor at procuring large projects. The frequent result of the traditional model of state procurement was a long delay, a big cost overrun and some quiet de-scoping so that less was bought than originally planned.

PPP has bought tangible benefits to the UK taxpayer and we believe it should continue to evolve and be strongly considered alongside other procurement approaches.

The two-decade journey of PPP has resulted in enhanced public safeguards now being included in the contracts without affecting the cost of private capital. We are now on to the latest model contracts that are fair, sustainable and will provide the necessary infrastructure ensuring value for money for the taxpayer.

To get under the skin of the infrastructure challenge and to compare like with like, the focus should not be driven by ideology and articulated through social media soundbites. It should be on securing the best outcome for the taxpayer and public users, forcing the public sector and its partners to think long-term for the benefit of the many.

This article was previously published in the FT on 11 October.