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The potential pitfalls of PPP

Source: Public Sector Executive May/June 12

PPP and PFI schemes are used all over the world to finance new infrastructure. ACCA’s head of public sector, Gillian Fawcett, describes the lessons learnt from a new report that examines these trends.

The Association of Chartered Certified Accountants (ACCA) recently commissioned a report evaluating the use of Public Private Partnerships (PPP) and Private Finance Initiatives (PFI) across the world. The research considered what finance schemes were preferred in different countries and questioned their value for money.

Manchester Business School conducted the research, focusing on the different drivers for investment and the various contexts that affect the development and implementation of PPP/ PFI schemes.

Gillian Fawcett, head of public sector for the ACCA, talked to PSE about the report and its implications for the UK; particularly how PPP is presented to the public as a value-for-money scheme.

Different drivers

The report, ‘Taking stock of PPP and PFI around the world’ explores the popularity of such schemes following the 2008 financial crisis, and whether governments are, or perhaps should be, looking for new ways to fund infrastructure projects.

It used case studies from ten different countries, providing a comparative review at an international level, and offering governments the opportunity to learn from others’ experience and take the schemes forward.

The major driver for PPP is the gap between the demand for infrastructure development and governments’ ability to fund those developments. In the UK, with its mature level of infrastructure development, the main driver for PPP is additionality, as opposed to value for money, despite what may officially be claimed. The funding shortage in this case comes from the public sector net debt (PSND).

The report concludes: “Generally, the PSND is politically constrained in order to discipline the public budget.”

This means that while additionality to publicfunded investment is the principle motivation for PPP use, there is a tension in PSNDconstrained countries admitting this.

Fawcett said: “We tried to address the thorny issue in relation to value for money; are these schemes delivering value for money at the end of the day and does that matter?”

Nobody knows

The lessons learnt from the research show there are significant issues with transparency and accountability in a number of countries, particularly developing countries which account on a cash basis.

“Quite a number of governments don’t account for it, because they don’t have balance sheets!” she added.

A lack of transparency also occurred in the UK, as the Government was previously not required to produce national accounts to show PFI liability.

Fawcett continued: “Nobody knew what liabilities work was stacking up for the future and what obligations needed to be met.”

In 2009/10, the UK published accounts which, for the first time, showed PFI liabilities and assets. Fawcett labelled this “a move forwards” which was “not the case for many other countries”.

Although accounting for these schemes and publishing that data seems an intuitive way of working, it has taken the UK a long time to get there, and many other countries have yet to achieve an adequate level of accountability for their PPP/PFI schemes. Fawcett suggested that the accounting standards countries follow is a “vital part of the problem”.

Additionally, she acknowledged that it did present an incredibly large amount of work.

“It’s taken a long time for them to actually achieve the whole of government accounts because at the end of the day, it’s over 15,000 bodies to be consolidated and that’s quite a huge task by any stretch of the imagination.”

Another key element in the struggle to improve transparency and the success of such schemes is the requirement for public sector staff to work with the private sector, a situation for which they may have little or no relevant experience.

“People in the public sector haven’t got the commercial and project management skills that are necessary when entering into these complex schemes with private funders and the like. So that’s another lesson to be learned,” Fawcett said.

Value for money?

When analysing PPP it emerged that in many cases, another option would have been cheaper. 

The schemes are used to provide the necessary funding for essential infrastructure, with little thought given to value for money, or financial cost. This is most evident in developing countries, and demonstrates a “key difference” between those and developed countries.

Fawcett explained that this was due to developing economies prioritising growth over cost: “In developing countries value for money criteria just doesn’t matter. It’s not even thought about. In those countries it’s because they need the infrastructure to support growth, so their economies are growing very rapidly and this is a means by which they can get the infrastructure in place very quickly to support their economic growth; value for money isn’t a criteria in that case. It’s more about getting access to funds very quickly and taking the short term benefits of boosting growth.”

In the UK, the Government must “assure the public that PPP is the best option for procurement in terms of value for money”, the report notes.

Another supposed advantage PPP and PFI offers is the private sector assuming the majority of the risk. Unfortunately, this does not appear to be playing out in practice.

“Predominantly what’s happened is that at the end of the day, the government has taken on most of the risk!” Fawcett said. “The reality is that it’s fallen back on the public sector. There’s some important work to be done in that area, in relation to how you deal and balance risk transfer.”

Options appraisal

Rather than suggesting that PPP/PFI is being over-used by governments, Fawcett believes it should be considered as one option out of a range of possible financing schemes at the options appraisal stage.

She explained: “When you’re thinking about building a new road or school, there’s a robust appraisal stage where you look quite clearly at the costs and benefits of other alternatives of achieving the same objectives. That needs to be much more robust and it needs to be properly evaluated before you go down the route of PFI/ PPP schemes. Consider it at the very beginning, rather than do less or more.”

“I think quite clearly there are problems with PPP/PFI and this has been recognised. The Treasury has just finished a consultation about what are the new and better ways of taking this forward. You’re starting to see increment schemes developing so it will be interesting to see how they take that forward. That’s probably a next step for us.”

Transferable skills

Considering ways for the public sector to ensure PPPs are chosen successfully, Fawcett reiterated the importance of options appraisal and considering alternative ways to raise finance and build infrastructure projects. Additionally, she called for the sector to ensure the right skills are in place to carry out such assessments.

This isn’t some trickery conducted by the private sector to enhance their profits, Fawcett said, but a lack of skills on the part of public sector.

“The skills weren’t there to navigate the detail. I don’t think it was the private sector pulling the wool over the public sector’s eyes; it was just that they hadn’t got the commercial skills necessary to make sure that the schemes weren’t going to be so costly in the future.”

While this has improved, and more public sector staff now understand the need to work more flexibly and acquire these commercial skills, Fawcett considers this to be a continuing problem. Minimising this gap would undoubtedly increase the success, however that may be measured, of privately-financed infrastructure.

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