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The ‘secret’ ingredients for innovative PPPs - healthy tension, thinking in reverse

Bruce Riddle

Bruce E Riddle | Principal and PPP and Global Procurement Strategy Service Line Lead, Sydney | 03 May 2017

Public-private partnerships (PPPs) are all the rage. From the Sydney motorways, to the new Perth Stadium – and from Royal Adelaide Hospital to Canberra’s own $900 million-plus light rail – PPPs are instrumental in literally rebuilding Australia.

Apart from sounding like some form of “magic pudding”, what is a PPP? And more importantly, what makes a successful PPP?

Simply put it is a form of procurement where the public sector contracts with the private sector to deliver a large piece of infrastructure, accompanied by the long-term maintenance and occasionally, the services delivery associated with the infrastructure too.

The public sector funds the infrastructure and services via periodic payments over a long-term period (traditionally 20-30 years) and usually gets to keep the infrastructure at the end of this period – much like buying a car complete with a full servicing package on a financing agreement (potentially with a chauffeur thrown in too!).

But not all PPPs are created equal and a ‘cookie cutter’ approach is not something which lends itself to this style of infrastructure and services procurement. Some are more complex than others and similarly some are more successful than others.

So what is it that makes a good PPP?

Fostering innovation in a partnership

In my view, a good PPP is one where the “P” in Partnership is truly embodied and where one of the key hallmarks of PPPs - innovation - is a prime focus.

Partnership, by nature, is a relationship where give and take is the norm, however modern-day PPPs tend to gravitate towards highly commercial and rigid relationships where every move is governed by onerous contractual obligations.

Notwithstanding the terms of the contract, the ‘Partnership’ component is fostered where Government and private sector drivers are closely aligned.

This is not easy to do. Government is driven to improve the lives of its citizens, whereas the private sector is driven by profit and returns to shareholders/investors.

Alignment is more achievable when the focus of the PPP is the project outcomes.

Alignment is more achievable when the focus of the PPP is the project outcomes. Where Government is looking at improved outcomes and the private sector is paid/incentivised to deliver the outcomes, then the ‘partnership’ component is magnified.

This is most prevalent in PPPs which are operator-led and/or where the service provision and outcomes, rather than the infrastructure necessary to deliver them, are the key focus.

This service/outcome-focused model also lends itself to the enhancement of innovation. This is as a result of the focus on the output first and the infrastructure second – effectively embracing the Stephen Covey concept of “Start with the end in mind”.

With this approach, the means to achieve the output is effectively reverse engineered and innovation is focused on how to most effectively achieve the project objectives. The flow-on effect is that the infrastructure solution is optimised to achieve the outcomes.

A further feature of this service-focused approach is tension: not between client and consortium, but tension within the consortium itself. The inclusion of the facility manager – known as the FM in the trade - with the design and constructing teams and (in some cases) the operator too within a consortium leads to the inevitable tussle between construction cost versus ease of maintenance and service delivery.

If balanced properly, this leads to the most effective solution which meets not only the service outcomes, but the constructability, operability and whole-of-life requirements.

Ensuring that the FM provider and operator fully own and sign off on any PPP’s design is critical to maximise the likelihood of achieving the project outcomes. Essentially the parties have ‘skin in the game’ – they are effectively incentivised to own the outcomes.

A good PPP embodies the model described above, places minimal constraints on the bidders and maximises opportunity for the private sector to innovate.

Outcomes instead of prescriptions and process specification

In the early 2000s, before joining Advisian, I worked with the UK Department of Health on a series of projects to allow private sector healthcare providers to deliver healthcare services to public sector patients.

This ambitious scheme used the PPP model to both introduce new players into the UK market and to create competition and choice between private hospitals and the National Health Service (NHS). In essence, it was an output-based model and by nature ended up being operator led.

In short, it turned the traditional bureaucratic process-driven mindset upside down by specifying only what had to be achieved, without prescribing how to get there. The result maximised innovation, with providers offering a range of service delivery methods.

This included specialised, fully-mobile operating and recovery units doing cataract surgery in hospital car parks, the use of spare capacity within NHS hospitals and the co-location and construction of all-new facilities.

The end-game was not the construction solution, but rather how to effectively and efficiently to deliver the service.

Government can drive efficiency from the PPP model and the accompanying process in the specification and the efficient management of the procurement process.

Over prescription and over specification stifles private sector innovation and robs government of one of the intended benefits of the PPP model.

When government defines high-level requirements and focuses on project outcomes, the private sector has room to manoeuvre and to come up with new ways to deliver the services and infrastructure.

Government as enabler

Government has another critical role in enabling the process, and that is its own governance compliance and obligations.

Often these can be time-consuming and appear convoluted. In a process where time equals money, an expedient process of Government decision-making has the ability to significantly speed up the transaction process.

When you are looking at a 20-30 year arrangement, the focus on getting the contract management structure and process correct is incredibly important.

Lastly, the focus is often on getting the deal done, but when you are looking at a 20-30 year arrangement, the focus on getting the contract management structure and process correct is incredibly important.

When the cost of running PPP-procured infrastructure easily eclipses the initial capital costs, effective contract management is key to not only delivering the required service outcomes, but also to ensuring the ongoing cost and quality control.

Contract management is a two-way street and both parties need to establish a working relationship to ensure the punitive commercial mechanism within a PPP contract is effectively managed.

Again, the most important word to this approach being “Partnership”.