Brand New Thinking

1 February 2017 The PPP market continues to take a lot of flak from the general public and some politicians. Is it time for a rebrand and what more can be done, asks Marina Formoso

Over the course of 2016, there was an increasing noise from the general public rejecting the idea of ‘PPP’, however that might be constituted, with critics around the world often equating it to privatisation.

While this may not exactly be a new phenomenon, the noise has become increasingly loud, raising the prospect that it may now be time to rebrand the PPP model as a result of a constant rejection by the general public.

The UN’s Sustainable Development Goals (SDGs) are also expected to drive governments across the world to increase their engagements with the private sector and put infrastructure higher on the priority list for many. If such moves are not to cause political tensions between leaders and the electorate, there is an increasingly urgent need to rehabilitate PPP’s image across the world.

This possible rebranding of the model would not just involve changing its name – as has already happened in Scotland and England, with differing degrees of success – but look deeper into the system to correct practices that the general public perceive as ‘unfair’. In many cases, there remains a feeling that changes carried out in the past are still not enough for the public, which continues to question any real value for money and whether the model is producing better services.

“PPPs have often been associated with high levels of debt, with risk being loaded on the private sector, with dubious claims of financial additionality and with little evidence of positive outcomes,” argues Graham Gordon, head of public policy at Catholic international development charity CAFOD.

In Spain, for example, alarm bells rang again during 2016 after the government announced a rescue worth €5.7bn for nine toll roads that were declared to be in bankruptcy. Six of the roads that interconnect Madrid and were planned to free the capital from traffic were hit by the global economic downturn, turning them into expensive ghost roads with an average of just 4,000 vehicles a day, compared to the 70,000 originally expected.

Inevitably, the final responsibility for this situation falls back on the government, and while that may seem like the most logical solution from the private sector’s point of view, it may not seem the most favourable of outcomes to the general public – even if it has been shielded from some of the costs.

And it is not simply a problem for Spain. Last year, the UN launched a series of PPP Guidelines for consultation among the wider public. “I received 200 letters coming from society organisations saying that PPPs involve a lack of transparency, big debts and big revenues for the private sector,” says Geoffrey Hamilton, chief of the cooperation and partnerships section of the UNECE.

This perceived lack of transparency continues to be the biggest issue. The European Network on Debt and Development (Eurodad) recently suggested that whatever the various benefits of the partnership model may be, for most in the public sector there is only one issue that really matters – and it is one that is rarely put forward in public.

“We found that one of the main reasons why governments go for the PPP option is because they can keep the PPP projects off balance sheet,” says Mathieu Vervynckt, a policy & research analyst at Eurodad. He argues that there is a belief that this means governments can effectively hide the costs of a project from the public eye.

In reality, of course, it is much harder for governments to hide the true costs of a project through a PPP deal because the risks have to be set out at the outset.

“You get more transparency in the PFI model than you do with many other government procurements,” explains Nick Prior, partner at financial consultancy Deloitte. “Having worked on a number of these contracts, of the bits that might not be in the public domain there is very little that would ever cause significant public interest excitement. It is mainly around commercial sensitivities that companies don’t want their rivals to know about.”

Another aspect of the criticism today continues to come from a perception that the private sector simply creams off the profits in a project, leaving no benefit for the public sector partner in a deal. And while that might have been true in some cases in the early days of PFI in the UK, it is no longer the case.

“Because of the number of players, their appetite for these projects, and ultra-low interest rates, the days when investors could make high levels of profit are over,” says Mark Elsey, partner at law firm Ashurst. “In effect, market competition and liquidity has self-regulated out the scope for the super-profits that were made from some of the earlier deals, [but] there is still a stigma attached to any level of profit being made out of what some people see as ‘public’ services or assets and no recognition is given to the risks that are assumed by the private sector under these deals.”

“A lack of public sector share on refinancing gains can still be quoted in debates by those that oppose PPPs, yet everyone in the industry knows that issue was addressed over 10 years ago,” adds Liam Cowell, partner at DLA Piper. “As I recall, the guidance change actually had retrospective effect, so that one really does appear to be an unfair stick with which to beat the PPP market.”

Most in the industry accept that, in many cases, the problems ascribed to the model stem largely from a mixture of bad press and misinformation.

PPP supporters point to unions, uninformed press and politics as the forces that tend to focus solely on the failures of projects – and of course those examples where there have been big revenues for investors.

“I think unions tend to confuse PPP or PFI with privatisations, which are completely different,” suggests Elsey, “and the press and politicians tend to focus on projects that go wrong instead of highlighting those many projects that work well.”

“PFI was blamed for a whole lot of things that went wrong, but the contracts usually did what they said they would do. Performance has been typically in line with contractual specification. The problem has been that PFI was allowed to become an easy political football that the politicians were only too happy to kick. Many projects that used PFI should never have used the PFI contractual framework and quite probably should never have happened at all,” adds Prior.

Making amends

While rebranding the model, as Hamilton has suggested, may be one way to tackle the issues, it seems that there are now so many voices attacking the PPP concept that something more fundamental may be necessary.

For a start, the model has been rebranded before – most notably in the UK. Many practitioners point to the failure of Westminster in relaunching the much-maligned PFI model with PF2, arguing that this has done little to assuage the public’s fears over privatisation and profiteering.

“So rebranding is not the issue,” argues Gordon. “It goes much deeper. The focus needs to move towards demonstrating why a PPP will deliver better than another financing model and to show the positive development impacts.”

Prior suggests that the creation of a new platform to drive private sector investment might offer an answer. “An infrastructure bank would be a good way to tackle the problem and it would create another level of transparency,” he suggests.

Providing empirical evidence, comparing the performance of a PPP with the traditional model and procuring in a smarter way are among the solutions suggested by the private sector to win back trust.

“It might be difficult to find out the average, post contract close, cost overrun to the public sector or slippage to timetable on a non-project financed project, but it might be possible to pull this data together for project financed projects,” suggests Cowell.

“That data might help highlight some of the true benefits of the model. Perhaps it is worth drawing from experiences in Scotland. A rebranding in Scotland is considered to have been successful with stakeholders, politicians and the public. The Hub and NPD models are perceived as addressing the problems of the earlier PFIs.”

But it is not just about getting projects to financial close. “The private sector needs to work better with the public sector, not just in the construction period but thereafter,” points out Robin Baillie, partner at law firm Squire Patton Boggs. “There have been a lot of disputes that are not being handled as well as they could be by either side.

“From a private sector perspective, once a project has signed, the deal team moves onto the next deal and can then take their eye off the ball; a general manager and/or management services provider comes in, but they are not necessarily as familiar with the project or the contractual matrix and you get similar issues at subcontract level. This can cause issues around delay, poor performance and disputes over allocation of responsibility which end up damaging the relationship with the public sector, and ultimately affects support for new deals going forward.”

Whatever approach is taken to rehabilitating the model’s public image, a key element will be getting the positive message across to the public. In Canada, for example, criticisms of the model are regularly countered by the Canadian Council for PPPs with facts and statistics demonstrating the model’s benefits.

“Well-designed partnership schemes need to be defended and explained vigorously,” says Graham Mather, president of the Infrastructure Forum in the UK. “The alternative is often not a scheme at lower cost but no scheme at all; or a scheme which is constantly delayed by government vacillation, hesitation and change of priorities. One of the advantages of well-designed third party financing schemes is they can lock government into desirable objectives over the longer term.”

Across the industry, experts believe that the future of the model depends on citizens’ acceptance and a better understanding of the model. To this end, the UN is already preparing a formula to avoid the failure of projects and to enhance their approval ratings.

People’s role

Hamilton believes that the negative perception of the model “can be changed” by adding the ‘P’ of ‘people’ into the PPP formula. “In the UNECE we talk about ‘people first’, involving projects that increase the access to essential services and strengthen social equity,” he explains.

The UN is also preparing an evaluation methodology for PPPs to help demonstrate “as close to scientifically as possible” whether a project is compliant or not with the UN’s agenda – and if it is not, to adjust the scheme.

CAFOD, in a report issued together with other entities, has also pointed out some principles it believes a PPP should fulfil to ensure sustainable development. These are: to minimise risks for people and the environment, to ensure transparent and accountable processes for the use of all public money and to make the most of the role of the private sector to promote social, economic and environmental development objectives.

Any changes, though, would need to be supported by a strong public figure in any government to stand behind it. “Government and the private sector need to be blunt about the challenges of financing infrastructure,” Mather says, referring to the UK’s situation. “A detailed speech from the Chancellor at some point might be really helpful. It would need to explain that these financing partnerships are complex. They can involve a mixture of public guarantees, equity investment, loans and be repaid over a number of years from customer charges.

“All this needs to be upfront and clear. The success of the Thames Tideway financing is a good example to use. We need to help people understand the approach and also make it easy to replicate. Government should be enthusiastic about these schemes and not regard them grudgingly as a last resort.”

Indeed, former Chancellor George Osborne hailed the Thames Tideway scheme when in office as an example of the positives that can be achieved – despite the fact that he had previously lambasted PFI and been apparently reluctant to use PF2.

While the industry accepts that the use of PPP will always come down to a political ideology, the current global economy means that governments will have to be more pragmatic.

“The public won’t accept that a project is good value simply because the private sector is involved,” says Mather. “But equally, public opinion is realistic. It knows that governments are strapped for cash around the world. People also understand that harnessing private sector financing skills while keeping a tight grip on them is mission critical.

“Demystifying the schemes is an important task and it will only be achieved if governments and the private sector work together.”

This page was last updated on:
3 April 2017.

thumb

Time to be bold

PF2 projects are slowly bubbling to the surface, but will the market take the bait?

thumb

The Insurance Man

Darryl Murphy, head of debt investment at Aviva Investors discusses where he intends to take the organisation next

register

Register now to get un-restricted access to all sections of the website.

Want to see more first? Try our free preview...