PPPs Creating winning conditions
PPPs: Creating winning conditions
Gary Sturgess
Australian Chief Executive - July 2004
In a number of ways, Australia led the world in the development of the new generation of public-private partnerships. Throughout the late 1980s and early 1990s, state governments experimented with various kinds of public infrastructure that were owned and financed, designed, built and operated by the private sector.
We were relative latecomers to PPPs in light rail, water and waste management, but the Queensland government was the first in the world to follow the Americans with privately-managed prisons and NSW launched a new era of private tollroads with the M4 and M5. NSW also broke new ground with a full-service PPP hospital at Port Macquarie.
For a number of reasons (only some of them sound), Australia stopped experimenting and in the second half of the 1990s, the United Kingdom became the international centre of excellence for public-private partnerships. And while Australian state and federal governments have issued comprehensive policy documents over the past four or five years, not a lot has actually been done.
There are signs that may now be starting to change, with governments finally succeeding in shifting construction risk, and procurement authorities increasingly looking to the inclusion of services. As we begin to take PPPs seriously, what lessons might we learn from the UK market in order to create winning conditions?
1. Create a demand for service improvement. One of the most fascinating aspects of the Blair Government has been the way in which the Prime Minister has continued to side with the users of public services against the producers. Of course, as the leader of the Labour Party, he has had to make compromises, but he has continually returned to this theme throughout his premiership.
It takes a great deal of courage and not a small amount of political leadership to adopt this approach. Among other things, it implies the need for a reliable set of performance measures, a credible system for auditing government performance and reporting to the public, and some means of turning around the performance of failing organisations. Of course, there are political risks, but the Blair Government has shown that they are risks that can be managed.
It also suggests the need for a coalition of stakeholders representing the interests of public service users, to counter the special pleading of the providers. There is evidence that such a coalition is beginning to emerge in the UK.
2. Create markets, don't just conduct procurements. Over time there has been a shift from the old 'state contract control board' model to one heavily influenced by industrial procurement. But over the past twelve months, the UK government has come to realise that this slice-by-slice approach may not meet the government's needs. They are now looking to a form of market management.
In some cases, the government has gone out to the private sector and talked companies into developing the capabilities necessary to deliver public services. In other places, the government understands that it will have to regulate the rate at which procurements are brought onto the market to avoid driving up prices through scarcity of supply.
In part, this is about market depth. This is a particularly important issue in federal systems such as Australia and Canada, where sub-national governments have most of the responsibility for infrastructure services, and market fragmentation can result in the lack of a clear deal flow, or in governments competing for scarce resources.
3. Create a moral economy. The burghers who organised and conducted medieval fairs and markets used to lay down rules for market entry, and they would expel traders who failed to treat their customers honourably. How much more should this be the case with markets for the delivery of public services.
PPP contracts are often 25 or 30 years in duration, which suggests that governments need to pay close attention to the companies that they invite into the market. There is a Gresham's Law at work in public service markets - bad contractors will drive out good contractors, unless government makes it clear that it values commitment and trustworthiness.
4. Develop capability, both in procurement and contract management. Governments suffer a number of disadvantages when it comes to acquiring the capability to manage large and complex procurements. They tend to find it difficult to recruit and retain high quality project managers, if only because there are so few career opportunities for these people at the top of government. It is not enough for government simply to buy in external advisers. Their interests are not necessarily the same as government's and they too have to be managed.
At the same time, government has tended to under-invest in contract managers. The very concept of 'partnership' suggests an ongoing collaborative relationship which needs to be carefully managed. This is not the same as privatisation or outsourcing where government can push the services away at arm's length and rely on light-handed regulation.
5. Take positive steps to address workplace issues. One of the reasons why public sector unions have opposed PPPs is that they perceive them as a threat to union membership and workers' terms and conditions. Obviously this has been one of the major reasons why the Labor-dominated state governments have not been enthusiastic about proceeding down this path.
Of course, governments can and should use competition to stimulate more flexible and innovative employment arrangements, but there is no good reason why the transfer of employment - a time when workers are in a weakened bargaining position - should be used to change terms and conditions.
In Australia, transfer rights have been largely protected through case law. In the UK, they have been addressed through government regulations issued under European law. While these regulations have not been without their problems, they have largely taken this question off the table.
In the UK, public sector unions are able to extend their coverage into the private sector, which has meant that union leaders are not faced with the loss of membership, which has often been the case in Australia. If the state Labor governments are serious about PPPs, they should sit down with unions and industry and negotiate a workable set of regulations that will protect workers at the moment of transfer, whilst not constraining the opportunities for real innovation.
6. Use competition and contracting to improve accountability. There is strong evidence that competition and contracting, if done well, can have the effect of strengthening accountability. It tends to be a different kind of accountability, but there is no reason why it should not be better than what has prevailed in practice under the traditional Westminster system.
This has certainly been the case in the UK prison service, where the Home Office is now developing a performance measurement regime for the public sector based on the lessons it has learned from contracting with the private sector. It was meant to be the case with Port Macquarie hospital, although the NSW government has never published the benchmark data that was supposed to have been generated under that model.
Claims of commercial confidentiality on the part of contractors or their government customers, should be scrutinised closely. Again, if government engages firmly and intelligently with private firms, many of these objections can be overcome.
7. Use competition and contracting to improve service quality. Whether or not it was done deliberately, privatisation and contracting out often resulted in a reduction in the quality of service. To some extent, this was because procurement was traditionally used to drive down costs and far too little attention was paid to the role that competition could pay in improving service quality.
In the UK, the Home Office has used competition and contracting to improve the quality of prison management, in large part just by insisting on higher standards in the contractual documentation. In the education sector, competition has been used to engage the private sector in turning around failing local education authorities (roughly equivalent to the regional office of a state education department in the Australian system).
Competitive tendering can just as easily be used to improve service quality as it can be to bring down costs, although it does demand the development of acceptable quality metrics.
8. Develop contractual communities. Contracting for public services is about a great deal more than competition. Indeed, in many PPP contracts, the competition occurs over one or two years, while the collaboration must continue for twenty or thirty years.
Successful public sector contracting in the UK - in defence and the prison service - has led to the creation of contractual communities, where government customers are able to learn from their mistakes through repeat business, and contractors are concerned about their reputations because they expect to encounter the same customer again in the future.
There was a brief moment in the mid-1990s, when officials from Her Majesty's Treasury were studying the Australian market to understand what had been accomplished with public-private partnerships. Home-grown firms such as Macquarie Bank and former politicians and public officials were provided with an opportunity to play on the world stage.
Over the past decade, the British have done so much in this area that Australians now must learn from them. But there is no reason in principle why Australia could not once again become one of the world leaders in public-private partnerships and provide a whole new generation of public officials and private firms with an opportunity to succeed in the international environment.