The collapse of Carillion, the UK’s second largest construction and service company, followed closely by profit warnings from Capita, continue to raise questions over the way that public services are contracted out to private sector businesses. It is inevitable that some local authorities, housing associations and public sector bodies will choose to bring certain services back under their own control. But such is the extent to which essential services and significant development projects, such as housing, are outsourced to specialist companies, reports of the demise of public private partnership are premature.
Successful public-private joint venture structures require a great deal of honesty up front. Each party should openly declare what it needs to achieve from the project and determine the extent to which their prospective partner can realistically deliver. Ideally, key parameters are set out early on in the heads of terms.
Take for example, the case of local authorities and private residential developers; the shared objective of the delivery of housing will be driven by very different motivations. For private developers the bottom line is always going to be key, while local authorities need to build homes that best serve their local community and provide much needed housing. A public private partnership that brings these two objectives together under one unifying purpose can create an extremely powerful delivery force that achieves far more than either partner could on their own.
Within equitable public private partnerships structured through a joint venture, there is also an expectation that both parties will invest alongside each other in return for receiving a proportional benefit. This truly collaborative approach offers some protection against the overreliance on one party that was the downfall of Carillion’s schemes.
Joint ventures structured this way provide a far greater opportunity to save a project before catastrophic failure occurs. If one of the parties fails to deliver – for example by missing payments because of solvency issues – then the other will usually be entitled to buy them out at a discounted price. The surviving partner can then continue with the project without viability being undermined by the misfortunes of the other. They could even choose to bring in another investor to take the departing partner’s place.
Carillion’s collapse has rightly led to considerable debate over the future of outsourcing and public private partnerships. The debate needs not to focus on how local authorities and social housing providers should seek to extricate themselves from these arrangements but on how successful models can be more fully embraced and improved.
For projects to operate in an efficient and sustainable manner, risk needs to be allocated to those that are best placed to understand and manage all the related issues that flow from it. That then needs to be factored into the way in which ‘global’ risk and reward is shared across the entirety of the venture. Traditionally, a contracting party will usually only accept more risk, relatively speaking, if they stand to make greater gains (assuming the risk is appropriately managed and contained), and there lies the problem. Such an approach is often inherently speculative. It can distort the overall risk profile of the project once other factors, such as the state of the economy, and the private sector party’s success with other projects and its ability to withstand the obligations it has agreed to take on are taken into account. In managing these issues, due diligence remains king and expert advice is essential.
If the failure of Carillion provides but one lesson it is that public private partnerships need to be just that – a partnership where the needs of each party is understood, considered and managed in a sustainable manner. With common ground at the outset the future of public private partnerships continues to look bright.
This article first appeared in Local Authority Building & Maintenance magazine