Assessing PPP needs objective analysis

Published on Friday 26 January 2007 00:56

PPP is a hot topic for parties in the forthcoming elections. The key area of criticism in Scotland is the cost of private funding. The SNP says PPP has resulted in "hospitals and schools lumbered with credit-card payments" to banks and have proposed a "Scottish Futures Trust" to fund public-sector infrastructure projects.

But criticism is not confined to politicians and to value for money. Many architects see PPP as encouraging cheapness rather than promoting the design excellence that most want to see in public buildings and major engineering works.

Given the huge cost of renewing our infrastructure, the SNP and others are quite right to debate the value for money and effectiveness of PPP. But are these particular criticisms well founded?

As regards the cost of funding, the SNP is correct that private finance is more expensive than public borrowing. But that is not the whole story and it does not, in itself, mean PPP projects are necessarily more expensive. We need to compare like with like before making judgments.

First, comparisons have to take account of anticipated inflation. Paying 1 million more, but spread over 30 years, would, using current inflation assumptions, be in the region of 350,000-400,000 in today's terms. Second, PPP contracts all transfer very significant risk to contractors when compared with "traditional" construction contracts. If anything goes wrong, it is the contractor and/or the funders who have to fix it. If there is a major defect in a school, the council will not have to find the money. And if it is not fixed the council can either do the work itself and recover the cost from future annual payments or terminate the contract and deduct the cost from the compensation that would otherwise be payable. If the council had funded the project itself it would not have this financial security.

But councils do not want things to go wrong. Even if they are covered financially for repairs, there may still be disruption to education if a school fails. External funders do not want failure either: their security for loan repayments is the monthly payments from the council that will stop if the building is unavailable. Funders are very active in policing construction to ensure this is unlikely to happen, giving an extra layer of reassurance to the council in return for part of any price differential.

The SNP has not published enough detail yet about how their proposals would work in practice and it may well be they are addressing those issues. However, there are already examples of PFI-type projects that seek to achieve greater value for taxpayers while still covering the points above.

For example, my firm acted for the successful bidders on the 240m Docklands Light Railway Woolwich extension. Although the project was initially funded in a manner consistent with other PPP market deals, the pricing of the private debt drops by 25 per cent after the construction phase: subject to performance targets being met.

Nearer home, Western Isles Council's "hybrid PPP" schools project combines public borrowing with contractual concepts borrowed from PPP and Argyll and Bute has a privately financed PPP project but with profits ultimately going to a charity.

As regards design quality, there is no logical reason why PPP contracts should necessarily produce lower quality. In our experience, design quality is primarily down to what the council has asked for and more importantly is prepared to pay for. East Renfrewshire Council was very conscious of this in its recent PPP schools project. So it set a design quality benchmark for bidders by providing "exemplar designs" that bidders were free to adopt. As it turned out the successful bidder, HBG, used the exemplar designs as the basis for their detailed bids. All the schools have now opened and the council is delighted with the quality of the design.

On closer examination, the issues are, not surprisingly, a lot less black and white than they first appear. In PPP, like every form of public-sector contracting, there are pluses and minuses and there are good projects and not so good projects. We do not have to look further than Holyrood to be reminded that criticism of public sector projects is not limited to PPP.

The challenge for the future should be how to build on existing models to address genuine concerns - but that debate needs to be founded on objective analysis rather than catchy headlines.

• David Nash is a consultant in the projects group at law firm Pinsent Masons.