1999

What should Public/Private Partnerships (PPP) mean?

Public Management and Policy Association (UK) ,  01 May 1999

Government has a number of systemic faults:

• There are few incentives for good performance.
• Lack of good information on performance or customer satisfaction.
• Dominance of operations over strategy.
• Difficulty of planning in terms of the ‘outcomes’ of public policy.
• Inefficient investment decisions.
• Disenfranchisement of customer and staff stakeholders.

The public sector is not going to modernize itself using only internal management and financial resources. This article shows that increasing the use of Public Private Partnerships (PPPs) could help without compromising the integrity of public services.

Private sector delivery of public services is still viewed with suspicion. The profit motive is perceived to create an irrevocably ‘divergent interest’ to long-term value for the public sector. This has led to adversarial arm’s-length contracts, and a reluctance to trust the private sector with mainstream customer service. The key to overcoming this problem and breathing life into the language of PPPs is to engineer a contractual agreement that aligns the interests of all stakeholders in a service so that they have more to gain from collaboration than from conflict.

The long-term interests of both parties have to be best served by a reasonable share of the overall benefits and this can be achieved by playing to the strengths of the private sector by providing packages of work and long-term relationships which maximize the value of using commercial management. In addition, the contract for each PPP must be watertight in sharing this added value equitably between the contracting parties and also distribute benefits to staff and customers.

Government has used the private sector over the last decades only for functions considered to be ‘non-core’ or infrastructure projects, such as front-line blue-collar activities, small areas of professional services like accountancy and training, some larger packages of IT development and support, and large-scale construction projects.

The only theoretical precondition for the delivery of a service via a PPP, rather than through in-house management, is that it must be possible to manage it by contract rather than by command. The key organizational principle necessary to underpin any large-scale and systematic move to managing public services by contract is the separation of the functions of democratic control and operational service delivery. There are major risks in contracting out control functions, but only about 10% of the staff and budget of a typical government department or local authority is involved in control.

The only precondition for managing operational functions by contract is that the nature, level and quality of a service can be defined in writing. However, there may be particular reasons for excluding the private sector from some areas of operational public provision which might be managed by contract. The most obvious of these is those functions which use force to maintain the authority of the state—the police, army and judiciary—which perhaps require an additional legitimacy. Though even here boundaries are changing with the use of private sector security guards and prisons.

Thus, in principle, reorganizing a public body’s activities into the categories of democratic control and operational delivery allows the full range of operational activities to be managed by contract without compromising the integrity of the democratic process. So, if the problem of divergent interests, and therefore the erosion of public trust can be resolved, there is no reason for not contracting out the delivery of front-line operational services, including direct customer contact. The potential benefits of PPP extend far beyond support functions or the construction of the public infrastructure through the Private Finance Initiative (PFI).

Moreover, the technology of managing by contract is of considerably greater sophistication than traditional in-house hierarchic command management. A contract forces the transparent specification of the service required and the quality standards to which it should be delivered, and performance can be continuously monitored against this specification.

The main potential downside to moving from the blunderbuss of command management to the armoury of management by contract tends to derive from over-enthusiasm for the concept, with every internal exchange being made into a transaction. The way to avoid the ‘playing at shops’ syndrome is a practical approach to casting the description of the service at the summary level that makes sense to its users.

There are some powerful reasons for supposing that bodies whose primary purpose is to trade have, in certain circumstances, some intrinsic advantages in creating value over in-house operational management. These are:

• Trading companies can develop additional third party business and thereby use assets and people more efficiently and, by combining the support functions for several contracts, create economies of scale.

• The private sector usually focuses on particular activities in particular markets, investing in developing specialist skills and tools to keep them at the competitive leading edge of their chosen industry.

• The commercial financial disciplines necessary for trading and securing a return on capital makes the private sector more willing than public bodies to invest.

The other strategy for creating profit is to cut costs, principally by reducing staff wages and conditions. This tactic is prohibited by European regulations, and could be made very difficult by strengthening domestic regulations.

To take advantage of these strengths PPPs should be considered where:

• The public sector wishes to see business growth, or consolidation, usually where downsizing of the in-house unit would lead to redundancies or where the function is already of a quasi commercial nature.
• The public sector wishes to buy a comprehensive change of service improvement programme that is beyond its own capabilities.
• The public sector needs specialist skills honed across a range of customers.
• The public sector wishes to radically reconfigure a service to align units from across different departments.

In a partnering contract most of the normal elements of a contract for services stay in place to form a base position, forged in competition, of responsibilities and targets that both parties understand and from which they cannot retreat. Superimposed on the traditional elements of a contract for services are clauses to ensure that additional benefits are created and shared, and that the parties are kept within a co-operative relationship These include gain sharing, and reducing running costs.

Through innovation, or the re-engineering of a service, the partner could create some additional programme value through a more effective service. For example more accurate provision of benefits with less errors and overpayments would potentially lead to a reduction of the national cost of social security. This is a more difficult area to quantify, but the long-term logic must be to provide incentives for the partner by also sharing such outcome orientated benefits.

Given the long-term nature of a partnership contract it is essential to protect the public sector from any potential divergence from the agreed service agenda. Providing the supplier with a stable long-term business is the carrot, sharing strategic control is the stick. The contract needs to be designed in such a way that the public sector has a number of vetoes or ‘silver bullets’ which can be used in extremis if the relationship shows signs of breaking down and which are potent enough to ensure that the partner will always be ‘forced’ to co-operate.

Also built into the contract should be mechanisms and processes for managing the process of collaboration between the public sector and the partner. Typically, this comes under the umbrella of a partnership governance committee with representatives from both sides (and potentially also including staff and customer representatives) charged with discussing and agreeing the strategic direction of the PPP at regular intervals.

PPPs offer a continuum of options for the constitution and ownership of the supplier organization. The public sector might wish, for example, to take a share in the ownership of the supplier vehicle (and therefore a share in the liabilities as well as profits). In these circumstances the state is effectively creating a joint venture for a speculative commercial enterprise. This is a supplier/supplier partnership as opposed to the core PPP model of partnership between purchaser and supplier.

There can be powerful arguments for sharing ownership of such vehicles with staff and, in some circumstances, customers. But the state should be cautious about taking on any unnecessary additional risk from ownership, when most of its ends can be achieved through the contract.

In practical terms the two main variables in deciding the form of the supplier vehicle for a PPP is the extent of ownership by the private sector, and the ‘separateness’ of the organizational form (either from the rest of the public sector or from the body of the private sector company).

The specific form of each PPP will depend on its circumstances. The key determinant will be the desire of the state to see a separate entity that can be ring-fenced and returned at the end of the contract. This will depend to what extent the state wishes to see some benefit from the growth of the enterprise into other markets, in addition to securing benefits of increased efficiency in the delivery of the contracted public service. There is considerable room for creativity in this area: options around joint venture PPPs or the encouragement of a new generation of not-for-profit or mutual PPPs have not been fully explored but offer exciting possibilities.

Moving to a regime of management by contract opens up a unique opportunity for involving a wider circle of stakeholders in the delivery of services.

The commissioner of a public service can be less prescriptive about how it should be achieved. This is the prerogative of the supplier, and it is in this territory that staff, customers and the wider community can play a more influential role in the delivery of public services than has generally been the case. This is the key to a great leap forward in creating a stakeholder society aimed at the empowerment of staff and the customer. How a public service is delivered is often just as important as the nature of the service itself. Involving staff and customers in the management of a service would be a massive extension of popular democracy into service provision, without compromising the role of representative democracy in setting the overall parameters and resources for a service.

The systematic implementation of collaborative PPPs implies a fundamental shift in attitude to a more self-confident acceptance of the market as one of the tools in the kitbag of excellent service provision. The state retains the responsibility for commissioning services, on behalf of the collective. It can introduce a role for the market in competing to supply these services, while the actual provision of the service remains free at the point of delivery.

The immediate implication of adopting the enabling model is the physical separation of the roles of strategic control from operational management. In traditional public service organizations, these roles tend to be merged and confused.

This separation holds the potential for overcoming one of the most intractable of the systemic problems of the public sector. Freed from the day-to-day concerns of the supplier, the service strategist becomes liberated to consider policy and service options from the point of view of the customer. This, in turn, overcomes the organizational reason why it is difficult for the public sector to consider the efficacy of public policy in terms of the ultimate outcomes of state action. Separated from the operational definition of departments they can organize around policy themes not operational concerns. This is the organizational basis for joined-up government.

Managing by contract is a more sophisticated mode of control than management by command because it focuses on outputs not inputs. This holds true for the management of in-house activities as well. Using the technology of contracts for PPPs and for in-house operations would provide the functions of democratic control with a much more powerful leverage over performance. It also provides a much better information base for the formulation of policy, in that costs are, of necessity, attributable to outputs. Decisions on how to apply budgets to changing priorities will be much more effective on this basis. For example politicians are in a much more informed position if they have an understanding of what it costs to improve examination results (the output cost), rather than budgeting for a number of extra teachers (the input cost) and hoping this will have the desired effect.

There is little point in embarking on the greater use of the private sector if there is not an adequately competitive market with whom to engage. To swap public sector monopolies for private sector monopolies would be foolhardy. The Government needs a coherent and co-ordinated strategy for creating, nurturing and managing the market for PPPs. The main elements of such a strategy might be:

• A co-ordinated process of quality assurance which registers companies as ‘PPP enabled’ as a precondition for bidding such contracts. This would not only rapidly create the necessary reciprocal attitude to partnering on the part of the private sector, but it would indicate areas of the market where competition was weak and where, therefore, efforts should be focused in bringing in new players.
• Another aspect of this central support and co-ordination of PPPs should be to keep track of major contracts and PPP initiatives across the public sector, mapping the jigsaw of different suppliers as it evolves in order to monitor the market share of different companies and anticipate conflicts of interest before they become a problem.
• Where markets need to be nurtured, it might be sensible to reduce entry costs for new or smaller players by deliberately packaging activities in a variety of ways in order to appeal to different sections of a market.

The logic being developed in this approach to PPP is that of moving from a comparatively rigid view of public services delivered by public servants to one that positively welcomes diversity and experiment in the delivery of services, whether this means the independent, private or public sectors. For the foreseeable future this would mean major areas of direct service provision continuing to be organized within the public sector, but under continual review to see whether it can perform as well as PPPs.

However, it can no longer be organized on the same basis as before. To make a fair comparison between sectors, it will be vital to review the constraints under which public sector managers currently labour, to ensure they are not artificially handicapped in comparison with their private sector colleagues. While the playing-field will never be truly level unless the public sector provider can trade with the same freedom as that private sector, it should be possible to ensure that both sides are at least playing broadly the same game.

To create fair competition we need to give the public sector manager and staff as much freedom to innovate and invest as the private sector supplier:

• Removing in-house operational units from the cloying consequences of bureaucratic organization. They should be organized within self-sufficient entities that have control over all the support they need for self-management, and which are of sufficient size to be able to afford a critical mass of management without it becoming an unduly costly overhead.
• This may well require the development of some new legal vehicles for public sector operations akin to such models as trading fund status agencies, trust hospitals or locally managed schools.
• Providing the public sector with the same management flexibility in the virement of budgets and in the rewarding and management of staff.
• Moving to a regime of management by contract for internal providers will give rise to the opportunity for some imaginative work around rewarding and incentivizing in-house providers for excellent performance in the same way that a PPP might be incentivized to search for continuous improvement.

This article puts forward a radical agenda. It is a 10-year programme for the modernization of government. But the potential prize for New Labour is going into the next election able to claim they are demonstrably in the process of making a quantum leap in the quality and value for money of public service. Elections have turned on less.

This article is based on two briefing papers by Rob Brown of PA’s Government and Public Services practice: these papers are available direct from PA Consulting Group – details below.

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