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1 Public-Private Partnerships and relationship-based procurement approaches
An introduction
Marcus Jefferies and Steve Rowlinson
Chapter introduction
The last three decades have seen the evolution of Public-Private Partnerships (PPPs) and Relationship Contracting (RC) as alternative procurement approaches to traditional methods of delivering public infrastructure. Governments have turned to the private sector to form partnerships in the design, construction, finance, ownership and operation of infrastructure assets and the emergence of PPPs and RC approaches, such as Alliancing, provides alternative means for developing infrastructure using private sector expertise. There is considerable growth potential for new forms of procurement given that many governments have now developed policies to expand the application of PPPs beyond economic infrastructure projects such as toll-roads to include social infrastructure projects such as healthcare and schools. A key argument for governments to procure projects using PPPs and RC is that the process would deliver better overall value for all the stakeholders, including the community and asset end-users.
In terms of coverage, this book includes issues of international historical context, collaboration, policy, risk management and emerging markets and focuses on sustainable procurement approaches through several supporting international case studies. Governments will be increasingly faced with strategic choices whether to use ‘public’ or ‘private’ mechanisms, or a combination of the two, for the provision of infrastructure. The principles embodied in RC are now established worldwide as a significant means of developing public services.
The increase in PPP-type schemes
The PPP method is a current innovation in construction procurement and has been implemented globally within the construction industry. The rise in popularity is first mentioned by McDermott (1999), who states that a significant development in construction procurement has been the rapid increase in the use of PPP arrangements. Angeles and Walker (2000) identify a growing trend for governments and other clients in the construction industry to place major projects into the private sector. This notion is further supported by Hardcastle et al. (2005) who identify Public-Private Partnerships (PPPs) as being increasingly used to provide public facilities and services.
PPPs are a natural progression from both the Build-Own-Operate (BOO) and the Build-Own-Operate-Transfer (BOOT) contracts (Jefferies, 2006). In making a fine distinction between PFPs (publicly financed partnerships) and PFIs (partnerships involving private financing) Jones (2003) groups operating franchises such as BOOT projects under PFIs, and long-term service agreements, such as Alliances and DCM (design, construct and maintain) projects under PFPs. Overall, using Jones’s terminology, PFIs still dominate the PPP sector in many of the developed countries.
Procurement definitions
In this first chapter of the book, it is important to offer a definition for the term ‘procurement’. As defined by Turner (1990), procurement is the act of obtaining, acquiring or securing. As an activity in industry it has come to mean the tendering and selection systems required to obtain anything from paper clips to power stations with organisations now having facilities departments and/or procurement managers to look at these requirements. It is now common to work with a procurement officer or project manager in order to agree on the holistic requirements for given projects.
A simple, yet effective definition of ‘building procurement’ is offered by Masterman (1992) as the organisational structure adopted by the client for the management of the design and construction of a building project. Lenard and Mohsini (1998) go one step further in their offering of a procurement definition by identifying it as ‘a strategy to satisfy client’s development and/or operational needs with respect to the provision of constructed facilities for a discrete life-cycle’.
In progressing on from the generic definition of building- (or construction-) related procurement, it is important to define the specific procurement approaches that are the subject of investigation in this thesis, i.e. PPP and Relationship Contracting. One of the problems with PPP is its very definition. Definitions tend to depend on a commentator’s own particular perspective and range from the very general to the quite particular. A general and well cited definition is provided by Akintoye et al. (2003): ‘Public Private Partnerships (PPPs) are defined as a long-term contractual arrangement between a public sector agency and a private sector concern whereby resources and risk are shared for the purpose of developing a public facility.’
PPPs are a means of public sector procurement using a mix of private sector finance and best practice. PPPs can involve design, construction, financing, operation and maintenance of public infrastructure and facilities, or the operation of services, to meet public needs. They are often privately financed and operated on the basis of revenues received for the delivery of the facility and/or services. Key to this is the ability of the private sector to provide more favourable long-term financing options than may be available to a government entity and to secure financing in a much quicker time frame (NSW Government, 2012). Such contracts are long-term in nature and typically 25–30 years.
Relationship Contracting is designed to break down the contractual and commercial walls between owners, contractors, designers and suppliers so that a trusting team is formed which shares the risks when something goes wrong and shares the savings when the team performs exceptionally well. Costs are expected to be reduced and outstanding results in key areas can be achieved.
Cheung et al. (2005) provide a definition of relationship contracting:
Successful relationship management requires trust, commitment, cooperation, open communication, goal alignment and joint problem solving (Howarth et al., 1995; Hampson and Kwok, 1997; Rowlinson and Cheung, 2004). Trust between alliance partners creates an opportunity and willingness for further alignment (such as future job opportunities), reduces the need for continuous cross monitoring of one’s behaviour, reduces the need for formal controls, and reduces the tensions created by short-term inequities. It allows the partners to focus on their long-term business development as well as cutting down cost and time outlays (Rowlinson et al., 2006).
PPPs and Relationship Contracting methods, such as Alliancing, are current examples of procurement innovation involving both government and private industry. The private sector is playing an increasingly important role in this trend that has partly arisen out of a necessity for the development of infrastructure to be undertaken at a rate that maintains growth, reduces public spending and allows for successful risk management. This in turn has become a major challenge for many countries, and particularly so where it is evident that these provisions cannot be met by government alone, as they have typically been in the past.
Adopting the PPP and RC approach
With the PPP family of procurement options an alliance or joint venture group forms to provide a facility for a client for which the client makes a concession agreement to fund the facility until that facility’s ownership is transferred to the client. In the past this arrangement has been more common for infrastructure projects than for buildings because the concession allows for tolls or other payments to be made by end-users to cover the cost of both procuring the facility and its operation (Walker et al., 2000). However, procurement approaches, such as PPPs or Alliances, have been used more recently for building projects, such as the National Museum in Canberra (Walker and Hampson, 2003), and various social infrastructure projects such as hospitals, schools and prisons (Duffield, 2005; Jefferies and McGeorge, 2009).
Many countries have now embarked on infrastructure projects procured via PPP or the use of similar methods. The scheme is now widely practised and is spread among a diverse range of countries from Australia, Canada, Hong Kong, the UK and the United States to countries like India, Malaysia, Mexico, Thailand and the Philippines (Walker and Smith, 1995; Walker and Hampson, 2003; Grimsey and Lewis, 2004; Bult-Spiering and Dewulf, 2006; Jefferies and McGeorge, 2009; Jefferies, 2014). Most of these projects are financed on a limited recourse basis and built and operated as private ventures under project agreements involving the host government.
It became evident several decades ago that governments globally had major shortcomings in funding public works. The fundamental influences from these issues are what have developed the trends towards greater private sector involvement and more specifically infrastructure procurement strategies such as PPP and Alliance Contracting.
Infrastructure development challenge
There are connections between a country’s economy and successful infrastructure development. For instance, according to the World Bank (1994), infrastructure can support economic growth and make development environmentally sustainable. A growing number of countries are now demanding alternatives, especially options involving the private sector (World Bank, 2005). The last three decades have seen the evolution of PPPs as an alternative procurement method to traditional methods of delivering public infrastructure. Competing demands for public sector investment for new infrastructure has prompted governments to turn increasingly to the private sector to form partnerships for infrastructure delivery. This has become a major challenge for both public and private sector stakeholders but the emergence of PPPs and RC provides an alternate means for developing infrastructure using private sector expertise.
This trend in public-private infrastructure partnerships is supported by McDermott (1999), Curnow et al. (2005), and Jefferies and McGeorge (2009), who see governments as having to obtain private sector finance for infrastructure projects which have previously been a drain on public sector finances. Therefore, the importance of infrastructure as a trigger for both economic and urban growth cannot be underestimated. Infrastructure can support economic growth, reduce poverty and make development environmentally sustainable. According to the World Bank (1995) there are current problems, with inefficient public sector monopolies widely blamed for the ineffective provision of infrastructure services, and a growing number of countries are now demanding alternatives, especially options involving the private sector.
Private sector participation in the procurement of public works
Private sector input takes many forms. The simplest is a service or management contract by which private contractors assume responsibility for operations and maintenance. Contracts typically are of short duration but offer the advantage of higher efficiency. The private partner can assume a longer term and greater responsibility through lease contracts, in which systems are leased and operated by private firms. The responsibility for investment and financing remains with the public sector in this case. In taking private sector participation a step further, fuller efficiency gains are possible through long-term concessions and ‘PPP-type’ schemes. Here the private partner not only finances new works but constructs and operates them for indefinite or specified periods of time (World Bank, 1995).
The World Bank has placed full support behind increasing private sector involvement in a country’s infrastructure provision. They have made clear their intentions that with projects the World Bank plans to finance, the package shall be designed from the outset in such a way that will facilitate private sector participation whenever the government chooses (World Bank, 2012). Underlying these issues is the fact that procurement logic must change. According to Miller (1999), procurement strategy should recognise explicitly what generations of experience has already taught, that innovations enter the infrastructure portfolio through each of the individual segments in the procurement process (design, construction, finance, operation, maintenance) and through combinations of ...
