Public-private partnerships may not always be the best solution

Recently, there has been a massive growth, in many countries, in public-private partnerships for the provision of public service infrastructure, such as, roads and health care facilities. Research funded by the Economic and Social Research Council confirms the potential benefits of partnerships, but also identifies circumstances under which more traditional forms of procurement are preferable.

The project, conducted by Professor John Bennett and Professor Elisabetta Iossa, Brunel Business School, Brunel University, examined the case for using public-private partnerships (PPPs), and especially the Private Finance Initiative – in which a consortium owns the assets for a period of time.

“We wanted to evaluate the current case for using PPPs, so we compared them to other forms of procurement, looked at alternative PPP models and specified the best circumstances for using the Private Finance Initiative,” said Professor John Bennett. “PPP contracts involve an element of ‘crystal ball gazing’ as they can last for decades and unforeseeable developments will inevitably occur. We used an ‘incomplete contract’ methodology in our work to account for this longevity and uncertainty.”

A major argument used to justify Private Finance Initiative projects has been that bundling allows the exploitation of synergies between different phases of a project, e.g. design, build and service delivery, that induce more innovative and cost-effective solutions. However, the research found that under some circumstances this may not necessarily be the case.

“We’ve shown that bundling phases of a project doesn’t always work in favour of a Private Finance Initiative,” said Professor John Bennett. “As a case in point, newly introduced safety features to a building may raise social benefits, but will generally result in increased operational costs for the skilled labour needed to operate them. In such circumstances, the case for bundling, and therefore Private Finance Initiatives, may be weakened.”

The research also showed that the market value of a facility at the end of a contract is critical to Private Finance Initiatives. If, for example, a building has little residual value despite the contractor’s actions, then it may be preferable for control rights to stay with government – as would be the case under traditional procurement arrangements. But the argument for a Private Finance Initiative is stronger if the residual value of the facility is significant higher than it was in the first place.

The research covers the recent developments of reliance on commercial not-for-profit firms to provide public services and the delegation to a private consortium of long-term management of service provision. A crucial role in determining the desirability of the inclusion of not-for-profit firms in PPPs is played by the links between the effect of investment on social benefit and profit. For example, a negative correlation between the two favours not-for-profit firms.

The case for public-private partnerships apparently depends on partnership structure, operational decisions, residual values and, because of the longevity of contracts, a substantial element of fate.