Buildings from Overhead

What does the future hold for PPP?

The liquidation of construction group Carillion has cast some doubt over the future of Public Private Partnerships (PPPs). PPPs have been around since the 1990s and Carillion had a substantial portfolio of these projects. It’s thought that the cost of replacing Carillion in these contracts will top £63 million and this has generated some negative feeling, as well as doubt over the future of PPPs. The objective for PPPs is to deliver more value for the public and to shift project risks to the private sector but the Carillion collapse, and its impact on the PPP projects the business had, has caused many to speculate whether PPPs really deliver on these key aspects. So, given the issues Carillion has highlighted, what does the future hold for PPP?

The benefits of PPP still exist

PPP gives the government a way to create and improve infrastructure without bearing the financial strain of the projects that are required to do this. Effectively, with Private Finance Initiative (PFI) PPPs, the private sector covers the initial costs that are required to get the project up and running and the public sector then makes repayments to the private sector funder over time. This overcomes a significant hurdle that the public sector faces: a lack of up front funds. This obstacle has not disappeared and if enthusiasm for PPPs wanes significantly as a result of the issues with Carillion then it could mean far fewer infrastructure projects even getting off the ground.

PFIs are not the only PPP model

There are many who see PFIs as an outdated model and not a true partnership in any sense of the word. The risks and rewards that are made available to the public sector partner and the private sector partner are vary different and many believe that it’s the inconsistency between the two that has meant there is no real collaboration. The public-private joint venture is increasingly being viewed as a much better model and one that could provide a more successful future for PPPs.

Would the joint venture model work in the housing sector?

The joint venture model requires a more open an honest approach to the goals of the parties involved so as to identify a point where those objectives actually meet. There is plenty of scope for success with this model in the housing sector – for example, where local authorities and private housing developers are working together on housing projects. Clearly, both of these parties will have rather different individual objectives – for the developer, the key target is profit whereas the local authority needs to cater to the housing requirements of the local community. However, the overall goal for both is the same: the creation of more housing.

How does a joint venture model reconcile the differences?

It works because it requires that each party brings something to the table. So, the developer may be bringing capital resources, skills and experience while the public authority has land to offer. Joint ventures could also potentially be better managed than a PFI type of PPP arrangement. Risk and reward can be shared equally so that both parties have to input into realistic strategies for success. Failures and uncertainties can be better managed too – for example, if there is an insolvency issue with one party then the other will usually be entitled to buy them out at a discounted price.

PPPs have a lot to offer the construction world and, with a new approach, could be more effective than ever.

If you are looking to discuss your construction project with industry experts then contact a member of our team.

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