Whitepaper: An introduction to Public Private Partnerships and their impact on the UK housing sector
The Public Private Partnership (PPP) is an innovation of the 1990s, designed to solve the problem of funding for public infrastructure projects and developments. PPPs have been widely used, in the UK and all over the world, to help deliver everything, from school construction through to new homes and prisons. PPPs have seen some controversy, thanks to some very high profile failures, but on the whole have a positive reputation for achieving tangible change. However, older PPP models are increasingly being challenged and replaced with new ideas so as to find better solutions to infrastructure funding challenges. In this white paper we will look at the origins of PPPs, how they operate in the housing sector, as well as the pros and cons of the PPP models currently in use.
The history of PPPs
Many of the problems associated with public infrastructure projects are often attributed to funding issues. Public sector bodies are frequently short on cash while those in the private sector may have plenty of resources but lack the direction in which to funnel them. So, in the 1990s PPPs were introduced with the intention that private sector resources would be used to help drive public sector projects in to being.
PPPs have historically been most common in countries in Western Europe but the market for PPPs in America is also growing very quickly. US interest in PPPs has increased with ongoing fiscal constraints and the urgent need to repair and expand the country’s infrastructure. In fact, in 2017, America overtook Britain for the first time to become the global leader in privately financed public sector infrastructure projects such as roads, airports, railways and bridges. Other countries have used the UK data and development of PPPs to begin creating their of public private initiatives. Canada, Ireland, Portugal, Sweden, Australia and Japan are just some of the countries where UK expertise has provided the basis for new domestic PPP models for local public authorities.
PPPs in the UK
According to government figures, PPPs in the UK have delivered £56 billion of private sector capital investment in over 700 UK infrastructure projects around the UK. The range of different projects that can potentially come under the PPP remit includes schools and housing, university student accommodation, defence projects, waste management, border control, street lighting, energy projects (including solar), as well as transport infrastructure and healthcare.
PPPs are designed to use private sector businesses to bring projects to life in the UK that might not otherwise make it off the drawing board and to deliver better value for taxpayers than pure public funding alone. Some PPPs have not achieved this and they have provoked fierce discussion as a result – however there are also some great examples of PPPs all over the world that demonstrate what can be achieved with public and private collaboration.
Examples of successful PPP projects
- In the UK, the first ever PPP contract signed to design, build, and finance and operate a 1,000-bed hospital in Norwich was signed in 1996. The hospital was completed five months ahead of schedule and came in on budget.
- In the US, one of the biggest and most high profile examples of a successful PPP project was the $3.91bn deal to build a terminal at New York’s LaGuardia Airport.
- In the UK, the St Bartholomew’s and Royal London Hospitals project is the largest single PPP hospital contract in the UK, valued at £1.1 billion.
- In Bangladesh, a Health sector PPP initiative was responsible for upgrading and running a total of 60 haemodialysis machines in two public hospitals to help the 400,000 diagnosed with kidney-related diseases every year in Bangladesh.
- In Pakistan, renewable energy PPP projects have enabled the government to bridge the country’s the gap in energy deficiency and help to reduce the pressure on deteriorating balance of payment conditions due to massive oil import bill.
- In Canada, the Centre Hospitalier de l’Université de Montréal (CHUM), is the most valuable social infrastructure PPP scheme in Canada’s history and is one of the world’s largest healthcare projects – a 772 room hospital worth CAD$ 2.1bn.
The different types of PPPs
There are three major types of PPPs currently in use:
- Concession contract PPPs. This type of PPP brings in a private sector business to provide a concession on behalf of a public authority. The most obvious example of this would be something like a toll motorway.
- Private Finance Initiative (PFI) PPPs. PFIs have been the most common option in PPP since this type of project financing was first introduced. They are also now probably the most criticised of the PPP structures. With a PFI project, a private sector business finances and delivers a public sector service or project. So, the project is effectively funded by the private sector, which is then repaid by the public sector over a period of time.
- Institutional/Joint Venture PPPs. Although previously not as widely used, this type of PPP is becoming increasingly popular. It involves the creation of a joint venture between a private business and a public authority with responsibilities and benefits on both sides of the agreement.
What issues could potentially arise with PPPs?
There have been some very high profile PPP failures that have caused people to focus on what it is that could potentially go wrong with PPPs. Of course, like any project, they do have a number of cons that need to be weighed up. These potentially include escalating costs, which has been the case for a number of PPP projects where initial estimates have been exceeded and the overall project cost to the public has been much higher than anticipated. PPPs that go wrong tend to do so in spectacular fashion and there have been plenty of examples of projects where a public authority has had to bear the cost of completing the project where the private sector has failed. In these cases, PPPs don’t deliver on value for money to the public and it’s because of such failures that there have been calls for major reform of the way PPPs are structured.
What are the benefits and advantages of PPP projects?
In spite of the failures, many PPPs do work. Not just in the UK but in countries all over the world there are some great examples of the ways in which PPPs have made development possible in circumstances where that would otherwise not have been the case. These are just a few of the pros of governments working with the private sector via PPPs:
- An increase in the volume of infrastructure projects completed. The availability of resources is one of the major obstacles to getting public infrastructure projects off the ground and this is the very reason why the PPP model was created in the first place. As a result of PPP use, many more projects have been launched than would otherwise have been possible.
- Project development risks are split. The risk of public investment in a public infrastructure project lies solely with the public authority. However, when a PPP project structure is used, these risks are shared, which often makes the project a more viable or manageable prospect. In fact, depending on the model used, the largest proportion of risk usually sits with the private sector partner. So, it will be the private sector that bears the consequences of delays or going over budget, as opposed to this draining public funds.
- Diversifying the funding sources that are available. The evolution of PPPs is increasingly providing a much wider range of equity and debt financing that can be channeled into improvements to the infrastructure and services that the public enjoys. Without the PPP vehicle this kind of financing would simply not be an option for public infrastructure projects.
- The public sector is improved by private sector input. It’s no secret that – in the UK at least – the public sector is not the major source of innovation, development and cutting edge evolution. That tends to come from the private sector. However, when public and private are combined via PPP, the projects involved often benefit from the insight and technology that is driving the private sector on.
- Performance based remuneration. PPP projects can (and usually are) structured so that the payment to the private sector partner is based on performance. This is to ensure that the private sector doesn’t become the recipient of large chunks of public money without adequately earning it. This kind of structure also ensures that there is an incentive for the private partner with respect to ensuring that the PPP project delivers when it comes to timelines and objectives.
- Swifter completion. While there are plenty of examples of PPPs that have run into trouble with delays etc, when a project like this runs smoothly it is an efficient and swift way to deliver construction that could otherwise take double the time. This is particularly important where the project involves urgently required infrastructure, whether that’s transport for commuters or healthcare for a desperately sick demographic.
Value for money can be created in a range of different ways. For example, PPP projects can introduce more flexibility into service provision. As PPP models evolve in the light of intense criticism of the failure of some projects, new and more accurate ways of ensuring value for money are coming to light.
PPPs and the UK housing sector
The housing crisis in the UK is common knowledge and the industry is often accused of lagging behind with respect to innovative solutions to the problems of housing shortages. PPP projects could present an ideal solution to issues of lack of resources or slow delivery estimates – so how does PPP work in the housing sector?
A solution to shortfalls in government capital
Local authorities are cash poor in the UK – particularly at the current time – and so public infrastructure housing projects are often stalled or simply never launched. There may also be substantial red tape involved in the launch of construction that is to be purely publicly funded and this can cause a lot of delays. PPP projects in the housing sector can help to solve both of these major issues, introducing value for money, up front capital, as well as the opportunity to deliver projects more quickly to try to catch up with ever-increasing housing demand.
Enabling funding for a much wider range of housing projects
Many people believe that it is innovation in construction that will deliver a solution to the housing shortage – not something that is frequently found in publicly funded projects. PPP has the potential to diversify the range of different projects that can be launched because of the shared risk. From rent-to-buy through to new and innovative affordable public housing schemes, a partnership between forward thinking private interests and public authorities looking for housing solutions could generate many more options.
There are many private sector bodies available to enable PPP housing infrastructure projects, from volume house builders through to housing associations, co-operative housing and community land trusts. So, PPPs provide access to resources, expertise and innovation – as well as investment – on a much broader scale. This offers the opportunity for housing sector collaborations to genuinely add value in a way that a purely publicly funded team may not be able to do.
PPP as the solution to infrastructure issues
From increasing the number of retirement communities to cope with an ageing population, to building more affordable housing for first time buyers who are currently priced out of the market, there are many infrastructure issues that PPP projects in the housing sector could solve. The resources and expertise in the private sector, applied to the specific problems that public infrastructure currently faces, have the potential to produce effective results.
The future of PPPs
The future of PPPs has to begin with the mistakes of the past
Perhaps the most significant obstacle to the future of PPPs is the fact that there have been so many high profile failures. Although PPP successes tend to attract less airtime and so aren’t remembered in the same way, there is no doubt that mistakes have been made with PPPs. Perhaps one of the most obvious examples of this has been revealed by the liquidation of construction group Carillion.
PPPs and Carillion
Over the years, Carillion has been contracted to build some of the UK’s most important infrastructure projects, from NHS hospitals through to key roads – all via PPP. The construction company had a substantial portfolio of PPP projects when it collapsed in 2017 and the cost of the trust that was placed in the business could be high. In fact, it’s estimated that replacing Carillion in these contracts will top £63 million – all of which will have to be covered by the public purse. So, in the light of the fact that many PPPs simply don’t seem to deliver on their core purpose (value for money), do they have a future at all?
The PFI model may not have a future
Increasingly, the PFI model of PPP is being discussed as outdated and ineffective. Primary criticisms of it revolve around the fact that the risks and rewards for the two sides in the PPP contract are inconsistent and, as a result, there is no real collaboration between those involved in PFIs. Instead, the joint venture model is increasingly being highlighted as the best possible option for the future of PPPs.
- Why is the joint venture model preferable? It’s viewed as a more authentic model that brings together the key objectives of the parties and identifies where there are differences. For example, a housing developer’s objective is profit while a local authority’s primary objective is housing for local residents – but in between these two differing objectives is the shared goal of construction.
- How do joint venture PPPs bring the parties closer? Instead of the public sector partner paying the private sector partner to deliver the project, joint ventures are more often structured so that each party is adding something to the collaboration. A private partner can bring resources and expertise to a housing PPP project, for example, while a local authority may have access to land. Risk and reward can be more realistically attributed and failures and uncertainties better managed. 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 are still necessary
The reality for infrastructure projects is that, if you remove PPPs from the picture altogether, rates of project completion slow down and the number of projects that are possible drops significantly. The issue of lack of resources remains, no matter what industry or public opinion says about PPPs – and these public private collaborations are (with some tweaks to the model) the most obvious way to overcome that obstacle.
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.