Governments around the world are seeking new ways of meeting the challenges of renewing and providing new infrastructure. Factors such as disenchantment with traditional procurement methods and increasing pressures on public finances (intensified by the global economics crisis) have encouraged governments to look to public-private partnerships (PPP) for the purpose of meeting these challenges. The use of PPP is however a recent phenomenon and the evidence on whether it achieves goals such as better value for money and speedy delivery of infrastructure is patchy.
My recent article in Local Government Studies, The Not So Good, the Bad and the Ugly: Over Twelve Years of PPP in Ireland, seeks to add to the emerging evidence on the experience with PPP by focusing on the case of Ireland. The Irish government initially adopted PPP in an effort to meet the demands placed by rapid economic growth in the late 1990s. Since then it has, in relative terms, become one of the world leaders in PPP procurement. The Irish case therefore provides a valuable country-based case study of PPP procurement.
The article adopts a framework that embraces perspectives from the literature on economics and governance. From an economic perspective the case for adopting PPP rests on the proposition that it yields positive net social returns (in other words, the benefit-cost ratio is positive). However, governments tend to articulate the objective of PPP in terms of faster delivery of projects and value for money compared to traditional procurement. While satisfying these criteria is indicative of a degree of success it does not necessarily ensure a positive benefit-cost ratio. This is attributable to the fact that these criteria are too narrow and fail to include transaction costs.
PPPs also have important governance dimensions. A key governance issue concerns contract design and framing incentives to encourage the performance of the PPP contractor. In a PPP context the question of incentives largely centres on the allocation of risks. Other governance issues concern the development of mechanisms that protect accountability. Stakeholder consultation and transparency are important in this respect and the advantages of making PPP arrangements more accessible and assessable are widely recognized.
The article adopts a case-study approach and analyses three separate PPPs at the level of local government. Two cases are drawn from the water services sector and the third case covers the PPP adopted for the regeneration of a housing estate in Dublin’s inner city.
In the three PPP cases examined, parties to the contracts grappled with the complexity/uncertainty associated with the implementation of PPP. In each case there was little experience on the public sector side with procurement under PPP. Both water service cases illuminated shortcomings in the early stages of procurement especially the conduct of value for money assessments (VFM). However, in the case where the level of stakeholder consultation extended to in-depth analysis of the initial VFM assessment there were clear benefits derived from the sharing of information between stakeholders and the adoption of a co-operative approach to preparing for PPP.
The social housing case represents one of the biggest PPP contract failures in Ireland to date. In this case, procurement was terminated following the collapse of the Irish housing market in mid-2008. The termination of this PPP can be mainly understood in terms of the failure to adequately transfer risk to the private sector. The (possibly) loss-leading contractor withdrew from the contract due to inability to absorb the financial risks associated with the collapse of the Irish housing market. The contractor also pleaded an inability to assume planning risks which materialized in some contracts. The private contractor’s behaviour in this case exemplifies how failure to adequately transfer risk can have drastic social consequences.
These cases show how policy makers and public sector managers face difficult challenges if the PPP model is to be adopted successfully. These include framing PPP policy, organizing competitive markets for contracts, designing contracts, enforcing risk transfer and ensuring that the thread of accountability between service providers and citizens is strong. This may be a tall order but unless these challenges are met PPP will not improve economic efficiency or social welfare.
Dr. Eoin Reeves is a Senior Lecturer in the Department of Economics and Director of the Privatisation and PPP Research Group at the University of Limerick. Eoin researches market-based reforms of the public sector and the regulation of infrastructure including privatisation, liberalisation, and different forms of private sector participation in the delivery of public services.