The Wall Street Journal headline "Look Who's Embracing Privatization--Big City Democrats" on 6th July was certainly eye catching to one who has been involved, studied and commentated on public-private partnerships in the UK for over 25 years.
The statement in the article that "There are decades of major public-private partnership success stories in the United Kingdom, France, Italy, Spain and elsewhere." also made me sit up and ask "where is the evidence?".
Chicago's' high profile and energetic Mayor Rahm Emanuel has committed himself and the City Council to a major investment programme to address decades of underinvestment in public infrastructure. He is adopting public - private partnerships to finance this investment and to manage a range of associated facilities and services.
The WSJ article unfortunately conflated several models which are well known in the UK. These included outsourcing, PPP/PFI and privatisation. It would seem that Mayor Emanuel is turning to the PPP/PFI model to construct two new runways at O'Hare Airport; replace 900 miles of water pipes and 750 miles of the sewer system; create special routes for rapid bus transit; modernise schools, transit stations and city buildings; and build 12 new parks and 20 playgrounds.
Under PPP and PFI schemes the public sector contracts and specifies its requirements whether these be buildings or service outputs - and occasionally service outcomes; and may set conditions for the provider such as employment standards or supply chain policy. The same applies when services are outsourced. In a privatisation the assets and the business supporting and associated with the asset is sold to the private sector with the public sector loosing much more control. Regulatory control replaces contractual specification as the means of public accountability; and the provider has much more discretion.It is common under the PPP/PFI model for some ancillary services to be provided by the private sector provider. For example, in the UK PPP hospital programme, the facilities management, portering and catering services have traditionally been provided by the contractor. Staff are employed in the private sector and any staff previously employed in the service in the public sector transfer to their new employer with their terms and conditions protected under the EU Transfer of Undertakings of Employment Directive (TUPE). New employees are not bound to be employed on the same terms as their colleagues with TUPE rights.
The Mayor and City of Chicago would be well advised to study the UK experience before they embark on their programme. There are some key lessons to be learnt and mistakes to be avoided in respect of contracting and debt financing.
I address below some of these key lessons indicate that Chicago and other new adopters should consider before embarking on a a major PPP programme.
They need to be clear what their objectives are and what form of engagement with the private sector they which to pursue. They need to be clear what outcomes they are seeking - not just the obvious ones like the quality of the building or the service to be provided but wider public policy considerations such as employment standards, local sourcing of goods and commodities, public transparency and accountability. These have to be built into the contract.
The UK experience of PFI is mixed. The cost of private sector borrowing is much in excess of the cost to the government or local authorities. However, often in building projects, PFI has been more successful in terms of delivering to time and budget, and when contracts are properly constructed, the risk of time or cost overrun should be borne by the contractor and/or its financing partner. It is now becoming increasingly apparent in the UK that a series of PFI contracts has placed a long term
financial burden on a public sector already under massive financial pressure. However, it has ensured new roads, new modern hospitals and schools and other public infrastructure. Before embarking on a PPP / PFI programme, a public authority needs to be confident that the long term 'value for money' equation is positive and should avoid trying to manipulate the calculations - especially when creating, as is required in the UK, a public sector comparator against which to judge the PPP/PFI proposal. This has been an area of much contention in the UK.
There are some myths though about risk transfer from public to private sectors. There can be some risk transfer especially in terms of construction risks. However, as was the case with the London Underground railway PPP in the case of a public service when one of the major providers collapsed, the Government had to step in as the service was too critical to be allowed to fail. The same would apply to hospitals and schools; and interestingly in these cases generally the core clinical and teaching functions have been retained in the public sector. In any partnership including PPPs risk has to be understood and managed by the partner most able to undertake this. Political and reputation risk is not easily passed from politicians to the private sector - even when the former would wish this were possible.
Long term service contracts can also be problematic. They can lead to inflexible service provision and expensive change control procedures. Typically a PFI contract will be 20 - 25 years and a single service contract will lead to a lack of competition of supply for literally decades. Even at its most efficient, PFI is best for structures and less effective for services which is why it has long been rejected as appropriate for IT systems and services.
Equally the experience of more traditional outsourcing has been mixed in the UK and there are many commentators and practitioners questioning its long term contribution to a cash starved and very fast changing public sector. It can inject innovation, challenge orthodoxy, drive down price and/or drive up productivity, contribute capital investment. There are good examples and there are horrific examples of where the approach has been a failure for provider, public sector client and most significantly for service users.
Outsourcing and PPP require a confident and capable public sector client. Too often, the UK experience is that failures and underperformance against expectations have been as a result of poor client procurement and contract management.
Partnership has to be more than a "polite" way of relabeling a contracted outsourced or privatised arrangement. Consequently, this requires collaborative behaviours to be displayed by public and private sector "partners", at all levels in their organisations and on a sustainable basis. It requires selecting the right partner / provider with the right ethos and values; a proven track record; and long term commitment. It also requires effective partnership governance arrangements.
Mayor Emanuel should study the UK experience and that of other countries including his near neighbours in Canada where the UK PFI model has been modernised and reshaped.
He would be well advised to consider the following as part of his approach:
•always consider a publicly financed scheme first or a partly publicly funded PPP model
•focus PFI on infrastructure not on services
•ensure that the City Council has the expertise and capability to manage major PPP projects without an over-reliance on external consultants and advisors
•adopt transparent procurement processes including ensuring that the value for money and public sector comparator analysis and the costs of the procurement and client management are fully available to the public
•insist on transparency and independently audited financial and operational performance with genuine 'open book' accounts
•establish partnership governance arrangements with the contractors and the City Council; with the latter retaining independent and effective client and scrutiny functions
•require contractors to agree to profit-share schemes involving clients and local communities
•require the contractor to seek agreement before any change of ownership of the company or its major funders
•require the contractor to ensure transparency of ownership and commercial relations, benefits and the cash flow within the PFI or PPP consortium
•introduce contractual requirements that secure client approval before any change in ownership of or within a consortium; or any significant change in the financing arrangements or business
•require contractors to publish senior executive remuneration including pension arrangements and share options
•have employee or trade union appointees, and user and community representatives on PPP/PFI consortia boards
•require providers to invest in communities, local social enterprises and voluntary organisations
•impose minimum employment standards for all staff including those in supply chains and including share ownership schemes
Above all else, Mayor Emanuel and any other US public body considering following his example should listen to those involved in the UK and wider global experience of PPPs and PFI including staff and trade unions, politicians, academics, bankers, contractors, advisor and most importantly service users.
Because what matters is what will deliver the best outcomes for the people of Chicago.