PPPs can be seen as one component of a rearrangement of the public sector with a management culture that focuses on the centrality of the citizen or customer, accountability for results, investigation of a wide variety of alterna- tive service delivery mechanisms, and competition between public and private bodies for contracts to deliver services, consistent with cost recovery and achievement of value for money (Manning, 2002). Partnerships are part of a broad shift in the workings of government and the search for new forms of
governance. In this reorientation, the image of government as the direct provider of services is transformed to one in which government is the enabler, coordinating provision and actions by and through others. The emphasis is on
‘the task rather than the actor’, ‘outcomes rather than inputs’. Government becomes ‘more about steering and less about rowing’ (Stoker, 1998, p. 34).
In order to understand the distinctive contribution of PPPs, we need to consider a broader range of government business models in the context of the commercialism or marketization of the public sector. Hood (1995) outlines the various dimensions of what has become known as the ‘new public manage- ment’, under seven headings:
1. A shift towards greater disaggregation of public organizations into sepa- rately managed ‘corporatized’ units for each public sector ‘product’ (each identified as a separate cost centre, with its own organizational identity).
2. A trend towards greater competition both between public sector organiza- tions and between public sector organizations and the private sector.
3. Greater use within the public sector of management practices drawn from the private corporate sector, rather than public-sector-specific methods of doing business.
4. An increased emphasis on parsimony in resource use and on the active search for finding alternative, less costly ways to deliver public services, instead of laying the stress on institutional continuity.
5. More ‘hands-on’ control by visible top managers wielding discretionary power, as against the traditional ‘hands-off’ style of relatively anonymous bureaucrats at the top of public sector organizations.
6. A move towards more explicit and measurable (or at least verifiable) stand- ards of performance for public sector organizations, in terms of the range, level and content of services to be provided, as against trust in profes- sional standards and expertise across the public sector.
7. Attempts to control public organizations in a more ‘homeostatic’ style according to preset output measures (particularly in pay based on job performance instead of on rank or educational attainment), rather than by the traditional style of ‘orders of the day’ coming on an ad hoc basis from the top.
Implementation of this agenda has spawned a number of different public sector business models, and widened the interface between public and private agencies. Table 3.1 sets out a list of public/private business models, starting from complete public provision (‘collectivization’) at one end of the scale, through service provision contracts and outsourcing to, at the other end, outright privatization where the ownership of the asset is transferred fully to the private sector entity. Traditional public procurement is covered by design
and construct contracts, while sale and leaseback arrangements are often driven by taxation advantages, rather than any partnership motives (Grimsey and Lewis, 2002b). Most of the other models encompass some form of PPP arrangement, with wide variety being based on some form of lease, franchise or fixed-term concession, using different combinations of private sector resources to design, renovate, construct, finance, operate, manage and main- tain facilities. Except in the case of a BOO when ownership remains with the private sector virtually for ever, at the end of a concession the public body usually takes over (or resumes) responsibility for the ownership, operation and management of the asset. Nevertheless, the public entity may then effectively extend the concession by means of an O & M, OM & M, or LROT (lease-reno- vate-operate-transfer) contract.
On this basis, relationships between the government and the market can be viewed as a continuum. Traditional public funding and provision of services constitute one pole, and purely private activity the other. Partnerships cover Table 3.1 Range of public/private business models
• Public provision of collective goods
• Service provision contracts
• Outsourcing/contracting
• Design and construct (D & C)
• Sale and leaseback
• Operate and maintain (O & M)
• Operate maintain and manage (OM & M)
• Build transfer operate (BTO)
• Build operate transfer (BOT)
• Build lease transfer (BLT)
• Build lease transfer maintain (BLTM)
• Build own operate remove (BOOR)
• Build own operate transfer (BOOT)
• Lease renovate operate transfer (LROT)
• Design build finance operate (DBFO)
• Design construct manage finance (DCMF)
• Design build finance operate manage (DBFOM)
• Build own operate (BOO)
• Franchise
• Concession
• Joint venture (JV)
• Regeneration partnership
• Outright privatization
most of the points between the two, with each position representing a slightly different mix between the public and private sectors. For example, contracting could constitute a ‘partnership’ depending on the precise nature of the respon- sibilities assigned to the private and public entities under the terms of the contract.
This leads us to three questions. First, how do PPPs differ from privatiza- tion? Second, in what ways do PPPs differ from contracting out? Third, what do partnerships contribute to public sector management?
PPPs and Privatization
Consider, first, the question of whether, and how, PPPs differ from privatiza- tion. One reason is that within a PPP the public sector acquires and pays for services from the private sector on behalf of the community and retains ulti- mate responsibility for the delivery of the services, albeit that they are being provided by the private sector over an extended period of time (i.e. 25 years or longer). By contrast, when a government entity is privatized the private firm that takes over the business also assumes the responsibility for service deliv- ery. In this case, it would be wrong to say that the government is indifferent as to the quality of services provided by the newly privatized entity. Rather, two other mechanisms come into play, since the private firm is subject to disci- plines from both product and capital markets in the form of competition from other firms and competition when raising finance. Moreover, if these market constraints do not exist effectively, perhaps because the privatized firm has some form of natural monopoly, then the government will usually impose some type of regulatory regime, typically over price or rate of return.
In this latter case, however, the regulation imposed on the privatized firm is quite different from that under a PPP, and this difference is another reason why PPPs are not privatization. A PPP is a formal business arrangement between the public and private sectors. The nature of this business activity, the outcomes required, the prices paid for the services (and thus the scope for profits) along with the general rights and obligations of the various parties are specified in considerable detail in the contract or concession agreement.
Consequently, regulation does not come from some statutory regulatory agency or from unseen market forces, but is a direct result of an explicit contract subject to performance indicators and quality standards, with abate- ment attached to any failure to maintain service standards on a continuing basis.
These two differences – regulation through contract and the lack of govern- ment disengagement – define much that is distinctive about a PPP.
Nevertheless, PPPs might still be seen as privatization in all but name, as they are by many public sector unions. At issue is how privatization is defined.
Starr (1988) notes that privatization has generally come to mean two things:
(1) any shift of activities or functions from the state to the private sector; and, more specifically, (2) any shift of the production of goods and services from public to private. The first, broader, definition includes all reductions in the regulatory and spending activity of the state. The second, more specific, defi- nition excludes deregulation and spending cuts except when they result in a shift from public to private in the production of goods and services. This second definition is the one preferred by Starr.
Starr goes on to argue that four types of government activities can bring about a shift in production from the public to the private sector. First, the cessation of public programmes and withdrawal of government from specific responsibilities can represent implicit privatization. At another level, the restriction of publicly produced services in volume, availability, or quality may lead consumers to shift to privately produced substitutes (called ‘privati- zation by attrition’ when a government lets public services run down). Second, privatization may take the explicit form of transfers of public assets to private ownership, through sale or lease of public land, infrastructure and enterprises.
Third, instead of directly producing some service, the government may finance private services, for example, through contracting out or vouchers.
Fourth, privatization may result from the deregulation of entry into activities previously treated as public monopolies.
None of these four policies in itself directly covers the example of PPPs.
Some transfer of assets, especially by way of leasehold, forms a component of most PPPs, but it is not a defining characteristic. There is procurement, certainly, but normally under a PPP this covers much more than an operations and maintenance (O & M) contract. Deregulation of entry is important for many PPPs, for example when a private toll operator is allowed to levy tolls, and to utilize public law enforcement officers to enforce payment and impose fines. Yet a PPP allows for a contractual relationship between the public entity and private provider that far exceeds deregulation alone.
PPPs and Contracting Out
In considering the second question of how PPPs differ from contracting out, we note that privatization and contracting out are often used synonymously, particularly in the USA, as we saw with Starr’s definition. Elsewhere, and especially in the UK and Australia, privatization refers to the transfer of ownership of physical assets from public to private hands (that is, ‘explicit’
privatization in Starr’s terminology). The sale of a public utility via a share float constitutes straightforward privatization in these terms. However, the privatized organizations may or may not operate in a competitive environ- ment. In this respect, privatization can be essentially independent of the
promotion of competition. How much competition there is post-privatization will depend largely on the structure of the industry and on government regu- latory policy.
By contrast, contracting out involves opening up to competition a set of economic activities that were previously excluded from it. Organizations are invited to submit bids for contracts to provide particular services to the client.
The distinctive feature of contracting out is the element of ex ante competition – competition for the market as opposed to competition in it. The market in this case is defined by the contract specification, and the bidding process resembles an auction (Domberger and Rimmer, 1994, Domberger and Jensen, 1997). A formal contract binds the parties to an exchange of services of a pre- determined quality and quantity for agreed financial payments. The contract itself becomes the instrument through which relations between the parties are managed and regulated.
Domberger et al. survey the type of activities outsourced, encompassing
‘brush and flush’ cleaning services and refuse collection predominantly but also air traffic control, buses and business services. Lengthening the term of the contract and widening its scope to incorporate operations, maintenance and management (OM & M) of the public facility over an extended period, say five years, would see some similarities emerge between contracting out and a PPP. Such an OM & M contract operates for the Haldimand–Norfolk, Ontario, Canada wastewater treatment facility whereby the operator is responsible for all aspects of operating, maintaining and managing an existing facility, includ- ing decisions about personnel, energy use, chemicals and sludge disposal. Yet there remains some gap between this OM & M contract and that of another water treatment project in Moncton, New Brunswick, Canada. This PPP incor- porates two contracts, one for the design, building and finance of a new water treatment plant, the other a 20-year operations and maintenance contract for the facility which, when combined, make it effectively a design-build-finance- operate (DBFO) project. Quite clearly, PPPs like these involve some elements similar to those involved in contracting out, but at the same time are much more complex in that intricate financing and organizational/contractual issues are intertwined.10
Contracting out is normally associated with saving money. Substantial evidence has emerged since the mid-1980s, and is surveyed by Domberger et al., that suggests that governments can save in the order of 20 per cent of expenditures on services by putting them through a competitive tendering process. The benefits are therefore substantial, and have been sustained by the growth of specialist private sector firms providing a wide range of business and managerial services. Not surprisingly, the policy has gained currency as an instrument of public sector reform – achieving better value for taxpayers’
money. Nevertheless, because of their wider scope and sophistication, PPPs
introduce many more elements into the equation. Achieving value for money is obviously an important issue, but it is not the overriding consideration. A PPP is not just about producing an asset or a service. Rather it is about attempt- ing to achieve a social outcome that may not be obtained by government or private sector forces acting separately. This brings us to our third question.
PPPs and Public Sector Management
The third question concerns the impact of a PPP agenda on public sector management. In a way, the whole of this volume addresses this issue and it would be premature to try to answer it now. Nevertheless, it may be valuable at this early juncture to outline what PPPs are meant to do.
In broad terms, a PPP is a method of producing and delivering public services that brings together the public and private sectors in a long-term contractual relationship in which each retains its own identity and set of responsibilities. Public and private sector resources are combined on the basis of a clearly defined division of tasks and risks. The purpose of this collabora- tion is to bring added value to infrastructure through innovation, enabling the government to deliver either a qualitatively better end product for the same outlay or the same quality at a cost saving. PPPs are predicted on the assump- tion that there exist in the private sector certain core competencies that can be drawn into infrastructure projects and that incentives can be written into the contractual arrangements to encourage the participants to find other parties who can bring extra value by way of complementary skills and synergies. To this end, PPPs are designed to maximize the use of private sector skills where these are needed to supplement the existing skills of the public sector, while ensuring clear accountability and risk transfer for both project delivery and operation (American Chamber of Commerce, 2002). In the words of Linder and Rosenau (2000),
They [PPPs] are a means to finance and deliver publicly demanded services, quali- tatively different from private and public, and superior to either one alone. For example, they may be structured to get around the deficiencies of extreme privati- zation that include important conflicts of interest. They may be structured to over- come, as well, public sector difficulties with lackadaisical performance and inefficiency due to monopoly status. (p. 9)
Drawing on the US experience of partnerships, Linder (2000) goes on to suggest six ways in which PPPs can introduce change into the public sector.
First, PPPs are a tool for management reform. As such a device, they can alter the way government operates by introducing market disciplines into public services. Second, PPPs encourage what is termed ‘problem conversion’, so that the task for public sector managers becomes one of reframing the
constraints they face so as to facilitate the entry of private sector operators and their commitment of funds. The focus becomes one of the outcomes to be achieved, rather than the processes by which things are done. Third, once this is done, PPPs can produce a ‘moral regeneration’ by widening the number of participants in the outcomes and building market experience for public service managers. Fourth, PPPs allow for financial risks to be shifted from public to private investors. Fifth, partnerships can be a vehicle for restructuring public services, streamlining administrative procedures and substituting a private workplace for public servants. Sixth, as power sharing arrangements, PPPs can alter business–government relations in fundamental ways. One is that an ethos of cooperation and trust can replace the adversarial relations endemic in command-and-control regulation. Also, any relationship between partners will involve some mutually beneficial sharing of responsibility, knowledge or risk.
In most instances, each party brings something of value to the others to be invested or exchanged. Finally, there is an expectation of give-and-take between the partners, negotiating differences that were otherwise litigated.
This is the essence of partnering considered later in this chapter.