Faculty of Management & Organization
January 10, 2005
By: Luc van Rooijen stud.nr.: 1029835
Supervisors:
Drs. C.P.A. Heijes (faculty of Management & Organization) Drs. E. Gnirrep (faculty of Management & Organization) T. Treharne (KPMG Corporate Finance, London)
This document contains pages
A government is responsible for the well being of its subjects. To provide in this responsibility, public services are offered. They are the backbone of the well being of our society and this countries economy. The procurement of these services has always been done in a traditional manner, based on input- specifications provided by the public authority.
The United Kingdom gave rise to a new form of procurement, adding more Value for Money and reduced delivery time for projects. It is called Public- Private Partnerships, procurement of a public service in a partnership between public and private parties, based on an output based specification.
Public-Private Partnerships cover a broad spectrum of arrangements under which partnerships between public and private sector organisations are developed for the purpose of designing, planning, financing constructing and/or operating infrastructure projects, normally provided through a traditional procurement route by the state.
Well established in the United Kingdom, this process of procurement still is in its infancy in the Netherlands. The research covered in this dissertation has been done with the following goal in mind:
For this, a research question has been set up:
Key Conclusions:
Due to large budget-deficits, the poor state Public Service was in and disastrous experience with privatisation of the Rail industry amongst other things, the English government was forced to invest in making PPP
successful.
In the Netherlands, where budget was more sufficient and the quality of public services was good, this dire need for a more efficient procurement-measure never arose.
PPP developed as an alternative form of procurement, next to the traditional methodology.
The Dutch government recognised the potential of PPP, from closely observing the United Kingdom. A pilot programme was set up, with 6 – 10 projects that were to be procured as a Public-Private Partnership, in order to gain experience with the phenomenon. The first few projects were already
Providing insight into the generic and country specific driving mechanisms for successful implementation of Public Private Partnerships.
What factors influence the implementation of PPPs in the Netherlands and contribute to the underdevelopment of PPPs compared to the United Kingdom?
Some projects with substantial budget deficits were converted to a PPP in the idle hope this would fill the financial gap. This proved to be an unjust strategy.
Although PPP can provide a more efficient procurement and added Value for Money for a public service, it will still cost money, be it spread over a longer period of time.
A great deal of the early projects reverted back to traditional procurement;
others were procured as a PPP, but only partly.
One of the key elements for the lack of tenacity in pursuing the PPP process can be explained by the uncertainty avoidance of the Dutch. The risk of choosing for a new –unproven- form of procurement, combined with the uncertainty caused by lack of experience creates a tendency to favour traditional procurement over PPP.
The uncertainty surrounding the policy environment of projects also causes public authorities to be hesitant in committing to a private party over a relatively long time period.
Comparing traditional procurement with PPP procurement also failed to be conducted on an apple-for-apple comparison. Cost estimation based on traditional procurement only involves the cost of construction. Cost estimation for a PPP involves the entire life-cycle of a public service. In order to be comparable, the incurred costs of risk should be prised in the traditional cost estimation. Because some risk is more efficiently handled by the private sector, comparing the cost of the same risk allocated to the public sector should be adjusted upwards.
still resides in a learning phase. The Government’s choice to pursue big infrastructure projects and mega projects combing infrastructure with urban development are not recommended at this stage. These projects are complex and their size make them virtually unmanageable. They also take a long time to develop and time to produce results. The lack of many small, rapidly succeeding projects cause both private and public sector to lose interest.
Recommendations:
In order to keep gaining experience, short-term manageable succeeding projects are required to be set up. To stimulate the learning experience, the path of traditional procurement should be discouraged. Preferably by requiring a as procurement method. A learning phase will always be more expensive at first, but the current under-investment in PPP will lead to a lot more expenses in the long run.
Focus should be directed to projects that can generate results in the short run.
Projects that are suitable are:
Healthcare projects, such as hospitals, service flats and residential homes.
Government Building Agency (Rijksgebouwendienst) projects, such as the build or maintenance of Government buildings
These are all projects with a short start-up phase and results will show faster than complex infrastructure and urban regeneration programmes.
KPMG Corporate Finance London, with its knowledge and experience could set up a teacher-apprentice relationship with the Dutch firm, sharing the knowledge. Secondments from the public sector into KPMG could advocate PPP, by fanning out this knowledge. The trust gained could prove a fertile soil for future cooperation.
Nothing could prepare me for what lay ahead when I first entered the KPMG building in the heart of The City, London. Entering a brave new world, the first hurdle would have to be overcome the next day already. I was thrown in the deep. After just being with the firm for no less than 48 hours I was sent off to Leeds to get ‘hands-on-experience’ with the product. This would be my first encounter with Public-Private Partnerships (PPP).
A well-established procedure for procurement of public services was the item of interest.
Proven itself in the United Kingdom, it still seemed to be at a stand-still in the Netherlands. How come?
A great deal of the time I spent in London was consumed by working on these PPP projects, gathering more insight in their working mechanisms and
restrictions.
Looking back, working in weekends and getting acquainted with adequately filled workweeks proved to be a cinch, compared to actually writing a thesis.
The end product, a research into the influences on the development of PPP in the Netherlands, lies in front of you. I hope you enjoy reading it.
Of course, finishing my dissertation would not have been possible on my own.
My thanks are due to the wonderful people at KPMG Corporate Finance, both in the UK practice and the Dutch practice. My six-month experience in London was one I will not promptly forget. Also most grateful am I to my supervisors at the university of Groningen, mr. Heijes and mr. Gnirrep. Their insights, but most of all the patience they had with me was received with the utmost gratitude.
A final word is reserved for the one person that means the most to me.
Renske, thank you for your support, your gentle kindness and care proved to be the solid ground I desperately needed to cling to from time to time.
Luc van Rooijen
1 INTRODUCTION 1
1.1 Public-Private Partnerships defined 1
1.1.1 The PPP as an integrated contract (concession) 2
1.1.2 Public Private Partnership as joint development 2
1.2 The objective of PPP 3
1.3 The process of PPP 4
1.4 The structure of PPP 6
1.5 PPP in the United Kingdom 7
1.5.1 Project Finance 8
1.6 PPP in Italy and Portugal 9
2 PROBLEM STATEMENT 10
2.1 Problem Analysis 10
2.2 Problem Definition 11
2.2.1 Research Objective 11
2.2.2 Delimitation 12
2.2.3 Conceptual representation 12
2.2.4 Research Question 12
2.2.5 Sub-Questions 13
3 METHODOLOGY 14
3.1 Reliability and validity 14
3.2 Data gathering 16
3.3 The research process 17
4 THEORETICAL FRAMEWORK 19
4.1 Partnership challenges 19
4.2 Challenges brought about by change 21
5 FINDINGS 22
5.1 Background to the rise of PPP in the United Kingdom 22
5.2 PPP background in the Netherlands 23
5.3 PPP background in Italy 26
5.4 PPP background in Portugal 28
5.4.1 Funding through the EU Cohesion Fund 28
5.4.2 PPP taking shape 28
5.6 Legal environment 33
5.6.1 Italian legal issues 34
5.6.2 Portuguese legal issues 35
5.7 Political environment 36
5.8 Cultural environment 37
5.9 Experience 38
5.10 Expectations 40
6 CONCLUSIONS AND RECOMMENDATIONS 42
6.1 The need for PPP 42
6.2 Uncertainty of the unknown 43
6.3 Project scope 44
6.4 Building a future foundation 45
6.5 Unforeseen issues 45
6.6 Possibilities for KPMG 46
7 APPENDICES 47
7.1 Summary of PPPs by country and sector in Europe 47
7.2 Signed value of PPP contracts 48
7.3 Summary of several PPP projects in the Netherlands 49
7.3.1 A2 Passage Maastricht 49
7.3.2 A59 Motorway 49
7.3.3 HSL-Zuid project 49
7.3.4 Metro Shuttle Kop van Zuid 50
7.3.5 National highway N31 50
7.3.6 North-South Line Amsterdam (Noord-Zuidlijn) 50
7.3.7 RandstadRail 50
7.3.8 Underground Logistics System Schiphol 51
7.3.9 Zuiderzee Link 51
7.4 Summary of PPP pathfinder projects in Italy 52
7.4.1 Stretta di Messina (Italy-Sicily link) 52
7.4.2 Salerno-Reggio Calabria toll road 52
7.4.3 Pedemontana-Veneta toll road 53
7.5 Summary of several PPP projects in Portugal 54
7.5.1 Tagus Bridge 54
7.5.2 The Norte Litoral SCUT toll road 54
7.5.3 The Algarve SCUT toll road 54
7.5.4 The Beiras Litoral e Alta SCUT toll road 54
7.5.5 The Grande Porto SCUT toll road 55
7.5.6 The Beira Interior SCUT toll road 55
REFERENCES 56
7.6 Books 56
7.7 White Papers & Reports 56
7.8 Internet Related Links 57
1 Introduction
“It’s my strong belief, that government and private business have to consider each other more as partners than they have done in the preceding years. (…) If this partnership between government and private business takes shape gradually, different types of
interrelation will develop on different societal levels and will contribute in that manner to an increase in the productivity and effectiveness of our society”5
A good idea does not necessarily imply success, even though it has proven its success elsewhere. It still requires good implementation. In the United Kingdom, by April 2003 a total of 563 Public-Private Partnership transactions, with a total capital value of £ 35.5 billion reached financial close.6 In the Netherlands the first pilot-projects have reached, or are reaching financial close.
In my dissertation I would like to establish, through research, the reason behind the fact that Public-Private Partnerships (PPPs) are perceived as a successful means of public procurement in the United Kingdom, whereas the Netherlands still have great difficulty in implementing projects through this form of public procurement.
1.1 Public-Private Partnerships defined
Public-Private Partnerships cover a broad spectrum of arrangements under which partnerships between public and private sector organisations are developed for the purpose of designing, planning, financing constructing and/or operating
infrastructure projects, normally provided through a traditional procurement route by the state.
In the Netherlands PPP, in Dutch referred to as PPS (Publiek Private Samenwerking) has been introduced as an additional instrument for the
government to improve functionality and effectiveness of its policy. The origin of PPP in the Netherlands dates back to 1986, where the rise of this new form of cooperation is marked by a passage in the governmental coalition agreement, which called for PPPs in view of increasing the investments in, amongst other things, the field of urban revitalisation.
In 1999 the Ministry of Finance established an independent body to gather and make accessible the knowledge and experience of both the private sector and government agencies. This body is known as The Knowledge Centre Public- Private Partnerships.
5 Brevoord, C. (1979). Partnership, interaction and effectiveness, pp. 21-22. Internal publication. Reeuwijk.
6 HM Treasury (July 2003). PFI: Meeting the investment challenge. London: HMSO.
The definition of PPP used by the Knowledge Centre is the following:
PPP is Public-Private Partnership: the public and the private sector –government and industry– work together on the implementation of projects requiring significant capital instruments. Both retain their own identity and responsibilities. They collaborate on the basis of clearly defined sharing of tasks and risks. The purpose of the collaboration is to achieve benefits of added value and increased efficiency: a better end product for the same money or the same quality at lower costs.7
In the Netherlands the Public-Private Partnerships framework is set up according to the English model, although the Dutch Knowledge Centre clearly defines two main manifestations of PPP:
The PPP as an integrated contract (concession)
Public Private Partnership as joint development
1.1.1 The PPP as an integrated contract (concession)
The government formulates the functional requirements to be met by the building or infrastructure concerned, but does not prescribe how this should be achieved.
This represents an opportunity for the private sector to devise the best and/or most efficient solution for the entire duration of the contract. As a result, it is possible to take account of such aspects as maintenance and management costs even as early as the design stage.
1.1.2 Public Private Partnership as joint development
In this form of PPP the private sector is drawn into the process at an early stage and the two sides jointly draw up a plan for the project. This ensures that the public elements (e.g. access roads and other public amenities) and private elements (e.g.
property development) are coordinated. One difference with integrated contracts is that in some cases private sector parties are brought in even before the
government is quite sure what ‘output’ it wishes to achieve. This means that it is possible for both sides to put their heads together to determine what the project’s goals should be, or to work out its framework in a jointly developed plan. The process of plan development is thus a key element in such a PPP.
Involvement in the design of the plan does not, incidentally, automatically mean that the same private-sector partners will be responsible for implementing the plan once it has been developed.
The two forms of PPP are far from being mutually exclusive. For example, it is quite possible for a municipality to get together with a developer to come up with an integrated plan, after which a integrated contract is procured for the public infrastructure while a joint venture between municipality and developer is set up to develop the area surrounding it.
7 Knowledge Centre PPP(September 1999). Public Private Partnership: Pulling together, p. 5. The Hague.
The term ‘government’ as used in this document may refer to all levels of government: central, Provincial, or local, and/or to government departments, agencies and authorities.
1.2 The objective of PPP
There are a number of reasons as to why governments undertake PPPs. The objective of achieving improved value for money, or improved services for the same amount of money as the public sector would spend to deliver a similar project, is often stated as the prime objective. But other objectives may also be important. These can include the desire to provide increased infrastructure provision and services within imposed budgetary constraints (such as the Maastricht criteria) by utilising private sources of finance via off balance sheet structures, or to accelerate delivery of projects, which might otherwise have to be delayed. The Dutch government aims at improving the quality of public services and optimising the efficiency of the supply of these services8
Central to the notion of PPP is the idea that risks should be allocated to the parties that are best able to manage them. Furthermore, PPP hinges on the idea that transferring the responsibility for service delivery to the private sector allows the public sector to concentrate on policy development, service planning and
performance monitoring.
Important is the fact that the cooperation between public and private sector is of a temporary nature. The project of making available a public service has a finite life, dependent on the length of the contract. A Public-Private Partnership can be regarded as a temporary inter-organisational relationship between public and private entities.
Due to the joint sharing of risks and benefits amongst the private parties involved and the public sector, motivation is created to create as much value as possible.
No longer can the negligence of responsibilities be blamed on other parties, since everyone is in it together.
It should be noted that PPPs might potentially have disadvantages. The investment in the project, through private financing can lead to higher costs of capital for the private sector, which needs to be offset by the cost savings arising from a properly executed tender and by the efficiencies generated by private sector skills. Due to the nature of these contracts, with a life span of multiple years, the long-term commitment of funds can lead to limited financial flexibility. During the contract, refinancing the debt under better conditions is not uncommon though.
The complexity of PPPs can lead to more expensive and time-consuming transaction development stage, which requires dedicated resources from both public and private sector.
8 Knowledge Centre PPP(2002). Voortgangsrapportage PPS. The Hague : Knowledge Centre PPP
1.3 The process of PPP
This paragraph will cover from start to finish all the different stages involved in the procurement of a public service, through a Public-Private Partnership.
Due to the broad nature of the definition of PPP the process may differ slightly, but most transactions will involve one or more of the following stages. At present the EU also has no agreed general definition of a PPP. This creates a challenge in developing legislation on PPPs, as a number of Member States are finding out. If a narrow definition is taken, this can result in legislation, which only applies to a narrow range of project types, or structures, which may be of limited practical value.
Public-Private Partnerships are however subject to multiple European Union Directives.
Directive 2004/18/EC of the European Parliament and of the Council on the Coordination of Procedures for the Award of Public Works Contracts, Public Supply Contracts and Public Service Contracts;
Directive 93/36/EEC regulating the procedures for the award of public supply contracts;
Directive 93/37/EEC in relation to the award of public works contracts;
Directive 92/50/EEC governing the award of public service contracts; and
Directive 90/531/EEC co-ordinates procedures for the award of contracts in the water, energy, transport and telecommunications sectors (the Utilities
Directive).
Start up and mobilisation
The procurement of a public service will commence with the identification of the need for a public service. A firm political support needs to be established to
guarantee the projects (political) viability. Once this has been established, scoping and planning of the project will commence, setting up a Strategic Outline Case and forming a procurement team. During this stage the public sector will identify the business need, different options and ways to achieve the objectives, including any risks and rewards in principle.
Requirements need to be specified, a timetable set up, a procurement strategy adopted.
At this stage the public sector can attract technical, legal and financial advisers to guide and assist them in the procurement process. A feasibility study needs to be undertaken to establish the technical and financial feasibility of the project,
including affordability assessment. A Value for Money (VfM) analysis will provide the foundation for the political justification for the project.
Definition and documentation
The data gathered in the previous phase will complement The Strategic Outline Case to grow out to become a detailed business case. This business case will contain detailed information on the strategic fit of the project, the affordability, achievability and VfM. A Prior Information Notice (PIN) can be
published in the Official Journal of the European Communities (OJEC)9, as well as a prospectus, to keep stakeholders (e.g. ministers) and market parties informed.
Detailed requirements as an output-based specification need to be produced. A detailed risk analysis, including financial and technical risk as well as the allocation of risk will provide a framework for a future project agreement. Legal advisers can start with production of draft contracts. A bid strategy will help the public sector smoothing the process to come. Evaluation models and criteria for shortlisting providers will have to be set up. These models will be used to be able to make an
“apple for apple” comparison between bidders.
At the end of this stage a Contract Notice is dispatched for publication in the Official Journal of the European Communities along with being published in the national press. Additional information is provided to interested parties in an Information Memorandum and Pre-qualification Document. Potential bidders confirm their interest in the project via the specified means (e.g. 10 or more
parties). This is commonly referred to as an Expression of Interest 'EOI'. Based on these publications, private companies will start to attract partners and possible sub-contractors, to form a consortium with, best suitable to complete the project.
Pre-qualification
The procuring entity draws up a list of interested bidders who meet the pre- determined procurement criteria (very general criteria. Companies are asked to submit a range of information such as; projects and operations experience, a history of the company (often including financial statements and independently audited accounts), and background on their proposed sub-contractors/partners.
Based on the responses to the bidders’ Pre-qualification questionnaire/interviews the list of applicants will be reduced to a shortlist. After the Pre-qualification stage, a few candidates (e.g. 3-4) will be selected (shortlisted), to whom an invitation to negotiate will be issued. Bidders will start considering funding options.
Invitation to negotiate (ITN)
The ITN enables bidders to prepare detailed proposals outlining their suitability for the work. An initial approach to funders will take place. Financial modelling and data co-ordination will commence. Bidders will set up bid tactics. Clarification meetings between public sector and private sector will be held to
The tenders submitted by the bidders will be reviewed, including assessment of the funding source and structures, review of financial models, risk management and technical specifications.
9 On occasion, The Official Journal of the European Communities is referred to as OJEU (Official Journal of the European Union).
Identification of areas for optimisation within and between bids will be sought to create the highest Value for Money. At the end of this stage in the process the procuring entity will shorlist a select number (e.g. 1-3) of preferred bidders to continue negotiations.
Best and Final Offer (BAFO)
Negotiations between public sector and private sector will commence. At the end of this stage a Best and Final Offer (BAFO) needs to be submitted to the procuring entity, based on pre-determined instructions. These pre-determined instructions will provide an equal comparison between bids. In general besides a compliant bid, the procuring entity can ask for a variant bid to be submitted. This variant bid
enables the private side to use their creativity and market expertise to come up with innovative solutions, providing better Value for Money. The bidder will need to manage competition between funders and negotiate terms and conditions on the debt.
Financial and Contract Close
After the bidder is selected the project agreement is finalised between the bidding consortium, the procuring authority and the consortium’s funders. The deal is signed and financial and contractual closes take place.
1.4 The structure of PPP
Central to the notion of PPP is the cooperation between a public entity on the one hand and a private entity on the other. In order to get a clear view on the workings of a Public-Private Partnership, the structure will be examined. In the following figure the involved parties and their relationships are depicted.
Fig. Simplified PPP structure
P
Prroojjeecctt CCoommppaannyy
Design & Build Contractor Funders
P
Prrooccuurriinngg AAuutthhoorriittyy
Operator
Sponsors
•Finance Agreements
•Concession Agreement
•Shareholders Agreement
•Operating Subcontract
•D&B Subcontract
•Direct
Agreement
The Public Sector, being the Government or local Government (Procuring Authority) forms an inter-organisational relationship with a Private Sector entity (Project Company) over a finite life span. The length of the concession the Authority agrees upon with the Project Company determines the life span of this relationship.
Although the procuring authority can take on a direct agreement with funders, it is in general the Project Company’s responsibility to provide every aspect of the service, including financing it. The Project Company will be, when the asset has been built, remunerated for the availability of the service. The risk associated with a venture should be distributed amongst both public and private party, based on their ability to manage that risk. Risk should be borne by the party best able to manage it. The sharing of risk and the pooling of responsibility, combined with private sector ingenuity paves the way for efficient procurement and the creation of more Value for Money.
1.5 PPP in the United Kingdom
In the United Kingdom PPPs are not split out in such clear distinctions like the Dutch definitions.
According to the HM Treasury, Public-Private Partnerships bring public and private sectors together in long-term partnership for mutual benefit.10
In the United Kingdom the term PFI Private -Finance Initiative- is also often used interchangeably with PPP.
The definition of PFI is:
The Private Finance Initiative (PFI) and other arrangements where the public sector contracts to purchase quality services on a long-term basis so as to take advantage of private sector management skills incentivised by having private finance at risk.11 The Private Finance Initiative emerged in the UK and is a form of PPP. There is, however next to no difference between the two. Arrangements are less formalised under PPP than PFI and projects may involve a mix of end-user charges and public subsidy, such as capital grants, or the contribution of surplus land/ assets for income generation. PFI is one form of PPP and is about the procurement of
services that are delivered through assets. This involves the negotiation of contracts, sometimes very complex in detail, between the public sector procurer and the private sector supplier. PFI focuses on service and value for money and is at present the main manifestation of PPPs. Under PFI, contractors pay for the construction costs and then rent the finished project back to the public sector. This allows the government to procure a public service without raising taxes.
The (private) financing method used in the Private Finance Initiative is called Project Finance.
10 HM Treasury (2000). PPP: The Government’s approach. Norwich: HMSO
11 HM Treasury (July 2003). PFI: Meeting the investment challenge. Norwich: HMSO.
1.5.1 Project Finance
Traditionally public procurement was financed by public-sector debt; in developing countries, projects were financed by the government borrowing from the
international banking market, multilateral institutions such as the World Bank, or through grants (e.g. EU). Privatisation, deregulation and the emergence of Public- Private Partnerships have changed the approach to financing investments in major projects, transferring a significant share of the financing burden to the private sector.
Project Finance is a method of raising long-term debt financing for major projects, based on lending against the cash-flows of the project alone.
This is not the same as ‘financing projects’ since a project can be financed in many different ways.
Project Finance depends on a detailed evaluation of a project’s construction, operating and revenue risks, and their allocation amongst parties involved.
Project Finance is provided for a legally and economically self-contained (“ring- fenced”) project through a special purpose legal entity (“Special Purpose Vehicle”
or “Project Company”), whose only business is the project. This Project Company usually comprises of a consortium of multiple contractors (and their sub-
contractors) that take on all the separate stages of the project. This may include the design, build, operation and if necessary maintenance of the public service.
Investors invest money in the Project Company on a non-recourse, or limited- recourse basis, i.e.
In case of default, lenders can claim only the equity put into the Project Company by investors. Characteristic to these projects is the fact that they are financed predominantly through debt (70%-90%). The main security for the lenders are not its assets or financial history (there is no history), but the Project Company’s
contracts, licenses or ownership of rights to natural resources; the psychical assets are likely to be worth much less than the debt if they were to be sold off after a default on the financing.
The project (and thus the Project Company) has a finite life, based on the length of the contract, or the awarded concession-length. By the end of this concession the finance debt must be fully repaid.
Using Project Finance, the private sector finances the project entirely. The public sector will only have to pay for the availability of the service (after completion) during the life span of the concession (they rent back the finished project).
Problem Statement
This chapter will explore the problem that will be the foundation of this thesis and will cover the justification and relevance of this research. An analysis of the problem will bring forward the issues facing this research. Through a research question and sub-questions an answer will be sought for the research objective.
2.1 Problem Analysis
Public-Private Partnerships and providing advice for PPPs are still an emerging market in the Netherlands and a potential source of business for KPMG Corporate Finance. KPMG Corporate Finance UK has extensive experience in advising both the public and the private sector and could be a potential source of knowledge for
the Dutch practice. The Dutch PPP model on the whole is an implementation of the Anglo-Saxon model, but it is generally believed at Corporate Finance UK that PPP is not reaching its full potential in the Netherlands.
In September 2002 the Knowledge Centre PPP presented their third PPP-progress report to the Dutch House of Representatives in Parliament (Tweede kamer der Staten Generaal).
The belief that the Netherlands are under-performing is being confirmed by a report by Ecorys made on behalf of the Knowledge Centre.12 This report was one of the appendices to the progress report.
Ecorys have compiled a list of 51 projects, in order to ascertain current affairs of PPPs in the Netherlands. The sampling size crossed multiple sectors, including infrastructure, urban development, local development and public utilities.
The evaluation has been approached from three points-of-view. At project-level, at stakeholder-level and at a platform level.
Conclusions, concerning the success of implementation of PPP in the Netherlands, reported in this evaluation where:
Up to date, too little tangible projects have been brought about.
Efforts made by central government are extensive, but there is still lack of practical results
On a Provincial level there is great lack of knowledge and experience
Market parties have an arrearage in the international playing field compared to other European countries, which will only increase over time.
Anglo-Saxon countries, as well as other countries in Europe are significantly progressing more in the development of PPP compared to the Netherlands
the Netherlands appear to lack driving force and political commitment in the development of PPP
12 Ecorys Finance in association with Ecorys Kolpron Consultans and Twynstra Gudde (May 2002). Progress evaluation of PPP in the Netherlands (Evaluatie voortgang PPS in Nederland). Rotterdam: Knowledge Centre PPP
In name of the English Government, HM Treasury issued a research-report13 assessing Government procurement through PFI, the manifestation of PPP. This report issued the following conclusions:
This investment programme is delivering extensive new and modernised infrastructure to public services.
Investment in public services has increased significantly since 1997, and the PFI programme has expanded in proportion.
The decision to use PFI is taken on value for money grounds alone, and whether it is on or off balance sheet is not relevant.
77 per cent of public sector managers stated that their project was meeting their initial expectations
As mentioned in the introduction, 563 PPP transactions had reached financial close by April 2003. Overall it can be assumed that PPPs are considered
successful in the United Kingdom, but as of yet not considered successful in the Netherlands.
2.2 Problem Definition
Now that the problem has been analysed a clear definition needs to be given to it, in order to structure the research.
The justification for this research will be provided by means of a research
objective, which will be answered through a research question and additional sub- questions.
2.2.1 Research Objective
To get the most out of the synergy of cooperation between public and private sector it is important to research what creates this synergy.
The objective of this research can be described as follows.
Through this understanding a handle will be provided, that KPMG can use in enhancing their advisory role in the Dutch market, thereby demonstrating the practical relevance of this research. The theoretical relevance lies with the identification of the driving forces behind the success of Public-Private Partnerships.
Delimitation
The topic of this thesis will be geographically delimited to the United Kingdom and the Netherlands. The main focus will be on infrastructure projects and less on urban development projects.
Urban Development Projects often consists of multiple PPP projects combined.
Because infrastructure projects stand alone they are not subject to mutual influences caused by the combination of projects, but only by causes intrinsic to the PPP process.
13 HM Treasury (July 2003). PFI: Meeting the investment challenge. London: HMSO.
Providing insight into the generic and country specific driving mechanisms for successful implementation of Public Private Partnerships.
2.2.3 Conceptual representation
To help clarify the research topic a conceptual representation will be used.
The implementation of a Public Service is driven by a demand for this Public Service. The implementation will require a process of procurement, which in this case will be a Public-Private Partnership. The PPP is a temporary inter-
organisational relationship between a public entity and a private entity, set in a Socio-economic, Cultural and Political context. The interaction between the Public and the Private entity will determine the effectiveness and efficiency of the PPP and with that, the procurement and implementation of the public service.
2.2.4 Research Question
The problem can be tackled through a well-defined research question, which will be supported by additional in-depth sub-questions.
Sub-Questions
Is there a difference in the procurement process (of a PPP) between the Netherlands and the United Kingdom?
What are the generic factors that contribute to the success of a Public Private Partnership?
What country specific factors are of influence on the implementation of PPPs?
What factors influence the implementation of PPPs in the Netherlands and contribute to the underdevelopment of PPPs compared to the United Kingdom?
Context
Socio-economic,
Cultural and
Political environment
Implementation of Public Service Demand for
Public Service
Private entity (Special Purpose Vehicle)
Public entity (Central or local government)
PPP
3 Methodology
There are no general accepted theories or strictly defined hypotheses at hand to explain the behaviour of Public-Private Partnerships through the stages of
conception to implementation. Therefore the research on the factors that influence implementation of Public-Private Partnerships will be one of an explorative nature.
To determine the relevant variables and relationships that need to be taken into account, a flexible method is required to adapt to the issues we encounter in the research situation.
Qualitative research methods, due to their open nature and flexibility, will provide the opportunity to adapt to unforeseen and unplanned circumstances and events.
Good research requires good methodology and the methodological quality of the research depends greatly on the path leading to conclusions. With an explorative research, using qualitative research methods, the vulnerability arises of lacking repeatability. This is due to the dynamic nature of this topic. It is likely views on Public-Private Partnerships and the way they are realized will change over time, therefore repeatability of the research will be difficult to accomplish. We can however pursue virtual repeatability, in which the research would be repeatable using the same methods and techniques, should reality not have changed.
Thorough documentation on the execution of the research establishes a trackability path (or audit trail), assuring that virtual repeatability can be accomplished.
It is of importance that dedicated measures are adopted for optimising the quality of the research. The criteria, which the scientific research process needs to satisfy, are reliability and validity.
3.1 Reliability and validity
To achieve a high standard quality study is to ensure right answers to the study questions, but research can be subject to bias and error. The assurance a good study depends on how good the study design is, which would reflect on how valid and reliable the measurement of exposure factors and outcomes of interest are. In order to minimize errors and assure repeatability and reproducibility of the
research, the reliability and validity of the research need to be proven. Validity has to do with bias, or the systematic error, whereas reliability has to do with variance, or random error. High reliability will assure a precise research. High validity will assure an accurate research.
The following picture will illustrate the differences between accuracy and precision.
Source: http://www.pitt.edu/~super1/lecture/lec6211/040.htm
Reliability can be formulated as the lack of random or non-systematic distortions to the object that is being researched14. To put it differently, it relates to the extent to which a tool produces similar results under the same conditions. Due to the
qualitative nature of this research, reliability is a challenging issue and can only be satisfied through validity and verifiability (by leaving an audit trail).
Validity is the lack of systematic distortions to the object that is being researched15, sometimes referred to as measuring what is intended to measure. Validity
encompasses content validity, internal and external validity.
Content Validity is based on the extent to which a measurement reflects the specific intended domain of content.16 The applied techniques (operational
measurement instruments) need to reflect the intended features and relationships, whilst not measuring redundant aspects.
Internal validity has to do with defending against sources of bias, which would affect the cause-effect process being studied by introducing covert variables.
When there is lack of internal validity, variables other than the independent(s) being studied may be responsible for part or all of the observed effect on the dependent variable(s). The validity is based of the soundness of the arguments (accumulated data) and reasoning (research set-up and analysis) that led to the research conclusions. Prolonged engagement (persistent observation) with the topic, during the research has led to higher internal validity.
External validity has to do with possible bias in the process of generalizing
conclusions to other settings, and/or to other time periods. This will be very difficult to satisfy, since the research is very topic-specific.
However, based on the theoretical assumptions it is possible to generalize theoretical universal principles (analytical generalization). 17
14 Maso, I. en A. Smaling (1998). Kwalitatief onderzoek: praktijk en theorie. Amsterdam: Boom.
15 Maso, I. en A. Smaling (1998). Kwalitatief onderzoek: praktijk en theorie. Amsterdam: Boom.
16 Carmines, E. G. & Zeller, R.A. (1991). Reliability and validity assessment. Newbury Park: Sage Publications.
17 Yin, R.K (1984), Case study research: Design and methods. Beverly Hills, CA: Sage.
In an attempt to maximize both reliability and validity the concept of triangulation is adopted. Triangulation is the attempt to increase reliability by reducing systematic (method) error, through a strategy in which the researcher employs multiple methods of measurement (e.g. survey, observation, archival data). If the
alternative methods do not share the same source of systematic error, examination of data from the alternative methods gives insight into how individual scores may be adjusted to come closer to reflecting true scores, thereby increasing reliability. It will also increase validity, by using different techniques for the measurement of the same feature or relationship and by comparing different theoretical points of view for the same phenomenon.
3.2 Data gathering
A multi-angle approach to the research topic is set up, gathering independent evidence to provide a better understanding in the mechanisms at work in implementing PPPs.
An explanatory case-study methodology will be used to provide an in-depth investigation in the mechanisms at work in the implementation of a PPP.
Data is gathered and analysed in an integrative fashion through use of:
Literature
Participant observation
Interviews
Due to the lack of general applicable theories, a theoretical framework has been set up, using information gathered by a literature study. The literature study proved insight into the mechanisms at work in Public-Private Partnerships and the
elements that should be taken into account in this research.
The framework tries to encompass all relevant theories, explaining separate elements of influence on the topic.
During my research in London, I actively participated for six months in several different PPP infrastructure projects, as part of the KPMG advisory team. The team worked on UK only projects, a project with Dutch companies bidding for UK
procurement, and the preparation of a Dutch PPP Rail project. Afterwards I spent some time at the Dutch KPMG practice to get a Dutch point of view on PPPs and to verify and compare findings.
Open interviews have been held to further search for general applicable themes, establish differences and similarities in the Dutch and the English mindset on PPPs (What are PPPs and how are they perceived). Interviews are an easy form of collecting information, but there is a price to pay due to the
uncertainty in reliability. Interviews are subject to observer and subject bias.
Observer bias is a consistent distortion in reporting the measurement by the observer, which has been minimized by meticulous perpetration and comparing topics between interviewees.
Subject bias is a consistent distortion by the subject; either being a recall bias (selective recall of the situation) or a respondent bias (selective report of the situation). Again, by comparing interviews a certain degree of distortion could be filtered out.
Due to the possible existence of these biases, multiple data gathering methods have been used (triangulation), in the attempt to minimize the distortion.
Literature based case studies have been used to increase the sampling size and broaden perspective on a more comprehensive set of projects.
3.3 The research process
First of all, an analysis of the current situation is made, using a theoretical framework as guidance in disclosing characteristics and general connections applicable to PPPs. These relationships have been studied in greater detail through the use of the data gathering tools mentioned earlier. Once the PPP process had been clarified, through the use of these theories, influences on the different characteristics and relationships were highlighted. After which a
comparison has been made between the United Kingdom and the Netherlands.
Also checking whether the process of procurement through a PPP was not
significantly different between the two. After applying the theoretical framework to the findings from the data-gathering phase, thereby confronting theory and
practice, an analysis could be made. The analysis resulted in the mapping of the driving mechanisms of successful PPP implementation.
4 Theoretical Framework
In order to ascertain the factors that influence the implementation of PPPs, a broader perspective on the features of a PPP is required. In order to establish the key factors causing the underdevelopment in the Netherlands, influential
differences between the United Kingdom and the Netherlands need to be mapped.
If we take a look at the nomenclature, we can establish that the concept ‘Public- Private Partnership’ is used in two fashions.
The structure of the PPP: the creation and functioning of an inter-organisational relationship between a private and a public entity.
The process of the PPP: the actual procurement and creation of the public service by the inter-organisational relationship.
The partnership revolves in a context of a socio-economic, cultural and political environment. A conceptual representation of the problem is shown in chapter 2.2.3 The process of public procurement is not new, but the creation of an inter-
organisational relationship, with shared benefits and responsibilities, to produce a public service is. This change in mindset will require adaptation by both public and private sector.
Using these elements, a theoretical framework has been constructed to explain the behaviour of a Public-Private Partnership.
4.1 Partnership challenges
A PPP can be interpreted as a temporary inter-organisational relationship between private and public sector entities. It will encounter challenges brought about by the formation of this relationship and the individual participants within. Establishing and sustaining a mutually beneficial partnership is not easy and in order to do so, a number of issues need to be tackled.
At the basis of a PPP is the formation of the inter-organisational relationship. Let us review the motives for forming such a relationship. This would give a more detailed insight in possible issues that could affect the origination of a PPP and therefore contribute to the success or failure of implementation.
Combining a multitude of studies on motives for inter-organisational relationships has brought forth an overview of grounds for the formation of such a relationship.20 The exchange of complementary resources leads to financial or economic
advantages. Another motive is the pursuit of a mutual objective. Partnering up can be desirable for reaching it, or attaining a bigger piece of the pie. These motives and the willingness for forming an organisational relationship can be accelerated by the presence of outside competition or through external compulsion.
The probability of cooperation will increase if it leads to synergy21; a mutually advantageous conjunction of the distinct elements will increase the total value and
20 Andriessen, J.H.T.H.(1987), Organisaties en hun relaties, Tilburg: IVA.
21 Lemstra, Prof. Dr. W. (1996). Samenwerking tussen overheid en bedrijfsleven: utopie of werkelijkheid?.
Bedrijfskunde, 68(3), pp. 44-50.
quality of the project. A better result can be attained, than would be possible independently.
Once the desire has led to the actual willingness to start a relationship, it will face new issues in its formation and sustenance. Some of the practical challenges partnerships encounter, are the following:22
Bridging diversity.
One of the challenges to overcome is the ignorance, mistrust and
misunderstanding between the different constituencies. There are numerous practical and cultural obstacles to overcome in building a partnership.
Attracting and sustaining participant involvement.
A variety of problems arise with attracting and sustaining the interest of participants. Expectations between the two entities can show great discrepancies and are also subject to change over time. Managing these expectations is a critical element. Many participants enter a partnership with unrealistic expectations. Most partnerships require more management time and take longer to show results.
Building new competencies.
New skills, attitudes and capacities are needed by all participants in order to meet the partnership’s aims. Added to this are the management and mediation competencies needed by those mandated to actually run the partnership
Addressing Power.
There is evidence of the unequal nature of many partnerships. Mutuality in interests and actions is difficult to attain where participating organisations have different levels of authority, economic and political strengths.
Assessing value-added.
Partnership building can be costly and time-consuming. It is essential that these additional costs are worthwhile. It is not, however, always easy to asses the value-added of a partnership over what would have been achieved without the participants pooling their resources and competencies.
Beside previously mentioned issues, the willingness to cooperate is essential in order to form an inter-organisational relationship.23
Combined with the awareness of the mutual interdependence24 they form sociological motives for the creation of inter-organisational relationships. A final relevant aspect in the realization of the relationship is the acknowledgement by both parties of each other’s right to operate in a certain domain (domain
consensus).25 The public entity has to allow the private party to do, what it does best and vice versa and be aware of each other’s objectives, competence and reliability.
22 Nelson, J. and Zadek, S. (2000), Partnership Alchemy: New Social Partnerships in Europe. Copenhagen: The Copenhagen Centre
23 Alter, C. and Hage, J. (1993), Organizations working together, Newbury Park: Sage Publications
24 Andriessen, J.H.T.H.(1987), Organisaties en hun relaties, Tilburg: IVA.
25 Andriessen, J.H.T.H.(1987), Organisaties en hun relaties, Tilburg: IVA.
4.2 Challenges brought about by change
Organisational change is considered the adoption of a new idea or behaviour by an organisation.26 Change is typically assimilated through a series of steps or
elements. Organisation members first become aware of a possible change, evaluate its appropriateness, evaluate and then choose the idea. Successful implementation of change starts of with an idea27, which in this case is PPP.
Having fulfilled this precondition already, a need for this idea is required or needs to be established. Only when the need is perceived, will the idea be seriously considered. Now the idea can be adopted. Everyone involved need to be in agreement to support the change. The implementation will occur, when the idea (the Public-Private Partnership) is actually used. Often being the most difficult part of the change process. Barriers for the implementation are failure to perceive the benefits, lack of coordination and cooperation, and uncertainty avoidance.
Uncertainty avoidance will also be covered in the paragraph on cultural challenges.
A final requirement for successful implementation of change is resources. Time and resource dedication is essential for the implementation of the PPP concept, preferably aided by parties with experience.
26 Pierce, J.L. and Delbecq, A.L.(1977). Organization Structure, Individual Attitudes and Innovation.
Academy of management review,(1) 2 , pp27-37.
27 Daft, R. (2001), Organization Theory and Design, 7th edition, Ohio: South-Western College Publishing
5 Findings
The first item that requires examination is the history and the reason behind the emergence of Public-Private Partnerships for both the United Kingdom and the Netherlands. This will not only provide a better insight in the working mechanisms of PPP, but also the foundation for any country specific differences. Important projects that are mentioned in this chapter will be more thoroughly covered in the appendices.
5.1 Background to the rise of PPP in the United Kingdom
In the United Kingdom PPP originated from a need and a desire for less expensive procurement and better value for money.
The UK ’s public services suffered from a legacy of under-investment. A repairs and maintenance backlog built up on existing assets, and plans for new investment projects were subject to flaws in the budgeting system which encouraged short term thinking and a bias against capital spending. Public Sector Net Investment fell by an average of more than 15 percent each year between 1991–92 and 1996–97, and represented 0.6 per cent of GDP in that year – the lowest level for over a decade.
PPP (or PFI) was launched in 1992 by the Conservative British government of John Major. Since 1997, the New Labour Blair governments have energetically taken on PFI. The original motivation behind PFI was to reduce public expenditure in Britain at a time in the early 1990s when public borrowing was perceived to be out of control, while at the same time being seen to respond to the need to replace and upgrade outdated infrastructure in the public sector - the health service,
schools, roads, etc.
The result was a profound and dedicated driving force to invest time and money in PPP, to make it successful. The poor state public infrastructure was in, combined with the financial trigger of too little budget to facilitate improvements proved to be a very positive stimulus to the emergence of PPP.
There was little public debate around the introduction of PFI/PPP in Britain. Given the rightward turn in mainstream political ideology over the past decade or more, the policy was introduced with little opposition (except in Scotland). However, once PFI was introduced various bodies raised concerns. British trade unions launched a concerted campaign against PFI, some threatening strike action if its
implementation was continued. Fortunately for PPP, these opposing forces were nipped in the bud, by pursuing a strategy for enhancing worker protections and ensuring their fair and reasonable treatment in PFI projects. Although debate is still present, it is still at a relatively low level. The propagation of PPP as a success- story by the UK Government is one of the reasons for this low level of discussion.
By 2001 the British public sector budget had a surplus of more than £20 billion, negating the dire financial need for PPP. However, the first results from PPP implementation became noticeable and both public sector and private sector were in such a way acquainted with PPP (and its positive effects) that it would not face the risk of being discarded.
UK Government was, and still is actively pursuing PPP, acknowledging its potential for adding Value for Money. This insight has been brought forth by evaluation of projects realised. Making PPP a success had also become a political goal on its own.
5.2 PPP background in the Netherlands
In the Netherlands, with higher income tax, budgets have always been much more adequate. The Dutch budget deficits have always been reasonably modest and kept under control. Infrastructure and Public Service on a whole are (and were) well organised and of good quality. There existed no dire need for immediate solutions to provide cheap and higher quality public service in a short span of time, as did in the UK.
The successfulness of PPP in creating Value for Money in the United Kingdom has, however, not gone unnoticed by the Dutch Government. The appeal of a faster and more efficient method of procuring Public Services caught the attention of both the Public and the Private sector. In 1998 the Dutch minister of Finance presented a report 29 to the Dutch House of Representatives in Parliament (Tweede kamer der Staten Generaal) on how the Netherlands can benefit from PPP. This report also issues recommendations on how PPP should be
implemented. The first recommendation was the establishment of a Knowledge Centre, which was realised a year later in 1999. The second recommendation was to start of with what was branded ‘laag hangend fruit’ (‘reachable fruit’). This was a proposal to apply PPP principles in the procurement of some 6 to 10 projects, with a relatively small and manageable scope, that would produce results on a short- term basis. Unfortunately, these projects did not really take off. Two of the projects to be used as pilots were already set in motion before conception of this scheme.
They were to be continued employing private sector involvement to gain experience in attracting private funding.
The first being the Betuwe-Route: a freight railway, running from west to east through the Netherlands, connecting Rotterdam Port with Germany. The second being the HSL-Zuid: a High Speed Line passenger railway, running from Schiphol Airport, Amsterdam and Rotterdam to Antwerp in Belgium.
Although both projects started of with high anticipation of private sector
involvement and were dubbed Public-Private Partnership, it cannot be stated these projects were in fact true PPPs.
29 Ministry of Finance (NL) (1998), Eindrapport Project publiek-private samenwerking: Meer Waarde door Samen Werken, The Hague: Ministry of Finance
The Betuwe-Route was completely procured traditionally. It was supposed to be partially funded privately (approximately 1 billion euros), but this never happened and it does not look very likely it will in the future. There simply was and is no private sector appetite for this project.
The HSL-Zuid project was cut into three different segments (foundation,
superstructure and operations) that were differently procured, the first of which traditionally, the other two based on a PPP.
Two other projects that were considered for the ‘reachable fruit’ scheme were Metro Shuttle Kop van Zuid in Rotterdam and North-South Line (Noord-Zuid Lijn) in Amsterdam. The Metro Shuttle project was a proposal to build a metro (operating unmanned) to the Wilhelmina pier. This project failed because there was no budget available. Private parties were only willing to invest money in this project, if in return they would receive development rights for the pier. Local Rotterdam
Government was not willing to agree to these terms and the project was cancelled.
The choice to try out a PPP was taken in the idle hope this could fill a budget hole.
This of course is a fundamental misjudgement for choosing for a PPP.
A PPP can deliver more Value for Money and spread the costs of a project over a longer period of time. It will not, however, generate money to fill up gaps in budgets or produce services free of charge.
The North-South Line –a metro connecting the north with the south of Amsterdam- was discontinued as a PPP, because the municipal government of Amsterdam was unprepared to transfer responsibility for the build and maintenance of this metro- line to private parties. They concluded there was too much uncertainty surrounding the project’s policy environment. It is now being procured traditionally.
One of the problems that affected all these early projects was the stage of
development these projects were already in. They were simply too well developed based on a traditional mindset, to be transformed to a PPP. A Public-Private Partnership should be formed at the start, from the moment an idea or concept for a project is born. Only then can it fully benefit from it’s working mechanism.
43 D.J. Prinsen (2004). Fiscus moet privaat-publieke samenwerking duwtje geven.
Financieel Dagblad, 16/09/2004, p. 11
5.5 PPP process in both countries
An issue that requires inspection is the PPP process. It might just well be that the same nomenclature is used, in both the Netherlands and the United Kingdom, for different types of procurement. This could explain any discrepancies in the
difference in perception of the topic. Most of the projects that were suggested in the ‘reachable fruit’ scheme devised by the Dutch ministry of Finance were projects that were conceived based on a traditional procurement mindset. The general idea was to apply PPP principles to them. Most of these projects were already in such a far stage of conception that applying PPP was not easily possible and did not have the expected beneficial effects. Most were cancelled as a Public-Private
Partnership. One of the projects that did go ahead and eventually reached financial close in 2001 was the HSL-Zuid project.
Closer inspection of the HSL-Zuid shows a different strategy and approach to PPP, than is commonly used in the United Kingdom. The process of PPP is based on setting output specifications for a service and contracting a consortium to deliver this service from scratch. Multiple private parties, with together the required skills for providing this service are brought together in a consortium. This consortium is responsible for providing this service based on the output specifications, but it is left to them how to do so. HSL-Zuid was procured using a mixture of procurement methods.
The construction of the underlying concrete foundation for the track was procured traditionally. Multiple consortia would be responsible for this task, scattered over different geographical locations. The building and maintenance of the
superstructure (track, power-cables and signalling) was procured as a PPP and awarded to the Infraspeed consortium for a period of 30 years. For operation of the line, the government has procured a different consortium. For 15 years, the
government grants the High Speed Alliance consortium the right to use the HSL infrastructure to operate on. Granting rights on railway infrastructure is common practice in the Netherlands and is also used by the government with Dutch Rail (Nederlandse Spoorwegen). This cannot be regarded as a Public-Private Partnership. It is a form of controlled privatisation.
On the surface, the procurement of the HSL-Zuid using these methods looks like a formidable solution, but problems with this form of procurement can be foreseen.
Problems have already risen with costs-overruns for the construction of the foundations. This problem is often associated with traditional procurement. The mixture of different procurement strategies causes another issue. By only going halfway with PPP on this project, a problem rises, that is often seen in traditional procurement. If in the future any problems arise with the foundation, the
consortium that built the track can claim liability on the previous party, who is likely blame the government for a wrong design. In a similar way, the operator in an event of trouble is likely to blame the previous party involved. The overall and joint responsibility for the public service is not assembled in one party (consortium), but scattered over different stakeholders.
This would instantly negate one of the fundamental advantages of PPP: shared risk. Risk and the liability would simply be transferred to a previous party, ending
