Written evidence submitted by Dr Yseult
Marique, University of Essex
EXECUTIVE SUMMARY
In recent years, "public private partnerships"
(PPPs) and "private finance initiatives" (PFIs) have
been used as long-term projects based on cooperation between public
and private entities to deliver public infrastructures and services.
Value for money (VfM) and risk allocation are commonly
associated with PPPs/PFIs and their articulation of public and
private interests. As highly tailored solutions to complex problems,
PPPs/PFIs work as a global framework of agreement to integrate
within one project a range of fragmented issues. Flexible articulation
of the public-private relationships would result in a governance
structure fitting the particularised circumstances of the PPP/PFI,
supported by a relevant procurement and risk allocation. Public
procurement requires the bringing together from the outset of
the various parties involved in the delivery of the project over
its whole duration. Risk management demands a fair degree of legal
certainty. Therefore, a good understanding of the project specificities
and of the various parties' interests is key to the success of
their joint endeavour. It calls for distinguishing between different
PPP/PFI structures to map the specific difficulties each structure
involves. Such an approach would equip public bodies with a toolkit
of strategies to define the circumstances in which a specific
PPP/PFI structure may be used. Further steps are then needed:
developing such a typology of PPPs/PFIs with legal or practical
relevance, gathering the data needed to model the dynamics specific
to each category, and ensuring that the gathered data are worked
in the modelled typology.
1. SOURCES OF
THE FINDINGS
1.1 The information and opinions expressed here
result from a doctoral dissertation in law carried out at the
University of Cambridge between 2006 and 2010 under Prof. Bell's
supervision. The thesis ascertains the role of the law in public
private partnerships (PPPs) on the basis of a comparison between
England and Belgium. It draws on semi-structured interviews with
PPP experts and on case studies. The London Underground PPPs,
waste PFIs, BsF and accommodation PFIs illustrate English
practice. The Oosterweelverbinding (a major failure involving
a tunnel in Antwerp), Flemish and Walloon school PPPs and Aquiris
(a water treatment plant in Brussels) illustrate Belgian PPPs.
Belgian PPP players are major construction contractors such as
BAM, Veolia or Suez. Finally, the thesis builds on information
gathered during a research project carried out on behalf of a
Belgian university (Université libre de Bruxelles) in 2009.
This project was commissioned by the Belgian professional organisation
for the construction industry and involved panel discussions with
construction industry members.
1.2 As a lecturer in law at the University of
Essex, I am developing my research in the area of public contracting.
I am also a member of an advisory board to a PPP Chair at the
Vrije Universiteit Brussel. Located within the Business School,
the Chair is sponsored by Deloitte, Grontmij and Laga, which are
involved in PPP consulting.
2. PPPS /PFIS:
FRAMEWORK FOR
BUNDLING CONTRACTS
2.1 Complex projects
2.1.1 PPPs/PFIs are long-term projects based
on cooperation between public and private entities to deliver
public infrastructures and services. Value for money (VfM)
and risk allocation are commonly associated with PPPs/PFIs. PPPs/PFIs
integrate in one major project a range of contractual, financial
or economic relationships. PFIs have two main features. The first
feature is "the bundling of construction, maintenance
and sometimes other services into long-term 'whole life'
contracts under which private sector contractors are responsible
for the construction and functioning of public buildings over
many years, in return for annual payment by public authorities".[46]
The second feature is the use of private debt finance. Depending
upon the PPP/PFI considered, the public-private cooperation integrating
these contracts in one project takes various forms.
2.1.2 Mainly used for infrastructure, PFIs involve
design-build-finance-maintain-(operate) (DBFM(O)) contracts. Different
purposes, such as urban regeneration projects, require, as well,
the integration of similar contracts to PFIs. They beg interlinked
legal questions in terms of procurement, risks or governance structures.
2.2 Management and control
2.2.1 Bundling a range of contracts into one
project requires balancing management and control of the various
relationships integrated into the project. PFIs "brought
about perhaps the greater change to the construction procurement".[47]
Indeed, since WWII, the construction industry has struggled with
poor records regarding deadlines, budgets and endless disputes.
This still applies today. PFIs/PPPs here bring two contributions
to VfM: coordinating the supply-chain and challenging accountability
for public spending. These contributions have their own drawbacks
however.
2.2.2 First, PFIs help overcome issues linked
to the organisation of the supply-chain for two reasons. The first
reason is that the public client is free from coordinating the
supply-chain: it may focus on its core tasks and the private contractor,
the SPV (special purpose vehicle), bears the risks associated
with organising the supply-chain in the construction phase of
the project and the risks of construction delays. The SPV has
to start servicing the debt at a specified deadline, while the
public authority starts paying the periodic payments only when
the project is delivered. The second reason is that PFIs integrate
the construction and the operational phases of the project. Early
integration in the project of all variables influencing the operational
costs should save money in the long term. It also results in solutions
in which risk management is improved.
2.2.3 Secondly, PFIs/PPPs develop a single point
of contact, the SPV, for the public body. On paper, PFI/PPP contracts
would formalise the breakdown of costs, performance monitoring
and control of money flows by the public party. The accountability
for public spending in PFIs/PPPs is subjected to various controls
(from political bodies, the OGC, the NAO, taxpayers, external
audit, financial institutions, competitors, etc). This blurs how
VfM is assessed: the concrete contribution of these techniques
to understanding PFI costs is unclear. However, as PPPs/PFIs are
tailored to specific projects, they may provide a strategic overview
of accountability lines. It may enable to map them realistically
so as to streamline control. This would prevent accountability
issues from jeopardising projects (cf. the Bicester Accommodation
Centre).
2.2.4 In organising and controlling these complex
relationships, problems also arise. Firstly, constructors and
maintenance firms are not one single entity, so more parties need
to be brought into the discussions, which takes time and money.
Secondly, PFIs are rigid: any changes to match ever-changing public
interests lead to over-expensive processes. Thirdly, ensuring
proper accountability for public spending requires monitoring
mechanisms, which are costly or difficult to fine-tune to the
specificity of the projects. One way to lessen these drawbacks
is to develop stronger cooperation—"partnering"—between
the parties to PPPs/PFIs. Against this background, procurement,
risks and governance structures are examined.
3. PROCUREMENT
FOR COMPLEX
PROJECTS
3.1 Introduction: planning
3.1.1 As procurement is a planning process, public
authorities exercise discretion and make a series of choices.
They may use this discretion in a creative way to reach VfM.
Yet, they may also harm market players' and taxpayers' interests.
Procurement regulations take a prophylactic approach and limit
possible abuses of discretion. However, this approach reduces
the ways in which discretion can be used to the benefit of all
interests involved. When it comes to complex procurement, the
question is how public authorities may be encouraged to use their
much-needed discretion positively without being unduly constrained
by technical complexity.
3.1.2 During the procurement, public authorities
have to make decisions related to the future performance of the
PPPs/PFIs. Many issues in contractual performance find their roots
in bad planning. Yet, there are few indications about how the
performance should be legally framed. European regulations are
silent. Most English contractual arrangements rely on construction
contracts models (eg NEC3), whose respective advantages are not
definitively settled. However, the anticipated contractual governance
influences the planning process, and the planning process affects
the resulting contractual governance.
3.1.3 This mutual influence between planning
and contractual outcomes is part of the many uncertainties public
authorities face during procurement. Public authorities have to
deal with information asymmetry with the bidders, limited numbers
of market players, and ensuring competition, transparency, non-discrimination
and the regularity of the overall process. Finally, they also
need to work with the chosen contractor towards flexible solutions
for supervening risks for the whole duration of the contract.
3.1.4 Public authorities have to make their choices
between different procurement processes available, with each their
own advantages and drawbacks to ensuring cooperation in PPPs/PFIs.
3.2 Competitive dialogue
3.2.1 Competitive dialogue offers a procurement
route for "particularly complex contracts", for technical,
legal or financial reasons.[48]
A dialogue is open once publicity has been released and expressions
of interest received. The dialogue follows the process the public
authority defined in its publicity and once the dialogue has been
formally closed no further discussion may be held.
3.2.2 It requires the public authority to plan
an informed strategy as it has to set out beforehand the various
stages of the competitive dialogue. It gives bidders a fairly
clear overview of the preparations needed for the whole process.
The dialogue is open to any issues related to the project, which
leaves space for innovation from bidders. Finally, this process
enables the maintenance of equality between bidders.
3.2.3 This has proved to be difficult to implement.
As it is a novel route, it may require more time for fine-tuning.
However, some structural issues have been pinpointed. First, negotiations
cannot be held with only one preferred bidder, which increases
costs. Competition may drive prices down or improve the contractual
terms. Yet, in the long-term, bidders whose bids have been kept
instrumentally may withdraw. They also want to recoup the high
costs of their bidding. If public authorities accept this claim,
the overall costs of the project increase. If they don't, they
may face legal challenges for violation of the procurement process.
Procurement regulations are complicated enough to provide such
grounds. The contracts may then be postponed. Secondly, bidders
fear violation of confidentiality. Thirdly, once the dialogue
is closed, no discussions may be held. This may cause trouble
if the financial institutions involved require changes in the
contracts for financing the project or granting more favourable
terms.
3.3 Two stages - design and build under a
restricted procedure
3.3.1 The restricted procedure enables the public
authority to choose which private contractors it invites to submit
tenders, once publicity has been released and expression of interest
received. The basis for choice may not be discriminatory grounds
and needs to have been published in the contract notice.
3.3.2 According to construction literature, this
procedure is especially efficient in overcoming supply-chain problems
as it favours partnering and collaborative working.
3.3.3 Public authorities may not discuss the
contract with the bidders, but amendments to the contracts, albeit
non-negotiable, may be included in the bids if the public authority
has mentioned this faculty. The lack of discussion is problematic
for complex projects, which require tailoring negotiated solutions.
Furthermore, this procedure has to comply with EU procurement.
First, the first stage may be used as negotiation towards the
final contract, while such negotiation is not allowed under the
restricted procedure.[49]
Secondly, the second stage needs to respect competition. Therefore
the first stage does not ensure that successful bidders get the
contract at the end of the second stage, which may discourage
bidders. France has tailored its own two-stage process to supplement
European procedures. However, the ECJ ruled that the European
procedures were limitative,[50]
ending creativity.
3.4 Negotiated procedure
3.4.1 The negotiated procedure is open for utilities
and under specific conditions in the classic directive 2004/18.[51]
These conditions restrict its use to exceptional circumstances.
3.4.2 Negotiations are possible quickly with
only one bidder. The public authority is in a weaker bargaining
position however, which weakens VfM. It also requires due
justification from public authorities. Competitors may successfully
challenge the use of the procedure, the awarded contract may lose
its effects, or financial penalties may be awarded against public
authorities. Both sanctions result in wasted money.
3.5 Concessions
3.5.1 In concessions, public authorities grant
private contractors the right to build an infrastructure or provide
a service for which the users pay. Because the remuneration comes
from the public, the contractor bears the commercial risks, and
not the public authorities. However, financially free-standing
PFIs awarded through concessions in the 1990s have been bought
back by public authorities (eg Skye Bridge) or involved in public
subsidization, challenging the choice of "concession"
as a procurement route.
3.5.2 Service concessions in theory do not involve
public money and therefore are not subject to the formalities
of European procurement but only to Treaty principles such as
transparency and non-discrimination on grounds of nationality.
However, the ways in which these principles have to be respected
are unclear.
3.5.3 Labelling a contract as a concession is
tricky. First, choosing the lighter tendering process of concession
is problematic when it results in an arrangement falling within
the public procurement regulation: the procedure is invalid. The
competitive dialogue was introduced to avoid this. Secondly, public
authorities often partly subvent these projects to lessen contractors'
risks. Yet, this may change the legal qualification. Thirdly,
it is tricky to assess the risk transfer linked to the remuneration
beforehand. The ECJ recently judged that what matters is that
"the supplier assumes all, or at least a significant share,
of all the operating risk faced by the contracting authority,
even if that risk is, from the outset, very limited on account
of the detailed rules of public law governing that service."[52]
This may not solve all issues of categorisation. Further evolution
may follow a 2010 consultation by the European Commission.
3.6 Conclusion
3.6.1 The suitable procurement route depends
upon the project features, which may or may not enable cooperation.
Skill and familiarity with the process also bear on the success
of the chosen route.[53]
Unprecedented procurement litigation has recently appeared,[54]
making it even more important to choose an appropriate route.
It implies that any procurement has to respect strictly procedures.
The ultimate decision regarding the regularity of any creative
technique to attain VfM lies with the courts.
4. MANAGING RISKS:
A LEGAL PERSPECTIVE
4.1 Risk identification, allocation and management
demand legal certainty: the law shapes solutions to risks (eg
frustration in contracts) and takes risks into account (eg public
procurement), or risks may arise from challenges/disputes against
the PPP/PFI, or between the parties, or from contractual fragmentation
in the networks of contracts bundled in PPPs/PFIs. Here some brief
points highlight the connection between the law and risks.
4.2 Construction literature underlines joint
risk management and partnering as important for success in construction
projects. Yet, partnering has a legal drawback: it lacks enforceability
when parties need it, ie when they cannot reach an agreement.
Partnering help manage supervening risks but it becomes a risk
when it no longer works.
4.3 The law plays a role in allocating risks,
through contract law, joint venture arrangements or organising
SPV separation from its shareholders. In case of financial failure
of the PPP/PFI, the law may provide direct or indirect answers.
For instance, the legislation sometimes makes it clear that the
ultimate risk-holders are the public authorities. Legislation
may impose minimum requirements in service delivery. If the public
authorities want to discontinue the service provided by the PPPs/PFIs,
PPP/PFI users may be partially protected through legal techniques
such as legitimate expectations. All this result in public authorities
having to bear the ultimate legal risks and costs associated with
the PPP/PFI failure.
4.4 The law may impose either confidentiality
or transparency in PPPs/PFIs. Both relate to information/data
regarding risks in PPPs/PFIs and their costs. This contentious
point[55]
also highlights the lack of methodology for monitoring risks and
VfM in PPPs/PFIs. In France, an "évaluation
préablable" is legally mandatory at the start of the
procurement process[56]
In England, the NAO has developed a matrix but its use and practical
result are both uncertain. The Gateway Process may have built
its own methods, but access to their reports is currently uncertain.
Legal challenges have managed to gain some information but this
is by no means systematic. Because of this lack of data,[57]
the necessary in-depth understanding of PPP/PFI dynamics required
for modelling public procurement and risk management is so far
based on uncertain assumptions. This represents a crucial risk
for developing PPPs/PFIs.
5. GOVERNANCE
STRUCTURES
5.1 Clear-cut recipes for PPPs/PFIs clash with
the need for PPPs/PFIs to be tailored to particularly complex
issues and the uncertainty surrounding available data. To define
in what circumstances PPPs/PFIs may be suitable for the delivery
of services, a possible thinking path would be to design a couple
of PPP categories on the basis of the specific risks mainly connected
to a given project and their possible evolution over time. This
would at least give a starting point for filling in the data gaps
and a general direction/strategy for designing PPPs/PFIs and governance
structures interfacing public and private interests. Different
criteria may be used to develop such modelling. One approach would
hinge upon the relationships between cooperation and trust within
the overall governance structure.
5.2 First, PPPs/PFIs may be market-driven: they
focus on services bought from private contractors with no legal
connections to end-users of the public services (eg defence, accommodation
PFIs). The structure may be based on commercial arrangements to
ensure VfM. Attention would be focused on ensuring suitable
practical monitoring techniques and reinforcing trust between
the parties
5.3 Secondly, PPPs/PFIs provide intricate services/infrastructures
where both the public and private sectors have to cooperate in
the effective delivery of services/infrastructures to end-users.
PPPs/PFIs offer a point from which to adjudicate between competing
demands. The governance structure needs to define clearly which
party is responsible for which risks in the delivery of the service
itself and clarify possible conflicts of interests, to promote
trust. The dispute settlement mechanisms developed in construction
contracts do not apply between the public and private parties,
but they do between the SPV and its supply-chain. These two levels
need further articulation to strengthen cooperation.
5.4 Thirdly, PPPs/PFIs may rely on joint ventures.
So far, the various institutional and legal provisions needed
to ensure an environment of trust and cooperation between parties
have been external to specific PPP/PFI projects as they have been
developed at a scheme/programme level (eg BsF). The extent
to which the general level may be translated directly into specific
projects require further fine-tuning and experience, especially
regarding the possible conflicts of interests jeopardizing trust
in PPPs/PFIs.
6. CONCLUSIONS
6.1 Cooperation between public and private actors
is needed to deliver public services and infrastructures. PPPs/PFIs
provide spaces for articulating public and private commitments
and for maturing/aligning them in complex cases. Project structures
matching specific circumstances need to embrace a range of possibilities,
with each their own tailored advantages and dynamics. The procurement
environment is currently changing as the European Union is considering
a range of issues impacting on PPPs/PFIs (public procurement,
concession). Legal risks are uncertain due to partnering and transparency/confidentiality
questions. Governance structures are evolving. Only fragmented
information is available regarding all these points, mostly drawn
from patent failures, limiting the relevance of lessons to be
drawn. More systematic data are needed to refine our understanding
of the strengths and weaknesses of PPPs/PFIs.
6.2 To model governance structures appropriate
to PPPs/PFIs and their specific circumstances, further stages
must be defined: fine-tuning a typology of PPPs/PFIs with legal/practical
relevance, gathering the data needed to model the dynamics specific
to each category, and ensuring that the gathered data are fed
back into the typology. Developing such an approach to PPPs/PFIs
would maintain their flexibility and allow for building on their
ability to work as a platform for the public and private sectors
in sharing their respective strengths, and, most of all, creativity.
April 2011
46 SCEA, Private Finance Projects and Off-balance
Sheet Debt (63-1 HL 2009-10) para 3. Back
47
P Hibberd "New Procurement Routes of Little Benefit"
(2010) 21 8 Cons Law 23. Back
48
Public Contracts Regulations 2006 reg 18. Back
49
J Barber and S Jackson, "Pre-construction Services Agreement
- Early Lessons from Experience" (2010) ConsLJ 182. Back
50
ECJ, Commission v France (C-299/08), 10 December 2009. Back
51
Public Contract Regulations 2006 reg 13 and 14. Back
52
ECJ, Wasser- und Abwasserzweckverband Gotha und Landkreisgemeinden
(WAZV Gotha) v Eurawasser Aufbereitungs- und Entsorgungsgesellschaft
mbH (C-206/08) 10 September 2009. Back
53
P Hibberd "New Procurement Routes of Little Benefit"
(2010) 21 8 Cons Law 23. Back
54
D Thomas, "Contactors Challenge Tender Awards with Notable
Success" 2009 (4/2) Cons LI 30. Back
55
Veolia ES Nottinghamshire Ltd v Nottinghamshire CC 2010
EWCA Civ 1214; 2011 EuLR 172. Back
56
Ordonnance n°2004-559 du 17 juin 2004 sur les contrats de
partenariat s. 2 recently modified. Back
57
SCEA, Private Finance Projects and Off-balance Sheet Debt
(63-1 HL 2009-10) para 38 ff. Back
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