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What is a PPP?
PPP stands for public-private partnership. This is an agreement between the public sector (such as national or local level government bodies) and a private sector consortium or SPV (special purpose vehicle) which can include equity investors, lenders, EPC (engineering, procurement and construction) contractors and O&M (operation and maintenance) contractors / the FM service providers.
Forming a PPP makes meeting demand for public facilities such as hospitals, schools, roads, prisons or bridges more viable for the public sector. The use of private finance can provide governments with short-term relief from capital budget constraints, as they allow public sector bodies to spread payments for facilities over their useful life, usually 20 to 30 years. However, PPPs should not be seen primarily as a way of bringing in additional finance for the delivery of assets. Rather, these partnerships add real economic and social value, in comparison with traditional public procurement approaches, because they utilize private sector management skills and experience to enhance value for money.
PPP Contract Models
There are several types of PPP contract model, and the one chosen depends on the type of project being undertaken. For example, under the ‘Design – Build – Finance – Operate’ model, the private sector designs, builds, finances, and operates an asset such as a school, then leases it back to the government, typically over a 25 – 30 year period. Public sector long-term risk is reduced and the regular payments make it an attractive option to the private sector.
For roads, the ‘Build – Operate – Transfer’ model is often used as it allows the private entity to recoup investment, and make a profit, by charging tolls to road users, before transferring the asset back to the government. For a more extensive list of contract models, read our guide: Types of PPP Contracts.
Global PPP Growth
2022 data from the World Bank suggests that while PPP investment dipped during the Covid-19 pandemic, private investment commitments have increased 49% since 2020 in low- and middle-income countries. Following a difficult period of UK investment under the PFI (public finance initiative) scheme, Partnerships Bulletin’s global PPP market report shows the UK is leading the pack in terms of PPP tenders. North America continues to progress its projects at pace, as well as Canada – traditionally regarded as one of the most innovative PPP markets in the world. For more information on Canadian PPPs, download our white paper: PPPs – What the World Can Learn From Canada. The Middle East has also placed significant focus on PPPs to boost its economy.
The Importance of Transparency and Auditability
Because of the scope of services involved in PPPs, and the extent of risk transfer to the private sector, contracting through PPPs is an inherently complex process.
The PPP contract sets out the key agreement terms between the authority and contractor, including the allocation of risk to the contractor and the required quality of service to be delivered. Payments tend to be based on outputs, such as availability of facilities and the quality of service provision, and if these fall short of the contractually defined standards, the public authority is entitled to reduce payments to its private partner. Consequently, the quality of information shared by the partners is of fundamental importance to the success of the partnership.
As the process can become complicated, rather than keeping track of data using emails, paper and spreadsheets, a contract management system is often used to more easily achieve:
- Auditability – relevant data is recorded to enable systematic review and evaluation to determine the quality of the services provided; and
- Transparency – relevant information about the nature and quality of service provision under the contract is fully available and accessible.
In PPPs the recording of performance is usually undertaken by the service provider to enable them to remedy service problems and to reduce the burden of reporting on the public sector. As a control, the public sector may obtain user feedback and discuss this and the service provider’s performance data with the contractor on a regular basis. These methods of monitoring performance can work well if the necessary processes and supporting systems are in place. However, there may be a perceived risk that private sector staff might not record shortfalls in performance where the lapse is unlikely to be detected by the public sector and could potentially result in financial deductions. Where information systems are not in place to guard against this, there may be an absence of trust between the parties, and this may lead to a break down in the quality of the partnership and a more adversarial relationship.
For more information, download our complimentary white paper: The Importance of Transparency and Auditability in PPPs.
What is an Automated Payment Mechanism?
Not surprisingly, PPPs often have more complex performance management systems than would be the case for normal outsourcing arrangements. Service providers must generally accept a stringent specification against which deductions are derived for poor performance. The performance calculations and auditing conditions are detailed and include deductions for non-availability, poor service and repeat failures, all of which can have ratchet percentages for failures.
A fully integrated payment mechanism (or paymech) software solution manages the financial element of the O&M process by reporting against the agreed parameters for measuring KPIs and SLAs as well as quantifying the pain share/gain share incentive. When well implemented, such software should be capable of automatically calculating availability, service and quality failures against a variety of measurement values such as percentages, points, priorities, caps and thresholds. It should be capable of calculating repeat deductions and ratchets whilst automatically applying multiple payment mechanism rules. The deductions should be generated in real time, capable of calculating over multiple time periods and displaying in multiple report formats. And, if the paymech is fully integrated, data never leaves the system during the calculation process so every step is fully auditable and transparent.
What is O&M Software?
Software to manage the operation and maintenance phase is similar to IWMS (integrated workplace mangement system) software, but it can be fully tailored to the PPP contract terms to help manage deadlines and identify potential problems before they arise. O&M software also features a paymech to calculate payments within a given time period.
FM contractor Mitie chose SWG’s O&M software due its ability to handle the intricacies of its school and healthcare contract terms. The number of KPIs for the FM team varies between each contract, from around 200, where only soft services like cleaning and porterage are required, to a thousand or more where a wider range of services are supplied. Many of the KPI service levels are associated with the facility opening hours, which means the software not only needs to manage and allocate the jobs but also intelligently calculate when they are due. For example, the main areas of a 24-hour healthcare center could trigger a failure or deduction for an inadequate response time, but within the premises there might be offices or administration areas which are only open during standard business hours.
Under Mitie’s previous legacy system, calculations had to be performed on spreadsheets. This was a manual, time-consuming process that was also prone to error, with much time dedicated to technical checking and fixing.
Lee Clarke, System Support Analyst (PPP) at Mitie says: “Our commercial team were spending time looking into the spreadsheet formulae instead of just being able to just check the accuracy of deductions. With P3rform, it’s just a matter of specifying a few parameters and clicking the generate button. It’s so easy.”
If you’d like to learn more about Service Works Global’s PPP software and consultancy services, request a meeting with one of our advisors.