PPP is a mindset: not a way of building

Author: Harry Sterk, Director of the Dutch Network* for Public Private Partnerships
Source: RISK Management & Governance, Edition 6, Summer 2010

The major differences between traditional and PPP projects are, according to Harry sterk, the way costs are defined and how building plans are made. With a PPP project the total costs of a project are placed in light of the lifecycle of a project.

Traditionally, the focus ‘merely’ lies on the initial construction costs and leaves out –for instance- maintenance and other ‘post initial’ costs. The initiator doesn’t make a detailed plan, but formulates what has to be done within a certain frame: the output specifications. The contracting party is therefore stimulated to be creative and smart within that frame and has to develop a complete solution. Once the project has been realized, the contracting party receives a fee based on the actual fulfillment of these output specifications. This incentive stimulates the contractor to stay sharp throughout the entire running period of the project. It also explains why the overwhelming majority of PPP projects is delivered on time and within budget.

Especially in financial and economic difficult times, like we’re experiencing at this moment, there are plenty additional reasons for local governments to roll out projects based on public private partnerships. The basis should be that the projects aren’t too small. The development of PPP projects usually takes some time (the process of making an idea an achievable project). This costs time and money and therefore the project has to be of a certain volume to make up for such initialization costs.

But this shouldn’t discourage local governments to invest in PPP projects. The network has calculated that, based on the study of PPP projects put against traditionally built projects, governments can save up to 20% in costs, or to put it the other way around, get up to 20% more quality for the same money. In reality, the upside is likely to be significantly higher because these PPP projects were benchmarked against flawlessly executed traditional projects whereas research shows that a whopping 75% of such traditional projects don’t stay within the initial budget and/or where completed behind schedule. this could save millions of government money a year. This should make investing in PPP projects more interesting, especially in a time when the government should be extra careful with the use of public money. Based on the before mentioned calculation governments can achieve more effect with lesser costs. PPP projects have a longer run time (20 to 30 years). With this in mind the government achieves more stability within the market, than when creating short-term projects, which have no real lasting effect. In addition, PPP is an effective way for the public sector to ‘export’ risks to the private sector: again, if the contracting party does not deliver products on predefined times, according the output specifications, the contracting party gets penalized by means of a lower fee or no fee at all.

Currently the UK is leading when it comes to the realization of PPP projects in all forms, roads, bridges, hospitals, schools, etc. the last few years especially Germany and Belgium have made major leaps forward when it comes to public private partnerships. the netherlands is lacking behind in international perspective. Despite that fact a Dutch PPP project is nominated for the ‘International PPF award’. the military compound of the Kromhoutkazerne in Utrecht is nominated, because the PPP-project was immensely big (8.0.000 m2), it was delivered on time (within 18. months), within budget (achieving a cost reduction of 15%) and offered a superb functional solution to the highly complex needs of modern defense organizations.

When a public organization has little experience in working on projects basis on partnerships, it can cause organizations to become overcautious in engaging new project partnerships. The result on the long term is that an organization falls behind in experience and in making long term plans. the network is currently active in creating a toolkit for local governments. In this toolkit governments can make use of best practices and also apply PPP to smaller projects.

In the end it all comes down to realizing that PPP based projects can be used in all possible sectors, as diverse as building roads, healthcare, building schools, prisons, waterways, IT projects…and the list goes on. It’s important that people realize that public private partnerships is about a mindset, and not about a building solution.

A few tips when starting up a new project:
1. Check in an early stage if a project has PPP potential and not at the
moment when the plans are already drafted;
2. When in doubt, let experts assist you. This will pay itself back on the
long run;
3. New projects demand vision and drive of the management officials.
Because most organizations have but little experience with PPP,
intuitively employees will fall back on traditional methods;
4. Don’t think PPP is a magic trick that will get you a solution and save
you money, no matter how bad your business case is. A plan still needs decent financial backing.

* This network was started by public and private organizations, ranging from financial companies, consulting agencies, the building industry to the local and central government. The mission of the network is on one hand to prevent that projects that are well suited for PPP-are being realized in a traditional way, because the initiator didn’t have enough knowledge and experience with PPP. on the other hand, the network aims to prevent for PPP unfit projects to be still carried out as a PPP project. In short, its goal is not to miss out on PPP potential. the network members are more than often asked by municipalities to quick scan potential projects and to assess what PPP could mean for that project or how the existing partnership can be enhanced.