PPP - Paper 3 - what can go wrong

Czech Republic

INTRODUCTION:

In this paper we analyse what can go wrong if a PPP project is inadequately prepared for and consider a methodology to avoid pitfalls.

Benefits Payment Card

The Project

In brief, two UK entities, the Department of Social Security (the "Department") and Post Office Counters Limited (the "Post Office") (in the UK the Post Office is still owned within the public sector), signed a private finance contract with a joint venture known as Pathway to provide a modern, secure method of benefit payment and to automate Post Offices.  The project had multiple aims.  For the Department, the project was intended to deliver savings in benefit fraud and running costs, modernise the delivery of benefits and improve accounting.  For Post Office, it was intended that the project automate and safeguard their business.  The contract was signed in May 1996 but terminated in May 1999 following continual slippage. 

National Audit Office Issues

It is suggested that anyone who is considering PPPs should read the report as an aid as to issues which need to be considered.  The summary is some 15 pages and the report itself is some 90 pages.  It might be helpful to highlight a number of the risks which the National Audit Office reported on:

The purchasers did not see it as their role in a private finance arrangement to document detailed rules for benefit payment in the form to be automated - this resulted in a mismatch in performance.

Details of the resources that the bidder would employ upon the project were not given.

There was a lack of clarity as to how certain risks were to be managed.

In relation to the development of a Benefits Payment Card (similar to a credit card), instead of rethinking the whole process, which could have resulted in a total departure from old methodologies and the arrangement of departments within a management structure, only the original processes were applied.

Apparently when the Benefits Payment Card Agreement was signed, there were some 289 outstanding items which were the subject matter of an agreement to agree.

As the contract was implemented, so complexity arose.  In addition, in trying to reach less complex solutions, the Department was constrained by legislation as well as to the benefit recipients' expectations.

The successful bidder's proposed solutions did not have a detailed design but demonstrated how the solutions in required areas would work in practice.  Similarly, there were different requirements for different benefits and no mechanism for simplification.

The successful bidder, Pathway, believed that it had more scope to redesign the Department's business rules and requirements so that they could use software closely based upon initial solutions.

The Department's business case was periodically reviewed and up-dated over the life of the project.  Value for money to the Department was eroded by slippage.  However, the Department took only limited steps to evaluate this risk before signing the contract and, apparently, the initial business case included no analysis to assess its sensitivity to major slippage in the project, since this was seen as largely outside the Department's control.

The Department's business case for the project could be affected by changes in policy and methods of benefit payment.

The project initially proceeded on the basis of proposals from Pathway that it would involve, mainly, integration of existing software packages.  In the event, the greater than expected complexity of the service requirements obliged Pathway to undertake much more development of new software than it had planned for its winning bid. 

A study by the Standish Group shown at Figure 14 of the National Audit Office report basically indicates that in large companies some 29% of software development projects are aborted and in medium size companies some 30%.  In large companies, some 62% are either over-budget or over-time and offer fewer features and functions than originally specified and some 47% in medium companies.  Successful projects are some 16% in medium companies and 9% in large.

In the implementation phase, one of the members of Pathway had insufficient resources to deliver revised solutions. 

On the assumption that there were likely delays, the Department had to manage the risk as to slow progress. 

Running developments in parallel may well add to the risks.

The Department  and the Post Office were effective at identifying the risks (including the risks in Pathway's proposals), but were less successful in evaluating and reducing these risks.  Delays in delivering the project cost the tax payer some £15 million per month in terms of continuing fraud and administration costs.  Although there were some rights of recovery, in fact, there was a subsequent negotiation relating to the cessation of the contract.

In the risk register of the Department and the Post Office, the most severe risk recorded related to the technical boundaries between Pathways' systems and the systems of the users.  At the time of bidding, Pathway also prepared a risk register but there was no evidence found that the procurement authority fed anything in from the Pathway risk register to their own risk assessment process.

The Department and the Post Office had a lower confidence in delivery of Pathway's proposed solution but accepted Pathway because the bid was compliant with the Private Finance Initiative ("PFI").

Although formal risk management arrangements continued after the contract was signed, apparently they were never fully effective. 

There was insufficient piloting of technical solutions to assess the full service requirements and there was reliance on part-functional demonstrations.  There must be agreement between the purchasers of the service and the suppliers at the outset of information technology projects on the extent to which new systems will either replicate the purchasers' existing systems or re-engineer and simplify them.

Business Management

Consultation

There are ways of scoping and sculpting the public sector's requirements.  On the first of the local authority shadow toll roads in England (the A130) the local authority held a workshop consisting of experienced practitioners, both from the consultancy side (e.g. lawyers, financial advisers etc.) and from the potential service providers' side.  As a consequence, a number of issues were raised and solutions identified before the project went to competitive tender.  Similarly, in relation to the high speed rail link for The Netherlands, the author's firm developed some six different procurement strategies.  These were then distilled into a number of options and a paper was put out on a website and also sent to certain selected individuals for comments.  Provided that a huge amount of time is not required, the private sector will contribute and this does help the public sector in reaching decisions. 

External Advisers

In most countries, the civil servants do not have a long shelf life in the same position.  In some jurisdictions, senior civil servants are usually changed by the incoming Government after an election.  This is not so in the UK but on the project known as the Second Severn Crossing, the external lawyer is probably the only person still on the project who knew the reasons behind the wording of the contract.  Civil servants have now moved on or retired.  Part of the problem, therefore, is that civil servants who have become experienced in PPP projects are then promoted into other areas and that capability is then lost. 

In addition, there are a number of techniques which are used in relation to PFI, such as financial advisory, technical or legal which may not be available to the public sector.  There is a recognition that external advisers have their uses.  The author was once told that it was right for the consultants to warn the Government of risks but it was for the Government to decide on what action to take.

An issue for the public sector is to ensure that the consultants are extremely competent.  World Bank guidelines for procurement of consultants provide for up to 80% of the weighting to be based on capability and experience and 20% on price.  If there is an insufficient budget for consultants, this can badly backfire on the public sector because the costs of the private sector will increase if the bidding documentation is not properly prepared or bids properly responded to by the public sector.

Another issue is that external advisers can produce different advice and conflicting advice.  That does create a problem when the necessary individuals within the Department do not have the experience of running with PPPs.  Part of this has been overcome in the UK by the creation of the Treasury Task Force, which has now been replaced by a number of agencies.

This concept has been adopted now in a number of continental European countries.  A task force is really a combination of individuals who are made available from the private sector as well as from the public sector.  In the case of the Treasury Task Force, the individuals from the private sector were not on secondment although certain of them did return to their former colleagues.  There is very little risk that an individual from the private sector will not have the relevant skills because most of the good players are already known.  The risk for the colleagues is that, having had experience with a task force, an individual will be offered eye wateringly large sums of money to join another organisation. 

To have projects reviewed by the equivalent of a task force assists in the reconciliation.  Nevertheless, there is a greater risk where the public sector does not have sufficient individuals for a project and then buys in consultants as if they were secondees.  However, there may be a case for secondment where looking for a chief negotiator and team manager.  On large projects, the handling of negotiations is key as is the project management of the various sub-teams dealing with elements of the transaction.  It is noticeable that there is now much more depth within the civil service in the United Kingdom with experience in those types of negotiations but, again, the individuals involved may be promoted or transferred.  Therefore, if it is found that there is a gap in expertise, that is one gap which probably can be filled.  However, one should be looking at high calibre personnel (e.g. on two occasions, directors of BP (British Petroleum) were made available).

Co-operation

Unlike negotiations for a sale or acquisition where one is trying to achieve the best immediate deal without requiring a long-term relationship with the counter-party, a ppp contract will last for ten or more years.  Thus, if there is no relationship other than a blood feud at the beginning of the transaction (i.e. during negotiations) it is not realistic to expect there to be a successful transaction.  The UK Office of Government Commerce Guidelines encapsulate the advice by saying "a co-operative and open attitude during the procurement will lay the foundation for a similar atmosphere after Contract award, helping to foster the required partnering". 

In addition, because the public sector is endeavouring to achieve the benefits of private sector initiative, the process should be much more one of clarification and enquiry rather than demands.  The demands will be there namely, the supply of information by certain dates and it is important to set up a regime including a timetable which can be reasonably well adhered to.  It is likely that the timetable will slip but it should never have been so ambitious as to have been patently impossible from the outset: Any adjustments should be done openly and timeously so that the private sector does not get the impression that the public sector team is in disarray. 

The criteria for evaluating bids may also be given so that there is a clear understanding as to what the public sector is expecting from the private sector.  However, the building up of relationships between the public sector and the various bidding consortia does sometimes make it much harder to tell the unsuccessful bidders that they have been unsuccessful.