2010-11-24
By Editor, CIR
The Public Private Partnerships (PPPs) that build many of the UK’s roads, hospitals and schools are in dire need of policy review. So says a Queen’s University Belfast academic who, in a new study, highlights the fragility of the UK’s infrastructure.
Ten per cent, or £70 billion, of total Government expenditure since the inception of the PPP policy in the 1990s to the end of 2008, was spent on such projects. The schemes have been vital to the economy in terms of building infrastructure and providing much needed employment.
The new study, led by Professor Istemi Demirag of Queen’s University Management School, however, suggests a policy review is urgently needed to reassure private financiers that the risks involved in continuing with such projects are worth it, in the face of an unstable financial climate.
Professor Demirag’s research Public Private Partnership: Financiers’ Perceptions of Risks is the first major study to examine the risks involved for those who actually pump the money into these important schemes and how they perceive the risks, in comparison with the perceptions of their public sector partners.
The research decodes the complex network used in PPP schemes and looks at how the credit crunch has impacted on the whole process.
Professor Demirag explained: “Previous research focused on the risks to the construction industry or the risks for other stakeholders including government funders, rather than the private financiers. This research aims to contribute to an understanding of how PPP operates in practice. It points to the need for a policy review that would help reduce the vast costs associated with minimising and spreading the risks involved.
“The financiers’ indicated that these risks can include issues around securing funding. As the credit crunch bites banks are not as keen to invest and have increased margins. Uncertainty is also a factor concerning them, and in order to minimise these risks, financers increase costs by buying in insurance, using consultants or paying for technical and legal advice.
“Ultimately this dispersal of risk adds to costs for the procurer and the taxpayer. But an understanding of how risks are dispersed is important to order to inform future policy.”
The report recommends that any review of PPP policy should include:
•A re-evaluation of risk pricing and a reduction of bidding costs
•The possibility of acquiring risk mitigation, or insurance, across a range of PPP projects rather than paying for each project through the ‘middlemen’ of private sector contractors
•A reduction in the use of consultants
•More transparency around the availability of contract details
The study also states that it is possible to transfer risk back to the public sector after contracts have been settled. But the impact of this on value for money to the public sector and the taxpayer needs to be assessed.
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