The failure of the UK’s second largest construction company has led to considerable scrutiny of the way that public services are contracted out to private sector businesses. Several councils have already begun to bring services back in house, and some commentators have suggested that Carillion’s liquidation could signal the beginning of the end for public-private partnerships. This seems too hasty – particularly as many of the issues raised can be mitigated through legal structures and terms of agreement that allocate risk and reward in an appropriate manner, not to mention thorough due diligence at the outset of discussions.
Rather than throwing the baby out with the bath water, the public sector needs to put more time and energy into the conclusion of partnerships with suitable partners on the right terms, rather than eschewing collaboration with private companies entirely.
Many of Carillion’s contracts with the public sector were in the form of Private Finance Initiative (PFI) schemes. Worth billions of pounds, these agreements provided essential construction and facilities management services. Designed originally as a way for the government to build without bearing the financial strain upfront, private sector investors cover the initial costs of delivering a project. The public sector then makes gradual repayments over time.
PFIs are now considered by some to be an outdated model that doesn’t provide good value. Although their original selling point was the transfer of risk from the public to the private sector, Carillion has demonstrated in a somewhat perverse manner that such risk transfer may not be all it seems. In failed schemes, the taxpayer picks up the tab along with the many thousands of affected sub-contractors, notwithstanding the profits made by the private sector during the good times.
As we consider the future of public-private partnerships, it’s important to point out that PFIs are not the only way to skin the cat. In fact, part of their inadequacy stems from the reality that in one view they are not “partnerships” in the fair and equitable sense of the word. The risk and rewards available to each differ vastly, putting the parties’ interests at odds from the outset.
Successful public-private joint venture structures – which are becoming increasingly common – require a great deal of honesty up front. Each party should openly declare what it needs to achieve from the project and determine the extent to which their prospective partner can realistically deliver.
In the case of local authorities and private housing developers, for example, a shared objective involving the delivery of housing will be driven by very different motivations. For private developers the bottom line is key, while local authorities need to build homes that best serve their local community and provide much needed housing. Melding partisan and apparently opposing objectives together into a single, unifying purpose can create an extremely powerful delivery force that achieves far more than either partner could on their own.
Within equitable JVs, there is also an expectation that both parties will invest alongside each other, in return for receiving a proportional benefit. This truly collaborative approach offers some protection against the overreliance on one party that was the downfall of Carillion’s schemes.
JVs structured this way provide far greater opportunity to save a project before catastrophic failure occurs. If one of the parties fails to deliver – for example by missing payments because of solvency issues – then the other will usually be entitled to buy them out at a discounted price. The surviving partner can then continue with the project without viability being undermined by the misfortunes of the other. They could even choose to bring in another investor to take the departing partner’s place.
Carillion’s collapse has rightly led to considerable soul-searching, but rather than abandoning all public-private partnerships and the many benefits they can bring, we need to focus instead on how processes can be improved to identify partners suitable for the task at hand, with use of structures that allocate risk and reward in a sustainable and fair manner. If both the public and private sectors heed the other’s needs and pay closer attention to finding common ground at the outset, there is a bright future ahead for this kind of collaboration.
Richard Tinham is Head of Commercial and Corporate at Winckworth Sherwood, specialising in advising on joint ventures