PPP and insurance gains: How to restore public trust?

Sharing the profits of PPP: show me the money!

Decide’s friends at the Public-Private Partnership Bulletin raised the flag recently on the lack of clarity and transparency of the gains and savings made by special purpose vehicles (SPVs which operate large complex contractual arrangements to provide infrastructure-based stream of services to public authorities, eg. PPP in health).

Ever since the first wave of Private Finance Initiative contracts in the 1990's which saw a massive programme of investment in privately owned and operated public service facilities in the UK  (schools, hospitals or prisons for instance), the question of the sharing of gains rose to prominence.

In essence, public authorities pay their private partners (the SPVs operating the whole infrastructure and related services programme) an annuity based on performance.

 

However, there were no provisions at first in the PPP contracts pertaining to any additional profit resulting from the management of the assets.

Yet private sector partners proved extremely successful -and at times creative- in generating “third-party revenue”, i.e. securing income out of two main streams:

- refinancing the debt pertaining to the project: this may entail negotiation for better interest rates with the project lenders (typically banks) or with insurance companies;

- stimulating purchases of goods or services ancillary to the project: shops, gyms, accommodation or any other service that can be used by patients, their families and visitors, or by staff or even the larger community that the health asset is part of (bars, restaurants, flower shops to name a few).

While the refinancing of loans triggered robust negotiations in the UK, leading to agreements to share 50/50 of the gains (thus maintaining an incentive for the private sector and ensuring value for money for public project owners), there remains a number of grey areas.

Gains from insurance deals refinancing may fall in those cracks….in particular if no specific provisions are included in the contract.

It seems that there are increasing concerns that the private sector in some cases may not want to brag too much about cashing in on their negotiation skills with insurance companies while not realizing the potential damages that can result for the partnership which is a trust-based relationship.

This lack of transparency could affect the growth of complex contractual arrangements and will certainly not help convince an already largely reluctant general public who has legitimate fears that profit-driven entities cannot be left unchecked when in charge of the delivery of public services.

Restoring, consolidating trust is vital to the economic growth and opportunities that PPPs and other infrastructure contracts can deliver.

Both public and private sectors, and most importantly populations served by these infrastructure will win if more clarity is brought to complex contracts and their contribution to value for money across the delivery of public services.