4 Ensure sustainable deal flows through managed markets to encourage new providers

Establishing a sufficient deal flow - that is, maintaining enough projects in the pipeline to keep the PPP market thriving - is crucial to encouraging providers to enter markets. Companies make investment decisions on the basis of the potential market growth, so it is vital that markets are sustainable and resources are available to incentivise, reassure and encourage private providers to get involved in PPPs. This can also apply to federal governments reassuring regional governments that are introducing PPPs. There needs to be a long-term commitment to PPPs from government and a clear indication of future deals and development to encourage entry into the market. This also includes ensuring that deals are fairly advertised to all bidders to counter concerns that in-house teams benefit from unfair advantages. There must be transparency and rigour in the tendering process - ensuring thorough needs assessments and clear project specifications for bidders will help avoid procurement delays.

Effectively managing risk is a priority if private providers are to be encouraged to enter the market. In most PFIs, the risks of meeting required standards of delivery, construction costs and delays are met by the private sector. The public sector is considered to be more able to deal with allocational risk, the risk of future changes of public service requirements and risks around the actual use of the facility such as demand.31 Effective risk allocation creates incentives for projects to be delivered on time and to budget. Companies will not want to get involved in a partnership where they are responsible for risks they are not best equipped to deal with.

Although the UK Treasury has developed guidance on how to quantify risk, the public sector tends to have limited experience in this, which can often mean projects are prone to optimism bias and budgeted for the best possible scenario (often lowest cost and earliest completion, rather than the most likely).32 This links to issues around the capacity of public sector procurers and the need for skills development.

It is also important to ensure risks are properly transferred to the most appropriate party and contracts are of sufficient length. Transferring too much risk, or risks the private provider has little control over, can lead to delays and cost overruns and eventually discourage participation from new providers. The reverse is also true - if contracts are too short, the private sector will be discouraged from entering the market due to the cost of re-bidding for contracts and the time needed to recoup their investment in service improvement. This acts as a barrier to innovation, whereas longer contracts allow the time for providers to be more creative in designing services.