8.5  Exploration and Validation of PPP Value-for-Money Issues

In reporting aspects of the primary interview data analysis in this section, references to the responses of individual interviewees are made in the present verb tense (i.e. what they say, rather than what they said). This is done deliberately, in order to more closely mirror the dynamics of the actual interviews.

For interviewees PF11, PT08, PT03 and PF01, a precursor to defining 'VfM' is to highlight the criticality of satisfactorily understanding social welfare problems before attempting to solve them through the use of capital asset investment or by other means (which should be determined before a Public Sector Comparator instrument is designed and applied and before a procurement method chosen). For instance, PF11 states that governments ought to be more considered when determining "why projects should become projects", including identifying the opportunity cost of what they deliver, and perhaps as importantly, what partnerships will not solve. PT03 asserts that in some instances, government departments fail to effectively address these issues, including adequately identifying broader investment and project benefits. The rationale used in project proposals and business cases should thus be properly defensible on these wider grounds with all legitimate options being considered. These views are echoed by PF01:

"The first decision on any piece of infrastructure isn't how to procure it. The first decision is 'what's the problem?'...It's all too easy to say that the answer is to build something. It's not so easy to say the answer is not to build something. Sometimes people look to infrastructure and then for a problem to solve whereas it should be that the problem comes first and then an intervention comes second. The intervention may or may not include capital asset investment. It's not until much later down the path that you start talking about how you're going to buy this from the marketplace".

Allied to these views, and to deliver VfM outcomes, project proposals and business cases should be considered in context of delivering infrastructure assets for their intended purpose as well as the value they will provide to existing networks (PF11, PT08 and PF01) e.g. how a PPP-procured asset will connect to electrical, hydraulic, transportation networks, etc (although it is acknowledged that this cannot not always be the case, particularly with Social Infrastructure projects e.g. schools and hospitals - there may be merit in delivering these types of projects, in isolation to, or in the absence of, existing networks). This type of strategic thinking (including adequately defining the benefits derived from it) is identified as a key area for improvement for the public sector (PF11) as poorly conceived projects could ultimately result in government paying its private partner hundreds of millions (or even billions) of dollars for under-utilised assets and through regular service payments for delivering agreed services that do not fully address intended social needs.

PF01 believes that as soon as a contract is signed between the public and private partners, there may be an "uphill battle" for the public partner to maintain the intended value of the agreement. The attainment of VfM, according to PF01, is dependent upon the quality of the individuals involved in discharging their contract management responsibilities, defined as the ability to interrogate, question and push-back against the commercially-driven private partner. Thus, attempting to improve expected VfM outcomes during the operating phase may be just as challenging, since co-operation between the public and private partners may depend upon the extent to which change will benefit each partner, the motivation of the public partner to revisit value propositions over time, or the capability and resourcing of both partners to manage new requirements. Moreover, PT06 questions the rationale for seeking VfM enhancements during the operational phase over and above what is contracted for, and commented that, assuming the private partner is meeting all of its KPIs, it is not contractually required to do anything more unless it wishes to do so.

Interviewees tend to associate with, to varying degrees, one of two practical approaches for PPP contract oversight: 'black letter' (i.e. to the 'letter of the law') contract enforcement and 'give and take' relationship management. For those interview participants who lean towards a point-by-point black letter view (PT13, PF11 and PT08), a concern is that failure to comply with contractual requirements could lead to unanticipated changes in organisational culture and behaviour (PF11) which may, over time, run the risk of eroding the basis of the contract (PT08) or create an opportunity for someone to refer to informal precedent over something dealt with that was different from what had been stipulated in the concession deed (PT13) - all of which may have a significant financial cost implication for government and expose public sector decision-makers to criticism by Auditors-General (PF11). Taken to an extreme, failure to abide by financial management and audit legislation (PT08) breaches public sector codes of conduct and undermines accountability in the contract management process. This interview outcome is an important finding for the research, since it does not arise in the extant literature.

Generally speaking, the interviewees who are inclined to adopt a give and take approach (PF03, PT10, RK09, RK05, PT11, PF14, PF06, PF07 and PF10), acknowledge the need for starting with the contract but emphasise the significance of partners 'working together' to achieve mutually beneficial outcomes (PF06), particularly when there is something in the contract that cannot be easily enforced e.g. loosely worded KPIs that are subject to different interpretations. In such circumstances, PF07 suggests that the best course of action may be to take a co-operative, solutions-orientated approach; an approach that engenders "commercial fairness" and mutual gain rather than trying to force an outcome where one party benefits at the other's expense (PF10). Working together in this way may lead to issues being resolved more easily and flexibly (PT11) without the need for formal dispute resolution clauses in concession agreements to be enacted. As PT10 explains:

"In this department, it's traditionally been that the contract is important but it's only used as a last resort. We're interested in the 25-30 year partnership element - that's what the public sector client tends to go into these for...strategic relationships. We're looking for a long-term partner for long-term service delivery."

For the interviewees, having a view on how to achieve VfM seems easier to them than trying to provide an interpretation of what it means. As a consequence, only a few participants (RK10, PT05, PT03 and PT08) offered explanations. For RK10, VfM involves price, performance and quality, whereby VfM is obtained when "the solution drives the best price for the best performance for the best outcome". This differs from the view of PT05 who talks about strategic fit and quantification of additional benefits obtained from a partnership beyond the financial elements: "VfM is quantifying the added extras of a partnership over and above the dollars in terms of quality and there is also an element of strategic fit". The other interviewees frame their definitions by referencing the procurement arrangements of two Australian state governments. With regard to the jurisdictional aspects, PT03 is inclined to view VfM from a Victorian Government Purchasing Board-style characterisation where VfM is achieved through a "balanced assessment of benefits and costs over the whole of life of the investment" and for PT08, VfM is defined by the New South Wales Public Authorities Financial Arrangements Act 1987, "when the winning bid beats all others and beats the PSC".

Interview participants also found it challenging to define 'VfM' from partnership, risk and performance management perspectives that relate solely to the operational phase of PPPs as it is generally considered that the VfM concept is rooted in the entire lifecycle of the asset. With that said, some participants offer VfM considerations that can apply to each of the three perspectives during operations:

- Partnership management. VfM may be achieved using the principle of reciprocity (PT06) i.e. through give and take where both partners may, from time to time (and for the right reasons), go 'above and beyond' the 'black letter' approach for each other to attain a desired outcome. In such circumstances where relationships work well and the right sorts of people are involved in managing the contract, it may be possible to add additional value over time e.g. by introducing new technology that has been developed outside of the PPP in order to get a better outcome (PT03). Furthermore, VfM can be demonstrated when the private partner identifies issues or potential issues and brings them to the attention of its public partner before they become major challenges that could severely impact upon government business (PF03).

-  Risk management. Known risks should be continually monitored and managed during the operational phase because risk appetite can change over time and existing risk positions may not be broken down or be static (RK04). Equally, it is important to identify the source of new risks, their drivers and to whom the consequences (or benefits) flow (RK04). On a separate note, RK06 emphasises the need for the public partner to effectively manage its accountabilities in overseeing the concession deed (e.g. to reduce the risk of informal precedent being enacted).

-  Performance management. For the public partner, VfM is sought and obtained from its private partner through consistent delivery of contracted services e.g. delivering services on time and to agreed standards (PF07) and through efficient and effective public sector contract management oversight (PT05). PF09 provides a broader view that embraces the management of PPP assets: "VfM is...about [the] quality of services offered, performance history, service delivery program, operational support, skilled personnel, ongoing maintenance and whole of life programs".

As part of the wider VfM discussion, a number of interviewees spoke about VfM drivers. Some of those relate predominantly to the procurement and delivery phases, whilst others are aimed more at the operational phase. Table 8.11 outlines each of these drivers.

Table 8.11 PPP VfM Drivers Identified by Interview Participants.

Strategic underpinning of partnering not only extends to the parameters, definition and drivers of VfM but also to its measurement. For example, in describing VfM as a long-term proposition, PT13 states, in relative terms, value cannot solely be determined by calculating a dollar spend on a year-by-year basis during the operational phase (although measuring VfM, say over the first five years and then assessing how that period relates to the next 25 years of the concession, may be a better predictor of VfM (PF11)) using both quantitative and qualitative assessments. Over and above analysing the financial benefits quantitatively, using qualitative assessments may provide greater certainty in terms of appraising the quality of relationship between the partners (as it should have become well established at that point) e.g. judging how supportive the private partner may be in interpreting ambiguous service standards. Such assessment may provide useful for public partner decision-making with regard to the potential for improving existing VfM outcomes and / or avoiding costly partnering disputes.