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Strong bonds

20 April 2015

Strong bonds - read more

Good governance is essential in public-private partnerships

Recent months have seen a series of stories about public-private partnerships collapsing or running into severe difficulties. Circle Holdings, a private healthcare operator, pulled out of its contract to run Hinchingbrooke Hospital; the private consortium Nuclear Management Partners lost a £9 billion contract to clean up the nuclear waste site at Sellafield; and concerns persist about the long-term costs of assets funded via the Private Finance Initiative. The arena of public-private partnerships is a fraught one, with major scandals frequently coming to light and the media eager to cast a spotlight on failures.That said, in the current age of austerity, with public bodies looking for innovative ways to reduce costs and improve public services, such partnerships can be fruitful and are increasingly seen as a favoured option.

In November 2013 the National Audit Office (NAO), in its memorandum ‘The role of major contractors in the delivery of public services’, estimated that ‘contracting out accounts for around half of the £187 billion that the public sector spends on goods and services each year.’ Yet it also noted concerns about whether all contractors know what is going on in their business, if they are behaving appropriately and how well the government manages contracts. It drew attention to a lack of transparency over contractors’ costs and profits, stating that the government needs a better understanding of what is a fair return for good performance. A further concern was that the government could become overdependent upon its major providers, with some being ‘too big to fail’. It has long been recognised that failures in major contracts are just as likely to be caused by poor contract management as by poor contact delivery.

Cultural differences

The NAO was commenting on central government partnerships, but similar concerns apply in local government. Grant Thornton has been monitoring the development of alternative delivery models (ADMs), of which partnerships with the private sector are a major element. The variety and number of ADMs being developed shows how much innovation there is in the local government sector.

One significant pitfall of public-private agreements, however, relates to structural and cultural differences: private companies aim to maximise shareholder returns and minimise risk to shareholder capital; the public sector seeks to minimise financial risk to the public purse, which may not always be consistent with its private sector partners’ objectives. There are also numerous examples of local-government owned companies that have moved into deficit, resulting in the taxpayer picking up the costs.

In the NHS, cultural differences with the private sector can be particularly acute. Grant Thornton’s 2014 NHS Governance Review, ‘Staying in the saddle’, ran a survey of leaders within clinical commissioning groups. It asked them which partners they found the easiest and most difficult to work with. Only 1% cited the private sector as the easiest, compared to 23% who said it was most difficult – although this was better than the 30% who found local government to be problematic partners.

Risk assessment

Given these issues, there is a clear need for proper due diligence and thorough planning before public sector bodies embark on such projects. They need to support any decision to change the way services are delivered or to use a new delivery model with a thorough options appraisal and business case. Public bodies need to establish reporting, accountability and control mechanisms at the start of any new project so they are aware of the risk profile of each partnership, and the actions being taken to mitigate them. Time and money need to be invested to make sure the taxpayer gets the best value for money.

Despite the risks, it is rare that all of the options are fully considered and a thorough business case produced. Where business cases are produced these can be weak, particularly with regard to the service risk and financial risk assessments. This is typically due to time and resource pressures, and the need to make savings and changes quickly. Reporting, accountability and control arrangements can often be poor, with a limited understanding of the risks involved. The following difficulties frequently arise:

  • On implementation – if the expected benefits and routes to achieving them have not been well understood, the delivery of the benefits is almost impossible. The credibility of the partnership is also quickly challenged as it is impossible to meet the varying expectations of stakeholders, or capture sufficient evidence to demonstrate progress.
  • On delivery and monitoring – a lack of clear outcomes results in a focus on project inputs and a lack of clarity over responsibilities and expected service practices. From a contract management viewpoint, it is not possible to drive out the quality of service or efficiency.
  • On reporting, control and accountability – a lack of appropriate mechanisms often results in insufficient understanding of the contracts and associated risks. The cost of poor decision making can often rest with the public sector.

The risks should not stop government bodies from innovating. There is little option for central and local government and the NHS other than to adjust to the new environment. The risks should be well managed, but only if they are thought through properly and appropriate structures are set up.

Grant Thornton’s 2015 local government governance review, ‘All aboard?’, reported on a survey of senior council officers and members on governance in their partnerships. Although almost 90% said that their organisation is open to all available options for service delivery, more than half of respondents said that scrutiny of service quality, including outsourced services, is not sufficiently proactive. This highlights an important gap in governance – once public sector bodies hand over the running of key services to an external provider, accountability for performance can be less direct and become lost in a fog of contract clauses and disputes. Oversight bodies, such as the Public Accounts Committee and scrutiny and overview committees in local councils, have the potential to play a vital role here. They can cut across parochial concerns and offer a fresh perspective through a long-term view of strategic issues and ‘deep dives’ into the way partnerships operate. For this they need more power to ‘follow the public pound.’ However, scrutiny at local level at least, appears to be in the doldrums; over 40% of survey respondents thought that scrutiny committees were not effective at challenging the way authorities act, and that scrutiny of service quality – including outsourced areas – is not sufficiently challenging.

Managing risks

Another key problem is how to manage risks in a complex arrangement. Failures are frequently the result of the crystallisation of risks that have either been ignored or poorly managed. It is vital to establish a common understanding between all parties of the partnership on the risks they face and how these will be managed. All responsibilities should be clearly set out, assigned and accepted, both individually and collectively. It should also be clear which party carries the lead responsibility for which key risk and this should be incorporated into contracts. A joint risk register should be kept and regularly reviewed at joint risk meetings. There should be an agreed process for the day-to-day management of risks.

To govern partnerships effectively public sector bodies therefore need to be satisfied that risk management is robust and all parties involved are fully engaged in it – a meaningless paper exercise can give the impression of control, but avoids addressing the real issues. They need to be confident that the arrangements would identify a potential service failure before it happens, with clear plans about what action should be taken if partnerships show signs of failing. The financial consequences of the failure to manage the key risks of the partnership should be fully understood, along with clarity on who will bear these costs. Senior members of the organisation should ask themselves if they truly understand the financial and performance reporting and are satisfied with its quality.

Grant Thornton’s recent research suggests that there is some way to go to achieve good risk management in public-private and other partnerships. Responses from leading council figures in the local government governance review of 2014, ‘Working in tandem’, shows that almost a third thought the parties to ADMs did not share the same understanding of risk. Over half said that joint risk registers were not in place and joint risk meetings were not happening. A quarter of respondents also doubted whether councillors and officers were clear about their responsibilities in such agreements.

Getting the governance of public-private sector partnerships right is challenging, but is manageable – and indeed obligatory where the stewardship of public money is concerned.

Paul Dossett is Head of Local Government at Grant Thornton UK LLP

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