Time for change
Over recent years, the idea that the public sector has become much better at extracting maximum value when procuring infrastructure has become pervasive.
In mature markets such as the UK and Canada, the feeling has built up in many quarters that there are now public sector authorities with sufficient knowledge and experience to drive not only a hard bargain, but the best bargain for the taxpayer.
Unfortunately, evidence emerging over recent months suggests such a hope may have been misplaced.
There is no doubt that in bodies such as the Infrastructure and Projects Authority (IPA) within the UK Treasury, or a body like Infrastructure Ontario in Canada, there are now some very good brains that have both experience of the private sector and are capable of negotiating with the private sector to deliver better value for the taxpayer.
However, the big problem here is not the level of skills now within public agencies. Rather, it is the rigid procurement processes put in place that make it difficult for them to accept anything other than the lowest bid on a deal.
This of course largely blew up in the wake of Carillion’s collapse, when much was made of the government’s willingness to accept Carillion bids on projects such as the Midland Metropolitan Hospital PF2 scheme even after all others had pulled out on the basis that it was impossible to make the figures stack up.
And while there may be a certain element of 20:20 vision in hindsight when viewing the Carillion mess, it is not the only example where the lowest bid has forced the public sector’s hand.
A recent hearing of the Commons transport committee in the UK found that Department for Transport officials thought that the bid for the now defunct East Coast franchise deal was “ambitious” when they received it. However, despite the bid clearly raising eyebrows at the time, the bid was accepted. Earlier this year, the franchise was ended early because of the private partner was losing significant sums on the deal.
And one former public official has told me of a time when concerns were raised over a bid for a privately funded project, only for the answer to come back that a failure to accept the lowest bid – with no safety net in the event that the bid proved to be too low – would not be looked upon favourably by the spending watchdog.
It is in this backdrop, then, that large investors are either raising concerns about the ability to make money in the market, or simply getting out completely. Competition was introduced into infrastructure to drive up standards and improve the quality of procurement, but the focus on price – almost to the exclusion of all else – has led to a race to the bottom.
That race is both unsustainable from the private sector side – as cases like Carillion and Jarvis before it have shown – but is also unhelpful to the public sector, as it finds that corners are cut in order for the private sector to make any sort of returns.
It is not just in the UK that such problems have emerged, with some disquiet in places like Ontario over the way in which the private sector is being pushed to the limits on cost, while opportunities for innovation are squeezed to the edges of what a procurement exercise is about.
This is clearly not a good position for the private finance market to be in. For so long, critics have attacked it for being too costly, so it is understandably tricky for the industry to argue that contracts need to be bigger, rather than smaller.
It therefore needs some mature government responses and an ability by politicians to explain that getting the best out of a contract with a private partner is not the same thing as getting the cheapest price. For years the UK industry has been lumbered with the apocryphal ‘£150 to change a lightbulb’ complaint, and sadly politicians at present simply don’t want to get into that debate.
Nonetheless, the fallout from Carillion has sparked some consideration in both government and among MPs over the need to change the way the public sector conducts its procurements. The hope is that at some point a more mature approach, focused more on outcomes than simple price, will emerge.