How PPPs Can Help Improve Cultural Bias

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Wednesday, February 24th, 2016
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A common criticism from companies that contract with government on a regular basis is that there is a cultural bias for the government department to allocate risk away.

This bias indicates to companies that the relationship is not a partnership where risks are fairly shared and return is reasonable.

In recent years, there have been attempts to deal with this cultural bias, but much more can be done. The end goal should be a partnership that acknowledges and deals appropriately with risks and the needs of both parties to the transaction.

When structuring a Public Private Partnership (PPP), the issues of bringing together two very different business cultures is often ignored.

Much has been said and written about how to develop efficient contracts, but much less attention has been paid on how to bring together two or more disparate groups.

The public sector has two key tasks: to deliver optimal outcomes and to do so within a probity framework that is open, fair and reasonable. Similarly, the private sector also wants to deliver outcomes but companies have a need to provide a good return to their investors.

Both parties have the same goal regarding outcomes, but there is potential for conflict around probity and profit. The key to a successful partnership is that outcomes must be the focus but probity and profit must not be ignored.

The public sector needs to understand that probity is not a code for forcing profit down. Probity is about ensuring the return for an investment is acceptable for all parties, including external stakeholders. Too often, probity is being used to protect the public sector from certain risks and sacrificing better outcomes.

Supplementary to the discussion of the cultural differences between public and private sector is the impact of their advisors.

Too often, lawyers in these transactions see the negotiation as a battle to be fought between the opposing counsels. In this environment, the opportunity for a consensual outcome becomes limited.

When you combine the cultural bias of distrust of the private sector with legal advisors briefed by government to minimise risk, there is a likely outcome of an ‘us’ and ‘them’ view regarding the contract.

This only adds to the lack of trust between the private and public parties. The advisors should be looking at creating a positive partnership that can continue once their involvement ends, rather than winning the battle.

In traditional projects, the private sector has risks limited to the design and construction of the asset to be provided to the government. The finance and operational risks remain with the public sector.

In PPP projects, there must be value for money and the government decides on a value for money basis what the optimal risk distribution is. These risks need to be analysed and managed on a project by project basis.

However, the spirit of partnerships dies immediately when ‘us’ and ‘them’ starts. As a result, private companies are taking on too much risk, which results in additional costs, project delays and services which then do not deliver value for money.

As we face the next decade, the cultural shift to partnerships rather than fixed risk allocation contracts will happen. I have no doubt that this shift will occur, as has been proven by every infrastructure crisis since federation.

A perfect example is the drought projects for water supply between 2006 and 2010 across Queensland, NSW and Victoria. Within a very short period of time and across an ever-expanding scope, massive projects were delivered against a tight timeframe. When time and quality are the drivers, risk sharing becomes paramount to the delivery of these essential services. The common criticism of the cost paid because of inaction has unfairly labelled risk sharing as being expensive.

PPPs need to look at the relationships with a renewed spirit of partnership, with risk allocated on a project-by-project basis. This should start with better governance from the onset of a PPP, and advisors can do their part to assist the different cultures to come together in a positive way.

With the cultural bias shifted, the PPP can focus on delivering the best outcome for the partnership and the community.

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