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Thursday, 25th April 2024 |
| Public Private Partnerships, a closed shop or is there room for smaller players? |
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| As the Public Private Partnerships (PPP) market in Ireland continues to mature, Kenny Whitelaw-Jones asks whether this is the time for smaller regional construction firms to take their share of the market. |
The island of Ireland is continuing to observe unprecedented levels of investment in public sector services. This was reinforced in December 2005 by the publication of the 'Investment Strategy for Northern Ireland 2005-2015' where the Secretary of State, Peter Hain MP, announced a potential investment in public services over the next decade of up to €23 billion. It is suggested that up to 20 per cent of this could be through Public Private Partnerships (PPP). In parallel, the Irish budget announced by Minister for Finance, Brian Cowen TD, provided a €43.5 billion capital investment programme for the period 2006 to 2010, of which €5.5 billion of the investment will be provided through PPP.
As the market in PPP projects has continued to develop and mature across the island, a recognisable group of companies have become the key players in the market, building upon project successes and their track record to secure further contract wins. This trend has increased barriers to any new entrants to the market, especially given the significant bidding costs required to secure contract wins in the competitive process through which projects are awarded. This has led to the perception that the PPP market had become something of a closed shop.
During the last year PPP has continued to be a significant element in the mix of public procurement. However, the development of new models for partnership twinned with the continuing high demand for the delivery of schemes in the last year has the potential to open the door for smaller, more localised regional construction companies to play their part in the market and share some of the rewards.
Essentially, there are two potential drivers for this change. The first is demand. The sheer number of projects coming to the market, and the emerging practice for procurers to bundle a number of schemes together means that bidders are becoming increasingly selective as to those projects for which they are willing to bid. The established players are now tending to focus their attentions on the higher value schemes (?100 million plus), leaving authorities seeking bids for smaller scale projects (less than ?50 million) short of interested bidders. Our clients include procurers with projects across the value spectrum. Those with smaller value schemes are marketing their schemes intensively, and yet sometimes still only receive two or three credible expressions of interest. In this situation, procurers naturally become concerned whether they will be able to achieve value for money on their projects due to the reduced level of competition.
However, smaller value schemes are set to continue, since the bundling of projects, especially for smaller procurers, is not always feasible and is often not considered to be desirable if it requires multi-authority bundling. The withdrawal of the 'established players' from this type of project leaves the way open for more participation from smaller construction companies with less PPP experience. We have seen a number of schemes where smaller companies have tentatively expressed an interest in projects, only to withdraw due to lack of confidence in their ability to win. However, given the proper preparations and planning there are attractions for procurers in selecting a local provider for their project, and the increasing standardisation of the procurement process means that bid costs are lower than they once were. The key lessons for the smaller regional companies wishing to establish a presence in this market include:
• Team up with high quality service providers that can fulfil the operational obligations of the project; this is certainly going to include facilities management providers, but could extend to others such as leisure services companies
• Play to your strengths; stress the local nature of your bid, and the advantages that could provide for the procuring organisation. For example, this may be quicker response times in respect of facilities management
• Satisfy the procurer that you have the necessary access to finance, designers, and will build something as good or better than the larger companies
• Obtain good advice, to enable the submission of a high quality bid that meets the requirements of procurers
The second key driver for change within the market is the changing models for partnerships in the public sector. Procurers are now seeking to establish scaleable and flexible partnerships with the private sector with both sides sharing the risks and rewards of the project. One such model is the NHS LIFT model (the objective of which is to improve GP premises) where the public sector (the local Primary Care Trust) will take an equity stake in the special purpose vehicle established to deliver the project, and will expect to receive the same financial returns as the private sector. The nature of these partnerships demand a real commitment to partnering from the bidder, and often this can only be delivered through an understanding of the unique features of the regions population. Often this is best provided through local knowledge and local delivery. A variant of this model looks set to be rolled out across the Northern Ireland Primary Care Estate over the coming years. Market positioning has already commenced and preliminary discussions are currently being had between bid teams.
The developments outlined above provide scope for the entry of new and smaller players to contribute capacity to a constrained market. However, if bid costs remain prohibitive there are other routes that smaller firms may wish to take to get a piece of the action.
Strategic Partnerships such as the LIFT and 'Building Schools for the Future' models place particular emphasis on the quality of the Bidder's supply chain. Partnerships between the larger construction companies and smaller regional companies could reap dividends for both parties here. A partnership on the private sector side of the deal could allow the larger company to stress the local aspects of their bid, whilst the smaller company would have the opportunity to carry out high margin construction and facilities management work on their behalf, whilst gaining access to the bidding expertise within the larger company and the opportunity to invest in the project and benefit from long term equity returns. Strategic partnerships of this type may also help the established bidders to overcome their growing aversion to the lower value PFI schemes. The public sector has a role to play however. Sometimes smaller companies do not express interest because their perception is that the financial standing criteria imposed by the procuring authority will preclude them from the competition. It is incumbent on the public sector to ensure that a thoughtful approach is taken to establishing appropriately scaled criteria.
To date, the market has been dominated by a relatively small number of large companies given the number of contracts awarded. Now may be the time for the smaller, local firms to make their presence felt, and provide the public sector with access to their high quality and customer-focused services. |
Kenny Whitelaw-Jones is an associate director in the infrastructure finance and financial modelling team at RSM Robson Rhodes in Belfast.
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| Article appeared in the March 2007 issue.
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