WASTE–TO–POWER RAISES A FEW ISSUES

A learned exposition about PPPs (public-private partnerships) has winged its way to Bandicoot’s email in-box in the past day or so, which wraps a considerable poundage of meat on to the bare bones of his post, ‘We run a tip: why not a waste–to–power plant?’ (31 October).

The correspondent, experienced in the theory and practice of PPPs and their use as vehicles for project delivery, begins by remarking that I was wrong in stating there was more to it than being “just about the financing”.

This view is common, but is not the main reason to use a PPP. “It actually a third-order issue. The principal reason for a PPP is risk; or more particularly, from the public sector’s perspective, the transfer of risk.”

The “age-old mantra concerning risk” is that ” . . . risk should be allocated/taken by the party best placed to manage the risk”: this remains the key determinant, my Learned Friend (LF) writes.

He goes on: “There is always one risk that neither the public or private sectors can easily identify, manage or price, and that is Political Risk.

“Invariably, when a project is lambasted for ‘costing too much’ or ‘does not represent value-for-money’, it invariably gets down to some action / statement by politicians that ends up altering the risk profile that has been contractually agreed.”

At this point the state ends up taking back risk.

Contract management is the private sector’s “Achilles heel” in calculating the success or otherwise of a PPP project. I could write a book about how badly good transactions were ruined by inept contract management.”

(Another expert of Bandicoot’s acquaintance, a manager of large engineering projects, whispers that tendering firms add a substantial percentage their tender sum to try to ensure they cover their risk on difficult projects.)

The LF expands on this. “The cost of finance is not a risk issue, but more to do with evaluating ‘value for money’. “It is like baking a cake using only one ingredient – flour. It just will not work.” Bandicoot finds the cake example has glued his tongue to the roof of his mouth.

At this point the explanation becomes esoteric. Bandicoot gave as an example a British National Health Service PPP-style contract which was paid out when the hospital involved found it could do so and save a very large sum of money. This was intended to mean that many such contracts were a gold mine for the private-sector contractors.

Bandicoot’s LF queries this closely, pointing to factors that might not have been taken into account by the contracting hospital, particularly risks it might not have included in its buy-back calculations. ” If structured correctly, the true cost of a PPP project should be easy to establish and therefore becomes more transparent,” he states.

More technical project procedure follows regarding financing of a PPP, including the profit to which the private operator is entitled under the contract. Then comes even more technical details of how a government, from federal to local, produces a financial model, the Public Sector Comparator, which covers every aspect of the project to be built.

At this point, Bandicoot can sense that readers are pausing, sighing and wondering if they will continue reading this dry and dusty stuff. But battle on, dear readers – persuade yourselves you are indeed on a learning curve. There might be an epiphany ahead! Think of it this way: politicians don’t really want you to know this sort of stuff. They prefer you to be ignorant.

When finished, government department’s Comparator should equate to the true cost of undertaking the project – including a cost of capital and internal rate of return inputs, taxes &c that the private sector incurs but which would not necessarily apply to the government. This is referred to as “competitive neutrality”, and ensures a ‘like-for-like’ value-for-money comparison.

As well as this, detailed risk figures are prepared that indicate who carries which risks. Sometimes risks are shared.

The government, armed with its Comparator and risk matrix, sits down with project tenderers and provides them with its calculations – with all money amounts removed. The government merely stipulates its desired outcomes, including standards to be met in, say, a hospital. It does not tell tenderers how to deliver the asset or the outcomes.

To win, a PPP tender must be lower than the cost the government has modelled. This occurs where the tender is innovative in building the asset and/or delivering services more cheaply than the government usually does.

End of theory. Now, for the practice.

Most executives hate PPPs because they take from them control and autonomy over projects. Considering many senior government executives like being in control (Bandicoot will leave you to substitute any common expression that springs to mind) they can stridently oppose outsourcing.

How do they deal with outsourcing and thus losing control? They adjust (Bandicoot will leave you to substitute any common expression that springs to mind) the Comparator and risk figures &c in the hope that PPP tenderers aren’t low enough to win. Then they can proceed, having retained control of the project.

However, Treasury are alert to this. They do some figure-fiddling of their own to tweak the department’s figure upwards, along with other money magic. Presto! The department loses the ppp to the best tender.

An example of this departmental tactic that apparently dodged past Treasury involved a PPP for a regional hospital that was tendered on figures that meant the contract was doomed to fail. It did. The government had to buy back the contract.

But another hospital contract has gone well. The local health network was right behind the concept, the bureaucrats got shut out and the PPP operator is making everyone including patients happy – happier than those in department-operated facilities in neighbouring districts.

Now, to the suggested model Bandicoot published.

The Learned Friend asks: is running a waste-to-power facility councils’ core business? No.

Could six or so councils form a joint venture to do so? Writes the LF: “The idea that six or so councils could form a joint venture and develop their own waste-to-power facility caused me sleepless nights.”

Councils can collect waste and dispose of it. But generating electricity and selling it to the grid are not core council business, he says.

A number of possible obstacles are then set out – size of the waste-to-power facility; consistent supply of fuel; getting the necessary price for the electricity generated; general financial and political performance of council group; outside political factors. Etcetera.

Bandicoot feels a sleepless night coming on.

The LF concludes: “Almost certainly, a PPP would work here as the private sector would form a consortium with the right skills and resources to understand, accept and manage the risks.

“I would expect a consortium comprising a waste collector, an electricity generator / wholesaler and a facilities manager would be a good mix.” The state government would also need to have a role in all of this, he says, to monitor that the council group “and, potentially, the state, obtains a value-for-money outcome under an appropriate and acceptable risk profile”.

Bandicoot remains bravely optimistic in the face of this torrent of additional factors. Should we throw in the towel, or look to find solutions to the technical and human considerations now on the table?

It needs further deep examination, methinks. It fits the old US Deep South adage: “When you are up to your (substitute any appropriate expression that springs to mind) in alligators it’s difficult to remember that your initial objective was to drain the swamp.”

Thank you for staying to the bitter end!

■ See http://www.monbiot.com/2017/10/30/rooting-out-democracy/ for more on the UK’s version of PPPs, known there as Private Finance Initiatives, or PFIs.