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Partnerships rely on understanding what is needed to succeed, says Lewis Williamson ...
Partnerships rely on understanding what is needed to succeed, says Lewis Williamson

An agony aunt writes: 'Going to bed with a new partner can be exciting and liberating. But doing so without getting to know what your partner wants out of the relationship can lead to uncomfortable situations, especially if performance does not match expectations.'

These words of wisdom could equally apply to local government's sometimes disappointing relationship with private sector partners.

According to the DTLR, one of the biggest benefits of getting private companies involved in areas traditionally reserved for the public sector is that they can take on the major risks involved in the design, building, financing and operation of an asset.

'This makes both overruns and additional costs less likely and means that the local authority does not bear any costs involved,' says the DTLR website.

This seems to makes good sense. But is it really that simple? Not according to Sheila Boyce, chief executive of the Association of Local Authority Risk Managers.

'There is now a great deal of debate about how much risk can actually be transferred,' she says, pointing out that potential partners approach projects with very different sets of expectations and needs.

'Public sector organisations are largely governed by what they have to deliver in terms of statutory obligations, and however much you get private sector involvement in that delivery, the statutory obligation remains with the public sector partner.'

The difficulty of getting the balance right was shown by the breakdown of Croydon LBC's£100m deal with Capita to improve customer services, which fell through after two years of negotiations (LGC, 8 November 2001).

This collapse was sparked by disagreement over the element of risk to be borne by the company. Croydon's leader, Hugh Malyan, blamed Capita's demand to be paid 'irrespective of the quality of service it provides'.

Capita suggested the council had unrealistic expectations. Its executive chairman Rod Aldridge says the firm was asked to agree to over 40 performance targets, many of which were unreasonable, with hefty penalties if they were not met.

Mr Aldridge says the council's 'extreme position' created unnecessary tension throughout the negotiations. 'There was no true recognition of how existing operations would be temporarily affected by such a massive overhaul. Pragmatic compromise and mutual understanding was required but was not forthcoming.'

Mr Aldridge believes councils could go further in establishing true partnerships with the private sector, moving away from the contractual, confrontational approach prevalent under CCT. To achieve this councils need to commit themselves to a new way of working.

This approach is endorsed by Colin Hearn of Zurich Public Private Solutions, who says public private partnerships need to adopt a seamless approach to the management of risk and insurance.

'PPPs have to manage very different types of risk throughout the life of a contract. Where construction and operational risks are managed separately, there is always a danger that grey areas will be missed - and the public services will suffer.'

But this is easier said than done. Ms Boyce believes there are major cultural issues in both the public and private spheres:'I think what public sector has to deliver in statutory terms is quite all-embracing and often the private sector has difficulties getting a handle on that and really understanding the service delivery orientation, rather than just focusing on costs.

'There are two different motives, with the public sector trying to deliver what is best for its community and the private sector being motivated by its bottom line.'

The key is how these objectives - profit and cost-effective delivery - can be brought closer together.

One of the problems in previous projects has been that people have not considered basic issues at the preliminary stage.

'The project gains momentum on its own and if you are not careful there comes a situation where there is a denial of the possible downside because the drive is actually to get this thing in progress,' says Ms Boyce.

According to David Forster, management adviser at Zurich Municipal Management Services, the first challenge any prospective partnership must meet is to set clear objectives agreed by all.

However, Pam Shaw, also a management adviser at Zurich Municipal Management Services, believes this lesson has been learned: 'I don't think there are many authorities now that haven't got good exit strategies.'

According to Ms Boyce, the best approach should ensure all the risks are identified and allocated to the partner best able to manage them.

Another problem is that partnerships are often not legal entities, so it is not always clear which partner is leading and where liabilities lie. Ms Shaw points out that a lot of partnerships are set up as one-off initiatives and rely on individuals to keep the approach working. Problems occur when there is a disagreement.

But things are changing. The public sector perception used to be that projects involved a straightforward transfer away of risk. Councils now better understand the amount of work involved in the identification, allocation and management of risk for both parties.

On the private sector side, many companies previously found themselves putting a lot of time, energy and money into investigating projects which were subsequently abandoned, leading to huge abortive cost issues.

As a sign of this sober new approach, the construction and outsourcing firm Amey recently decided not to recognise the costs associated with bidding for a contract as assets. The company will count these as assets only when there is a high degree of certainty, supported by evidence, that a contract will be obtained.

It remains to be seen whether other outsourcing companies will follow Amey's lead, but the move is indicative of a maturing market and a more responsible attitude to partnerships and risk.

Although some projects are coming unravelled because the partners realise they cannot get what they want from a deal, many PFI and PPP projects are successfully going ahead.

Ms Shaw believes people are beginning to recognise that more protocols are needed about what they can and cannot do in a partnership, although a lot more work is still to be done in this area.

Councils' passion to make beautiful music with new partners remains undiminished, but this desire is now accompanied by a real understanding of the need for both partners to be playing the same tune.

Public Treasurer

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