Everyone is feeling the pinch of the credit crunch. Public services are set to see their budgets cut, at a time when many are seeing demand rise as a direct consequence of the economic crisis. The private sector has also been affected: access to investment has become a major concern for many enterprises, and that has led to worries that some forms of public-private partnership (PPP) – such as the Private Finance Initiative (PFI) – could flounder in the new climate.

These issues were under discussion at a recent round table discussion held (before the Pre-Budget Report) by Civil Service World and outsourcing company Capita. Asked about the recession’s implications for existing forms of PPP, Capita’s market director Patrick Smith summed up the view of many in the private sector: the PFI market, he said, is now “a very tough environment”. Such arrangements will be less popular in the future. “We anticipate that there could well be more service contract arrangements and less asset creation [PFIs],” said Smith.

However, even relatively straightforward outsourcing contracts are feeling the strain of the economic climate, argued Oliver Morley, director of customer business development for the National Archives. “Although you may argue there is a shift away from PFI, I think almost all partnerships are going to be subject to much more intense scrutiny around return on investments, and service contracts particularly look quite scary if significant investment is needed,” he said.

Meanwhile, the private sector will be “shifting as much risk as they possibly can on to the public sector”, Morley argued. Smith agreed, but took issue with the wording: “It is not about shifting all the risk; it is about allocating risk appropriately and having a mature discussion with clients. It comes to a point where bidders will just say: ‘Sorry, we’re not in this; you’re pushing the private sector too hard’.”

Payment by results (PBR) might also now be an unattractive prospect in some fields, said Morley, raising concerns that the unpredictable economy will make contracts too risky to attract bidders: “If I was in the private sector, I wouldn’t touch it with a barge pole.” However, Chu Ofili from the Home Office’s commercial directorate warned the table not to dismiss PBR out of hand: “It will work better in some circumstances than others. It is a way of ensuring that people [in the private sector] are putting their money where their mouth is. It will ensure that the supplier will think carefully before putting forward their tender; they won’t promise what they can’t deliver,” he argued.

In general, future contracts will have to be even more clear about what is expected of the contractor, and how success is measured. “We don’t do vagueness,” said Smith. Companies taking on a contract need to know not only what they are expected to do with a contract – be it cut costs or improve the service – but also the baseline from which they’re working. “We can take a risk on driving up efficiency as long as we’re very comfortable that we understand the prevailing level,” he explained. To agree to increase efficiency without knowing the baseline is “not responsible”, he warned.

Calculating the unknowable
Carolyn Heaney, director of the third sector partnership programme at the Department of Health, warned that a focus on simply “finding efficiency and cost reductions” is too simplistic an approach. “We’re not going to get very far at all towards maximising the value we get from the public sector pound if we only think in terms of an individual service or contract,” she argued. Cross-government working, such as the Total Place pilots for rethinking the way services work in a single area, are the way forward, she said.

However, asked whether the renewed focus on better coordination of local services might affect relationships between contractors and the government, participants raised the concern that there’s no sensible way of measuring the wider benefits reaped by such activity. And without an agreed metric examining, say, the social and economic benefits of community health initiatives, contractors cannot be incentivised to ensure that their services yield results for other public agencies. Permanent secretaries can decide to write off spending, in the knowledge that another department is reaping the benefits. For a contractor, though, unmeasured public benefits represent an inefficiency.

Dr Su Maddock, head of the Whitehall Innovation Hub – part of the National School of Government – is involved in research into the measurement of wider public benefits and the allocation of credit to responsible agencies, and she explained that there is work going on by the Treasury to solve this conundrum. But until there is real change on this front, she said, the system “is sort of stifling lots of things from taking off, because you have got to be extra-committed to go beyond what you’re normally assessed for.”

Heaney was not sure that this has to be such a problem: such uncertainty and experimentation are inevitable in government, she argued. “You never really know how things are going to pan out until you start doing it,” she said. Ofili also thought that the lack of metrics “should not stop us experimenting”.

Morley was sceptical: will ministers be as happy to risk taxpayers’ money on unproven approaches? In such cases, “your evidence on outcomes is less solid than the evidence on costs”, he argued; and in the future, “that is precisely what ministers will object to: that kind of experimentation and innovation, because it is something that is expensive”. Smith, as the token representative of the private sector, was in whole-hearted agreement: “Never a truer word said”.

Morley was sceptical that place-based innovations such as the Total Place experiment, which look to eliminate overlaps between different services, can provide financial savings; there is more evidence of them providing better services, he argued. Organisations might be better off concentrating on bringing their own internal costs down, and then moving on to look for cross-service synergies, he said. “Can private partnerships work for these kind of synergies,” he asked, “or is it something where you focus on the services in your department and deliver [via the private sector] on those?”

Making innovative contracts
That might be one answer: leave the experimental approaches to the public sector (if ministers can be persuaded to take a risk), and get the private sector to provide straightforward back office services in a contract that has a clear baseline and clear deliverables. But, warned Ofili, even then the equation is not that cut and dried. Back office functions must support front office functions, and if those front office functions are innovating with new ways of working or changing in response to mergers and cuts, then the back office needs the flexibility to change with it.

“There comes the challenge,” he explained. “When you’re commissioning back office functions in that context, you are basically commissioning the unknowable, because you don’t know where you’re going to end up.” On the one hand, the public sector needs a contract that is flexible enough to accommodate future changes; on the other, the private sector needs some certainty.

Smith said this is the kind of problem that “exercises lawyers’ minds, and ours and our customers”. He agreed that joint ventures are a good answer and are likely to become more common; they can already be seen in the form of Local Education Partnerships (LEPs) and the Lift programme in the Health Service, he said (see box). At the moment it is local authorities embracing such ventures rather than central government, he added. The advantage of joint ventures, Smith explained, is that “you’re all in it together”. They can, Ofili added, offer transparency about decision-making and the cost of changes to operating methods.

While many thought it unlikely that there will be many more PFI deals – which require the private sector to raise loan finance – it is not entirely clear what form of PPP will replace them. However, many around the table saw joint ventures and straightforward service agreements as likely alternatives.

Public service commissioners face the need to be experimental in order to find ways of providing equivalent or improved services, but their budgets are falling and offer little room for maneouvre; meanwhile, private sector suppliers are struggling to access loan finance and cautious over investing when asset values and the economic outlook are so uncertain.

It does not appear that the public and private sector have managed to reconcile these parallel difficulties. In the short term, at least, use of the private sector may be limited to more established functions, while it’s left to the public sector to experiment with new ways of delivering services. After all, if an innovative approach works out, contractors can always look for a contractor who thinks they can do it better.

Life partners: a one-minute guide to types of partnership

Private finance initiative (PFI)
Usually used for infrastructure projects, PFI comes in a number of different forms but is essentially a way for the public sector to slowly pay the supplier the cost of the building or new service over a number of years. In the Health Service there are LIFT companies; schools have Local Education Partnerships (LEPs). Early problems with the scheme included criticisms that the contracts allowed excessive private profits or were too inflexible – particularly about post-construction maintenance – and did not allow facilities staff to do basic work. There has also been criticism of the way that PFI was used to keep borrowing off the Treasury’s balance sheet, although the National Audit Office recently approved the practice.

Service delivery contracts
These are more straightforward partnerships whereby a contractor agrees to carry out a public service. For years, contractors have been chosen on the basis of their record and paid to do a set amount of work – as in Jobcentre Plus’s New Deal delivery contracts. More recently, a Payment By Results (PBR) approach has won more backers; Jobcentre Plus’s new set of contracts, the Flexible New Deal, reward companies by their results rather than their activity.

Asset-backed vehicles
These partnerships are usually involved with physical regeneration, such as housing companies. Most see a public body, such as British Waterways, put land into a partnership, while the private sector partner provides the capital to develop the land before it is brought to market. British Waterways set up its Isis joint venture in this way.

Participants

Elliot Brinkworth
Assistant head of programmes, Streamlining Programme Team, Ministry of Defence

Paul Butler
Policy and research director, Driving Standards Agency

John Garrity
Head of Central Private Finance Unit, Communities and Local Government department

Carolyn Heaney
Deputy director, Third Sector Programme, Reducing Health Inequalities Partnerships, Policy and Strategy Directorate, Department of Health

Dr Su Maddock
Director, The Whitehall Innovation Hub

Oliver Morley
Director, customer business development,The National Archives

Chu Ofili
Commercial Directorate, Home Office

Kamala Sekar
Head of PPP promotion, UK Trade & Investments

Patrick Smith
Market Director, Capita