This month the Royal Institution of Chartered Surveyors (RICS) published a research paper, The Future of Private Finance Initiatives and Public Private Partnerships, known as PFI and PPP.
This method of public sector procurement of major infrastructure and development work has been much maligned. At it simplest, it is the transfer of risk of capital investment from the public sector to the private sector.
The private sector invests the capital to provide a road or buildings and the public sector pay an accommodation charge. The public sector does not pay the capital cost, but an annual amount for the provision of the infrastructure and its operational costs.
The private sector receives an accommodation charge that repays the cost of the use of capital in building the asset and its long-term management.
What are our local examples? The maintenance of the A69, a road I travel daily, and which for the last few years has been maintained well enough without any problems that I can recall. The other is the provision of the office accommodation for the then Department of Social Security (DSS), now Her Majesty's Revenue and Customs at Longbenton and Washington. This is about 1.6 million square feet of office space. It is a project that I was involved in from the outset and helped to deliver.
PPP is simply a method of procurement. The key question is: Can the private sector build and maintain the project at less cost than the public sector? If so, then it is viable, if not, the public sector should deliver the project.
How is it viable for the private sector to deliver value for money better than the public sector when the public sector can borrow money at a lower rate of interest than the private sector?
The old model of public sector procurement looked at building projects, roads or buildings, at the lowest cost. This did not necessarily look at the performance of 'materials I use'; that means, the low capital cost of provision may incur a high annual maintenance cost.
It also meant that in times of austerity, the maintenance of the road or building would be reactive and sometimes little cost would be incurred, thus building up a huge liability at a future date. Examples of this are all around, in terms of under-maintained schools and other public buildings.
In contrast, the PPP requires the private sector to be innovative. Whilst the choice of materials in use may add to the initial capital cost, in general those materials perform better over time and require less maintenance, which is carried out on a preventative basis.
In the UK the use of PPP has been ridiculed, yet it has transferred 'risk' from the public to the private sector.
In essence, PPP is a long-term partnership. The question is whether the public sector is ready to change culture and partner with the private sector? Is there trust and confidence to do so? Last week, I challenged the public sector to establish a partnership with the private sector to form a group to market the region, I wonder if this will happen?
:: Kevan Carrick is a partner at JK Property Consultants LLP, the policy spokesman for RICS North East, and member of both G9 and the NE LEP Investment Fund Panel