Feature

Are public-private IT partnerships doomed to fail?

With public sector IT projects increasingly become a testing ground for unproven public-private finance initiatives, there is a real danger of short-term disappointment and long-term loans to service. So how should we manage the risks involved in delivering partnerships that offer real value for money?

Prime Minister Tony Blair and Chancellor Gordon Brown insisted at the Labour Party conference at the beginning of October that Public Finance Initiative (PFI) and Public Private Partnership (PPP) schemes are the way to encourage innovation in public service delivery.

So far, 512 PFI deals have been signed, of which 208 are in local government. PFI schemes in education and health have caused considerable controversy, while PFI IT projects have proved particularly difficult to get right. Many people hope the more flexible PPP approach will prove more successful.

Identify those at risk
"The current IT model for PFI is imperfect," says Charles Pybus, co-ordinator of KPMG's PPP Advisory Services for IT and telecoms. "The transfer of risk may be appropriate for building projects, but is not appropriate for IT projects. We need to get a better way to identify and allocate risk so that more IT suppliers are prepared to tender for these projects. At the moment, no-one wants to play, which leaves the market open to just a few suppliers."

According to Pybus these deficiencies are well known within the Office of Government Commerce (OGC), the Treasury division set up in April 2000 to deal with procurement policy. "We know the OGC has this in hand," he says.

The agency has taken a number of steps to increase the effectiveness of PFI projects. In July, it re-issued its general PFI guidelines and last week it launched its Successful Delivery Skills programme.

This aims to improve civil servants' knowledge of the purchasing process, particularly in relation to PFI and PPPs. It also aims to boost the skills of those managing complex government projects, an area that government watchdogs, such as the National Audit Office, have increasingly criticised.

The problems with PFI cannot all be laid at the door of the public sector, according to James McVicar, account director for home affairs and criminal justice at technology services company SchlumbergerSema.

McVicar's organisation has one PFI contract, the National Strategic Tracing Service that it runs for the Department of Health. "There has been poor management on the private sector side," he comments. "When PFI deals turn out not to be as profitable or as advantageous as a company may have thought, the management team changes and that creates difficulties."

In search of a super model
The classic PFI model is based on drawing up a specification and then going out to tender. This doesn't work particularly well for IT, which depends on client and supplier working far more flexibly on developing projects, says McVicar.

"PFI is a matter of risk transfer at a premium and the difficulty with IT is that the world changes fast and neither side really understands how it will change until they are well into the contract," he says. "It is too easy for PFI to turn into a straitjacket on both sides."

McVicar is convinced that too many public sector managers thought PFI would enable them to move all responsibility and risk for IT projects over to the private sector. "That doesn't work," he says. "You can't treat technology as a black box."

The answer, McVicar says, would be a more equal approach to risk sharing between both sides and he insists that it is entirely feasible under existing Treasury PFI guidelines.

This recognition of the desirability of sharing risk and reward also lies behind the move from classic PFI projects to the more loosely structured PPP schemes.

Whatever the title that governments and critics put on new projects, McVicar says there are examples of IT projects where risk is being shared between private and public sectors, but not under the PFI umbrella.

He points to his own company's PPP contract with the NHS in Scotland, which replaced a former PFI deal. Under the contract, which was extended in December 2001, SchlumbergerSema provides a range of IT services for the Scottish NHS.

"We provided capital up front and amortised it over the life of the contract," explains McVicar. "It's not PFI, but it's not just about being paid for our services. There are shared risks and rewards and there is joint planning each year. It is a close, productive relationship."

Bending the rules
Putting together flexible IT contracts has, of course, proved as problematic for the private sector as it has for the public sector, and new models continually emerge. Earlier this year, for example, BT Cellnet (now O2) signed an innovative 10-year outsourcing deal with IBM that outlines the company's IT strategy only for the next two years and allows the mobile telecoms provider to make monthly changes to the services it requires from IBM.

John Warchus, technology law partner at law firm Shadbolt Law, says the existing government guidelines on IT PFI projects do little to support such flexibility, although he says the guidelines are just that, and are open to negotiation. "Unlike construction contracts, the sheer variety of IT hardware and software projects will ensure that the guidelines are a starting point for commercial negotiations, rather than the final word," he says.

Warchus says a crucial issue is the question of change control once a contract is under way. "IT contractors may need to reconcile themselves to facing pressure to accept provisions that are less favourable than they are used to in traditional IT projects," he says. "It is arguable that the guidelines do not sufficiently protect the contractor."

Kate Mountain, chief executive of the Society of Information Technology Management, the local government IT managers' organisation, acknowledges that some public sector IT managers have had unrealistic expectations of what they can gain from PFI contracts. Mountain is also concerned that some local authorities lack experience in handling large PFI-type contracts, although she says they can hire partners to help in this area.

Paying for IT for years to come
More offputting, says Mountain, are fears within local government about the time it takes to put PFI IT deals together and their cost. "The greatest area of caution is about what the long-term costs could be," she says. "There is not a great deal of evidence about this yet, but there is some concern that the costs after about four or five years are higher than people were expecting.

"Traditional IT contracts tend to run for about three to five years, but these PFI deals are much longer and can be seen as something of a hostage to fortune."

Phil Ruston, director of public sector services at Bull Information Systems, says PFI deals can work, despite the challenges and complexity, but can only do so if people in the public sector have the right skills. One of the problems, he says, is that public sector IT staff have traditionally not been "on the high table".

The Home Office is one government department with experience of the benefits and pitfalls of PFI with its troubled contracts for the Immigration and Nationality Directorate and Passport Agency making headlines. However, the Home Office says its PFI deal with Fujitsu Services. Signed in February 2001, to provide IT and telecoms services has brought real benefits - at a price. It has provided the Home Office with a platform to develop a longer-term IT strategy, but has required extra specialist staff and considerable effort on both sides.

See the world through different eyes
"The complexity of the underlying commercial arrangements, especially financial, has required both sides to retain specialist advisers and this demand will continue as new projects are brought forward," says a Home Office spokesman. "The development of a shared vision for the partnership between the two parties takes time and both must commit to developing an understanding of each other's objective and be sympathetic where these do not necessarily match their own."

Whether this is possible remains to be seen. It is, however, absolutely necessary if the many PFI and PPP contracts already underway are to deliver value for money.

There is a lot at stake. The Government is firmly wedded to increasing the amount of private capital and involvement in the public sector and with billions being spent on e-government, the cost of failure could be very high.

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This was first published in January 2003

 

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