Partnering, PPP, PFI in construction Free Essay Example

The following report gives a brief description of Partnering, P.P.P. & P.F.I. and sets out the advantages and disadvantages they each offer and how successful these approaches have been.

During the 1990s the Latham and Egan reports, “Building the Team” and “Rethinking Construction” identified the inefficiency inherent in an adversarial Construction Industry. In particular “Rethinking construction” set a challenge for change and improvement.

Clients, designers and contractors have taken up the gauntlet and developed different types of business relationships.

Notable among these is ‘partnering’. Under this type of arrangement parties to a contract work towards agreed goals which will benefit all concerned. There is overwhelming evidence that the traditional approach to construction procurement fails to satisfy clients and does not generate the efficiency improvements delivered in most other industries.

This has a negative effect on the international competitiveness of the UK and uses resources that could be better utilized elsewhere in the economy, so the need for change and more options from the traditional construction procurement is a step in the right direction.

Partnering

Partnering is about better working relationships with contractors and suppliers

to deliver better outcomes for all concerned. It requires genuine commitment from all levels of all the organisations involved, including the client, and a clear understanding by all parties of what is expected.

Partnering usually takes two forms;

* Project partnering; involves the main contractor and the client organisation working together on a single project usually after the contract for the project has

been awarded.

* Strategic partnering involves the main contractor and the client organisation working together on a series of construction projects to promote continuous

improvement.

Partnering in practice.

Initially, the awarding authority pre selects firms of known capacity, interviews

contenders and chooses a partnering contractor. It then calls upon the resources or value propositions proposed from time to time as the need arises.

The success of single project partnering will largely depend upon how the arrangements are made. The usual purpose of the ‘partnering’ element is to secure a level of mutuality in the team’s relationship and to influence how the project members communicate and manage the project.

Advantages

Partnering can promote better value for money by encouraging clients and contractors to work together to:

* improve building design so that the completed building is more efficient to run;

* minimise the need for costly design changes.

* identify ways of driving out waste and inefficiency in the construction process;

* incentivise contractors to deliver tangible improvements in costs, time taken to complete a building and the quality of the construction;

* replicate good practice from earlier projects;

* minimise the risk of disputes resulting in costly and lengthy litigation by avoiding an adversarial relationship between client and contractors; and

* integrate the Supply Chain.

Independent research has found that strategic partnering has delivered savings of up to

30 per cent in the cost of constructing buildings and project specific partnering savings of between 2 to 10 per cent.

Disadvantages

Stale Ideas – as the company grows and the employees are doing the same type of work over and over again there can be a lack of stimulation between the employees of the company.

The Cost Of Consultants – as you have read the partnering processes main objective is to produce solutions and alternative solutions if needed. As a result to these solutions it will provide the company with greater workload, which will mean higher fees for the clients.

Loss Of Confidentiality – as with everything there can be loss of this within any company. The only way to prevent is to put in proper safeguards so it won’t happen. But this can happen and this is why it is notified.

Published article;

In our experience, partnering marks a shift away from competitive tendering to an emphasis on quality: employers need to have the means of assessing whether they are receiving best value of money. Clients also need to ensure that contractual documentation is comprehensive and consistent and that there is no divergence between the partnering arrangement and the Works contract. (‘Constructive comment’, Number 12, Partnering, Jan 2004,)

Various publishers of standard forms have dealt with partnering in different

ways:

* JCT has published a partnering supplement. Where this is used in

conjunction with the JCT standard form of Building Contract, consideration

should be given to whether the supplement will in fact change parties

behaviour.

* GC/Works suite. No form of partnering agreement or supplement is

understood to be available.

* PPC2000. This is an integrated construction and partnering contract

published by ACA. It is the first of its kind available and requires joint

decision-making and each key project contributor to sign the

agreement or part thereto. A potential difficulty with the form is that

liability for decisions or difficulties arising may be difficult to isolate.

All are based on similar principles, but the JCT charter is non-binding whereas

the other contracts are binding.

Public Private Partnerships

Public Private Partnerships, particularly Private Finance Initiative (PFI) projects, are created for the provision of services and not specifically for the exclusive provision of capital assets such as buildings. For this reason it is preferable to investigate Public Private Partnerships as soon as possible after a user need has been identified rather than leaving it until a conventional construction project has been selected as the solution.

The period over which the service is provided is usually between 10 and 30 years.

An example would be where a contractor agreed to design, construct and maintain a leisure centre (or collection of centres) for a term of 25 years.

The UK Government develops PPPs with three broad objectives in mind, namely:

* To deliver significantly improved public services, by contributing to increases in the quality and quantity of investment

* To release the full potential of public sector assets to provide value for the tax payer and wider benefits for the economy

* To allow stakeholders such as the users of the service, tax payers and employees to receive a fair share of the benefits of the PPP

Private Finance Initiative

The PFI is the most successful and prolific form of PPP to date, and is used to deliver services where it will provide better value for money compared to traditional public sector investment.

PFI allows the public sector to contract with the private sector to provide quality services on a long-term basis, typically 25-30 years, so as to take advantage of private sector management skills incentives by having private finance at risk.

In practise, the contractor offers to provide a service, which is to make available the certain specified facilities, for a term, so that the configuration of the buildings and their specification is largely a matter for the contractor. It is possible that a Public Private Partnership may result in a solution (provision of services to meet the user need) that does not require a construction project at all.

The typical PFI project involves a complex collection of agreements, including a principal agreement, (between authority and contractor), construction contract (between contractor and subcontractors), Facilities Management agreement (for maintenance of the completed facilities) together with loan agreements with banks and a range of collateral agreements and warranties. In view of the long-term commitment involved, many, if not all of the agreements, will be drafted on a bespoke basis involving many months of

negotiation involving contractors, bankers, lawyers, insurers, operators and their respective advisors.

The National Audit Office published a report on 5th February 2003 “PFI: Construction Performance” which detailed that 78% of PPP/PFI projects are delivered within budget and 76% are delivered on time, compared with 27% and 30% respectively for traditionally procured public building projects during a previous Government survey in 1999.

Findings of HM Treasury research into completed major capital PFI projects dated July 2003 include:

* PFI projects are being delivered on time and on budget, with 88% of completed projects coming in on time or early, and with no cost overruns on construction borne by the public sector. Previous research has shown that 70% of non-PFI projects were delivered late and 73% ran over budget.

* Operational performance of PFI has been met with approval from public sector clients. Over 75% of clients report PFI project performance to date as expected or better.

P.F.I. & P.P.P. in practice

Key Facts: source- (Balfour Beatty P.P.P. & P.F.I. website);

* PFI launched in November 1992 and revitalised as part of PPP in 1997

* PPP/PFI investments currently represent circa 10-15% of total annual investment in UK public services

* As at December 2004, over 750 PPP/PFI projects with a combined value of �62 billion have reached financial close.

* As at July 2003, 451 PFI projects were completed and in operation

* HM Treasury research in July 2003 of 61 PFI projects found:

o 88% of projects were delivered on time or early

o all projects in the sample were delivered within public sector budget

Advantages

There is a range of benefits to be derived through securing use of facilities

under a PPP/PFI arrangement.

* The entire construction risk is with the contractor. In the event of a cost

or time overrun, this will (depending upon the terms of the principal

agreement) be the contractor’s responsibility.

* The contractor has an incentive to design a facility that will have a low

operating cost, or to provide an incentive to provide the lowest

operational cost over the long term. This may result in delivery of a

higher specification facility that might otherwise have been expected,

particular where there are limitations on capital spend under traditional

procurement routes.

* The authority may make significant savings in operation costs, where

part of its existing workforce is transferred to the contractor.

* It may be economic for groups of similar facilities, (such as schools or

games facilities) spread across many sites to be procured or managed

under a PPP model.

As stated on Laing O’Rourke website 2006 “Through initiatives like Private Finance Initiative (PFI) and Design Build Finance and Operate schemes (DBFO), the public sector can avoid the risks of investing in assets and the provision of routine services, whilst still maintaining control of the services offered to the public.

The advantages of this procurement route include the certainty of long-term costs, appropriate risk sharing, paying for services at the time of delivery, defined performance targets throughout asset life, greater availability to plan through Government spending cycle, tight cost and services level control”.( http://www.laingorourke.com strength/construction/ppp&pfi)

Disadvantages

Authorities should be aware that use of PFI is probably uneconomic where the

capital construction costs is below �5m. Typical issues for authorities on

smaller projects are likely to be:

* The long lead-time for completion of a PPP package compared to

capital project work. It will normally take many months to negotiate a

completed contract with a contractor.

* Potentially complex drafting is required in order to incorporate

specifications both for the facility and its maintenance, revenue and

payment arrangements and compatibility of construction contract,

facilities management agreement, Project Agreement and credit

agreements.

* As PPP packages typically incorporate management of the facility,

surveys of existing facilities and their use and staff transfer proposals

will require consideration.

Authorities considering use of PPP will need to secure advice at an early

stage from a construction consulting firm experienced in acting as technical

advisor in this specialist sector.

Here are just a couple of examples of many, successful Partnering P.P.P.& P.F.I. projects.

Laing O’Rourke

Joint Services Command and Staff College, Wiltshire, England

Responsibility for the Design, Build, Finance and Operation of one of the first PFI projects for the Ministry of Defence. The Staff College brings the Joint Forces of the Army, Navy and Air Force together under one establishment for teaching in modern warfare techniques. The project was completed on time and officially opened by the Duke of Edinburgh in February 2001

Second Severn bridge

April 1992- June 1996

Client: Highways Agency and Transport Directorate, Welsh Office jointly represented by Government Agent, Maunsell.

The project was an early example of the private sector providing public transport infrastructure through a process of Design, Build, Finance and Operate (DBFO).

The Second Severn Crossing was constructed over a four-year period, which saw the project completed on time and within budget, and the two crossings have been operated in tandem successfully ever since. In 1996 the project was successful in achieving the British Construction Industry Civil Engineering and Supreme Award.

Mcgrigors

Project Aquatrine -February 2005

The project is being delivered as three separate contracts:

The largest PPP water project to have made it off the drawing board in the UK – is a three-stage water and wastewater scheme worth �2.3bn across Ministry of Defence (MoD) properties around the British Isles

If a complex �2.3bn programme split into three packages involving several private sector companies can move from concept to close in a little over six years, the MoD PFI market has a lot to look forward to. (Published Infrastructure Journal Online).

This publication shows evidence that the traditional approach to construction procurement is changing;

“Construction and engineering firm Carillion has agreed to buy its smaller rival Mowlem for about �290m ($503.1m). Carillion said the deal would create one of the UK’s largest support services and construction firms with a combined turnover of more than �4.1bn.

The deal is expected to boost Carillion’s presence in Private Finance Initiative (PFI) projects. Carillion was behind the rebuilding of the GCHQ intelligence centre in Cheltenham back in 2000. The company was spun out of the Tarmac demerger in 1999, and has been selling off its traditional contracting businesses to focus on PFI projects.”

(BBC News Wednesday, 7 December 2005)

Conclusion

As this report shows, it is important to understand the concept of Partnering, Public Private Partnership & Public Finance Initiative and that there are distinct advantages and disadvantages with all types of procurement approaches.

There is evidence that the traditional approach to construction procurement fails to satisfy all clients needs, therefore the need for change and more options is crucial.

Partnering is a very successful part of the construction industry as illustrated in the report as it has achieved many benefits for organisations who have adopted this method of procurement.

Also, authorities should be aware that use of Public Finance Initiative is likely to be unprofitable where the capital construction costs is below �5m.

This shows that the right procurement choice is essential for a successful project.