PUBLIC PRIVATE PARTNERSHIP: A SERVICE INNOVATION The Treasury Building case

Transcription

1 PUBLIC PRIVATE PARTNERSHIP: A SERVICE INNOVATION The Treasury Building case Jean Carassus, Centre Scientifique et Technique du Bâtiment (CSTB).Paris, France. carassus@cstb.fr Abstract A Public Private Partnership (PPP) contract combines the competences of a client, a bank, a designer, a construction company and a facilities manager, to finance, design, build and manage a building or an infrastructure. It is a service innovation analysed through a case study: the PPP/PFI Treasury Building refurbishment and operation project in London. The analysis method is the Barcet and Tannery one [1], specifying the service as an aim, as a concept, as a process and using specific means and resources. PPP is a process service innovation, following a methodological trajectory, which is the result of a change of competences and technical (material and immaterial) characteristics [2]. The main innovation through PPP is the combining of usually separated competences: client, architect, construction firm, facilities managers and users. This combining of competences is revolutionary in an industry where design and build have been for a long time separated from facilities management and use. This combining competences innovation is just beginning through a quite long learning by doing process. Keywords: Public Private Partnership, service innovation, service key performance indicators, competences, facilities management. 1. Introduction Most of the time, government or local authorities fund public buildings and infrastructures, and the building of the facility and its operation after completing are separated. On the one hand, the construction of the facility is provided by designers and construction firms through public procurement (design bid build, design and build, construction management)1, on the other hand, 1 for a comparison between the different procurement procedures, see for example Konchar and Sanvido [3] for the US and UK procurement processes and the special issue of Building Research and Information, edited by Graham Winch, on procurement procedures in the European Union [4]. 647

2 the public authority manages the operation and maintenance of the facility itself and with sub contractors (for heating, lifts, cleaning ). Public private partnership (PPP) is a new way to finance, build and manage public buildings and infrastructures. Usually, in a PPP process, the public authority negotiates, through a competitive procurement process, a single contract with a private consortium specifying the funding, the design, the construction and the operation, for ten to forty years, of the facility. The public authority pays the investment and the operation through annual rents after the completion of the building. When the contract is achieved after ten to forty years, the facility is owned by the public authority. PPP is a feature of ongoing change of the construction sector, from the structures to the service [5] [6]. 2. A service innovation Even if the facility may be different on technical aspects through PPP, in comparison with a usual public procurement, this new way is obviously not a technological innovation. It is a service innovation Gallouj [2] has highlighted five kinds of services, namely: «quasi products» (whenever the service is highly standardized), operational or manual services, informational or relational services, intellectual or professional services, and finally the packages of products and services. The final service of a PPP process is the package of a product (the building) and a service (the management of the building), Sundbo s typology [7] inspired by Schumpeter s one [8] specifies four service innovation categories: Service innovations: new service, Process innovations: change in the service elaboration procedures, Organizational innovations: change in the management modes, Marketing innovations: marketing, sales, and so forth. PPP practice is a change in the package (building plus services) elaboration procedures; it is fundamentally a process innovation. Gallouj [2] defines a service as a set of characteristics and competences, the final characteristics of the service Ym resulting from the simultaneous mobilization of competences (coming from the service provider Cp and the client C q ) and technical characteristics Tn (material and immaterial). Innovations are particular movements of those competences and characteristics. 648

3 According to him, service innovations evolve according to different possible innovation trajectories, namely: the material transformation trajectory ŒM (Y), which corresponds in the alteration of the material basis of the service, the information processing trajectory ŒI (Y), corresponding to new data, new uses of data, network sharing of information, etc, the methodological trajectory ŒK (Y), dealing with the implementation of formalized methods for knowledge processing, the «pure» service trajectory ŒC (Y) corresponds to the direct mobilization of competences, regardless of any material, informational or methodological support. PPP is a service innovation evolving essentially according to a methodological trajectory through formalized methods, even if it normally makes necessary the use of new data and if alters the material basis (the building) through life cycle cost design. We will highlight the weight of the implementation of new formalized methods used to specify and to control the PPP process. We have already analysed service innovations in the construction sector [9] [10]. How to analyse PPP as a service innovation? To study and set up a service innovation, Barcet and Tannery [1] suggest a method in four analysis levels summed up in the following table. 649

4 Table 1. The service innovation analysis method Analysis level Question Topic Meaning 1. The client What for? The functionalities The service as an aim system Whom for? 2. The result of the performance What? The service product The service as a concept 3. The supply system How? The performance The service as a process 4. The means and resources What with? The tools, methods, information, technical means, skills, competences To implement, or to obtain, means and competencies From Barcet and Tannery (1998) To be more specific, a PPP case will be analysed: the refurbishment and the operation of the Treasury Building in London. This project is one of the ten PPP cases studied in the UK, Italy, Denmark and France, by a French team, assisted by European experts [11] 2. The project is one of the notable British Project Finance Initiative (PFI) investments, in the political frame specified by the Conservative government in 1992, amended by the Labour government in The service as an aim The first analysis level is the service as an aim, the client system. Her Majesty Treasury (HMT) had three main goals through this PPP/PFI refurbishment project of its head offices: To spread the payment of a significant investment, in a context of low level of financial public means, To design a building to back a new business process in the ministry, focused on a team and network way of working more than a hierarchical one, To provide a high level of day to day service to the employees. Usual public procurement systems do not allow differed payment of a public investment. Conversely, to design a building to back a new business process and to provide a high quality service to the end users are normally possible through usual public procurement procedures. 2 Then this team made the framework of a French Public Sector Comparator (PSC), available at igd.org/ [12] and the PSC dedicated to the French hospitals. This PSC is included in the French PPP guide for hospitals, available at [13] 3 On recent evolution of British PFI, see Allen et alii [14], Weill and Biau [15], and the following websites: [16], [17], [18]. 650

5 4. The service as a concept The second analysis level is the service as a concept, the service product. The concept offered by the PPP/PFI process has two main characteristics: The private partner pays the investment, the public authority spreads the reimbursement through rents paid during a long period, the first rent being paid after the completion of the building, A single team, dealing with the funding, the design, the construction and the facilities management is responsible for the package, refurbished building plus the services provided for a long period. This concept, in comparison with the usual public processes, is a very innovative one: commonly public procurement plans a payment of the investment by the public authority during the design and construction time, and separated processes for construction and facilities management. 5. The service as a process The third analysis level is the service as a process, the supply system. The PPP/PFI process has four main characteristics: A new procurement system with, in the case of the Treasury Building, two tenders: one for the package building and services, one for the funding, A transfer of risks from the public authority to the private consortium, The valuation of the transferred risks in the amount of the rent, A long term partnership between the two parties. In 1995, an invitation to tender was issued for the refurbishment and operation of the HM Treasury s offices in London. Exchequer Partnership was selected in September 1996 as preferred bidder after a competitive procurement process, but Labour Government elected in 1997 considered it inappropriate to proceed at that time. Following a review of the project a contract was signed in August HMT had also to set up a new tender on funding which was concluded in January 2000 [19]. The facility was successfully delivered one month early in July 2002, when payment of the unitary annual charge for 35 years commenced. The two parties negotiated a complex contract specifying the package design, refurbishment, hard and soft facilities management by Exchequer Partnership (EP), a Special Purpose Vehicle Company, created by a construction company (Bovis Lend Lease), a developer (Stanhope) and a facilities manager (Chesterton), and the funding through index linked bonds insured by Ambac 651

6 (monoline insurer). Johnson Workplace then controlled Chesterton. The facilities manager was no longer EP s shareholder. Forster and Partners are the architects of the project. Figure 1 sums up the present construction and property business system. We have studied the first half of the refurbishment, the second one, specified by another PFI contract with the same partners, is in progress. The risks allocated to the private consortium are: Obtaining Planning permission and listed building consents, Design and construction compliance to achieve the occupier brief and deliver output brief performance, 652

7 Bovis Lend Lease (construction firm and hard facilities manager) Stanhope (developper) 50% 50% Ambac (monoline insurer) Index linked bonds HM Treasury (client) 35 years service contract Exchequer Partnership (Special Purpose Vehicle Company) Funding contract 95% 5% Design and Build contract 35 years hard facilites management contract 35 years soft facilities management contract Shareholders Bovis Lend Lease Forster and Partners Bovis Lend Lease (construction branch) Bovis Lend Lease (hard facilities management branch) Johnson Workplace (soft facilities manager) Stanhope Figure 1. Treasury Building PPP/PFI project : the construction and property business system 653

8 Construction and latent defects risk, which was significant in a poorly maintained 100 year old building, Service delivery risk, which lasts through the life cycle of the facility. Many of these risks were then re allocated to the FM sub contractors by Exchequer Partnership (EP), although these risks were capped and above a threshold are retained by EP, Bankruptcy risk. Should EP fail, Ambac are obliged to step in to assure service delivery, Regulatory changes requiring changes in the output or occupier briefs, Letting risk i.e finding a tenant for other half of the building. The risks shared include inflation, in that the unitary charge is index linked. The risks retained by the Treasury include changes in user requirements implying changes in the output or occupational briefs other than those required due to changes in national regulations. The valuation of the project and the transferred risks is embodied in an annual unitary charge of 14M during 35 years. The cost of the project was 141M, of which 112M represents design and refurbishment. The amount of 29M corresponds to the negotiation costs and the funding costs, among them, preparation and negotiation costs were about 7M for Exchequer Partnership. The PPP/PFI process involves a long term partnership between the parties. According to the interviewees, this partnership works very well. In our opinion, success factors for such a partnership are: The willingness of the parties for the success of the HMT head offices refurbishment in a PFI process, The high level competences of the partners, The quality of the tools and methods (see infra) The profitability of the contract for the private partner. No specific information is available on the profitability, but we think that it is very difficult to manage a serene partnership, when the contract has been under priced by the private partner and is not profitable4. 6. The methods and the competences We are dealing now with the fourth analysis level suggested by Barcet and Tannery (1998), the means and resources one: tools, methods, information, technical means, skills, competences. Our analysis highlights five aspects dealing with the means and resources: The competitive procurement process, The funding method, The occupier brief and associated tools, 4 See for instance the problems of the under priced STEPS deal between Inland Revenue and Mapeley [20]. 654

9 The output brief and tied tools, The combining of usually separated competencies. We will also underline some lacks, especially the need of operating costs data bases. We did not get into details to analyse the competitive procurement process because we chose to study the Treasury Building case more than one year after completion of the refurbishment. In opposition to the usual procurement one, the PPP competitive procurement process is a performance based one. The occupier brief and the output brief specify the results to be obtained but do not define the solutions to meet them. The private partner elaborates the practical means to reach the objectives and to measure the output. The counterpart of this very productive process is the time and the cost. The negotiation between the public authority and the preferred bidder is long and pricey. The complexity of the long term contract explains a part of the cost, but solutions have to be fund to moderate the cost of PPP/PFI contracts5. The Labour government asked HMT to set up a separate tender for funding. An opportunity to innovate was created. Bank financing and bond financing competed. One solution was funds provided by one or several banks, through a negotiation between the project company and the bank. The other solution was funds provided by bond investors, through an agreement via an intermediary, a bond arranger. Bond financing was chosen for three reasons (NAO 2001): The project length, at 37 years, including design and construction, is 4 years longer than the longest period for which banks would have been willing to lend, Index linked finance can be cheaper than fixed rate finance and favours bonds, Monoline insurance of a bond reduces the interest rate bonds investors will require and increases the attraction of a wrapped, or insured, bond finance relative to bank borrowing. Although bond financing was more competitive than bank financing at the time of Treasury funding competition this may not be always the case. The occupier brief described the required functionality of the facility in technical terms. As we noticed one objective of HMT was a design to back a new business process in the ministry, focused on a team and network way of working more than a hierarchical one. This involved an occupier brief focused on a shift from wholly cellular to partially open plan offices. This activity included a pilot open plan office. This choice and technical aspects were discussed in many meetings between the design team and Treasury staff, dealing with space design, access control and security, health and safety, information technologies, lift, signage and way 5 Public task forces promoting the best practices, technical expertises put in common, free practical PPP guides, standardised contracts or parts of contracts, control of the cost of the advisers are some solutions; but the problem is complex. We just notice that PPP can also concern, like in Italy, small and non complex projects involving local authorities and regional construction firms, without many advisers. 655

10 According to the architects, the quality of the occupier brief is one of the success factors of the project. After completion of the refurbishment, the Post Occupation Evaluation is the tool in relation to the occupier brief. This survey, made six months after moving in, dealt with: Place: aesthetics, temperature, lighting, cleanliness, workplace, space for concentrated work, space for collaborative work, Technology and services: telephones, filing, printing, shredders, information technologies, catering, reception, People and processes: feelings, communication, openness and transparency, flexibility in working practices, productivity and innovation. The level of satisfaction was high: 83 % of respondents said that their working environment had improved in terms of functionality and afforded more opportunities for collaboration. Some critics concerned temperature monitoring, noise and privacy. To change attitudes regarding the suitability of open areas for private conversations was wished. The output brief and tied tools sound very innovative. The output brief deals with the facilities management issues in terms of the service delivered to the users. Facilities management deals with eleven topics: Hard services: Mechanical, Electrical, Plumbing (MEP), lifts, building fabric, pest control, furniture, Soft services: security, cleaning, catering, waste management, help desk and general facilities management being used for hard and soft FM. A Performance Incentive Scheme specifies service and availability deductions. Service deductions concern 38 hard and soft facilities management components and are measured by 80 Key Performance Indicators (KPI). The 67 type one indicators involve financial penalties, the 13 type two indicators do not involve financial penalties. 656

11 Performance Incentive Scheme Service deductions Availability deductions 38 Components 80 Key Performance Indicators Type 1 Type 2 Number of failures Measure of impact Building access Building loss, damage Legislative failure Security failing Failing to maintain temperature, lighting, ventilation, Failure of draining plumbing drinking water supplies, life safety systems, structured cabling, Power failure, Non compliance to Health & Safety legislation Figure 2. The Performance Incentive Scheme Source: Exchequer Partner Audits of FM made four times per year by the monocline insurer and permanent control by HMT facilities managers fill up this rather sophisticated service control system. The last topic dealing with methods and competences concerns maybe the most potentially innovative aspect of PPP: the combining of usually separated competences. Figure 3 sums up the separation of the different mobilized competences in separate contracts in a Design Bid Build process. Figure 4 illustrates the combining of the mobilized competences through a PPP long term contract. The client as investor and as facilities manager, the architect, the construction firms, the facilities management subcontractors work usually in a separate way. 657

12 Client as investor Design contract(s) Works contract(s) Designer Construction firms Employer Employees Client as facilities manager Maintenance and operation contracts Sub contractors Figure 3. The separated competences in a Design Bid Build process Client PPP long term contract Consortium Employer Employees Funder Designer Construction firm Facilities manager Figure 4. The combined competences in a PPP process 658

13 The PPP process obliges them to work together, the result of this combined work being written down in a long term contract. For the first time, the architects designed a building by working with the users and the facilities managers. They told us that this process forced them to look at the project in a new way. The combined competences of the architects and the facilities managers allowed to improve many aspects of the project: heat summer, ventilation, lighting, windows curtains, wall paint, carpet quality etc. The sophisticated service control system is also the result of combined competences of the client and the facilities managers. The players are not used to do so. PPP is a learning by doing process which requires time to learn how to combine the competences. This implies a cultural revolution in the construction industry. For ages, construction and facilities management have been separated. New ways to work together as client, architect, construction firm, facilities managers have to be invented. This also makes new tools necessary. For example, operation costs data bases are needed. Such data bases, giving the maintenance and operation costs and the link between them and the investment costs, are necessary. There must be practical life cycle costs data bases for each kind of building (offices, hospitals, schools, prisons ), based on real costs, not theoretical ones. Those data bases and contract contents could be designed in a sustainable way, with new incentives, for example the gains of energy consumption being shared between the public and the private partners. Long term PPP contracts are a very good opportunity to design, build and manage buildings in an environmental friendly way. 7. Conclusion The Barcet and Tannery (1998) method offers a comprehensive view of a service innovation. Success factors concern each of the four analysis levels. The players have to answer very clearly the strategic questions dealing with the service innovation: What for? What whom? What? How? What with? The high level quality of the tools and the combined mobilized competences are key success factors of the innovation. We agree with Gallouj (2002) when he specifies a service innovation as the result of a change of the service provider s and client s competences, and technical (material and immaterial) characteristics of a process. The analysis of a PPP/PFI project, such as the Treasury Building one, a process service innovation following a methodological trajectory, confirms this definition. The potential of innovation through PPP sounds high. The main innovation is the combining of usually separated competences. This combining of competences is revolutionary in an industry where construction has been for a long time separated from facilities management and use. The efficiency of the PPP process is that the players are obliged to write down in a long term contract the result of their innovative cooperation. 659

14 Innovation is just beginning. Practices will change progressively. Some innovations are still potential, such as practical life cycle costs data bases and long term sustainable facilities management. Actually many PPP innovations could be used to improve the usual Design Bid Build and facilities management processes. Accurate occupier and output briefs, cooperation with the facilities managers and the users, financial incentives to make the works time shorter, multi service contracts, performance indicators, financial incentives for efficient operation are examples of PPP best practices which could be employed to improve usual procurement and facilities management processes. 8. Acknowledgements I would like to thank, for all the information given through interviews: Mr Nick Gray, Faithful & Gould, Mr Thomas Huw and Philipp Eichstadt, Forster and Partners, Mr Barry Kearton, Chesterton, Mr Paul Lewis, Stanhope, Exchequer Partnership, Mr Richard Lewis, Bovis Lend Lease, FM branch, Mr Karen Mangroo, Exchequer Partnership, Mr Paul Pegler, HM Treasury. I would like to express them all my deep gratitude. Nevertheless, I alone am responsible for the text and any errors in this paper. References [1] Barcet A. and Tannery F. (1998), Innovation de service. Synthèse du Séminaire ANVIE, Paris : Centre National de la Recherche Scientifique (CNRS). [2] Gallouj, F. (2002), Innovation in the Service Economy: the new wealth of nations, London: Edward Elgar Publishers. [3] Konchar, M.D. and Sanvido, V.E. (1999), A Comparison of US and UK Project Delivery Systems. In Bowen, P. and Hindle, R (eds) Consumer Satisfaction: A focus for research and practice. CIB W 55 & W 65 Joint Triennal Meeting. [4] Winch, G. (special editor guest), Construction business systems in the European Union, special issue of Building Research and Information, 2000, 28 (2). [5] Carassus, J. (2002) Construction : la mutation. De l ouvrage au service, Paris : Presses des Ponts et Chaussées. [6] Carassus, J. (ed) (2004), Construction sector system: an international comparison. CIB W55 W65 Construction industry comparative analysis Project Group report, CIB Publication 293, available at [7] Sundbo, J. (1998), The organisation of innovation in services, Roskilde: University Press. 660

15 [8] Schumpeter, J. (1934), The Theory of Economic Development, French translation, Paris: Dalloz, [9] Carassus, J. (2003), Construction sector system and innovation in stock management, in Uwakwek, B.O. and Minkarah, I. A. (eds), Construction Innovation and Global Competitiveness, University of Cincinnati, CIB, Boca Raton: CRC Press. [10] Carassus, J. (2004), Construction sector system, innovation and services. CIB Congress Proceedings. Toronto. Canada. [11] Bougrain, F., Carassus J., Colombard Prout M. (2004), with the support of Antonini E., Koch C., Winch G., Partenariat Public Privé et bâtiment en Europe : quels enseignements pour la France? Retours d expériences du Royaume Uni, d Italie, du Danemark et de France, Paris : Plan Urbanisme, Construction, Architecture (PUCA) and Centre Scientifique et Technique du Bâtiment (CSTB), to be published in 2005 by Paris : Les Presses de l Ecole Nationale des Ponts et Chaussées. [12] Institut de la Gestion Déléguée, (2004), Evaluation des contrats globaux de partenariat (PPP contracts evaluation), available at igd.org/ (2004 April 22 nd Report). [13] Mission nationale d Appui à l INvestissement Hospitalier (MAINH), (2005), Guide du Bail Emphytéotique Hospitalier (PPP Hospital Guide), available at [14] Allen S., Abbott C., Lenard, D. (2003), Private Finance and Public Private Partnership: a Review, Centre for Construction Innovation, UMIST, Salford University. [15] Weill S. and Biau V. (2003), Le développement de la procédure de PPP/PFI en Grande Bretagne, Paris: Mission Interministérielle pour la Qualité des Constructions Publiques (MIQCP). [16] PPP/PFI UK central task force. [17] PPP/PFI UK task force for the local authorities, [18] UK National Audit Office reports, [19] NAO (2001), Innovation in PFI Financing :The Treasury Building Project, available at [20] NAO (2004), PFI: The STEPS deal, available at 661