Public private partnership projects in the operating phase

Abstract

Under Public Private Partnership arrangements, the public sector partner is ultimately responsible for ensuring that contracted services provided by private consortia are carried out and that specified delivery standards are met. Contracts, however, do not protect governments from every adverse eventuality. It is therefore important that partnership and performance management issues are actively managed during the operating phase. From the perspective of the public partner, operational issues relating to partnership and performance management are explored in the context of three Australian case studies. Partnership issues relate to: management commitment and support; clear and open communication; conflict management; employee capability and expertise; and reputation damage. For performance management, the pertinent issues are: key performance indicator modification; availability and integrity of performance data and metrics; performance monitoring and adjustment; and penalties and abatement. Effective management of these issues by the public partner will increase the likelihood that intended value-for-money outcomes are achieved.

Introduction

Public Private Partnership (PPP) is characterised as a long-term collaborative endeavour (Smyth and Edkins, 2006) involving public and private partners, developed through the expertise of each partner in order to meet identified public needs through appropriate resource, risk and reward allocation (Canadian Council for Public Private Partnerships, 2009).

PPP began to emerge as a serious alternative to more conventional methods of public procurement during the 1990s, becoming popular in countries such as Chile, Ireland, Mexico and the United Kingdom (International Monetary Fund, 2004: 3) at least in part due to increasing demands on the provision of public services and the ever-increasing financial burden of maintaining and replacing ageing public infrastructure and other assets. In the United Kingdom, this method of public asset and services procurement is known as the ‘Private Finance Initiative’ under the UK Treasury (Spackman, 2002). In more recent times, PPP arrangements have become a commonly adopted method of providing infrastructure and services by governments in developed economies (Joyner, 2007), including Australia (Jin and Doloi, 2008).

Achievement of value-for-money (VfM) outcomes is considered to be one of the greatest drivers of risk transfer between the partners (Partnerships Victoria, 2001: 4), where risk is transferred or allocated to the partner best able to manage those risks. It is argued this can lead to considerable cost savings throughout project lifecycles (Commonwealth Department of Administration and Finance, 2006: 2) of between 5% and 66%, depending on how well the PPP project phases are integrated and the extent to which assets are effectively managed (AECOM, 2007: 41). These claims are complementary to a study undertaken by Cambridge Economic Policy Associates (2005: 39), which found that 96% of contractors and 85% of government officials believed that operational risks had been properly allocated in projects. However, efficient allocation (Li et al., 2005; Quiggin, 2004) may not always be realised (The Asian Development Bank, 2008: 2) and, in practice, its application has led to questionable results.

Ergas (2009) claims for instance that poorly allocated risk may unintentionally see potential cost savings turn into profits for project promoters, while Davidson (2006) argues that the cost of ‘transferring’ financial risk to the private partner may actually be built into partnership deals (at the tendering stage), which would obviously detract from accomplishing genuine VfM outcomes, particularly during operational phases should ongoing under-performance occur. And, of course, all procurement and contract management relies on human judgement, skills and experience (National Audit Office, 2009: 47) and thus become subject to the errors, imperfections and biases of people.

Notwithstanding ‘efficient’ allocation of risk (e.g. transfer of service delivery risk to private consortia), the public sector partner is ultimately responsible for ensuring that services provided by its partner in the operating phase are delivered and that specified standards are met. Ongoing partnership and performance management, on the part of the public partner, is therefore necessary if VfM expectations are to be achieved. Partnerships involve managing social interactions between people in administering contractual performance provisions. Governments should take necessary and timely action to resolve private partner under-performance whenever it occurs.

Using partnership and performance management issues identified from the literature, the presence and nature of partnership and performance management issues in the operating phase of PPP are explored through three Australian case studies. The case study method is an appropriate way to explore how the effectiveness of public partner management of such issues can influence the likelihood of achieving intended PPP outcomes: these matters should not be left to chance.

Following this introduction, a contextual background is provided by a short literature review. The case studies are then presented, together with analysis and discussion of the findings. Recommendations for practice in public sector governance during the operating phase of PPP are made.

Literature review

Given the importance of appropriate partnership and performance management of PPP for the public partner (in terms of public accountability), this section explores extant issues relating to these two areas of management.

Partnership management

Partnership management is defined as ‘a relationship involving the sharing of power, work, support and/or information with others for the achievement of joint goals and/or mutual benefits’ (Kernaghan, in Trafford and Proctor, 2006), although partnership management is not a relationship per se, but the process of dealing with that relationship. Issues relating to PPP projects include: management commitment and support; clear and open communication; conflict management; employee capability and expertise; and reputation damage. These factors do not tend to occur in isolation from each other; rather, they are likely to have a collective impact on partner relations where the importance of one factor over another will depend on particular circumstances.

Management commitment and support are crucial for achieving successful outcomes (Harback et al., in Chan et al., 2004; Hope, 2012). This includes commitment and support given by public partner decision-makers to their employees. This is important, because senior management controls the deployment of additional resources, e.g. finance, work force (Cheng et al., 2000), information and/or technology (Hope, 2012) that may be needed for PPP contract managers to detect or address under-performance in the delivery of services. A study of VfM drivers by Arthur Andersen and Enterprise LSE (2000: 38) found that managers must make time and other resources available to ensure that the task of contract management is properly handled. Supportive management may be decisive in resolving difficulties (Pinto and Slevin, 1987) or disputes (see ‘Conflict management’, below).

Clear and open communication is key to successful partner relations (Hope, 2012; National Audit Office, 2009: 10) as information can be used to influence the planning, direction and development of projects (Karlsen, 2002) and their subsequent operational management. A lack of communication or miscommunication flowing from decision-making can lead to misunderstanding between PPP partners. If left unresolved, this could result in communication breakdowns, which could then reduce the level of trust that partners have in each other’s motives and thus impact operational productivity, regardless of whether the failures are intermittent or continuous. Effective communication, on the other hand, can stimulate constructive exchanges of ideas, reduce the potential for misunderstanding and encourage trust (Cheng et al., 2000).

Conflict between public and private partners may be inevitable (Edwards et al., 2004: 55). Broadly speaking, disagreements arise over timeframes, costs and quality issues (Leung et al., 2004). Apart from time and money, other factors can lead to disputes (Thamhain and Wilemon, 1975). These include: project operational priorities (e.g. setting project priorities, see Hope, 2012); workforce resources (e.g. a lack of skills to deliver services to agreed standards); and personality conflicts. Another pertinent factor is conflicting interpretation of contract requirements due to individual or organisational biases or preferences. Cambridge Economic Policy Associates (2005: 34–35) found that the majority of their research participants that had been involved in disputes ascribed them to the interpretation of contractual provisions and lack of clarity in the project development phase.

A lack of staff capability or expertise (Hope, 2012) can also lead to tensions between public and private partners and, if not remedied, could lead to service delivery under-performance. While it is easy to blame private partner operators when delivery outputs fail to meet minimum standards, it may not be reasonable to do so, particularly if public partner staff tasked with contract oversight do not fulfil their responsibilities properly. Poor co-ordination and a lack of skill are factors that can negatively impact the public partner’s ability to successfully manage PPP outcomes (Yuan et al., 2009). The quality of public partner contract management skills, including monitoring performance targets, affects the achievement of satisfactory VfM outcomes (Edwards et al., 2004: 63). This view is shared by the Organisation for Economic Co-operation and Development (2007: 20), which claims that appropriate corporate experience among government employees is in short supply. A lack of understanding of commercial principles and practices may make it difficult for public partner contract managers to understand the nuances of the issues faced by their private partner and why certain decisions have been taken that lead to particular outcomes. A lack of understanding could lead to ‘unfair’ penalties being applied by the public partner (as perceived by the private partner) and could damage relationships between them. The capability constraint may become acute at critical points in the PPP: at the transition between delivery of the project and operational service; at the transition between operational service and termination of the concession; and at points in between where changes (e.g. extensions or additions to the contract agreement) have to be negotiated, or where succession planning is necessary for staff that are about to retire or who are transferred.

Unanticipated events (Hodge and Greve, 2005: 110; Joyner, 2007) during PPP operations can have unexpected consequences for the public sector. Even though its private partner is responsible for service delivery, there may be potential for negative media attention (Chung et al., 2010; Karlsen, 2002) to be misdirected to the public partner when things go wrong. Furthermore, a government’s reputation can be damaged if governance, probity and compliance frameworks are not properly adhered to by its employees.

Performance management

Performance management is characterised by ‘the use of inter-related strategies and activities to improve the performance of individuals, teams and organisations’ (Australian Public Service Commission, 2001). Performance is directly related to the achievement of VfM (National Audit Office, 2009: 55). For PPPs, performance management issues identified relate to: Key Performance Indicator (KPI) modification; availability and integrity of performance data and metrics; performance monitoring and adjustment; and penalties and abatement.

Lee and Fisher (2007) assert that there is a strong correlation between the attainment of organisational objectives and effective performance management. KPIs should be relevant, reliable and accurate (Partnerships Victoria, 2003a: 131). Adhering to these principles may appear simple; however programmes (or in this case the achievement of PPP objectives) can fail due to poorly defined KPIs (Evans and Bellamy, 1995). Optimum levels of performance are not prescribed by Partnerships Victoria (2003a) in its guidance material for PPP, neither subsequently by Infrastructure Australia (2008) in the national Australian PPP guidelines. Ideally, but depending upon the nature of the contract, performance ranges for project specific KPIs should be reviewed regularly in conjunction with the private partner.

Performance data allow informed judgement and decisions to be made about operational effectiveness and efficiency, and such data are linked to the prior formulation and adoption of appropriate KPIs. Performance metrics provide the means of measuring performance. If KPIs are poorly designed, the data obtained from evaluating performance against these measures will be of limited or no value. Moreover, performance outputs cannot be effectively managed if data are not accurately or honestly reported, or the metrics are not effectively applied.

The best way for the public partner to hold its private partner accountable for performance is through the continuous application of effective contract administration (AECOM, 2007: 84–85). Edwards et al. (2004: 49) state that, without a strong understanding of the service delivery environment (e.g. lack of performance data as a reference to the establishment of KPIs), public partner contract managers will find it difficult to accurately evaluate operational performance. Therefore, contract managers should develop a ‘hands-on’ role to ensure VfM propositions are maintained over time. This, of course, will be tempered by the extent to which the private partner is required to report appropriately under contractual agreements (Partnerships Victoria, 2003a: 46). In Victoria (Australia), for example, regular monitoring is supplemented with periodic Gateway Reviews. ‘Gate 6’ is a component of a formal review process, undertaken by the Victorian Department of Treasury and Finance or its nominees, which compares the benefits set out in project business cases with the achievement of these benefits at key points during operations (Department of Treasury and Finance, 2009: 9). All this suggests that performance criteria should be clearly established in the concession agreement; assessed on the basis of accessible and verifiable data; and measured and monitored regularly and consistently. Where performance requirements change with contract variations, the performance criteria should be adjusted. The public partner’s performance monitoring should also be subject to periodic audit.

The National Audit Office (2009: 56) states that historical practice in the United Kingdom has seen only a small percentage of projects where penalties have been applied to consortia for under-performance in PPP. The rationale for non-enforcement can be justified on a number of fronts, but typically, penalties are most often deferred to improve working relationships between the partners (or to prevent them from deteriorating further), or to off-set under-performing services with other services rendered (National Audit Office, 2009: 56).The mere threat of applying abatement may have the desired effect by providing ‘sufficient incentive’ for the private partner to improve its performance in line with the contract and service specifications (Ernst and Young, 2008: 13).

Research method and design

Yin (2014) claims that case studies can be an effective method of collecting information, either as sources for wholly secondary data or as a means of accessing data that can then be manipulated as primary data to serve new investigative purposes. Case studies can be used to address the more profound ‘why?’ and ‘how?’ questions, as well as basic ‘who?’, ‘what?’, ‘where?’ and ‘when?’ enquiries. They allow a focus on contemporary issues and do not require the researcher to exercise control over events and behaviours.

The case studies used here form part of more extensive doctoral PPP research carried out by McCann (2014) and follow the Australian context of that research. In essence, these case studies track the presence or absence, of the partnership and performance issues identified in the literature, in real-life Australian PPP examples.

The PPP projects were purposively and conveniently selected for two reasons: first, due to the volume and range of publically available material that relates to the operating phase for these PPPs. This was important, because information on the operating phase is generally scarce. Second, it enabled the researcher to subsequently test the findings from the secondary data collected for the case studies, through interviews with senior practitioners involved in the management of these projects.

Secondary data for the case studies were obtained through extensive academic database searches, including Business Source Premier, Scopus and ScienceDirect, using key words such as PPP, VfM, Melbourne CityLink, Spencer Street Station Re-development, Southern Cross Station, New South Wales New Schools Privately Financed Project, partnership, stakeholder, performance, risk, governance and public management. This was supplemented with searches to identify applicable government agency and industry reports, newspaper articles and other relevant information relating to the topics, using similar search criteria.

For each case study, applicable partnership and performance issues were analysed. The NVivo version 10 software application was deployed to conduct a thematic analysis to enhance the depth and breadth of the reported issues. This form of data analysis presents a categorisation of issues in partnership and performance management.

While generalisation cannot be claimed for the findings of case studies used in this way, they are capable of yielding important insights, both theoretically and for practice, into partnership and performance management in PPP by the public partner.

Case studies

Case 1. Melbourne Citylink Tollway

CityLink is a 22 kilometre, AUD$2.2 billion motorway toll project (Infrastructure Partnerships Australia, 2006) constructed to reduce traffic congestion (Muhammad and Low, 2006: 4), improve access to Melbourne and facilitate traffic flow around its central administrative district (Grimsey and Lewis, 2004: 38; VicRoads, 2009) by linking together routes between Melbourne Airport, the port and the city’s south-eastern industrial centres (Infrastructure Partnerships Australia, 2006). The project consists of two sections – the Western Link and the Southern Link. The Western Link joins the Tullamarine Freeway with the Westgate Freeway, and the Southern Link connects the Westgate and Monash freeways (Infrastructure Partnerships Australia, 2006). This part of the project involved the development of new and existing roads and infrastructure, six kilometres of tunnels and traffic management measures (Hodge, 2004). CityLink was Australia’s largest public infrastructure project at the time of its construction in 1996 (Parliament of Victoria Public Accounts and Estimates Committee, 2006: 57).

During 1995, a private sector consortium, Transurban City Link (known as CityLink Melbourne Ltd after stock exchange flotation), was awarded a concession to own and operate the tolled motorway initially for a period of 34 years (Infrastructure Partnerships Australia 2006), after which CityLink would be handed over in a fully maintained condition to the State (VicRoads, 2009), at no cost (Office of the Director, Melbourne CityLink, 2002: 6).

Construction of CityLink commenced during 1996 (Alonso et al., 2003: 3) and the tolling of the Western Link began in 2000, with the Southern Link being fully operational by 2001 (Transurban City Link, 2001: 3) due to minor project delays.

Case 2. Melbourne Spencer Street (Southern Cross) Station Re-development

The Spencer Street Station (now known as Southern Cross Station) Re-development project was the Victorian Government’s centrepiece of a AUD$700 million plan (Kestigan, 2005) intended to transform the existing railway station and bus terminus into a ‘world-class inter-modal transport facility’ (Victorian Auditor-General, 2007: 37), capable of managing 15 million commuters a year (Brumby and Batchelor, 2002) and increasing to 45 million passengers annually by 2020 (Kestigan, 2005). The station serves metropolitan, regional, and interstate rail and bus passengers.

During 2000, the Southern Cross Station Authority, a statutory body established to represent the Victorian State Government (until it was wound up during 2009 with its statutory powers transferred to the Department of Transport, V/Line and MetLink), was charged with managing the procurement and delivery phases of the station re-development (Southern Cross Station Authority, 2008: 10) and overseeing its operations. For this project, continuing operation of the existing station during construction was essential.

In 2002, a private sector consortium, Civic Nexus Pty Ltd, signed a Services and Development Agreement with the Authority to design, build and then take operational responsibility for the station over a period of 30 years (Victorian Auditor-General, 2007: 35).

Construction commenced during 2002, with work scheduled to be completed by April 2005. Due to delays and disputes, operational management of the Southern Cross Station was not commenced by Civic Nexus Pty Ltd until 2006 (Tomazin and Myer, 2006; Victorian Auditor-General, 2007: 38, 53).

In the operational hand-over, the Southern Cross Station Authority had responsibility for oversight of the Services and Development Agreement. Its key deliverables therefore became: monitoring and assessing the consortium’s management and operational delivery (based on agreed KPIs); managing a number of capital projects within the precinct; and assuming its obligations relating to the land it owns within the broader station precinct (Victorian Auditor-General, 2007: 53).

Case 3. New South Wales New Schools Privately Financed Project

The New Schools Privately Financed Project (the first contract) was a AUD$137 million schools’ development that was the first social infrastructure project commissioned as a Privately Financed Project by the New South Wales State Government (New South Wales Auditor-General, 2006: 10; New South Wales Treasury, 2005a: 1; Ross, 2004: 2). The project consisted of the construction and maintenance of nine new schools (six primary, two secondary and one special needs school) in northwestern and western Sydney, Illawarra and the Central Coast (New South Wales Department of Education and Training, 2003: 1).

Five schools (comprising Dapto Primary School, Ironbark Ridge Primary School, Kellyville Ridge Primary School, Sherwood Ridge Primary School and Tallowood Special School) were to be opened in 2004, with the remaining schools (John Edmundson High School, Shell Cove Primary School, Woongarah Primary School and Glenwood High School) to be opened in 2005 (New South Wales Auditor-General, 2006: 10). In addition (and as part of the contract), eight childcare centres were to be built and run independently of the schools by a private operator (New South Wales Treasury, 2005a: 1, 2005b: 44).

The New South Wales Government is responsible for managing project oversight (New South Wales Department of Education and Training, 2003: 4; Ross, 2004: 2). In December 2002, Axiom Education Pty Ltd, a private sector consortium, was awarded the contract to finance, design, build and then maintain the schools/facilities (e.g. cleaning, security, routine maintenance services, etc.) for a 30-year period (New South Wales Department of Education and Training, 2003: 3; New South Wales Treasury, 2005b: 44). In December 2032, the school buildings/facilities will be handed over to the State (New South Wales Department of Education and Training, 2003: 8; New South Wales Treasury, 2005a: 1) at no cost and in a pre-agreed condition.

Construction of the schools commenced in 2003 (Ross, 2004: 3). The first tranche was delivered as scheduled in 2004 and the second tranche in 2005 (New South Wales Treasury, 2005b: 44). The childcare centres opened ‘progressively’ from late 2004 onwards (New South Wales Treasury, 2005b: 44).

Analysis

The analysis of the case data follows the issues identified in the literature for partnership and performance management. Examples of the presence of issues are presented from relevant cases. Where these are common to more than one case, they are considered on an inter as well as an intra case basis.

Partnership management issues

Management commitment and support

For Case 2, the Melbourne Spencer Street (Southern Cross) Station Re-development, the Southern Cross Station Authority enforced only one service payment abatement during the first year of operations even though the concessionaire failed to meet its performance targets in three out of four financial quarters (Victorian Auditor-General, 2007: 59). The Southern Cross Station Authority held the view that it was preferable that Civic Nexus Pty Ltd be given an opportunity to resolve operational lapses, as it was expected that such decision-making would help to build a ‘positive ongoing working relationship’ (Victorian Auditor-General, 2007: 59–60) between the partners. These decisions were taken on the basis of a commitment made by Civic Nexus Pty Ltd to improve its performance monitoring system capabilities (Victorian Auditor-General, 2007: 60). However, failure to follow through on the assurance would mean that abatement could be applied retrospectively (Victorian Auditor-General, 2007: 60) – also see ‘Penalties and abatement’, below.

Clear and open communication

As part of its post-implementation project review of Case 3, the New South Wales Treasury (2005a: 6, 12) highlighted a need to clearly articulate the differences in responsibilities under the contract, between the Project Director and school principals. The review outcome stated that it was ‘important that principals are kept up-to-date with the operation of the contract and understand their rights and responsibilities at a (Privately Financed Project) school’ as there was ‘potential for crossover’ (New South Wales Treasury, 2005a: 12), e.g. between educational and operational matters.

In a separate matter, although raised during the same review, it was found that the helpdesk provided by the private partner’s facility manager was at times closing off maintenance jobs even when the work had not been completed to the satisfaction of school principals (New South Wales Treasury, 2005a: 44). In these instances, the helpdesk re-issued incomplete jobs under new job numbers (New South Wales Treasury, 2005a: 44). Clearly, this might also impact the performance management requirements for the project, but the actual issue arose because of a lack of clarity in the operational procedures documentation. It was recommended that the circumstances in which a job could be closed, re-opened and/or re-issued, should be clarified both with school staff and the private partner (New South Wales Treasury, 2005a: 44). The research found no evidence of deliberate deception on the part of the private partner, e.g. using the additional job numbers to artificially inflate the amount of maintenance work carried out.

Conflict management

For Case 1, the Office of the Director, Melbourne CityLink, as part of its oversight responsibilities, appointed an accounting firm to undertake a two-stage inspection of the operator’s customer account records (Victorian Auditor-General, 2004: 64). Stage two of the review (that was supposed to begin two weeks after tolling started), and intended to examine whether or not the operator was imposing the correct tolls, was scrapped. The operator strongly resisted the proposed scope of the inspection process (Victorian Auditor-General, 2004: 64). Even though the State has enforcement powers under The Melbourne CityLink Act 1995, it decided not to exercise this right as the operator threatened that it would assess each request for information made by the public partner ‘on a “document-by-document” basis and possibly obtain formal legal advice at every request’ (Victorian Auditor-General, 2004: 64). A more explicit partnership management failure is hard to imagine, with the private partner obviously threatening delaying tactics as a means of pressuring the public partner to reconsider its performance management arrangements. Despite these difficulties, the Victorian Auditor-General asserted that to be effective in monitoring the imposition of the tolls, the Office of the Director, Melbourne CityLink, should conduct periodic inspections of the operator’s tolling systems and records (Victorian Auditor-General, 2004: 65). This example demonstrates that although the private partner is legally obligated to share operational performance data with its public partner on its request, it may not do so willingly and may deploy tactics to discourage the public partner from obtaining information if the consortia believes it may be financially or commercially disadvantaged by such access or disclosure.

A second example of conflict relates to the Case 2 Melbourne Spencer Street (Southern Cross) Station Re-development. Delays and cost overruns (Victorian Auditor-General, 2007: 38), (e.g. the unanticipated costs of providing continuous 24-hour access required by rail operators during the construction phase), as well as contractual disputes (e.g. the threat of being forced to pay millions of dollars in liquidated damages (Das, 2005)), all impacted the attainment of project milestones and ultimately affected the parallel delivery of commuter services at Southern Cross Station. On one occasion, this led Wal King, the Chief Executive of Leightons Contractors (part of the Civic Nexus consortia), to publically state that the company had a subservient ‘master-slave’ (as opposed to a partnership) relationship with the Government (Tomazin and Myer, 2006). He alleged that the State had breached the ‘spirit’ of the Partnerships Victoria guidelines and blamed inaction by the Government for delays and increased costs (estimated by Leightons Contractors to exceed AUD$50 million) relating to the western section of the project. A public sector spokesperson countered the accusation made by Mr King, denying that the Government had not co-operated with the company. Furthermore, the spokesperson claimed that the Government was therefore not responsible for the cost blowouts and accused Leighton Contractors of trying to shift the blame (Hannan, 2004). However, during mid-2005, the Victorian State Government agreed to forgo potential claims for liquidated damages in exchange for Civic Nexus Pty Ltd withdrawing its writ against the Government over delays in access and contamination issues (Das, 2005).

The two conflict issue examples indicate that operational partnership relationships in PPP may be less robust than anticipated and, as demonstrated in Case 2, may flow on from as yet unresolved conflicts arising for the project delivery phase. Both examples have their origins in communication failure: for Case 1, a failure to fully articulate performance audit requirements beforehand; and in Case 2, a failure to properly disclose and negotiate the requirements and conditions for maintaining existing rail services during the delivery phase.

Employee capability and expertise

The 2007 audit undertaken by the Victorian Auditor-General identified a range of limitations and skill deficiencies in the context of the Case 2 Southern Cross Station Authority’s ability to successfully perform its management and oversight role of Civic Nexus Pty Ltd (Victorian Auditor-General, 2007: 58). The allocation of a single contract manager to monitor all aspects of the consortia’s performance was cited as an example. The audit team found that improvements could be made by the Southern Cross Station Authority through updating its asset management plans, clarifying/simplifying the KPI measurement regime, enhancing data integrity and addressing skills gaps of its staff (Victorian Auditor-General, 2007: 58). If unresolved, this type of situation, especially lack of resourcing, may test the public partner’s capacity (and therefore ability) to effectively manage the terms of the Services and Development Agreement, particularly over an extended period of time. While previous experience on the public partner’s part with similar types of PPPs should help to mitigate this issue, for public organisations new to PPP (or new to a particular type of PPP) the capability and expertise of staff needed to carry out operational management is a critical factor that can directly impact VfM outcomes.

Reputation damage

Government may decide it is necessary to intervene in situations where there is a public perception that operators are treating their customers unfairly (even when consortia are acting within the terms and conditions of contractual agreements). Under such circumstances, the public partner may, as a means of deflecting unwarranted negative media attention directed towards itself, negotiate with the private concessionaire to discount/waive service charges for a limited period of time. Government may also conduct awareness raising campaigns (at its own cost) to inform users of the conditions of service.

With respect to Case 1, during 1999, the interstate motoring bodies, the New South Wales motoring organisation, NRMA; the Royal Automobile Club of Queensland; and the Royal Automobile Association of South Australia raised concerns that visitors to Victoria were at risk of being unfairly fined on CityLink as they did not understand the tolling system (Techapeeraparnich, 2004). In October 2000, the State Government then negotiated with the concessionaire for extended payment times for interstate motorists who were first time offenders and put in place a campaign to raise awareness with the travelling public (Lally, in Techapeeraparnich, 2004).

A Case 2 example shows how unanticipated events (Hodge and Greve, 2005: 110; Joyner, 2007) – and unsubstantiated ‘facts’ – may impact operational oversight: between 2006 and 2009, over 130 staff working at the newly finished Southern Cross Station precinct complained that diesel fumes from idling trains were affecting their health (Lucas, 2010, 2011). However, the claimed ‘cause’ of the complaints was rebuffed by a spokesman for Civic Nexus, who cited a lack of evidence and stated that, since 2002, regular air quality testing had shown that the fumes were well within prescribed safety levels (Lucas, 2010). In spite of this, and in an apparent ‘U Turn’ implied by Lucas (2011), the Victorian State Government (through the Department of Transport) agreed to partially fund a proposal for installing extraction fans to improve air quality at the station. It can be construed that the State Government’s decision to intervene was driven by a need to be ‘seen to be doing something’ to avert potential industrial disputes and avoid prolonged negative media attention (Karlsen, 2002) over this matter.

Sensitive financial and commercial information relating to PPPs, such as cost structures, profit margins and intellectual property tend to be protected by ‘commercial in confidence’ restrictions. Such secrecy can give rise to a risk of public criticism and accusations of ‘dodgy deals’ whereby the private partner profits at the expense of taxpayers or service users. An example from Case 3 demonstrates how clearly communicated treatment in the PPP agreement can mitigate this risk. With the New Schools Privately Financed Project (as with other New South Wales PPPs), there are exemptions to privacy restrictions, as specified under contractual arrangements. They include disclosures required by law, disclosures by the Department’s Project Director (or statutory authority depending on the nature of the agreement) to State Government departments and their agencies and/or disclosures to prospective shareholders or other investors (New South Wales Department of Education and Training, 2003: 25).

The three examples demonstrate the susceptibility and sensitivity of public partners in PPP to reputation damage arising from adverse media reporting. Such risk events are difficult to anticipate (and thus managed through pre-planned proactive risk management measures). Inevitably, this means that they have to be dealt with reactively, usually with some loss of control or some degree of concession.

Performance management issues

KPI modification

As part of the Services and Development Agreement for managing the Southern Cross Station (Case 2), Civic Nexus Pty Ltd is obliged to meet 15 service standards and 60 related KPIs as well as developing and maintaining quarterly performance reports, operating manuals, quality assurance manuals, asset management plans and annual reports (Victorian Auditor-General, 2007: 54). The Government Auditor found that a number of the service standards and KPIs were difficult to measure, which impacted the ability of the Southern Cross Station Authority to successfully monitor and review the consortium’s performance (Victorian Auditor-General, 2007: 43, 54). The audit team concluded that the Southern Cross Station Authority should make ‘demonstrable progress’ in addressing its KPI deficiencies (Victorian Auditor-General, 2007: 36).

Availability and integrity of performance data and metrics

In the Melbourne Spencer Street (Southern Cross) Station Re-development (Case 2), the Victorian Auditor-General (2007: 58) found instances of inaccurate data being entered into performance management systems by the private partner. Such situations can potentially give rise to undetected or unreported incidents as well as fraud (Victorian Auditor-General, 2007: 58), all of which could detract from the achievement of VfM outcomes.

Performance data can also contain errors or omissions. If public partners are not vigilant in providing adequate oversight, operators could use inaccurate data for decisions that could lead to, for instance, over-charging service users. The CityLink (Case 1) operator is obligated, for each financial quarter, to set vehicle toll charges including a maximum charge for a single trip. It is also responsible for informing the public partner of pricing changes not less than one month before they take effect and for advising the motoring public of them (Victorian Auditor-General, 2004: 63–64). It is asserted by the Victorian Auditor-General (2004: 64) that although these conditions were met by the operator, the Office of the Director, Melbourne CityLink found instances of ‘rounding or indexing errors’ in the private partners’ toll calculations before the charges were published. However, in each instance the private operator did take responsibility for correcting its mistakes (Victorian Auditor-General, 2004: 64).

Performance monitoring and adjustment

The New Schools Privately Financed Project Concession Deed (Case 3) states that the private partner must, for each individual school, develop operations manuals (New South Wales Department of Education and Training, 2003: 13) and provide monthly operational performance and payment reports to the Project Director (New South Wales Treasury, 2005a: 43). The Department of Education and Training has an oversight responsibility to ensure that the plans and related documentation are put in place and that they are updated by the contractor on an annual basis (New South Wales Auditor-General, 2006: 37; New South Wales Department of Education and Training, 2003: 13). The manuals consist of asset management plans, operation plans, maintenance programmes and environmental management plans (New South Wales Auditor-General, 2006: 37). These documents must be independently audited at least every 12 months against agreed quality standards (New South Wales Department of Education and Training, 2003: 16).

Penalties and abatement

Under the partnership arrangement, Civic Nexus Pty Ltd (Case 2) is offered financial incentives in the form of regular structured payments from the State to deliver an efficient operating service (Partnerships Victoria, 2003b: 15). Conversely, deductions are applied by the public partner (typically due to an accumulation of penalty points, which are then used to calculate an abatement) for instances of under-performance or non-compliance (Baker and McKenzie Solicitors, 2006; Brumby and Batchelor, 2002).

In 2007, the Victorian Auditor-General (2007: 35) concluded that the reward and sanction regime for Case 2 was satisfactorily aligned to service requirements and performance weightings under the Services and Development Agreement and therefore fit-for-purpose. However, it was recommended that penalties and abatements be consistently applied unless there was a properly justified case for not doing so (e.g. to improve positive working relationships), but not at the risk of endangering sustainable public partner management control.

Discussion

Partnership management

Pinto and Slevin’s (1987) view that supportive management is decisive in resolving difficulties (see also Harback et al., in Chan et al., 2004; Hope, 2012) is demonstrated in Case 2, the Spencer Street (Southern Cross) Station Re-development. The private partner was given an opportunity to resolve operational lapses rather than the public partner applying abatement unilaterally for instances of under-performance, in order to foster a positive working relationship in the partnership (Victorian Auditor-General, 2007: 59–60). This may lead to the modification of contractual clauses, e.g. extending the remediation period to address service delivery shortfalls in return for a pledge or guarantee by consortia to improve its service outputs beyond its existing KPI targets. Such compromises may benefit taxpayers in terms of providing assurance to government of sustainability of contract, thus reducing the risk of service provider failure over the short term, and might even yield improved VfM outcomes. However, subsequent failure by the private partner to follow through on service improvement commitments, resulting in continued poor performance, should lead to strict abatement being applied retrospectively (Victorian Auditor-General, 2007: 60), since it is public money (and hence public VfM) at stake.

Although the private partner is legally obliged to share operational data with its public partner on request, it may not do so willingly (as in Case 1) and may even deploy tactics to discourage the public partner from seeking and obtaining information, particularly if the consortia believes that it may be financially or commercially disadvantaged by the information release (Victorian Auditor-General, 2004: 64). For the public partner, failure to acquire and act on such information may have a detrimental impact on achieving VfM outcomes. Furthermore, delays, cost overruns (Leung et al., 2004) and contractual disputes (Cambridge Economic Policy Associates, 2005: 34–35), as in the Case 2 Southern Cross Station Re-development project (Das, 2005), can impact the attainment of service delivery outcomes. Partners should seek to continue to work together under these situations to avoid further delays and costly litigation, as relationship breakdowns can have a significant and lasting adverse effect on long-term PPP concession agreements. Decision-makers and contract managers should attempt to resolve differences early before they escalate into more serious problems. They should understand the issues from the perspectives of the key people involved (Hannan, 2004), taking advice, as appropriate, from operations committees/working groups, subject matter experts and external consultants. Decision-makers should then propose treatment options to resolve the dispute. Although remedial action will largely depend on the nature/source of conflict, favoured outcomes may include: re-arranging priorities, re-allocating resources, amending documentation and taking disciplinary action/imposing training on under-performing employees.

The New Schools Privately Financed Project (Case 3) shows how misunderstandings can arise that might impact the effective use of resourcing (by the public partner) and detract from the achievement of planned outcomes. For communication to be effective, messages should be conveyed in a manner that ensures understanding by intended recipients (Hope, 2012; National Audit Office, 2009: 10; New South Wales Treasury, 2005a: 12). A shared understanding should be founded on, and be consistent with, the PPP’s objectives; the beliefs, values and behaviours that decision-makers wish to promote; and the adoption of common language (e.g. of key concepts and processes). Effective communication may also promote more trusting relationships between partners (Cheng et al., 2000).

The inability of the Southern Cross Station Authority (Case 2), representing the Victorian State Government, to successfully perform its management and oversight role of Civic Nexus Pty Ltd, e.g. due to the allocation of a single contract manager for monitoring all of the private partner’s performance outputs (Victorian Auditor-General, 2007: 58), illustrates the importance of the sufficiency, capability and expertise of public partner contract management (see Hope, 2012; Organisation for Economic Co-operation and Development, 2007: 20; Yuan et al., 2009). Employee development is vital for improving staff morale, competency (resulting in increased productivity) and career satisfaction (leading to the retention of high performing staff and continuity of operations). Public partner project directors should also continuously monitor employee compliance with internal policies, frameworks and procedures, including taking remedial action for non-conforming behaviour. Furthermore, project directors should distil, document and disseminate key project learning from subject matter experts. Such information could be used to augment existing team knowledge and skills and prevent corporate memory loss.

The Melbourne CityLink Tollway (Case 1) and Southern Cross Station Re-development (Case 2) PPPs demonstrate that governments may decide to intervene in situations where there is a public perception that operators are treating their customers unfairly (even when consortia are acting within the terms and conditions of contractual agreements) (Lucas, 2010, 2011; Techapeeraparnich, 2004). In order to deflect unwarranted, negative media attention directed towards Government (Chung et al., 2010; Karlsen, 2002), the public partner may negotiate with the private concessionaire to discount/waive service charges for a limited period of time. Government may also conduct awareness raising campaigns (at its own cost) to inform users of the conditions of service (and changes to them). An annual contingency budget should be set aside to cover the costs of communication and issue management planning by Government.

Performance management

The Case 2 Southern Cross Station Re-development audit by the Victorian Auditor-General (2007: 43, 54) concluded that a number of service standards and KPIs were difficult to measure, which then impacted the ability of the Southern Cross Station Authority to successfully monitor and review performance (Victorian Auditor-General, 2007: 43, 54). Where appropriate, KPIs should be reviewed with proposed modifications (including costing) being agreed between public and private partners prior to the commencement of each contract year, or at least on a triennial basis. From a public partner perspective, the need for change may arise, for example, over governance structure inadequacies (e.g. weaknesses in risk management frameworks, which should be addressed as part of scheduled annual policy, framework and procedural reviews), trend analysis findings (e.g. patterns identified in failure event reports/output exception reports), service user complaints, audit findings and variations to contractual agreements arising from wider industry drivers (e.g. economic recession). Changes should be relevant, measurable, repeatable and achievable (Evans and Bellamy, 1995; Partnerships Victoria, 2003a: 131).

The CityLink tollway (Case 1) and the Southern Cross Station Re-development (Case 2) studies (see Victorian Auditor-General, 2004: 64, 2007: 58) show that performance data may contain errors or omissions either through human error or from deliberate deception. Metrics must be reliable and relatively simple to use. Self-reported data must be capable of validation. Public partners need to be vigilant in collecting performance data and competent in checking and analysing the data (Victorian Auditor-General, 2007: 58). Such data and data analyses are often the only objective means the public partner has for confirming the achievement of VfM outcomes for PPP. Failure of the private partner to provide KPI performance data and metrics (including presenting the data in agreed formats) should be properly enforced by the public partner, if necessary through abatement. Threats by the private partner to be ‘awkward’ (see Victorian Auditor-General, 2004: 64 as an example) should be treated for what they are and, if necessary, countered by media publicity or warning that such behaviour may result in reluctance to engage in future projects with that consortia. This has a potential cost in terms of partnership relations, and firm (but private) negotiation should be preferred.

Exceptions in performance, or in provision of performance data, should be fully justified and documented. Inaccurate or falsified data may have serious consequences for the continuation of a partnering arrangement: possibly even leading to enforced contract termination. ‘Self-reporting’ by the private partner of performance failures or breaches should only be incorporated into contractual agreements when full audit processes can be carried out if needed.

The New Schools Privately Financed Project (Case 3) shows that oversight should include regular review of relevant performance documentation, including asset management plans, operation plans, maintenance programmes and environmental management plans (New South Wales Department of Education and Training, 2003: 13). Moreover, regular benchmarking exercises/competitive market testing should take place to establish the relative quality and competitiveness of the services being provided. Even if the private partner is accountable for monitoring its own performance, service delivery outputs should be tested/validated by the public partner (or its nominees) on a regular basis against the consortia’s contractual obligations (AECOM, 2007: 84–85; New South Wales Auditor-General, 2006: 37; New South Wales Treasury, 2005a: 43). This could include progress made against work plans and technical assessments, e.g. public safety reviews; the achievement of outputs and outcomes against KPIs and milestones; improvement made to the delivery of services arising from stakeholder feedback; and the implementation of audit recommendations. Other types of review could include five-year reviews to assess the level of progress made with regard to the achievement of project business case objectives, or for justifications for amending the contract (New South Wales Department of Education and Training, 2003: 16).

Penalties and abatements for under-performance should be consistently applied (Victorian Auditor-General, 2007: 35) unless there is a properly justified case for not doing so (e.g. as evidenced by the Southern Cross Station Authority’s decision not to abate its private partner for repeated under-performance (Victorian Auditor-General, 2007: 59)). Abatement, for example, can be deferred to improve working relationships between the partners (i.e. by giving consortia more time to address issues), or by off-setting under-performing services with other services rendered (National Audit Office, 2009: 56). Under appropriate circumstances, the private partner could be given sufficient time to address under-performance, since achieving compliance is better than punitively pursuing breaches. Such situations should be closely monitored by the public partner. Persistent failure of the private partner to follow through on performance assurances within agreed timeframes should lead to abatement being applied retrospectively. Furthermore, the rationale leading to each instance of non-abatement should be fully documented to protect against corporate memory loss in case of unexpected staffing changes and to provide justification to appropriate government agencies, e.g. Auditors-General, as to why these decisions were taken.

Other observations arise from analysis of the three case studies. Issues of partnership management and operational performance management in PPP are likely to interact with and impact one another. Addressing them will require the public partner to assess carefully if response treatments should be prioritised or harmonised, but ignoring one of them (i.e. either the partnership or the performance issue) is unlikely to bring about remedial improvement in the long run.

The very long-term nature of most PPPs inevitably brings about personnel changes for both parties during the concession period, including those resulting from machinery-of-government restructures, and for the private partner, consortia changes. Such change (for either party) is likely to affect attitudes towards, and observance of, partnership and performance management practices. Management ‘slippage’ of this nature thus becomes a threat risk over time, especially for the public partner with its over-arching public accountability burden. Beyond this (but not found in this research), there is also potential for corruption. Minor acts of deception may turn out to be the start of a very slippery slope. Public auditors-general may have the capacity to detect this for the public partner, but less so for the private partner.

Conclusions

Despite risk being ‘transferred’ or ‘allocated’ to the party best able to manage it under PPP arrangements, partnership and performance management are essential elements within the operating environment. Analysis of three case studies confirms that issues identified in the management literature are applicable to, and found in, public governance in the operational phase of PPP. Partnership management issues include: management commitment and support; clear and open communication; conflict management; employee capability and expertise; and reputation damage. The important issues for performance management confirmed by the case studies are: KPI modification; availability and integrity of performance data and metrics; performance monitoring and adjustment; and penalties and abatement. Only by effective management of these partnership and performance issues will the public partner in PPP, in its governance role, increase the likelihood that intended VfM outcomes are achieved in the long term. Further attention could usefully be given to exploring ways in which the public partner can drive operational performance, but not at the expense of irreparable damage to the relationship between partners.

Limitations and contribution

The three case studies presented here may be considered a small sample, but they are not totally insufficient given the magnitude of such projects. Moreover, relatively few of them are undertaken in any particular jurisdiction and fewer still have reached a fully mature operational state whereby all operational management issues have been fully exposed.

The three cases demonstrate that issues relating to partnership and performance management, found in the literature and across a wide range of entrepreneurial partnership projects, are equally applicable in the environment arising from the greater significance and longer duration of PPPs. It is this environment that demands careful and prompt management attention to the issues since, if they are allowed to persist, the impacts are also likely to be larger and felt longer. This is the contribution of the research.