How to master a Public-Private Partnership (P3) contract
Public-Private Partnership contracts (P3s) may have originated in the UK and developed in a number of other countries such as Australia, but no country has come close to Canada in perfecting the model. The country has reached financial close on more than 220 infrastructure projects from roads, hospitals and schools through to water treatment plants representing over C$70 billion of capital investment.
But despite this success, for private sector organisations and their public sector counterparts entering into P3 partnerships for the first time, and even for some very experienced businesses, there are potential pitfalls that can come to light during the operational phase. The issues tend to revolve around different perceptions of the reality on the ground.
Contracts and contract management
In some cases, the original P3 contracts were poorly drafted. The language used was overly complex, and was difficult to translate into day-to-day facilities and maintenance activities. The legalese meant that both parties were unsure of their responsibilities, which caused confusion and the potential breakdown of stakeholder relationships. Survey evidence from the UK shows that the most frequent reason for disputes between public sector clients and the private partner is over the interpretation of the contract (National Audit Office 2001).
Even now, some contracts are not ‘translated’ into standard English leaving both client and service partner floundering. Having an agreed and objective interpretation of the contract is essential when dealing with complexities as they arise. An obvious solution to this is to ensure that all parties in a P3 relationship interpret each clause of the contract in a common way. This might be a lengthy process but it will save a great deal of time and trouble further down the line. A properly designed contract management framework that outlines the service outputs that the client requires, the methods for measuring and monitoring performance, and the regime under which the payment due to the private partner is determined, reinforces the sense that everyone knows what is expected of them, and by when.
Furthermore, some of the original P3 contracts failed to adequately anticipate that adjustments might need to be made to the contract to respond to the changing requirements on the ground. For example, the maintenance requirements for a hospital is unlikely to be the same in year one, as it is in year 25. Medical advances, combined with technological change in building management, would mean that the contract needs to be modified to support the environment and its users. Having a strong relationship of trust, generated from having one version of the truth as described above, can help to ensure that any adjustments are smooth.
Within the public sector, professionals are often over-stretched or lack the experience to manage such highly complex contracts. With a strong desire from taxpayers to ensure that their funds are being well spent, it can be challenging to demonstrate that these massive deals are delivering good value – or not.
The role of good data
Independent, transparent and auditable data is the solution to this challenge. If the public sector client has detailed and unbiased data about the operation of the contract – on the service provider’s performance on a specific range of service level agreements and key performance indicators – then they can demonstrate with certainty to the government and taxpayers that they have achieved value for money.
Within successful P3 relationships, the contract’s legal requirements are typically translated into a performance management software system that produces outputs which are clear and easily understandable by everyone. Such systems can also analyse the financial and operational impact of any changes to the contract which might be needed. The key is for the data to be transparent (fully available and accessible to all) and auditable (recorded to enable systematic review and evaluation to determine the quality and timeliness of the services provided).
While the public sector’s requirements are typically framed in an output specification that is measured through the performance management software, which determines the correct payments to a service provider from the authority, many newer P3 relationships are going even further. Introducing an automated payment mechanism system to ensure that where the quality of service delivery falls short of that outlined in the output specification, the appropriate financial deduction can be levied on the service provider, is ensuring complete transparency.
The payment mechanism sets out the time required for repair and rectification of failures, depending on the importance of the affected area, before payment deductions are triggered. In the hospital example, a light bulb out in an operating theatre would require a much quicker rectification time than a similar issue in a storeroom. Many P3 relationships have also introduced ‘ratchet’ mechanisms, whereby recurring or widespread failures across key services lead automatically to higher deductions.
The important thing is for the deductions to incentivise good performance, and not introduce perverse incentives or unintended consequences. Poor use of payment mechanisms, for example, using them as a punitive, revenue-generating tool, rather than as a joint management tool to optimise performance, its intended purpose.
P3 contracts are complex and the pitfalls are numerous. But with a strong relationship based on trust and independent, transparent and auditable data providing one version of the truth, they can provide enormous benefit to society, improving infrastructure and service delivery and creating jobs.
Gary Watkins is CEO of Service Works Global, an international solutions provider of Facilities, property and P3 Performance Management software.
Read the September 2016 issue of Business Review USA & Canada magazine
Six issues at the top of tax and finance leaders’ agenda
New Deloitte research reveals that tax leaders are under increasing pressure to add strategic value as companies accelerate business model transformation, from undergoing digital transformations to rethinking their supply chains or investing in green initiatives.
According to Phil Mills, Deloitte Global Tax & Legal Leader, to “truly deliver value to the business, the tax function needs to rethink its resourcing model and transform its technology infrastructure to create capacity and control costs”.
And the good news, according to Mills, is that tax and business leaders have more options at their disposal to achieve this.
Reflecting the insights of global tax and finance executives at global companies, Deloitte’s Tax Operations in Focus study reveals the six issues at the top of tax and finance leaders’ agenda.
Trend 1: Businesses seek more strategic counsel from tax
Companies are being pushed to develop new digital products and distribution channels and accelerate sustainable transformation and this is taking them into uncharted tax territory. Tax leaders say their teams must have the resources and skills to give deeper advisory support on digital business models (65%), supply chain restructuring (49%) and sustainability (48%) over the next two years. This means redrawing the boundaries of what tax professionals focus on, and accelerating adoption of advanced technologies and lower-cost resourcing models to meet compliance requirements and free up time.
According to Joanne Walker, Group Tax Director, BT Group PLC, "There’s still a heavy compliance load today, but the vision for the future would be that much of that falls away, and tax people become subject matter experts who help program the machine, ensure quality control, and redirect their time to advisory activity.”
Trend 2: Tipping point for resourcing models
Business partnering demands in the tax department are on the rise, but 93% of tax leaders say their department’s budget is remaining flat or falling. To ensure that the tax function can redefine itself as a strategic function at the pace that is required, leaders are choosing to move increasing amounts of compliance and reporting to a combination of shared service centers, finance departments, and outsourcing providers that have invested in best-in-class technology.
Trend 3: Digital tax administration is moving faster than expected
in addition to the rising focus of the corporate tax department partnering with their business counterparts, transformative changes to the way companies share tax information with revenue authorities is also creating an imperative to modernize operations at a faster pace. Nine in 10 (92%) respondents say that shifting revenue authority demands on digital tax administration will have a moderate or high impact on tax operations and resources over the next five years—and several heads of tax said the trend is moving faster than expected.
"It’s really stepped up in the last couple of years," says Anna Elphick, VP Tax, Unilever. "Tax authorities don't just want a faster turnaround for compliance but access into a company’s systems. It's not unreasonable to think that in a much shorter time than we expect, compliance will be about companies reviewing a return that's been drafted by the tax authorities."
Trend 4: Data simplification and lower-cost resourcing are top priorities
Tax leaders said that simplifying data management (53%) and moving to lower-cost resourcing models (51%) must be prioritized if tax is to become more proactive at delivering strategic insights to the business. Many tax teams are ensuring that they have a seat at the table as ERP systems are overhauled, which is paying dividends: 56% of those that have introduced NextGen ERP systems are now highly effective at supporting the business with scenario-modeling insights. Only 35% of those with moderate to low use of NextGen ERP systems said the same.
At Stryker, “we automated the source P&L process for transfer pricing which took a huge burden off of the divisions," says David Furgason, Vice President Tax. "Then we created a transfer price database to deposit and retrieve data so we have limited impact on the divisions. We are moving to a single ERP platform which will help us make take the next step with robotics.”
Trend 5: Skillsets are shifting
Embedding a new data infrastructure and redesigning processes are critical for the future tax vision. Tax leaders are aligned — data skills (45%) and technology process experience (43%) are ‘must have’ skills in a tax department of the future, but more traditional tax specialist knowledge also remains key (40%). The trick to success will be in tax leaders facilitating the way these professionals, with their different backgrounds, can work together collectively to unlock lasting value.
Take Infineon Technologies, which formed a VAT technology and governance group "that has the right knowledge about how to change the system to ensure it generates the right reports", according to Matthias Schubert, Global Head of Tax. "Involving them early was key as we took a greenfield approach, so we could think about what the optimal processes would look like and how more intelligent systems could make an impact
Trend 6: 2020 brought productivity improvements
Improved productivity (50%) and accelerating shifts to remote working (48%) were cited as the biggest operational benefits to emerge from COVID-19-driven disruption. But, as 78% of leaders now plan to embed either hybrid or fully remote models in the tax function long term, 34% say maintaining productivity benefits is a top concern. And, as leaders think about building their talent pipeline and strengthening advisory skill sets, 47% say they must prioritize new approaches to talent recognition and career development over the next two years, while 36% say new processes for involving tax in business strategy decisions must be established.