12 March 2004
IT public/private partnerships are growing, and have their own unique challenges.
Public/private partnerships play an increasingly important role in major IT projects, nationally and internationally, but IT PPPs projects differ from other PPP projects in a number of important respects. Some of these differences are more a matter of degree than of fundamental principle or structure, but they explain (at least partially) why IT PPP procurements have come to be out of step with other PPP sectors. In this article, we look at the main areas of difference.
Lack of replicable business models
Many areas of PPP activity, such as roads, hospitals and schools, have well established and replicable business models. By contrast:
“Partnering” and “partnership”
IT service providers in all fields (not just PPP) frequently stress that they see the relationship with their customers as one of “partnership”, but for several reasons this concept can cause difficulties:
Failure to set these parameters will undoubtedly make the project more risky (usually for both parties) and may also deter third party investors (whose involvement might improve the value for money options available to the customer). This is because financiers, being distanced from day-to-day involvement in the progress of a project, have to be satisfied not only with the feasibility of particular solutions, but also that the project risks are specified with sufficient clarity and allocated correctly.
Customers, service providers and financiers should therefore equally recognise the importance of contractual certainty in partnering arrangements, as well as the need to provide for the flexibility that is essential for the purposes of the project. Partnering should not be used as an excuse for failing to decide or agree on important parts of the deal that should be included in the contract.
Subject to a few exceptions, most IT PPP contracts have not (yet) involved either limited recourse financing or a stand-alone Special Purpose Vehicle (SPV) acting as the service provider, but have rather been handled directly by a major IT service provider financing the project through its own internal resources. The consequences of this trend have been:
Of course, while the involvement of third party finance can help in reducing the risks identified above, externally funded structures should be assessed on an equal footing with the established service provider funded model. It is not the intention of this article to promote any one model. Indeed, there are advantages to the service provider funded model (ie. the security of a large organisation backing the deal) as there are to the externally funded model (ie. security that the deal terms have passed the scrutiny of a third party financier). However, we do expect that third party funding will increase in IT PPP projects as the market becomes more established.
The nature of the assets used to deliver IT services
Although the principal obligations of the service provider will be framed in terms of delivering services to meet the customer’s business requirements, performance will depend on the ability to develop, operate and maintain both tangible and intangible assets - put broadly, hardware and software. By contrast with many non-IT PPP projects, a substantial part of the benefit of an IT project may lie in intangible assets produced in the development phase, which impacts on the contract documentation in a number of ways. For example, special provision needs to be made in the contract as to ownership and use of intellectual property rights (“IPR”), access to source code and know-how, residual value risks and alternative use of the assets on termination or expiry.
The assets required for an IT PPP project have a number of other unusual characteristics. In particular:
Frequency and extent of changes to the services
IT PPP projects invariably impact on core business; similarly core business will often dictate the type of IT services that are required. Consequently, aspects of the customer’s business requirements may need to change because of alterations in the customer’s business processes. These alterations may be caused by new laws, changes in Government policy, changes in administrative objectives or changes in the priorities of the customer. Alternatively, changes to the customer’s requirements may be the result of choices made by the customer (as opposed to impositions through circumstance). The fact is that core business is a moving object and, as it develops, the services that the service provider delivers will evolve. The parties will need to be careful to manage the issue of frequent and sometimes major changes in requirements.
There are five aspects of an IT PPP project that require special consideration: