Intouch Autumn/Winter 2007-08

The UK: a model for public-private partnership

When private participation in UK public services was introduced by the Thatcher governments of the 1980s, its remit was quite narrow. It was a one- imensional focus on cost reduction, in particular around the delivery of low value added blue collar services. The result was relatively short-term contract tenures being awarded to the lowest price contractor.

Alan Giddins, the 3i Partner who leads its global Business Services team, has seen the UK market develop a long way since those early days: “As the public sector has embraced outsourcing it has seen the shortcomings of a commoditised approach. The frequent change of providers was disruptive and the lack of a value-added dimension in the bidding process meant that opportunities to drive through quality improvements were lost.

“Today, the public sector has sought to address this through developing partnership relationships, with service providers focused on longer term service and value delivery.”



Longer contracts: more innovation
The first sign of the partnership approach was a lengthening of contracts, as three years typically extended to seven. With a longer term contract in place, it made sense for public bodies and private sector providers to spend more time focusing on innovation and improvement. Low cost was taken as a given – better delivery became the driving force.

The desire for longer term relationships was also reflected in the trend towards the bundling of a range of services into a single contract. In the 1980s, local authorities would typically buy a series of different services from a variety of single service providers. Today, the emphasis has switched to using a smaller number of large providers, each of whom has the capability to undertake a broad range of activities.

This has delivered further savings through simplifying the contract management process.



Outsourcing provider Enterprise plc exemplifies this new approach. Acquired by 3i in May 2007, Enterprise is wellknown for its groundbreaking contract with Liverpool City Council, signed in 2000. This contract covers a range of maintenance activities, including street lighting and road maintenance through to social housing. This type of contract is hugely efficient, because it gives responsibility for a wide range of the council’s core maintenance services to a single provider. It is also a more satisfying way to work, as it creates rounded jobs for employees and offers them better development opportunities.

But according to Giddins, the other key feature of the contract is its legal structure: “Ultimately, what makes the contract so innovative is that it’s a joint venture between Enterprise and Liverpool City Council – so the better the contractor performs, the more money gets returned to the local authority, and therefore reinvested back into improving public services. Hence the rationale for all parties working together is clear.

“Public sector outsourcing in the UK has taken 20 years to reach this level of partnership. There remains however a long way to go in the refinement of how the public and private sector models can work alongside each other.”

Public outsourcing in Europe: Slow evolution or rapid leap?
The lessons learned in the UK have not gone unnoticed across the Channel. While outsourcing has yet to reach the levels of penetration seen in the UK, many public sector bodies in Europe have actively encouraged private participation. In France, local authorities have long outsourced key aspects of their maintenance.

Former 3i investment, Keolis, is a leading player in the privatised provision of local bus services in France.

According to UBS’ Head of European Business Services, Richard Gostling: “The lower penetration rates across Europe are in part the result of cultural and political  resistance to the concept, and in part the impact of more restrictive labour practices and legislation. Unlike the UK, the trend to outsourcing has been led by the private sector rather than the public sector. This has resulted in a more fragmented, single service provision approach to the letting of contracts rather than the bundled model that has developed in the UK.



“The political climate for change is, however, growing and I expect to see a steady growth in public sector outsourcing across Europe. The public funding challenges faced by European governments are the same as those faced in the UK and indeed, a lot of infrastructure outsourcing has already occurred,” adds Gostling.

In June 2007, 3i invested in Eltel Networks, a Finnish company which designs, builds and maintains telecoms and electricity networks across the Nordic region. Many of its clients are in the public sector, and its strong recent growth has, in part, been fuelled by the appetite of state-owned bodies to introduce private sector efficiencies into the provision of core maintenance activities.

Whilst the trend has been less marked in the Mediterranean countries, the adoption of public sector outsourcing is certainly not confined to northern Europe. Giddins sees clear signs of change in Spain, where 3i has invested in waste collection company Daorje Grupo (formerly Cares): “Public sector outsourcing is at an early stage in Spain. Daorje, however, is a great example of a company successfully accessing these markets.

“Over the next few years, it will be fascinating to see whether a market such as Spain evolves through each of the phases the UK saw or uses the British experience to take a single leap forward. Private sector providers in European countries have every reason to move rapidly to the multiple-activity, full-partnership model. The key question is whether their public sector counter parties will feel a similar motivation.”

Giddins concludes that while the opportunity exists in Europe, many European service providers are already increasingly looking to the significant opportunity for outsourced maintenance services in the Middle East, as the huge levels of construction activity continues.

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