Rising East Online

Polarities: Who Will Build The Thames Gateway?

Julian Barwick claims market forces have a progressive role to play. Richard Sharpe disagrees

• The Private Sector Will Provide (with Government as pro-active partner) by Julian Barwick;
• Markets Are Not Working in the Public Interest (only for those who dominate them) by Richard Sharpe.

The Private Sector Will Provide (with Government as pro-active partner)

—Julian Barwick, Managing Director, Development Securities

By 2020 the Thames Gateway will have formed a new city within a city, with a well-designed mixture of houses, a range of job opportunities, excellent social and cultural infrastructure and good transport connections to the rest of London, South East England and Europe.

Tapping into the development potential of the Thames Gateway will help accommodate London’s growth without encroaching on green field sites or the Green Belt, and has the potential to deliver improved quality of life through integrated social, environmental and economic revitalisation for existing communities. The importance of development in the Thames Gateway has been recognised by central government with £46 million allocated for infrastructure, £60 million for local health services, and nearly £10 million for education and training.

Although there are very few projects to compare with the scale and ambition of Thames Gateway, similarly challenging projects in the UK have all benefited from private sector involvement. In Canary Wharf, developers provided the commercial backbone needed to drive the project to its current, successful state. The courage of the early private sector organisations helped create the steady momentum from which sustainable development has been built.

The private sector is able to deliver innovative solutions that are crucial to the creation of sustainable communities. In areas such as waste management, state of the art construction techniques and materials-use, companies can develop environmentally sound practices that have demonstrable benefits.

Development Securities’ management approach and corporate governance are geared towards a broader, ‘sustainable’ outlook, and as a consequence we are committed to making a distinctive contribution to the Thames Gateway project. Within the Thames Gateway, Development Securities’ work at Royals Business Park covers 20 hectares of land which is being transformed into a high-quality business and leisure quarter. The Park itself will be a 50-acre, highly landscaped environment opposite London City Airport. The four integrated waste initiatives that we undertook at the site, including employing a specialist contractor to manage and measure waste, comprise a clear demonstration of private sector innovation. On completion of Phase I of the development, Building 1000, we were able to measure a significant reduction in waste generation. We are now committed to putting in place waste management plans for all our future large-scale developments.

Our experiences on the other side of London at Paddington Central could also make a real contribution elsewhere. Here we have made a dramatic, social contribution, boosting both the local economy and educational facilities. This has clearly demonstrated to both central and local government that the private sector is a reliable vehicle for delivering requirements beyond the immediate remit of a project.

In addition, our Cambourne Business Park project for South Cambridgeshire District Council is a leading example of practical environmental sustainability. The key lesson of the development and construction of this building is that sustainable ‘green’ design need not be seen as a separate option that architects or developers can choose to take, but as an inherent component in any aspiration to produce good buildings.

In order to continue to provide effective support for regeneration, the private sector needs to have a stable environment in which to invest, where the regulatory framework and responsibilities are clear from the outset, and where the right incentives are in place to achieve government objectives.

In an industry with long lead times, it is crucial that developers understand future plans for taxation and regulation. The current proposals for Planning Gain Supplement have been controversial with industry and commentators; these difficulties have been exacerbated by a lack of clarity about what is happening. The proposal remains on the public agenda, and was neither moved forward nor laid to rest in the Chancellor’s budget speech of March 2006. The consequent prolonged uncertainty has significant implications for private sector involvement in large-scale regeneration schemes and may impact future investment levels.

It is also key that the private sector understands the political process and that there is transparency about how decisions are made. However, this is difficult in London, which now has one of the most complex set of governance arrangements of any major Western city. The clarity of the role of an elected mayor has been eroded not only through the checks and balances of the Greater London Assembly (GLA), but also by the enduring significance of the boroughs, Government Office for London (GOL), the London Development Agency (LDA) and a host of other public bodies. In some cases these bodies enjoy statutory involvement in key decisions. We welcome the Government’s recognition that these arrangements need reviewing.

Finally, it is important that government policy objectives such as sustainable development are reflected in the way that development is taxed and regulated. There has been a keenness by all political parties to chase after the high visibility initiatives rather than those that might deliver the most environmental value. My particular interest is waste management, where effective design has the potential to make huge reductions in waste generation.

Government cannot and should not try to escape the democratic straightjacket of the four-to-five year electoral cycle. However, within that constraint perhaps it is time to replace annual processes with quadrennial ones. For instance, the idea of an annual budget is surely fast becoming an anachronism in an era of low inflation and independently set interest rates. Indeed, the Chancellor’s emphasis on an extended economic cycle, three-year rolling public expenditure programmes, and his ‘Golden Rule’ of borrowing over a five-to-seven year cycle themselves suggests government recognition of the redundancy of the self-contained annual plan. This long-term thinking will increase private sector investment through providing potential developers with an economic and legislative framework that is clear and predictable.

Similarly major subjects such as the governance of London and the reform of the planning system should be subject to one thorough assessment, rather than repeated review, ensuring that the commercial world can plan ahead with a greater degree of certainty. Government also needs to look at best practice in the private sector on issues such as sustainability and waste management and ensure that incentives created by the planning and development system encourage rather than impede optimal performance. Such an approach would ensure that areas like Thames Gateway will, of course, continue to benefit from and appreciate not just the considerable resources coming into the area from central government, but also a commercial climate that enables the private sector to bring to bear its full track record of achievement and expertise.

The Thames Gateway development is a ground breaking and challenging scheme. With effective engagement from Government the significant contribution that private sectors firms stand to make will be fully realised. The early signs are positive but it is crucial to the future success of the development that through clear and open dialogue, Government can provide certainty for private sector organisations looking to assist with Thames Gateway.

Julian Barwick is managing director of Development Securities

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Markets Aren’t Working in the Public Interest (only for those who dominate them)

—Richard Sharpe, journalist and consultant

The regeneration projects of the Thames Gateway and the London Olympics will severely test the relationships between the private and public sector. The theory of these relationships is that both sides bring different expertise and create partners to benefit both sides. A win-win partnership, to use the jargon.

The reality has proven to be very different from this theory in most cases. We do not have to rely solely on evidence from such monumental cock-ups as the Dome or the privatisation of the railways to see the problems. There are, indeed, two key issues which underlie all the vexed relationships between the private and the public sector in projects or services. They are easily said but need some explanation.

They are: markets and risk.

The theory is that the private sector operates in a market-led economy. Companies only succeed if they service the interests of their customers at the right price. Success comes in the form of higher profits and more satisfied customers. The market provides competition. This competition keeps all players on their toes and weeds out those who cannot compete. This attracts the public sector looking for competent partners.

The public sector uses this competitive element of the market to tone up its own services and projects. It uses external competition to select suppliers from a market. It relies on market competition to tone up the suppliers of public sector services.

That’s the theory.

The practice is different, as I have found in researching the relationship between the two. I have found that there is no ideological barrier at all to the provision of a public service by a private contractor. The service may remain public: for example in the NHS free at the point of need; but supplied by a private contractor. The network of public transport, for example, remains a public service increasingly provided by private contractors. The relationship can only work if the private sector is really bringing all that the market promises to the job. But it is not. And that is where, under all the details of the various high profile projects, the relationship between the public and the private sectors breaks down.

First, markets are not evenly distributed between competitors: they are concentrated. You look at almost any list of suppliers of projects or services to the public sector and you will find a handful of providers. You will not find an open healthy market in which the full force of competition is felt from a range of suppliers of different size and capabilities. Take a sector with which I am particularly familiar: the provision of IT services to the public sector. Again and again the same handful of suppliers are bidders, partners and suppliers of services. EDS, IBM, Unisys, CSC, Capita, BT and few others. Smaller companies just cannot compete for such work because of the complexity and administrative overheads. So the large companies have a market to themselves.

Second, the theory says markets should force competitors to be separate, to act in fearsome competition. Yet, one day a private sector vendor will be bidding in competition; another day they will be playing the senior or junior partner to the same company that yesterday they were apparently trying to beat.

Third, markets should provide multiple options to buyers. In essence, the public sector has very few options, wherever it turns. Drill down into the detail of each public service and you find just a handful of suppliers. Primary and secondary school catering? It’s Compass and Initial. Facilities management for the NHS? It’s ISS, Compass (again), Sodexho and Initial (again). Privatised prisons? It’s Serco, UKDS, Group 4 and Securicor. And so it goes on through almost every sector of the delivery of public services. The rest of the vendors are left with small market shares or, even more dangerous, adopt a strategy of grabbing market share by underbidding. Just look at the history of Jarvis for a tragic example of the latter.

In all, the private and voluntary sector can today deliver some 20% of public services on behalf of public bodies. That’s about £60 billion worth of business (Financial Times 18 April 2005). Tomorrow it will be more. In each project area, each part of the public sector now supplied by the private sector, a small handful of companies operate. And it is not a conspiracy. It’s just how markets, real markets, work.

Fourth, big government enforces the role of big business. Most of this business is handed over to a small handful of companies. But, just to make the point again, that’s how markets work: big players take the largest shares and big government supports this approach.

This is not a plea for the small and medium business sector to get more public sector work, to get a larger share than just the crumbs of that £60 billion and rising. Big government can hardly deal with small and medium enterprises. They are too small to be detected by the radar of big government; or, much more likely, small and medium enterprises just cannot afford to work with big government. The bidding processes alone, let alone the monitoring of services, are a prohibitive burden on small and medium businesses. Yet, understandably, the public sector has to have clear and detailed bidding rules to make sure it gets value for money, selects adequate providers, and avoids fraud. So the market is already bent out of shape. But we see that these rules are also changed in favour of big business which becomes the partner of big government.

And, shocking though this might be to people outside the loop of public sector purchasing officers and the private sector suppliers, some contracts never go to competition. The new word is ‘partner’. There are preferred partners for many ranges of service who do not have to bid. The public sector shows ‘trust’ in their partners by handing across projects and services without any competition at all. This, for example, has recently happened when the Ministry of Defence signed a £200 million, five-year contract for helicopter maintenance to Boeing without competition.

Now some important points about risk. When the public sector uses the private sector to supply services or undertake projects, it wants to balance reward and risk. The reward is the profits which the private sector can make. The financial risk is that the project may fail, may overrun, may not generate any profits, indeed may cause the private sector partner to lose money. But under this financial risk is a larger risk: that the public will not get the service it has contracted for.

Experts can calculate risk. And they can build it into their price models. But they find it hard to calculate when it is not clear who is taking the risk. And, here’s the core point that distorts the relationship between the private and public sector on risk: the public sector cannot transfer the risk of not providing the service to the private sector. For the risk is carried by the public, in both ways. The public does not get the service it has mandated its elected representatives to provide. And has paid for through taxation. Further, the public sector still carries the financial risk at the end of the day. Just look at the subsidies for the transport sector and see how the risk is being shouldered by the public purse.

If a train does not turn up the travelling public carries the risk. The train operating company may be fined – a financial risk it has built into its economic model. Finally, however, the public sector pays a subsidy to the train operator. Little risk has really been transferred to the private sector. Who profits? The train leasing companies, who are mostly the subsidiaries of the larger banks.

So the balance of risk and reward is not equal. In other words, the market is again not working because there is no equal transaction between the two parties. The public sector cannot shed the risk. For the risk is dead patients of the NHS, abandoned passengers, and the like.

This is not to say all is doom and gloom. There is a handful of successful projects between the public and private sectors. They adorn the annual reports of the large companies which dominate the public sector market as they report to their shareholders their financial success. But they do not report that they have taken on any substantial risks. That would, after all, frighten away investors, collapse share prices and force senior executives into retirement.

But when you skim off the spin you will find in sector after sector a failure of the market to properly support public services and projects and an unequal balance of risk and reward. Think of the state of the rail service. Think of the state of the London Underground. Think of the state of the NHS. Think of the state of the outsourced information technology projects. All of these, and more, show that the market does not work as the mediator between the search for project and service suppliers by the public sector, on the one hand, and profits of the private sector on the other.

A relationship between public and private sector based on such shaky foundations is bound to cause problems for the regeneration projects and services of East London and the Thames Gateway.

Former editor of Computing, now an editorial trainer and consultant, Richard Sharpe is also Honorary Visiting Fellow in the School of Social Sciences, Media and Cultural Studies at the University of East London.

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