The public sector is meant to be spending, but is it really? And how do you win those potentially invaluable contracts? Christian Annesley reports.
The global economic slump has arrived with a vengeance, and in the short term the UK government wants to spend the country’s way out of trouble.
That was one of the messages in Chancellor Alistair Darling’s Pre-Budget Report delivered to the Commons in November 2008.
And the premise is simple: public investment now will help lift the economy out of recession more quickly and get the tills ringing and the tax receipts flowing again.
Alongside that headline-grabbing commitment, Darling paraded some big national investment plans, including £700m to advance the Department for Transport’s plans to increase capacity on the motorways and other highways, plus £775m to be brought forward for housing and regeneration investment.
He also pledged £150m to be invested in social rented housing in an attempt to deliver 2,000 more social rented homes, as well as £175m for major repairs to council housing stock. Another big tranche of money – £800m – was to be brought forward on the priority schools capital programmes.
In the five months since then there have been plenty of reasons to doubt this programme of spending as public sector finances start to come under pressure. In recent weeks, for example, funding shortfalls have surfaced at the Learning and Skills Council for planned building works at further education colleges, while in the West Country the South West Regional Development Agency (RDA) now has £56m less to spend in the next two years.
Yet, even if Darling’s plans to bring forward public sector projects don’t all come off, there are still public works worth huge sums up for grabs. It’s reckoned that annually £175bn of public sector business is put out for tender – and that’s just in an average year.
In the South West, as in other parts of the country, public sector contracts are generated by central government, regional agencies and by local authorities – or by a combination of these.
As you may expect, different financial forces are driving these sources of potential business. Some of the projects, backed by central government – for schools, hospitals and the like – are bankrolled by private finance initiatives, which had looked shaky until the government stepped in.
But at the regional level, bodies such as the Homes & Communities Agency and the South West RDA are still investing in their respective agendas, as are the councils involved in a raft of different schemes.
And it’s fair to say the public sector is more aware than ever of its responsibility to keep these projects moving forwards if at all possible.
Colin Molton, regional director for the South West at the Homes & Communities Agency – the national housing and regeneration delivery agency for England – says his agency and other public sector bodies are creating more flexible partnerships with the private sector to better withstand financial shocks and enable everyone involved to take a long-term view.
“The money available to spend now is being used more flexibly than ever,” he says. “We are working with developers and local authorities in imaginative ways that should help to make the cash we are investing go further.
“Developers and contractors that may instinctively view working with the public sector as difficult should revisit the idea. Whereas in the past contracts might have suffered from being too rigid, these days our relationships with the private sector are partnerships first and foremost. And the spin-out benefits from the schemes we work on are there for the wider business community to tap into.”
The South West RDA also says the priority is to work for the long term and keep projects moving where possible.
Ian Thompson, the RDA’s area director for the southern half of the region, says the regeneration schemes the agency gets involved with rely on partnership working, often with several partners, on schemes that promise to unlock the region’s economic potential.
“Every deal is different, and the RDA has put money into schemes large and small, but these days we favour bigger projects and long-term arrangements with the private sector,” he says. “If you are working on projects that will last five years or more, a partnership arrangement is what you need to deal more easily with the peaks and troughs experienced by the wider economy. It is a more organic approach than coming up with a tightly defined deal that falls apart the minute the economic landscape changes.”
One company that spends a lot of time working with the public sector is developer and regeneration specialist St Modwen, which has a South West office in Avonmouth. It sometimes participates in partnerships with the public sector by forming a joint venture following the government’s local asset-backed vehicle (LABV) methodology.
The principle behind an LABV is that a company will be created to work on a development project and the public sector will invest in that company by transferring land and property assets. A private sector partner such as St Modwen will be appointed, via a competition, that will invest cash in the company to match the public sector investment. The LABV will then work to deliver a business plan using the cash and assets, and be run as a commercial business to provide a financial return to the investors.#
In February 2009 St Modwen was named as preferred joint venture partner for a 20-year project with Devon County Council to work on the Skypark project – a 107-acre site to the north of Exeter International Airport, which has been earmarked for a 1.4m sq ft development of office and industrial space.
Rupert Joseland, St Modwen’s regional director for the South West, says the deal is typical of the kind of arrangement St Modwen enters into with the public sector, and it’s not something to fear.
"Competing to get involved in a joint venture like this is a lengthy process, for sure. There are lots of stages and a big commitment is required because it may take a couple of years from start to finish,” he says. “But it’s a fair, transparent process and I wouldn’t say it’s unnecessarily bureaucratic. We learn from the process whenever we bid.”
And every time a major developer such as St Modwen competes for a contract or wins one, it creates a flow of business for local companies.
“For the Skypark project we are using engineers, planning consultants and architects,” adds Joseland. “Later on we should be going out to tender to pick suitable contractors – and there will be a local focus.
With the public sector involved there are often local labour clauses specified and a requirement to source materials locally.”
When seeking out contractors the company is ready with a live job, too. “Tendering contractors need to know there is real work to be had and this isn’t speculative,” he says. “Once we put out a tender there is certainty that the project will go ahead.” Another good example of how public sector schemes are generating opportunities for private companies is the Twin Sails Bridge project, poised to get under way later this year in Poole.
The £40m project is being financed by a £10m loan from the South West RDA, plus £14m from the Department for Transport and smaller contributions from other public sector sources.
The money will go on building a new bridge and link road that will connect Hamworthy with Poole’s harbour, opening up Hamworthy’s 65 acres as a viable regeneration site for decades to come. Poole councillor Ron Parker is also explicit that the project “will generate crucial employment opportunities that will help boost the local economy at a difficult time”.
Alan Taylor, regeneration project manager at the council, says the Europe-wide and OJEU-compliant tendering process to build the bridge – a £19m contract – is under way and interested companies have until June 2009 to submit an entry.
“We then have to satisfy the Department for Transport in the summer that all the tenders are within a given range,” he says. “If they are satisfied, we get the £14m and it’s all systems go.”
Construction work on the bridge is expected to take 20 months and the build is based on plans already developed by engineers at Gifford and Wilkinson Eyre Architects and Bennetts Associates.
Like nearly all the major investment projects happening in the region, work on the Twin Sails Bridge will be a product of collaboration between different public and private sector partners, and it serves as a useful reminder that the South West is expected to speak to central government with one voice.
Something called the Regional Funding Advice process was completed by the region in February and a final document submitted to the regional minister, Ben Bradshaw, on 28 February 2009. The advice it contains is the collective work of organisations including the South West Regional Assembly and the South West RDA. It goes forward to central government listing the region’s detailed funding priorities for the next three years and indicative plans as far ahead as 2018.
Ian Knight, the South West RDA’s area director in charge of the Bristol-Bath city region and south Gloucestershire, says putting a collective case like this is not easy but is important because helps to give everyone a clear view of what’s coming – as well as being a genuine attempt to align the region’s capital investment with economic performance.
“And remember, the story we tell isn’t just a public sector story because the region’s projects and plans are all public-private collaborations of one sort or another,” he says.
Collaboration so often implies compromise, but Knight says one important message for the private sector to understand is that the public sector’s commitment to creating sustainable communities for the long term and greener building practices will only strengthen as time goes on – and compromise really isn’t on the cards.
“For those developers and other pioneers able to break the mould with their plans or suggestions for how to develop new communities like the one proposed at Ashton Vale in a sustainable way, there is a big opportunity,” says Knight.
“Too often we see traditional plans from developers that don’t address questions about long-term sustainability. We want to see ideas to help create sustainable, self-contained communities where residents can live and work locally if at all possible. And we want to see plans for district heating in the mix, for instance, as well as integrated transport plans that minimise reliance on private cars.”
Knight says developers and land owners have “a heavy responsibility” to create good plans for new communities because these schemes will take a long time to deliver, and the world’s environmental targets – an 80 per cent reduction in carbon from 1990 levels by 2050 – are there to be met.
“One tendency that we have noticed is for some developers to argue sustainable building practices aren’t economic in the current climate, but most projects won’t even start until the recession is behind us – and in the long run, as energy prices climb, sustainable buildings and communities should attract a premium.”
And it’s the same message from Knight’s colleague Thompson.
“Nearly 30 per cent of CO2 emissions come from buildings. That is a huge factor in a low-carbon economy,” he says. “We will definitely be maintaining standards whatever the developers say – it’s better if they work with us on this at every step.”
Also in: April 2009
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