Vanguard Magazine

18 JUNE/JULY 2018 www.vanguardcanada.com trical generators and the heavy equipment transporters. The PPP project on combat support vehicles was rejected. Contractual structure and is- sues with PPPs We can visualize components of a general PPP in the chart below with defence ter- minology and, in particular, UK's Voy- ager program that we will closely examine below. The user (3) being RAF, SPV or AirTanker (2) delivers the input services to RAF, strategic air transport and air-to-air refuelling, in return for service payments from the Ministry of Defence (MOD) (1). AirTanker acquires the equipment from Airbus (Design and Construction con- tractor) and builds the capability with Sponsored Reserves (a special category of reservists for combat-related operations), maintained by its contractor (4) or OEM Airbus and operated by AirTanker's Spon- sored Reserves (5). The procurement au- thority only allocates effort to contract enforcement in coordination with the mili- tary and makes the contractually-specified payments. In the process of standing the capabil- ity, the defence force specifies the outputs required of the outsourced capability but, by and large, leaves the private sector to choose the input mix (see below the air- craft choices of the two finalists for Voy- ager). First, the contractor minimizes the overall cost over the life-time operation of the capability. This is conducive to an ef- ficient choice of inputs without wasteful excess capacity or contractually-costly de- ficient capacity. By contrast, governments may minimize the upfront acquisition cost of equipment rather than the total cost of the capability by underplaying operations and maintenance costs accruing later. A second advantage is the allocation of the risk to partners in best position to miti- gate them. For example, political interfer- ence or electoral cycle risks may be reduced as the contractor is less politically-exposed than government, or in-service sustain- ment will be assigned to a partner chosen on the basis of performance evidence. Third, a PPP can shift the equipment ac- quisition cost off the defence capital bud- get by bundling it into yearly contractual fees payable to SPV. Though the cost of capital is lower to a government than to private sector, the generally superior oper- ational efficiency of the private sector may more than compensate for this public sec- tor advantage. Thus, overall cost savings must come from the private sector efficien- cies of running the capability, including the ability to generate revenues from ex- cess capacities inherent to the outsourced capability. Finally, savings from organizational tasks shifted to SPV, releasing the military from managerial burden, contribute to overall financial savings. An often disregarded fac- tor in this comparison is the cost of man- agement in hierarchies when the service is provided in-house. However, a decisive issue remains. When the military's hierarchical decision-making authority structure and unlimited liability are replaced by contractual relations un- der PPPs, service quality questions arise in relation to command and control. For instance, timeliness of refuelling, the qual- ity and quantity of fuel delivered, and ac- cess to service over danger zones come to mind. These issues of probity are expected to be addressed by contractual incentives and trust under PPPs. The early UK evi- dence supports this expectation. in serViCe sUpport Procuring Authority 1 Users 3 Debt holders Insurers RaŸng agencies OperaŸons Contractor 5 Equity finance Debt finance Debt insurance Debt ra�ng Contract enforcement Service fees and subsidies User fees Service and Quality delivered Building contract Service contract ConstrucŸon Contractor Maintenance Contractor 4 Design Contractor SPV 2 Sponsors Royal Air Force Voyager. Photo: MoD/Crown

• Cover