/ NORDEFCO Strategy / Addendum 1
Date / {Designation
2010-08-27 / FINAL DRAFT!
Coordination Group PPP / Page 1 of 3

NORDEFCO strategy

Public-Private Partnerships 2010

Ways of raising efficiency in the military through cooperation with or benchmarking against the private sector

1Introduction

1.1Background

1.2The need to develop a joint strategy

2The purpose of Public-Private Partnerships

3The objectives of PPP in NORDEFCO

4Success factors

A.Definition of military core activity and core competence

B.Development of consensus as to why and how PPP should be used

C.Ensuring a holistic approach for the utilisation of PPP within the area of the Armed Forces

D.Development of skills within the area of PPP among the Armed Forces

E.Identification of laws, provisions, regulations and agreements, which impact on the possibility of providing PPP solutions

5Main categories of PPP and definitions

5.1Outsourcing

5.2Financial solution

5.3Partnerships

6The NORDEFCO flowchart for mapping efficiency on which to base decisions concerning procurement of a PPP solution

If you have ay questions regarding this document please do not hesitate to contact Mats Josell (editor of this document), +46704486612
/ NORDEFCO Strategy / Addendum 1
Date / {Designation
2010-08-27 / FINAL DRAFT!
Coordination Group PPP / Page 1 of 3

1Introduction

The intention of this document is to present the NORDEFCO strategy for utilising Public-Private Partnerships (PPP) within each nation’s political framework,to improve efficiency, and provide practices and guidelines for using PPP. To implement the strategy a method of improving efficiency is enclosed, comprising how to analyse the area(s) in a structured and documented way.

The NORDEFCO Coordination Group Public-Private Partnerships (CoG PPP) aims at getting more value for money in the Armed Forces. This strategy is the framework for the joint PPP-effort of the NORDEFCO countries’ Armed Forces.

1.1Background

The Armed Forces constantly face a challenge of finding ways of raising efficiency – for example through internally improving processes, and sometimes through cooperation with other nations or the private sector. Cooperation with the private sector can be made as Public-Private Partnerships.

PPP is a new name for an old concept that has been a natural part of military operations from time immemorial. Military logistics have always been more or less dependent on the civilian sector of society. What has changed is only the extent to which and how close to combat this dependency has reached. This applies to food as well as munitions.

1.2The need to develop a joint strategy

The focus and use of PPP solutions within and among NORDEFCO has increased over the past few years. A joint strategy is therefore needed to implement a common understanding of the concept for better communication and cooperation, and also to gain a common and efficient method for NORDEFCO's PPP processes. This will also make it easier to adapt each others experiences from different cases.

2The purpose of Public-Private Partnerships

By maximising the benefits of PPP, more activities within our core business will be possible. An increased and coordinated utilisation of PPP solutions will contribute to:

  • ensure that the Armed Forces have access to the services/supplies/facilities required in order to carry out their core activities.
  • an improvement in professionalism within the activities being carried out in the form of PPP as well as within the Armed Forces. This will lead to a more cost-efficient utilisation of allocated resources.
  • securing that the management at all levels can focus on core military activities.
  • standardization, facilitating cooperation in the Nordic as well as the international arena. The private sector aims to achieve economies of scale, which will further reinforce that national special arrangements will be avoided and that the opportunity for interoperability will increase.
  • streamlining and increasing freedom of action with available resources. Reducing long-term obligations and focusing activities on processes which create sought-after response capacity and reducing other activities as much as possible.
  • identifying and terminating non-relevant activities.

3The objectives of PPP in NORDEFCO

PPP should be regarded as a natural alternative and
must always be considered prior to procurement.

In order for PPP to be an effective tool within NORDEFCO which could contribute to the fulfilment of the objectives that are expressed in this document, the following intermediate objectives need to be achieved:

  1. The concept of PPP should be adapted by those in charge of procurement, maintenance, disposal and the purchasing of services/supplies/facilities within the NORDEFCO countries.
  2. Directives for all NORDEFCO groups to consider the possibilities for PPP in their area of responsibility. It should be mandatory for all programs to have a formal information brief from the CoG PPP implementing the method into their programs.
  3. Those who are in any other way affected by PPP processes should have some knowledge as to what PPP means and encompasses.
  4. Any individual who is looking for knowledge of PPP knows where the information and support is to be found.
  5. Armed Forces are strongly advised to set up a permanent PPP unit.
  6. Central coordination is available for ongoing PPP activities
  7. PPP experiences should be documented and collected in a database
  8. Guidelines and checklists are available as support to evaluate whether a PPP solution is suitable and how PPP activities should be carried out.
  9. For all PPP activities that are being considered, are underway or ongoing, there is a documented analysis available according to the guidelines enclosed.

4Success factors

The areas that are of significance in order to achieve the objectives are presented below, together with measures taken and proposals for action within each area.

  1. Definition of military core activity and core competence

There must be a clear picture of activities and functions that could be subject to PPP solutions.

Core activity and core competence are defined by each country. The definition should be used to discern what should and what should not be the subject of PPP considerations and for the choice of an appropriate procurement strategy.

  1. {Development of consensus as to why and how PPP should be used

It is necessary for the parties involved to balance potential gains and risks within PPP. A balance between reducing long-term commitments and an increased development of partnerships requires clarity both within and between the Armed Forces as well as their suppliers.

Within the area of PPP, transparency and consensus/acceptance must prevail within the Armed Forces and also between the defence agencies as regards to strategies so that they can be fully coordinated. This has primarily to be achieved through:

  • Established conditions for dialogue and networking between the agencies/authorities and the trade unionsconcerned.
  • Established forms for the Armed Forces’ continued and extended cooperation with other agencies/authorities as regards PPP.
  • Established and used forms for the dissemination of information as regards the Armed Forces’ view of PPP through private operators.
  • Established and used forms for the dissemination of knowledge concerning PPP within the Armed Forces.
  1. Ensuring a holistic approach for the utilisation of PPP within the area of the Armed Forces

It is important that the Armed Forces together with the agencies/authorities concerned develop common strategic objectives whereby the Armed Forces’ assignments and objectives should be governing. Rationalisations must be viewed holistically among the common defence agencies/authorities, so that imbalances and sub optimisations do not arise.

A PPP solution may be profitable in monetary terms for a wing of the Armed Forces that has chosen the solution, but it may have negative consequences for Armed Forces’ activities on a strategic level. Fundamentally, the outcome of PPP solutions should be of benefit to the Government(s).

Analysis should always be carried out in a similar fashion to ensure the holistic view. In this way traceability is improved as regards decision-making. This is achieved primarily by:

The NORDEFCO flowchart for mapping efficiency on which to base decisions concerning procurement of a PPP solution, provided in chapter 6. Using this method ensures a holistic perspective and traceability.

  1. Development of skills within the area of PPP among the Armed Forces

The use of PPP solutions requires special skills and the development of tools within a number of areas, not least within the legal and commercial fields. This competence must be made available to all agencies working with PPP solutions within the area of the Armed Forces. It is advisable to form a single PPP entity of excellence and not to build up redundant resources. Enhanced skills are achieved primarily by:

  • Analysing and benchmarking against other countries which should take place on a continuous basis, in particular as regards PPP within the defence sector.
  • This document, which was written in order to transfer and share the knowledge and the insights from the participating nations in the NORDEFCO Coordination Group PPP.
  • An established and up-to-date database of experiences containing implemented PPP solutions.
  • The development and sharing within the NORDEFCO of skills relating to PPP.
  • The implementation of formalized PPP education.
  1. Identification of laws, provisions, regulations and agreements, which impact on the possibility of providing PPP solutions

The objective is to identify laws/provisions/regulations/agreements which can have an effect on the possibilities for the Armed Forces to realise the full potential of PPP solutions. The work should result in a general view of the legal references which may be affected so consideration can be taken at an early stage prior to a possible PPP solution. Qualified legal personnel should be involved in all faces of the programs.

5Main categories of PPP and definitions

PPP relate to different forms of collaboration between public and private sector operators with regard to services, supplies and facilities. PPP comprise a wide range of solutions, i.e. outsourcing, financial solutions and partnerships.

A common denominator of PPP solutions is that the Armed Forces first define their needs and requirements with regard to the function and quality of the services, supplies and facilities required. Thereafter, based on the requirements made, the private operators together with the principal will be able to suggest, develop and provide the services, supplies and facilities.

Many of the principles behind different PPP solutions are similar, as are the potential risks. A common feature of PPP solutions is that the Armed Forces first define the functional and qualitative requirements for services/ necessities/facilities. Thereafter it is the private players who, in the contract dialogue with the principal, propose, develop and provide what is requested on the basis of established requirements.

In what follows, three main categories of PPP are described. In each category there are a number of more or less refined PPP solutions, some of the more usual of which are presented in greater detail.

Defining concepts such as outsourcing, and partnership etc. in an unambiguous manner is difficult, for which reason the concepts are described in the next three subchapters with the help of characteristic features and examples. It is also important to remember that PPP solutions are seldom found in their pure form. The solution that is adopted in each specific case may often be a combination of PPP solutions, incorporating features of all of the categories described.

5.1Outsourcing

Outsourcing is the process of handing over the whole or parts of an internal activity to one or more external suppliers. The supplier in turn guarantees to deliver the agreed capacity, quantity and quality. Normally it is possible to have competitive bidding from multiple suppliers at regular intervals.

The reason why outsourcing is considered is usually an anticipated reduction in costs, quality improvement and better sharing of risks. This is obtained (where there is a functioning market in the area) through, among other things, benefits of scale offered by a specialised supplier with a large customer base or cost-effective production. It is not always the case, however, that these advantages apply to the activities of the Armed Forces. In the case of certain materiel, the market virtually amounts to a monopoly and certain services, necessities and facilities are used in such a limited extent and in such limited numbers, that benefits of scale are scarcely possible.

Moreover, it is sometimes the case that the cost aspect is not the only important thing; there may also be explicit targets for reductions in the number of employees in one’s organisation. In an international context, for example, the number of military personnel who are allowed to enter a field of operations may be limited by the receiving nation. In such cases the outsourcing of certain functions may be a solution, so that the personnel of the activity that is outsourced are not counted as military personnel by the receiving nation.

The savings in terms of manpower and costs are by no means easy to calculate. If a lorry belonging to a civilian distributor is armed, the driver has been trained in operating in an area of conflict, and the transport is protected by armed military personnel, in what way does this delivery differ from a purely military one? The civilian contractor charges for these preparations, extra materiel, and a risk premium for his personnel etc.

Any judgment as to whether the advantages outweigh the disadvantages in any outsourcing that is contemplated must be linked to each individual case and given situation. It is impossible to say unambiguously that a particular function, service or capability is not part of the core competence of the Armed Forces, thereby making it relevant for outsourcing. Most people would agree that supplying soldiers and officers domestically with three meals a day and a sandwich for supper is not part of core operations, although catering for a unit on active service in the jungles of Africa during a guerrilla assault would probably be regarded as such.

There are two subcategories of outsourcing: facility management and deployment contracting. Combinations of these two and also of them with other PPP solutions are common.

Included in the term facility management, as the word facility implies, are normally support services associated with premises of some kind. For services of this type, there exist in nearly every case a well-functioning market and wide experience on the part of the defence authorities.

NATO distinguishes between deployment contracting which supplements in-house activities (e.g. the maintenance of complex material) and deployment contracting which replaces in-house activities (e.g. restaurant operations). Irrespective of which type of deployment contracting is involved, it must be based on a well-thought-out strategy. It should not be employed on an ad hoc basis or as a reaction to the discovery at the last moment of a lack in one’s own capability.

It is important to involve the employee organisations and the personnel early on in the work leading up to a PPP solution.

5.2Financial solution

The international term project finance is the basis for developing partnership solutions of this type between the private and the public sector. External classification/valuation by an independent finance company is one way of validating the correctness of one’s assumptions and that the calculations are realistic. In addition, there is also an incentive for a “lifetime approach”, which helps to counteract a common tendency to save on maintenance in the short term.

Leasing is one method of renting property. A lease is an agreement whereby a lessor gives a lessee (the Armed Forces) the right on agreed terms for an agreed period to use an asset in return for payments. A lease or lease-purchase agreement may be entered into, provided that viewed over the entire economic life of the item leased, it involves lower costs for the state than acquisition via a purchase. Finance leasing rarely has this effect and the payments should be counted against borrowing levels. It is important, therefore, to be able to distinguish between finance leasing and operating leasing, which at times is a fine distinction to make.

A finance lease is a lease in which the economic risks and benefits associated with ownership of an asset are transferred substantially from the lessor to the lessee. The lessor functions as source of finance for the lessee to acquire property which he wishes to use in his business. Since the lessee does not need to make an acquisition in order to have access to the property, it is possible, in principle, to acquire and make use of it without the need for contributed capital or other security than the lease item. The payment obligation of the lessee is, in principle, strict and independent of use. The lessee bears the risk of the property after it has been handed over to him.

In operating leasing the risk for the necessity/facility is not transferred to the Armed Forces, but remains with the lessor. In practice, this means that the Armed Forces have a function or availability without needing to be concerned about future needs for upgrading or scrapping, for example. Payments (rentals) for items that are held under an operating lease are charged to the income statement over the period of the lease.

PFI stands for private finance initiative, which in its pure form means that private players are responsible for the financing and operating of an infrastructure/facility in a long-term contract. It is suitable when the private sector is able to provide a service connected to a facility which is acquired with the help of private financing and the payment mechanism reflects the provision of a service, not an asset. A common argument that is put against privately financed partnership solutions is that the government by and large invariably has lower capital costs than private players. The capital cost is determined mainly by the specific project risks and not by where the capital comes from. It is also important to remember that the actual capital cost is generally a minor part of the total cost of investments in materiel and facilities.

5.3Partnerships

Partnership-like solutions mean that the content and forms of cooperation differ from the traditional customer-supplier relationship. The traditional contractual form of cooperation is based on the contracting parties being able in detail to manage and control each other’s obligations and actions. Not infrequently this results in two contracting parties, who each strive to get as much as possible out of the agreement. It has proved to be the fact that the more detailed the contract and the assignment specification, the greater the number of potential conflicts and discussions about matters such as implementation and extra tasks. This applies especially in those areas where circumstances can change during the contract period.